-----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, Dj57uWIwqMDvZjQVSEEXIchLeEjWzZ2w8WTgikwh0ocdoF8nm2aRbDkMB8Bt0GFS Q3hgaXG3gzwwlPIXjrXN0w== 0000950168-98-003118.txt : 19980929 0000950168-98-003118.hdr.sgml : 19980929 ACCESSION NUMBER: 0000950168-98-003118 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19980928 SROS: NYSE 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-4 SEC ACT: SEC FILE NUMBER: 333-64397 FILM NUMBER: 98715742 BUSINESS ADDRESS: STREET 1: 5401 EAST INDEPENDENCE BLVD STREET 2: PO BOX 18747 CITY: CHARLOTTE STATE: NC ZIP: 28026 BUSINESS PHONE: 7045323354 MAIL ADDRESS: STREET 1: 5401 EAST INDEPENDENCE BLVD CITY: CHARLOTTE STATE: NC ZIP: 28026 S-4 1 SONIC AUTOMOTIVE, INC. FORM S-4 As filed with the Securities and Exchange Commission on September 28, 1998 Registration No. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM S-4 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 Number)
5401 East Independence Boulevard P.O. Box 18747 Charlotte, North Carolina 28212 Telephone (704) 532-3320 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) --------------- Mr. O. Bruton Smith Chairman and Chief Executive Officer 5401 East Independence Boulevard P.O. Box 18747 Charlotte, North Carolina 28212 Telephone (704) 532-3320 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service) Copies to: Peter J. Shea, Esq. Parker, Poe, Adams & Bernstein L.L.P. 2500 Charlotte Plaza Charlotte, North Carolina 28244 Telephone (704) 372-9000 --------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] --------------- CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Proposed Proposed Title of Each Class Maximum Maximum Amount Of Of Securities To Amount To Be Offering Price Aggregate Offering Registration Be Registered Registered Per Unit (1) Price (1) Fee (2) 11% Senior Subordinated Notes Due 2008, Series B ....... $125,000,000 99.25% $124,062,500 $36,600 Guarantees of 11% Senior Subordinated Notes, Series B .. $125,000,000 (3) (3) NONE (3)
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Estimated solely for the purpose of calculating the registration fee, pursuant to Rule 457(f) of Regulation C under the Securities Act of 1933. (2) Each Registrant other than Sonic Automotive, Inc. is a subsidiary of Sonic Automotive, Inc. and is guaranteeing payment of the Notes. Pursuant to Rule 457(n) under the Securities Act of 1933, as amended, no registration fee is required with respect to these guarantees. (3) No separate consideration will be received for the guarantees of the Notes by the subsidiaries of Sonic Automotive, Inc. The Registrants hereby amend this Registration Statement on such dates as may be necessary to delay its effective date until the Registrants shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF ADDITIONAL REGISTRANTS
Primary State or other Standard Jurisdiction of Industrial Exact Name of Registrant as Specified in its Incorporation Classification Charter or Organization Code Number Capital Chevrolet and Imports, Inc. Alabama 5511 Casa Ford of Houston, Inc. Texas 5511 Fort Mill Chrysler-Plymouth-Dodge Inc. South Carolina 5511 Fort Mill Ford, Inc. South Carolina 5511 Freedom Ford, Inc. Florida 5511 Frontier Oldsmobile-Cadillac, Inc. North Carolina 5511 Lone Star Ford, Inc. Texas 5511 Marcus David Corporation North Carolina 5511 Sonic Automotive of Chattanooga, LLC Tennessee 5511 Sonic Automotive - Clearwater, Inc. Florida 5511 Sonic Automotive Collision Center of Florida 5511 Clearwater, Inc. Sonic Automotive of Georgia, Inc. Georgia 5511 Sonic Automotive - Hwy. 153 at Tennessee 5511 Shallowford Road, Chattanooga, Inc. Sonic Automotive of Nashville, LLC Tennessee 5511 Sonic Automotive of Nevada, Inc. Nevada 5511 Sonic Automotive of Tennessee, Inc. Tennessee 5511 Sonic Automotive - Florida 5511 1307 N. Dixie Hwy., NSB, Inc. Sonic Automotive - Ohio 5511 1400 Automall Drive, Columbus, Inc. Sonic Automotive - Ohio 5511 1455 Automall Drive, Columbus, Inc. Sonic Automotive - Ohio 5511 1495 Automall Drive, Columbus, Inc. Sonic Automotive - Ohio 5511 1500 Automall Drive, Columbus, Inc. Sonic Automotive - Florida 5511 1720 Mason Ave., DB, Inc. Sonic Automotive - Florida 5511 1720 Mason Ave., DB, LLC Sonic Automotive - Florida 5511 1919 N. Dixie Hwy., NSB, Inc. Sonic Automotive - Florida 5511 21699 U.S. Hwy 19 N., Inc. Sonic Automotive - Florida 5511 241 Ridgewood Ave., HH, Inc. Sonic Automotive South Carolina 5511 2424 Laurens Rd., Greenville, Inc. Sonic Automotive - Tennessee 5511 2490 South Lee Highway, LLC I.R.S. Employer Address, Including Zip Code, and Exact Name of Registrant as Specified in its Identification Telephone Number, Including Area Code, Charter Number of Registrant's Principal Executive Office Capital Chevrolet and Imports, Inc. 63-1204447 711 Eastern Blvd. Montgomery, AL 36117; 334-272-8700 Casa Ford of Houston, Inc. 76-0430684 4701 I-10 East Baytown, TX 77521; 281-471-5550 Fort Mill Chrysler-Plymouth-Dodge Inc. 58-2285505 3310 Highway 51, Carowinds Blvd. Fort Mill, SC 29715; 704-375-4799 Fort Mill Ford, Inc. 62-1289609 788 Gold Hill Rd., Fort Mill, SC 29715; 704-377-8877 Freedom Ford, Inc. 59-2214873 24825 US Highway 19 N. Clearwater, FL 34623; 813-797-2277 Frontier Oldsmobile-Cadillac, Inc. 56-1621461 2501 Roosevelt Blvd. West Monroe, NC 28110; 704-283-7594 Lone Star Ford, Inc. 76-0191708 8477 North Freeway, Houston, TX 77037; 281-931-3300 Marcus David Corporation 56-1708384 9101 South Blvd., Charlotte, NC 28273; 704-552-7600 Sonic Automotive of Chattanooga, LLC 62-1708471 5949 Brainerd Rd, Chattanooga, TN 37421; 423-894-5660 Sonic Automotive - Clearwater, Inc. 59-3501017 21799 US Highway 19 North Clearwater, FL 33765; 813-799-1234 Sonic Automotive Collision Center of 59-3501024 2300 Drew St., Clearwater, FL 34625; Clearwater, Inc. 813-797-6335 Sonic Automotive of Georgia, Inc. 58-2399219 5260 Peachtree Industrial Blvd., Chamblee, GA 30341; 770-452-0077 Sonic Automotive - Hwy. 153 at (*) Hwy 153 at Shallowford Road Shallowford Road, Chattanooga, TN 37042; Chattanooga, Inc. Sonic Automotive of Nashville, LLC 62-1708481 4040 Armory Oaks Drive, Nashville, TN 37204; 615-254-5641 Sonic Automotive of Nevada, Inc. 88-0378636 3773 Howard Hughes Parkway Suite 300 North Las Vegas, NV 89109; 702-866-2222 Sonic Automotive of Tennessee, Inc. 62-1710960 5915 Brainard Rd., Chattanooga, TN 37421; 423-899-8934 Sonic Automotive - 59-3523302 1307 N. Dixie Hwy. New Smyrna Beach, 1307 N. Dixie Hwy., NSB, Inc. FL 32168; 904-428-9094 Sonic Automotive - 31-1604259 1400 Automall Dr. Columbus , OH 1400 Automall Drive, Columbus, Inc. 43228; 614-870-9559 Sonic Automotive - 31-1604276 1455 Automall Dr. Columubs, OH 43228; 1455 Automall Drive, Columbus, Inc. 614-870-5425 Sonic Automotive - 31-1604281 1495 Automall Dr. Columbus, OH 43228; 1495 Automall Drive, Columbus, Inc. 614-870-1495 Sonic Automotive - 31-1604285 1500 Automall Dr. Columbus, OH 43228; 1500 Automall Drive, Columbus, Inc. 614-870-8200 Sonic Automotive - 59-3523303 1720 Mason Ave. Daytona Beach, FL 1720 Mason Ave., DB, Inc. 32117; 904-274-4775 Sonic Automotive - Being 1720 Mason Ave. Daytona Beach, FL 1720 Mason Ave., DB, LLC applied for 32117; 904-274-4775 Sonic Automotive - 59-3523301 1919 N. Dixie Hwy. New Smyrna Beach, 1919 N. Dixie Hwy., NSB, Inc. FL 32168; 904-427-1313 Sonic Automotive - 59-3501021 21699 US Hwy. 19 N. Clearwater, FL 21699 U.S. Hwy 19 N., Inc. 33765; 813-799-6400 Sonic Automotive - 59-3523304 241 Ridgewood Ave. Holly Hill, FL 241 Ridgewood Ave., HH, Inc. 32117; 904-254-8441 Sonic Automotive 58-2384994 2424 Laurens Rd. Greenville, SC 29607; 2424 Laurens Rd., Greenville, Inc. 864-234-6400 Sonic Automotive - 62-1708486 2490 South Lee Highway Cleveland, OH 2490 South Lee Highway, LLC 37311; 423-478-5301
(*) Entity has no I.R.S. Employer Identification Number because either it is currently dormant with no operation or has no employees.
Primary State or other Standard Jurisdiction of Industrial Exact Name of Registrant as Specified in its Incorporation Classification Charter or Organization Code Number Sonic Automotive South Carolina 5511 2752 Laurens Rd., Greenville, Inc. Sonic Automotive - Ohio 5511 3700 West Broad Street, Columbus, Inc. Sonic Automotive - Florida 5511 3741 S. Nova Rd., PO, Inc. Sonic Automotive - Ohio 5511 4000 West Broad Street, Columbus, Inc. Sonic Automotive Georgia 5511 5260 Peachtree Industrial Blvd., LLC Sonic Automotive - Georgia 5511 5585 Peachtree Industrial Blvd., LLC Sonic Automotive - Tennessee 5511 6025 International Drive, LLC Sonic Chrysler-Plymouth-Jeep-Eagle, North Carolina 5511 LLC Sonic Dodge, LLC North Carolina 5511 Sonic Peachtree Industrial Blvd., L.P. Georgia 5511 Town and Country Chrysler- Tennessee 5511 Plymouth-Jeep, LLC Town and Country Chrysler- South Carolina 5511 Plymouth-Jeep of Rock Hill, Inc. Town and Country Dodge of Tennessee 5511 Chattanooga, LLC Town and Country Ford, Incorporated North Carolina 5511 Town and Country Ford of Cleveland, Tennessee 5511 LLC Town and Country Jaguar, LLC Tennessee 5511 I.R.S. Employer Address, Including Zip Code, and Exact Name of Registrant as Specified in its Identification Telephone Number, Including Area Code, Charter Number of Registrant's Principal Executive Office Sonic Automotive 58-2384996 2752 Laurens Rd. Greenville, SC 29607; 2752 Laurens Rd., Greenville, Inc. 864-234-6437 Sonic Automotive - 31-1604296 3700 West Broad St. Columbus, OH 3700 West Broad Street, Columbus, 43228; 612-272-8100 Inc. Sonic Automotive - 59-3532504 3741 S. Nova Rd. Port Orange, FL 32199; 3741 S. Nova Rd., PO, Inc. 940-322-1020 Sonic Automotive - 31-1604301 4000 W. Broad St. Columbus, OH 43228; 4000 West Broad Street, Columbus, 614-272-0000 Inc. Sonic Automotive 62-1716095 5260 Peachtree Industrial Blvd. Chamblee, 5260 Peachtree Industrial Blvd., LLC GA 30341; 770-452-0077 Sonic Automotive - (*) 5585 Peachtree Industrial Blvd. Camblee, 5585 Peachtree Industrial Blvd., LLC GA 30341 Sonic Automotive - 62-1708490 6025 International Drive Chattanooga, TN 6025 International Drive, LLC 37421; 423-855-4981 Sonic Chrysler-Plymouth-Jeep-Eagle, 56-2044997 20435 Chartwell Center Drive Cornelius, NC LLC 28031; 704-896-3800 Sonic Dodge, LLC 56-2044965 20700 Torrence Chapel Rd. Cornelius, NC 28031; 704-892-7800 Sonic Peachtree Industrial Blvd., L.P. 56-2089761 5260 Peachtree Industrial Blvd., Chamblee, GA 30341; 770-452-0077 Town and Country Chrysler- 62-1708483 2496 South Lee Highway Cleveland, TN Plymouth-Jeep, LLC 37311; 432-339-8756 Town and Country Chrysler- 56-2044964 380 North Anderson Rd. Rock Hill, SC Plymouth-Jeep of Rock Hill, Inc. 29730; 803-324-4042 Town and Country Dodge of 62-1708487 402 W. Martin Luther King Blvd. Chattanooga, LLC Chattanooga, TN 37402; 423-265-0505 Town and Country Ford, Incorporated 56-0887416 5401 E. Independence Blvd. Charlotte, NC 28212; 704-536-5600 Town and Country Ford of Cleveland, 62-1708484 717 South Lee Highway Cleveland, TN LLC 37311; 423-472-5454 Town and Country Jaguar, LLC 62-1708491 5915 Brainard Rd. Chattanooga, TN 37421; 423-899-8934
(*) Entity has no I.R.S. Employer Identification Number because either it is currently dormant with no operation or has no employees. 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 under the securities laws of any such state SUBJECT TO COMPLETION, DATED SEPTEMBER 28, 1998 PROSPECTUS [SONIC LOGO] Offer to Exchange All Outstanding 11% Senior Subordinated Notes Due 2008, Series A ($125,000,000 Principal Amount Outstanding) for 11% Senior Subordinated Notes Due 2008, Series B --------------- This Exchange Offer (as defined below) and all withdrawal rights hereunder will expire at 5:00 p.m., New York City time, (as such date may be extended from time to time, the "Expiration Date"). --------------- Sonic Automotive, Inc., a Delaware corporation (the "Company"), hereby offers (the "Exchange Offer"), upon the terms and subject to the conditions set forth in this Prospectus and the accompanying letter of transmittal (the "Letter of Transmittal"), to exchange $1,000 in principal amount of its 11% Senior Subordinated Notes Due 2008, Series A (the "New Notes") for each $1,000 in principal amount of its currently outstanding 11% Senior Subordinated Notes Due 2008, Series B (the "Old Notes") (the Old Notes and the New Notes are collectively referred to herein as the "Notes"). An aggregate principal amount of $125.0 million of Old Notes is currently outstanding. See "The Exchange Offer." Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, starting on the Expiration Date and ending on the close of business one year after the Expiration Date, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." The Company will accept for exchange any and all Old Notes that are validly tendered prior to 5:00 p.m., New York City time, on the Expiration Date. Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is not conditioned upon any minimum principal amount of the Old Notes being tendered for exchange. However, the Exchange Offer is subject to the terms and provisions of the Registration Rights Agreement dated as of July 31, 1998 (the "Registration Rights Agreement"), among the Company, each of the Company's existing subsidiaries (the "Guarantors") and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, BancAmerica Robertson Stephens and NationsBanc Montgomery Securities LLC (the "Initial Purchasers"). The Old Notes may be tendered only in multiples of $1,000. See "The Exchange Offer." The Old Notes were issued in a transaction (the "Prior Offering") pursuant to which the Company issued an aggregate of $125.0 million principal amount of the Old Notes to the Initial Purchasers on July 31, 1998 pursuant to a Purchase Agreement dated as of July 28, 1998 (the "Purchase Agreement") among the Company, the Guarantors and the Initial Purchasers. The Initial Purchasers subsequently resold the Old Notes in reliance on Rule 144A under the Securities Act. The Company, the Guarantors and the Initial Purchasers also entered into the Registration Rights Agreement, pursuant to which the Company and the Guarantors granted certain registration rights for the benefit of the holders of the Old Notes. The Exchange Offer is intended to satisfy certain of the Company's obligations under the Registration Rights Agreement with respect to the Old Notes. See "The Exchange Offer -- Purpose and Effect." The Old Notes were, and the New Notes will be, issued under the Indenture dated as of July 1, 1998 (the "Indenture") among the Company, the Company's existing domestic subsidiaries and U.S. Bank Trust National Association, as trustee (in such capacity, the "Trustee"). The form and terms of the New Notes will be identical in all material respects to the form and terms of the Old Notes, except that (i) the New Notes have been registered under the Securities Act and, therefore, will not bear legends restricting the transfer thereof, and (ii) holders of New Notes will not be entitled to certain rights under the Registration Rights Agreement intended for the holders of unregistered securities. The Exchange Offer shall be deemed consummated upon the occurrence of the delivery by the Company to U.S. Bank Trust National Association, as registrar of the Old Notes (in such capacity, the "Registrar"), under the Indenture of New Notes in the same aggregate principal amount as the aggregate principal amount of Old Notes that are (cover continued on next page) See "Risk Factors" beginning on page 15 for a discussion of certain factors that should be considered in evaluating the Exchange Offer. --------------- THE NEW NOTES 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. --------------- The date of Prospectus is , 1998. validly tendered by holders thereof pursuant to the Exchange Offer. See "The Exchange Offer -- Termination of Certain Rights," " -- Procedures for Tendering Old Notes" and "Description of the New Notes." The Notes will bear interest at a rate equal to 11% per annum. Interest on the Notes is payable semiannually, commencing February 1, 1999, on February 1 and August 1 of each year (each an "Interest Payment Date") and shall accrue from July 31, 1998 or from the most recent Interest Payment Date with respect to the Old Notes to which interest was paid or duly provided for. The Notes will mature on August 1, 2008. See "Description of Notes." The Notes will be redeemable for cash at the option of the Company, in whole or in part, at any time on or after August 1, 2003 at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time on or prior to August 1, 2001, the Company may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the net proceeds of one or more Public Equity Offerings (as defined herein), at a redemption price in cash equal to 111% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption; provided that at least 65% of the aggregate principal amount of the Notes originally issued remains outstanding immediately after such redemption. See "Description of the New Notes -- Optional Redemption." Upon the occurrence of a Change of Control (as defined herein), the Company will be required to make an offer to repurchase all outstanding Notes at 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of repurchase. There is no assurance that the Company will have adequate funds to repurchase the Notes upon a Change of Control. See "Description of the New Notes -- Purchase of Notes Upon a Change of Control." The Notes will be unsecured senior subordinated obligations of the Company and, as such, will be subordinated in right of payment to all other existing and future senior indebtedness of the Company, and will rank pari passu in right of payment with all other existing and future senior subordinated indebtedness of the Company. The Notes will be guaranteed, jointly and severally, on a senior subordinated basis (the "Guarantees") by the Guarantors. The Guarantees will be unsecured senior subordinated obligations of the Guarantors and will be subordinated in right of payment to all existing and future senior indebtedness of the Guarantors. As of June 30, 1998, on a pro forma basis after giving effect to the 1998 Acquisitions (as defined herein) and the Prior Offering and the application of the net proceeds therefrom, (i) the Company and the Guarantors would have had $4.3 million in aggregate principal amount of indebtedness outstanding which would have ranked senior in right of payment to the Notes ($2.9 million of which would have been secured) and no indebtedness pari passu to the Notes or the Guarantees, as the case may be, (ii) the Company would also have had $3.7 million of indebtedness senior to, and $5.5 million of indebtedness subordinated to, the Notes and (iii) the Guarantors would also have had $197.7 million of floor plan indebtedness and $3.2 million of additional indebtedness which would have ranked senior in right of payment to the Guarantees ($3.0 million of which would have been secured). Based on existing interpretations of the Securities Act by the staff of the Securities and Exchange Commission (the "Commission") set forth in "no-action" letters issued to third parties, the Company believes that New Notes issued pursuant to the Exchange Offer to any holder of Old Notes in exchange for Old Notes may be offered for resale, resold and otherwise transferred by such holder (other than (i) a broker-dealer who purchased Old Notes directly from the Company for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act or (ii) a person that is an affiliate of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such holder is acquiring the New Notes in the ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in a distribution of the New Notes. Holders wishing to accept the Exchange Offer must represent to the Company, as required by the Registration Rights Agreement, that such conditions have been met. In addition, if such holder is not a broker-dealer, it must represent that it is not engaged in, and does not intend to engage in, a distribution of the New Notes. Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. See "The Exchange Offer -- Resales of the New Notes" and "Plan of Distribution." This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making or other trading activities. As of September 15, 1998, Cede & Co. ("Cede"), as nominee for The Depository Trust Company, New York, New York ("DTC"), was the sole registered holder of the Old Notes and held the Old Notes for certain of its participants. The Company believes that no such participant is an affiliate (as such term is defined in Rule 405 of the Securities Act) of the Company. There has previously been only a limited secondary market, and no public market, for the Old Notes. The Old Notes are eligible for trading in the Private Offering, Resales and Trading through Automatic Linkages ("PORTAL") market. In addition, the Initial Purchasers have advised the Company that they currently intend to make a market in the New Notes; however, the Initial Purchasers are not obligated to do so and any market making activities may be discontinued by the Initial Purchasers at any time. Therefore, there can be no assurance that an active market for the New Notes will develop. If such a trading market develops for the New Notes, future trading prices will depend on many factors, including, among other things, prevailing interest rates, the Company's results of operations and the market for similar securities. Depending on such factors, the New Notes may trade at a discount from their principal amount. See "Risk Factors -- Absence of a Public Market for the Notes." The Company and the Guarantors will not receive any proceeds from this Exchange Offer, and no underwriter is being utilized in connection with the Exchange Offer. Pursuant to the Registration Rights Agreement, the Company will bear certain registration expenses. THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION. The Old Notes were issued originally in global form (the "Global Old Note"). The Global Old Note was deposited with, or on behalf of, DTC, as the initial depository with respect to the Old Notes (in such capacity, the "Depositary"). The Global Old Note is registered in the name of Cede, as nominee of DTC, and beneficial interests in the Global Old Note are shown on, and transfers thereof are effected only through, records maintained by the Depositary and its participants. The use of the Global Old Note to represent certain of the Old Notes permits the Depositary's participants, and anyone holding a beneficial interest in an Old Note registered in the name of such a participant, to transfer interests in the Old Notes electronically in accordance with the Depositary's established procedures without the need to transfer a physical certificate. New Notes issued in exchange for the Global Old Note also will be issued initially as a note in global form (the "Global New Note," and, together with the Global Old Note, the "Global Notes") and deposited with, or on behalf of, the Depositary. After the initial issuance of the Global New Note, New Notes in certificated form will be issued in exchange for a holder's proportionate interest in the Global New Note only as set forth in the Indenture. NOTICE TO NEW HAMPSHIRE RESIDENTS NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT, ANY REPRESENTATION INCONSISTENT WITH THE PROVISION OF THIS PARAGRAPH. --------------- THE INFORMATION CONTAINED IN THIS PROSPECTUS HAS BEEN FURNISHED BY THE COMPANY AND OTHER SOURCES BELIEVED BY THE COMPANY TO BE RELIABLE. THIS PROSPECTUS CONTAINS SUMMARIES, BELIEVED TO BE ACCURATE, OF CERTAIN TERMS OF CERTAIN DOCUMENTS BUT REFERENCE IS MADE TO THE ACTUAL DOCUMENTS, CERTAIN OF WHICH HAVE BEEN FILED AS EXHIBITS TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART, FOR THE COMPLETE INFORMATION CONTAINED THEREIN. ALL SUCH SUMMARIES ARE QUALIFIED IN THEIR ENTIRETY BY THIS REFERENCE. --------------- CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS This Prospectus contains statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements appear in a number of places in this Prospectus and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) potential acquisitions by the Company; (ii) the Company's financing plans; (iii) trends affecting the Company's financial condition or results of operations; and (iv) the Company's business and growth strategies. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. Among others, factors that could adversely affect actual results and performance include local and regional economic conditions in the areas served by the Company, the level of consumer spending, relationships with manufacturers, competition, site selection and related traffic and demographic patterns, inventory management and turnover levels, realization of cost savings, and the Company's success in integrating recent and potential future acquisitions. The accompanying information contained in this Prospectus, including, without limitation, the information set forth under the headings "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" identifies important additional factors that could materially adversely affect actual results and performance. Prospective investors are urged to carefully consider such factors. All forward-looking statements attributable to the Company are expressly qualified in their entirety by the foregoing cautionary statement. AVAILABLE INFORMATION The Company is subject to the informational and reporting requirements of the Exchange Act, and in accordance therewith is required to file periodic reports, proxy statements and other information with the Commission relating to its business, financial condition and other matters. Such reports, proxy statements and other information, may be inspected and copied at the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at 7 World Trade Center, Suite 1300, New York, New York 10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission maintains an Internet Web site that contains reports, proxy and information statements and other information regarding the Company and other registrants that file electronically with the Commission. The address of such site is http://www.sec.gov. Copies of all or any part of such materials may be obtained from any such office upon payment of the fees prescribed by the Commission. Such information may also be inspected and copied at the offices of the New York Stock Exchange at 20 Broad Street, New York, New York 10005. The Company's Class A common stock, par value $.01 per share, is traded on the New York Stock Exchange under the symbol "SAH.". This Prospectus constitutes a part of a registration statement (the "Registration Statement") filed by the Company with the Commission under the Securities Act. As permitted by the rules and regulations of the Commission, this Prospectus does not contain all of the information contained in the Registration Statement and the exhibits and schedules thereto and reference is hereby made to the Registration Statement and the exhibits and schedules thereto for further information with respect to the Company and the securities offered hereby. Statements contained herein concerning the provisions of any documents filed as an exhibit to the Registration Statement or otherwise filed with the Commission are not necessarily complete, and in each instance reference is made to the copy of such document so filed. Each such statement is qualified in its entirety by such reference. The Indenture (as defined herein) provides that the Company will furnish copies of the periodic reports required to be filed with the Commission under the Exchange Act to the holders of the Notes. If the Company is not subject to the periodic reporting and informational i requirements of the Exchange Act, it will, to the extent such filings are accepted by the Commission, and whether or not the Company has a class of securities registered under the Exchange Act, file with the Commission, and provide the Trustee and the holders of the Notes within 15 days after such filings with, annual reports containing the information required to be contained in Form 10-K promulgated under the Exchange Act, quarterly reports containing the information required to be contained in Form 10-Q promulgated under the Exchange Act and from time to time such other information as is required to be contained in Form 8-K promulgated under the Exchange Act. If filing such reports with the Commission is not accepted by the Commission or prohibited by the Exchange Act, the Company will also provide copies of such reports, at its cost, to prospective purchasers of the Notes promptly upon written request. In addition, the Company has agreed that, for so long as any Old Notes remain outstanding as Old Notes it will furnish to the holders and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act until such time as the Company has either exchanged the Old Notes for the New Notes or until such time as the holders thereof have disposed of such Notes pursuant to an effective registration statement under the Securities Act. See "Description of the New Notes -- Certain Covenants -- Provisions of Financial Statements." Any such request and requests for the agreements summarized herein should be directed to: Mr. Todd Atenhan, Director of Investor Relations of the Company, at 5401 E. Independence Blvd., Charlotte, North Carolina 28212, telephone: 1-888-766-4218. ii [SONIC LOGO GOES HERE] [MAP GOES HERE]
BMW AND VOLKSWAGEN OF CLEVELAND VILLAGE HONDA HATFIELD VOLKSWAGEN-JEEP LAKE NORMAN DODGE NASHVILLE DODGE OF CHATTANOOGA HERITAGE LINCOLN-MERCURY LONE STAR FORD BMW AND VOLVO OF DYER VOLVO HIGGINBOTHAM CHEVY-OLDS NELSON BOWERS FORD CHATTANOOGA ECONOMY HONDA HIGGINBOTHAM AUTOMOBILES TOWN AND COUNTRY CHRYSLER- CAPITOL CHEVROLET FORT MILL CHRYSLER- INFINITI OF CHATTANOOGA PLYMOUTH-JEEP OF ROCK HILL CAPITOL IMPORTS PLYMOUTH-DODGE KEN MARKS FORD TOWN AND COUNTRY FORD CASA FORD FORT MILL FORD KIA AND VOLKSWAGEN OF TOWN AND COUNTRY TOYOTA CENTURY BMW FRONTIER OLDSMOBILE-CADILLAC CHATTANOOGA TOYOTA WEST CLEARWATER MITSUBISHI HALIFAX FORD-MERCURY LAKE NORMAN CHRYSLER- TRADER BUD'S WESTSIDE CLEARWATER TOYOTA HATFIELD HYUNDAI-ISUZU-SUBARU PLYMOUTH-JEEP CHRYSLER-PLYMOUTH CLEVELAND CHRYSLER- HATFIELD LINCOLN-MERCURY TRADER BUD'S WESTSIDE DODGE PLYMOUTH-JEEP
Dealerships listed and locations shown above are on a pro forma basis giving effect to the pending 1998 Acquisitions (as defined herein). This Offering Memorandum includes statistical data regarding the retail automotive industry. Unless otherwise indicated herein, such data is taken or derived from information published by (i) The Wall Street Journal, (ii) a division of Intertec Publishing Corp. in its "Ward's Dealer Business," (iii) Crain's Communications, Inc. in its "Automotive News" and "1997 Market Data Book" or (iv) the Industry Analysis Division of the National Automobile Dealers Association ("NADA") in its "Industry Analysis and Outlook" and "Automotive Executive Magazine" publications. 2 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 herein to "Sonic" or the "Company" are to Sonic Automotive, Inc. and, unless the context indicates otherwise, its consolidated subsidiaries and their respective predecessors. Unless otherwise indicated, references to "pro forma" give effect to (i) the 1997 Acquisitions and the 1998 Acquisitions (each as defined herein and, collectively, the "Acquisitions"), (ii) the Company's initial public offering of its Class A Common Stock in November 1997 (the "IPO"), (iii) the reorganization of the Company in anticipation of its IPO (the "Reorganization"), and (iv) the Prior Offering and the application of the net proceeds therefrom. References to "pro forma" do not give effect to the Jordan Acquisition and the Tampa Volvo Acquisition (each as defined herein). The Company The Company is one of the top ten automotive retailers in the United States, operating 27 dealerships and ten collision repair centers, as of June 30, 1998, in eight metropolitan areas of 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 operated dealerships as of June 30, 1998 in the Atlanta, Georgia, Charlotte, North Carolina, Chattanooga, Tennessee, Greenville/Spartanburg, South Carolina, Houston, Texas, Montgomery, Alabama, Nashville, Tennessee and Tampa/Clearwater, Florida markets, each of which the Company believes is experiencing favorable demographic trends. As of June 30, 1998, Sonic sold the following 20 domestic and foreign brands: BMW, Cadillac, Chevrolet, Chrysler, Dodge, Ford, Honda, Hyundai, Infiniti, Jaguar, Jeep, KIA, Lincoln, Mercury, Mitsubishi, Oldsmobile, Plymouth, Toyota, Volkswagen and Volvo. In several of its markets, the Company's dealerships have a significant market share for new cars and light trucks. As of September 15, 1998, the Company had acquired or entered into definitive agreements to acquire 12 additional dealerships in certain of the Company's existing markets and in new markets including Columbus, Ohio and Daytona Beach, Florida (which includes a total of two dealerships being acquired in the Jordan Acquisition and the Tampa Volvo Acquisition). Upon consummation of these acquisitions, the Company will sell the following four additional brands: Acura, Isuzu, Mercedes and Subaru. For the year ended December 31, 1997, the Company would have had pro forma revenues and EBITDA (as defined herein) of $1.8 billion and $42.8 million, respectively. Company Strengths Leading Automotive Retailer. The Company is one of the top ten automotive retailers in the United States, operating 37 dealerships in ten metropolitan areas on a pro forma basis. The Company believes that its leading position in the highly fragmented automotive retailing industry combined with its strong reputation and management team, successful history of acquiring and integrating dealerships and strong financial condition have positioned the Company as a premier consolidator of automotive dealerships, thereby providing the Company with increased attractive acquisition opportunities. Proven Track Record of Integrating and Improving Acquisitions. In recent years, the Company has grown primarily through the acquisition of well-managed dealerships in growing metropolitan and suburban geographic markets. During 1996 and 1997, the Company acquired 16 dealerships in five states for total consideration of $104.5 million. Senior management of the Company has, collectively, acquired and integrated the operations of more than 75 dealerships during their careers. This acquisition experience allows management to identify and capitalize on opportunities for improvement, determine and implement necessary corrective actions, and minimize acquisition risk. Experienced Management Team. The Company is led by a strong senior management team with extensive automotive retailing and aftermarket products and services experience, including O. Bruton Smith, Chief Executive Officer, and Nelson E. Bowers, II, Executive Vice President. The members of the Company's senior management team have on average 19 years of automotive industry experience. As of June 30, 1998, the Company's senior management owned approximately 52.7% of the Company's outstanding Class A Common Stock and 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"). 3 Consistent Record of Internal Growth. In addition to indentifying, consummating and integrating attractive acquisitions, the Company continually focuses on improving its existing dealership operations. As a result, the Company has a history of strong internal growth with average same store sales growth of 16.3%, 6.4% and 10.1% in 1995, 1996 and 1997, respectively. Diverse Offering of Automotive Brands, Products and Services. The Company sells on a pro forma basis a wide variety of 24 domestic and international automotive brands (38.4% of pro forma gross profit in 1997) in ten metropolitan areas which it believes (i) mitigates the effect of regional economic conditions and changing consumer preferences and (ii) reduces its reliance on any single manufacturer. In addition to selling a broad range of new vehicles, the Company has a balanced portfolio of other automotive products and services including used vehicles (16.9% of pro forma gross profit in 1997), F&I and leasing (11.6%), and parts, service and collision repair services (33.1%). The Company believes that this diverse offering of products and services improves financial stability as sales of higher margin products and services offset in part sales of lower margin new and used vehicles. In addition, sales of parts, service and collision repair services are less cyclical than vehicle sales and related product sales. Economies of Scale. The Company's growth through acquisitions over the past two years has resulted in increasing economies of scale as the Company integrates acquired dealerships including (i) improved terms on bank and floor plan financing, (ii) improved commissions on sales of finance and insurance products, (iii) increased vendor consolidation opportunities, (iv) reduced advertising and insurance costs as a percentage of sales, and (v) improved inventory management. Strategy Acquire Dealerships. The Company believes that attractive acquisition opportunities exist for dealership groups with significant equity capital and experience in identifying, acquiring and professionally managing dealerships. The automotive retailing industry is highly fragmented, with the largest 100 dealer groups generating approximately 10% of the industry's $640 billion of total sales in 1996 and controlling less than 5% of all new vehicle dealerships in the United States. 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. The Company has implemented a "hub and spoke" acquisition strategy to acquire (i) well-managed dealerships in new growing metropolitan and suburban geographic markets, and (ii) additional dealerships in its existing markets that will allow the Company to capitalize on regional economies of scale, offer a greater breadth of products and services and/or increase brand diversity. In addition, the Company selectively acquires dealerships which have underperformed the industry average but which carry attractive product lines or have attractive locations, thereby leveraging the Company's management infrastructure and improving return on investment. Increased Sales of Higher Margin Products and Services. The Company intends to pursue opportunities to increase its sales of higher-margin products and services by, for instance, expanding its collision repair business and increasing sales of used vehicles. 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 small volume shops. The Company further believes that the collision repair industry is undergoing a period of consolidation and that it is well positioned to expand its collision repair business. Sonic also believes that significant opportunities exist to improve its used vehicle departments, which historically have generated higher margins on sales than its new vehicle departments, to (i) increase the number of used vehicles sold and (ii) increase gross profit margins on sales of used vehicles. For example, the Company's ability to manage inventory levels more effectively created increased gross profit margins on sales of used vehicles to 9.9% for the first six months of 1998 from 8.5% for the first six months of 1997. 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 has been able to negotiate with lending institutions that purchase its financing contracts and insurance carriers that underwrite its insurance policies to increase commissions on the origination of customer vehicle financing and insurance policies, which the Company believes will result in increased revenues and profitability. 4 Train, Develop and Incentivize Qualified Management. The Company believes that well trained dealership personnel are the key to the long-term performance of the Company and to the profitability of its dealerships. Sonic requires all of its employees, from service technicians to regional vice presidents, to participate in in-house training programs. The Company's senior management, along with third party trainers from manufacturers, industry affiliates and vendors, formally train all employees. The Company believes that its comprehensive training of all employees and the institution of a multi-tiered management structure to supervise effectively its dealership operations provide the Company with a competitive advantage over other dealership groups. In addition, the Company employs an incentive compensation program for each officer, vice president and executive manager, a portion of which 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, together with the opportunity for promotion and for equity participation, serve as a strong motivation for its employees. 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 designed to satisfy customers by providing high-quality vehicles in a positive, "consumer friendly" buying environment. Some manufacturers offer specific performance incentives, on a per vehicle basis, if certain customer satisfaction index ("CSI") levels (which vary by manufacturer) are achieved by a dealer. Manufacturers can withhold approval of acquisitions if a dealer fails to maintain a minimum CSI score. To keep management focused on customer satisfaction, the Company includes CSI results as a component of its incentive compensation program. The 1998 Acquisitions In March 1998, the Company acquired two dealerships and a standalone collision repair center located in Clearwater, Florida, for a total purchase price of approximately $14.9 million, subject to adjustment based on the net book value of the purchased assets and assumed liabilities as of the closing date (the "Clearwater Acquisition"). The Clearwater Acquisition was financed with $11.5 million in cash borrowed from Ford Motor Credit Company ("Ford Motor Credit") under the Company's $75.0 million secured revolving line of credit (the "Revolving Facility") and 3,960 shares of the Company's Class A Convertible Preferred Stock, par value $.10 per share (the "Preferred Stock" and, together with the Common Stock, the "Voting Stock"), with a liquidation preference of approximately $4.0 million. By April 30, 1999, the Company will be required to pay a contingent amount equal to 50% of the combined 1998 pre-tax earnings of the entities acquired, such amount not to exceed approximately $1.8 million. In July 1998, the Company acquired six dealerships located in Columbus, Ohio for a total purchase price of approximately $48.6 million plus the assumption of certain liabilities, subject to adjustment based on the value of the net current assets of the sellers as of the closing date (the "Hatfield Acquisition"). Of the total purchase price, the Company paid approximately $34.6 million in cash ($26.2 million of which was financed by borrowings under the Revolving Facility and the balance of which was financed by cash from the Company's existing operations, which was subsequently replenished with a portion of the net proceeds from the Prior Offering), and the balance of the total purchase price was paid by the Company's issuance to the sellers of 14,025 shares of its Preferred Stock with a liquidation preference of approximately $14.0 million. Also in July 1998, the Company acquired one dealership located in Greenville, South Carolina for a total purchase price of approximately $1.1 million plus the assumption of certain operating liabilities of the sellers (the "Heritage Acquisition"). Of the total purchase price, the Company paid approximately $0.7 million in cash (all of which was financed by borrowings under the Revolving Facility), and the balance of the total purchase price was paid by the Company's issuance to the sellers of 400 shares of its Preferred Stock with a liquidation preference of $0.4 million. In connection with the Heritage Acquisition, Chartown, a general partnership and an affiliate of the Company through common control ("Chartown"), acquired the real property on which the dealerships comprising the Heritage Acquisition are operated for approximately $3.0 million, and the Company currently is leasing this real property from Chartown. Chartown is expected to sell the real property underlying these dealerships to Mar Mar Realty Trust, a real estate investment trust affiliated with the Company through common control ("MMRT"), in the future. The Company did not consummate the acquisition of the assets of the Jaguar franchise that comprises a portion of the Heritage Acquisition because Jaguar Cars, a division of Ford Motor Company ("Jaguar") declined to consent to this acquisition. See "Risk Factors -- No Consent from Jaguar." Also in July 1998, the Company acquired one dealership located in Greenville, South Carolina and a satellite sales location in Spartanburg, South Carolina for an aggregate purchase price of approximately $3.8 million in cash (all of which was financed with a portion of the net proceeds of the Prior Offering), warrants issued to the seller to purchase 75,000 shares of the Company's Class A Common Stock at a purchase price equal to the market value of the Class A Common Stock on the closing date and 2,166.5 shares of Preferred Stock with a liquidation preference of approximately $2.2 million (the "Century Acquisition"). The seller in the Century Acquisition is affiliated with the seller in the Heritage Acquisition. In 5 connection with the acquisition, Chartown purchased the real property underlying the dealership and the satellite sales location. Chartown is expected to sell the real property to MMRT in the future. Also in July 1998, the Company acquired one dealership located in Houston, Texas for a total purchase price of approximately $11.3 million, subject to adjustment at a later date based upon a final determination of the net working capital of the acquired dealership as of the closing date (the "Casa Ford Acquisition"). Of the price paid at closing, the Company paid approximately $9.0 million in cash (all of which was financed with a portion of the net proceeds of the Prior Offering), and the balance was paid to the seller by the Company's issuance of 2,313 shares of Preferred Stock with a liquidation preference of approximately $2.3 million. In addition, the Company agreed to pay to the seller in the future an additional contingent payment equal to five times the amount by which the dealership's pre-tax earnings for 1998, if any, exceed $2.5 million, and five times the amount by which the dealership's 1999 pre-tax earnings, if any, exceed the greater of $2.5 million or the dealership's 1998 pre-tax earnings. Also in July 1998, the Company acquired two dealerships located in Montgomery, Alabama for a purchase price of approximately $8.1 million paid to the sellers at the closing (the "Montgomery Acquisition"). The total purchase price paid at closing was paid with approximately $3.4 million in cash (approximately $0.1 million of which was financed by cash from the Company's existing operations and approximately $3.3 million of which was financed with a portion of the net proceeds of the Prior Offering) and with 4,194.3 shares of Preferred Stock with a liquidation preference of approximately $4.2 million. The remaining $0.6 million of the cash portion of the purchase price is payable to the sellers on the first and second anniversaries of the closing date. The Company has also agreed to pay an additional payment to the sellers, not to exceed $3.3 million, contingent upon the future performance of the acquired dealerships. In September 1998, the Company acquired three dealerships and related assets located in the Daytona Beach, Florida area for a total purchase price of approximately $27.0 million, including the repayment of approximately $2.7 million in indebtedness owed by one of the sellers to its sole shareholder, subject to adjustment based on the net book value of the purchased assets as of the closing date (the "Higginbotham Acquisition"). The total purchase price was paid with approximately $18.2 million in cash (all of which was financed with a portion of the net proceeds from the Prior Offering), and with the issuance to the sellers of Class A Common Stock with a market value at the date of closing of approximately $8.3 million. The remaining $0.5 million of the cash portion of the purchase price is payable to the seller in December 1998. In addition, the Company also assumed certain liabilities of the sellers at closing. In connection with the Higginbotham Acquisition, it is anticipated that MMRT will acquire the real property on which these dealerships and related assets are operated in the future, and that the Company will lease these properties from MMRT. In addition, the Company has entered into a definitive agreement, which contains certain closing conditions and purchase price adjustments, providing for the Company's purchase of a dealership located in Chattanooga, Tennessee, for a purchase price of approximately $7.5 million plus an amount equal to the net book value of the assets of the dealership (the "Economy Honda Acquisition"). The Company's consummation of the Economy Honda Acquisition is subject to the approval of Honda, which has informed the Company that its approval is contingent upon the Company divesting its ownership of the Cleveland Village Honda dealership, which is also located in Chattanooga, prior to acquiring the Economy Honda dealership. The Company is currently negotiating with potential buyers for the sale of the Cleveland Village Honda dealership. There can be no assurance that the Company will be able to sell the Cleveland Village Honda dealership or that the approval of Honda to the Economy Honda Acquisition will be obtained. See "Risk Factors -- No Consent from Honda." Hereinafter the Clearwater Acquisition, the Hatfield Acquisition, the Heritage Acquisition, the Century Acquisition, the Casa Ford Acquisition, the Montgomery Acquisition, the Higginbotham Acquisition and the Economy Honda Acquisition are collectively referred to as the "1998 Acquisitions." The aggregate purchase price for the 1998 Acquisitions is approximately $127.4 million, which has been or will be paid with approximately $88.3 million in cash and with approximately 40,409 shares of Preferred Stock having an aggregate liquidation preference of approximately $40.4 million. Of the $88.3 million cash portion of the aggregate purchase price, approximately $38.4 million was financed with borrowings under the Revolving Facility (which was subsequently repaid with a portion of the net proceeds from the Prior Offering), approximately $34.3 million with a portion of the net proceeds from the Prior Offering, and approximately $8.5 million with cash generated from the Company's existing operations (approximately $8.4 million of which was subsequently replenished with a portion of the net proceeds from the Prior Offering). The remaining $7.1 million of the cash portion of the aggregate purchase price for the 1998 Acquisitions will be financed with a combination of borrowings under the Revolving Facility and a portion of the net proceeds of the Prior Offering. The 1998 Acquisitions have all been consummated, except for the Economy Honda Acquisition for which the consent of Honda has not yet been obtained. There can be no assurance that such consent will be obtained. See "Risk Factors -- No Consent from Honda." In addition, the Company did not consummate the acquisition of a Jaguar franchise representing a portion of the Heritage Acquisition because Jaguar declined to consent to such acquisition. 6 See "Risk Factors -- No Consent from Jaguar." Any manufacturer who does not consent to an acquisition may seek to terminate its franchise agreement, although relevant state franchising laws impose limitations on a manufacturer's ability to terminate a franchise. See "Risk Factors -- Manufacturers' Restrictions on Acquisitions" and "Business -- Relationships with Manufacturers." Prior to their acquisition, the Company operated the dealerships which comprise the Montgomery Acquisition, the Century Acquisition and the Casa Ford Acquisition under separate management agreements. In connection with the 1998 Acquisitions, the Company has or will acquire the following additional or new dealership franchises: Acura, BMW, Chevrolet, Chrysler, Dodge, Ford, Honda, Hyundai, Isuzu, Jeep, KIA, Lincoln, Mercedes, Mercury, Mitsubishi, Oldsmobile, Plymouth, Subaru, Toyota and Volkswagen. For additional information regarding the acquisitions described above, see "The 1998 Acquisitions." Recent Developments In August 1998, the Company entered into a definitive agreement for the acquisition of the assets of an Infiniti dealership located in Charlotte, North Carolina and the real estate upon which the dealership is operated, which real estate the Company anticipates selling to MMRT in the future (the "Jordan Acquisition"). In addition, in September 1998, the Company entered into a definitive agreement for the acquisition of the assets of a Volvo dealership located in Tampa, Florida (the "Tampa Volvo Acquisition"). The pro forma information included in this Prospectus does not give effect to the Jordan Acquisition or the Tampa Volvo Acquisition. The Company was recently awarded two new Volvo franchises and a new Oldsmobile franchise in the Atlanta market. The Company currently expects to open these new dealerships in the first half of 1999. On July 9, 1998, the Company entered into, subject to the approval of the Company's Board of Directors and the Company's independent directors, a Strategic Alliance Agreement and Agreement for the Mutual Referral of Acquisition Opportunities (the "Alliance Agreement") with an operating partnership controlled by MMRT. MMRT intends to acquire certain real estate associated with various automobile dealerships, automotive aftermarket retailers and other automotive related businesses and to lease such properties to the business operators located thereon. Mr. Smith, the Company's Chairman and Chief Executive Officer, serves as the chairman of MMRT's board of trustees and is presently its largest shareholder. See "Risk Factors -- Potential Conflicts of Interest" and "Certain Transactions -- Transactions with MMRT." Under the Alliance Agreement, the Company has agreed to refer real estate acquisition opportunities that arise in connection with its dealership acquisitions to MMRT. In exchange, MMRT has agreed to refer dealership acquisition opportunities to the Company and to provide to the Company, at the Company's cost, certain real estate development, maintenance, survey and inspection services. Pursuant to the Alliance Agreement, the Company has entered into contracts to sell the real estate associated with Town and Country Toyota and Fort Mill Ford, two of the Company's dealerships, for an aggregate purchase price of approximately $10.3 million. In addition, the Alliance Agreement provides for an agreed form of lease (the "Sonic Form Lease") pursuant to which MMRT would lease real estate to the Company should MMRT acquire real estate associated with any of the Company's operations. Presently, the Company leases or intends to lease from MMRT 29 parcels of land associated with 21 of its dealerships, including the real estate associated with Town and Country Toyota and Fort Mill Ford that the Company will lease back from MMRT, pursuant to leases substantially similar to the Sonic Form Lease. The aggregate initial annual base rent to be paid by the Company for all 29 properties under the leases with MMRT is approximately $7.7 million. MMRT has also entered into new leases with each of Town and Country Ford and Lone Star Ford which provide that the annual lease payments for their properties will each be increased to approximately $1.1 million effective January 1, 2000, as compared to current annual lease payments of approximately $0.4 million and $0.3 million, respectively. 7 The Prior Offering The outstanding $125.0 million aggregate principal amount of Old Notes were issued by the Company to the Initial Purchasers on July 31, 1997, pursuant to the Purchase Agreement. The Initial Purchasers subsequently resold the Old Notes in reliance on Rule 144A under the Securities Act. The Company, the Guarantors and the Initial Purchasers also entered into the Registration Rights Agreement pursuant to which the Company and the Guarantors granted certain registration rights for the benefit of the holders of the Old Notes. The Exchange Offer is intended to satisfy certain of the Company's obligations under the Registration Rights Agreement with respect to the Old Notes. See "The Exchange Offer -- Purpose and Effect." The Exchange Offer The Exchange Offer.............. The Company is offering upon the terms and subject to the conditions set forth herein and in the Letter of Transmittal to exchange the New Notes for the outstanding Old Notes. As of the date of this Prospectus, $125.0 million in aggregate principal amount of the Old Notes is outstanding. As of September 15, 1998, there was one registered holder of the Old Notes, Cede & Co., which held the Old Notes for certain of its participants. See "The Exchange Offer -- Terms of the Exchange Offer." Expiration Date................. 5:00 p.m., New York City time, on , 1998 as the same may be extended from time to time. See "The Exchange Offer -- Expiration Date; Extensions; Amendments." Conditions of the Exchange Offer.................. The Exchange Offer is not conditioned upon any minimum principal amount of Old Notes being tendered for exchange. The only condition to the Exchange Offer is the declaration by the Commission of the effectiveness of the Registration Statement of which this Prospectus constitutes a part (the "Exchange Offer Registration Statement"). See "The Exchange Offer -- Conditions of the Exchange Offer." Termination of Certain Rights... Pursuant to the Registration Rights Agreement and the Old Notes, holders of Old Notes have certain rights intended for the holders of unregistered securities. Holders of New Notes will not be and, upon consummation of the Exchange Offer, holders of Old Notes will no longer be, entitled to certain rights under the Registration Rights Agreement intended for holders of unregistered securities except in certain limited circumstances. See "The Exchange Offer -- Termination of Certain Rights" and " -- Procedures for Tendering Old Notes." Accrued Interest................ The New Notes will bear interest at a rate equal to 11% per annum. Interest shall accrue from July 31, 1998 or from the most recent Interest Payment Date with respect to the Old Notes to which interest was paid or duly provided for. See "Description of the New Notes -- General." Procedures for Tendering Old Notes....................... Unless a tender of Old Notes is effected pursuant to the procedures for book-entry transfer as provided herein, each holder desiring to accept the Exchange Offer must complete and sign the Letter of Transmittal, have the signature thereon guaranteed if required by the Letter of Transmittal, and mail or deliver the Letter of Transmittal, together with the Old Notes or a Notice of Guaranteed Delivery (as defined in the Letter of Transmittal) and any other required documents (such as evidence of authority to act, if the Letter of Transmittal is signed by someone acting in a fiduciary or representative capacity), to the Exchange Agent (as defined herein) at the address set forth on the back cover page of this Prospectus prior to 5:00 p.m., New York City time, on the Expiration Date. Any Beneficial Owner (as defined herein) of the Old Notes whose Old Notes are registered in the name of a nominee, such as a broker, dealer, commercial bank or trust company and who wishes to tender 8 Old Notes in the Exchange Offer, should instruct such entity or person to tender promptly on such Beneficial Owner's behalf. See "The Exchange Offer -- Procedures for Tendering Old Notes." Guaranteed Delivery Procedures... Holders of Old Notes who wish to tender their Old Notes and (i) whose Old Notes are not immediately available or (ii) who cannot deliver their Old Notes or any other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date (or complete the procedure for book-entry transfer on a timely basis), may tender their Old Notes according to the guaranteed delivery procedures set forth in the Letter of Transmittal. See "The Exchange Offer -- Guaranteed Delivery Procedures." Acceptance of Old Notes and Delivery of New Notes.......... Following effectiveness of the Exchange Offer Registration Statement and the consummation of the Exchange Offer thereafter, the Company will accept any and all Old Notes that are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Notes issued pursuant to the Exchange Offer will be delivered promptly after acceptance of the Old Notes. See "The Exchange Offer -- Acceptance of Old Notes for Exchange; Delivery of New Notes." Withdrawal Rights............... Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. See "The Exchange Offer -- Withdrawal Rights." The Exchange Agent.............. U.S. Bank Trust National Association is the exchange agent (in such capacity, the "Exchange Agent"). The address and telephone number of the Exchange Agent are set forth in "The Exchange Offer -- The Exchange Agent; Assistance." Fees and Expenses............... All expenses incident to the Company's and the Guarantors' consummation of the Exchange Offer and compliance with the Registration Rights Agreement will be borne by the Company. The Company will also pay certain transfer taxes applicable to the Exchange Offer. See "The Exchange Offer -- Fees and Expenses." Resales of the New Notes........ Based on existing interpretations by the staff of the Commission set forth in "no-action" letters issued to third parties, the Company believes that New Notes issued pursuant to the Exchange Offer to any holder of Old Notes in exchange for Old Notes may be offered for resale, resold and otherwise transferred by such holder (other than (i) a broker-dealer who purchased the Old Notes directly from the Company for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act or (ii) a person that is an affiliate of the Company within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such holder is acquiring the New Notes in the ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in a distribution of the New Notes. Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer, where such Old Notes were acquired by such broker as a result of market-making or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. See "The Exchange Offer -- Resales of the New Notes" and "Plan of Distribution." 9 Effect of Not Tendering Old Notes for Exchange................... Old Notes that are not tendered or that are not properly tendered will, following the expiration of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. Except for certain limited circumstances, the Company will have no further obligations to provide for the registration under the Securities Act of such Old Notes following the expiration of the Exchange Offer, and such Old Notes will, bear interest at the same rate as the New Notes. Description of New Notes Notes Offered................... $125,000,000 aggregate principal amount of 11% Senior Subordinated Notes due 2008, Series B. Maturity Date................... August 1, 2008. Interest Payment Dates.......... February 1 and August 1 of each year, commencing February 1, 1999. Optional Redemption............. The Notes are redeemable for cash at the option of the Company, in whole or in part at any time on or after August 1, 2003 at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time prior to August 1, 2001, the Company may redeem up to 35% of the original aggregate principal amount of the Notes with the net proceeds of one or more Public Equity Offerings (as defined herein) at a redemption price in cash equal to 111% of the principal amount thereof, together with accrued and unpaid interest, if any, to the redemption date, provided that not less than 65% of the aggregate principal amount of Notes originally issued remain outstanding immediately after such redemption. See "Description of the New Notes -- Optional Redemption." Guarantees...................... The Old Notes are, and the New Notes will be, guaranteed, jointly and severally, on a senior subordinated basis, by all of the Company's existing subsidiaries. See "Description of the New Notes -- Guarantees." Change of Control............... Upon the occurrence of a Change of Control, each holder of the Notes may require the Company to purchase all or a portion of such holder's Notes at a cash purchase price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of repurchase. See "Description of the New Notes -- Purchase of Notes Upon a Change of Control." Ranking and Asset Encumbrances... The Notes will be unsecured senior subordinated obligations of the Company and, as such, will be subordinated in right of payment to all other existing and future senior indebtedness of the Company and will rank pari passu in right of payment with all other existing and future senior subordinated indebtedness of the Company. The Guarantees will be unsecured senior subordinated obligations of the Guarantors and will be subordinated in right of payment to all existing and future senior indebtedness of the Guarantors. As of June 30, 1998, on a pro forma basis after giving effect to the 1998 Acquisitions and the Prior Offering and the application of the net proceeds therefrom, (i) the Company and the Guarantors would have had $4.3 million in aggregate principal amount of indebtedness outstanding which would have ranked senior in right of payment to the Notes ($2.9 million of which would have been secured) and no indebtedness pari passu to the Notes or the Guarantees, as the case may be, (ii) the Company would also have had $3.7 million of indebtedness senior to, and $5.5 million of indebtedness 10 subordinated to, the Notes and (iii) the Guarantors would also have had $197.7 million of floor plan indebtedness and $3.2 million of additional indebtedness which would have ranked senior in right of payment to the Guarantees ($3.0 million of which would have been secured). Certain Covenants............... The indenture relating to the Notes (the "Indenture") contains certain restrictive covenants, including, but not limited to, covenants with respect to the following matters: (i) limitation on indebtedness; (ii) limitation on restricted payments; (iii) limitation on transactions with affiliates; (iv) limitation on liens; (v) limitation on disposition of proceeds of asset sales; (vi) limitation on issuances of guarantees of and pledges for indebtedness; (vii) limitation on other senior subordinated indebtedness; (viii) limitation on dividend and other payment restrictions affecting subsidiaries; (ix) limitation on unrestricted subsidiaries; (x) limitation on the issuance of preferred stock of subsidiaries; and (xi) restrictions on mergers, consolidations and the transfer of all or substantially all of the assets of the Company. See "Description of the New Notes -- Certain Covenants." Use of Proceeds................. There will be no proceeds payable to the Company or the Guarantors from this Exchange Offer. The Company and the Guarantors are conducting the Exchange Offer to satisfy certain of their obligations under the Registration Rights Agreement executed in connection with the issuance of the Old Notes. See "Use of Proceeds." Registration Rights............. In connection with the sale of the Old Notes, the Company and the Guarantors agreed, at the Company's and the Guarantors' cost, to use their reasonable best efforts to (i) file within 60 days, and cause to become effective within 135 days, of the date of original issuance of the Old Notes, a registration statement (the "Registration Statement"), of which this Prospectus is a part, with respect to a registered offer to exchange the Old Notes for the New Notes with terms identical in all material respects to the Old Notes (except that the New Notes will not contain terms with respect to transfer restrictions or interest rate increases as described below) and (ii) cause the Exchange Offer to be consummated within 165 days of the original issuance of the Old Notes. In the event that any changes in law or the applicable interpretations of the staff of the Commission do not permit the Issuers to effect the Exchange Offer, or if the Exchange Offer Registration Statement is not declared effective within 135 days or consummated within 165 days following the date of original issuance of the Old Notes, or upon the request of any of the Initial Purchasers, or if any holder of the Old Notes is not permitted by applicable law to participate in the Exchange Offer or elects to participate in the Exchange Offer but does not receive fully tradeable New Notes pursuant to the Exchange Offer, the Issuers will use their reasonable best efforts to cause a shelf registration statement with respect to the resale of the Old Notes (the "Shelf Registration Statement") to become effective within 165 days following the date of original issuance of the Old Notes and to keep the Shelf Registration Statement effective for up to two years from the date the Shelf Registration Statement is declared effective by the Commission. The interest rate on the Old Notes is subject to increase under certain circumstances if the Company and the Guarantors are not in compliance with their obligations under the Registration Rights Agreement. See "Exchange Offer." 11 Absence of a Public Market for the Notes...................... There is no public trading market for the New Notes and the Company does not intend to apply for listing of the New Notes on any national securities exchange or for quotation of the New Notes on any automated dealer quotation system. The Company has been advised by the Initial Purchasers that they presently intend to make a market in the Notes, although they are under no obligation to do so and may discontinue any market making activities at any time without any notice. The Notes are eligible for trading in the Private Offerings, Resale and Trading through Automated Linkages ("PORTAL") market. However, no assurance can be given as to the liquidity of the trading market for the Notes or that an active public market for the Notes will develop. If an active trading market for the Notes does not develop, the market price and liquidity of the Notes may be adversely affected. If the Notes are traded, they may trade at a discount from their initial offering price, depending on prevailing interest rates, the market for similar securities, the performance of the Company and certain other factors. See "Risk Factors -- Absence of Public Market for the Notes." Risk Factors See "Risk Factors" beginning on page 15 for a discussion of certain factors that should be considered by prospective investors in evaluating an investment in the Notes. 12 Summary Historical and Pro Forma Consolidated Financial and Operating Data
Six Months Ended June Year Ended December 31, 30, --------------------------------------------------- ----------------------- Pro Actual Forma Actual ----------------------------------- --------------- ----------------------- 1995 1996(a) 1997(b) 1997(c) 1997(b) 1998 ----------- ----------- ----------- --------------- ----------- ----------- (Unaudited) --------------------------------------- (Dollars in Thousands) Consolidated Income Statement Data: Revenues ................................... $311,323 $376,867 $536,001 $ 1,806,453 $212,886 $648,840 Cost of sales .............................. 272,130 332,122 473,003 1,584,440 189,254 566,392 -------- -------- -------- ----------- -------- -------- Gross profit ............................... 39,193 44,745 62,998 222,013 23,632 82,448 Selling, general and administrative expenses ................................. 28,091 32,602 46,770 161,289 17,532 59,622 Operating income ........................... 10,270 11,067 14,906 54,095 5,704 20,975 Interest expense, floor plan ............... 4,504 5,968 8,007 19,123 3,018 7,341 Interest expense, other .................... 436 433 1,199 15,163 318 2,745 Income before income taxes and minority interest ........................ 5,436 5,021 5,998 20,997 2,503 10,904 Net income ................................. 3,238 2,983 3,702 12,678 1,540 6,804 Consolidated Balance Sheet Data: Cash and cash equivalents .................. $ 8,993 $ 6,679 $ 18,304 $ 9,238 $ 27,228 Receivables, net ........................... 9,085 11,908 19,784 12,897 35,761 Inventories ................................ 51,348 71,550 156,514 73,410 175,515 Property and equipment, net ................ 8,527 12,467 19,081 13,270 22,040 Total assets ............................... 79,462 110,976 291,450 120,384 369,623 Notes payable -- floor plan ................ 45,151 63,893 133,236 67,855 149,670 Long-term debt, including current portion (d) .............................. 6,950 6,719 49,563 9,979 65,538 Minority interest .......................... 200 314 -- -- -- Stockholders' equity ....................... 16,306 26,295 84,365 28,406 103,401 Other Consolidated Financial Data: Revenues: Vehicle sales ............................ $267,650 $327,674 $467,858 $ 1,592,802 $185,216 $567,279 Parts, service and collision repairs ..... 35,860 42,075 57,537 176,299 22,907 68,020 Finance and insurance .................... 7,813 7,118 10,606 37,352 4,763 13,541 EBITDAR(e) ................................. $ 7,681 $ 7,619 $ 10,668 $ 55,117 $ 3,760 $ 19,337 Rental expense ............................. 977 1,089 2,149 12,328 543 3,837 -------- -------- -------- ----------- -------- -------- EBITDA(f) .................................. $ 6,704 $ 6,530 $ 8,519 $ 42,789 $ 3,217 $ 15,500 ======== ======== ======== =========== ======== ======== Depreciation and amortization .............. $ 832 $ 1,076 $ 1,322 $ 6,629 $ 396 $ 1,851 Capital expenditures ....................... 1,509 1,907 2,007 886 1,261 Ratio of EBITDA to interest expense, other .................................... 2.8x Ratio of long-term debt to EBITDA(g) ....... Other Operating Data: Dealerships ................................ 4 5 20 37 6 26 New vehicles units sold(h) ................. 10,273 11,693 15,715 48,079 6,533 16,601 Used vehicles units sold(h) ................ 5,172 5,488 6,712 32,478 2,638 9,719 Six Months Ended June 30, ------------- Pro Forma ------------- 1998(c) ------------- (Unaudited) ------------- Consolidated Income Statement Data: Revenues ................................... $ 963,509 Cost of sales .............................. 842,095 --------- Gross profit ............................... 121,414 Selling, general and administrative expenses ................................. 87,886 Operating income ........................... 30,395 Interest expense, floor plan ............... 10,061 Interest expense, other .................... 7,651 Income before income taxes and minority interest ........................ 13,031 Net income ................................. 8,019 Consolidated Balance Sheet Data: Cash and cash equivalents .................. $ 37,589 Receivables, net ........................... 43,550 Inventories ................................ 228,549 Property and equipment, net ................ 23,583 Total assets ............................... 512,177 Notes payable -- floor plan ................ 199,037 Long-term debt, including current portion (d) .............................. 140,843 Minority interest .......................... -- Stockholders' equity ....................... 130,776 Other Consolidated Financial Data: Revenues: Vehicle sales ............................ $ 848,235 Parts, service and collision repairs ..... 94,070 Finance and insurance .................... 21,204 EBITDAR(e) ................................. $ 29,943 Rental expense ............................. 6,128 --------- EBITDA(f) .................................. $ 23,815 ========= Depreciation and amortization .............. $ 3,133 Capital expenditures ....................... Ratio of EBITDA to interest expense, other .................................... 3.1x Ratio of long-term debt to EBITDA(g) ....... 3.3x Other Operating Data: Dealerships ................................ 37 New vehicles units sold(h) ................. 25,195 Used vehicles units sold(h) ................ 17,094
- --------- (a) The Company acquired Fort Mill Ford, Inc. in February 1996. The acquisition was accounted for using the purchase method of accounting. As a result, the actual financial data does not include the results of this dealership prior to the date it was acquired by the Company. Accordingly, the actual financial data for periods after the acquisition may not be comparable to data presented for periods prior to the acquisition. (b) The Company acquired Fort Mill Chrysler-Plymouth-Dodge in June 1997, Lake Norman Chrysler/Plymouth/Jeep and Lake Norman Dodge in September 1997, Williams Motors and Ken Marks Ford in October 1997, and the Bowers Automotive Group and Dyer & Dyer Volvo in November 1997 (collectively, the "1997 Acquisitions"). The 1997 Acquisitions were accounted for using the purchase method of accounting. As a result, the actual financial data does not include the results of operations of these dealerships prior to the date they were acquired by the Company. Accordingly, the actual financial data for periods after the acquisitions may not be comparable to data presented for periods prior to the acquisitions. (footnotes continued on following page) 13 (c) For information regarding the unaudited pro forma adjustments made to the Company's historical financial data, which give effect to the IPO, the Reorganization, the 1997 Acquisitions and the 1998 Acquisitions (collectively, the "Acquisitions"), and the Prior Offering and the application of the net proceeds therefrom, see "Unaudited Pro Forma Consolidated Financial Data." (d) Long-term debt, including current portion, includes the payable to the Company's Chairman and the payable to affiliates of the Company. See the Company's Consolidated Financial Statements and the related notes included elsewhere in this Prospectus. (e) EBITDAR is defined as earnings before interest (other than interest expense related to notes payable-floor plan), taxes, depreciation, amortization, rent expense and other non-recurring charges. While EBITDAR should not be construed as a substitute for operating income or as a better measure of liquidity than cash flows from operating activities, which are determined in accordance with generally accepted accounting principles, it is included herein to provide additional information with respect to the ability of the Company to meet future debt service, capital expenditures and working capital requirements. This measure may not be comparable to similarly titled measures reported by other companies. (f) EBITDA is defined as earnings before interest (other than interest expense related to notes payable-floor plan), taxes, depreciation, amortization and other non-recurring charges which is consistent with the measure used to calculate the Company's Consolidated Fixed Charge Coverage Ratio for purposes of the limitations on indebtedness covenant in the Indenture. While EBITDA should not be construed as a substitute for operating income or as a better measure of liquidity than cash flows from operating activities, which are determined in accordance with generally accepted accounting principles, it is included herein to provide additional information with respect to the ability of the Company to meet future debt service, capital expenditures and working capital requirements. This measure may not be comparable to similarly titled measures reported by other companies. (g) Ratio of long-term debt to EBITDA for the pro forma six months ended June 30, 1998 is calculated by dividing pro forma long-term debt, including current portion, at June 30, 1998 by EBITDA for the pro forma year ended December 31, 1997. (h) The number of units sold consists of retail sales to consumers as opposed to wholesale sales. 14 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. ADVERSE CONSEQUENCES OF FINANCIAL LEVERAGE As of June 30, 1998, on a pro forma basis, the Company's total consolidated long-term indebtedness (including certain affiliated payables), total consolidated short-term indebtedness (including floor plan notes payable) and total stockholders' equity would have been $139.6 million, $202.1 million and $130.8 million, respectively. In addition, the Indenture and the Company's and the Guarantors' other debt instruments will allow the Company and the Guarantors to incur certain additional indebtedness, including secured indebtedness. The Indenture permits the Company to incur inventory financing without satisfaction of the fixed charge coverage test. See "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Description of the New Notes" and "Description of Certain Other Indebtedness." The degree to which the Company is leveraged could have important consequences to the holders of Notes, including the following: (i) the Company's ability to obtain additional financing for acquisitions, capital expenditures, working capital or general corporate purposes may be impaired in the future; (ii) a substantial portion of the Company's cash flow from operations must be dedicated to the payment of principal and interest on the Notes and borrowings under the Revolving Facility and a standardized floor plan credit facility with Ford Motor Credit for each of the Company's dealership subsidiaries (the "Floor Plan Facility" and, together with the Revolving Facility, the "Ford Credit Facilities") and other indebtedness, thereby reducing the funds available to the Company for its operations and other purposes; (iii) certain of the Company's borrowings are and will continue to be at variable rates of interest, which exposes the Company to the risk of increased interest rates; (iv) the indebtedness outstanding under the Ford Credit Facilities is secured by a pledge of substantially all the assets of the Company's dealerships and will mature prior to the maturity of the Notes; and (v) the Company may be substantially more leveraged than certain of its competitors, which may place the Company at a relative competitive disadvantage and make the Company more vulnerable to changing market conditions and regulations. See "Description of the New Notes" and "Description of Certain Other Indebtedness." The Ford Credit Facilities and the Indenture contain numerous financial and operating covenants that will limit the discretion of the Company's and the Guarantors' management with respect to certain business matters. These covenants will place significant restrictions on, among other things, the ability of the Company or any of the Guarantors to incur additional indebtedness, to create liens or other encumbrances, to make certain payments and investments, and to sell or otherwise dispose of assets and merge or consolidate with other entities. The Ford Credit Facilities also require the Company and the Guarantors to meet certain financial ratios and tests. A failure of the Company and the Guarantors to comply with the obligations contained in the Ford Credit Facilities or the Indenture could result in an event of default under the Ford Credit Facilities or the Indenture, which could permit acceleration of the related debt and acceleration of debt under other instruments that may contain cross acceleration or cross-default provisions. See "Description of Certain Other Indebtedness." The Company did not meet the specified debt to tangible equity ratio covenant of the Revolving Facility at December 31, 1997, at March 31, 1998 and at June 30, 1998 and has obtained waivers with regard to such requirement from Ford Motor Credit. The waivers are subject to certain requirements to the effect that the Company meet modified ratios. In connection with the issuance of the Old Notes, the Company and Ford Motor Credit amended the Revolving Facility to provide that the Notes (which are subordinated to the Revolving Facility) will be treated as equity capital for purposes of this ratio and, accordingly, the Company is in compliance with this covenant after giving effect to its issuance of the Old Notes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 12 to the Consolidated Financial Statements. The Company believes that, based on its current level of operations, it will have sufficient capital to carry on its business, including acquisitions, and will be able to meet its scheduled debt service requirements for the forseeable future, although the Company may need to refinance the repayment of principal of the Notes at maturity. However, there can be no assurance that the future cash flow of the Company will be sufficient to meet the Company's obligations and commitments. If the Company is unable to generate sufficient cash flow from operations in the future to service its indebtedness and to meet its other commitments, the Company will be required to adopt one or more alternatives, such as refinancing or restructuring its debt or equity capital. There can be no assurance that any of these actions could be effected on a timely basis or on satisfactory terms or that these actions would enable the Company to continue to satisfy its capital requirements. In addition, the terms of existing or future franchise agreements or debt agreements, including the Indenture and the Ford Credit Facilities, may prohibit the Company from adopting any of these alternatives. See " -- Stock Ownership/Issuance Limits; Limitation on Ability to Issue Additional Equity," and "Description of the New Notes." 15 SUBORDINATION OF THE NOTES AND THE GUARANTEES; ASSET ENCUMBRANCES; CHANGE OF CONTROL OFFER The payment of the principal of, premium, if any, and interest on the Notes will be subordinated to the prior payment in full of all existing and future senior indebtedness of the Company. Therefore, in the event of a liquidation, dissolution, reorganization or any similar proceeding regarding the Company, the assets of the Company will be available to pay obligations on the Notes only after senior indebtedness has been paid in full, and there may not be sufficient assets to pay amounts due on all or any of the Notes. In addition, the Company may not pay principal of, premium, if any, interest on or any other amounts owing in respect of the Notes, make any deposit pursuant to defeasance provisions or purchase, redeem or otherwise retire the Notes, if any senior indebtedness is not paid when due or any other default on senior indebtedness occurs and the maturity of such indebtedness is accelerated in accordance with its terms unless, in either case, such default has been cured or waived, any such acceleration has been rescinded or such indebtedness has been repaid in full. Moreover, under certain circumstances, if any non-payment default exists with respect to Designated Senior Indebtedness (as defined herein), the Company may not make any payments on the Notes for a specified time, unless such default is cured or waived, any acceleration of such indebtedness has been rescinded or such indebtedness has been repaid in full. See "Description of the New Notes -- Ranking." The Notes will be unsecured senior subordinated obligations of the Company and, as such, will be subordinated in right of payment with all other existing and future senior indebtedness of the Company and the Guarantors and pari passu in right of payment to all existing and future senior subordinated indebtedness of the Company and the Guarantors. As of June 30, 1998, on a pro forma basis after giving effect to the 1998 Acquisitions and the Prior Offering and the application of the net proceeds thereof, (i) the Company and the Guarantors would have had $4.3 million in aggregate principal amount of indebtedness outstanding which would have ranked senior in right of payment to the Notes ($2.9 million of which would have been secured) and no indebtedness pari passu to the Notes or the Guarantees, as the case may be, (ii) the Company would also have had $3.7 million of indebtedness senior to, and $5.5 million of indebtedness subordinated to, the Notes and (iii) the Guarantors would also have had $197.7 million of floor plan indebtedness and $3.2 million of additional indebtedness which would have ranked senior in right of payment to the Guarantees ($3.0 million of which would have been secured). The Notes will not be secured by any assets of the Company or the Guarantors. The indebtedness under the Ford Credit Facilities is secured by (i) a pledge by the Company of all the capital stock, membership interests and partnership interests of all of the Company's subsidiaries, (ii) guarantees by all of the Company's subsidiaries that are, in turn, secured by a lien on all of the assets of such subsidiaries (with the exception of the liens on the assets of the Company's Ford dealership subsidiaries, which liens secure only such Ford subsidiaries' obligations under the Floor Plan Facility) and (iii) a lien on all of the Company's other assets, except for real estate owned by the Company or its subsidiaries. In the event of a default on the Notes or a bankruptcy, liquidation or reorganization of the Company, such assets will be available to satisfy the obligations with respect to the indebtedness secured thereby before any payment therefrom could be made on the Notes. In addition, the Ford Credit Facilities are partially secured by a pledge of shares of Speedway Motorsports, Inc. ("Speedway Motorsports") common stock owned by Sonic Financial Corporation ("Sonic Financial"), a corporation controlled by Bruton Smith. See "Certain Transactions -- The Smith Guarantees and Pledges." Upon a Change of Control, the Company is required to offer to repurchase all outstanding Notes at 101% of the principal amount thereof plus accrued and unpaid interest to the repurchase date. However, there can be no assurance that sufficient funds will be available at the time of any Change of Control to make any required repurchases of Notes tendered. Moreover, the Revolving Facility provides that certain change of control events with respect to the Company would constitute a default thereunder. In such circumstances, the subordination provisions in the Indenture would likely restrict payments to holders of Notes. There can be no assurance that the Company will be able to obtain appropriate consents under the Revolving Facility to enable it to fulfill such repurchase obligations. Notwithstanding these provisions, the Company could enter into certain transactions, including certain recapitalizations, that would not constitute a Change of Control but would increase the amount of debt outstanding at such time. See "Description of the New Notes -- Purchase of Notes Upon a Change of Control." DEPENDENCE UPON OPERATIONS OF SUBSIDIARIES; POSSIBLE INVALIDITY OF GUARANTEES; POTENTIAL RELEASE OF GUARANTEES; FRAUDULENT CONVEYANCE The Notes are the obligations of the Company. As of June 30, 1998, substantially all of the consolidated assets of the Company were held by the Guarantors and substantially all of the Company's cash flow and net income were generated by the Guarantors. Therefore, the Company's ability to make interest and principal payments when due to holders of the Notes is dependent, in part, upon the receipt of sufficient funds from its subsidiaries. 16 The Company's obligations under the Notes will be guaranteed on a senior subordinated basis by the Guarantors. To the extent that a court were to find, pursuant to federal or state fraudulent transfer laws or otherwise, that (i) the Guarantees were incurred by the Guarantors with intent to hinder, delay or defraud any present or future creditor or the Guarantors contemplated insolvency with a design to prefer one or more creditors to the exclusion in whole or in part of others; or (ii) a Guarantor did not receive fair consideration or reasonably equivalent value for issuing its Guarantee and the Guarantor (a) was insolvent, (b) was rendered insolvent by reason of the issuance of the Guarantee, (c) was engaged or about to engage in a business or transaction for which the remaining assets of the Guarantor constituted unreasonably small capital to carry on its business, (d) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured or (e) was a defendant in an action for money damages or had a judgment for money damages docketed against it (in either case, if after final judgment, the judgment remained unsatisfied), the court could avoid or subordinate the Guarantee in favor of the Guarantor's other creditors. Among other things, a legal challenge of a Guarantee on fraudulent conveyance grounds may focus on the benefits, if any, realized by the Guarantor as a result of the issuance by the Company of the Notes. The measure of insolvency of the Guarantor for purposes of the foregoing will vary depending upon the law of the relevant jurisdiction. Generally, however, a company would be considered insolvent for purposes of the foregoing if the sum of the company's debts is greater than all of the company's property at a fair valuation, or if the present fair saleable value of the company's assets is less than the amount that will be required to pay its probable liability on its existing debts as they become absolute and mature. There can be no assurance as to what standards a court would apply to determine whether a Guarantor was solvent at the relevant time. To the extent that a Guarantee were to be avoided as a fraudulent conveyance or held unenforceable for any other reason, holders of the Notes would cease to have any claim in respect of such Guarantor and would be creditors solely of the Company and of the Guarantors whose Guarantees had not been avoided or held unenforceable. In such event, the claims of the holders of the Notes against the issuer of an invalid Guarantee would be subject to the prior payment in full of all liabilities of such Guarantor thereunder. There can be no assurance that, after providing for all prior claims, there would be sufficient assets to satisfy the claims of the holders of the Notes relating to the voided Guarantees. Based upon financial and other information currently available to it, the Company believes that the Notes and the Guarantees are being incurred for proper purposes and in good faith and that each of the Company and the Guarantors is solvent and will continue to be solvent after issuing the Notes or the Guarantees, as the case may be, will have sufficient capital for carrying on its business after such issuance and will be able to pay its debts as they mature. See "Description of the New Notes," "Description of Certain Other Indebtedness" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Guarantees may be released under certain circumstances upon resale, exchange or transfer by the Company of the stock of the related Guarantor or all or substantially all of the assets of such Guarantor to a non-affiliate. See "Description of the New Notes -- Certain Covenants -- Limitation on Issuances of Guarantees of and Pledges for Indebtedness." In addition, the Company anticipates that some of the net proceeds of the Offering will be applied to repay a portion of the indebtedness incurred by it under the Revolving Facility, which was incurred to finance acquisitions by the Company and its subsidiaries, and under the Floor Plan Facility. To the extent that a court were to find that the issuance of the Notes violated federal or state fraudulent transfer or conveyance laws, in the manner described above with respect to the Guarantors, the court could avoid or modify the Company's obligations to holders of the Notes in favor of the Company's other creditors. To the extent that the issuance of the Notes were to be avoided as a fraudulent conveyance or held unenforceable for any other reason, holders of the Notes would cease to have any claim in respect of the Company and would be creditors solely of the Guarantors whose Guarantees had not been avoided or held unenforceable. In such event, the claims of the holders of the Notes against the Company would be subject to the prior payment in full of all liabilities of the Company. There can be no assurance that, after providing for all prior claims, there would be sufficient assets to satisfy the claims of the holders of the Notes. 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 relationships with such Manufacturers. Vehicles manufactured by Ford Motor Company ("Ford"), Chrysler Corporation ("Chrysler"), Toyota Motor Sales (U.S.A.) ("Toyota") and General Motors Corporation ("GM") accounted for approximately 42.4%, 18.6%, 10.9% and 6.7%, respectively, of the Company's 1997 new vehicle revenues on a pro forma basis. No other Manufacturer accounted for more than 5% of the pro forma new vehicle sales of the Company during 1997. See "Business -- New Vehicle Sales," and " -- Relationships with Manufacturers." Accordingly, a significant decline in the sale of Ford, Chrysler, Toyota or GM new cars could have a 17 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 has no reason to believe that it will not be able to renew all of its existing 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 Manufacturers, and Ford, Chrysler, Toyota or GM in particular, could have a material adverse effect 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 affected Manufacturer in order to carry an adequate level and mix of inventory. Consequently, such events could materially adversely affect the financial results of the Company. In June 1998, the United Auto Workers went on strike at two GM facilities in Flint, Michigan. The strike lasted 53 days, causing 27 GM manufacturing facilities to shut down during the strike and severely affecting production of GM vehicles during the strike period. 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, except for Jaguar's refusal to approve the acquisition of the Chattanooga Jaguar franchise comprising a portion of the 1997 Acquisitions which Jaguar claimed was in part due to CSI scores below the level expected of Jaguar dealership franchises. However, there can be no assurance that the Company will be able to comply with such standards 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." 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 is 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." 18 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 year ended December 31, 1997, industry retail sales increased 0.1% as a result of retail car sales declines of 2.7% offset by retail truck sales gains of 3.8% from the same period in 1996. As of May 31, 1998, industry retail sales for the year to date increased 1.1% as a result of retail car sales declines of 3.2% offset by retail truck sale gains of 6.4% from the same period in 1997. 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 Company's dealerships currently are located in the Charlotte, Chattanooga, Daytona Beach, Nashville, Tampa/Clearwater, Houston, Atlanta, Columbus, Greenville/Spartanburg and Montgomery markets. 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 and Columbus markets, as well as various other factors, such as tax rates and state and local regulations, specific to North Carolina, Tennessee, Florida, Texas, Georgia, Ohio, South Carolina and Alabama. 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 -- Strategy -- Acquire Dealerships." 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 used car market faces increasing competition from non-traditional outlets such as used-vehicle "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 many of the markets where the Company has significant operations, used vehicle superstores operate in competition with the Company. "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, Ford has announced that it is entering into joint ventures to acquire dealerships in various cities in the United States and other manufacturers may also 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 grant 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 businesses to be purchased in the 1998 Acquisitions in light of the circumstances of each transaction, certain unavoidable levels of risk remain regarding the actual operating condition of these businesses. 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 any of the 1998 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. 19 RISKS OF CONSOLIDATING OPERATIONS AS A RESULT OF ACQUISITIONS In connection with the 1998 Acquisitions, Sonic acquired or is acquiring 17 dealerships. Each of these dealerships 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. There can be no assurance that the management group will be able to effectively and profitably integrate in a timely manner any of the dealerships included in the 1998 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 1998 Acquisitions, into existing operations. In pursuing a strategy of acquiring other dealerships, including the 1998 Acquisitions, 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. Failure to retain qualified management personnel at any acquired dealership may increase the risk associated with integrating such acquired dealership. 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 approximately six months 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 1998 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 1998 Acquisitions," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Strategy -- Acquire Dealerships." 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. 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 be prohibited by the Company's franchise agreements with Manufacturers. See " -- Stock Ownership/Issuance Limits; Limitation on Ability to Issue Additional Equity." 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 1998 Acquisitions," 20 "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Business -- Strategy -- Acquire Dealerships." 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, 1998, the Company had approximately $149.7 million of floor plan indebtedness outstanding, all of which is under the Floor Plan Facility. 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. Ford Motor Credit is associated with Ford. Consequently, deterioration of the Company's relationship with Ford could adversely affect its relationship with Ford Motor Credit 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." Bruton Smith initially guaranteed the obligations of the Company under the Revolving Facility and such obligations were further secured with a pledge of shares of common stock of Speedway Motorsports owned by Sonic Financial, a corporation controlled by Mr. Smith, and having an estimated value at the time of pledge of approximately $50.0 million (the "Revolving Pledge"). In December 1997, upon the increase of the borrowing limit under the Revolving Facility to the maximum loan commitment of $75.0 million, Mr. Smith's personal guarantee of the Company's obligations under the Revolving Facility was released, although the Revolving Pledge remained in place and Mr. Smith was required to lend $5.5 million (the "Subordinated Smith Loan") to the Company to increase its capitalization. The Subordinated Smith Loan was required by Ford Motor Credit as a condition to its agreement to increase the borrowing limit under the Revolving Facility because the net offering proceeds to the Company from its IPO in November 1997 were significantly less than expected by the Company and Ford Motor Credit. For further discussion of the Revolving Pledge and the Subordinated Smith Loan, see "Certain Transactions -- The Smith Guarantees, Pledges and Subordinated Loan." No assurance can be given that Mr. Smith or Sonic Financial will provide similar or additional security or capitalization for the benefit of the Company in connection with future refinancings of the Company's debt or future additions or increases in financing sources of the Company. 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. All of the Manufacturers of which Company subsidiaries are franchisees, except for Jaguar, have agreed to permit trading in the Class A Common Stock. A number of Manufacturers impose restrictions upon the transferability of the Class A 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 the current holders of the Company's Class B Common Stock and their lineal descendants and affiliates (collectively, 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") 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 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. See "Business -- Relationships with Manufacturers." In a similar manner, the Company's lending arrangements 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." 21 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. In the course of acquiring Jaguar franchises associated with dealerships in Chattanooga, Tennessee and Greenville, South Carolina, Jaguar declined to consent to the Company's proposed acquisitions of those franchises. Subsequently, the Company agreed with Jaguar not to acquire any Jaguar franchise until August 3, 2001. See " -- No Consent from Jaguar." 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 1997 Acquisitions and the 1998 Acquisitions, other than Jaguar, which was not obtained, took approximately five months. Although no assurances can be given, the Company believes that Manufacturer approvals of subsequent acquisitions from Manufacturers with which the Company has previously completed applications and agreements may take less time. Excluding Jaguar, the Company has obtained Manufacturer consent to all of the 1998 Acquisitions other than from Honda in the Economy Honda Acquisition. The Company currently expects to receive the consent of Honda to the Economy Honda Acquisition prior to the closing of this acquisition, although there can be no assurance that such consent will be obtained. See " -- No Consent from Honda." 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. BMW has made a similar request. Moreover, Chrysler has previously 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. The Economy Honda Acquisition would violate Honda's contiguous dealership policy since it would result in the Company having two contiguous dealership points in Chattanooga. See "No Consent from Honda." GM has limited the number of GM dealerships that the Company may acquire during the next 12 months 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 1997 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 22 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 will own, after giving effect to the 1998 Acquisitions, nine Chrysler franchises, seven Ford franchises, four BMW franchises, four GM franchises, three Toyota franchises, three Volkswagen franchises, three KIA franchises, three Mercury franchises, two Honda franchises, two Lincoln franchises, two Hyundai franchises, two Mitsubishi franchises, and one franchise each of Acura, Infiniti, Isuzu, Mercedes and Subaru. See " -- No Consent from Honda" and " -- No Consent from Jaguar." NO CONSENT FROM HONDA The Company has requested the consent of Honda to the acquisition of a Honda dealership located in Chattanooga, Tennessee (the "Economy Honda Dealership") by the Company relating to the Economy Honda Acquisition. Honda has informed the Company that its acquisition of the Economy Honda Dealership would violate Honda's policy against the ownership of contiguous dealerships, which the Company has agreed to in its agreement with Honda, since the Company already owns the Cleveland Village Honda dealership located in the Chattanooga market. Therefore, Honda has further informed the Company that its approval of the Company's acquisition of the Economy Honda Dealership is contingent upon the Company divesting its ownership of the Cleveland Village Honda dealership prior to such acquisition. The Company is currently negotiating with potential buyers for the sale of the Cleveland Village Honda dealership. There can be no assurance that the Company will be able to sell the Cleveland Village Honda dealership or that the approval of Honda to the Economy Honda Acquisition will be obtained. On a pro forma basis, the Cleveland Village Honda dealership accounted for, and the Economy Honda Dealership would have accounted for, approximately 1.9% and 2.7% of the Company's 1997 revenues and approximately 2.0% and 3.2% of gross profits, respectively. NO CONSENT FROM JAGUAR In the course of acquiring Jaguar franchises in Chattanooga, Tennessee and Greenville, South Carolina, Jaguar declined to consent to the Company's proposed acquisitions of these franchises. The Company is operating the Chattanooga Jaguar franchise pursuant to a Service and Parts Agreement with Jaguar and is providing management services to the present owners of the Greenville Jaguar franchise pursuant to a Services Agreement. Both of these arrangements will terminate upon the respective sales of these franchises to third parties approved by Jaguar in the future. In settling legal actions brought against Jaguar by the seller of the Chattanooga Jaguar franchise, the Company agreed with Jaguar not to acquire any Jaguar franchise until August 3, 2001. The Chattanooga and Greenville Jaguar franchises, individually and in the aggregate, would have accounted for less than 1% of the Company's 1997 revenues and gross profits on a pro forma basis. 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 or Nelson Bowers or other affiliates of the Company, including transactions with MMRT, a real estate investment trust for which Mr. Smith serves as chairman of MMRT's board of trustees and is presently its largest shareholder. The Company has recently entered into certain transactions with MMRT. See "Prospectus Summary -- Recent Developments" and "Certain Transactions -- Transactions with MMRT." The Company believes that all of its existing arrangements are favorable to the Company and were entered into on terms that, taken as a whole, reflect arm's-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. 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." 23 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, and an used-car auction house. 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 and is only permitted to maintain a passive investment in these enterprises. Under the General Corporation Law of Delaware 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 arm's-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. In addition, the terms of the Ford Credit Facilities restrict, and the terms of the Indenture will restrict, certain transactions with affiliates. See "Description of the New Notes -- Certain Covenants -- Limitation on Transactions with Affiliates." LACK OF MAJORITY OF INDEPENDENT DIRECTORS Independent directors do 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. These and other transactions could present the potential for a conflict of interest between the Company and its minority stockholders and the controlling officers, stockholders or directors. See "Management." 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, Dennis D. Higginbotham, 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 -- Strategy -- Acquire Dealerships," " -- Competition" and "Management." 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, 24 particularly Germany, 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 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 wastes and the remediation of contamination associated with such disposal or release. Certain of these laws and regulations may impose joint and several liability on certain statutory classes of persons for the costs of investigation and/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. In addition, in connection with the Company's recent or expected acquisitions, the Company could become subject to new or unforeseen environmental costs or liabilities, certain of which could be material. 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 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. As of September 15, 1998, the holders of Class B Common Stock had approximately 90.7% of the combined voting power of the outstanding Voting Stock, representing 55.6% of the outstanding shares of Voting Stock. Consequently, holders of Class B Common Stock 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. See "Principal Stockholders." YEAR 2000 COMPLIANCE The Company recognizes the need to ensure that its operations will not be adversely impacted by Year 2000 software failures and it has completed an assessment of its own operations in this regard. The Company has determined that its systems are currently Year 2000 compliant and that the costs associated with making its systems Year 2000 compliant were immaterial. However, many of the Company's lenders and suppliers, including the Company's suppliers that provide finance and insurance products, may be impacted by Year 2000 complications. The Company is in the process of making inquiries to its lenders and suppliers regarding their Year 2000 compliance efforts, and it is reviewing the Year 2000 disclosures in documents filed 25 with the Commission for those lenders and suppliers that are publicly-held companies. The Company does not believe that failure of the Company's lenders or suppliers to ensure that their computer systems are Year 2000 compliant will have a material adverse impact on the Company's business, results of operations, and financial condition, although no assurances can be given in this regard. Furthermore, there can be no assurances that Year 2000 deficiencies on the part of dealerships to be acquired by the Company would not have a material adverse impact on the Company's business, results of operations, and financial condition. The Company has not yet established a contingency plan in the event that its expectations regarding Year 2000 problems are incorrect, but the Company intends to create such a contingency plan within the next six months. At this time, it is impossible to state with certainty whether Year 2000 computer software or equipment failures on the part of the Company or third parties involved with the Company will have a material adverse impact on the Company's results of operations, liquidity and financial condition. However, based on the Company's assessment of its own operations, the Company believes that it is adequately prepared to deal with Year 2000 problems which may arise. SIGNIFICANT MATERIALITY OF GOODWILL On a pro forma basis, goodwill would have represented approximately 32.8% and 128.6% of the Company's total assets and stockholders' equity, respectively, as of June 30, 1998. Goodwill arises when an acquiror pays more for a business than the fair value of the tangible and separately measurable intangible net assets. Generally accepted accounting principles require that this and all other intangible assets be amortized over the period benefited. The Company determined that the period benefited by the goodwill will be no less than 40 years. If the Company were not to separately recognize a material intangible asset having a benefit period less than 40 years, or were not to give effect to shorter benefit periods of factors giving rise to a material portion of the goodwill, earnings reported in periods immediately following the acquisition would be overstated. In later years, the Company would be burdened by a continuing charge against earnings without the associated benefit to income valued by management in arriving at the consideration paid for the businesses. Earnings in later years also could be significantly affected if management determined then that the remaining balance of goodwill was impaired. The Company reviewed with its independent accountants all of the factors and related future cash flows which it considered in arriving at the amount incurred in the 1998 Acquisitions. The Company concluded that the anticipated future cash flows associated with intangible assets recognized in the acquisitions will continue indefinitely, and there is no persuasive evidence that any material portion will dissipate over a period shorter than 40 years. ABSENCE OF A PUBLIC MARKET FOR THE NOTES The Notes are new securities for which there currently is no trading market and there can be no assurance as to the liquidity of any market for the Notes that may develop, the ability of holders of the Notes to sell their Notes, or the prices at which holders of the Notes would be able to sell their Notes. If such markets were to exist, the Notes could trade at prices higher or lower than their initial purchase prices depending on many factors, including prevailing interest rates, the Company's operating results and the market for similar securities. Although the Initial Purchasers have informed the Company that they currently intend to make a market in the Notes, the Initial Purchasers are not obligated to do so, and any such market making may be discontinued at any time without notice. Accordingly, there can be no assurance as to the development or liquidity of any market for the Notes. The Notes are eligible for trading in the PORTAL market. The Company does not intend to apply for listing of the Notes, or if issued, the Exchange Notes on any securities exchange or for quotation on the National Association of Securities Dealers Automated Quotation System. CONSEQUENCES OF FAILURE TO EXCHANGE Untendered Old Notes that are not exchanged for New Notes pursuant to the Exchange Offer will remain restricted securities. Old Notes will continue to be subject to the following restrictions on transfer and limitation of rights: (i) Old Notes may be resold only if registered pursuant to the Securities Act, if an exemption from registration is available thereunder, or if neither such registration nor such exemption is required by law, (ii) Old Notes shall bear a legend restricting transfer in the absence of registration or an exemption therefrom, (iii) a holder of Old Notes who desires to sell or otherwise dispose of all or any part of its Old Notes under an exemption from registration under the Securities Act, if requested by the Company, must deliver to the Company an opinion of counsel reasonably satisfactory in form and substance to the Company, that such exemption is available and (iv) the Old Notes may no longer have rights under the Registration Rights Agreement. Consequently, the Old Notes will have less liquidity than the New Notes but will bear interest at the same rate as that borne by the New Notes. 26 THE EXCHANGE OFFER PURPOSE AND EFFECT The Old Notes were issued by the Company to the Initial Purchasers on July 31, 1998, pursuant to the Purchase Agreement. The Initial Purchasers subsequently resold the Old Notes in reliance on Rule 144A under the Securities Act. In connection with the sale of the Old Notes, the purchasers thereof became entitled to the benefits of certain registration rights. Pursuant to the Registration Rights Agreement, the Company and the Guarantors agreed, for the benefit of the holders of the Old Notes, at the Company's and the Guarantors' cost, to use their reasonable best efforts (i) to file with the Commission the Registration Statement of which this Prospectus is a part within 60 days after the date of original issue of the Old Notes, (ii) to cause the Registration Statement to be declared effective under the Securities Act within 135 days of the date of original issue of the Old Notes, (iii) to keep the Registration Statement effective until the closing of the Exchange Offer, and (iv) to cause the Exchange Offer to be consummated within 165 days of the original issue date of the Old Notes. In the event that any changes in law or the applicable interpretations of the staff of the Commission do not permit the Company and the Guarantors to effect the Exchange Offer, or if for any other reason the Exchange Offer Registration Statement is not declared effective within 135 days of the date of original issue of the Old Notes or the Exchange Offer is not consummated within 165 days of the date of original issue of the Old Notes, or upon the request of any of the Initial Purchasers, or if a holder of the Old Notes is not permitted by applicable law to participate in the Exchange Offer or elects to participate in the Exchange Offer but does not receive fully tradeable New Notes pursuant to the Exchange Offer, the Company and the Guarantors will, in lieu of effecting the registration of the New Notes pursuant to the Exchange Offer Registration Statement and at the Company's and the Guarantors' cost, (a) as promptly as practicable, file with the Commission the Shelf Registration Statement covering resales of the Old Notes, (b) use their reasonable best efforts to cause the Shelf Registration Statement to be declared effective under the Securities Act by the 165th day after the original issue of the Old Notes and (c) use their reasonable best efforts to keep effective the Shelf Registration Statement for a period of two years after its effective date (or for such shorter period that will terminate when all of the Notes covered by the Shelf Registration Statement have been sold pursuant thereto or cease to be outstanding). The Company will, in the event of the filing of a Shelf Registration Statement, provide to each holder of the Old Notes copies of the prospectus which is a part of the Shelf Registration Statement, notify each such holder when the Shelf Registration Statement for the Notes has become effective and take certain other actions as are required to permit unrestricted resales of the Notes. A holder of Notes who sells such Notes pursuant to the Shelf Registration Statement generally will be required to be named as a selling security holder in the related prospectus and to deliver the prospectus to purchasers, will be subject to certain of the civil liability provisions under the Securities Act in connection with such sales and will be bound by the provisions of the Registration Rights Agreement which are applicable to such a holder (including certain indemnification obligations). In the event that (a) the Exchange Offer Registration Statement is not filed with the Commission on or prior to the 60th calendar day following the date of original issue of the Old Notes, (b) the Exchange Offer Registration Statement is not declared effective on or prior to the 135th calendar day following the date of original issue of the Old Notes, (c) the Exchange Offer is not consummated or a Shelf Registration Statement is not declared effective, in either case, on or prior to the 165th day following the date of original issue of the Old Notes or (d) the Shelf Registration Statement is declared effective but shall thereafter become unusable for more than 30 days in the aggregate in any consecutive twelve-month period (each such event referred to in clauses (a) through (d) above, a "Registration Default"), the interest rate borne by the Notes shall be increased by one-quarter of one percent per annum upon the occurrence of each Registration Default, which rate (as increased as aforesaid) will increase by one quarter of one percent each 90-day period that such additional interest continues to accrue under any such circumstance, with an aggregate maximum increase in the interest rate equal to one percent (1%) per annum. The Shelf Registration Statement will be required to remain effective until the second anniversary of the Old Notes. Following the cure of all Registration Defaults the accrual of additional interest will cease and the interest rate will revert to the original rate. The summary herein of certain provisions of the Registration Rights Agreement does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Registration Rights Agreement, a copy of which is available upon request to the Company. CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES In the event the Exchange Offer is consummated, the Company will not be required to file a Shelf Registration Statement relating to any outstanding Old Notes other than those held by persons not eligible to participate in the Exchange Offer, and the interest rate on such Old Notes will remain at its initial level of 11%. The Exchange Offer shall be deemed to have been consummated upon the earlier to occur of (i) the Company having exchanged New Notes for all outstanding Old Notes 27 (other than Old Notes held by persons not eligible to participate in the Exchange Offer) pursuant to the Exchange Offer and (ii) the Company having exchanged, pursuant to the Exchange Offer, New Notes for all Old Notes that have been tendered and not withdrawn on the Expiration Date. Upon consummation, holders of Old Notes seeking liquidity in their investment would have to rely on exemptions to registration requirements under the securities laws, including the Securities Act. See "Risk Factors -- Consequences of Failure to Exchange." TERMS OF THE EXCHANGE OFFER The Company hereby offers, upon the terms and subject to the conditions set forth herein and in the accompanying Letter of Transmittal, to exchange $1,000 in principal amount of the New Notes for each $1,000 in principal amount of the outstanding Old Notes. The Company will accept for exchange any and all Old Notes that are validly tendered on or prior to 5:00 p.m., New York City time, on the Expiration Date. Tenders of the Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is not conditioned upon any minimum principal amount of Old Notes being tendered for exchange. However, the Exchange Offer is subject to the terms and provisions of the Registration Rights Agreement. See " -- Conditions of the Exchange Offer." Old Notes may be tendered only in multiples of $1,000. Subject to the foregoing, holders of Old Notes may tender less than the aggregate principal amount represented by the Old Notes held by them, provided that they appropriately indicate this fact on the Letter of Transmittal accompanying the tendered Old Notes (or so indicate pursuant to the procedures for book-entry transfer). As of the date of this Prospectus, $125.0 million in aggregate principal amount of the Old Notes is outstanding. As of September 15, 1998, there was one registered holder of the Old Notes, Cede, as nominee for DTC, which held the Old Notes for certain of its participants. Solely for reasons of administration, the Company has fixed the close of business on , 1998 as the record date (the "Record Date") for purposes of determining the persons to whom this Prospectus and the Letter of Transmittal will be mailed initially. Only a holder of the Old Notes (or such holder's legal representative or attorney-in-fact) may participate in the Exchange Offer. There will be no fixed record date for determining holders of the Old Notes entitled to participate in the Exchange Offer. The Company believes that, as of the date of this Prospectus, no such holder is an affiliate (as defined in Rule 405 under the Securities Act) of the Company. The Company shall be deemed to have accepted validly tendered Old Notes when, as and if the Company has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering holders of Old Notes and for the purposes of receiving the New Notes from the Company. If any tendered Old Notes are not accepted for exchange because of an invalid tender, the occurrence of certain other events set forth herein or otherwise, certificates for any such unaccepted Old Notes will be returned, without expense, to the tendering holder thereof as promptly as practicable after the Expiration Date. EXPIRATION DATE; EXTENSIONS; AMENDMENTS The Expiration Date shall be , 1998 at 5:00 p.m., New York City time, unless the Company, in its sole discretion, extends the Exchange Offer, in which case the Expiration Date shall be the latest date and time to which the Exchange Offer is extended. In order to extend the Exchange Offer, the Company will notify the Exchange Agent of any extension by oral or written notice and will make a public announcement thereof, each prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. The Company reserves the right, in its sole discretion (subject to the terms and provisions of the Registration Rights Agreement), (i) to delay accepting any Old Notes, (ii) to extend the Exchange Offer, (iii) if any of the conditions set forth below under " -- Conditions of the Exchange Offer" shall not have been satisfied, to terminate the Exchange Offer, by giving oral or written notice of such delay, extension, or termination to the Exchange Agent, and (iv) to amend the terms of the Exchange Offer in any manner. If the Exchange Offer is amended in a manner determined by the Company to constitute a material change, the Company will promptly disclose such amendment by means of a prospectus supplement that will be distributed to the registered holders of the Old Notes. Modification of the Exchange Offer, including, but not limited to, (i) extension of the period during which the Exchange Offer is open and (ii) satisfaction of the conditions set forth below under " -- Conditions of the Exchange Offer", may require that at least ten business days remain in the Exchange Offer. 28 CONDITIONS OF THE EXCHANGE OFFER The Exchange Offer is not conditioned upon any minimum principal amount of the Old Notes being tendered for exchange. However, the Exchange Offer is conditioned upon the declaration by the Commission of the effectiveness of the Exchange Offer Registration Statement of which this Prospectus constitutes a part. TERMINATION OF CERTAIN RIGHTS The Registration Rights Agreement provides that, subject to certain exceptions, in the event of a Registration Default, holders of Old Notes are entitled to receive additional interest on their Notes. See " -- Purpose and Effect." Holders of New Notes will not be and, upon consummation of the Exchange Offer, holders of Old Notes will no longer be, entitled to (i) the right to receive additional interest provided for in the event of a Registration Default or (ii) certain other rights under the Registration Rights Agreement intended for holders of Old Notes, except in certain limited circumstances. The Exchange Offer shall be deemed consummated upon the delivery by the Company to the Registrar under the Indenture of New Notes in the same aggregate principal amount as the aggregate principal amount of Old Notes that are tendered by holders thereof pursuant to the Exchange Offer. ACCRUED INTEREST The New Notes will bear interest at a rate equal to 11% per annum, which interest shall accrue from July 31, 1998 or from the most recent interest payment date with respect to the Old Notes to which interest was paid or duly provided for. See "Description of Notes -- Principal, Maturity and Interest." PROCEDURES FOR TENDERING OLD NOTES The tender of a holder's Old Notes as set forth below and the acceptance thereof by the Company will constitute a binding agreement between the tendering holder and the Company upon the terms and subject to the conditions set forth in this Prospectus and in the accompanying Letter of Transmittal. Except as set forth below, a holder who wishes to tender Old Notes for exchange pursuant to the Exchange Offer must transmit such Old Notes, together with a properly completed and duly executed Letter of Transmittal (or comply with the procedure for book-entry transfer if delivery of such Old Notes is to be made by book-entry transfer to an account maintained by the Exchange Agent at DTC as set forth below), including all other documents required by such Letter of Transmittal, to the Exchange Agent at the address set forth on the back cover page of this Prospectus prior to 5:00 p.m., New York City time, on the Expiration Date. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT THE HOLDER USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. Each signature on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed unless the Old Notes surrendered for exchange pursuant hereto are tendered (i) by a registered holder of the Old Notes who has not completed either the box entitled "Special Exchange Instructions" or the box entitled "Special Delivery Instructions" in the Letter of Transmittal, or (ii) by an Eligible Institution (as defined herein). In the event that a signature on a Letter of Transmittal or a notice of withdrawal, as the case may be, is required to be guaranteed, such guarantee must be by a firm which is a member of a registered national securities exchange or the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or otherwise be an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act (collectively, "Eligible Institutions"). If the Letter of Transmittal is signed by a person other than the registered holder of the Old Notes, the Old Notes surrendered for exchange must either (i) be endorsed by the registered holder, with the signature thereon guaranteed by an Eligible Institution, or (ii) be accompanied by a bond power, in satisfactory form as determined by the Company in its sole discretion, duly executed by the registered holder, with the signature thereon guaranteed by an Eligible Institution. The term "registered holder" as used herein with respect to the Old Notes means any person in whose name the Old Notes are registered on the books of the Registrar. Any financial institution that is a participant in DTC's Book-Entry Transfer Facility system may make book-entry delivery of the Old Notes by causing DTC to transfer such Old Notes into the Exchange Agent's account in accordance with DTC's ATOP procedures for such transfer, and in such case no Letter of Transmittal is required to be transmitted to the Exchange Agent. 29 All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of Old Notes tendered for exchange will be determined by the Company in its sole discretion, which determination shall be final and binding. The Company reserves the absolute right to reject any and all Old Notes not properly tendered and to reject any Old Notes the Company's acceptance of which might, in the judgment of the Company or its counsel, be unlawful. The Company also reserves the absolute right to waive any defects or irregularities or conditions of the Exchange Offer as to particular Old Notes either before or after the Expiration Date (including the right to waive the ineligibility of any holder who seeks to tender Old Notes in the Exchange Offer). The interpretation of the terms and conditions of the Exchange Offer (including the Letter of Transmittal and the instructions thereto) by the Company shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Notes for exchange must be cured within such period of time as the Company shall determine. The Company will use reasonable efforts to give notification of defects or irregularities with respect to tenders of Old Notes for exchange but shall not incur any liability for failure to give such notification. Tenders of the Old Notes will not be deemed to have been made until such irregularities have been cured or waived. If any Letter of Transmittal, endorsement, bond power, power of attorney or any other document required by the Letter of Transmittal is signed by a trustee, executor, corporation or other person acting in a fiduciary or representative capacity, such person should so indicate when signing and, unless waived by the Company, proper evidence satisfactory to the Company, in its sole discretion, of such person's authority to so act must be submitted. Any beneficial owner of the Old Notes (a "Beneficial Owner") whose Old Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender Old Notes in the Exchange Offer should contact such registered holder promptly and instruct such registered holder to tender on such Beneficial Owner's behalf. If such Beneficial Owner wishes to tender directly, such Beneficial Owner must, prior to completing and executing the Letter of Transmittal and tendering Old Notes, make appropriate arrangements to register ownership of the Old Notes in such Beneficial Owner's name. Beneficial Owners should be aware that the transfer of registered ownership may take considerable time. By tendering, each registered holder will represent to the Company that, among other things (i) the New Notes to be acquired in connection with the Exchange Offer by the holder and each Beneficial Owner of the Old Notes are being acquired by the holder and each Beneficial Owner in the ordinary course of business of the holder and each Beneficial Owner, (ii) the holder and each Beneficial Owner are not participating, do not intend to participate, and have no arrangement or understanding with any person to participate, in the distribution of the New Notes, (iii) the holder and each Beneficial Owner acknowledge and agree that any person participating in the Exchange Offer for the purpose of distributing the New Notes must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction of the New Notes acquired by such person and cannot rely on the position of the staff of the Commission set forth in "no-action" letters that are discussed herein under " -- Resales of the New Notes," (iv) that if the holder is a broker-dealer that acquired Old Notes as a result of market making or other trading activities, it will deliver a prospectus in connection with any resale of New Notes acquired in the Exchange Offer, (v) the holder and each Beneficial Owner understand that a secondary resale transaction described in clause (iii) above should be covered by an effective registration statement containing the selling security holder information required by Item 507 of Regulation S-K of the Securities Act, and (vi) neither the holder nor any Beneficial Owner is an "affiliate," as defined under Rule 405 of the Securities Act, of the Company except as otherwise disclosed to the Company in writing. GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their Old Notes and (i) whose Old Notes are not immediately available or (ii) who cannot deliver their Old Notes or any other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date (or complete the procedure for book-entry transfer on a timely basis), may tender their Old Notes according to the guaranteed delivery procedures set forth in the Letter of Transmittal. Pursuant to such procedures: (i) such tender must be made by or through an Eligible Institution and a Notice of Guaranteed Delivery (as defined in the Letter of Transmittal) must be signed by such holder, (ii) on or prior to the Expiration Date, the Exchange Agent must have received from the holder and the Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting forth the name and address of the holder, the certificate number or numbers of the tendered Old Notes, and the principal amount of tendered Old Notes, stating that the tender is being made thereby and guaranteeing that, within four business days after the date of delivery of the Notice of Guaranteed Delivery, the tendered Old Notes, a duly executed Letter of Transmittal and any other required documents will be deposited by the Eligible Institution with the Exchange Agent, and (iii) such properly completed and executed documents required by the Letter of Transmittal 30 and the tendered Old Notes in proper form for transfer must be received by the Exchange Agent within four business days after the date of delivery of the Notice of Guaranteed Delivery. Any Holder who wishes to tender Old Notes pursuant to the guaranteed delivery procedures described above must ensure that the Exchange Agent receives the Notice of Guaranteed Delivery and Letter of Transmittal relating to such Old Notes prior to 5:00 p.m., New York City time, on the Expiration Date. ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES Upon satisfaction or waiver of all the conditions to the Exchange Offer, the Company will accept any and all Old Notes that are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Notes issued pursuant to the Exchange Offer will be delivered promptly after acceptance of the Old Notes. For purposes of the Exchange Offer, the Company shall be deemed to have accepted validly tendered Old Notes, when, as, and if the Company has given oral or written notice thereof to the Exchange Agent. In all cases, issuances of New Notes for Old Notes that are accepted for exchange pursuant to the Exchange Offer will be made only after timely receipt by the Exchange Agent of such Old Notes, a properly completed and duly executed Letter of Transmittal and all other required documents, or after completion of the procedure for book-entry transfer, as the case may be; provided, however, that the Company reserves the absolute right to waive any defects or irregularities in the tender or conditions of the Exchange Offer. If any tendered Old Notes are not accepted for any reason, such unaccepted Old Notes will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. WITHDRAWAL RIGHTS Tenders of the Old Notes may be withdrawn by delivery of a written notice to the Exchange Agent at its address set forth on the back cover page of this Prospectus at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any such notice of withdrawal must (i) specify the name of the person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the certificate number or numbers and principal amount of such Old Notes, as applicable), (iii) be signed by the holder in the same manner as the original signature on the Letter of Transmittal by which such Old Notes were tendered (including any required signature guarantees) or be accompanied by a bond power in the name of the person withdrawing the tender, in satisfactory form as determined by the Company in its sole discretion, duly executed by the registered holder, with the signature thereon guaranteed by an Eligible Institution together with any other documents required upon transfer by the Indenture, and (iv) specify the name in which such Old Notes are to be re-registered, if different from the Depositor, pursuant to such documents of transfer. Any questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company, in its sole discretion. The Old Notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the Exchange Offer. Any Old Notes which have been tendered for exchange but which are withdrawn will be returned to the holder thereof without cost to such holder as soon as practicable after withdrawal. Properly withdrawn Old Notes may be re-tendered by following one of the procedures described under "The Exchange Offer -- Procedures for Tendering Old Notes" at any time on or prior to the Expiration Date. THE EXCHANGE AGENT; ASSISTANCE U.S. Bank Trust National Association is the Exchange Agent. All tendered Old Notes, executed Letters of Transmittal and other related documents should be directed to the Exchange Agent. Questions and requests for assistance and requests for additional copies of this Prospectus, the Letter of Transmittal and other related documents should be addressed to the Exchange Agent as follows: BY REGISTERED OR CERTIFIED MAIL: U.S. Bank Trust National Association 180 East Fifth Street Mail Code: SPFT0210 St. Paul, Minnesota 55101 Attn: Specialized Finance 31 BY HAND OR OVERNIGHT COURIER: U.S. Bank Trust National Association 180 East Fifth Street Mail Code: SPFT0210 St. Paul, Minnesota 55101 Attn: Specialized Finance BY FACSIMILE: (612) 244-1537 (MN) Confirm by Telephone: (612) 244-5011 (MN) FEES AND EXPENSES All expenses incident to the Company's consummation of the Exchange Offer and compliance with the Registration Rights Agreement will be borne by the Company including, without limitation: (i) all registration and filing fees and expenses (including fees and expenses of compliance with state securities or Blue Sky laws), (ii) printing expenses (including expenses of printing certificates for the New Notes in a form eligible for deposit with DTC and of printing Prospectuses), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company, and (v) fees and disbursements of independent certified public accountants. The Company has not retained any dealer-manager in connection with the Exchange Offer and will not make any payments to brokers, dealers or others soliciting acceptance of the Exchange Offer. The Company, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. The Company will pay all transfer taxes, if any, applicable to the exchange of Old Notes pursuant to the Exchange Offer. If, however, a transfer tax is imposed for any reason other than the exchange of Old Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption is not submitted with the Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering holder. ACCOUNTING TREATMENT The New Notes will be recorded at the same carrying value as the Old Notes, as reflected in the Company's accounting records on the date of the exchange. Accordingly, no gain or loss will be recognized by the Company for accounting purposes. The expenses of the Exchange Offer will be amortized over the term of the New Notes. RESALES OF THE NEW NOTES Based on an interpretation by the staff of the Commission set forth in "no-action" letters issued to third parties, the Company believes that the New Notes issued pursuant to the Exchange Offer to a holder in exchange for Old Notes may be offered for resale, resold and otherwise transferred by such holder (other than (i) a broker-dealer who purchased Old Notes directly from the Company for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act, or (ii) a person that is an affiliate of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such holder is acquiring the New Notes in the ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in a distribution of the New Notes. The Company has not requested or obtained an interpretive letter from the Commission staff with respect to this Exchange Offer, and the Company and the holders are not entitled to rely on interpretive advice provided by the staff to other persons, which advice was based on the facts and conditions represented in such letters. However, the Exchange Offer is being conducted in a manner intended to be consistent with the facts and conditions represented in such letters. If any holder acquires New Notes in the Exchange Offer for the purpose of distributing or participating in a distribution of the New Notes, such holder cannot rely on the position of the staff of the Commission enunciated in Morgan Stanley & Co., Incorporated (available June 5, 1991), Exxon Capital Holdings Corporation (available April 13, 1989), Mary Kay Cosmetics, Inc. (available June 5, 1991) and Warnaco, Inc. (available October 11, 1991), or interpreted in the Commission's letter to Shearman & Sterling (available July 2, 1993), or similar "no-action" or interpretive letters and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction, unless an exemption from registration is otherwise available. Each broker-dealer that receives New Notes for its own account in exchange for Old Notes, where such Old Notes 32 were acquired by such broker-dealer as a result of market making or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. See "Plan of Distribution." It is expected that the New Notes will be freely transferable by the holders thereof, subject to the limitations described in the immediately preceding paragraph. Sales of New Notes acquired in the Exchange Offer by holders who are "affiliates" of the Company within the meaning of the Securities Act will be subject to certain limitations on resale under Rule 144 of the Securities Act. Such persons will only be entitled to sell New Notes in compliance with the volume limitations set forth in Rule 144, and sales of New Notes by affiliates will be subject to certain Rule 144 requirements as to the manner of sale, notice and the availability of current public information regarding the Company. Any such persons must consult their own legal counsel for advice as to any restrictions that might apply to the resale of their Notes. USE OF PROCEEDS There will be no proceeds payable to the Company or the Guarantors from the Exchange Offer. The Company and the Guarantors are conducting the Exchange Offer to satisfy certain of their obligations under the Registration Rights Agreement executed in connection with the issuance of the Old Notes. THE 1998 ACQUISITIONS The Clearwater Acquisition. In March 1998, the Company completed the Clearwater Acquisition effective January 1, 1998, which is comprised of a Toyota dealership, a Mitsubishi dealership and a collision repair center, each located in Clearwater, Florida, for a total purchase price of approximately $14.9 million, subject to adjustment based on the net book value of the purchased assets and assumed liabilities as of the closing date. The Clearwater Acquisition was financed with $11.5 million in cash borrowed from Ford Motor Credit under the Revolving Facility and 3,960 shares of Preferred Stock with a liquidation preference of approximately $4.0 million as of the date of the acquisition. By April 30, 1999, the Company will be required to pay a contingent amount equal to 50% of the combined 1998 pre-tax earnings of the entities acquired, such amount not to exceed approximately $1.8 million. The Hatfield Acquisition. In July 1998, the Company completed the Hatfield Acquisition, which is comprised of six individual dealerships located in Columbus, Ohio selling Chrysler, Plymouth, Dodge, Hyundai, Isuzu, Jeep, KIA, Lincoln, Mercury, Subaru, Toyota and Volkswagen brands of vehicles, for a total purchase price of approximately $48.6 million plus the assumption of certain liabilities, subject to adjustment based on the value of the net current assets of the sellers as of the closing date. Of the total purchase price, the Company paid approximately $34.6 million in cash ($26.2 million of which was financed by borrowings under the Revolving Facility and the balance of which was financed by cash from the Company's existing operations, which was subsequently replenished with a portion of the net proceeds from the Prior Offering), and the balance of the total purchase price was paid by the Company's issuance to the sellers of 14,025 shares of its Preferred Stock with a liquidation preference of approximately $14.0 million. The Heritage Acquisition. In July 1998, the Company completed the Heritage Acquisition, which is comprised of a Lincoln-Mercury dealership located in Greenville, South Carolina, for a total purchase price of approximately $1.1 million plus the assumption of certain operating liabilities of the sellers. Of the total purchase price, the Company paid approximately $0.7 million in cash (all of which was financed by borrowings under the Revolving Facility), and the balance of the total purchase price was paid by the Company's issuance to the sellers of 400 shares of its Preferred Stock with a liquidation preference of $0.4 million. In connection with the Heritage Acquisition, Chartown acquired the real property on which the dealerships comprising the Heritage Acquisition are operated for approximately $3.0 million, and the Company currently is leasing this real property from Chartown. Chartown is expected to sell this real property to MMRT in the future. The Company did not consummate the acquisition of the assets of the Jaguar franchise that comprises a portion of the Heritage Acquisition because Jaguar declined to consent to this acquisition. See "Risk Factors -- No Consent from Jaguar." The Century Acquisition. Also in July 1998, the Company completed the Century Acquisition, which is comprised of a BMW dealership located in Greenville, South Carolina and a satellite sales location in Spartanburg, South Carolina. The total consideration paid by the Company for the Century Acquisition consisted of approximately $3.8 million in cash (all of which was financed with a portion of the net proceeds of the Prior Offering), the issuance to the seller of warrants to purchase 75,000 shares of the Company's Class A Common Stock at a purchase price equal to the market value of the Class A Common Stock on the closing date and the issuance to the seller of 2,166.5 shares of Preferred Stock with a liquidation preference of approximately $2.2 million. The seller under the Century Acquisition is affiliated with the seller under the Heritage Acquisition. In connection with the Century Acquisition, Chartown acquired the real property on which the dealership and satellite sales 33 location comprising the Century Acquisition are operated for approximately $5.0 million, and the Company is currently leasing this real property from Chartown. Chartown is expected to sell the real property to MMRT in the future. The Casa Ford Acquisition. Also in July 1998, the Company completed the Casa Ford Acquisition, which is comprised of a Ford dealership located in the Houston, Texas area, for a total purchase price paid at closing of approximately $11.3 million. The price paid at closing is subject to adjustment at a later date based upon a final determination of the net working capital of the acquired dealership as of the closing date. Of the price paid at closing, the Company paid approximately $9.0 million in cash (all of which was financed with a portion of the net proceeds of the Prior Offering), and the balance was paid to the seller by the Company's issuance of 2,313 shares of Preferred Stock with a liquidation preference of approximately $2.3 million. In addition, the Company agreed to pay to the seller in the future an additional contingent payment equal to five times the amount by which the dealership's pre-tax earnings for 1998, if any, exceed $2.5 million, and five times the amount by which the dealership's 1999 pre-tax earnings, if any, exceed the greater of $2.5 million or the dealership's 1998 pre-tax earnings. The Montgomery Acquisition. Also in July 1998, the Company completed the Montgomery Acquisition, which is comprised of a Chevrolet dealership, a KIA dealership, a Mitsubishi dealership and a Hyundai dealership located in Montgomery, Alabama, for a total purchase price of approximately $8.1 million paid to the sellers at the closing. Of the purchase price paid at the closing, the Company paid approximately $3.4 million in cash (approximately $0.1 million of which was financed by cash from the Company's existing operations and approximately $3.3 million of which was financed with a portion of the net proceeds of the Prior Offering), and issued 4,194.3 shares of Preferred Stock to the sellers having an aggregate liquidation preference of approximately $4.2 million. The remaining $0.6 million of the cash portion of the purchase price is payable to the sellers on the first and second anniversaries of the closing date. The Company has also agreed to pay an additional payment to the sellers, not to exceed $3.3 million, contingent upon the future performance of the acquired dealerships. The Company has agreed to pay 51% of this additional payment, if any, to the sellers in the form of Preferred Stock, and 49% of such payments in cash. The Higginbotham Acquisition. In September 1998, the Company completed the Higginbotham Acquisition, which is comprised of three individual dealerships selling Acura, Chevrolet, Ford, Mercedes, Mercury and Oldsmobile brands of vehicles, as well as two standalone used vehicle dealerships and an automobile financing company, located in the Daytona Beach, Florida area for a total purchase price of approximately $27.0 million, including the repayment of approximately $2.7 million in indebtedness owed by one of the sellers to its sole shareholder, subject to adjustment based on the net book value of the purchased assets as of the closing date. The total purchase price was paid with approximately $18.2 million in cash (all of which was financed with a portion of the net proceeds from the Prior Offering), and with the issuance to the sellers of Class A Common Stock with a market value at the date of closing of approximately $8.3 million. The remaining $0.5 million of the cash portion of the purchase price is payable to the seller in December 1998. In addition, the Company also assumed certain liabilities of the sellers at closing. In connection with the Higginbotham Acquisition, it is anticipated that MMRT will acquire the real property on which these dealerships and related assets are operated in the future, and that the Company will lease these properties from MMRT. The Economy Honda Acquisition. In March 1998, the Company signed a stock purchase agreement regarding the Economy Honda Acquisition, which is comprised of one Honda dealership located in Chattanooga, Tennessee. The Company has agreed to pay a total price of $7.5 million plus an amount equal to the net book value of the assets of the Economy Honda dealership. Preferred Stock will be issued for 51% of the total purchase price, not to exceed $5.1 million in liquidation preference as of the closing of the acquisition. The Company's consummation of the Economy Honda Acquisition is subject to the approval of Honda, which has informed the Company that its approval is contingent upon the Company divesting its ownership of the Cleveland Village Honda dealership, which is also located in Chattanooga, prior to acquiring the Economy Honda dealership. The Company is currently negotiating with potential buyers for the sale of the Cleveland Village Honda dealership. There can be no assurance that the Company will be able to sell the Cleveland Village Honda dealership or that the approval of Honda to the Economy Honda Acquisition will be obtained. See "Risk Factors -- No Consent from Honda." The 1998 Acquisitions. The aggregate purchase price for the 1998 Acquisitions is approximately $127.4 million, which has been or will be paid with approximately $88.3 million in cash and with approximately 40,409 shares of Preferred Stock having an aggregate liquidation preference of approximately $40.4 million. Of the $88.3 million cash portion of the aggregate purchase price, approximately $38.4 million was financed with borrowings under the Revolving Facility (which was subsequently repaid with a portion of the net proceeds from the Prior Offering), approximately $34.3 million with a portion of the net proceeds from the Prior Offering and approximately $8.5 million with cash generated from the Company's existing operations (approximately $8.4 million of which was subsequently replenished with a portion of the net proceeds from the Prior Offering). The remaining $7.1 million of the cash portion of the aggregate purchase price for the 1998 Acquisitions will be financed 34 with a combination of borrowings under the Revolving Facility and a portion of the net proceeds of the Prior Offering. The 1998 Acquisitions have all been consummated, except for the Economy Honda Acquisition for which the consent of Honda has not yet been obtained. There can be no assurance that such consent will be obtained. See "Risk Factors -- No Consent from Honda." In addition, the Company did not consummate the acquisition of a Jaguar franchise representing a portion of the Heritage Acquisition because Jaguar declined to consent to such acquisition. See "Risk Factors -- No Consent from Jaguar." Any Manufacturer who does not consent to an acquisition may seek to terminate its franchise agreement, although relevant state franchising laws impose limitations on a Manufacturer's ability to terminate a franchise. See "Risk Factors -- Manufacturers' Restrictions on Acquisitions" and "Business -- Relationships with Manufacturers." Prior to their acquisition, the Company operated the dealerships which comprise the Montgomery Acquisition, the Century Acquisition and the Casa Ford Acquisition under separate management agreements. Future Acquisitions. The Company intends to pursue additional acquisitions in the future that will be financed with cash, debt or equity financing or a combination thereof. See "Prospectus Summary -- Recent Developments." Although the Company has identified and has held preliminary discussions with several potential acquisition candidates, some of which may be material, at this time the Company has no agreements to effect any such acquisitions other than the Economy Honda Acquisition, the Jordan Acquisition and the Tampa Volvo Acquisition. There is no assurance that the Company will consummate any future acquisition, that any future acquisition will be on favorable terms to the Company or that financing for such acquisitions will be available. Under the Company's acquisition agreements, it is a condition (which condition may be waived) to the Company's obligation to close an acquisition that the consent of the applicable Manufacturer be obtained. No assurance can be given that any such consents will be obtained. 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." 35 CAPITALIZATION The following table sets forth the capitalization of the Company as of June 30, 1998, (i) on an actual basis and (ii) as adjusted on a pro forma basis for the pending 1998 Acquisitions and the Prior Offering and the application of the net proceeds therefrom. See "Use of Proceeds" and the Company's Consolidated Financial Statements and the related notes thereto included elsewhere in this Prospectus.
As of June 30, 1998 --------------------------------- Actual As Adjusted ---------------- ---------------- (In thousands) Short-term debt: (a) $ 1,234 $ 3,034 ========== ========== Long-term debt: Revolving Facility (b) .......... $ 48,758 $ -- Mortgage notes .................. 3,914 3,914 Notes offered hereby ............ -- 124,063(c) Subordinated Smith Loan ......... 5,500 5,500 Other debt ...................... 6,132 6,132 ---------- ---------- Total long-term debt .................. 64,304 139,609 ---------- ---------- Stockholders' equity ............. 103,401(d) 130,776(e) ---------- ---------- Total capitalization .................. $ 167,705 $ 270,385 ========== ==========
- --------- (a) Includes current maturities of long-term debt and excludes $149.7 million (actual) and $199.0 million (as adjusted) of short-term notes payable-floor plan. (b) As adjusted, the Company would have had $75.0 million of availability under the Revolving Facility, subject to the satisfaction of certain conditions. (c) Represents the $125.0 million principal amount of the Notes less unamortized discount of $937,000. (d) Includes Class A Common Stock, $.01 par value, 50,000,000 shares authorized, 5,027,452 shares issued and outstanding; Class B Common Stock, $.01 par value, 15,000,000 shares authorized, 6,250,000 shares issued and outstanding; and preferred stock, $.10 par value, 3,000,000 shares authorized, 13,034 shares issued and outstanding. (e) In connection with the Hatfield Acquisition and the Economy Honda Acquisition, the Company has issued or intends to issue approximately 19,125 additional shares of Preferred Stock with an aggregate liquidation preference of approximately $19.1 million. The actual number of shares of Preferred Stock to be so issued may vary depending on purchase price adjustments in certain of the 1998 Acquisitions. In connection with the Higginbotham Acquisition, the Company has issued Class A Common Stock having a market value at the date of issuance of approximately $8.3 million. 36 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated statement of operations data for the years ended December 31, 1995, 1996 and 1997 and the selected consolidated balance sheet data as of December 31, 1996 and 1997 are derived from the Company's audited financial statements together with the notes thereto, included elsewhere in this Prospectus. The selected consolidated statement of operations data for the year ended December 31, 1994 and the selected consolidated balance sheet data as of December 31, 1995 are derived from the Company's audited financial statements not included herein. The selected consolidated statement of operations data for the year ended December 31, 1993 and the selected consolidated balance sheet data as of December 31, 1993 and 1994 are derived from the Company's unaudited financial statements not included herein. The selected consolidated statement of operations data for the six months ended June 30, 1997 and June 30, 1998, and the selected balance sheet data as of June 30, 1998, are derived from the Company's unaudited financial statements 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 unaudited pro forma consolidated financial data for the year ended December 31, 1997 and as of and for the six month period ended June 30, 1998, are derived from the Unaudited Pro Forma Consolidated Financial Data included elsewhere in this Prospectus. The selected consolidated financial data should be read in conjunction with "Unaudited Pro Forma Consolidated Financial Data", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements for the year ended December 31, 1997 and the unaudited Consolidated Financial Statements for the six months ended June 30, 1998, and related notes included elsewhere in this Prospectus. 37
Year Ended December 31, --------------------------------------------------------------------- Actual --------------------------------------------------------------------- 1993 1994 1995 1996(a) 1997(b) ------------- ------------- ------------- ------------- ------------- (Dollars in thousands except per share data) Consolidated Income Statement Data: Revenues .......................... $ 238,291 $ 267,734 $ 311,323 $ 376,867 $ 536,001 Cost of sales ..................... 209,113 233,833 272,130 332,122 473,003 --------- --------- --------- --------- --------- Gross profit ...................... 29,178 33,901 39,193 44,745 62,998 Selling, general and adminis- trative expenses ................. 22,070 23,810 28,091 32,602 46,770 Operating income .................. 6,320 9,253 10,270 11,067 14,906 Interest expense, floor plan ...... 2,743 3,001 4,504 5,968 8,007 Interest expense, other ........... 263 443 436 433 1,199 Income before income taxes and minority interest ............ 3,314 5,809 5,436 5,021 5,998 Net income ........................ 2,613 3,676 3,238 2,983 3,702 Diluted net income per share ...... N/A N/A N/A N/A 0.53 Weighted average common shares outstanding (000's) .......................... N/A N/A N/A N/A 6,949 Consolidated Balance Sheet Data: Cash and cash equivalents ......... $ 3,507 $ 4,723 $ 8,993 $ 6,679 $ 18,304 Receivables, net .................. 7,020 8,645 9,085 11,908 19,784 Inventories ....................... 35,870 46,266 51,348 71,550 156,514 Property and equipment, net ....... 7,546 8,226 8,527 12,467 19,081 Total assets ...................... 54,917 69,061 79,462 110,976 291,450 Notes payable -- floor plan ....... 32,231 41,626 45,151 63,893 133,236 Long-term debt, including current portion(e) ............... 4,142 3,773 6,950 6,719 49,563 Minority interest ................. 139 177 200 314 -- Stockholders' equity .............. 2,543 5,343 16,306 26,295 84,365 Other Consolidated Financial Data: Revenues: Vehicle sales .................... $ 204,243 $ 228,569 $ 267,650 $ 327,674 $ 467,858 Parts, service and collision repairs ......................... 30,337 33,984 35,860 42,075 57,537 Finance and insurance ....................... 3,711 5,181 7,813 7,118 10,606 EBITDAR(f) ........................ $ 5,462 $ 8,086 $ 7,681 $ 7,619 $ 10,668 Rental expense .................... 1,097 996 977 1,089 2,149 --------- --------- --------- --------- ---------- EBITDA(g) ......................... $ 4,365 $ 7,090 $ 6,704 $ 6,530 $ 8,519 ========= ========= ========= ========= ========== Depreciation and amortization ..... $ 788 $ 838 $ 832 $ 1,076 $ 1,322 Capital expenditures .............. 2,559 1,260 1,509 1,907 2,007 Ratio of EBITDA to interest expense, other ................... Ratio of long-term debt to EBITDA(h) ........................ Ratio of earnings to fixed charges(i) ....................... 6.3x 8.5x 8.1x 7.3x 4.1 x Other Operating Data: Dealerships ....................... 4 4 4 5 20 New vehicles units sold(j) ........ 9,429 9,686 10,273 11,693 15,715 Used vehicles units sold(j) ....... 4,104 4,374 5,172 5,488 6,712 Year Ended December 31, Six Months Ended June 30, ---------------- ------------------------------------------ Pro Pro Forma Actual Forma ---------------- --------------------------- -------------- 1997(c) 1997(b) 1998 1998(c) ---------------- ------------- ------------- -------------- (Unaudited) ----------------------------------------------------------- (Dollars in thousands except per share data) Consolidated Income Statement Data: Revenues .......................... $1,806,453 $ 212,886 $ 648,840 $ 963,509 Cost of sales ..................... 1,584,440 189,254 566,392 842,095 ---------- --------- --------- ---------- Gross profit ...................... 222,013 23,632 82,448 121,414 Selling, general and adminis- trative expenses ................. 161,289 17,532 59,622 87,886 Operating income .................. 54,095 5,704 20,975 30,395 Interest expense, floor plan ...... 19,123 3,018 7,341 10,061 Interest expense, other ........... 15,163 318 2,745 7,651 Income before income taxes and minority interest ............ 20,997 2,503 10,904 13,031 Net income ........................ 12,678 1,540 6,804 8,019 Diluted net income per share ...... 0.88(d) N/A 0.58 0.55(d) Weighted average common shares outstanding (000's) .......................... 14,415(d) N/A 11,637 14,658(d) Consolidated Balance Sheet Data: Cash and cash equivalents ......... $ 9,238 $ 27,228 $ 37,589 Receivables, net .................. 12,897 35,761 43,550 Inventories ....................... 73,410 175,515 228,549 Property and equipment, net ....... 13,270 22,040 23,583 Total assets ...................... 120,384 369,623 512,177 Notes payable -- floor plan ....... 67,855 149,670 199,037 Long-term debt, including current portion(e) ............... 9,979 65,538 140,843 Minority interest ................. -- -- -- Stockholders' equity .............. 28,406 103,401 130,776 Other Consolidated Financial Data: Revenues: Vehicle sales .................... $1,592,802 $ 185,216 $ 567,279 $ 848,235 Parts, service and collision repairs ......................... 176,299 22,907 68,020 94,070 Finance and insurance ....................... 37,352 4,763 13,541 21,204 EBITDAR(f) ........................ $ 55,117 $ 3,760 $ 19,337 $ 29,943 Rental expense .................... 12,328 543 3,837 6,128 ---------- --------- ---------- ---------- EBITDA(g) ......................... $ 42,789 $ 3,217 $ 15,500 $ 23,815 ========== ========= ========== ========== Depreciation and amortization ..... $ 6,629 $ 396 $ 1,851 $ 3,133 Capital expenditures .............. 886 1,261 Ratio of EBITDA to interest expense, other ................... 2.8 x 3.1 x Ratio of long-term debt to EBITDA(h) ........................ 3.3 x Ratio of earnings to fixed charges(i) ....................... 2.1 x 6.0x 3.7 x 2.3 x Other Operating Data: Dealerships ....................... 37 6 26 37 New vehicles units sold(j) ........ 48,079 6,553 16,601 25,195 Used vehicles units sold(j) ....... 32,478 2,638 9,719 17,094
(footnotes on following page) 38 - --------- (a) The Company acquired Fort Mill Ford, Inc. in February 1996. This acquisition was accounted for using the purchase method of accounting. As a result, the actual financial data does not include the results of this dealership prior to the date it was acquired by the Company. Accordingly, the actual financial data for periods after the acquisition may not be comparable to data presented for periods prior to the acquisition. (b) The Company acquired Fort Mill Chrysler-Plymouth-Dodge in June 1997, Lake Norman Chrysler/Plymouth/Jeep and Lake Norman Dodge in September 1997, Williams Motors and Ken Marks Ford in October 1997, and the Bowers Automotive Group and Dyer & Dyer Volvo in November 1997. The 1997 Acquisitions were accounted for using the purchase method of accounting. As a result, the actual financial data does not include the results of operations of these dealerships prior to the date they were acquired by the Company. Accordingly, the actual financial data for periods after the acquisitions may not be comparable to data presented for periods prior to the acquisitions. (c) For information regarding the unaudited pro forma adjustments made to the Company's historical financial data, which give effect to the IPO, the Reorganization, the Acquisitions, and the Prior Offering and the application of the net proceeds therefrom, see "Unaudited Pro Forma Consolidated Financial Data." (d) Weighted average common shares outstanding assumes a Class A Common Stock price of $12.00 per share (the price per share of Class A Common Stock in the IPO) for the Preferred Stock conversion factor. Had the Company used a Class A Common Stock price of $16.44 (the June 30, 1998 closing price for shares of Class A Common Stock on the NYSE), the pro forma weighted average common shares outstanding would have been 13,691,000 and 13,934,000 resulting in a pro forma diluted net income per share of $0.93 and $0.58 for the pro forma twelve months ended December 31, 1997 and the pro forma six months ended June 30, 1998, respectively. (e) Long-term debt, including current portion, includes the payable to the Company's Chairman and the Company's payable to affiliates of the Company. See the Company's Consolidated Financial Statements and the related notes thereto included elsewhere in this Prospectus. (f) EBITDAR is defined as earnings before interest (other than interest expense related to notes payable-floor plan), taxes, depreciation, amortization, rent expense and other non-recurring charges. While EBITDAR should not be construed as a substitute for operating income or as a better measure of liquidity than cash flows from operating activities, which are determined in accordance with generally accepted accounting principles, it is included herein to provide additional information with respect to the ability of the Company to meet future debt service, capital expenditures and working capital requirements. This measure may not be comparable to similarly titled measures reported by other companies. (g) EBITDA is defined as earnings before interest (other than interest expense related to notes payable-floor plan), taxes, depreciation, amortization and other non-recurring charges which is consistent with the measure used to calculate the Company's Consolidated Fixed Charge Coverage Ratio for purposes of the limitation on indebtedness covenant in the Indenture. While EBITDA should not be construed as a substitute for operating income or as a better measure of liquidity than cash flows from operating activities, which are determined in accordance with generally accepted accounting principles, it is included herein to provide additional information with respect to the ability of the Company to meet future debt service, capital expenditures and working capital requirements. This measure may not be comparable to similarly titled measures reported by other companies. (h) Ratio of long-term debt to EBITDA for the pro forma six months ended June 30, 1998 is calculated by dividing pro forma long-term debt, including current portion, at June 30, 1998 by EBITDA for the pro forma year ended December 31, 1997. (i) Fixed charges is defined as interest (other than interest expense related to notes payable-floor plan) and such portion of rent expense determined to be representative of the interest factor. The ratio of earnings to fixed charges is calculated by adding fixed charges to income before income taxes and minority interest and dividing the sum by fixed charges. (j) The number of units sold consists of retail sales to consumers as opposed to wholesale sales. 39 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA The following unaudited pro forma consolidated statement of operations for the year ended December 31, 1997 reflects the historical accounts of the Company for that period, adjusted giving effect to the Acquisitions, the IPO, the Reorganization, and the Prior Offering and the application of the net proceeds therefrom, as if those events had occurred on the first day of the period presented. The following unaudited pro forma combined and consolidated statement of operations for the six months ended June 30, 1998 reflects the historical accounts of the Company for that period, adjusted to give effect to the 1998 Acquisitions (other than the Clearwater Acquisition which was effective as of January 1, 1998), and the Prior Offering and the application of the net proceeds therefrom, as if those events had occurred on the first day of the period presented. The following unaudited pro forma consolidated balance sheet as of June 30, 1998 reflects the historical accounts of the Company as of that date as adjusted to give pro forma effect to the 1998 Acquisitions (other than the Clearwater Acquisition, the Heritage Acquisition, the Montgomery Acquisition, the Century Acquisition, and the Casa Ford Acquisition, which are included in the historical accounts of the Company) and the Prior Offering and the application of the net proceeds therefrom, as if those events had occurred on June 30, 1998. The unaudited pro forma consolidated financial data and accompanying notes should be read in conjunction with the Consolidated Financial Statements and related notes of the Company as well as the financial statements and related notes of the Clearwater Dealerships and Affiliated Companies, the Hatfield Automotive Group, Economy Honda Cars, Casa Ford of Houston, Inc., Higginbotham Automotive Group, the Bowers Dealerships and Affiliated Companies, Lake Norman Dodge Inc. and Affiliated Companies, Ken Marks Ford Inc. and Dyer and Dyer, Inc., all of which are included elsewhere in this Prospectus. Such unaudited pro forma consolidated data and accompanying notes do not give effect to the Fort Mill Acquisition, the Williams Acquisition or the financing thereof because such transactions are not required to be presented in this Prospectus on a pro forma basis in accordance with SEC rules. The Company believes that the assumptions used in the following statements provide a reasonable basis on which to present the unaudited pro forma financial data. The unaudited pro forma consolidated financial data are provided for informational purposes only and should not be construed to be indicative of the Company's financial condition, results of operations or covenant compliance 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. 40 Unaudited Pro Forma Consolidated Statement of Operations Year Ended December 31, 1997
The Acquisition ----------------- ----------------------------s (a) Pro Forma ------------------ Hatfield Higginbotham ------------------ Adjustments 1997 Automotive Automotive Other 1998 for the Actual(b) Acquisitions(c) Group(d) Group Acquisitions(e) Acquisitions ----------- ----------------- ------------ -------------- ----------------- ----------------- (in thousands except per share data) Revenues: Vehicle sales .................. $467,858 $364,756 $251,981 $102,594 $405,613 $ Parts, service and collision repair .............. 57,537 42,164 16,400 10,496 49,702 Finance and insurance 10,606 7,723 6,899 3,060 8,505 559 (f) -------- -------- -------- -------- -------- ---------- Total revenues ................. 536,001 414,643 275,280 116,150 463,820 559 Cost of sales ................... 473,003 361,902 244,330 98,430 407,654 (879)(g) -------- -------- -------- -------- -------- ---------- Gross profit .................... 62,998 52,741 30,950 17,720 56,166 1,438 Selling, general and administrative expenses ....................... 46,770 40,801 20,193 13,099 43,402 (5,925)(h) 2,658 (j) Management bonus ................ 7,121 (7,121)(h) Depreciation and amortization ................... 1,322 914 221 338 1,245 (436)(l) (601)(j) 3,611 (m) ---------- Operating income ................ 14,906 11,026 3,415 4,283 11,519 9,252 Interest expense, floor plan ........................... 8,007 4,722 3,663 1,208 4,258 (2,608)(n) Interest expense, other ......... 1,199 234 303 1,969 (923)(j) 267 (p) (698)(q) Other income .................... 298 180 224 20 466 -------- -------- -------- -------- -------- Income before income taxes and minority interest ....................... 5,998 6,250 (24) 2,792 5,758 13,214 Provision for income taxes .......................... 2,249 178 1,140 5,401 (r) 4,211 (t) ---------- Income before minority interest ....................... 3,749 6,072 (24) 2,792 4,618 3,602 Minority interest in earnings of subsidiary 47 -------- Net income ...................... $ 3,702 $ 6,072 $ (24) $ 2,792 $ 4,618 $ 3,602 ======== ======== ======== ======== ======== ========== Pro forma basic net income per share ............... Pro forma weighted average common shares outstanding -- basic (000's) ........................ Pro forma diluted net income per share (v) ........... Pro forma weighted average common shares outstanding -- diluted (000's) (v) .................... Pro Forma Pro Forma Adjustments for the for the Reorganization, Reorganization, the Acquisitions, the IPO and the IPO and the Prior Offering the Prior Offering -------------------- ------------------- (in thousands except per share data) Revenues: Vehicle sales .................. $ $1,592,802 Parts, service and collision repair .............. 176,299 Finance and insurance 37,352 ---------- Total revenues ................. 1,806,453 Cost of sales ................... 1,584,440 ---------- Gross profit .................... 222,013 Selling, general and administrative expenses ....................... 291 (i) 161,289 Management bonus ................ Depreciation and amortization ................... 15 (k) 6,629 Operating income ................ (306) 54,095 Interest expense, floor plan ........................... (127)(o) 19,123 Interest expense, other ......... 12,812 (o) 15,163 Other income .................... 1,188 ---------- Income before income taxes and minority interest ....................... (12,991) 20,997 Provision for income taxes .......................... 6 (s) 8,319 (4,866) (u) ----------- Income before minority interest ....................... (8,131) 12,678 Minority interest in earnings of subsidiary (47) (k) ----------- Net income ...................... $ (8,084) $ 12,678 =========== ========== Pro forma basic net income per share ............... $ 1.08 ========== Pro forma weighted average common shares outstanding -- basic (000's) ........................ 11,735 ========== Pro forma diluted net income per share (v) ........... $ 0.88 ========== Pro forma weighted average common shares outstanding -- diluted (000's) (v) .................... 14,415 ==========
(See accompanying notes to Unaudited Pro Forma Consolidated Statement of Operations) 41 Unaudited Pro Forma Consolidated Statement of Operations Six Months Ended June 30, 1998
The 1998 Acquisitions (a) --------------------------------------------------- Higginbotham Hatfield Automotive Other 1998 Actual(b) Automotive Group Group Acquisitions(e) ----------- ------------------ -------------- ----------------- (in thousands except per share data) Revenues: Vehicle sales ................... $567,279 $133,661 $57,829 $ 89,466 Parts, service and collision repair ......................... 68,020 8,774 5,363 11,913 Finance and insurance ........... 13,541 4,190 1,583 1,819 -------- -------- ------- -------- Total revenues .................. 648,840 146,625 64,775 103,198 Cost of sales .................... 566,392 130,221 55,166 90,391 -------- -------- ------- -------- Gross profit ..................... 82,448 16,404 9,609 12,807 Selling, general and adminis- trative expenses ................ 59,622 11,308 6,948 10,103 Management bonus ................. 3,181 Depreciation and amortization .................... 1,851 158 144 269 Operating income ................. 20,975 1,757 2,517 2,435 Interest expense, floor plan ..... 7,341 1,245 566 948 Interest expense, other .......... 2,745 145 264 Other income ..................... 15 244 20 69 -------- -------- ------- -------- Income before income taxes ....... 10,904 756 1,826 1,292 Provision for income taxes ....... 4,100 298 Net income ....................... $ 6,804 $ 756 $ 1,826 $ 994 ======== ======== ======= ======== Pro forma basic net income per share ....................... Pro forma weighted average common shares outstanding -- basic (000's) ......................... Pro forma diluted net income per share (v) ................... Pro forma weighted average common shares outstanding -- diluted (000's) (v) ..................... Pro Forma Pro Forma Pro Forma Adjustments Adjustments for the for the for the Acquisitions and Acquisitions Prior Offering the Prior Offering ----------------- ---------------- ------------------- (in thousands except per share data) Revenues: Vehicle sales ................... $ $ $ 848,235 Parts, service and collision repair ......................... 94,070 Finance and insurance ........... 71 (f) 21,204 ---------- ---------- --------- Total revenues .................. 71 963,509 Cost of sales .................... (75)(g) 842,095 ---------- ---------- --------- Gross profit ..................... 146 121,414 Selling, general and adminis- trative expenses ................ (661)(h) 87,886 566 (j) Management bonus ................. (3,181)(h) Depreciation and amortization .................... (149)(j) 3,133 (68)(l) 928 (m) ---------- ---------- --------- Operating income ................. 2,711 30,395 Interest expense, floor plan ..... 24 (n) (63)(o) 10,061 Interest expense, other .......... (79)(j) 4,765 (o) 7,651 (189)(q) Other income ..................... 348 ---------- ----------- --------- Income before income taxes ....... 2,955 (4,702) 13,031 Provision for income taxes ....... 1,146 (r) (1,763)(w) 5,012 1,231 (t) ---------- ---------- --------- Net income ....................... $ 578 $ (2,939) $ 8,019 ========== ========== ========= Pro forma basic net income per share ....................... $ 0.68 ========= Pro forma weighted average common shares outstanding -- basic (000's) ......................... 11,749 ========= Pro forma diluted net income per share (v) ................... $ 0.55 ========= Pro forma weighted average common shares outstanding -- diluted (000's) (v) ..................... 14,658 =========
(See accompanying notes to Unaudited Pro Forma Consolidated Statement of Operations) 42 - --------- (a) The Company has obtained Manufacturer consent to all of the 1998 Acquisitions other than from Honda in the Economy Honda Acquisition, which the Company expects to receive prior to the closing of the acquisition. There can be no assurance that such consent will be obtained. The Company's request for consent to the acquisition of a Jaguar franchise included in the 1997 Acquisitions and a Jaguar franchise included in the Heritage Acquisition was denied. The two Jaguar franchises and the Economy Honda Dealership, which are included in the Unaudited Pro Forma Consolidated Financial Data, represented in the aggregate 3.2% and 3.6% of the Company's pro forma revenues and gross profit for 1997, and 2.9% and 2.9% of the Company's pro forma revenues and gross profit for the first six months of 1998. See "Risk Factors -- No Consent from Jaguar" and " -- No Consent from Honda." (b) The actual consolidated statement of operations data for the Company for the year ended December 31, 1997 includes the results of operations of the following dealerships and dealership groups acquired during the year ended December 31, 1997 (the "1997 Acquisitions") from their respective dates of acquisition:
Date Dealership Acquired of Acquisition - ------------------------------------- ------------------ Fort Mill Chrysler-Plymouth-Dodge June 3, 1997 Lake Norman Dealerships September 1, 1997 Ken Marks Ford October 1, 1997 Williams Motors October 10, 1997 Dyer Volvo November 1, 1997 Bowers Dealerships November 1, 1997
The actual consolidated statement of operations data for the Company the six months ended June 30, 1998 includes the results of operations of the following dealerships and dealership groups acquired during the first six months of 1998 from their respective dates of acquisition:
Date Dealership Acquired of Acquisition - -------------------------------------------------- ---------------- Clearwater Dealerships and Affiliate Companies January 1, 1998 Casa Ford of Houston, Inc. May 1, 1998 Capitol Chevrolet and Imports April 1, 1998 Century BMW April 1, 1998 Heritage Lincoln Mercury April 1, 1998
(c) Reflects the results of operations of the 1997 Acquisitions for the period from January 1, 1997 to their respective dates of acquisition. Pro forma adjustments have not been presented to include the results of (i) Fort Mill Chrysler-Plymouth-Dodge for the period from January 1, 1997 to June 3, 1997, the effective date of the acquisition or (ii) Williams Motors for the period from January 1, 1997 to October 10, 1997, the effective date of acquisition, because management believes such results are not material. (d) The combined statement of operations data for Hatfield Automotive Group include the results of Trader Bud's Westside Chrysler-Plymouth from May 1, 1997, the effective date of the acquisition by Hatfield Automotive Group. Pro forma adjustments have not been presented to include the results of operations of Trader Bud's Westside Chrysler-Plymouth for the four month period ended April 30, 1997 because management believes such results are not material. (e) Reflects the results of operations of the 1998 Acquisitions (other than the Hatfield Acquisition and the Higginbotham Acquisition) for the year ended December 31, 1997 and reflects the results of operations of the 1998 Acquisitions (other than the Hatfield Acquisition, the Higginbotham Acquisition and the Clearwater Acquisition) from January 1, 1998 to their respective dates of acquisition. Certain historical amounts have been reclassified to conform to the Company's method of presentation. (f) Reflects finance and insurance revenues generated by the 1997 Acquisitions and the 1998 Acquisitions in the amounts of $252,000 and $307,000, respectively for the year ended December 31, 1997, and by the 1998 Acquisitions (other than the Clearwater Acquisition) in the amount of $71,000 for the six months ended June 30, 1998, that were paid directly to the dealership owners or wholly-owned management companies and excluded from revenue in the historical financial statements of the acquired dealerships. No adjustment has been made to reflect such amounts for the Economy Honda Acquisition, the Montgomery Acquisition, the Hatfield Acquisition, the Century Acquisition or the Heritage Acquisition as such amounts could not be reasonably ascertained. (footnotes continued on following pages) 43 (g) Adjustment reflects the conversion from the LIFO Method of inventory accounting to the FIFO Method of inventory accounting for the 1997 Acquisitions and the 1998 Acquisitions (other than the Hatfield Acquisition and the Clearwater Acquisition) in the amounts of $371,000 and $508,000, respectively, for the year ended December 31, 1997 and for the 1998 Acquisitions (other than the Hatfield Acquisition and the Clearwater Acquisition) in the amount of $75,000 for the six months ended June 30, 1998, to conform to the Company's method of accounting for vehicle inventories. (h) Reflects the net decrease in selling, general and administrative expenses related to the net reduction in salaries, bonuses, fringe benefits and related expenses of owners and officers of the acquired dealerships who have become or will become employees, consistent with reduced salaries pursuant to employment agreements with the Company, or whose positions have been or will be eliminated as part of the Acquisitions. (i) Reflects the increase in salaries of existing officers who entered into employment agreements with the Company, effective upon consummation of the IPO. (j) Reflects the increase in rent expense related to lease agreements entered into with the sellers of certain acquired dealerships for the dealerships' real property that will not be acquired by the Company, and the decreases in depreciation expense and interest expense related to mortgage indebtedness encumbering such property of approximately $9.6 million (of which $112,000 is included in current maturities of long-term debt) bearing interest at rates from 7.0% to 10.0%. (k) Reflects the elimination of minority interest in earnings as a result of the acquisition of the 31% minority interest in Town & Country Toyota for $3.2 million of Class B Common Stock in connection with the Reorganization, and the amortization over 40 years of approximately $1.2 million in goodwill arising from such acquisition. (l) Reflects the elimination of amortization expense related to goodwill that arose in previous acquisitions in certain of the acquired dealerships from the effective date of the acquisitions. (m) Reflects the amortization over an assumed useful life of 40 years, of intangible assets, consisting primarily of goodwill, resulting from the Acquisitions which were assumed to occur on January 1, 1997. Certain of the 1998 Acquisitions have purchase agreements which require the Company to pay additional amounts in cash or Preferred Stock based on future operating results. Amount includes amortization of the additional goodwill associated with the $1.8 million contingent purchase price related to the Clearwater Acquisition. Should the Company be required to pay the maximum additional amounts contingent in the purchase agreements for the pending 1998 Acquisitions (other than Casa Ford), the Company would incur goodwill amortization charges in addition to the amounts recorded in the Unaudited Pro Forma Consolidated Statements of Operations of approximately $81,000 in 1997 and $40,000 for the six months ended June 30, 1998, respectively. The Company's purchase agreement for Casa Ford does not provide a maximum contingent amount to be paid based on future operating results, therefore a maximum additional amount of amortization expense cannot be estimated. See "The 1998 Acquisitions" and "Unaudited Pro Forma Consolidated Balance Sheet." (n) Reflects the decrease in interest expense, floor plan resulting from the refinancing of the notes payable, floor plan arrangements of the Company and the dealerships being acquired, under the Floor Plan Facility as if such refinancing had occurred at the beginning of the period presented. The aggregate balance of notes payable, floor plan arrangements of the Company and the dealerships being acquired was $232.3 million and $200.6 million at December 31, 1997 and June 30, 1998, respectively, prior to the assumed repayment by the Company reflected in (o) below. The average interest rate under the Floor Plan Facility is approximately 7.6% compared to historical interest rates ranging from 7.8% to 9.5%. (o) Reflects the increase in interest expense associated with the Notes issued in the Prior Offering and the decrease in interest expense as a result of the assumed repayment of approximately $48.8 million of debt outstanding under the Revolving Facility and $1.5 million of debt outstanding under the Floor Plan Facility with the net proceeds from the Prior Offering not used to finance the pending 1998 Acquisitions. See "Use of Proceeds." (p) In connection with the Bowers Acquisition, the Company issued a promissory note to the former owner in the amount of $4.0 million bearing 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% as if the note was issued at the beginning of the period presented. (q) Reflects the decrease in interest expense related to debt, other than mortgage indebtedness, which has not or will not be assumed of approximately $8.1 million (of which $2.3 million is included in current maturities of long-term debt) bearing interest at rates from 4.0% to 10.7%. (footnotes continued on following page) 44 (r) Reflects the net increase in provision for income taxes resulting from pro forma adjustments above, computed using a combined statutory income tax rate of approximately 39%. (s) 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 combined statutory income tax rate of 39.9%. (t) Certain of the acquired dealerships were not subject to federal and state income taxes because they were either S corporations, partnerships, or limited liability companies during the period indicated. Upon completion of these acquisitions, these dealerships will be subject to federal and state income tax as C corporations. This adjustment reflects the resulting 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%. (u) Reflects the net decrease in the provision for income taxes resulting from adjustments (i) and (o), computed using a combined statutory income tax rate of 37.5%. (v) Pro forma basic and diluted net income per share and the related weighted average shares outstanding for the year ended December 31, 1997 have been adjusted to reflect the issuance of 5 million shares of Class A Common Stock in connection with the IPO and the issuance of 485,294 shares of Class A Common Stock in connection with the Higginbotham Acquisition as if such shares had been issued on January 1, 1997. Pro forma diluted net income per share and the related weighted average shares outstanding for the year ended December 31, 1997 includes the dilutive effect of the issuance of 32,159 shares of Preferred Stock in connection with the 1998 Acquisitions. Warrants to purchase 44,391 shares of Class A Common Stock issued in January 1998 in connection with the consummation of the 1997 Acquisitions and warrants to purchase 75,000 shares of Class A Common Stock to be issued in connection with the 1998 Acquisitions were not included in the reported amounts because they were anti-dilutive. Pro forma net income per share and the related weighted average shares outstanding for the six months ended June 30, 1998 includes the dilutive effect of the issuance of 32,159 shares of Preferred Stock in connection with the 1998 Acquisitions and warrants to purchase 75,000 shares of Class A Common Stock issued in connection with the Century Acquisition as if such shares and warrants had been issued on January 1, 1998. The following is a reconciliation of the pro forma weighted average shares for the year ended December 31, 1997 and the six months ended June 30, 1998:
Six Months Year Ended Ended December 31, 1997 June 30, 1998 ------------------- -------------- Weighted Average Shares -- Basic (actual) .............. 6,949 11,264 Issuance of Common Stock in connection with IPO ........ 4,301 -- Issuance of Common Stock in connection with Higginbotham Acquisition ........................................... 485 485 ----- ------ Weighted Average Shares -- Basic (pro forma) ........... 11,735 11,749 ====== ====== Weighted Average Shares -- Diluted (actual) ............ 6,949 11,637 Issuance of Common Stock in connection with Higginbotham Acquisition ........................................... 485 485 Issuance of common Stock in connection with IPO ........ 4,301 -- Class A Convertible Preferred Stock .................... 2,680 2,518 Warrants ............................................... -- 18 ------ ------ Weighted Average Shares -- Diluted (pro forma) ......... 14,415 14,658 ====== ======
(w) Reflects the net decrease in the provision for income taxes resulting from adjustment (o) computed using a combined statutory income tax rate of 37.5%. 45 Unaudited Pro Forma Consolidated Balance Sheet As of June 30, 1998
The 1998 Acquisitions ------------------------------------------ Pro Forma Pro Forma Hatfield Higginbotham Adjustments Adjustments Automotive Automotive Other 1998 for the 1998 for the Actual Group Group Acquisitions Acquisitions Prior Offering ---------- ------------ -------------- -------------- ------------------- ------------------ (in thousands) Assets Current Assets: Cash and cash equivalents $ 27,228 $14,200 $ 4,628 $ 7,266 $ (58,950)(a) $ 120,126(b) 4,300 (h) (15,733)(c) (65,476)(d) Receivables ................... 35,761 3,294 2,292 496 (2,292)(c) Inventories ................... 175,515 33,733 9,893 4,023 3,866 (e) 1,519 (a) Finance notes receivable ...... 2,480 (41)(c) Deferred incomes taxes ........ 669 Due from affiliates ........... 1,084 -- Other current assets .......... 3,854 480 557 57 (512)(c) -------- ------- ------- ------- ----------- ---------- Total current assets ....... 244,111 51,707 19,850 11,842 (67,843) 54,650 Property and equipment, net 22,040 952 2,922 1,731 (4,062)(f) Finance notes receivable ....... 1,564 (4)(c) Goodwill, net .................. 102,948 971 847 65,308 (a) (1,818)(g) Other assets ................... 524 374 (374)(c) 3,937 (b) -------- ------- ----------- ---------- Total assets ............... $369,623 $53,630 $25,557 $13,573 $ (8,793) $ 58,587 ======== ======= ======= ======= =========== ========== Liabilities and Stockholders' Equity Current Liabilities: Notes payable-floor plan ...... $149,670 $35,343 $11,033 $ 4,300(h) $ (1,542)(d) 233 (a) Trade accounts payable ........ 7,971 1,374 980 205 (980)(c) Accrued interest .............. 1,584 156 10 (10)(c) Other accrued liabilities ..... 17,949 1,195 1,896 902 (1,607)(c) Dividends payable ............. 250 (250)(c) Payable for Acquisitions ...... 15,726 1,250 (a) (15,176)(d) Payable to affiliates ......... 445 609 3,035 (3,644)(c) Current maturities of long-term debt ............... 789 112 (112)(f) -------- ------- ----------- ---------- Total current liabilities ............... 194,134 38,677 17,316 1,107 (820) (16,718) Long-term debt ................. 54,644 1,064 (20)(c) 124,063 (b) (1,044)(f) (48,758)(d) Payable to the Company's Chairman ....................... 5,500 Payable to affiliates .......... 4,160 8,325 (8,325)(c) Deferred income taxes .......... 1,079 78 Income tax payable ............. 6,705 234 (e) Stockholders' Equity: Receivable from stockholder .................. -- -- -- Common Stock of combined companies ........... 2,825 3,064 50 (5,939)(a) Preferred Stock ............... 11,763 19,125 (a) Class A Common Stock .......... 50 8,250 (a) Class B Common Stock .......... 63 Paid-in capital ............... 68,535 1,744 (1,744)(a) Retained earnings and members' and partners' equity ....................... 22,990 2,059 4,113 12,338 (13,258) (a) (4,160)(c) 3,632 (e) (2,906)(f) (1,818)(g) Total stockholders' equity ..... 103,401 6,628 7,177 12,388 1,182 -------- ------- ------- ------- ----------- ---------- Total liabilities and stockholders' equity ........... $369,623 $53,630 $25,557 $13,573 $ (8,793) $ 58,587 ======== ======= ======= ======= =========== ========== Pro Forma for the 1998 Acquisitions and the Prior Offering ------------------- Assets Current Assets: Cash and cash equivalents $ 37,589 Receivables ................... 39,551 Inventories ................... 228,549 Finance notes receivable ...... 2,439 Deferred incomes taxes ........ 669 Due from affiliates ........... 1,084 Other current assets .......... 4,436 -------- Total current assets ....... 314,317 Property and equipment, net 23,583 Finance notes receivable ....... 1,560 Goodwill, net .................. 168,256 Other assets ................... 4,461 -------- Total assets ............... $512,177 ======== Liabilities and Stockholders' Equity Current Liabilities: Notes payable-floor plan ...... $199,037 Trade accounts payable ........ 9,550 Accrued interest .............. 1,740 Other accrued liabilities ..... 20,335 Dividends payable ............. Payable for Acquisitions ...... 1,800 Payable to affiliates ......... 445 Current maturities of long-term debt ............... 789 -------- Total current liabilities ............... 233,696 Long-term debt ................. 129,949 Payable to the Company's Chairman ....................... 5,500 Payable to affiliates .......... 4,160 Deferred income taxes .......... 1,157 Income tax payable ............. 6,939 Stockholders' Equity: Receivable from stockholder .................. -- Common Stock of combined companies ........... Preferred Stock ............... 30,888 Class A Common Stock .......... 8,300 Class B Common Stock .......... 63 Paid-in capital ............... 68,535 Retained earnings and members' and partners' equity ....................... 22,990 Total stockholders' equity ..... 130,776 -------- Total liabilities and stockholders' equity ........... $512,177 ========
(See accompanying notes to Unaudited Pro Forma Consolidated Balance Sheet) 46 - --------- (a) Reflects the preliminary allocation of the aggregate purchase price of the 1998 Acquisitions (other than the Clearwater Acquisition, the Heritage Acquisition, the Montgomery Acquisition, the Century Acquisition, and the Casa Ford Acquisition, which are included in the historical accounts of the Company) 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 a significant adjustment to the carrying amount of those net assets. The amount of goodwill and the corresponding amortization actually recorded may ultimately be different from amounts estimated here, depending on the actual fair value of tangible net assets acquired at closing of the 1998 Acquisitions. The estimated purchase price allocation consists of the following:
Hatfield Higginbotham Automotive Automotive Other 1998 Group Group Acquisitions Total ------------ ------------- -------------- ---------- (in thousands) Estimated total consideration: Cash .................................... $34,525 $18,244 $ 6,181 $58,950 Payable for acquisitions ................ -- 500 1,300 1,800 Class A Common Stock .................... -- 8,250 -- 8,250 Preferred Stock ......................... 14,025 -- 5,100 19,125 ------- ------- ------- ------- Total .................................. 48,550 26,994 12,581 88,125 ------- ------- ------- ------- Less: Estimated fair value of tangible net assets acquired ......................... 10,752 7,734 4,331 22,817 ------- ------- ------- ------- Excess of purchase price over fair value of net tangible assets acquired ............ $37,798 $19,260 $ 8,250 $65,308 ======= ======= ======= =======
The Company has obtained Manufacturer consent to all of the 1998 Acquisitions other than from Honda in the Economy Honda Acquisition, which the Company expects to receive prior to the closing of the acquisition. There can be no assurance that such consent will be obtained. The Company's request for consent to the acquisition of a Jaguar franchise included in the 1997 Acquisitions and a Jaguar franchise included in the Heritage Acquisition was denied. The two Jaguar franchises and the Economy Honda Dealership, which are included in the Unaudited Pro Forma Consolidated Financial Data, represented in the aggregate 3.2% and 3.4% of the Company's pro forma revenues and gross profit for 1997, and 2.9% and 2.8% of the Company's pro forma revenues and gross profit for the first six months of 1998. See "Risk Factors -- No Consent from Jaguar" and " -- No Consent from Honda." (b) Reflects the proceeds (net of estimated debt issuance costs of $3.9 million) to the Company from the issuance of $125.0 million of the Notes in the Prior Offering, less unamortized discount of $937,000. (c) Reflects the elimination of certain assets and liabilities other than goodwill, real property and related mortgage indebtedness of the acquired dealerships that will not be acquired. (d) Reflects the net proceeds from the Prior Offering in excess of amounts required to consummate the 1998 Acquisitions (other than the Clearwater Acquisition) that will be used to repay amounts outstanding under the Revolving Facility, the Floor Plan Facility and the Payable for Acquisitions. (e) Reflects the conversion from the LIFO Method of inventory accounting to the FIFO Method of inventory accounting at certain of the acquired dealerships, including the resulting tax liability calculated at the applicable statutory income tax rate ranging from 37.9% to 38.9%. (f) Reflects the elimination of real property and related mortgage indebtedness at certain of the dealerships which are not being acquired. (g) Reflects the elimination of goodwill that arose in previous acquisitions of certain of the acquired dealerships. (h) Reflects the proceeds received from the issuance of floor plan notes payable used to finance vehicles acquired in the Economy Honda Acquisition. 47 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 the Sonic Automotive, Inc. and Subsidiaries Consolidated Financial Statements and the related notes thereto included elsewhere herein. Overview The Company is one of the leading automotive retailers in the United States, operating 27 dealerships and ten collision repair centers in the southeastern and southwestern United States as of June 30, 1998. 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 Atlanta, Charlotte, Chattanooga, Greenville/Spartanburg, Houston, Montgomery, Nashville and Tampa/Clearwater markets as of June 30, 1998. Sonic sold 20 domestic and foreign brands as of June 30, 1998, consisting of BMW, Cadillac, Chevrolet, Chrysler, Dodge, Ford, Honda, Hyundai, Infiniti, Jaguar, Jeep, KIA, Lincoln, Mercury, Mitsubishi, Oldsmobile, Plymouth, Toyota, Volkswagen and Volvo. New vehicle revenues include both the sale and lease of new vehicles. Used vehicle revenues include amounts received for used vehicles sold to retail customers, other dealers and wholesalers. Other operating revenues include parts and services revenues, fees and commissions for arranging 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 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, reduce 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") as well as the amount of indebtedness incurred for acquisitions. The Company has 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 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, 1998. As a result of the effects of the Acquisitions, the historical consolidated financial information described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" is not necessarily indicative of the results of operations, financial position and cash flows of the Company in the future or the results of operations, financial position and cash flows which would have resulted had the Acquisitions occurred at the beginning of the periods presented in the Consolidated Financial Statements. 48 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. The Company's profit margins are primarily impacted by changes in the percentage of revenues attributed to new vehicle sales. 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 Three Months Ended Six Months Ended Year Ended December 31, June 30, June 30, ----------------------------------- --------------------- --------------------- 1995 1996 1997 1997 1998 1997 1998 ----------- ----------- ----------- ---------- ---------- ---------- ---------- Revenues: New vehicle sales .................... 60.0% 62.0% 64.2% 65.1% 60.7% 64.5% 59.7% Used vehicle sales ................... 26.0% 24.9% 23.1% 22.2% 27.2% 22.5% 27.7% Parts, service and collision repair .. 11.5% 11.2% 10.7% 10.5% 10.1% 10.8% 10.5% Finance and insurance ................ 2.5% 1.9% 2.0% 2.2% 2.0% 2.2% 2.1% Total revenues. ...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales ........................ 87.4% 88.1% 88.2% 88.8% 87.5% 88.9% 87.3% Gross profit ......................... 12.6% 11.9% 11.8% 11.2% 12.5% 11.1% 12.7% Selling, general and administrative .. 9.3% 8.9% 9.0% 8.2% 9.1% 8.4% 9.5% Operating income ..................... 3.2% 2.9% 2.8% 3.0% 3.4% 2.7% 3.2% Interest expense ..................... 1.6% 1.7% 1.7% 1.6% 1.5% 1.6% 1.6% Income before income taxes ........... 1.7% 1.3% 1.5% 1.4% 1.9% 1.2% 1.7%
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997 Revenues. Revenues grew in each of the Company's primary revenue areas for the first six months of 1998 as compared with the first six months of 1997, causing total revenues to increase 204.8% to $648.8 million. New vehicle sales revenue increased 182.4% to $387.5 million in the first six months of 1998, compared with $137.2 million in the first six months of 1997. The increase was due primarily to an increase in new vehicle unit sales of 153.3% to 16,601, as compared with 6,553 in the first six months of 1997 resulting principally from additional unit sales contributed by the acquisitions of Jeff Boyd Chrysler-Plymouth-Dodge in June 1997; Lake Norman Dodge and Affiliates in September 1997; Ken Marks Ford in October 1997; Dyer Volvo and the Bowers Dealerships and Affiliated Companies in November 1997; Clearwater Toyota, Clearwater Mitsubishi, and Clearwater Collision Center in January 1998; Century BMW, Heritage Lincoln Mercury, and Capitol Chevrolet and Imports in April 1998; and Casa Ford in May 1998 (the "Closed Acquisitions"). The remainder of the increase was due to an 11.5% increase in the average selling price of new vehicles resulting principally from sales of higher priced import vehicles contributed by the Closed Acquisitions. Used vehicle revenues from retail sales increased 305.6% to $132.5 million in the first six months of 1998 from $32.7 million in the first six months of 1997. The increase was due primarily to an increase in used vehicle unit sales of 268.4% to 9,719, as compared with 2,638 in the first six months of 1997, resulting from additional unit sales contributed by the Closed Acquisitions. The remainder of the increase was due to a 10.1% increase in the average selling price of used vehicles resulting principally from sales of higher priced luxury and import vehicles contributed by the Closed Acquisitions along with an increase in used vehicle revenues of 15.2% in the first six months of 1998 compared to the first six months of 1997 from used vehicle revenues from stores owned for longer than one year. The Company's parts, service and collision repair revenue increased 196.9% to $68.0 million in the first six months of 1998 compared to $22.9 million in the first six months of 1997, due principally to the Closed Acquisitions. Finance and insurance revenue increased $8.8 million, or 184.3%, due principally to increased new vehicle sales and related financing. Gross Profit. Gross profit increased 248.9% to $82.4 million in the first six months of 1998 from $23.6 million in the first six months of 1997 due principally to increases in revenues contributed by dealerships acquired. Gross profit as a percentage of sales increased to 12.7% from 11.1% due to increases in new vehicle gross margins resulting from sales of higher margin import vehicles contributed by acquired dealerships, as well as improved gross margins of used vehicles 49 resulting from efforts made to improve management of used vehicle inventories. Additionally, gross margin percentages for each profit center are affected by the mix of revenues within each profit center, correspondingly. Used vehicle revenues increased and new vehicle revenues decreased as a percentage of total revenues from 15.3% and 64.4% in the first six months of 1997, respectively, compared to 20.4% and 59.7% for the first six months of 1998, respectively. The revenue mix resulted in increased used vehicle gross profits and decreased new vehicle gross profits as a percentage of the total gross profits from 11.7% and 38.0%, respectively, in the first six months of 1997 to 16.0% and 36.3% in the first six months of 1998. Selling, General and Administrative Expenses. Selling, general and administrative expenses, including depreciation and amortization, increased 242.9% to $61.5 million in the first six months of 1998 from $17.9 million in the first six months of 1997. Such expenses as a percentage of revenues increased to 9.5% from 8.4% due principally to expenses inherent with the initial growth and formation of the Company. Additionally, as gross profits and gross profit margins increase expenses related to employees commissions for sales of related products increase, respectively. Interest Expense, Floorplan. Interest expense, floorplan increased 143.3% to $7.3 million from $3.0 million, due primarily to floorplan interest incurred by the Closed Acquisitions. As a percentage of total revenues, floor plan interest decreased from 1.4% to 1.1% primarily due to decreased interest rates under the Company's floor plan financing arrangements, as well as improved management of inventory levels. Interest Expense, Other. Interest expense, other increased 764.2% to $2.7 million from $0.3 million, due primarily to interest incurred on acquisition related indebtedness. Net Income. As a result of the factors noted above, the Company's net income increased by $5.3 million in the first six months of 1998 compared to the first six months of 1997. Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997 Revenues. Revenues grew in each of the Company's primary revenue areas for the three months ended June 30, 1998 as compared with the three months ended June 30, 1997, causing total revenues to increase 237.8% to $385.5 million. New vehicle sales revenue increased 214.5% to $233.7 million for the three months ended June 30, 1998, compared with $74.3 million for the three months ended June 30, 1997. The increase was due primarily to an increase in new vehicle unit sales of 182.6% to 9,984, as compared with 3,533 for the three months ended June 30, 1997 resulting principally from additional unit sales contributed by the Closed Acquisitions. The remainder of the increase was due to a 11.3% increase in the average selling price of new vehicles resulting principally from sales of higher priced import vehicles contributed by the Closed Acquisitions. Used vehicle revenues from retail sales increased 344.5% to $76.0 million for the three months ended June 30, 1998 from $17.1 million for the comparable period of 1997. The increase was due primarily to an increase in used vehicle unit sales of 293.4% to 5,386 as compared with 1,369 for the three months ended June 30, 1997, resulting from additional unit sales contributed by the Closed Acquisitions. The remainder of the increase was due to a 13.0% increase in the average selling price of used vehicles resulting principally from sales of higher priced luxury and import vehicles contributed by the Closed Acquisitions along with an increase in used vehicle revenues of 12.1% for the three months ended June 30, 1998 compared to the three months ended June 30, 1997 from used vehicle revenues on a same store basis The Company's parts, service and collision repair revenue increased 227.2% to $39.0 million for the three months ended June 30, 1998 compared to $11.9 million for the same period of the prior year, due principally to the Closed Acquisitions. Finance and insurance revenue increased $5.2 million, or 201.2%, due principally to increased new vehicle sales and related financing. Gross Profit. Gross profit increased 276.7% to $48.2 million for the three months ended June 30, 1998 from $12.8 million for the three months ended June 30, 1997 due principally to increases in revenues contributed by dealerships acquired. Gross profit as a percentage of sales increased to 12.5% from 11.2% due to increases in new vehicle gross margins resulting from sales of higher margin import vehicles contributed by acquired dealerships, as well as improved gross margins of used vehicles resulting from efforts made to improve management of used vehicle inventories. Additionally, gross margin percentages for each profit center are affected by the mix of revenues within each profit center, correspondingly. Used vehicle revenues increased and new vehicle revenues decreased as a percentage of total revenues from 14.9% and 65.1% for the three months ended June 30, 1997, respectively, compared to 19.7% and 60.6% for the three months ended June 30, 1998, respectively. The revenue mix resulted in increased used vehicle gross profits and decreased new vehicle gross profits as a percentage of the total gross profits from 11.9% and 39.7%, respectively, for the three months ended June 30, 1997 to 16.1% and 37.0% for the three months ended June 30, 1998. 50 Selling, General and Administrative Expenses. Selling, general and administrative expenses, including depreciation and amortization, increased 273.3% to $35.0 million for the three months ended June 30, 1998 from $9.4 million for the same period in the prior year. Such expenses as a percentage of revenues increased to 9.1% from 8.2% due principally to expenses inherent with the initial growth and formation of the Company. Additionally, as gross profits and gross profit margins increase expenses related to employees commissions for sales of related products increase, respectively. Interest Expense, Floorplan. Interest expense, floorplan increased 144.4% to $4.1 million from $1.7 million, due primarily to floorplan interest incurred by the Closed Acquisitions. As a percentage of total revenues, floor plan interest decreased from 1.5% to 1.1% primarily due to decreased interest rates under the Company's floor plan financing arrangements, as well as improved management of inventory levels. Interest Expense, Other. Interest expense, other increased 932.3% to $1.7 million from $0.2 million, due primarily to interest incurred on acquisition related indebtedness. Net Income. As a result of the factors noted above, the Company's net income increased by $3.7 million for the three months ended June 30, 1998 compared to comparable period of 1997. Twelve Months Ended December 31, 1997 Compared to Twelve Months Ended December 31, 1996 Revenues. Revenues grew in each of the Company's primary revenue areas for 1997 as compared with 1996, causing total revenues to increase 42.2% to $536.0 million. New vehicle sales revenue increased 47.0% to $343.9 million, compared with $233.9 million. New vehicle unit sales increased from 11,693 to 15,715, accounting for 34.4% of the increase in vehicle sales revenues. The remainder of the increase was primarily due to a 9.4% 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, and additional revenues from the 1997 Acquisitions. Used vehicle revenues from retail sales increased 25.1% from $68.0 million in 1996 to $85.1 million in 1997. The increase in used vehicle revenues was due principally to additional revenues contributed from the 1997 Acquisitions in the fourth quarter of 1997. The Company's parts, service and collision repair revenue increased 36.7% to $57.5 million from $42.1 million, and declined as a percentage of revenue to 10.7% from 11.2%. 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 and additional revenues from the 1997 Acquisitions in the fourth quarter 1997. F&I revenue increased $3.5 million, due principally to increased new vehicle sales and related financings. Gross Profit. Gross profit increased 40.8% in 1997 to $63.0 million from $44.7 million in 1996 due to increases in new vehicle sales revenues principally at the Company's Lone Star Ford and Fort Mill Ford locations and additional revenues from the 1997 Acquisitions in the third and fourth quarters of 1997. Parts and service revenue increases also contributed to the increase in gross profit. Selling, General and Administrative Expenses. SG&A expenses, including depreciation and amortization, increased 42.8% from $33.7 million to $48.1 million. These expenses increased due to increases in sales volume as well as expenses associated with the 1997 Acquisitions and the Company's IPO. Interest Expense, floor plan. Interest expense, floor plan increased 34.2% to $8.0 million from $6.0 million, primarily due to the 1997 Acquisitions. As a percentage of total revenues, floor plan interest decreased from 1.6% to 1.5%. Interest Expense, other. Interest expense, other increased 176.9% from $0.4 million to $1.2 million. The increase in interest expense was due to funding of the 1997 Acquisitions in the fourth quarter. Net Income. As a result of the factors noted above, the Company's net income increased by $0.7 million in 1997 compared to 1996. Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 Revenues. The Company's total revenue increased 21.2% to $376.9 million in 1996 from $311.3 million in 1995. New vehicle sales increased 25.2% to $234.0 million in 1996 from $186.9 million in 1995, primarily because of the acquisition in February 1996 of the Company's Fort Mill Ford dealership. The inclusion of the results of the Fort Mill Ford dealership accounted for 69.0% 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 10.0% which the Company believes was primarily due to 51 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 17.3% to $42.1 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 14.2% in 1996 to $44.7 million from $39.2 million in 1995 primarily due to the addition of the Fort Mill Ford dealership. Gross profit decreased from 12.6% to 11.9% 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 $4.8 million, or 16.4%, from $28.9 million in 1995 to $33.7 million in 1996. However, as a percentage of revenue, SG&A expenses decreased from 9.3% 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, floor plan. The Company's interest expense, floor plan in 1996 increased 32.5% to $6.0 million from $4.5 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 an increase in floor plan interest rates during 1996. Interest Expense, other. The Company's interest expense, other was $0.4 million in 1996 and 1995. 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. Liquidity and Capital Resources The Company's principal needs for capital resources are to finance acquisitions and fund debt service and working capital requirements. Historically, the Company has relied primarily upon internally generated cash flows from operations, borrowings under its various credit facilities and borrowings and capital contributions from its stockholders to finance its operations and expansion. On November 10, 1997, the Company completed its IPO providing approximately $53.7 million of additional capital resources for the consummation of the 1997 Acquisitions. On July 31, 1998, the Company completed the Prior Offering of the Old Notes receiving approximately $120.1 million in net proceeds. These proceeds were used to pay the cash portions of the purchase prices for certain 1998 Acquisitions and repay indebtedness under the Revolving Facility. The Notes bear interest at 11% per annum and will mature on August 1, 2008. The Notes are unsecured senior subordinated obligations of the Company and, as such, are subordinated in right of payment to all other existing and future senior indebtedness. In the Indenture, the Company and the Guarantors have agreed to certain negative covenants, including covenants restricting or prohibiting the payment of dividends, the incurrence of additional indebtedness, investment of funds, sales of assets as well as other customary covenants. The Company currently has in place the Floor Plan Facility, a standardized floor plan credit facility with Ford Motor Credit for each of the Company's dealership subsidiaries. As of June 30, 1998, there was an aggregate of $149.7 million outstanding under the Floor Plan Facility. The Floor Plan Facility at June 30, 1998 had an effective rate of prime less 0.9%, subject to certain incentives and other adjustments, which was 7.6%. 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 52 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 Facility 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 relevant dealership subsidiary. The Floor Plan Facility contains 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 generated net cash of $2.1 million and $7.8 million from operating activities in 1996 and 1997, respectively. The 1997 increase was attributable principally to a decrease in receivables, inventory levels and increased net income. During the first six months of 1998, the Company generated net cash of $3.0 million from operating activities, compared to $4.0 million in the first six months of 1997. The decrease was attributable principally an increase in receivables due to additional acquisitions and revenue growth. Cash used in investing activities, excluding amounts paid in acquisitions, was approximately $1.2 million for the year ended December 31, 1997 and related primarily to acquisitions of property and equipment. Cash used in investing activities was $1.5 million, $6.7 million and $86.8 million in 1995, 1996 and 1997 respectively, including $1.5 million, $1.9 million and $2.0 million of capital expenditures during such periods. Cash used for investing activities, excluding amounts paid in acquisitions, was approximately $1.3 million for the first six months of 1998 and related primarily to acquisitions of property and equipment. In 1996, cash provided by financing activities of $2.3 million primarily 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 capital stock by a stockholder of Town & Country Ford. Cash provided by financing activities for the year ended December 31, 1997 was $90.7 million principally due to proceeds of the IPO and debt incurred for certain acquisitions. Cash provided by financing activities for the first six months of 1998 of $15.0 million primarily reflects amounts borrowed under the Revolving Facility to finance acquisitions. In August 1997, the Company obtained a $20 million loan from NationsBank, N.A. (the "NationsBank Facility"). The proceeds from the NationsBank Facility were used in the consummation of the acquisition of the two Lake Norman dealerships and of the Fort Mill Chrysler-Plymouth-Dodge dealership. The NationsBank Facility was guaranteed by Mr. Bruton Smith personally, which guarantee was released in February 1998. The NationsBank Facility matured in February 1998 and was repaid in full with proceeds of the IPO and the Revolving Facility. In October 1997, the Company obtained the Revolving Facility from Ford Motor Credit in the principal amount of $26.0 million. In December 1997, the Company increased the aggregate amount available to borrow under this facility to a maximum of $75.0 million pursuant to the Revolving Facility's terms. The Revolving Facility bears interest at the Revolving Facility Prime Rate and will mature in December 1999, unless the Company requests that such term be extended, at the option of Ford Motor Credit, for additional one-year terms. No assurance can be given that such extensions will be granted. The proceeds from the Revolving Facility were used in the consummation of the acquisition of Ken Marks Ford in 1997, the Clearwater Acquisition in March 1998 and the repayment in February 1998 of $8.2 million of the amount borrowed under the NationsBank Facility. Amounts to be drawn under the Revolving Facility are anticipated by the Company to be used for the acquisition of additional dealership subsidiaries in the future and to provide general working capital needs of the Company not to exceed $10 million. At June 30, 1998 the balance outstanding on the Revolving Facility was $48.8 million and the Revolving Credit Facility Prime Rate was 8.5% per annum. All of the indebtedness outstanding under the Revolving Facility was repaid with a portion of the net proceeds of the Prior Offering on July 31, 1998. The Company agreed under the Revolving Facility 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). The Revolving Facility also contains 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. Additional negative covenants include specified ratios of (i) total 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) the current lending commitment under the Revolving Facility to scaled assets (as defined in the Revolving Facility). 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, 53 membership or partnership interests in its dealership subsidiaries will constitute an event of default under the Revolving Facility. The Company did not meet the specified debt to tangible equity ratios required by the Revolving Facility at December 31, 1997, at March 31, 1998 and at June 30, 1998 and has obtained waivers with regard to such requirement from Ford Motor Credit. The waivers are subject to certain requirements to the effect that the Company must meet modified ratios. In connection with the issuance of the Old Notes, the Company and Ford Motor Credit amended the Revolving Facility to provide that the Notes (which are subordinated to the Revolving Facility) will be treated as equity capital for purposes of this ratio and, accordingly, the Company is currently in compliance with this covenant after its issuance of the Old Notes. See "Description of Certain Other Indebtedness." Capital expenditures, excluding amounts paid in acquisitions, were $1.5 million, $1.9 million and $2.0 million in 1995, 1996 and 1997, respectively. The Company's principal capital expenditures typically include building improvements and equipment for use in the Company's dealerships. Capital expenditures in 1995 and 1996 were primarily attributable to expenditures for the addition of a standalone used car lot in 1996 and other capital improvements at the Lone Star Ford dealership. During 1997, the Company completed its previously announced acquisitions of Fort Mill Chrysler-Plymouth-Dodge, Williams Motors, Dyer Volvo, the Bowers Dealerships and Affiliated Companies and Ken Marks Ford, Inc. with an aggregate purchase price, net of cash purchased, of $85.6 million. Capital expenditures, excluding amounts paid in acquisitions, were $0.9 million and $1.3 million for the six months ended June 30, 1997 and 1998, respectively. The Company expects total capital expenditures for 1998 to approximate $2.5 million. The Company's principal capital expenditures typically include building improvements and equipment for use in the Company's dealerships. In 1997, the Company authorized 3 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. In March 1998, the Board of Directors designated 300,000 shares of preferred stock as Preferred Stock, which was divided into 100,000 of Series I Convertible Preferred Stock, par value $0.10 per share (the "Series I Preferred Stock"), 100,000 shares of Series II Convertible Preferred Stock, par value $0.10 per share (the "Series II Preferred Stock"), and 100,000 shares of Series III Convertible Preferred Stock, par value $0.10 per share (the "Series III Preferred Stock"). The Preferred Stock has a liquidation preference of $1,000 per share. Each share of Preferred Stock is convertible, at the option of the holder, into that number of shares of Class A Common Stock as is determined by dividing $1,000 by the average closing price for the Class A Common Stock on the NYSE for the 20 days preceding the date of issuance of the shares of Preferred Stock (the "Market Price"). Conversion of Series II Preferred Stock and Series III Preferred Stock is subject to certain adjustments which have the effect of limiting increases and decreases in the value of the Class A Common Stock receivable upon conversion by 10% of the original value of the shares of Series II Preferred Stock or Series III Preferred Stock. The Preferred Stock is redeemable at the Company's option at any time after the date of issuance. The redemption price of the Series I Preferred Stock is $1,000 per share. The redemption price for the Series II Preferred Stock and Series III Preferred Stock is as follows: (i) prior to the second anniversary of the date of issuance, the redemption price is the greater of $1,000 per share or the aggregate Market Price of the Class A Common Stock into which it could be converted at the time of redemption, and (ii) after the second anniversary of the date of issuance, the redemption price is the aggregate Market Price of the Class A Common Stock into which it could be converted at the time of redemption. Each share of Preferred Stock entitles its holder to a number of votes equal to that number of shares of Class A Common Stock into which it could be converted as of the record date for the vote. Holders of preferred stock are entitled to participate in dividends payable on the Class A Common Stock on an "as-if-converted" basis. The Preferred Stock has no preferential dividends. In July 1998, the Company completed the Hatfield Acquisition for a total purchase price of $48.6 million, paid with $34.6 million in cash and with 14,025 shares of Series I Preferred Stock having a liquidation preference of approximately $14.0 million. Of the cash portion of the purchase price, approximately $26.2 million was financed with borrowings under the Revolving Facility, which was subsequently repaid with a portion of the net proceeds from the Prior Offering, and approximately $8.4 million was financed with cash from the Company's existing operations, which was subsequently replenished with a portion of the net proceeds from the Prior Offering. On January 1, 1998, the Company began operation and obtained control of Clearwater Toyota, Clearwater Mitsubishi and Clearwater Collision Center. On April 1, 1998, the Company began operation and obtained control of Capitol Chevrolet and Imports, Century BMW and Heritage Lincoln-Mercury. On May 1, 1998, the Company began operation and obtained 54 control of Casa Ford of Houston, Inc. The aggregate purchase price for the Clearwater Acquisition, the Montgomery Acquisition, the Century Acquisition, the Heritage Acquisition, and the Casa Ford Acquisition was approximately $40.7 million, paid with approximately $29.0 million in cash and with 13,034 shares of Preferred Stock (381 shares of Series I Preferred Stock, 6,380 shares of Series II Preferred Stock, and 6,273 shares of Series III Preferred Stock) having an aggregate liquidation preference of approximately $13.0 million and an estimated fair value of approximately $11.7 million. Of the $29.0 million cash portion of the aggregate purchase price, approximately $12.2 million was financed with borrowings under the Revolving Facility, which was subsequently repaid with a portion of the net proceeds from the Prior Offering, approximately $16.1 million was financed with a portion of the net proceeds from the Prior Offering, and approximately $0.1 million was paid with cash generated from the Company's existing operations. The remaining $0.6 million of the cash portion of the purchase price is payable to the seller of the Montgomery Acquisition on the first and second anniversaries of the closing date of the Montgomery Acquisition. In addition, the Company granted to the seller of the Century Acquisition warrants to purchase 75,000 shares of the Company's Class A Common Stock at a purchase price equal to the market value of the Class A Common Stock on the date of grant. In accordance with terms of the Clearwater Acquisition and the Montgomery Acquisition, the Company may be required to pay additional amounts up to $5.1 million contingent on the future performance of the dealerships acquired in such acquisitions. In addition, in accordance with the terms of the Casa Ford Acquisition, the Company may be required to pay additional amounts to the seller equal to five times the amount by which the dealership's pre-tax earnings for 1998, if any, exceed $2.5 million, and five times the amount by which the dealership's pre-tax earnings for 1999, if any, exceed the greater of $2.5 million or the dealership's 1998 pre-tax earnings. Any additional amounts paid will be accounted for as additional goodwill. The Payable for Acquisitions in the amount of $16.1 million included in the accompanying consolidated financial statements represents the consideration to be paid for the Montgomery Acquisition, Century Acquisition, Heritage Acquisition, and Casa Ford Acquisition, which were closed in July 1998. The Company did not consummate the acquisition of the assets of the Jaguar franchise that comprises a portion of the Heritage Acquisition. In September 1998, the Company completed the Higginbotham Acquisition for a total purchase price of approximately $27.0 million, including the repayment of approximately $2.7 million in indebtedness owed by one of the sellers to its sole shareholder, subject to adjustment based on the net book value of the purchased assets as of the closing date. The total purchase price was paid with approximately $18.2 million in cash (all of which was financed with a portion of the net proceeds from the Prior Offering), and with the issuance to the sellers of Class A Common Stock with a market value at the date of closing of approximately $8.3 million. The remaining $0.5 million of the cash portion of the purchase price is payable to the seller in December 1998. In addition, the Company also assumed certain liabilities of the sellers at closing. In connection with the Higginbotham Acquisition, MMRT is anticipated to acquire the real property on which these dealerships and related assets are operated, and the Company will then lease these properties from MMRT. In March 1998, the Company signed a stock purchase agreement regarding the Economy Honda Acquisition. The Company has agreed to pay a total price of $7.5 million plus an amount equal to the net book value of the assets of the Economy Honda Acquisition dealership. Preferred Stock will be issued for 51% of the total purchase price, not to exceed $5.1 million in liquidation preference as of the closing of the acquisition. The Company's consummation of the Economy Honda Acquisition is subject to the approval of Honda, which has informed the Company that its approval is contingent upon the Company divesting its ownership of the Cleveland Village Honda dealership prior to acquiring the Economy Honda dealership. The Company is currently negotiating with potential buyers for the sale of the Cleveland Village Honda dealership. Of the approximately $88.3 million cash portion of the aggregate purchase price for the 1998 Acquisitions, approximately $38.4 million was obtained from borrowings under the Revolving Facility (which was subsequently repaid with a portion of the net proceeds from the Prior Offering), approximately $34.3 million was obtained with a portion of the net proceeds from the Prior Offering, and approximately $8.5 million was obtained with cash generated from the Company's existing operations (approximately $8.4 million of which was subsequently replenished with a portion of the net proceeds from the Prior Offering). The remaining $7.1 million of the cash portion of the aggregate purchase price will be financed with a combination of borrowings under the Revolving Facility and a portion of the net proceeds of the Prior Offering. The Economy Honda Acquisition is expected to be consummated, subject to certain closing conditions, in the fourth quarter of 1998. The Company incurred a tax liability of approximately $7.1 million in connection with the change in its tax basis of accounting for inventory from LIFO to FIFO, which is payable over a six-year period beginning in January 1998. In addition, in connection with the Montgomery Acquisition and the Casa Ford Acquisition, the Company will incur an additional estimated tax liability in the amount of approximately $20 million as a result of the change in accounting for the inventory from LIFO to FIFO, which will be a payable over a six year period. As of June 30, 1998, the remaining cumulative balance of the LIFO tax liability was $8.4 million. The Company expects to be pay such obligation with cash provided by operations. 55 The Company believes that the net proceeds from the Prior Offering, together with funds generated through future operations and availability of borrowings under its floor plan financing (or any replacements thereof) and its other credit arrangements 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 expects to fund any future acquisitions from its future cash flow from operations, additional debt financing (including the Revolving Facility) or the issuance of Class A Common Stock or the issuance of Preferred Stock or other convertible instruments. Year 2000 Compliance The Company recognizes the need to ensure that its operations will not be adversely impacted by Year 2000 software failures and it has completed an assessment of its own operations in this regard. The Company has determined that its systems are currently Year 2000 compliant and the costs associated with making its systems Year 2000 compliant were immaterial. However, many of the Company's lenders and suppliers, including suppliers that provide finance and insurance products, may be impacted by Year 2000 complications. The Company is in the process of making inquiries to its lenders and suppliers regarding their Year 2000 compliance efforts, and it is reviewing the Year 2000 disclosures in documents filed with the Commission for those lenders and suppliers that are publicly-held companies. The Company does not believe that failure of the Company's lenders or suppliers to ensure that their computer systems are Year 2000 compliant will have a material adverse impact on the Company's business, results of operations, and financial condition, although no assurances can be given in this regard. Furthermore, there can be no assurances that Year 2000 deficiencies on the part of dealerships to be acquired by the Company would not have a material adverse impact on the Company's business, results of operations, and financial condition. The Company has not yet established a contingency plan in the event that its expectations regarding Year 2000 problems are incorrect, but the Company intends to create such a contingency plan within the next six months. At this time, it is impossible to state with certainty whether Year 2000 computer software or equipment failures on the part of the Company or third parties involved with the Company will have a material adverse impact on the Company's results of operations, liquidity and financial condition. However, based on the Company's assessment of its own operations, the Company believes that it is adequately prepared to deal with Year 2000 problems which may arise. Significant Materiality of Goodwill Goodwill represents the excess purchase price over the estimated fair value of the tangible and separately measurable intangible net assets acquired. The cumulative amount of goodwill at December 31, 1997 and June 30, 1998 was $75.0 million and $104.5 million, respectively. As a percentage of total assets and stockholders' equity, goodwill, net of accumulated amortization, represented 25.5% and 88.1%, respectively, at December 31, 1997, and 27.8% and 99.6%, respectively, at June 30, 1998. Generally accepted accounting principles require that goodwill and all other intangible assets be amortized over the period benefited. The Company has determined that the period benefited by the goodwill will be no less than 40 years and, accordingly, is amortizing goodwill over a 40 year period. If the Company were not to separately recognize a material intangible asset having a benefit period of less than 40 years, or were not to give effect to shorter benefit periods of factors giving rise to a material portion of the goodwill, earnings reported in periods immediately following the acquisition would be overstated. In later years, the Company would be burdened by a continuing charge against earnings without the associated benefit to income valued by management in arriving at the consideration paid for the businesses acquired. Earnings in later years also could be significantly affected if management then determined that the remaining balance of goodwill was impaired. The Company periodically compares the carrying value of goodwill with the anticipated undiscounted future cash flows from operations of the businesses acquired in order to evaluate the recoverability of goodwill. The Company has concluded that the anticipated future cash flows associated with intangible assets recognized in its acquisitions will continue indefinitely, and these is no pervasive evidence that any material portion will dissipate over a period shorter than 40 years. 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 the timing of manufacturer incentive programs and model changeovers. Effects of Inflation Due to the relatively low levels of inflation in 1995, 1996 and 1997, inflation did not have a significant effect on the Company's results of operations for those periods. 56 New Accounting Standards 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 $2.4 million, $2.1 million and $3.8 million for the years ended December 31, 1995, 1996 and 1997, respectively. The Company adopted the interim-period reporting requirements of this standard for the six months ended June 30, 1998. Comprehensive income amounted to $1.5 million and $6.8 million for the six months ended June 30, 1997 and June 30, 1998, respectively. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." This Standard redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. This Statement will be effective for the Company's fiscal year ending December 31, 1998, and need not be applied to interim financial statements in the initial year of its application. The Company has not yet completed its analysis of which operating segments it will disclose, if any. Recent Developments In August 1998, the Company entered into a definitive agreement for the acquisition of the assets of the Jordan Acquisition. In addition, in September 1998, the Company entered into a definitive agrement for the acquisition of the assets of the Tampa Volvo Acquisition. The Company was recently awarded two new Volvo franchises and a new Oldsmobile franchise in the Atlanta market. The Company currently expects to open these new dealerships in the first half of 1999. On July 9, 1998, the Company entered into, subject to the approval of the Company's Board of Directors and the Company's independent directors, the Alliance Agreement with an operating partnership controlled by MMRT. MMRT intends to acquire certain real estate associated with various automobile dealerships, automotive aftermarket retailers and other automotive related businesses and to lease such properties to the business operators located thereon. Mr. Smith, the Company's Chairman and Chief Executive Officer, serves as the chairman of MMRT's board of trustees and is presently its largest shareholder. See "Risk Factors -- Potential Conflicts of Interest" and "Certain Transactions -- Transactions with MMRT." Under the Alliance Agreement, the Company has agreed to refer real estate acquisition opportunities that arise in connection with its dealership acquisitions to MMRT. In exchange, MMRT has agreed to refer dealership acquisition opportunities to the Company and to provide to the Company, at the Company's cost, certain real estate development, maintenance, survey and inspection services. Pursuant to the Alliance Agreement, the Company has entered into contracts to sell the real estate associated with Town and Country Toyota and Fort Mill Ford, two of the Company's dealerships, for an aggregate purchase price of approximately $10.3 million. In addition, the Alliance Agreement provides for an agreed form of lease (the "Sonic Form Lease") pursuant to which MMRT would lease real estate to the Company should MMRT acquire real estate associated with any of the Company's operations. Presently, the Company leases or intends to lease from MMRT 29 parcels of land associated with 21 of its dealerships, including the real estate associated with Town and Country Toyota and Fort Mill Ford that the Company will lease back from MMRT, pursuant to leases substantially similar to the Sonic Form Lease. The aggregate initial annual base rent to be paid by the Company for all 29 properties under the leases with MMRT is approximately $7.7 million. MMRT has also entered into new leases with each of Town and Country Ford and Lone Star Ford which provide that the annual lease payments for their properties will each be increased to approximately $1.1 million effective January 1, 2000, as compared to current annual lease payments of approximately $0.4 million and $0.3 million, respectively. 57 BUSINESS The Company is one of the top ten automotive retailers in the United States, operating 27 dealerships and ten collision repair centers, as of June 30, 1998, in eight metropolitan areas of 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 operated dealerships as of June 30, 1998 in the Atlanta, Charlotte, Chattanooga, Greenville/Spartanburg, Houston, Montgomery, Nashville and Tampa/Clearwater markets, each of which the Company believes is experiencing favorable demographic trends. As of June 30, 1998, Sonic sold the following 20 domestic and foreign brands: BMW, Cadillac, Chevrolet, Chrysler, Dodge, Ford, Honda, Hyundai, Infiniti, Jaguar, Jeep, KIA, Lincoln, Mercury, Mitsubishi, Oldsmobile, Plymouth, Toyota, Volkswagen and Volvo. In several of its markets, the Company's dealerships have a significant market share for new cars and light trucks. As of September 15, 1998, the Company had acquired or entered into definitive agreements to acquire 12 additional dealerships in certain of the Company's existing markets and in new markets including Columbus and Daytona Beach (which includes a total of two dealerships being acquired in the Jordan Acquisition and the Tampa Volvo Acquisition). Upon consummation of these acquisitions, the Company will sell the following four additional brands: Acura, Isuzu, Mercedes and Subaru. For the year ended December 31, 1997, the Company would have had pro forma revenues and EBITDA of $1.8 billion and $42.8 million, respectively. Company Strengths Leading Automotive Retailer. The Company is one of the top ten automotive retailers in the United States, operating 37 dealerships in ten metropolitan areas on a pro forma basis. The Company believes that its leading position in the highly fragmented automotive retailing industry combined with its strong reputation and management team, successful history of acquiring and integrating dealerships and strong financial condition have positioned the Company as a premier consolidator of automotive dealerships, thereby providing the Company with increased attractive acquisition opportunities. Proven Track Record of Integrating and Improving Acquisitions. In recent years, the Company has grown primarily through the acquisition of well-managed dealerships in growing metropolitan and suburban geographic markets. During 1996 and 1997, the Company acquired 16 dealerships in five states for total consideration of $104.5 million. Senior management of the Company has, collectively, acquired and integrated the operations of more than 75 dealerships during their careers. This acquisition experience allows management to identify and capitalize on opportunities for improvement, determine and implement necessary corrective actions, and minimize acquisition risk. Experienced Management Team. The Company is led by a strong senior management team with extensive automotive retailing and aftermarket products and services experience, including O. Bruton Smith, Chief Executive Officer, and Nelson E. Bowers, II, Executive Vice President. The members of the Company's senior management team have on average 19 years of automotive industry experience. As of June 30, 1998, the Company's senior management and employees owned approximately 52.8% of the Company's outstanding Common Stock. Consistent Record of Internal Growth. In addition to identifying, consummating and integrating attractive acquisitions, the Company continually focuses on improving its existing dealership operations. As a result, the Company has a history of strong internal growth with average same store sales growth of 16.3%, 6.4% and 10.1% in 1995, 1996 and 1997, respectively. Diverse Offering of Automotive Brands, Products and Services. The Company sells on a pro forma basis a wide variety of 24 domestic and international automotive brands (38.4% of pro forma gross profit in 1997) in ten metropolitan areas which it believes (i) mitigates the effect of regional economic conditions and changing consumer preferences and (ii) reduces its reliance on any single manufacturer. In addition to selling a broad range of new vehicles, the Company has a balanced portfolio of other automotive products and services including used vehicles (16.9% of pro forma gross profit in 1997), F&I and leasing (11.6%), and parts, service and collision repair services (33.1%). The Company believes that this diverse offering of products and services improves financial stability as sales of higher margin products and services offset in part sales of lower margin new and used vehicles. In addition, sales of parts, service and collision repair services are less cyclical than vehicle sales and related product sales. Economies of Scale. The Company's growth through acquisitions over the past two years has resulted in increasing economies of scale as the Company integrates acquired dealerships including (i) improved terms on bank and floor plan financing, (ii) improved commissions on sales of finance and insurance products, (iii) increased vendor consolidation opportunities, (iv) reduced advertising and insurance costs as a percentage of sales, and (v) improved inventory management. 58 Strategy Acquire Dealerships. The Company believes that attractive acquisition opportunities exist for dealership groups with significant equity capital and experience in identifying, acquiring and professionally managing dealerships. The automotive retailing industry is highly fragmented, with the largest 100 dealer groups generating approximately 10% of the industry's $640 billion of total sales in 1996 and controlling less than 5% of all new vehicle dealerships in the United States. 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. The Company has implemented a "hub and spoke" acquisition strategy to acquire (i) well-managed dealerships in new growing metropolitan and suburban geographic markets, and (ii) additional dealerships in its existing markets that will allow the Company to capitalize on regional economies of scale, offer a greater breadth of products and services and/or increase brand diversity. In addition, the Company selectively acquires dealerships which have underperformed the industry average but which carry attractive product lines or have attractive locations, thereby leveraging the Company's management infrastructure and improving return on investment. Increased Sales of Higher Margin Products and Services. The Company intends to pursue opportunities to increase its sales of higher-margin products and services by, for instance, expanding its collision repair business and increasing sales of used vehicles. 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 small volume shops. The Company further believes that the collision repair industry is undergoing a period of consolidation and that it is well positioned to expand its collision repair business. Sonic also believes that significant opportunities exist to improve its used vehicle departments, which historically have generated higher margins on sales than its new vehicle departments, to (i) increase the number of used vehicles sold and (ii) increase gross profit margins on sales of used vehicles. For example, the Company's ability to manage inventory levels more effectively created increased gross profit margins on sales of used vehicles to 9.9% for the first six months of 1998 from 8.5% for the first six months of 1997. 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 has been able to negotiate with lending institutions that purchase its financing contracts and insurance carriers that underwrite its insurance policies to increase commissions on the origination of customer vehicle financing and insurance policies, which the Company believes will result in increased revenues and profitability. Train, Develop and Incentivize Qualified Management. The Company believes that well trained dealership personnel are the key to the long-term performance of the Company and to the profitability of its dealerships. Sonic requires all of its employees, from service technicians to regional vice presidents, to participate in in-house training programs. The Company's senior management, along with third party trainers from manufacturers, industry affiliates and vendors, formally train all employees. The Company believes that its comprehensive training of all employees and the institution of a multi-tiered management structure to supervise effectively its dealership operations provide the Company with a competitive advantage over other dealership groups. In addition, the Company employs an incentive compensation program for each officer, vice president and executive manager, a portion of which 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, together with the opportunity for promotion and for equity participation, serve as a strong motivation for its employees. 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 designed to satisfy customers by providing high-quality vehicles in a positive, "consumer friendly" buying environment. Some manufacturers offer specific performance incentives, on a per vehicle basis, if certain 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. To keep management focused on customer satisfaction, the Company includes CSI results as a component of its incentive compensation program. 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 59 $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. 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. As of the date of this Prospectus, NADA has not published information for 1997 similar to that presented in the table. (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. For the year ended December 31, 1997, industry retail sales increased by 0.1% as a result of retail car sales declines of 2.7% offset by retail truck sale gains of 3.8% from the same period in 1996. As of May 31, 1998, industry retail sales for the year to date increased 1.1% as a result of retail car sales declines of 3.2% offset by retail truck sale gains of 6.4% from the same period in 1997. 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 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 dealership's 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 approximately 10% of total sales revenues and controlling less than 5% of all franchised dealerships. 60 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 After giving effect to the 1998 Acquisitions, the Company will own eight dealerships in the Charlotte market, ten dealerships in the Nashville/Chattanooga market, two dealerships in the Greenville/Spartanburg market, six dealerships in the Columbus market, three dealerships in the Daytona Beach market, three dealerships in the Tampa/Clearwater market, two dealerships in the Montgomery market, two dealerships in the Houston market, and one dealership in the Atlanta market. 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 its predecessors since 1990 and the dealership to be acquired by the Company pursuant to the pending Economy Honda Acquisition:
Year Acquired Location Dealerships and Brands ---------- ----------------- 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 Town & Country Chrysler-Plymouth-Jeep of Rock Hill 1997 Charlotte Freedom Ford ...................................... 1997 Tampa/Clearwater Infiniti of Chattanooga ........................... 1997 Chattanooga Town & Country Ford of Cleveland .................. 1997 Chattanooga Cleveland Village Honda ........................... 1997 Chattanooga Cleveland Chrysler-Plymouth-Jeep-Eagle ............ 1997 Chattanooga European Motors of Nashville "BMW, Volkswagen" ............................... 1997 Nashville European Motors "BMW, Volvo" .................................... 1997 Chattanooga Dodge of Chattanooga .............................. 1997 Chattanooga KIA - VW of Chattanooga ........................... 1997 Chattanooga Dyer Volvo ........................................ 1997 Atlanta Hatfield Volkswagen-Jeep .......................... 1998 Columbus Trader Bud's Westside Chrysler Plymouth "KIA" ........................................... 1998 Columbus Hatfield Lincoln Mercury .......................... 1998 Columbus Trader Bud's Westside Dodge ....................... 1998 Columbus Toyota West ....................................... 1998 Columbus Hatfield Hyundai-Isuzu-Subaru ..................... 1998 Columbus Century BMW ....................................... 1998 Greenville/ Spartanburg
61
Year Acquired Location Dealerships and Brands ---------- ----------------- Heritage Lincoln Mercury .......... 1998 Greenville/ Spartanburg Economy Honda1 .................... 1998 Chattanooga Capitol Chevrolet "KIA" ........................... 1998 Montgomery Capitol Imports "Hyundai, Mitsubishi" ........... 1998 Montgomery Casa Ford ......................... 1998 Houston Clearwater Mitsubishi ............. 1998 Tampa/Clearwater Clearwater Toyota ................. 1998 Tampa/Clearwater Higginbotham Automobiles "Acura, Mercedes" ............... 1998 Daytona Beach Higginbotham Chevy-Olds "Chevrolet, Oldsmobile" ......... 1998 Daytona Beach Halifax Ford-Mercury .............. 1998 Daytona Beach
- --------- 1 The Company has not obtained the consent of Honda to the acquisition of the Economy Honda dealership. See "Risk Factors -- No Consent from Honda." 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 who aid in the operation of the dealership. The General Sales Manager is primarily responsible for the operations, personnel, financial performance and customer satisfaction performance of the new vehicle sales, used vehicle sales, and finance and insurance departments. The Parts and Service Director is primarily responsible for the operations, personnel, financial and customer satisfaction performance of the service, parts and collision repair departments (if applicable). Each of the departments of the dealership typically has a manager who reports to the General Sales Manager or Parts and Service Director. The Company's Regional Vice Presidents are 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 .......... 36 Mid-South (Tennessee, Georgia, Kentucky and Alabama) Ivan A. Tufty .............. 57 Texas William Sullivan ........... 65 North Carolina and South Carolina
New Vehicle Sales As of June 30, 1998, the Company sold 20 brands of cars and light trucks, 24 brands on a pro forma basis (including Jaguar, which the Company sells pursuant to an interim services agreement with the seller under the Heritage Acquisition). See "Risk Factors -- No Consent from Jaguar." 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 reduces the risk of changes in customer preferences, product supply shortages and aging products. Approximately 4.4% of new vehicle sales in 1997 were luxury brands (for example, BMW, Cadillac, Infiniti and Volvo). See "Risk Factors -- Dependence on Automobile Manufacturers." 62 The following table presents information with respect to the Company's new vehicle sales:
Six Months Ended Year Ended December 31, June 30, --------------------------------------------------------------------- --------------------------- 1993 1994 1995 1996 1997 1997 1998 ------------- ------------- ------------- ------------- ------------- ------------- ------------- (dollars in thousands) Unit sales ............. 9,429 9,686 10,273 11,693 15,715 6,553 16,601 Sales revenue .......... $ 153,138 $ 164,970 $ 186,859 $ 233,979 $ 343,941 $ 137,208 $ 387,466 Gross profit ........... $ 11,087 $ 12,103 $ 13,926 $ 18,001 $ 26,427 $ 8,977 $ 29,919 Gross profit margin .... 7.2% 7.3% 7.5% 7.7% 7.7% 6.5% 7.7%
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 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. 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 following table sets forth information on the Company's used vehicle sales:
Six Months Ended Year Ended December 31, June 30, ---------------------------------------------------------------- -------------------------- 1993 1994 1995 1996 1997 1997 1998 ------------ ------------ ------------ ------------ ------------ ------------ ------------- (dollars in thousands) Retail unit sales ........... 4,104 4,374 5,172 5,488 6,712 2,638 9,719 Retail sales revenue ........ $ 37,742 $ 47,537 $60,766 $68,054 $85,132 $32,666 $132,508 Retail gross profit ......... 3,964 5,182 5,792 5,748 7,294 2,772 13,162 Retail gross margin ......... 10.5% 10.9% 9.5% 8.4% 8.6% 8.5% 9.9% Wholesale unit sales ........ 4,189 4,656 5,009 5,344 7,287 2,750 9,011 Wholesale sales revenue ..... $ 13,363 $ 16,062 $20,025 $25,642 $38,785 $15,342 $ 47,305 Wholesale gross profit ...... 27 43 (45) (23) (599) (145) (193) Wholesale gross margin ...... 0.2% 0.3% (0.2)% (0.1)% (1.5)% (0.9)% (0.4)% Total unit sales ............ 8,293 9,030 10,181 10,832 13,999 5,388 18,730 Total revenue ............... $ 51,105 $ 63,599 $80,791 $93,696 $123,917 $48,008 $179,813 Total gross profit .......... 3,991 5,225 5,747 5,725 6,695 2,627 12,969 Total gross margin .......... 7.8% 8.2% 7.1% 6.1% 5.5% 5.5% 7.2%
Service and Part Sales As of June 30, 1998, the Company provided service and parts at each of its franchised dealerships. The Company also provided maintenance and repair services at its 27 new vehicle dealership facilities (37 on a pro forma basis), offering both warranty and non-warranty services. Service and parts sales provide higher gross margins than vehicle sales. The following table sets forth information regarding the Company's service and parts sales:
Six Months Ended Year Ended December 31, June 30, ---------------------------------------------------------------- ------------------------- 1993 1994 1995 1996 1997 1997 1998 ------------ ------------ ------------ ------------ ------------ ------------ ------------ (dollars in thousands) Sales revenue .............. $ 27,243 $ 30,298 $ 31,958 $ 37,132 $ 51,033 $ 20,220 $ 60,687 Gross profit ............... 9,540 10,344 11,003 12,593 18,118 6,821 24,427 Gross profit margin ........ 35.0% 34.1% 34.4% 33.9% 35.5% 33.7% 40.3%
63 Collision Repair As of June 30, 1998, the Company operated collision repair centers, or body shops, at ten of its dealership locations (13 on a pro forma basis). 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 following table sets forth information regarding the Company's collision repair operations:
Six Months Ended Year Ended December 31, June 30, ----------------------------------------------------------- ----------------------- 1993 1994 1995 1996 1997 1997 1998 ----------- ----------- ----------- ----------- ----------- ----------- ----------- (dollars in thousands) Sales revenue ............... $ 3,094 $ 3,686 $ 3,903 $ 4,942 $ 6,504 $ 2,687 $ 7,333 Gross profit ................ 1,516 1,870 1,956 2,452 3,092 1,283 3,797 Gross profit margin ......... 49.0% 50.7% 50.1% 49.6% 47.5% 47.8% 51.8%
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 additionally 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 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 90 days of making the loan. Early cancellation can result from early repayment because of refinancing of the loan, the sale or trade-in of the vehicle, or default on the loan. The Company establishes an allowance to absorb estimated chargebacks and refunds. Finance and insurance commission revenue is recorded net of such chargebacks. Commission expense related to finance and insurance commission revenue is charged to cost of sales upon recognition of such revenue. The following table sets forth information regarding the Company's finance and insurance operations:
Six Months Ended Year Ended December 31, June 30, ------------------------------------------------------ --------------------- 1993 1994 1995 1996 1997 1997 1998 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Commission revenue ......... 3,711 5,181 7,813 7,118 10,606 4,763 13,541 Gross profit ............... 3,043 4,359 6,561 6,043 8,856 3,931 11,344 Gross margin ............... 82.0% 84.1% 84.0% 84.9% 83.5% 82.5% 83.8%
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 also utilizes computer technology to aid sales people in prospecting for customers. Under arrangements with certain Manufacturers, the Company receives a subsidy for a portion of its advertising expenses incurred in connection with a manufacturer's vehicles. 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 the related Manufacturer the right to approve the dealership's general manager and any material change in management or ownership of the dealership. Each Manufacturer may terminate a Dealer Agreement under certain circumstances, such as a change in control of the dealership without Manufacturer approval, the impairment of the reputation or financial condition 64 of the dealership, the death, removal or withdrawal of the dealership's general manager, the conviction of the dealership or the dealership's owner or general manager of certain crimes, the failure to adequately operate the dealership or maintain wholesale financing arrangements, insolvency or bankruptcy of the dealership or a material breach of other provisions of the Dealer Agreement. Many automobile manufacturers 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." The Company has received notice from Jaguar in which Jaguar has declined to consent to the acquisition of the assets of two Jaguar dealerships, one in Chattanooga and another in Greenville. On a pro forma basis, each of the Jaguar dealerships on an individual basis and in the aggregate would have accounted for less than 1% of the Company's 1997 revenues and gross profits. See "Risk Factors -- No Consent from Jaguar." The Company has received notice from Honda that its approval of the Company's acquisition of the Economy Honda Dealership is contingent upon the Company divesting its ownership of the Cleveland Village Honda dealership prior to such acquisition. Honda's stated reason for this condition is that the Company's ownership of the Economy Honda Dealership and the Cleveland Village Honda dealership would violate Honda's policy against the ownership of contiguous dealerships, and the Company agreed to comply with this policy pursuant to its agreement with Honda. The Company is currently negotiating with potential buyers for the sale of the Cleveland Village Honda dealership. There can be no assurance that the Company will be able to sell the Cleveland Village Honda dealership or that the approval of Honda to the Economy Honda Acquisition will be obtained. On a pro forma basis, the Cleveland Village Honda dealership accounted for, and the Economy Honda Dealership would have accounted for, approximately 1.9% and 2.7% of the Company's 1997 revenues and approximately 2.0% and 3.2% of gross profits, respectively. See "Risk Factors -- No Consent from Honda." 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 approved the sale of no more than 25% of the voting control of Sonic in its IPO, 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. 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 65 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. Alabama law prohibits manufacturers from terminating or refusing to continue or renew a franchise agreement except for "good cause." "Good cause" to discontinue a relationship may exist if, for example, a dealer violates a material term of, or fails to perform its duties under, a franchise agreement. In addition, a manufacturer is prohibited from interfering with the transfer of a dealership unless the transfer is to a person who would not qualify for a dealer's license under Alabama law. Finally, a manufacturer may not unreasonably establish a new dealership within the market area of an existing dealer. A manufacturer who violates Alabama law may be required to pay the dealer for the damages incurred, as well as the costs of suing the manufacturer for damages including attorneys fees. Under Ohio law, a dealer must obtain manufacturer approval before it can sell or transfer an interest in a dealership. The manufacturer may only prohibit the sale or transfer, however, for "good cause" after considering, among other things, the proposed new owner's business experience and financing. Similarly, a manufacturer may terminate or refuse to continue or renew a franchise agreement only for "good cause" considering, for example, the dealership's sales, the dealer's investment in the business, and the dealer's satisfaction of its warranty obligations. Finally, a manufacturer may not site a new dealership in a relevant market area without either the consent of the local dealers or by showing "good cause." Dealers may protest a manufacturer's actions to the Ohio Motor Vehicle Dealers Board, and eventually the courts, if there is no "good cause" for the transfer restriction or termination or siting of a new dealership. If the manufacturer violates Ohio's automobile franchise law, a dealer may be entitled to double its actual damages, as well as court costs and attorneys fees, from a manufacturer. South Carolina law forbids a manufacturer from imposing unreasonable restrictions on a dealer's rights to transfer, sell, or renew a franchise agreement unless the dealer is compensated. A manufacturer may not terminate or refuse to renew a franchise agreement without due cause. Further, although a dealer must obtain the manufacturer's consent to transfer a dealership, the manufacturer may not unreasonably withhold its consent. Finally, manufacturers are generally prohibited from acting in bad faith or engaging in arbitrary or unconscionable conduct. Manufacturers who violate South Carolina's law may be liable for double the actual damages incurred by the dealer and/or punitive damages in limited circumstances. 66 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 lines 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 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 the Internet 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. The used vehicle superstores generally offer a greater and more varied selection of vehicles than the Company's dealerships. In addition, Ford has announced that it is entering into joint ventures to acquire dealerships in various cities in the United States and other manufacturers may also directly enter the retail market in the future, which could have a material adverse effect on the Company. 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." 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, Atlanta, Columbus, Daytona Beach, Greenville/Spartanburg and Montgomery 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, Texas, Ohio and Alabama 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 67 imported, as classified pursuant to the Harmonized Tariff Schedule of the United States. See "Risk Factors -- Imported Product Restrictions and Foreign Trade Risk." 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 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. In addition, the Company may assume environmental liabilities, some of which may be material, in connection with its acquisitions. 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." 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 each of the properties to be utilized by the Company's operations and their respective locations, after giving effect to the pending Economy Honda Acquisition:
Dealership Location - -------------------------------------- -------------------------------- Town & Country Ford 5401 East Independence Blvd. Charlotte, NC Lone Star Ford 8477 North Freeway Houston, TX Fort Mill Ford 788 Gold Hill Rd. Fort Mill, SC Fort Mill Chrysler-Plymouth-Dodge 3310 Hwy. 51 Fort Mill, SC Town & Country Toyota 9101 South Blvd. Charlotte, NC Frontier Oldsmobile-Cadillac 2501 Roosevelt Blvd. Monroe, NC Freedom Ford 24825 US Hwy. 19 North, Clearwater & 3925 Tampa Rd., Oldsmar, FL Dyer Volvo 5260 Peachtree Industrial Blvd. Atlanta, GA Lake Norman Chrysler-Plymouth-Jeep Chartwell Center Dr. Cornelius, NC
68
Dealership Location - ------------------------------------------- ---------------------------------- Lake Norman Dodge I-77 & Torrence Chapel Rd. Cornelius, NC KIA/VW of Chattanooga 6015 International Dr. Chattanooga, TN BMW/VW of Nashville 630 Murfreeboro Pike Nashville, TN BMW/Volvo of Chattanooga 5949 Brainard Rd Chattanooga, TN Infiniti of Chattanooga 5915 Brainard Rd. Chattanooga, TN Town & Country Ford of Cleveland 2496 South Lee Hwy. Cleveland, TN Dodge of Chattanooga 402 West Martin Luther King Blvd. Chattanooga, TN Cleveland Village Imports 2490 & 2492 South Lee Hwy. Cleveland, TN Cleveland Chrysler-Plymouth-Jeep 717 South Lee Hwy. Cleveland, TN Town & Country Chrysler-Plymouth 803 North Anderson Rd. -Jeep of Rock Hill Rock Hill, SC Volkswagen West & Jeep Eagle West 1455 Automall Dr. Columbus, OH Hatfield KIA & Trader 3700 West Broad St. Bud's Westside Chrysler-Plymouth Columbus, OH Hatfield Lincoln Mercury 1495 Automall Dr. Columbus, OH Trader Bud's Westside Dodge 4000 West Broad Columbus, OH Toyota West 1500 Automall Dr. Columbus, OH Hatfield Hyundai & Hatfield 1400 Automall Dr. Isuzu & Hatfield Subaru Columbus, OH Century BMW 2752 Laurens Rd. Greenville, SC Heritage Lincoln Mercury 2424 Laurens Rd. Greenville, SC Economy Honda Hwy 153 Shallowford Rd Chattanooga, TN Capital Chevrolet 711 Eastern Blvd. Montgomery, AL Capital KIA 845 Eastern Blvd. Montgomery, AL Capital Hyundai & Capital 190 Eastern Blvd. Mitsubishi Montgomery, AL Casa Ford 4701 I-10 East Baytown, TX Clearwater Mitsubishi 21699 US Hwy 19N Clearwater, FL Clearwater Toyota 21799 US Hwy 19N Clearwater, FL Clearwater Collision Center 2300 Drew Street Clearwater, FL
69
Dealership Location - ---------------------------- --------------------- Halifax Ford-Mercury 1307 N. Dixie Hwy. New Smyrna Beach, FL Higginbotham Chevy-Olds 1919 N. Dixie Hwy. New Smyrna Beach, FL Higginbotham Automobiles 1720 Mason Ave. Daytona Beach, FL Sunrise Auto World 241 Ridgewood Ave. Holly Hill, FL HMC Finance 3741 S. Nova Rd. Port Orange, FL
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. The Company believes that its facilities are adequate for its current needs. In connection with its acquisition strategy, the Company generally intends to lease the real estate associated with a particular dealership whenever practicable. On July 9, 1998, the Company entered into, subject to the approval of the Company's Board of Directors and the Company's independent directors, the Alliance Agreement with MMRT. MMRT owns certain real estate associated with various automobile dealerships, automotive aftermarket retailers and other automotive related businesses and leases such properties to the business operators located thereon. Mr. Smith, the Company's Chairman and Chief Executive Officer, serves as the chairman of MMRT's board of trustees and is presently its controlling shareholder. See "Certain Transactions -- Transactions with MMRT." 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, 1998, the Company employed approximately 3,600 people, of whom approximately 570 were employed in managerial positions, 1,230 were employed in non-managerial sales positions, 760 were employed in non-managerial parts and service positions and 1,040 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 provides 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 is 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. 70 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 ......... 71 Chairman, Chief Executive Officer and Director* Bryan Scott Smith ....... 30 President, Chief Operating Officer and Director* Dennis D. Higginbotham .. 47 President of Retail Operations* Nelson E. Bowers, II .... 53 Executive Vice President and Director* Theodore M. Wright ...... 35 Chief Financial Officer, Vice President -- Finance, Treasurer, Secretary and Director* William P. Benton ....... 74 Director William R. Brooks ....... 47 Director William I. Belk ......... 49 Director Jeffrey C. Rachor ....... 36 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. Mr. Smith currently is, and since their acquisition by either the Company or 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. Additionally, Mr. Smith serves as chairman of the board of trustees of Mar Mar Realty Trust, a Maryland real estate investment trust. 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 an executive officer of Town and Country Ford since 1993, and was a minority owner of both Town and Country Ford and Fort Mill Ford prior to the acquisition by the Company of those dealerships in 1997. 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 term as a director of the Company will expire at the annual meeting of stockholders of the Company to be held in 1998. Dennis D. Higginbotham has been the President of Retail Operations of the Company since September 1998. Prior to joining the Company, Mr. Higginbotham owned a controlling interest in, and served as the president of, Higginbotham Chevrolet-Oldsmobile (from 1976 until September 1998), Halifax Ford-Mercury (from 1987 until September 1998) and Higginbotham Automobiles (from 1995 until September 1998), each of which was acquired by the Company in September 1998. Mr. Higginbotham has worked in the automobile industry since 1965. Nelson E. Bowers, II has been the Executive Vice President and a director of the Company since December 1997. Prior to joining the Company, Mr. Bowers owned a controlling interest in the Bowers automobile dealership group (the "Bowers Dealerships") which were acquired by the Company in 1997, and he 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 previously owned by Mr. Bowers have been awarded the highest awards available from manufacturers for customer satisfaction. Mr. Bowers' term as a director of the Company will expire at the annual meeting of stockholders to be held in 1999. 71 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 term as a director of the Company will expire at the annual meeting of stockholders to be held in 1999. 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' term as a director of the Company will expire at the annual meeting of stockholders to be held in 2000. William P. Benton became a director of the Company in December 1997. Since January 1997, Mr. Benton has been the Executive Director of Ogilvy & Mather, a world-wide advertising agency. Mr. Benton has been a director of Speedway Motorsports, Inc. since February 1995 and a director of Allied Holdings, Inc. since February 1998. He is also a consultant to the Chairman and Chief Executive Officer of TI Group. Prior to his appointment at Ogilvy & Mather, Mr. Benton served as Vice Chairman of Wells, Rich, Greene/BDDP, Inc., an advertising agency with offices in New York and Detroit. Mr. Benton retired from Ford Motor Company as its Vice President of Marketing Worldwide in 1984 after a 37-year career with that company. Mr. Benton's term as a director of the Company will expire at the annual meeting of stockholders to be held in 1998. William I. Belk became a director of the Company in March 1998. Mr. Belk is currently the Vice President and Director for Monroe Hardware Company, Director for Piedmont Ventures, Inc., and Treasurer and Director for Old Well Water, Inc. Mr. Belk previously held the position of Chairman and Director for certain Belk stores (a privately held retail department store chain). Mr. Belk's term as a director of the Company will expire at the annual meeting of stockholders to be held in 1998. Jeffrey C. Rachor is a Regional Vice President of the Company and has held this position since the Company's acquisition of the Bowers Dealerships in 1997. Mr. Rachor has over 13 years experience in automobile retailing and was the chief operating officer of the Bowers Dealerships from 1989 until their acquisition by the Company in 1997. During this period, Mr. Rachor has also served at various times as the general manager of Toyota, Saturn and Chrysler-Plymouth-Jeep-Eagle dealerships. 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. is a Regional Vice President of the Company and has held this position since the Company's acquisition of Ken Marks Ford in 1997. Prior to joining the Company, Mr. Marks owned a controlling interest in Ken Marks Ford and 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. Ivan A. Tufty is a Regional Vice President of the Company and has held this position since the consummation of the Company's IPO in 1997. Mr. Tufty also is the Executive Manager of Lone Star Ford, a position he has held since 1990. 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 is a Regional Vice President of the Company and has held this position since the consummation of the Company's IPO in 1997. Mr. Sullivan also is the Vice-President of Town & Country Ford, a position he has held since prior to 1992. Mr. Sullivan has over 25 years experience in auto retailing as an Executive Manager, head of F&I and in other roles. 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 at the Company's annual shareholder meeting each year. Messrs. Bruton Smith and Brooks belong to the class of directors whose term expires in 2000, Messrs. Bowers and Wright belong to the 72 class of directors whose term expires in 1999, and Messrs. Scott Smith, Benton and Belk belong to the class of directors whose term expires in 1998. The executive officers are elected annually by, and serve at the discretion of, the Company's Board of Directors. Committees of the Board There are two standing committees of the Board of Directors of the Company, the Audit Committee and the Compensation Committee. The Audit Committee was appointed on March 20, 1998 and consists of Messrs. Benton, Belk and Brooks. The Compensation Committee currently has no members and its functions are being performed by the full Board of Directors. The Board of Directors intends to select members for its Compensation Committee at the annual Board of Directors meeting to occur after the 1998 annual meeting of the Company's stockholders. Set forth below is a summary of the principal functions of each committee. There were no meetings held for either of the committees during 1997. Audit Committee. The Audit Committee recommends the appointment of the Company's independent auditors, determines the scope of the annual audit to be made, reviews the conclusions of the auditors and reports the findings and recommendations thereof to the Board, reviews the Company's auditors, the adequacy of the Company's system of internal control and procedures and the role of management in connection therewith, reviews transactions between the Company and its officers, directors and principal stockholders, and performs such other functions and exercises such other powers as the Board from time to time may determine. Compensation Committee. The Compensation Committee administers certain compensation and employee benefit plans of the Company, annually reviews and determines executive officer compensation, including annual salaries, bonus performance goals, bonus plan allocations, stock option grants and other benefits, direct and indirect, of all executive officers and other senior officers of the Company. The Compensation Committee administers the Company's Stock Option Plan and the Company's Employee Stock Purchase Plan, and periodically reviews the Company's executive compensation programs and takes action to modify programs that yield payments or benefits not closely related to the Company or executive performance. The policy of the Compensation Committee's program for executive officers is to link pay to business strategy and performance in a manner which is effective in attracting, retaining and rewarding key executives while also providing performance incentives and awarding equity-based compensation to align the long-term interests of executive officers with those of Company stockholders. It is the Compensation Committee's objective to offer salaries and incentive performance pay opportunities that are competitive in the marketplace. The Company currently has no standing nominating committee. During 1997, there was one meeting of the Board of Directors of the Company, with each director attending the meeting. Executive Compensation The following table sets forth compensation paid by or on behalf of the Company to the Chief Executive Officer of the Company and to its other executive officer with earnings greater than $100,000 during the year for services rendered during the Company's fiscal years ended December 31, 1995, 1996 and 1997: Summary Compensation Table
Annual Compensation ------------------------------------------------ Long-Term Compensation Awards Number of Other Shares Annual Underlying All Other Name and Principal Position(s) Year Salary (1) Bonus(2) Compensation(3) Options(4) Compensation(5) - -------------------------------- ------ ------------ ---------- ----------------- -------------------- ---------------- O. Bruton Smith 1997 $326,704 -- $15,000 -- -- Chairman, Chief Executive 1996 164,750 -- 33,350 -- -- Officer and Director 1995 142,200 -- 41,350 -- -- Bryan Scott Smith 1997 273,767 $ 18,331 (5) 99,875 -- President, Chief Operating 1996 48,000 230,714 (5) -- -- Officer and Director 1995 48,000 168,670 (5) -- --
- --------- (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. 73 (3) The Company provides Bruton 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 or 1995. (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. Employment Agreements The Company entered into employment agreements in 1997 with Messrs. Bruton Smith, Scott Smith, Bowers, Wright, Marks and Rachor in 1997, and with Mr. Higginbotham in 1998 (the "Employment Agreements"), which provide for an annual base salary and certain other benefits. Pursuant to the Employment Agreements, the 1998 base salaries of Messrs. Bruton Smith, Scott Smith, Bowers, Wright, Marks, Rachor and Higginbotham will be $350,000, $300,000, $400,000, $180,000, $48,000, $150,000 and $400,000, respectively. The executives will also receive such additional increases as may be determined by the Compensation Committee. The Employment Agreements, except those of Messrs. Higginbotham, 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 Agreement for Mr. Higginbotham provides for the payment of bonuses as may be determined and ratified from time to time 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. Under the terms of his Employment Agreement, 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. Under the terms of his Employment Agreement, the Company will employ Mr. Higginbotham for three years or until his Employment Agreement is terminated by the Company or by him. 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 IPO price, vesting in three equal annual installments beginning October 1998 and expiring in October 2007. Mr. Higginbotham's Employment Agreement provides that he will receive options to purchase Class A Common Stock in an amount and on terms consistent with the grants of options for similar employees of the Company. To date, no options have been granted to Mr. Higginbotham. 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 the 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. With respect to Mr. Higginbotham, the territorial restrictions apply only in the SMSA's for Atlanta, Charlotte, Chattanooga, Columbus, Daytona Beach, Houston, Montgomery, Nashville and Tampa-St. Petersburg-Clearwater. 74 CERTAIN TRANSACTIONS Registration Rights Agreement In connection with the acquisition by the Company of Town & Country Ford, Lone Star Ford, Fort Mill Ford, Town & Country Toyota and Frontier Oldsmobile-Cadillac in 1997, the Company entered into a Registration Rights Agreement dated as of June 30, 1997 (the "Class B Registration Rights Agreement") 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 Class B Registration Rights Agreement provides 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, included in any registration statement pertaining to the registration of Class A Common Stock for issuance by the Company or for resale by them or 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. The Class B Registration Rights Agreement expires in November 2007. Sonic Financial is controlled by the Company's Chairman and Chief Executive Officer, Bruton Smith. The Smith Advance In connection with the acquisition by the Company of Fort Mill Chrysler-Plymouth-Dodge, Bruton 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 this acquisition at closing. The Smith Advance was evidenced by a demand note bearing interest at the minimum statutory rate of 3.83% per annum. The Company repaid in full the principal of and interest on the Smith Advance from the proceeds of the IPO in November 1997. Shortly following the Company's repayment of the Smith Advance, Mr. Smith made the Subordinated Smith Loan to the Company in the amount of $5.5 million. The financial effect to the Company from the repayment of the Smith Advance and the subsequent Subordinated Smith Loan was substantially the same as if the Smith Advance had not been repaid but instead had been increased from $3.5 million to $5.5 million. See "The Smith Guarantees, Pledges and Subordinated Loan." The Smith Guarantees, Pledges and Subordinated Loan Under the NationsBank Facility, Bruton Smith guaranteed the obligations of the Company and secured his guarantee with a pledge of shares of common stock of Speedway Motorsports, owned directly by him. In February 1998, the Company repaid in full the amounts owed under the NationsBank Facility and Mr. Smith's guarantee was released. Mr. Smith initially guaranteed the obligations of the Company under the Revolving Facility and such obligations were further secured with the Revolving Pledge of shares of common stock of Speedway Motorsports, owned by Sonic Financial, a corporation controlled by Mr. Smith, and having an estimated value at the time of pledge of approximately $50.0 million. In December 1997, upon the increase of the borrowing limit under the Revolving Facility to the maximum loan commitment of $75.0 million, Mr. Smith's personal guarantee of the Company's obligations under the Revolving Facility was released, although the Revolving Pledge remained in place and Mr. Smith was required to lend the Subordinated Smith Loan of $5.5 million to the Company to increase its capitalization. The Subordinated Smith Loan was required by Ford Motor Credit as a condition to its agreement to increase the borrowing limit under the Revolving Facility because the net offering proceeds to the Company from its IPO in November 1997 were significantly less than expected by the Company and Ford Motor Credit. The Subordinated Smith Loan is evidenced by the Company's Subordinated Promissory Note dated December 1, 1997 in favor of Mr. Smith, bears interest at NationsBank's announced prime rate plus 0.5% and matures on November 30, 2000. All amounts owed by the Company to Mr. Smith under the Subordinated Smith Loan are subordinate in right of payment to all amounts owed by the Company under the Ford Credit Facilities pursuant to the terms of a Subordination Agreement dated as of December 15, 1997 between Mr. Smith and Ford Motor Credit. For further discussion of these lending arrangements, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Transactions with MMRT The Company has entered into, subject to the approval of the Company's Board of Directors and the Company's independent directors, the Alliance Agreement with MMRT. Mr. Smith, the Company's Chairman and Chief Executive Officer, serves as the chairman of MMRT's board of trustees and is presently its controlling shareholder. Under the Alliance Agreement, the 75 Company has agreed to refer real estate acquisition opportunities that arise in connection with its dealership acquisitions to MMRT. In exchange, MMRT has agreed to refer dealership acquisition opportunities to the Company and to provide certain real estate development and maintenance services to the Company. MMRT will also arrange for property inspections and environmental reports for prospective dealership properties at the Company's cost. Pursuant to the Alliance Agreement, the Company has entered into contracts to sell the real estate associated with Town and Country Toyota and Fort Mill Ford, two of the Company's dealerships, for an aggregate purchase price of approximately $10.3 million. In addition, the Alliance Agreement provides for an agreed form of lease (the "Sonic Form Lease") pursuant to which MMRT would lease real estate to the Company in connection with MMRT's future acquisitions of real estate associated with the Company's operations. Presently, the Company leases or intends to lease from MMRT 29 parcels of land associated with 21 of its dealerships, including the real estate associated with Town and Country Toyota and Fort Mill Ford that the Company will lease back from MMRT pursuant to leases substantially similar to the Sonic Form Lease. The aggregate initial annual base rent to be paid by the Company for all 29 properties under the leases with MMRT is approximately $7.7 million. The Company entered into the Alliance Agreement with MMRT rather than with an unaffiliated third party for purposes consistent with the Company's acquisition strategy. The Company is familiar with MMRT's growth and operating strategy and believes that MMRT is well-positioned to identify and refer attractive dealership acquisition opportunities for the Company in the course of MMRT's acquisitions of real property. In addition, the Company's relationship with MMRT will assist the Company in negotiating transactions with sellers of dealerships that the Company has identified for acquisition. Many dealership sellers who own their dealership's real property wish to sell the dealership real property as well as dealership businesses. Inclusion of real estate in a transaction may allow the Company to negotiate an acquisition on more favorable terms. Finally, MMRT will provide development assistance to the Company which will enable the Company to avoid additional costs associated with hiring employees with real estate development expertise. For these reasons, the Company feels that MMRT's growth and operating strategies are closely-aligned with the Company's dealership acquisition strategy and that the Alliance Agreement with MMRT will provide significant benefits to the Company on an ongoing basis. For acquisitions identified by the Company, the Alliance Agreement is intended to operate in two different contexts, depending on whether the dealership seller owns the dealership real property or leases the dealership real property from an unaffiliated third party. For acquisitions where the dealership seller owns the dealership real property, the Company will negotiate acquisition of the real property from the seller on an arms'-length basis and will assign its negotiated purchase rights to MMRT. MMRT will then acquire the real property from the seller. The Company and MMRT will subsequently enter into a lease agreement regarding the dealership real property using the Sonic Form Lease to satisfy all non-economic terms of the lease agreement. The economic terms of the lease agreement will be negotiated between the Company and MMRT and will depend on several factors, including the projected earnings capacity of the dealership, the quality, age and condition of the dealership structure(s), the location of the dealership property and the rent paid for comparable commercial properties. In accordance with the requirements of the Company's Amended and Restated Certificate of Incorporation, the terms of any lease agreement with MMRT involving aggregate payments in excess of $500,000 will be subject to the approval of the Company's Board of Directors and of the Company's independent directors to ensure that such terms are no less favorable to the Company than would be available to the Company in an arms'-length transaction dealing with an unrelated third party. In addition, where necessary, the Company will obtain independent appraisals to determine the fairness of lease terms to the Company. For acquisitions where the dealership real property is owned by an unaffiliated third party and is leased to the dealership seller, MMRT will negotiate with the unaffiliated third party to acquire the dealership real property. If MMRT is successful in acquiring the dealership real property and the Company completes its acquisition of the dealership business, then the Company and MMRT will enter into a lease agreement regarding the dealership real property using the Sonic Form Lease and will determine the economic terms of the Lease Agreement according to the principles described in the paragraph above. The Company has agreed to sell the dealership real properties for the Town and Country Toyota and Fort Mill Ford dealerships, which the Company currently owns, to MMRT for approximately $5.7 million and $4.6 million, respectively. The sales price for each of these parcels of real property was determined in negotiations between the Company and MMRT based on the projected earnings capacity of the dealership, from which a monthly lease payment was calculated. Using this rent calculation, the Company and MMRT agreed to a capitalization rate for the lease payments in order to determine a purchase price for the properties themselves. This capitalization rate was based on several factors, including the quality, age and condition of the dealership structure(s), the location of the dealership property, the value of the properties for alternative uses, the availability of similar properties in the area and recent sales prices for comparable commercial properties in the area. An additional factor in determining the sales price for each of the properties were independent appraisals obtained by the Company for the Town and Country Toyota and Fort Mill Ford properties in December 1997 and February 1996, respectively. 76 These appraisals, after giving effect to the passage of time, indicate that the sales price payable to the Company by MMRT for each of the properties exceeds the appraised fair value of such properties determined in the independent appraisals. The Company's Chief Executive Officer determined the sales price for each of these properties, such determination being subject to the approval by the Company's Board of Directors and the Company's independent directors to ensure that the sales are on terms no less favorable to the Company than would be available to the Company in an arms'-length transaction dealing with an unrelated third party. In giving their approval for these sales, the Company's directors are expected to evaluate the earnings capacities of the dealerships and the capitalization rates for the related leases through an analysis of the factors stated above as well as the previously mentioned independent appraisals. MMRT has entered into new leases with each of Town and Country Ford and Lone Star Ford which provide that the annual lease payments for their properties will each be increased to approximately $1.1 million effective January 1, 2000, as compared to current annual lease payments of approximately $0.4 million and $0.3 million, respectively. The lease rates for Town and Country Ford and Lone Star Ford are currently at below market rates, as supported by independent appraisal. Accordingly, MMRT, as a condition to its agreement to purchase these properties, required that the Company agree to enter into new lease agreements with MMRT that would reflect fair market rent payments beginning January 1, 2000. The increase in lease rates for Town and Country Ford and Lone Star Ford effective January 1, 2000 is subject to the approval of the Company's Board of Directors and of the Company's independent directors. As required by the Company's Amended and Restated Certificate of Incorporation, the terms of these transactions must be no less favorable to the Company than those available from an unrelated third party. 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 1995 and 1996, and $409,200 in 1997. Current minimum rent payments are $409,000 annually ($34,083 monthly) through 1999. In connection with the Alliance Agreement between MMRT and the Company, MMRT has agreed to purchase the real property on which Town & Country Ford is operated from STC and has entered into a lease with Town & Country Ford whereby the annual lease payment by Town & Country Ford will be increased to approximately $1.1 million effective January 1, 2000. Lone Star Ford operates, in part, at facilities leased from Viking Investments Associates, a Texas association ("Viking"), which is controlled by Mr. Bruton Smith. Annual payments under the Viking lease were $331,302, $360,000 and $360,000 for 1995, 1996 and 1997, respectively. Minimum annual rents under this lease are $360,000 ($30,000 monthly), such amount being below market. In connection with the Alliance Agreement, MMRT has agreed to purchase the real property on which Lone Star Ford is operated from Viking and has entered into a lease with Lone Star Ford whereby the annual lease payment by Lone Star Ford will be increased to approximately $1.1 million effective January 1, 2000. KIA of Chattanooga operates at facilities leased from KIA Land Development, a company in which Nelson Bowers, the Company's Executive Vice President and a director, maintains an ownership interest. The Company negotiated this lease in connection with the Bowers Acquisition. This triple net lease expires in 2007 and the rent will be $11,070 per month. Annual payments under this lease were $22,140 for 1997. 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 $23,320. Annual payments under this lease were $46,640 for 1997. This lease also provides for renewals on terms identical to the KIA of Chattanooga lease. Infiniti 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. Annual payments under this lease were $55,704 for 1997. This triple net lease expires in 2017 and provides for monthly rent of $27,852. 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 77 Acquisition. This triple net lease expires in 2011, provides for monthly rent of $23,452 and may be renewed on terms identical to the KIA of Chattanooga lease. Annual payments under this lease were $46,904 for 1997. Cleveland Village Honda operates at facilities leased from Nelson Bowers and another individual. Mr. Bowers owns a 75% undivided interest in the land and buildings leased by Cleveland Village Honda, 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 in October 2000 with rent of $12,858 per month and the other, pertaining to a used car lot, is a month-to-month lease with rent of $3,000 per month. Annual payments under this lease were $31,716 for 1997. In September 1998, MMRT entered into agreements to acquire all of the foregoing properties in which Mr. Bowers has an interest subject to the existing leases with the Company. In July 1998, simultaneously with the closing of the Heritage Acquisition, Chartown, a general partnership controlled by Mr. Bruton Smith and an affiliate of the Company ("Chartown"), acquired the real property upon which the Heritage Lincoln-Mercury dealership is operated for approximately $3.0 million. Chartown and the Company's subsidiary that acquired the assets of the Heritage Lincoln-Mercury dealership then entered into a lease agreement pursuant to which the subsidiary leases the real property from Chartown. The lease is for a ten year term with an option on the part of the lessee to extend for two additional five-year terms. The annual base rental under this lease is $349,860, adjusted every five years based on the consumer price index. The Company anticipates that Chartown will sell this real estate property to MMRT in the future. Also in July 1998, simultaneously with the closing of the Century Acquisition, Chartown acquired two separate parcels of real property upon which the BMW dealership and the satellite sales location are operated, respectively, for approximately $5.0 million. Chartown and the Company's subsidiary that acquired the assets of Century BMW then entered into separate two lease agreements for the BMW dealership property and the satellite sales location property, respectively, pursuant to which the subsidiary leases each of these properties from Chartown. Each of the leases is for a ten year term with an option on the part of the lessee to extend for two additional five-year terms. The annual base rentals under the BMW dealership lease and the satellite sales location lease are $420,000 and $112,805, respectively, adjusted every five years based on the consumer price index. The Company anticipates that Chartown will sell each of these real estate properties to MMRT in the future. 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"). Bruton 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 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 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 financed 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 is secured by Mr. Bowers' interest in Chattanooga Volvo. The Bowers Volvo Note is for a principal amount of $900,000 and bears interest at the lowest applicable federal rate as published by the U.S. Treasury Department in effect on November 17, 1998. Accrued interest is payable annually. The operating agreement of Chattanooga Volvo provides 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. 78 Other Transactions Beginning in early 1997, certain of the Sonic Dealerships entered into arrangements to sell to their customers credit life insurance policies underwritten by American Heritage Life Insurance Company, an insurer unaffiliated with the Company ("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 $576,000 to American Heritage in premiums for these policies for the year ended December 31, 1997. The Company terminated this arrangement with American Heritage in 1997. Provident American is a wholly owned subsidiary of Sonic Financial. Town & Country Ford and Lone Star Ford had each made several non-interest bearing advances to Sonic Financial, a company controlled by Bruton Smith. In preparation for the Reorganization, a demand promissory note by Sonic Financial evidencing $2.1 million of these advances was canceled in June 1997 in exchange for the redemption of certain shares of the capital stock of Town & Country Ford held by Sonic Financial. In addition, a demand promissory note by Sonic Financial evidencing of $0.5 million of these advances was canceled in June 1997 pursuant to a dividend. Approximately $0.5 million remain outstanding under these arrangements at December 31, 1997. As part of the purchase price in connection with the Company's acquisition of the Bowers Automotive Group in November 1997, the Company issued its promissory note in the original principal amount of $4.0 million in favor of Nelson Bowers (the "Bowers Acquisition Note"). The Bowers Acquisition Note is payable in 28 equal quarterly installments and bears interest at the prime rate less 0.5%. The Company made certain advances to its shareholder, Sonic Financial, in 1997, which amounts are currently outstanding. As of December 31, 1997, the amounts receivable from Sonic Financial with respect to such advances totalled $622,000. Town and Country Toyota has an amount payable to Bruton Smith, which payable totals approximately $0.8 million as of December 31, 1997. This loan bears interest at 8.75% per annum. 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 joined 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. The Company acquired Town & Country Ford, Lone Star Ford, Town & Country Toyota, Fort Mill Ford and Frontier Oldsmobile-Cadillac (the "Initial 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 Initial Dealerships from Sonic Financial, Bruton 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 Consolidated Financial Statements of Sonic and for the businesses being acquired in the 1998 Acquisitions, see "The 1998 Acquisitions" and the Consolidated Financial Statements of the dealerships being acquired in the pending 1998 Acquisitions contained elsewhere herein. 79 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Voting Stock as of September 15, 1998, by (i) each stockholder who is known to the Company to own beneficially five percent or more of each class of the outstanding Voting Stock, (ii) each director of Sonic, (iii) each executive officer of Sonic (including the Chief Executive Officer), and (iv) all directors and executive officers of Sonic as a group. 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. Holders of Preferred Stock are entitled to one vote per each share of Class A Common Stock into which such Preferred Stock is convertible into as of the record date of the Annual Meeting on all matters submitted to a vote of the stockholders of the Company. Except as otherwise indicated below, each of the persons named in the table has sole voting and investment power with respect to the securities beneficially owned by him or it as set forth opposite his or its name subject to community property laws where applicable.
Number of Number of Percentage of Shares of Shares of Outstanding Class B Class A Class A Common Common Stock Common Stock Beneficial Owner Owned Stock Owned - ----------------------------------------- -------------- --------------- ----------- O. Bruton Smith (2)(3) .................. -- -- 5,476,250 Sonic Financial Corporation (2) ......... -- -- 4,440,625 Bryan Scott Smith (2) ................... 33,292 (4) * 478,125 Nelson E. Bowers, II .................... 26,438 (5) * -- Theodore M. Wright ...................... 12,729 (6) * -- William R. Brooks ....................... 10,000 (7) * -- William P. Benton ....................... 10,000 (7) * -- William I. Belk ......................... 10,000 (7) * -- Citicorp (8)(10) ........................ 500,000 9.92% -- Citibank, N.A. (9)(10) .................. 500,000 9.92% -- Wellington Management Company, LLP (11)(13) ........................... 497,000 9.86% -- Wellington Trust Company, N.A. (12)(13) ............................... 308,300 6.12% -- Scott Fink (14) ......................... -- -- -- Michael S. Cohen (15) ................... -- -- -- Dan E. Hatfield (16) .................... -- -- -- Bud C. Hatfield (16) .................... -- -- -- Century Auto Sales, Inc. (17) ........... -- -- -- Aldo B. Paret (18) ...................... -- -- -- Frank McGough (19) ...................... All directors and executive officers as a group (10 persons) (1)(10) ........... -- -- 5,954,375 Percentage of Outstanding Number of Percentage of Percentage of Class B Shares of Outstanding all Outstanding Common Preferred Stock Preferred Voting Beneficial Owner Stock Owned Stock Stock (1) - ----------------------------------------- -------------- ----------------- --------------- ---------------- O. Bruton Smith (2)(3) .................. 87.62% -- -- 48.38% Sonic Financial Corporation (2) ......... 71.05% -- -- 39.23% Bryan Scott Smith (2) ................... 7.65% -- -- 4.51% Nelson E. Bowers, II .................... -- -- -- * Theodore M. Wright ...................... -- -- -- * William R. Brooks ....................... -- -- -- * William P. Benton ....................... -- -- -- * William I. Belk ......................... -- -- -- * Citicorp (8)(10) ........................ -- -- -- 4.42% Citibank, N.A. (9)(10) .................. -- -- -- 4.42% Wellington Management Company, LLP (11)(13) ........................... -- -- -- 4.39% Wellington Trust Company, N.A. (12)(13) ............................... -- -- -- 2.72% Scott Fink (14) ......................... -- 1,980 7.32% * Michael S. Cohen (15) ................... -- 1,980 7.32% * Dan E. Hatfield (16) .................... -- 3,750 13.86% * Bud C. Hatfield (16) .................... -- 8,971 33.15% * Century Auto Sales, Inc. (17) ........... -- 2,166.5 8.01% * Aldo B. Paret (18) ...................... -- 2,313 8.55% * Frank McGough (19) ...................... 4,194.3 15.50% * All directors and executive officers as a group (10 persons) (1)(10) ........... 95.27% -- -- 53.84%
- --------- * Less than one percent (1) The percentage of total voting power is as follows: O. Bruton Smith, 79.42%, Sonic Financial Corporation, 64.40%. Bryan Scott Smith, 6.98%, and Citicorp, Citibank, N.A.,Wellington Management Company, LLP, Wellington Trust Company, N.A., Messrs. Bowers, Wright, Brooks, Benton, Belk, Fink and Cohen, less than 1%. (2) The address of such person or group is 5401 East Independence Boulevard, Charlotte, North Carolina 28218. (3) The Schedule 13D filed by the beneficial owner indicates that the shares of Common Stock shown as owned by such person or group include all of the shares shown as owned by Sonic Financial Corporation ("Sonic Financial") elsewhere in the table. Bruton Smith owns the substantial majority Sonic Financial's outstanding capital stock. (footnotes continued on following page) 80 (4) Does not include 99,875 shares that underlie options to purchase shares of Class A Common Stock granted by the Company pursuant to the Company's 1997 Stock Option Plan, which become exercisable in three equal installments beginning in October 1998. (5) Does not include 79,313 shares that underlie options to purchase shares of Class A Common Stock granted by the Company pursuant to the Company's Stock Option Plan, which become exercisable in three equal installments beginning in October 1998. (6) Does not include 38,188 shares that underlie options to purchase shares of Class A Common Stock granted by the Company pursuant to the Company's Stock Option Plan, which become exercisable in three equal installments beginning in October 1998. (7) Does not include 10,000 shares that underlie options to purchase shares of Class A Common Stock granted by the Company pursuant to the Directors Plan, which become exercisable in September 1998. For additional information concerning options granted to the Company's independent directors, see "Proposed Adoption of the Directors Plan" below. (8) The Schedule 13D filed by the beneficial owner indicates that the shares of Common Stock shown as owned by such entity or group include all the shares shown as owned by Citibank, N.A. elsewhere in the table. Citicorp owns all of the outstanding capital stock of Citibank, N.A. (9) The Schedule 13D filed by the beneficial owner indicates that Citibank, N.A. has sole voting power as to 72,000 shares of the 500,000 shares shown with no voting power as to the remainder and has shared dispositive power over all 500,000 shares. (10) The address of such entity is 399 Park Avenue, New York, New York 10043. (11) The Schedule 13D filed by the beneficial owner indicates that Wellington Management Company has shared voting power as to 223,700 shares of the 497,000 shares shown with no voting power as to the remainder and has shared dispositive power over all 497,000 shares. (12) The Schedule 13D filed by the beneficial owner indicates that Wellington Trust Company, N.A. has shared voting power as to 84,600 shares of the 308,300 shares shown with no voting power as to the remainder and has shared dispositive power over all 308,300 shares. (13) The address of such entity is 75 State Street, Boston, Massachusetts 02109. (14) The address of such person is 3030 Turtle Brooke, Clearwater, Florida 33761. (15) The address of such person is 49 Rolling Hill Lane, Old Westbury, New York 11568. (16) The address of such person is 1500 Automall Drive, Columbus, Ohio 43228. (17) The address of such entity is 2323 Laurens Road, Greenville, South Carolina 29607. (18) The address of such person is 4615 Southwest Freeway, Suite 600, Houston, Texas 77027. (19) The address of such person is 711 Eastern Blvd., Montgomery, Alabama 36117. 81 DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS The Revolving Facility In October 1997, the Company obtained the Revolving Facility from Ford Motor Credit in the principal amount of $26.0 million. In December 1997, the Company increased the aggregate amount available to borrow under this facility to a maximum $75.0 million pursuant to the Revolving Facility's terms. The Revolving Facility bears interest at the Revolving Facility Prime Rate and matures in December 1999, unless the Company requests that such term be extended, at the option of Ford Motor Credit, for additional one year terms. No assurance can be given that such extensions will be granted. The proceeds from the Revolving Facility were used in the consummation of the acquisition of Ken Marks Ford in 1997, the Clearwater Acquisition, the Hatfield Acquisition and the repayment in February 1998 of $8.2 million of the amount borrowed under the NationsBank Facility. Amounts to be drawn under the Revolving Facility are anticipated by the Company to be used for paying a portion of the cash purchase price of the pending 1998 Acquisitions, to refinance designated indebtedness, for the acquisition of additional dealership subsidiaries in the future and to provide general working capital needs of the Company not to exceed $10 million. At September 15, 1998, no amounts were outstanding under the Revolving Facility. The Company agreed under the Revolving Facility 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). The Revolving Facility also contains 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. Additional covenants include specified ratios of (i) total debt to tangible equity (as defined in the Revolving Facility) no greater than 14 to 1 before December 31, 1998 and thereafter no greater than 8 to 1 (the "Total Base Capital Ratio"), (ii) total adjusted debt (as defined in the Revolving Facility) to tangible equity no greater than 4 to 1 before December 31, 1998 and thereafter no greater than 2.5 to 1 (the "Adjusted Total Base Capital Ratio"), (iii) current assets to current liabilities of at least 1.25 to 1, (iv) earnings before interest, taxes, depreciation, amortization and rent expense (EBITDAR) less capital expenditures to fixed charges of at least 1.3 to 1 for each fiscal quarter, (v) earnings before interest, taxes, depreciation and amortization (EBITDA) to interest expense of at least 2 to 1 for each fiscal quarter, (vi) EBITDA to total adjusted debt of more than 1 to 2.25 and (vii) the current lending commitment under the Revolving Facility to scaled assets (as defined in the Revolving Facility) of more than 3.5 to 1. 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. The Company did not meet the Total Base Capital Ratio and the Adjusted Total Base Capital Ratio covenants at December 31, 1997, at March 31, 1998 and at June 30, 1998 and has obtained waivers with regard to such requirement from Ford Motor Credit. The waivers are subject to the requirement that the Company meet a Total Base Capital Ratio and Adjusted Total Base Capital Ratio of 16 to 1 and 4 to 1, respectively, after June 30, 1998 and 8 to 1 and 2.5 to 1, respectively, after December 31, 1998. The Company and Ford Motor Credit have amended the Revolving Credit Facility to provide that the Notes (which are subordinated to the Revolving Facility) will be treated as equity capital for purposes of these ratios and, accordingly, the Company is in compliance with these covenants after giving effect to the issuance of the Notes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The indebtedness under the Ford Credit Facilities is secured by (i) a pledge by the Company of all the capital stock, membership interests and partnership interests of all of the Company's subsidiaries, (ii) guaranties by all of the Company's subsidiaries that are, in turn, secured by a lien on all of the assets of such subsidiaries (with the exception of the liens on the assets of the Company's Ford dealership subsidiaries, which liens only secure such Ford subsidiaries' obligations under the Floor Plan Facility) and (iii) a lien on all of the Company's other assets, except for real estate owned by the Company or its subsidiaries. In addition, the Revolving Facility is partially secured by a pledge of shares of SMI common stock owned by Sonic Financial, a corporation controlled by Bruton Smith. See "Certain Transactions -- The Smith Guarantees and Pledges." The Floor Plan Facility The Company currently has in place the Floor Plan Facility, a standardized floor plan credit facility with Ford Motor Credit for each of the Company's dealership subsidiaries. Each dealership subsidiary has its own agreement with Ford Motor Credit for its inventory financing needs. As of June 30, 1998, there was an aggregate of $149.7 million outstanding under the Floor Plan Facility. The Floor Plan Facility at September 15, 1998 had an effective rate of prime less 0.9%, subject to certain incentives and other adjustments, which was 7.6%. 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 82 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 Facility 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 applicable dealership subsidiary. For a description of the security for repayment of the indebtedness of the Company and its subsidiaries under the Floor Plan Facility, see " -- The Revolving Facility." 83 DESCRIPTION OF THE NEW NOTES The Old Notes were, and the New Notes will be, issued under an Indenture dated as of July 1, 1998 (the "Indenture") among the Company, the Guarantors and U.S. Bank Trust National Association, as trustee (the "Trustee"), a copy of the form of which will be made available to prospective purchasers of the Notes upon request to the Company. Upon the issuance of the New Notes, the Indenture will be subject to and governed by the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). References to ("Section ") mean the applicable Section of the Indenture. EXCEPT AS OTHERWISE INDICATED BELOW, THE FOLLOWING SUMMARY APPLIES TO BOTH THE OLD NOTES AND THE NEW NOTES. AS USED HEREIN, THE TERM "NOTES" SHALL MEAN THE OLD NOTES AND THE NEW NOTES, UNLESS OTHERWISE INDICATED. The form and terms of the New Notes are substantially identical to the form and terms of the Old Notes, except that (i) the New Notes will have been registered under the Securities Act and, therefore, will not bear legends restricting the transfer thereof and (ii) holders of New Notes will not be, and upon consummation of the Exchange Offer, holders of the Old Notes will no longer be, entitled to certain rights under the Registration Rights Agreement intended for the holders of unregistered securities, except in certain limited circumstances. The New Notes will be issued solely in exchange for an equal principal amount of Old Notes. As of the date hereof, $125.0 million aggregate principal amount of Old Notes is outstanding. See "The Exchange Offer." The following summary of the material provisions of the Indenture does not purport to be complete, and where reference is made to particular provisions of the Indenture, such provisions, including the definitions of certain terms, are qualified in their entirety by reference to all of the provisions of the Indenture and those terms made a part of the Indenture by the Trust Indenture Act. For definitions of certain capitalized terms used in the following summary, see " -- Certain Definitions" or "The Exchange Offer." General The Notes will mature on August 1, 2008, will be limited to $125,000,000 aggregate principal amount, and will be unsecured senior subordinated obligations of the Company. Each Note will bear interest at the rate of 11% per annum from July 31, 1998 or from the most recent interest payment date to which interest has been paid, payable semiannually in arrears on February 1 and August 1 in each year, commencing February 1, 1999, to the Person in whose name the Note (or any predecessor Note) is registered at the close of business on the January 15 or July 15 next preceding such interest payment date. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. (Sections 202, 301 and 309). Principal of, premium, if any, and interest on the Notes will be payable, and the Notes will be exchangeable and transferable, at the office or agency of the Company in The City of New York maintained for such purposes (which initially will be the corporate trust office of the Trustee); provided, however, that payment of interest may be made at the option of the Company by check mailed to the Person entitled thereto as shown on the security register. (Sections 301, 305 and 1002) The Notes will be issued only in fully registered form without coupons, in denominations of $1,000 and any integral multiple thereof. (Section 302) No service charge will be made for any registration of transfer, exchange or redemption of Notes, except in certain circumstances for any tax or other governmental charge that may be imposed in connection therewith. (Section 305) As discussed under "The Exchange Offer," pursuant to the Registration Rights Agreement, the Company and the Guarantors have agreed for the benefit of the holders of the Old Notes, at the Company's and the Guarantors' cost to use their reasonable best efforts, (i) to effect a registered Exchange Offer under the Securities Act to exchange the Old Notes for the New Notes, which will have terms identical in all material respects to the Old Notes (except that the New Notes will not contain terms with respect to transfer restrictions or requirements for exchange or registration) and (ii) in the event that any changes in law or applicable interpretations of the staff of the Commission do not permit the Company to effect the Exchange Offer, or if for any other reason the Exchange Offer is not consummated within 165 calendar days after the original issue of the Old Notes, or upon the request of any Initial Purchaser, or if any holder of the Old Notes is not permitted by applicable law to participate in the Exchange Offer or elects to participate in the Exchange Offer but does not receive fully tradable New Notes, to register the Old Notes for resale under the Securities Act through a shelf registration statement (the "Shelf Registration Statement"). In the event that (a) the Registration Statement of which this Prospectus is a part is not filed with the Commission on or prior to the 60th calendar day following the date of original issue of the Old Notes, (b) the Registration Statement has not been declared effective on or prior to the 135th calendar day following the date of original issue of the Old Notes, (c) the Exchange Offer is not consummated or a Shelf Registration Statement is not declared effective, in either case, on or prior to the 165th calendar day following the date of original issue of the Old Notes or (d) the Shelf Registration Statement 84 is declared effective but shall thereafter become unusable for more than 30 days in the aggregate (each such event referred to in clauses (a) through (d) above, a "Registration Default"), the interest rate borne by the Old Notes shall be increased by one-quarter of one percent per annum upon the occurrence of each Registration Default, which rate (as increased as aforesaid) will increase by an additional one quarter of one percent each 90-day period that such additional interest continues to accrue under any such circumstance, with an aggregate maximum increase in the interest rate equal to one percent (1%) per annum. The Shelf Registration Statement will be required to remain effective until the second anniversary of the issuance of the Old Notes. Following the cure of all Registration Defaults the accrual of additional interest will cease and the interest rate will revert to the original rate. See "Exchange Offer; Registration Rights." All payments of principal and interest will be made by the Company in same day funds. The Notes will trade in the Same-Day Funds Settlement System of The Depository Trust Company (the "Depositary" or "DTC") until maturity, and secondary market trading activity for the Notes will therefore settle in same day funds. When issued, the New Notes will be a new issue of securities with no established trading market. No assurance can be given as to the liquidity of the trading market for the Notes. See "Risk Factors -- Absence of Public Market for the Notes." Guarantees Payment of the Notes is guaranteed by the Guarantors jointly and severally, fully and unconditionally, on a senior subordinated basis. The Guarantors are comprised of all of the direct and indirect Restricted Subsidiaries of the Company on the Issue Date. Substantially all of the Company's operations are conducted through its subsidiaries. In addition, if any Restricted Subsidiary of the Company becomes a guarantor or obligor in respect of any other Indebtedness of the Company or any of the Restricted Subsidiaries, the Company shall cause such Restricted Subsidiary to enter into a supplemental indenture pursuant to which such Restricted Subsidiary shall agree to guarantee the Company's obligations under the Notes. If the Company defaults in payment of the principal of, premium, if any, or interest on the Notes, each of the Guarantors will be unconditionally, jointly and severally obligated to duly and punctually pay the same. The obligations of each Guarantor under its Guarantee are limited to the maximum amount which, after giving effect to all other contingent and fixed liabilities of such Guarantor, and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under its Guarantee or pursuant to its contribution obligations under the Indenture, will result in the obligations of such Guarantor under its Guarantee not constituting a fraudulent conveyance or fraudulent transfer under Federal or state law. Each Guarantor that makes a payment or distribution under its Guarantee shall be entitled to a contribution from any other Guarantor in a pro rata amount based on the net assets of each Guarantor determined in accordance with GAAP. Notwithstanding the foregoing, in certain circumstances a Guarantee of a Guarantor may be released pursuant to the provisions of subsection (c) under " - -- Certain Covenants -- Limitation on Guarantees by Restricted Subsidiaries." The Company also may, at any time, cause a Restricted Subsidiary to become a Guarantor by executing and delivering a supplemental indenture providing for the guarantee of payment of the Notes by such Restricted Subsidiary on the basis provided in the Indenture. Optional Redemption The Notes will be subject to redemption at any time on or after August 1, 2003, at the option of the Company, in whole or in part, on not less than 30 nor more than 60 days' prior notice, in amounts of $1,000 or an integral multiple thereof, at the following redemption prices (expressed as percentages of the principal amount), if redeemed during the 12-month period beginning August 1 of the years indicated below:
Redemption Year Price - ---------------- ------------- 2003 ......... 105.500% 2004 ......... 103.667% 2005 ......... 101.833%
and thereafter at 100% of the principal amount, in each case, together with accrued and unpaid interest, if any, to the redemption date (subject to the rights of holders of record on relevant record dates to receive interest due on an interest payment date). In addition, at any time prior to August 1, 2001, the Company, at its option, may use the net proceeds of one or more Public Equity Offerings to redeem up to an aggregate of 35% of the aggregate principal amount of Notes originally issued under the Indenture at a redemption price equal to 111% of the aggregate principal amount thereof, plus accrued and unpaid 85 interest thereon, if any, to the redemption date; provided that at least 65% of the initial aggregate principal amount of Notes remains outstanding immediately after the occurrence of such redemption. In order to effect the foregoing redemption, the Company must mail a notice of redemption no later than 30 days after the closing of the related Public Equity Offering and must consummate such redemption within 60 days of the closing of the Public Equity Offering. If less than all of the Notes are to be redeemed, the Trustee shall select the Notes or portions thereof to be redeemed in compliance with the requirements of the principal national security exchange, if any, on which the Notes are listed, or if the Notes are not so listed, on a pro rata basis, by lot or by any other method the Trustee shall deem fair and reasonable; provided, that Notes redeemed in part shall be redeemed only in integral multiples of $1,000; provided, further, that any such redemption pursuant to the provisions relating to a Public Equity Offering shall be made on a pro rata basis or on as nearly a pro rata basis as practicable (subject to the procedures of The Depository Trust Company or any other Depositary). (Sections 203, 1101, 1105 and 1107) Sinking Fund The Notes will not be entitled to the benefit of any sinking fund. Purchase of Notes Upon a Change of Control If a Change of Control shall occur at any time, then each holder of Notes shall have the right to require that the Company purchase such holder's Notes in whole or in part in integral multiples of $1,000, at a purchase price (the "Change of Control Purchase Price") in cash in an amount equal to 101% of the principal amount of such Notes, plus accrued and unpaid interest, if any, to the date of purchase (the "Change of Control Purchase Date"), pursuant to the offer described below (the "Change of Control Offer") and in accordance with the other procedures set forth in the Indenture. Within 30 days of any Change of Control, the Company shall notify the Trustee thereof and give written notice of such Change of Control to each holder of Notes, by first-class mail, postage prepaid, at his address appearing in the security register, stating, among other things, that a Change of Control has occurred and the date of such event; the circumstances and relevant facts regarding such Change of Control (including, but not limited to, information with respect to pro forma historical income, cash flow and capitalization after giving effect to such Change of Control); the purchase price and the purchase date which shall be fixed by the Company on a business day no earlier than 30 days nor later than 60 days from the date such notice is mailed, or such later date as is necessary to comply with requirements under the Exchange Act; that any Note not tendered will continue to accrue interest; that, unless the Company defaults in the payment of the Change of Control Purchase Price, any Notes accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Purchase Date; and certain other procedures that a holder of Notes must follow to accept a Change of Control Offer or to withdraw such acceptance. (Section 1014) If a Change of Control Offer is made, there can be no assurance that the Company will have available funds sufficient to pay the Change of Control Purchase Price for all of the Notes that might be delivered by holders of the Notes seeking to accept the Change of Control Offer. See " -- Ranking." The failure of the Company to make or consummate the Change of Control Offer or pay the Change of Control Purchase Price when due will give the Trustee and the holders of the Notes the rights described under "Events of Default." In addition to the obligations of the Company under the Indenture with respect to the Notes in the event of a Change of Control, all of the Company's Indebtedness under the Floor Plan Facility and the Revolving Facility also contain an event of default upon a Change of Control as defined therein which obligates the Company to repay amounts outstanding under such indebtedness upon an acceleration of the Indebtedness issued thereunder. In addition, a Change of Control could result in a termination or nonrenewal of one or more of the Company's franchise agreements or its agreements with the Manufacturers. The term "all or substantially all" as used in the definition of "Change of Control" has not been interpreted under New York law (which is the governing law of the Indenture) to represent a specific quantitative test. As a consequence, in the event the holders of the Notes elected to exercise their rights under the Indenture and the Company elected to contest such election, there could be no assurance as to how a court interpreting New York law would interpret the phrase. The existence of a holder's right to require the Company to repurchase such holder's Notes upon a Change of Control may deter a third party from acquiring the Company in a transaction which constitutes a Change of Control. The provisions of the Indenture will not afford holders of the Notes the right to require the Company to repurchase the Notes in the event of a highly leveraged transaction or certain transactions with the Company's management or its Affiliates, including a reorganization, restructuring, merger or similar transaction (including, in certain circumstances, an acquisition 86 of the Company by management or its affiliates) involving the Company that may adversely affect holders of the Notes, if such transaction is not a transaction defined as a Change of Control. A transaction involving the Company's management or its Affiliates, or a transaction involving a recapitalization of the Company, will result in a Change of Control if it is the type of transaction specified by such definition. The Company will comply with the applicable tender offer rules, including Rule 14e-1 under the Exchange Act, and any other applicable securities laws or regulations in connection with a Change of Control Offer. Ranking The payment of the principal of, premium, if any, and interest on, the Notes will be subordinated, as set forth in the Indenture, in right of payment, to the prior payment in full of all Senior Indebtedness. The Notes will be senior subordinated indebtedness of the Company ranking pari passu with all other existing and future senior subordinated indebtedness of the Company and senior to all existing and future Subordinated Indebtedness of the Company. Upon the occurrence of any default in the payment of any Designated Senior Indebtedness beyond any applicable grace period and after the receipt by the Trustee from a representative of holders of any Designated Senior Indebtedness (collectively, a "Senior Representative") of written notice of such default, no payment (other than payments previously made pursuant to the provisions described under " -- Defeasance or Covenant Defeasance of Indenture") or distribution of any assets of the Company of any kind or character (excluding certain permitted equity interests or subordinated securities) may be made on account of the principal of, premium, if any, or interest on, the Notes or on account of the purchase, redemption, defeasance or other acquisition of or in respect of, the Notes unless and until such default shall have been cured or waived or shall have ceased to exist or such Designated Senior Indebtedness shall have been discharged or paid in full after which the Company shall resume making any and all required payments in respect of the Notes, including any missed payments. Upon the occurrence and during the continuance of any non-payment default with respect to any Designated Senior Indebtedness pursuant to which the maturity thereof may then be accelerated immediately (a "Non-payment Default") and after the receipt by the Trustee and the Company from a Senior Representative of written notice of such Non-Payment Default, no payment (other than payments previously made pursuant to the provisions described under " -- Defeasance or Covenant Defeasance of Indenture") or distribution of any assets of the Company of any kind or character (excluding certain permitted equity interests or subordinated securities) may be made by the Company on account of the principal of, premium, if any, or interest on, the Notes or on account of the purchase, redemption, defeasance or other acquisition of, or in respect of, the Notes for the period specified below (the "Payment Blockage Period"). The Payment Blockage Period shall commence upon the receipt of notice of the Non-payment Default by the Trustee and the Company from a Senior Representative and shall end on the earliest of (i) the 179th day after such commencement, (ii) the date on which such Non-payment Default (and all other Non-payment Defaults as to which notice is given after such Payment Blockage Period is initiated) is cured, waived or ceases to exist or on which such Designated Senior Indebtedness is discharged or paid in full or (iii) the date on which such Payment Blockage Period (and all Non-payment Defaults as to which notice is given after such Payment Blockage Period is initiated) shall have been terminated by written notice to the Company or the Trustee from the Senior Representative initiating such Payment Blockage Period, after which, in the case of clauses (i), (ii) and (iii), the Company will promptly resume making any and all required payments in respect of the Notes, including any missed payments. In no event will a Payment Blockage Period extend beyond 179 days from the date of the receipt by the Company or the Trustee of the notice initiating such Payment Blockage Period (such 179-day period referred to as the "Initial Period"). Any number of notices of Non-payment Defaults may be given during the Initial Period; provided that during any period of 365 consecutive days only one Payment Blockage Period, during which payment of principal of, premium, if any, or interest on, the Notes may not be made, may commence and the duration of such period may not exceed 179 days. No Non-payment Default with respect to Designated Senior Indebtedness that existed or was continuing on the date of the commencement of any Payment Blockage Period will be, or can be, made the basis for the commencement of a second Payment Blockage Period, whether or not within a period of 365 consecutive days, unless such default has been cured or waived for a period of not less than 90 consecutive days. If the Company fails to make any payment on the Notes when due or within any applicable grace period, whether or not on account of the payment blockage provisions referred to above, such failure would constitute an Event of Default under the Indenture and would enable the holders of the Notes to accelerate the maturity thereof. See " -- Events of Default." The Indenture will provide that in the event of any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding in connection therewith, relative to the Company or its assets, or any liquidation, dissolution or other winding up of the Company, whether voluntary or involuntary, or whether or not 87 involving insolvency or bankruptcy, or any assignment for the benefit of creditors or other marshaling of assets or liabilities of the Company, all Senior Indebtedness must be paid in full before any payment or distribution (excluding distributions of certain permitted equity interests or subordinated securities) is made on account of the principal of, premium, if any, or interest on the Notes or on account of the purchase, redemption, defeasance or other acquisition of or in respect of the Notes (other than payments previously made pursuant to the provisions described under " -- Defeasance or Covenant Defeasance of Indenture"). By reason of such subordination, in the event of liquidation or insolvency, creditors of the Company who are holders of Senior Indebtedness may recover more, ratably, than the holders of the Notes, and funds which would be otherwise payable to the holders of the Notes will be paid to the holders of the Senior Indebtedness to the extent necessary to pay the Senior Indebtedness in full and the Company may be unable to meet its obligations fully with respect to the Notes. Each Guarantee of a Guarantor will be an unsecured senior subordinated obligation of such Guarantor, ranking pari passu with, or senior in right of payment to, all other existing and future Indebtedness of such Guarantor that is expressly subordinated to Senior Guarantor Indebtedness. The Indebtedness evidenced by the Guarantees will be subordinated to Senior Guarantor Indebtedness to substantially the same extent as the Notes are subordinated to Senior Indebtedness and during any period when payment on the Notes is blocked by Designated Senior Indebtedness, payment on the Guarantees is similarly blocked. "Senior Indebtedness" means the principal of, premium, if any, and interest (including interest, to the extent allowable, accruing after the filing of a petition initiating any proceeding under any state, federal or foreign bankruptcy law) on any Indebtedness of the Company (other than as otherwise provided in this definition), whether outstanding on the Issue Date or thereafter created, incurred or assumed, and whether at any time owing, actually or contingent, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to the Notes. Notwithstanding the foregoing, "Senior Indebtedness" shall (x) include the Floor Plan Facility and the Revolving Facility to the extent the Company is a party thereto and (y) not include (i) Indebtedness evidenced by the Notes, (ii) Indebtedness that is subordinate or junior in right of payment to any Indebtedness of the Company, (iii) Indebtedness which when incurred and without respect to any election under Section 1111(b) of Title 11 United States Code, is without recourse to the Company, (iv) Indebtedness which is represented by Redeemable Capital Stock, (v) any liability for foreign, federal, state, local or other taxes owed or owing by the Company to the extent such liability constitutes Indebtedness, (vi) Indebtedness of the Company to a Subsidiary or any other Affiliate of the Company or any of such Affiliate's Subsidiaries, (vii) to the extent it might constitute Indebtedness, amounts owing for goods, materials or services purchased in the ordinary course of business or consisting of trade accounts payable owed or owing by the Company, and amounts owed by the Company for compensation to employees or services rendered to the Company, (viii) that portion of any Indebtedness which at the time of issuance is issued in violation of the Indenture and (ix) Indebtedness evidenced by any guarantee of any Subordinated Indebtedness or Pari Passu Indebtedness. "Designated Senior Indebtedness" means (i) all Senior Indebtedness under the Floor Plan Facility or the Revolving Facility and (ii) any other Senior Indebtedness which at the time of determination has an aggregate principal amount outstanding of at least $25 million and which is specifically designated in the instrument evidencing such Senior Indebtedness or the agreement under which such Senior Indebtedness arises as "Designated Senior Indebtedness" by the Company. "Senior Guarantor Indebtedness" means the principal of, premium, if any, and interest (including interest, to the extent allowable, accruing after the filing of a petition initiating any proceeding under any state, federal or foreign bankruptcy law) on any Indebtedness of any Guarantor (other than as otherwise provided in this definition), whether outstanding on the Issue Date or thereafter created, incurred or assumed, and whether at any time owing, actually or contingent, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to any Guarantee. Notwithstanding the foregoing, "Senior Guarantor Indebtedness" shall (x) include the Floor Plan Facility and the Revolving Facility to the extent any Guarantor is a party thereto and (y) not include (i) Indebtedness evidenced by the Guarantees, (ii) Indebtedness that is subordinated or junior in right of payment to any Indebtedness of any Guarantor, (iii) Indebtedness which when incurred and without respect to any election under Section 1111(b) of Title 11 United States Code, is without recourse to any Guarantor, (iv) Indebtedness which is represented by Redeemable Capital Stock, (v) any liability for foreign, federal, state, local or other taxes owed or owing by any Guarantor to the extent such liability constitutes Indebtedness, (vi) Indebtedness of any Guarantor to a Subsidiary or any other Affiliate of the Company or any of such Affiliate's Subsidiaries, (vii) to the extent it might constitute Indebtedness, amounts owing for goods, materials or services purchased in the ordinary course of business or consisting of trade accounts payable owed or owing by such Guarantor, and amounts owed by such Guarantor for compensation to employees or services rendered to such Guarantor, (viii) that portion of any Indebtedness which at the time of issuance 88 is issued in violation of the Indenture and (ix) Indebtedness evidenced by any guarantee of any Subordinated Indebtedness or Pari Passu Indebtedness. The Indenture will limit, but not prohibit, the incurrence by the Company and its Subsidiaries of additional Indebtedness, and the Indenture will prohibit the incurrence by the Company of Indebtedness that is subordinated in right of payment to any Senior Indebtedness of the Company and senior in right of payment to the Notes. As of June 30, 1998, on a pro forma basis, (i) the Company and the Guarantors would have had $4.3 million in aggregate principal amount of indebtedness outstanding which would have ranked senior in right of payment to the Notes ($2.9 million of which would have been secured) and no indebtedness pari passu to the Notes or the Guarantees, as the case may be, (ii) the Company would also have had $3.7 million of indebtedness senior to, and $5.5 million of indebtedness subordinated to, the Notes and (iii) the Guarantors would also have had $197.7 million of floor plan indebtedness and $3.2 million of additional indebtedness which would have ranked senior in right of payment to the Guarantees ($3.0 million of which would have been secured). See "Risk Factors -- Leverage" and "Capitalization". Certain Covenants The Indenture contains, among others, the following covenants: Limitation on Indebtedness. The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, create, issue, incur, assume, guarantee or otherwise in any manner become directly or indirectly liable for the payment of or otherwise incur, contingently or otherwise (collectively, "incur"), any Indebtedness (including any Acquired Indebtedness), unless such Indebtedness is incurred by the Company or any Guarantor or constitutes Acquired Indebtedness of a Restricted Subsidiary and, in each case, the Company's Consolidated Fixed Charge Coverage Ratio for the most recent four full fiscal quarters for which financial statements are available immediately preceding the incurrence of such Indebtedness taken as one period is at least equal to or greater than 2.00:1. (Section 1008) Notwithstanding the foregoing, the Company and, to the extent specifically set forth below, the Restricted Subsidiaries may incur each and all of the following (collectively, the "Permitted Indebtedness"): (i) Indebtedness of the Company and the Guarantors under the Company's Revolving Facility (including any refinancing (as defined below) thereof) in an aggregate principal amount at any one time outstanding not to exceed the greater of (a) $75 million or (b) 30% of the Company's Consolidated Tangible Assets, in any case under the Revolving Facility (including any refinancing thereof) or in respect of letters of credit thereunder; (ii) Indebtedness of the Company and the Guarantors under any Inventory Facility; (iii) Indebtedness of the Company pursuant to the Notes or the Exchange Notes and Indebtedness of any Guarantor pursuant to a Guarantee of the Notes or the Exchange Notes; (iv) Indebtedness of the Company or any Restricted Subsidiary outstanding on the Issue Date, listed on a schedule thereto and not otherwise referred to in this definition of "Permitted Indebtedness;" (v) Indebtedness of the Company owing to a Restricted Subsidiary; provided that any Indebtedness of the Company owing to a Restricted Subsidiary that is not a Guarantor is made pursuant to an intercompany note in the form attached to the Indenture and is unsecured and is subordinated in right of payment from and after such time as the Notes shall become due and payable (whether at Stated Maturity, acceleration or otherwise) to the payment and performance of the Company's obligations under the Notes; provided, further, that any disposition, pledge or transfer of any such Indebtedness to a Person (other than a disposition, pledge or transfer to a Restricted Subsidiary) shall be deemed to be an incurrence of such Indebtedness by the Company or other obligor not permitted by this clause (v); (vi) Indebtedness of a Wholly Owned Restricted Subsidiary owing to the Company or another Wholly Owned Restricted Subsidiary; provided that any such Indebtedness is made pursuant to an intercompany note in the form attached to the Indenture; provided, further, that (a) any disposition, pledge or transfer of any such Indebtedness to a Person (other than a disposition, pledge or transfer to the Company or a Wholly Owned Restricted Subsidiary) shall be deemed to be an incurrence of such Indebtedness by the obligor not permitted by this clause (vi), and (b) any transaction pursuant to which any Wholly Owned Restricted Subsidiary, which has Indebtedness owing to the Company or any other Wholly Owned Restricted Subsidiary, ceases to be a Wholly Owned Restricted Subsidiary shall be deemed to be the incurrence of Indebtedness by such Wholly Owned Restricted Subsidiary that is not permitted by this clause (vi); 89 (vii) guarantees of any Restricted Subsidiary made in accordance with the provisions of " -- Limitation on Issuances of Guarantees of and Pledges for Indebtedness;" (viii) obligations of the Company or any Guarantor entered into in the ordinary course of business (a) pursuant to Interest Rate Agreements designed to protect the Company or any Restricted Subsidiary against fluctuations in interest rates in respect of Indebtedness of the Company or any Restricted Subsidiary as long as such obligations do not exceed the aggregate principal amount of such Indebtedness then outstanding, (b) under any Currency Hedging Agreements, relating to (i) Indebtedness of the Company or any Restricted Subsidiary and/or (ii) obligations to purchase or sell assets or properties, in each case, incurred in the ordinary course of business of the Company or any Restricted Subsidiary; provided, however, that such Currency Hedging Agreements do not increase the Indebtedness or other obligations of the Company or any Restricted Subsidiary outstanding other than as a result of fluctuations in foreign currency exchange rates or by reason of fees, indemnities and compensation payable thereunder or (c) under any Commodity Price Protection Agreements which do not increase the amount of Indebtedness or other obligations of the Company or any Restricted Subsidiary outstanding other than as a result of fluctuations in commodity prices or by reason of fees, indemnities and compensation payable thereunder; (ix) Indebtedness of the Company or any Restricted Subsidiary represented by Capital Lease Obligations or Purchase Money Obligations or other Indebtedness incurred or assumed in connection with the acquisition or development of real or personal, movable or immovable, property in each case incurred for the purpose of financing or refinancing all or any part of the purchase price or cost of construction or improvement of property used in the business of the Company, in an aggregate principal amount pursuant to this clause (ix) not to exceed $20 million outstanding at any time; provided that the principal amount of any Indebtedness permitted under this clause (ix) did not in each case at the time of incurrence exceed the Fair Market Value, as determined by the Company in good faith, of the acquired or constructed asset or improvement so financed; (x) obligations arising from agreements by the Company or a Restricted Subsidiary to provide for indemnification, customary purchase price closing adjustments, earn-outs or other similar obligations, in each case, incurred in connection with the acquisition or disposition of any business or assets of a Restricted Subsidiary; (xi) Indebtedness evidenced by letters of credit in the ordinary course of business to support the Company's or any Restricted Subsidiary's insurance or self-insurance obligations for workers' compensation and other similar insurance coverages; (xii) any renewals, extensions, substitutions, refundings, refinancings or replacements (collectively, a "refinancing") of any Indebtedness described in clauses (iii) and (iv) of this definition of "Permitted Indebtedness," including any successive refinancings so long as the borrower under such refinancing is the Company or, if not the Company, the same as the borrower of the Indebtedness being refinanced and the aggregate principal amount of Indebtedness represented thereby (or if such Indebtedness provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the maturity thereof, the original issue price of such Indebtedness plus any accreted value attributable thereto since the original issuance of such Indebtedness) does not exceed the initial principal amount of such Indebtedness plus the lesser of (I) the stated amount of any premium or other payment required to be paid in connection with such a refinancing pursuant to the terms of the Indebtedness being refinanced or (II) the amount of premium or other payment actually paid at such time to refinance the Indebtedness, plus, in either case, the amount of expenses of the Company incurred in connection with such refinancing and (A) in the case of any refinancing of Indebtedness that is Subordinated Indebtedness, such new Indebtedness is made subordinated to the Notes at least to the same extent as the Indebtedness being refinanced and (B) in the case of Pari Passu Indebtedness or Subordinated Indebtedness, as the case may be, such refinancing does not reduce the Average Life to Stated Maturity or the Stated Maturity of such Indebtedness; and (xiii) Indebtedness of the Company and its Restricted Subsidiaries or any Guarantor in addition to that described in clauses (i) through (xii) above, and any renewals, extensions, substitutions, refinancings or replacements of such Indebtedness, so long as the aggregate principal amount of all such Indebtedness shall not exceed $10 million outstanding at any one time in the aggregate. For purposes of determining compliance with this "Limitation on Indebtedness" covenant, in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness permitted by this covenant, the Company in its sole discretion shall classify such item of Indebtedness and only be required to include the amount of such Indebtedness as one of such types. 90 Limitation on Restricted Payments. (a) The Company will not, and will not cause or permit any Restricted Subsidiary to, directly or indirectly: (i) declare or pay any dividend on, or make any distribution to holders of, any shares of the Company's Capital Stock (other than dividends or distributions payable solely in shares of its Qualified Capital Stock or in options, warrants or other rights to acquire shares of such Qualified Capital Stock); (ii) purchase, redeem, defease or otherwise acquire or retire for value, directly or indirectly, the Company's Capital Stock or any Capital Stock of any Affiliate of the Company, including any Subsidiary of the Company (other than Capital Stock of any Wholly Owned Restricted Subsidiary of the Company), or options, warrants or other rights to acquire such Capital Stock; (iii) make any principal payment on, or repurchase, redeem, defease, retire or otherwise acquire for value, prior to any scheduled principal payment, sinking fund payment or maturity, any Subordinated Indebtedness; (iv) declare or pay any dividend or distribution on any Capital Stock of any Restricted Subsidiary to any Person (other than (a) to the Company or any of its Wholly Owned Restricted Subsidiaries or (b) dividends or distributions made by a Restricted Subsidiary (i) organized as a partnership, limited liability company or similar pass-through entity to the holders of its Capital Stock in amounts sufficient to satisfy the tax liabilities arising from their ownership of such Capital Stock or (ii) on a pro rata basis to all stockholders of such Restricted Subsidiary); or (v) make any Investment in any Person (other than any Permitted Investments) (any of the foregoing actions described in clauses (i) through (v), other than any such action that is a Permitted Payment (as defined below), collectively, "Restricted Payments") (the amount of any such Restricted Payment, if other than cash, shall be the Fair Market Value of the assets proposed to be transferred, as determined by the board of directors of the Company, whose determination shall be conclusive and evidenced by a board resolution), unless (1) immediately before and immediately after giving effect to such proposed Restricted Payment on a pro forma basis, no Default or Event of Default shall have occurred and be continuing and such Restricted Payment shall not be an event which is, or after notice or lapse of time or both, would be, an "event of default" under the terms of any Indebtedness of the Company or its Restricted Subsidiaries; (2) immediately before and immediately after giving effect to such Restricted Payment on a pro forma basis, the Company could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) under the provisions described under " -- Limitation on Indebtedness;" and (3) after giving effect to the proposed Restricted Payment, the aggregate amount of all such Restricted Payments declared or made after the Issue Date and all Designation Amounts does not exceed the sum of: (A) $5 million; (B) 50% of the aggregate Consolidated Net Income of the Company accrued on a cumulative basis during the period beginning on the first day of the Company's fiscal quarter in which the Issue Date occurs and ending on the last day of the Company's last fiscal quarter ending prior to the date of the Restricted Payment (or, if such aggregate cumulative Consolidated Net Income shall be a loss, minus 100% of such loss); (C) the aggregate Net Cash Proceeds received after the Issue Date by the Company either (x) as capital contributions in the form of common equity to the Company or (y) from the issuance or sale (other than to any of its Subsidiaries) of Qualified Capital Stock of the Company or any options, warrants or rights to purchase such Qualified Capital Stock of the Company (except, in each case, to the extent such proceeds are used to purchase, redeem or otherwise retire Capital Stock or Subordinated Indebtedness as set forth below in clause (ii) or (iii) of paragraph (b) below) (and excluding the Net Cash Proceeds from the issuance of Qualified Capital Stock financed, directly or indirectly, using funds borrowed from the Company or any Subsidiary until and to the extent such borrowing is repaid); (D) the aggregate Net Cash Proceeds received after the Issue Date by the Company (other than from any of its Subsidiaries) upon the exercise of any options, warrants or rights to purchase Qualified Capital Stock of the Company (and excluding the Net Cash Proceeds from the exercise of any options, warrants or rights to purchase Qualified Capital Stock financed, directly or indirectly, using funds borrowed from the Company or any Subsidiary until and to the extent such borrowing is repaid); (E) the aggregate Net Cash Proceeds received after the Issue Date by the Company from the conversion or exchange, if any, of debt securities or Redeemable Capital Stock of the Company or its Restricted Subsidiaries into or for Qualified Capital Stock of the Company plus, to the extent such debt securities or Redeemable Capital Stock were issued after the Issue Date, upon the conversion or exchange of such debt securities or Redeemable Capital Stock, 91 the aggregate of Net Cash Proceeds from their original issuance (and excluding the Net Cash Proceeds from the conversion or exchange of debt securities or Redeemable Capital Stock financed, directly or indirectly, using funds borrowed from the Company or any Subsidiary until and to the extent such borrowing is repaid); and (F) (a) in the case of the disposition or repayment of any Investment constituting a Restricted Payment made after the Issue Date, an amount (to the extent not included in Consolidated Net Income) equal to the lesser of the return of capital with respect to such Investment and the initial amount of such Investment, in either case, less the cost of the disposition of such Investment and net of taxes, and (b) in the case of the designation of an Unrestricted Subsidiary as a Restricted Subsidiary (as long as the designation of such Subsidiary as an Unrestricted Subsidiary was deemed a Restricted Payment), the Fair Market Value of the Company's interest in such Subsidiary provided that such amount shall not in any case exceed the amount of the Restricted Payment deemed made at the time the Subsidiary was designated as an Unrestricted Subsidiary. (b) Notwithstanding the foregoing, and in the case of clauses (ii) through (iv) below, so long as no Default or Event of Default is continuing or would arise therefrom, the foregoing provisions shall not prohibit the following actions (each of clauses (i) through (iv) and (viii) being referred to as a "Permitted Payment"): (i) the payment of any dividend within 60 days after the date of declaration thereof, if at such date of declaration such payment was permitted by the provisions of paragraph (a) of this Section and such payment shall have been deemed to have been paid on such date of declaration and shall not have been deemed a "Permitted Payment" for purposes of the calculation required by paragraph (a) of this Section; (ii) the repurchase, redemption, or other acquisition or retirement for value of any shares of any class of Capital Stock of the Company in exchange for (including any such exchange pursuant to the exercise of a conversion right or privilege in connection with which cash is paid in lieu of the issuance of fractional shares or scrip), or out of the Net Cash Proceeds of a substantially concurrent issuance and sale for cash (other than to a Subsidiary) of, other shares of Qualified Capital Stock of the Company; provided that the Net Cash Proceeds from the issuance of such shares of Qualified Capital Stock are excluded from clause (3)(C) of paragraph (a) of this Section; (iii) the repurchase, redemption, defeasance, retirement or acquisition for value or payment of principal of any Subordinated Indebtedness or Redeemable Capital Stock in exchange for, or in an amount not in excess of the Net Cash Proceeds of, a substantially concurrent issuance and sale for cash (other than to any Subsidiary of the Company) of any Qualified Capital Stock of the Company, provided that the Net Cash Proceeds from the issuance of such shares of Qualified Capital Stock are excluded from clause (3)(C) of paragraph (a) of this Section; (iv) the repurchase, redemption, defeasance, retirement, refinancing, acquisition for value or payment of principal of any Subordinated Indebtedness (other than Redeemable Capital Stock) (a "refinancing") through the substantially concurrent issuance of new Subordinated Indebtedness of the Company, provided that any such new Subordinated Indebtedness (1) shall be in a principal amount that does not exceed the principal amount so refinanced (or, if such Subordinated Indebtedness provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration thereof, then such lesser amount as of the date of determination), plus the lesser of (I) the stated amount of any premium or other payment required to be paid in connection with such a refinancing pursuant to the terms of the Indebtedness being refinanced or (II) the amount of premium or other payment actually paid at such time to refinance the Indebtedness, plus, in either case, the amount of expenses of the Company incurred in connection with such refinancing; (2) has an Average Life to Stated Maturity greater than the remaining Average Life to Stated Maturity of the Notes; (3) has a Stated Maturity for its final scheduled principal payment later than the Stated Maturity for the final scheduled principal payment of the Notes; and (4) is expressly subordinated in right of payment to the Notes at least to the same extent as the Subordinated Indebtedness to be refinanced; (v) the purchase, redemption, or other acquisition or retirement for value of any class of Capital Stock of the Company from employees, former employees, directors or former directors of the Company or any Subsidiary pursuant to the terms of the agreements pursuant to which such Capital Stock was acquired in an amount not to exceed $1.0 million in the aggregate in any calendar year; (vi) the repurchase, redemption or other acquisition or retirement for value of Capital Stock of the Company issued pursuant to acquisitions by the Company to the extent required by or needed to comply with the requirements of any of the Manufacturers with which the Company or a Restricted Subsidiary is a party to a franchise agreement; 92 (vii) the repurchase, redemption, defeasance, retirement or acquisition for value or payment of principal on the Smith Subordinated Loan; and (viii) the payment of the contingent purchase price of an acquisition to the extent such payment would be deemed a Restricted Payment. (Section 1009) Limitation on Transactions with Affiliates. The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, enter into any transaction or series of related transactions (including, without limitation, the sale, purchase, exchange or lease of assets, property or services) with or for the benefit of any Affiliate of the Company (other than the Company or a Wholly Owned Restricted Subsidiary) unless such transaction or series of related transactions is entered into in good faith and in writing and (a) such transaction or series of related transactions is on terms that are no less favorable to the Company or such Restricted Subsidiary, as the case may be, than those that would be available in a comparable transaction in arm's-length dealings with an unrelated third party, (b) with respect to any transaction or series of related transactions involving aggregate value in excess of $500,000 the Company delivers either an officers' certificate to the Trustee certifying that such transaction or series of related transactions complies with clause (a) above or such transaction or series of related transactions is approved by a majority of the Disinterested Directors of the board of directors of the Company, or in the event there is only one Disinterested Director, by such Disinterested Director, and (c) with respect to any transaction or series of related transactions involving aggregate value in excess of $1 million, either (i) such transaction or series of related transactions has been approved by a majority of the Disinterested Directors of the board of directors of the Company, or in the event there is only one Disinterested Director, by such Disinterested Director, or (ii) the Company delivers to the Trustee a written opinion of an investment banking firm of national standing or other recognized independent expert with experience appraising the terms and conditions of the type of transaction or series of related transactions for which an opinion is required stating that the transaction or series of related transactions is fair to the Company or such Restricted Subsidiary from a financial point of view; provided, however, that this provision shall not apply to (i) employee benefit arrangements with any officer or director of the Company, including under any stock option or stock incentive plans, entered into in the ordinary course of business; (ii) any transaction permitted as a Restricted Payment pursuant to the covenant described in " -- Limitation on Restricted Payments"; (iii) the payment of customary fees to directors of the Company and its Restricted Subsidiaries; (iv) any transaction with any officer or member of the Board of Directors of the Company involving indemnification arrangements; and (v) loans or advances to officers of the Company in the ordinary course of business not to exceed $1 million in any calendar year. (Section 1010) Limitation on Liens. The Company will not, and will not cause or permit any Restricted Subsidiary to, directly or indirectly, create, incur or affirm any Lien of any kind securing any Pari Passu Indebtedness or Subordinated Indebtedness (including any assumption, guarantee or other liability with respect thereto by any Restricted Subsidiary) upon any property or assets (including any intercompany notes) of the Company or any Restricted Subsidiary owned on the Issue Date or acquired after the Issue Date, or assign or convey any right to receive any income or profits therefrom, unless the Notes or a Guarantee in the case of Liens of a Guarantor are directly secured equally and ratably with (or, in the case of Subordinated Indebtedness, prior or senior thereto, with the same relative priority as the Notes shall have with respect to such Subordinated Indebtedness) the obligation or liability secured by such Lien except for Liens (A) securing any Indebtedness which became Indebtedness pursuant to a transaction permitted under " -- Consolidation, Merger, Sale of Assets" or securing Acquired Indebtedness which was created prior to (and not created in connection with, or in contemplation of) the incurrence of such Pari Passu Indebtedness or Subordinated Indebtedness (including any assumption, guarantee or other liability with respect thereto by any Restricted Subsidiary) and which Indebtedness is permitted under the provisions of "-- Limitation on Indebtedness" or (B) securing any Indebtedness incurred in connection with any refinancing, renewal, substitutions or replacements of any such Indebtedness described in clause (A), so long as the aggregate principal amount of Indebtedness represented thereby (or if such Indebtedness provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the maturity thereof, the original issue price of such Indebtedness plus any accreted value attributable thereto since the original issuance of such Indebtedness) is not increased by such refinancing by an amount greater than the lesser of (i) the stated amount of any premium or other payment required to be paid in connection with such a refinancing pursuant to the terms of the Indebtedness being refinanced or (ii) the amount of premium or other payment actually paid at such time to refinance the Indebtedness, plus, in either case, the amount of expenses of the Company incurred in connection with such refinancing, provided, however, that in the case of clauses (A) and (B), any such Lien only extends to the assets that were subject to such Lien securing such Indebtedness prior to the related acquisition by the Company or its Restricted Subsidiaries. Notwithstanding the foregoing, any Lien securing the Notes granted pursuant to this covenant shall be automatically and unconditionally released and discharged upon the release by the holders of the Pari Passu Indebtedness or Subordinated Indebtedness described above of their Lien on the property or assets of the Company or any Restricted Subsidiary (including any deemed release upon payment in full of all obligations under such Indebtedness), at such time as the holders of all such 93 Pari Passu Indebtedness or Subordinated Indebtedness also release their Lien on the property or assets of the Company or such Restricted Subsidiary, or upon any sale, exchange or transfer to any Person not an Affiliate of the Company of the property or assets secured by such Lien, or of all of the Capital Stock held by the Company or any Restricted Subsidiary in, or all or substantially all the assets of, any Restricted Subsidiary creating such Lien. (Section 1011) Limitation on Sale of Assets. (a) The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, consummate an Asset Sale unless (i) at least 80% of the consideration from such Asset Sale consists of (A) cash or Cash Equivalents, (B) the assumption of Senior Indebtedness or Senior Guarantor Indebtedness by the party acquiring the assets from the Company of any Restricted Subsidiary, (C) Replacement Assets or (D) a combination of any of the foregoing; and (ii) the Company or such Restricted Subsidiary receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the shares or assets subject to such Asset Sale (as determined by the board of directors of the Company and evidenced in a board resolution); provided that any notes or other obligations received by the Company or any such Restricted Subsidiary from any transferee of assets from the Company or such Restricted Subsidiary that are converted by the Company or such Restricted Subsidiary into cash at Fair Market Value within 30 days after receipt shall be deemed to be cash for purposes of this provision. (b) If all or a portion of the Net Cash Proceeds of any Asset Sale are not required to be applied to repay permanently any Senior Indebtedness or Senior Guarantor Indebtedness then outstanding as required by the terms thereof, or the Company determines not to apply such Net Cash Proceeds to the permanent prepayment of such Senior Indebtedness or Senior Guarantor Indebtedness or if no such Senior Indebtedness or Senior Guarantor Indebtedness is then outstanding, then the Company or a Restricted Subsidiary may within 365 days of the Asset Sale invest the Net Cash Proceeds in Replacement Assets. The amount of such Net Cash Proceeds not used or invested within 365 days of the Asset Sale as set forth in this paragraph constitutes "Excess Proceeds." (c) When the aggregate amount of Excess Proceeds exceeds $10 million or more, the Company will apply the Excess Proceeds to the repayment of the Notes and any other Pari Passu Indebtedness outstanding with similar provisions requiring the Company to make an offer to purchase such Indebtedness with the proceeds from any Asset Sale as follows: (A) the Company will make an offer to purchase (an "Offer") from all holders of the Notes in accordance with the procedures set forth in the Indenture in the maximum principal amount (expressed as a multiple of $1,000) of Notes that may be purchased out of an amount (the "Note Amount") equal to the product of such Excess Proceeds multiplied by a fraction, the numerator of which is the outstanding principal amount of the Notes, and the denominator of which is the sum of the outstanding principal amount of the Notes and such Pari Passu Indebtedness (subject to proration in the event such amount is less than the aggregate Offered Price (as defined herein) of all Notes tendered) and (B) to the extent required by such Pari Passu Indebtedness to permanently reduce the principal amount of such Pari Passu Indebtedness, the Company will make an offer to purchase or otherwise repurchase or redeem Pari Passu Indebtedness (a "Pari Passu Offer") in an amount (the "Pari Passu Debt Amount") equal to the excess of the Excess Proceeds over the Note Amount; provided that in no event will the Company be required to make a Pari Passu Offer in a Pari Passu Debt Amount exceeding the principal amount of such Pari Passu Indebtedness plus the amount of any premium required to be paid to repurchase such Pari Passu Indebtedness. The offer price for the Notes will be payable in cash in an amount equal to 100% of the principal amount of the Notes plus accrued and unpaid interest, if any, to the date (the "Offer Date") such Offer is consummated (the "Offered Price"), in accordance with the procedures set forth in the Indenture. To the extent that the aggregate Offered Price of the Notes tendered pursuant to the Offer is less than the Note Amount relating thereto or the aggregate amount of Pari Passu Indebtedness that is purchased in a Pari Passu Offer is less than the Pari Passu Debt Amount, the Company may use any remaining Excess Proceeds for general corporate purposes. If the aggregate principal amount of Notes and Pari Passu Indebtedness surrendered by holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro rata basis. Upon the completion of the purchase of all the Notes tendered pursuant to an Offer and the completion of a Pari Passu Offer, the amount of Excess Proceeds, if any, shall be reset at zero. (d) If the Company becomes obligated to make an Offer pursuant to clause (c) above, the Notes and the Pari Passu Indebtedness shall be purchased by the Company, at the option of the holders thereof, in whole or in part in integral multiples of $1,000, on a date that is not earlier than 30 days and not later than 60 days from the date the notice of the Offer is given to holders, or such later date as may be necessary for the Company to comply with the requirements under the Exchange Act. (e) The Indenture will provide that the Company will comply with applicable securities laws or regulations in connection with an Offer. (Section 1012) 94 Limitation on Issuances of Guarantees of and Pledges for Indebtedness. (a) The Company will not cause or permit any Restricted Subsidiary, other than a Guarantor, directly or indirectly, to secure the payment of any Senior Indebtedness of the Company and the Company will not, and will not permit any Restricted Subsidiary to, pledge any intercompany notes representing obligations of any Restricted Subsidiary (other than a Guarantor) to secure the payment of any Senior Indebtedness unless in each case such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to the Indenture providing for a guarantee of payment of the Notes by such Restricted Subsidiary, which guarantee shall be on the same terms as the guarantee of the Senior Indebtedness (if a guarantee of Senior Indebtedness is granted by any such Restricted Subsidiary) except that the guarantee of the Notes need not be secured and shall be subordinated to the claims against such Restricted Subsidiary in respect of Senior Indebtedness to the same extent as the Notes are subordinated to Senior Indebtedness of the Company under the Indenture. (b) The Company will not cause or permit any Restricted Subsidiary (which is not a Guarantor), directly or indirectly, to guarantee, assume or in any other manner become liable with respect to any Indebtedness of the Company or any Restricted Subsidiary unless such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to the Indenture providing for a Guarantee of the Notes on the same terms as the guarantee of such Indebtedness except that (A) such guarantee need not be secured unless required pursuant to " -- Limitation on Liens," (B) if such Indebtedness is by its terms Senior Indebtedness, any such assumption, guarantee or other liability of such Restricted Subsidiary with respect to such Indebtedness shall be senior to such Restricted Subsidiary's Guarantee of the Notes to the same extent as such Senior Indebtedness is senior to the Notes and (C) if such Indebtedness is by its terms expressly subordinated to the Notes, any such assumption, guarantee or other liability of such Restricted Subsidiary with respect to such Indebtedness shall be subordinated to such Restricted Subsidiary's Guarantee of the Notes at least to the same extent as such Indebtedness is subordinated to the Notes. (c) Notwithstanding the foregoing, any Guarantee by a Restricted Subsidiary of the Notes shall provide by its terms that it (and all Liens securing the same) shall be automatically and unconditionally released and discharged upon (i) any sale, exchange or transfer, to any Person not an Affiliate of the Company, of all of the Company's Capital Stock in, or all or substantially all the assets of, such Restricted Subsidiary, which transaction is in compliance with the terms of the Indenture and such Restricted Subsidiary is released from all guarantees, if any, by it of other Indebtedness of the Company or any Restricted Subsidiaries or (ii) the release by the holders of the Indebtedness of the Company of their security interest or their guarantee by such Restricted Subsidiary (including any deemed release upon payment in full of all obligations under such Indebtedness), at such time as (A) no other Indebtedness of the Company has been secured or guaranteed by such Restricted Subsidiary, as the case may be, or (B) the holders of all such other Indebtedness which is secured or guaranteed by such Restricted Subsidiary also release their security interest in or guarantee by such Restricted Subsidiary (including any deemed release upon payment in full of all obligations under such Indebtedness). (Section 1013) Limitation on Senior Subordinated Indebtedness. The Company will not, and will not permit or cause any Guarantor to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise in any manner become directly or indirectly liable for or with respect to or otherwise permit to exist any Indebtedness that is subordinate in right of payment to any Indebtedness of the Company or such Guarantor, as the case may be, unless such Indebtedness is also pari passu with the Notes or the Guarantee of such Guarantor or subordinated in right of payment to the Notes or such Guarantee at least to the same extent as the Notes or such Guarantee are subordinated in right of payment to Senior Indebtedness or Senior Indebtedness of such Guarantor, as the case may be, as set forth in the Indenture. (Section 1017) Limitation on Subsidiary Preferred Stock. The Company will not permit (a) any Restricted Subsidiary of the Company to issue, sell or transfer any Preferred Stock, except for (i) Preferred Stock issued or sold to, held by or transferred to the Company or a Wholly Owned Restricted Subsidiary, and (ii) Preferred Stock issued by a Person prior to the time (A) such Person becomes a Restricted Subsidiary, (B) such Person merges with or into a Restricted Subsidiary or (C) a Restricted Subsidiary merges with or into such Person; provided that such Preferred Stock was not issued or incurred by such Person in anticipation of the type of transaction contemplated by subclause (A), (B) or (C) or (b) any Person (other than the Company or a Wholly Owned Restricted Subsidiary) to acquire Preferred Stock of any Restricted Subsidiary from the Company or any Restricted Subsidiary, except, in the case of clause (a) or (b), upon the acquisition of all the outstanding Capital Stock of such Restricted Subsidiary in accordance with the terms of the Indenture. (Section 1015) Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries. The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to (i) pay dividends or make any other distribution on its Capital Stock or any other interest or participation in or measured by its profits, (ii) pay any Indebtedness owed to the Company or any other Restricted Subsidiary, (iii) make any Investment in the Company or any other Restricted Subsidiary or (iv) transfer any of its properties or assets to the Company or any other Restricted Subsidiary, 95 except for: (a) any encumbrance or restriction pursuant to an agreement in effect on the Issue Date; (b) any encumbrance or restriction, with respect to a Restricted Subsidiary that is not a Restricted Subsidiary of the Company on the Issue Date, in existence at the time such Person becomes a Restricted Subsidiary of the Company and not incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary, provided that such encumbrances and restrictions are not applicable to the Company or any Restricted Subsidiary or the properties or assets of the Company or any Restricted Subsidiary other than such Subsidiary which is becoming a Restricted Subsidiary; (c) customary provisions contained in an agreement that has been entered into for the sale or other disposition of all or substantially all of the Capital Stock or assets of a Restricted Subsidiary; provided however that the restrictions are applicable only to such Restricted Subsidiary or assets; (d) any encumbrance or restriction existing under or by reason of applicable law; (e) customary provisions restricting subletting or assignment of any lease governing any leasehold interest of any Restricted Subsidiary; (f) covenants in franchise agreements with Manufacturers customary for franchise agreements in the automobile retailing industry; (g) any encumbrance or restriction contained in any Purchase Money Obligations for property to the extent such restriction or encumbrance restricts the transfer of such property; (h) any encumbrances or restrictions in security agreements securing Indebtedness (other than Subordinated Indebtedness) of a Guarantor (including any Inventory Facility) (to the extent that such Liens are otherwise incurred in accordance with "-- Limitation on Liens") that restrict the transfer of property subject to such agreements, provided that any such encumbrance or restriction is released to the extent the underlying Lien is released or the related Indebtedness is repaid; and (i) any encumbrance or restriction existing under any agreement that extends, renews, refinances or replaces the agreements containing the encumbrances or restrictions in the foregoing clauses (a) and (b), or in this clause (i), provided that the terms and conditions of any such encumbrances or restrictions are no more restrictive in any material respect than those under or pursuant to the agreement evidencing the Indebtedness so extended, renewed, refinanced or replaced. (Section 1016) Limitation on Unrestricted Subsidiaries. The Company may designate after the Issue Date any Subsidiary as an "Unrestricted Subsidiary" under the Indenture (a "Designation") only if: (a) no Default shall have occurred and be continuing at the time of or after giving effect to such Designation; (b) the Company would be permitted to make an Investment (other than a Permitted Investment) at the time of Designation (assuming the effectiveness of such Designation) pursuant to the first paragraph of " -- Limitation on Restricted Payments" above in an amount (the "Designation Amount") equal to the greater of (1) the net book value of the Company's interest in such Subsidiary calculated in accordance with GAAP or (2) the Fair Market Value of the Company's interest in such Subsidiary as determined in good faith by the Company's board of directors; (c) the Company would be permitted under the Indenture to incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the covenant described under " -- Limitation on Indebtedness" at the time of such Designation (assuming the effectiveness of such Designation); (d) such Unrestricted Subsidiary does not own any Capital Stock in any Restricted Subsidiary of the Company which is not simultaneously being designated an Unrestricted Subsidiary; (e) such Unrestricted Subsidiary is not liable, directly or indirectly, with respect to any Indebtedness other than Unrestricted Subsidiary Indebtedness, provided that an Unrestricted Subsidiary may provide a Guarantee for the Notes; and (f) such Unrestricted Subsidiary is not a party to any agreement, contract, arrangement or understanding at such time with the Company or any Restricted Subsidiary unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company or, in the event such condition is not satisfied, the value of such agreement, contract, arrangement or understanding to such Unrestricted Subsidiary shall be deemed a Restricted Payment. In the event of any such Designation, the Company shall be deemed to have made an Investment constituting a Restricted Payment pursuant to the covenant " - -- Limitation on Restricted Payments" for all purposes of the Indenture in the Designation Amount. The Indenture will also provide that the Company shall not and shall not cause or permit any Restricted Subsidiary to at any time (x) provide credit support for, or subject any of its property or assets (other than the Capital Stock of any Unrestricted Subsidiary) to the satisfaction of, any Indebtedness of any Unrestricted Subsidiary (including any undertaking, agreement or instrument evidencing such Indebtedness) (other than Permitted Investments in Unrestricted Subsidiaries) or (y) be directly or indirectly liable for any Indebtedness of any Unrestricted Subsidiary. For purposes of the foregoing, the 96 Designation of a Subsidiary of the Company as an Unrestricted Subsidiary shall be deemed to be the Designation of all of the Subsidiaries of such Subsidiary. The Company may revoke any Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation") if: (a) no Default shall have occurred and be continuing at the time of and after giving effect to such Revocation; (b) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding immediately following such Revocation would, if incurred at such time, have been permitted to be incurred for all purposes of the Indenture; and (c) unless such redesignated Subsidiary shall not have any Indebtedness outstanding (other than Indebtedness that would be Permitted Indebtedness), immediately after giving effect to such proposed Revocation, and after giving pro forma effect to the incurrence of any such Indebtedness of such redesignated Subsidiary as if such Indebtedness was incurred on the date of the Revocation, the Company could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the covenant described under " -- Limitation on Indebtedness." All Designations and Revocations must be evidenced by a resolution of the board of directors of the Company delivered to the Trustee certifying compliance with the foregoing provisions. (Section 1018) Provision of Financial Statements. Whether or not the Company is subject to Section 13(a) or 15(d) of the Exchange Act, the Company and each Guarantor (to the extent such Guarantor would be required if subject to Section 13(a) or 15(d) of the Exchange Act) will, to the extent permitted under the Exchange Act, file with the Commission the annual reports, quarterly reports and other documents which the Company and such Guarantor would have been required to file with the Commission pursuant to Sections 13(a) or 15(d) if the Company or such Guarantor were so subject, such documents to be filed with the Commission on or prior to the date (the "Required Filing Date") by which the Company and such Guarantor would have been required so to file such documents if the Company and such Guarantor were so subject. The Company and any Guarantor will also in any event (x) within 15 days of each Required Filing Date (i) transmit by mail to all holders, as their names and addresses appear in the security register, without cost to such holders and (ii) file with the Trustee copies of the annual reports, quarterly reports and other documents which the Company and such Guarantor would have been required to file with the Commission pursuant to Sections 13(a) or 15(d) of the Exchange Act if the Company and such Guarantor were subject to either of such Sections and (y) if filing such documents by the Company and such Guarantor with the Commission is not permitted under the Exchange Act, promptly upon written request and payment of the reasonable cost of duplication and delivery, supply copies of such documents to any prospective holder at the Company's cost. If any Guarantor's financial statements would be required to be included in the financial statements filed or delivered pursuant to the Indenture if the Company were subject to Section 13(a) or 15(d) of the Exchange Act, the Company shall include such Guarantor's financial statements in any filing or delivery pursuant to the Indenture. The Indenture also provides that, so long as any of the Notes remain outstanding, the Company will make available to any prospective purchaser of Notes or beneficial owner of Notes in connection with any sale thereof the information required by Rule 144A(d)(4) under the Securities Act, until such time as the Company has either exchanged the Notes for securities identical in all material respects which have been registered under the Securities Act or until such time as the holders thereof have disposed of such Notes pursuant to an effective registration statement under the Securities Act. (Section 1019) Additional Covenants. The Indenture also contains covenants with respect to the following matters: (i) payment of principal, premium and interest; (ii) maintenance of an office or agency in The City of New York; (iii) arrangements regarding the handling of money held in trust; (iv) maintenance of corporate existence; (v) payment of taxes and other claims; (vi) maintenance of properties; and (vii) maintenance of insurance. Consolidation, Merger, Sale of Assets The Company will not, in a single transaction or through a series of related transactions, consolidate with or merge with or into any other Person or sell, assign, convey, transfer, lease or otherwise dispose of all or substantially all of its properties and assets to any Person or group of Persons, or permit any of its Restricted Subsidiaries to enter into any such transaction or series of related transactions, if such transaction or series of related transactions, in the aggregate, would result in a sale, assignment, conveyance, transfer, lease or disposition of all or substantially all of the properties and assets of the Company and its Restricted Subsidiaries on a Consolidated basis to any other Person or group of Persons, unless at the time and after giving effect thereto (i) either (a) the Company will be the continuing corporation (in the case of a consolidation or merger involving the Company) or (b) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person which acquires by sale, assignment, conveyance, transfer, lease or disposition all or substantially all of the properties and assets of the Company and its Restricted Subsidiaries on a Consolidated basis (the 97 "Surviving Entity") will be a corporation duly organized and validly existing under the laws of the United States of America, any state thereof or the District of Columbia and such Person expressly assumes, by a supplemental indenture, in a form reasonably satisfactory to the Trustee, all the obligations of the Company under the Notes and the Indenture and the Registration Rights Agreement, as the case may be, and the Notes and the Indenture and the Registration Rights Agreement will remain in full force and effect as so supplemented; (ii) immediately before and immediately after giving effect to such transaction on a pro forma basis (and treating any Indebtedness not previously an obligation of the Company or any of its Restricted Subsidiaries which becomes the obligation of the Company or any of its Restricted Subsidiaries as a result of such transaction as having been incurred at the time of such transaction), no Default or Event of Default will have occurred and be continuing; (iii) immediately before and immediately after giving effect to such transaction on a pro forma basis (on the assumption that the transaction occurred on the first day of the four-quarter period for which financial statements are available ending immediately prior to the consummation of such transaction with the appropriate adjustments with respect to the transaction being included in such pro forma calculation), the Company (or the Surviving Entity if the Company is not the continuing obligor under the Indenture) could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) under the provisions of " -- Certain Covenants -- Limitation on Indebtedness;" (iv) at the time of the transaction, each Guarantor, if any, unless it is the other party to the transactions described above, will have by supplemental indenture confirmed that its Guarantee shall apply to such Person's obligations under the Indenture and under the Notes; (v) at the time of the transaction if any of the property or assets of the Company or any of its Restricted Subsidiaries would thereupon become subject to any Lien, the provisions of " -- Certain Covenants -- Limitation on Liens" are complied with; and (vi) at the time of the transaction the Company or the Surviving Entity will have delivered, or caused to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an officers' certificate and an opinion of counsel, each to the effect that such consolidation, merger, transfer, sale, assignment, conveyance, transfer, lease or other transaction and the supplemental indenture in respect thereof comply with the Indenture and that all conditions precedent therein provided for relating to such transaction have been complied with. (Section 801) Each Guarantor will not, and the Company will not permit a Guarantor to, in a single transaction or through a series of related transactions, consolidate with or merge with or into any other Person (other than the Company or any Guarantor) or sell, assign, convey, transfer, lease or otherwise dispose of all or substantially all of its properties and assets on a Consolidated basis to any Person or group of Persons (other than the Company or any Guarantor), or permit any of its Restricted Subsidiaries to enter into any such transaction or series of transactions if such transaction or series of transactions, in the aggregate, would result in a sale, assignment, conveyance, transfer, lease or disposition of all or substantially all of the properties and assets of the Guarantor and its Restricted Subsidiaries on a Consolidated basis to any other Person or group of Persons (other than the Company or any Guarantor), unless at the time and after giving effect thereto: (i) either (a) the Guarantor will be the continuing corporation (in the case of a consolidation or merger involving the Guarantor) or (b) the Person (if other than the Guarantor) formed by such consolidation or into which such Guarantor is merged or the Person which acquires by sale, assignment, conveyance, transfer, lease or disposition all or substantially all of the properties and assets of the Guarantor and its Restricted Subsidiaries on a Consolidated basis (the "Surviving Guarantor Entity") will be a corporation or limited liability company duly organized and validly existing under the laws of the United States of America, any state thereof or the District of Columbia and such Person expressly assumes, by a supplemental indenture, in a form reasonably satisfactory to the Trustee, all the obligations of such Guarantor under its Guarantee of the Notes and the Indenture and the Registration Rights Agreement and such Guarantee, Indenture and Registration Rights Agreement will remain in full force and effect; (ii) immediately before and immediately after giving effect to such transaction on a pro forma basis, no Default or Event of Default will have occurred and be continuing; and (iii) at the time of the transaction such Guarantor or the Surviving Guarantor Entity will have delivered, or caused to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an officers' certificate and an opinion of counsel, each to the effect that such consolidation, merger, transfer, sale, assignment, conveyance, lease or other transaction and the supplemental indenture in respect thereof comply with the Indenture and that all conditions precedent therein provided for relating to such transaction have been complied with; provided, however, that this paragraph shall not apply to any Guarantor whose Guarantee of the Notes is unconditionally released and discharged in accordance with paragraph (b) under the provisions of " -- Certain Covenants -- Limitation on Issuances of Guarantees of Indebtedness." (Section 801) In the event of any transaction (other than a lease or a sale of substantially all of the assets of the Company or a Guarantor that results in the sale, assignment, conveyance, transfer or other disposition of assets constituting or accounting for less than 95% of the consolidated assets, revenues or Consolidated Net Income (Loss) of the Company or such Guarantor, as the case may be) described in and complying with the conditions listed in the two immediately preceding paragraphs in which the Company or any Guarantor, as the case may be, is not the continuing corporation, the successor Person formed or remaining or to which such transfer is made shall succeed to, and be substituted for, and may exercise every right and 98 power of, the Company or such Guarantor, as the case may be, and the Company or any Guarantor, as the case may be, would be discharged from all obligations and covenants under the Indenture and the Notes or its Guarantee, as the case may be, and the Registration Rights Agreement. (Section 802) Events of Default An Event of Default will occur under the Indenture if: (i) there shall be a default in the payment of any interest on any Note when it becomes due and payable, and such default shall continue for a period of 30 days (whether or not prohibited by the subordination provisions of the Indenture); (ii) there shall be a default in the payment of the principal of (or premium, if any, on) any Note at its Maturity (upon acceleration, optional or mandatory redemption, if any, required repurchase or otherwise) (whether or not prohibited by the subordination provisions of the Indenture); (iii) (a) there shall be a default in the performance, or breach, of any covenant or agreement of the Company or any Guarantor under the Indenture or any Guarantee (other than a default in the performance, or breach, of a covenant or agreement which is specifically dealt with in clause (i), (ii) or in clause (b), (c) or (d) of this clause (iii)) and such default or breach shall continue for a period of 60 days after written notice (30 days in the case of a default in the covenants described under " -- Certain Covenants -- Limitation on Indebtedness" or " -- Limitation on Restricted Payments") has been given, by certified mail, (x) to the Company by the Trustee or (y) to the Company and the Trustee by the holders of at least 25% in aggregate principal amount of the outstanding Notes; (b) there shall be a default in the performance or breach of the provisions described in " -- Consolidation, Merger, Sale of Assets;" (c) the Company shall have failed to consummate an Offer in accordance with the provisions of " -- Certain Covenants -- Limitation on Sale of Assets;" or (d) the Company shall have failed to consummate a Change of Control Offer in accordance with the provisions of "Purchase of Notes Upon a Change of Control;" (iv) one or more defaults, individually or in the aggregate, shall have occurred under any of the agreements, indentures or instruments under which the Company or any Restricted Subsidiary then has outstanding Indebtedness in excess of $20 million in principal amount, individually or in the aggregate, and either (a) such default results from the failure to pay such Indebtedness at its stated final maturity or (b) such default or defaults resulted in the acceleration of the maturity of such Indebtedness; (v) any Guarantee shall for any reason cease to be, or shall for any reason be asserted in writing by any Guarantor or the Company not to be, in full force and effect and enforceable in accordance with its terms, except to the extent contemplated by the Indenture and any such Guarantee; (vi) one or more final judgments, orders or decrees (not subject to appeal) of any court or regulatory or administrative agency for the payment of money in excess of $20 million, either individually or in the aggregate (exclusive of any portion of any such payment covered by insurance, if and to the extent the insurer has acknowledged in writing its liability therefor), shall be rendered against the Company, any Guarantor or any Subsidiary or any of their respective properties and shall not be discharged or fully binded and there shall have been a period of 60 consecutive days during which a stay of enforcement of such judgment or order, by reason of an appeal or otherwise, shall not be in effect; (vii) any holder or holders of at least $20 million in aggregate principal amount of Indebtedness of the Company, any Guarantor or any Restricted Subsidiary after a default under such Indebtedness shall notify the Trustee of the intended sale or disposition of any assets of the Company, any Guarantor or any Restricted Subsidiary that have been pledged to or for the benefit of such holder or holders to secure such Indebtedness or shall commence proceedings, or take any action (including by way of set-off), to retain in satisfaction of such Indebtedness or to collect on, seize, dispose of or apply in satisfaction of Indebtedness, assets of the Company, any Guarantor or any Restricted Subsidiary (including funds on deposit or held pursuant to lock-box and other similar arrangements); (viii) there shall have been the entry by a court of competent jurisdiction of (a) a decree or order for relief in respect of the Company or any Significant Restricted Subsidiary in an involuntary case or proceeding under any applicable Bankruptcy Law or (b) a decree or order adjudging the Company or any Significant Restricted Subsidiary bankrupt or insolvent, or seeking reorganization, arrangement, adjustment or composition of or in respect of the Company or any Significant Restricted Subsidiary under any applicable federal or state law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or any Significant Restricted Subsidiary or of any substantial part of their respective properties, or ordering the winding up or liquidation of their affairs, and any such decree or order for relief shall continue to be in effect, or any such other decree or order shall be unstayed and in effect, for a period of 60 consecutive days; or 99 (ix) (a) the Company or any Significant Restricted Subsidiary commences a voluntary case or proceeding under any applicable Bankruptcy Law or any other case or proceeding to be adjudicated bankrupt or insolvent, (b) the Company or any Significant Restricted Subsidiary consents to the entry of a decree or order for relief in respect of the Company or such Significant Restricted Subsidiary in an involuntary case or proceeding under any applicable Bankruptcy Law or to the commencement of any bankruptcy or insolvency case or proceeding against it, (c) the Company or any Significant Restricted Subsidiary files a petition or answer or consent seeking reorganization or relief under any applicable federal or state law, (d) the Company or any Significant Restricted Subsidiary (I) consents to the filing of such petition or the appointment of, or taking possession by, a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of the Company or such Significant Restricted Subsidiary or of any substantial part of their respective properties, (II) makes an assignment for the benefit of creditors or (III) admits in writing its inability to pay its debts generally as they become due or (e) the Company or any Significant Restricted Subsidiary takes any corporate action in furtherance of any such actions in this paragraph (ix). (Section 501) If an Event of Default (other than as specified in clauses (viii) and (ix) of the prior paragraph) shall occur and be continuing with respect to the Indenture, the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes then outstanding may, and the Trustee at the request of such holders shall, declare all unpaid principal of, premium, if any, and accrued interest on all Notes to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by the holders of the Notes) and upon any such declaration, such principal, premium, if any, and interest shall become due and payable immediately. If an Event of Default specified in clause (viii) or (ix) of the prior paragraph occurs and is continuing, then all the Notes shall ipso facto become and be due and payable immediately in an amount equal to the principal amount of the Notes, together with accrued and unpaid interest, if any, to the date the Notes become due and payable, without any declaration or other act on the part of the Trustee or any holder. Thereupon, the Trustee may, at its discretion, proceed to protect and enforce the rights of the holders of Notes by appropriate judicial proceedings. After a declaration of acceleration, but before a judgment or decree for payment of the money due has been obtained by the Trustee, the holders of a majority in aggregate principal amount of Notes outstanding by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if (a) the Company has paid or deposited with the Trustee a sum sufficient to pay (i) all sums paid or advanced by the Trustee under the Indenture and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, (ii) all overdue interest on all Notes then outstanding, (iii) the principal of and premium, if any, on any Notes then outstanding which have become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Notes and (iv) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate borne by the Notes; (b) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction; and (c) all Events of Default, other than the non-payment of principal of, premium, if any, and interest on the Notes which have become due solely by such declaration of acceleration, have been cured or waived as provided in the Indenture. No such rescission shall affect any subsequent default or impair any right consequent thereon. (Section 502) The holders of not less than a majority in aggregate principal amount of the Notes outstanding may on behalf of the holders of all outstanding Notes waive any past default under the Indenture and its consequences, except a default (i) in the payment of the principal of, premium, if any, or interest on any Note (which may only be waived with the consent of each holder of Notes affected) or (ii) in respect of a covenant or provision which under the Indenture cannot be modified or amended without the consent of the holder of each Note affected by such modification or amendment. (Section 513) No holder of any of the Notes has any right to institute any proceedings with respect to the Indenture or any remedy thereunder, unless the holders of at least 25% in aggregate principal amount of the outstanding Notes have made written request, and offered reasonable indemnity, to the Trustee to institute such proceeding as Trustee under the Notes and the Indenture, the Trustee has failed to institute such proceeding within 15 days after receipt of such notice and the Trustee, within such 15-day period, has not received directions inconsistent with such written request by holders of a majority in aggregate principal amount of the outstanding Notes. Such limitations do not, however, apply to a suit instituted by a holder of a Note for the enforcement of the payment of the principal of, premium, if any, or interest on such Note on or after the respective due dates expressed in such Note. The Company is required to notify the Trustee within five business days of the occurrence of any Default. The Company is required to deliver to the Trustee, on or before a date not more than 60 days after the end of each fiscal quarter and not more than 120 days after the end of each fiscal year, a written statement as to compliance with the Indenture, including whether or not any Default has occurred. (Section 1020) The Trustee is under no obligation to exercise any of the rights or powers vested in it by the Indenture at the request or direction of any of the holders of the Notes unless such holders offer 100 to the Trustee security or indemnity satisfactory to the Trustee against the costs, expenses and liabilities which might be incurred thereby. (Section 603) The Trust Indenture Act contains limitations on the rights of the Trustee, should it become a creditor of the Company or any Guarantor, if any, to obtain payment of claims in certain cases or to realize on certain property received by it in respect of any such claims, as security or otherwise. The Trustee is permitted to engage in other transactions, provided that if it acquires any conflicting interest it must eliminate such conflict upon the occurrence of an Event of Default or else resign. Defeasance or Covenant Defeasance of Indenture The Company may, at its option and at any time, elect to have the obligations of the Company, any Guarantor and any other obligor upon the Notes discharged with respect to the outstanding Notes ("defeasance"). Such defeasance means that the Company, any such Guarantor and any other obligor under the Indenture shall be deemed to have paid and discharged the entire Indebtedness represented by the outstanding Notes, except for (i) the rights of holders of such outstanding Notes to receive payments in respect of the principal of, premium, if any, and interest on such Notes when such payments are due, (ii) the Company's obligations with respect to the Notes concerning issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes, and the maintenance of an office or agency for payment and money for security payments held in trust, (iii) the rights, powers, trusts, duties and immunities of the Trustee and (iv) the defeasance provisions of the Indenture. In addition, the Company may, at its option and at any time, elect to have the obligations of the Company and any Guarantor released with respect to certain covenants that are described in the Indenture ("covenant defeasance") and thereafter any omission to comply with such obligations shall not constitute a Default or an Event of Default with respect to the Notes. In the event covenant defeasance occurs, certain events (not including non-payment, bankruptcy and insolvency events) described under "Events of Default" will no longer constitute an Event of Default with respect to the Notes. (Sections 401, 402 and 403) In order to exercise either defeasance or covenant defeasance, (i) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the holders of the Notes cash in United States dollars, U.S. Government Obligations (as defined in the Indenture), or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants or a nationally recognized investment banking firm, to pay and discharge the principal of, premium, if any, and interest on the outstanding Notes on the Stated Maturity (or on any date after August 1, 2003 (such date being referred to as the "Defeasance Redemption Date"), if at or prior to electing either defeasance or covenant defeasance, the Company has delivered to the Trustee an irrevocable notice to redeem all of the outstanding Notes on the Defeasance Redemption Date); (ii) in the case of defeasance, the Company shall have delivered to the Trustee an opinion of independent counsel in the United States stating that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the Issue Date, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of independent counsel in the United States shall confirm that, the holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred; (iii) in the case of covenant defeasance, the Company shall have delivered to the Trustee an opinion of independent counsel in the United States to the effect that the holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such covenant defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; (iv) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or insofar as clauses (viii) or (ix) under the first paragraph under -- "Events of Default" are concerned, at any time during the period ending on the 91st day after the date of deposit (other than a Default which results from the borrowing of amounts to finance the defeasance and which borrowing does not result in a breach or violation of, or constitute a default, under any other material agreement or instrument to which the Company or any Restricted Subsidiary is a party or to which it is bound); (v) such defeasance or covenant defeasance shall not cause the Trustee for the Notes to have a conflicting interest as defined in the Indenture and for purposes of the Trust Indenture Act with respect to any securities of the Company or any Guarantor; (vi) such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a Default under, the Indenture or any other material agreement or instrument to which the Company, any Guarantor or any Restricted Subsidiary is a party or by which it is bound; (vii) such defeasance or covenant defeasance shall not result in the trust arising from such deposit constituting an investment company within the meaning of the Investment Company Act of 1940, as amended, unless such trust shall be registered under such Act or exempt from registration thereunder; (viii) the Company will have delivered to the Trustee an opinion of independent counsel in the United States to the effect that (assuming that no holder of any Notes would be considered an insider of the Company under 101 any applicable bankruptcy or insolvency law) after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (ix) the Company shall have delivered to the Trustee an officers' certificate stating that the deposit was not made by the Company with the intent of preferring the holders of the Notes or any Guarantee over the other creditors of the Company or any Guarantor with the intent of defeating, hindering, delaying or defrauding creditors of the Company, any Guarantor or others; (x) no event or condition shall exist that would prevent the Company from making payments of the principal of, premium, if any, and interest on the Notes on the date of such deposit or at any time ending on the 91st day after the date of such deposit; and (xi) the Company will have delivered to the Trustee an officers' certificate and an opinion of independent counsel, each stating that all conditions precedent provided for relating to either the defeasance or the covenant defeasance, as the case may be, have been complied with. (Section 404) Satisfaction and Discharge The Indenture will be discharged and will cease to be of further effect (except as to surviving rights of registration of transfer or exchange of the Notes as expressly provided for in the Indenture) as to all outstanding Notes under the Indenture when (a) either (i) all such Notes theretofore authenticated and delivered (except lost, stolen or destroyed Notes which have been replaced or paid or Notes whose payment has been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust as provided for in the Indenture) have been delivered to the Trustee for cancellation or (ii) all Notes not theretofore delivered to the Trustee for cancellation (x) have become due and payable, (y) will become due and payable at their Stated Maturity within one year, or (z) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company; and the Company or any Guarantor has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust an amount in United States dollars sufficient to pay and discharge the entire indebtedness on the Notes not theretofore delivered to the Trustee for cancellation, including principal of, premium, if any, and accrued interest at such Maturity, Stated Maturity or redemption date; (b) the Company or any Guarantor has paid or caused to be paid all other sums payable under the Indenture by the Company and any Guarantor; and (c) the Company has delivered to the Trustee an officers' certificate and an opinion of independent counsel in form and substance reasonably satisfactory to the Trustee each stating that (i) all conditions precedent under the Indenture relating to the satisfaction and discharge of such Indenture have been complied with and (ii) such satisfaction and discharge will not result in a breach or violation of, or constitute a default under, the Indenture or any other material agreement or instrument to which the Company, any Guarantor or any Subsidiary is a party or by which the Company, any Guarantor or any Subsidiary is bound. (Section 1201) Modifications and Amendments Modifications and amendments of the Indenture may be made by the Company, each Guarantor, if any, and the Trustee with the consent of the holders of at least a majority in aggregate principal amount of the Notes then outstanding; provided, however, that no such modification or amendment may, without the consent of the holder of each outstanding Note affected thereby: (i) change the Stated Maturity of the principal of, or any installment of interest on, or change to an earlier date any redemption date of, or waive a default in the payment of the principal of, premium, if any, or interest on, any such Note or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change the coin or currency in which the principal of any such Note or any premium or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment after the Stated Maturity thereof (or, in the case of redemption, on or after the redemption date); (ii) amend, change or modify the obligation of the Company to make and consummate an Offer with respect to any Asset Sale or Asset Sales in accordance with " -- Certain Covenants -- Limitation on Sale of Assets" or the obligation of the Company to make and consummate a Change of Control Offer in the event of a Change of Control in accordance with "Purchase of Notes Upon a Change of Control," including, in each case, amending, changing or modifying any definitions related thereto, but only to the extent such definitions relate thereto; (iii) reduce the percentage in principal amount of such outstanding Notes, the consent of whose holders is required for any such supplemental indenture, or the consent of whose holders is required for any waiver or compliance with certain provisions of the Indenture; (iv) modify any of the provisions relating to supplemental indentures requiring the consent of holders or relating to the waiver of past defaults or relating to the waiver of certain covenants, except to increase the percentage of such outstanding Notes required for such actions or to provide that certain other provisions of the Indenture cannot be modified or waived without the consent of the holder of each such Note affected thereby; (v) except as otherwise permitted under " -- Consolidation, Merger, Sale of Assets," consent to the assignment or transfer by the Company or any Guarantor of any of 102 its rights and obligations under the Indenture; or (vi) amend or modify any of the provisions of the Indenture relating to the subordination of the Notes or any Guarantee in any manner adverse to the holders of the Notes or any Guarantee. (Section 902) Notwithstanding the foregoing, without the consent of any holders of the Notes, the Company, any Guarantor, any other obligor under the Notes and the Trustee may modify or amend the Indenture: (a) to evidence the succession of another Person to the Company or a Guarantor or any other obligor upon the securities, and the assumption by any such successor of the covenants of the Company or such Guarantor or obligor in the Indenture and in the Notes and in any Guarantee in accordance with " -- Consolidation, Merger, Sale of Assets;" (b) to add to the covenants of the Company, any Guarantor or any other obligor upon the Notes for the benefit of the holders of the Notes or to surrender any right or power conferred upon the Company or any Guarantor or any other obligor upon the Notes, as applicable, in the Indenture, in the Notes or in any Guarantee; (c) to cure any ambiguity, or to correct or supplement any provision in the Indenture or in any supplemental indenture, the Notes or any Guarantee which may be defective or inconsistent with any other provision in the Indenture, the Notes or any Guarantee or make any other provisions with respect to matters or questions arising under the Indenture, the Notes or any Guarantee; provided that, in each case, such provisions shall not adversely affect the interest of the holders of the Notes; (d) to comply with the requirements of the Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act; (e) to add a Guarantor under the Indenture; (f) to evidence and provide the acceptance of the appointment of a successor Trustee under the Indenture; or (g) to mortgage, pledge, hypothecate or grant a security interest in favor of the Trustee for the benefit of the holders of the Notes as additional security for the payment and performance of the Company's and any Guarantor's obligations under the Indenture, in any property, or assets, including any of which are required to be mortgaged, pledged or hypothecated, or in which a security interest is required to be granted to the Trustee pursuant to the Indenture or otherwise. (Section 901) The holders of a majority in aggregate principal amount of the Notes outstanding may waive compliance with certain restrictive covenants and provisions of the Indenture. (Section 1021) Governing Law The Indenture, the Notes and any Guarantee will be governed by, and construed in accordance with, the laws of the State of New York, without giving effect to the conflicts of law principles thereof. Concerning the Trustee The Indenture contains certain limitations on the rights of the Trustee, should it become a creditor of the Company, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the Commission for permission to continue as Trustee with such conflict or resign as Trustee. (Sections 608 and 611) The holders of a majority in principal amount of the then outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. The Indenture provides that in case an Event of Default occurs (which has not been cured), the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any holder of Notes unless such holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. (Section 602) Certain Definitions "Acquired Indebtedness" means Indebtedness of a Person (i) existing at the time such Person becomes a Restricted Subsidiary or (ii) assumed in connection with the acquisition of assets from such Person, in each case, other than Indebtedness incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary or such acquisition, as the case may be. Acquired Indebtedness shall be deemed to be incurred on the date of the related acquisition of assets from any Person or the date the acquired Person becomes a Restricted Subsidiary, as the case may be. "Affiliate" means, with respect to any specified Person: (i) any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person; (ii) any other Person that owns, directly or indirectly, 5% or more of such specified Person's Capital Stock or any officer or director of any such specified Person or other Person or, with respect to any natural Person, any person having a relationship with such Person by blood, marriage or adoption 103 not more remote than first cousin; or (iii) any other Person 5% or more of the Voting Stock of which is beneficially owned or held directly or indirectly by such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Asset Sale" means any sale, issuance, conveyance, transfer, lease or other disposition (including, without limitation, by way of merger, consolidation or sale and leaseback transaction) (collectively, a "transfer"), directly or indirectly, in one or a series of related transactions, of: (i) any Capital Stock of any Restricted Subsidiary (other than directors qualifying shares and transfers of Capital Stock required by a Manufacturer to the extent the Company does not receive cash or Cash Equivalents for such Capital Stock); (ii) all or substantially all of the properties and assets of any division or line of business of the Company or any Restricted Subsidiary; or (iii) any other properties or assets of the Company or any Restricted Subsidiary other than in the ordinary course of business. For the purposes of this definition, the term "Asset Sale" shall not include any transfer of properties and assets (A) that is governed by the provisions described under "Consolidation, Merger, Sale of Assets," (B) that is by the Company to any Wholly Owned Restricted Subsidiary, or by any Restricted Subsidiary to the Company or any Wholly Owned Restricted Subsidiary in accordance with the terms of the Indenture, (C) that is of obsolete equipment, (D) that consists of defaulted receivables for collection or any sale, transfer or other disposition of defaulted receivables for collection, or (E) the Fair Market Value of which in the aggregate does not exceed $2.5 million in any transaction or series of related transactions. "Average Life to Stated Maturity" means, as of the date of determination with respect to any Indebtedness, the quotient obtained by dividing (i) the sum of the products of (a) the number of years from the date of determination to the date or dates of each successive scheduled principal payment of such Indebtedness multiplied by (b) the amount of each such principal payment by (ii) the sum of all such principal payments. "Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as amended, or any similar United States federal or state law or foreign law relating to bankruptcy, insolvency, receivership, winding up, liquidation, reorganization or relief of debtors or any amendment to, succession to or change in any such law. "Capital Lease Obligation" of any Person means any obligation of such Person and its Restricted Subsidiaries on a Consolidated basis under any capital lease of (or other agreement conveying the right to use) real or personal property which, in accordance with GAAP, is required to be recorded as a capitalized lease obligation. "Capital Stock" of any Person means any and all shares, interests, participations, rights in or other equivalents (however designated) of such Person's capital stock or other equity interests whether now outstanding or issued after the Issue Date, partnership interests (whether general or limited), any other interest or participation that confers on a Person that right to receive a share of the profits and losses of, or distributions of assets of (other than a distribution in respect of Indebtedness), the issuing Person and any rights (other than debt securities convertible into Capital Stock), warrants or options exchangeable for or convertible into such Capital Stock. "Cash Equivalents" means (i) marketable direct obligations, maturing not more than one year after the date of acquisition, issued by the United States of America, or an instrumentality or agency thereof, and guaranteed fully as to principal, premium, if any, and interest by the United States of America, (ii) any certificate of deposit, maturing not more than one year after the date of acquisition, issued by a commercial banking institution that is a member of the Federal Reserve System and that has combined capital and surplus and undivided profits of not less than $500 million, whose debt has a rating, at the time as of which any investment therein is made, of "P-1" (or higher) according to Moody's Investors Service, Inc. ("Moody's") or any successor rating agency or "A-1" (or higher) according to Standard & Poor's Rating Group, a division of McGraw Hill, Inc. ("S&P") or any successor rating agency, (iii) commercial paper, maturing not more than 180 days after the date of acquisition, issued by a corporation (other than an Affiliate or Subsidiary of the Company) organized and existing under the laws of the United States of America with a rating, at the time as of which any investment therein is made, of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P and (iv) any money market deposit accounts issued or offered by a domestic commercial bank having capital and surplus in excess of $500 million; provided that the short term debt of such commercial bank has a rating, at the time of Investment, of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P. "Change of Control" means the occurrence of any of the following events: (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), other than Permitted Holders, is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person shall be deemed to have beneficial ownership of all shares that such Person has the right to acquire, whether such right is exercisable immediately or only after 104 the passage of time), directly or indirectly, of more than 35% of the total outstanding Voting Stock of the Company; (ii) during any period of two consecutive years, individuals who at the beginning of such period constituted the board of directors of the Company (together with any new directors whose election to such board or whose nomination for election by the stockholders of the Company was approved by a vote of 66 2/3% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved), cease for any reason to constitute a majority of such board of directors then in office; (iii) the Company consolidates with or merges with or into any Person or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any Person, or any Person consolidates with or merges into or with the Company, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company is converted into or exchanged for cash, securities or other property, other than any such transaction where (A) the outstanding Voting Stock of the Company is changed into or exchanged for (x) Voting Stock of the surviving corporation which is not Redeemable Capital Stock or (y) cash, securities and other property (other than Capital Stock of the surviving corporation) in an amount which could be paid by the Company as a Restricted Payment as described under " -- Certain Covenants -- Limitation on Restricted Payments" (and such amount shall be treated as a Restricted Payment subject to the provisions in the Indenture described under "-- Certain Covenants -- Limitation on Restricted Payments") and (B) immediately after such transaction, no "person" or "group," other than Permitted Holders, is the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to have beneficial ownership of all securities that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, more than 35% of the total outstanding Voting Stock of the surviving corporation; or (iv) the Company is liquidated or dissolved or adopts a plan of liquidation or dissolution other than in a transaction which complies with the provisions described under " -- Consolidation, Merger, Sale of Assets." For purposes of this definition, any transfer of an equity interest of an entity that was formed for the purpose of acquiring voting stock of the Company will be deemed to be a transfer of such portion of such voting stock as corresponds to the portion of the equity of such entity that has been so transferred. "Class A Common Stock" means the Company's Class A Common Stock, par value $.01 per share, or any successor common stock thereto. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or if at any time after the execution of the Indenture such Commission is not existing and performing the duties now assigned to it under the Securities Act, Exchange Act and Trust Indenture Act then the body performing such duties at such time. "Commodity Price Protection Agreement" means any forward contract, commodity swap, commodity option or other similar financial agreement or arrangement relating to, or the value which is dependent upon, fluctuations in commodity prices. "Company" means Sonic Automotive, Inc., a corporation incorporated under the laws of Delaware, until a successor Person shall have become such pursuant to the applicable provisions of the Indenture, and thereafter "Company" shall mean such successor Person. "Consolidated Fixed Charge Coverage Ratio" of any Person means, for any period, the ratio of (a) the sum of Consolidated Net Income (Loss), and in each case to the extent deducted in computing Consolidated Net Income (Loss) for such period, Consolidated Interest Expense, Consolidated Income Tax Expense and Consolidated Non-cash Charges for such period, of such Person and its Restricted Subsidiaries on a Consolidated basis, all determined in accordance with GAAP, less all noncash items increasing Consolidated Net Income for such period and less all cash payments during such period relating to noncash charges that were added back to Consolidated Net Income in determining the Consolidated Fixed Charge Coverage Ratio in any prior period to (b) the sum of Consolidated Interest Expense for such period and cash and noncash dividends paid on any Preferred Stock of such Person during such period, in each case after giving pro forma effect to (i) the incurrence of the Indebtedness giving rise to the need to make such calculation and (if applicable) the application of the net proceeds therefrom, including to refinance other Indebtedness, as if such Indebtedness was incurred, and the application of such proceeds occurred, on the first day of such period; (ii) the incurrence, repayment or retirement of any other Indebtedness by the Company and its Restricted Subsidiaries since the first day of such period as if such Indebtedness was incurred, repaid or retired at the beginning of such period (except that, in making such computation, the amount of Indebtedness under any revolving credit facility shall be computed based upon the average daily balance of such Indebtedness during such period); (iii) in the case of Acquired Indebtedness or any acquisition occurring at the time of the incurrence of such Indebtedness, the related acquisition, assuming such acquisition had been consummated on the first day of such period; and (iv) any acquisition or disposition by the Company and its Restricted Subsidiaries of any company or any business or any assets out of the ordinary course of business, whether by merger, stock purchase or sale or asset purchase or sale, or any related repayment 105 of Indebtedness, in each case since the first day of such period, assuming such acquisition or disposition had been consummated on the first day of such period; provided that (i) in making such computation, the Consolidated Interest Expense attributable to interest on any Indebtedness computed on a pro forma basis and (A) bearing a floating interest rate shall be computed as if the rate in effect on the date of computation had been the applicable rate for the entire period and (B) which was not outstanding during the period for which the computation is being made but which bears, at the option of such Person, a fixed or floating rate of interest, shall be computed by applying at the option of such Person either the fixed or floating rate and (ii) in making such computation, the Consolidated Interest Expense of such Person attributable to interest on any Indebtedness under a revolving credit facility computed on a pro forma basis shall be computed based upon the average daily balance of such Indebtedness during the applicable period. "Consolidated Income Tax Expense" of any Person means, for any period, the provision for federal, state, local and foreign income taxes of such Person and its Consolidated Restricted Subsidiaries for such period as determined in accordance with GAAP. "Consolidated Interest Expense" of any Person means, without duplication, for any period, the sum of (a) the interest expense of such Person and its Restricted Subsidiaries for such period, on a Consolidated basis (other than interest expense under any Inventory Facility), including, without limitation, (i) amortization of debt discount, (ii) the net costs associated with Interest Rate Agreements, Currency Hedging Agreements and Commodity Price Protection Agreements (including amortization of discounts), (iii) the interest portion of any deferred payment obligation, (iv) all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers acceptance financing and (v) accrued interest, plus (b) (i) the interest component of the Capital Lease Obligations paid, accrued and/or scheduled to be paid or accrued by such Person and its Restricted Subsidiaries during such period and (ii) all capitalized interest of such Person and its Restricted Subsidiaries plus (c) the interest expense under any Guaranteed Debt of such Person and any Restricted Subsidiary to the extent not included under clause (a)(iv) above, whether or not paid by such Person or its Restricted Subsidiaries. "Consolidated Net Income (Loss)" of any Person means, for any period, the Consolidated net income (or loss) of such Person and its Restricted Subsidiaries for such period on a Consolidated basis as determined in accordance with GAAP, adjusted, to the extent included in calculating such net income (or loss), by excluding, without duplication, (i) all extraordinary gains or losses net of taxes (less all fees and expenses relating thereto), (ii) the portion of net income (or loss) of such Person and its Restricted Subsidiaries on a Consolidated basis allocable to minority interests in unconsolidated Persons or Unrestricted Subsidiaries to the extent that cash dividends or distributions have not actually been received by such Person or one of its Consolidated Restricted Subsidiaries, (iii) net income (or loss) of any Person combined with such Person or any of its Restricted Subsidiaries on a "pooling of interests" basis attributable to any period prior to the date of combination, (iv) any gain or loss, net of taxes, realized upon the termination of any employee pension benefit plan, (v) gains or losses, net of taxes (less all fees and expenses relating thereto), in respect of dispositions of assets other than in the ordinary course of business, (vi) the net income of any Restricted Subsidiary to the extent that the declaration of dividends or similar distributions by that Restricted Subsidiary of that income is not at the time permitted, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Restricted Subsidiary or its stockholders, (vii) any restoration to net income of any contingency reserve, except to the extent provision for such reserve was made out of income accrued at any time following the Issue Date, or (viii) any net gain arising from the acquisition of any securities or extinguishment, under GAAP, of any Indebtedness of such Person. "Consolidated Non-cash Charges" of any Person means, for any period, the aggregate depreciation, amortization and other non-cash charges of such Person and its subsidiaries on a Consolidated basis for such period, as determined in accordance with GAAP (excluding any non-cash charge which requires an accrual or reserve for cash charges for any future period). "Consolidated Tangible Assets" of any Person means (a) all amounts that would be shown as assets on a consolidated balance sheet of such Person and its Restricted Subsidiaries prepared in accordance with GAAP, less (b) the amount thereof constituting goodwill and other intangible assets as calculated in accordance with GAAP. "Consolidation" means, with respect to any Person, the consolidation of the accounts of such Person and each of its subsidiaries if and to the extent the accounts of such Person and each of its subsidiaries would normally be consolidated with those of such Person, all in accordance with GAAP. The term "Consolidated" shall have a similar meaning. "Currency Hedging Agreements" means one or more of the following agreements which shall be entered into by one or more financial institutions: foreign exchange contracts, currency swap agreements or other similar agreements or arrangements designed to protect against the fluctuations in currency values. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. 106 "Disinterested Director" means, with respect to any transaction or series of related transactions, a member of the board of directors of the Company who does not have any material direct or indirect financial interest in or with respect to such transaction or series of transactions. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor statute, and the rules and regulations promulgated by the Commission thereunder. "Fair Market Value" means, with respect to any asset or property, the sale value that would be obtained in an arm's-length free market transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer under no compulsion to buy. Fair Market Value shall be determined by the board of directors of the Company acting in good faith and shall be evidenced by a resolution of the board of directors. "Floor Plan Facility" means an agreement from Ford Motor Credit Company or any other bank or asset-based lender pursuant to which the Company or any Restricted Subsidiary incurs Indebtedness all of the net proceeds of which are used to purchase, finance or refinance vehicles and/or vehicle parts and supplies to be sold in the ordinary course of business of the Company and its Restricted Subsidiaries and which may not be secured except by a Lien that does not extend to or cover any property other than the property of the dealership(s) which use the proceeds of the Floor Plan Facility. "Generally Accepted Accounting Principles" or "GAAP" means generally accepted accounting principles in the United States, consistently applied, which are in effect on the Issue Date. "Guarantee" means the guarantee by any Guarantor of the Company's Indenture Obligations. "Guaranteed Debt" of any Person means, without duplication, all Indebtedness of any other Person referred to in the definition of Indebtedness below guaranteed directly or indirectly in any manner by such Person, or in effect guaranteed directly or indirectly by such Person through an agreement (i) to pay or purchase such Indebtedness or to advance or supply funds for the payment or purchase of such Indebtedness, (ii) to purchase, sell or lease (as lessee or lessor) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such Indebtedness or to assure the holder of such Indebtedness against loss, (iii) to supply funds to, or in any other manner invest in, the debtor (including any agreement to pay for property or services without requiring that such property be received or such services be rendered), (iv) to maintain working capital or equity capital of the debtor, or otherwise to maintain the net worth, solvency or other financial condition of the debtor or to cause such debtor to achieve certain levels of financial performance or (v) otherwise to assure a creditor against loss; provided that the term "guarantee" shall not include endorsements for collection or deposit, in either case in the ordinary course of business. "Guarantor" means any Subsidiary which is a guarantor of the Notes, including any Person that is required after the Issue Date to execute a guarantee of the Notes pursuant to " -- Certain Covenants -- Limitation on Liens" or " -- Limitation on Issuance of Guarantees of and Pledges for Indebtedness" covenant until a successor replaces such party pursuant to the applicable provisions of the Indenture and, thereafter, shall mean such successor. "Indebtedness" means, with respect to any Person, without duplication, (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services, excluding any trade payables and other accrued current liabilities arising in the ordinary course of business, but including, without limitation, all obligations, contingent or otherwise, of such Person in connection with any letters of credit issued under letter of credit facilities, acceptance facilities or other similar facilities, (ii) all obligations of such Person evidenced by bonds, notes, debentures or other similar instruments, (iii) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even if the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), but excluding trade payables arising in the ordinary course of business, (iv) all obligations of such Person under Interest Rate Agreements, Currency Hedging Agreements or Commodity Price Protection Agreements of such Person, (v) all Capital Lease Obligations of such Person, (vi) all Indebtedness referred to in clauses (i) through (v) above of other Persons and all dividends of other Persons, the payment of which is secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien, upon or with respect to property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness, (vii) all Guaranteed Debt of such Person, (viii) all Redeemable Capital Stock issued by such Person valued at the greater of its voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid dividends, (ix) Preferred Stock of any Restricted Subsidiary of the Company which is not a Guarantor and (x) any amendment, supplement, modification, deferral, renewal, extension, refunding or refinancing of any liability of the types referred to in clauses (i) through (ix) above. For purposes hereof, the "maximum fixed repurchase price" of any Redeemable Capital Stock which does not have a fixed repurchase price shall be calculated in accordance with the 107 terms of such Redeemable Capital Stock as if such Redeemable Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to the Indenture, and if such price is based upon, or measured by, the Fair Market Value of such Redeemable Capital Stock, such Fair Market Value to be determined in good faith by the board of directors of the issuer of such Redeemable Capital Stock. "Indenture Obligations" means the obligations of the Company and any other obligor under the Indenture or under the Notes, including any Guarantor, to pay principal of, premium, if any, and interest when due and payable, and all other amounts due or to become due under or in connection with the Indenture, the Notes and the performance of all other obligations to the Trustee and the holders under the Indenture and the Notes, according to the respective terms thereof. "Interest Rate Agreements" means one or more of the following agreements which shall be entered into by one or more financial institutions: interest rate protection agreements (including, without limitation, interest rate swaps, caps, floors, collars and similar agreements) and/or other types of interest rate hedging agreements from time to time. "Inventory Facility" means any Floor Plan Facility or any other agreement (including pursuant to a commercial paper program) pursuant to which the Company or any Restricted Subsidiary incurs Indebtedness, the net proceeds of which are used to purchase, finance or refinance vehicles and/or vehicle parts and supplies to be sold in the ordinary course of business of the Company and its Restricted Subsidiaries and which may not be secured except by a Lien that does not extend to or cover any property other than the property of the dealership(s) which use the proceeds of the Inventory Facility. "Investment" means, with respect to any Person, directly or indirectly, any advance, loan (including guarantees), or other extension of credit or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase, acquisition or ownership by such Person of any Capital Stock, bonds, notes, debentures or other securities issued or owned by any other Person and all other items that would be classified as investments on a balance sheet prepared in accordance with GAAP. "Issue Date" means the original issue date of the Notes under the Indenture. "Lien" means any mortgage or deed of trust, charge, pledge, lien (statutory or otherwise), privilege, security interest, assignment, deposit, arrangement, easement, hypothecation, claim, preference, priority or other encumbrance upon or with respect to any property of any kind (including any conditional sale, capital lease or other title retention agreement, any leases in the nature thereof, and any agreement to give any security interest), real or personal, movable or immovable, now owned or hereafter acquired. A Person will be deemed to own subject to a Lien any property which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, Capitalized Lease Obligation or other title retention agreement. "Manufacturer" means a vehicle manufacturer which is a party to a dealership franchise agreement with the Company or any Restricted Subsidiary. "Maturity" means, when used with respect to the Notes, the date on which the principal of the Notes becomes due and payable as therein provided or as provided in the Indenture, whether at Stated Maturity, the Offer Date or the redemption date and whether by declaration of acceleration, Offer in respect of Excess Proceeds, Change of Control Offer in respect of a Change of Control, call for redemption or otherwise. "Net Cash Proceeds" means (a) with respect to any Asset Sale by any Person, the proceeds thereof (without duplication in respect of all Asset Sales) in the form of cash or Temporary Cash Investments including payments in respect of deferred payment obligations when received in the form of, or stock or other assets when disposed of for, cash or Temporary Cash Investments (except to the extent that such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary) net of (i) brokerage commissions and other reasonable fees and expenses (including fees and expenses of counsel and investment bankers) related to such Asset Sale, (ii) provisions for all taxes payable as a result of such Asset Sale, (iii) payments made to retire Indebtedness where payment of such Indebtedness is secured by the assets or properties the subject of such Asset Sale, (iv) amounts required to be paid to any Person (other than the Company or any Restricted Subsidiary) owning a beneficial interest in the assets subject to the Asset Sale and (v) appropriate amounts to be provided by the Company or any Restricted Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against any liabilities associated with such Asset Sale and retained by the Company or any Restricted Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as reflected in an officers' certificate delivered to the Trustee and (b) with respect to any issuance or sale of Capital Stock or options, warrants or rights to purchase Capital Stock, or debt securities or Capital Stock that have been converted into or exchanged for Capital Stock as referred to under " -- Certain Covenants -- Limitation on Restricted Payments," the proceeds of such issuance or sale in the form of 108 cash or Temporary Cash Investments including payments in respect of deferred payment obligations when received in the form of, or stock or other assets when disposed of for, cash or Temporary Cash Investments (except to the extent that such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary), net of attorney's fees, accountant's fees and brokerage, consultation, underwriting and other fees and expenses actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "Pari Passu Indebtedness" means (a) any Indebtedness of the Company that is pari passu in right of payment to the Notes and (b) with respect to any Guarantee, Indebtedness which ranks pari passu in right of payment to such Guarantee. "Permitted Holders" means (i) Mr. Bruton Smith or Mr. William S. Egan and their respective guardians, conservators, committees, or attorneys-in-fact; (ii) lineal descendants of Mr. Smith or Mr. Egan (in either case, a "Descendant") and their respective guardians, conservators, committees or attorneys-in-fact; and (ii) each "Family Controlled Entity" (as defined herein). The term "Family Controlled Entity" means (a) any not-for-profit corporation if at least 80% of its board of directors is composed of Mr. Smith, Mr. Egan and/or Descendants; (b) any other corporation if at least 80% of the value of its outstanding equity is owned by a Permitted Holder; (c) any partnership if at least 80% of the value of the partnership interests are owned by a Permitted Holder; and (d) any limited liability or similar company if at least 80% of the value of the company is owned by a Permitted Holder; and (e) any trusts created for the benefit of any of the persons listed in (i) or (ii) of the prior sentence. "Permitted Investment" means (i) Investments in any Wholly Owned Restricted Subsidiary or any Person which, as a result of such Investment, (a) becomes a Wholly Owned Restricted Subsidiary or (b) is merged or consolidated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or any Wholly Owned Restricted Subsidiary; (ii) Indebtedness of the Company or a Restricted Subsidiary described under clauses, (v), (vi) and (vii) of the definition of "Permitted Indebtedness;" (iii) Investments in any of the Notes; (iv) Temporary Cash Investments; (v) Investments acquired by the Company or any Restricted Subsidiary in connection with an Asset Sale permitted under "-- Certain Covenants -- Limitation on Sale of Assets" to the extent such Investments are non-cash proceeds as permitted under such covenant; (vi) any Investment to the extent the consideration therefor consists of Qualified Capital Stock of the Company or any Restricted Subsidiary; (vii) Investments representing Capital Stock or obligations issued to the Company or any Restricted Subsidiary in the course of the good faith settlement of claims against any other person by reason of a composition or readjustment of debt or a reorganization of any debtor or any Restricted Subsidiary; (viii) prepaid expenses advanced to employees in the ordinary course of business or other loans or advances to employees in the ordinary course of business not to exceed $1 million in the aggregate at any one time outstanding; (ix) Investments in existence on the Issue Date; and (x) in addition to the Investments described in clauses (i) through (x) above, Investments in an amount not to exceed $10 million in the aggregate at any one time outstanding. In connection with any assets or property contributed or transferred to any Person as an Investment, such property and assets shall be equal to the Fair Market Value (as determined by the Company's board of directors) at the time of Investment "Person" means any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Preferred Stock" means, with respect to any Person, any Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends or distributions, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over the Capital Stock of any other class in such Person. "Public Equity Offering" means an underwritten public offering of common stock (other than Redeemable Capital Stock) of the Company with gross proceeds to the Company of at least $50 million pursuant to a registration statement that has been declared effective by the Commission pursuant to the Securities Act (other than a registration statement on Form S-4, Form S-8 or otherwise relating to equity securities issuable under any employee benefit plan of the Company). "Purchase Money Obligation" means any Indebtedness secured by a Lien on assets related to the business of the Company and any additions and accessions thereto, which are purchased by the Company at any time after the Notes are issued; provided that (i) the security agreement or conditional sales or other title retention contract pursuant to which the Lien on such assets is created (collectively a "Purchase Money Security Agreement") shall be entered into within 90 days after the purchase or substantial completion of the construction of such assets and shall at all times be confined solely to the assets so purchased or acquired, any additions and accessions thereto and any proceeds therefrom, (ii) at no time shall the aggregate principal amount of the outstanding Indebtedness secured thereby be increased, except in connection with the purchase of additions and accessions thereto and except in respect of fees and other obligations in respect of such Indebtedness and (iii) (A) the aggregate outstanding principal amount of Indebtedness secured thereby (determined on a per asset basis in the case of any additions and accessions) shall not at the time such Purchase Money Security Agreement is entered into exceed 100% of the 109 purchase price to the Company of the assets subject thereto or (B) the Indebtedness secured thereby shall be with recourse solely to the assets so purchased or acquired, any additions and accessions thereto and any proceeds therefrom. "Qualified Capital Stock" of any Person means any and all Capital Stock of such Person other than Redeemable Capital Stock. "Redeemable Capital Stock" means any Capital Stock that, either by its terms or by the terms of any security into which it is convertible or exchangeable or otherwise, is or upon the happening of an event or passage of time would be, required to be redeemed prior to the final Stated Maturity of the principal of the Notes or is redeemable at the option of the holder thereof at any time prior to such final Stated Maturity (other than upon a change of control of the Company in circumstances where the holders of the Notes would have similar rights), or is convertible into or exchangeable for debt securities at any time prior to such final Stated Maturity at the option of the holder thereof. "Replacement Assets" means properties and assets (other than cash or any Capital Stock or other security) that will be used in a business of the Company or its Restricted Subsidiaries existing on the Issue Date or in business reasonably related thereto. "Restricted Subsidiary" means any Subsidiary of the Company that has not been designated by the board of directors of the Company by a board resolution delivered to the Trustee as an Unrestricted Subsidiary pursuant to and in compliance with the covenant described under " -- Certain Covenants -- Limitation on Unrestricted Subsidiaries." "Revolving Facility" means the Credit Agreement among the Company, the Guarantors and Ford Motor Credit Company dated as of December 15, 1997, as such agreement, in whole or in part, may be amended, renewed, extended, substituted, refinanced, restructured, replaced, supplemented or otherwise modified from time to time (including, without limitation, any successive renewals, extensions, substitutions, refinancings, restructurings, replacements, supplementations or other modifications of the foregoing). "Securities Act" means the Securities Act of 1933, as amended, or any successor statute, and the rules and regulations promulgated by the Commission thereunder. "Significant Restricted Subsidiary" means, at any particular time, any Restricted Subsidiary that, together with the Restricted Subsidiaries of such Restricted Subsidiary (i) accounted for more than 5% of the Consolidated revenues of the Company and its Restricted Subsidiaries for their most recently completed fiscal year or (ii) is or are the owner(s) of more than 5% of the Consolidated assets of the Company and its Restricted Subsidiaries as at the end of such fiscal year, all as calculated in accordance with GAAP and as shown on the Consolidated Financial Statements of the Company and its Restricted Subsidiaries for such fiscal year. "Smith Subordinated Loan" means the subordinated loan from O. Bruton Smith to the Company in the principal amount of $5.5 million in existence on the Issue Date. "Stated Maturity" means, when used with respect to any Indebtedness or any installment of interest thereon, the dates specified in such Indebtedness as the fixed date on which the principal of such Indebtedness or such installment of interest, as the case may be, is due and payable. "Subordinated Indebtedness" means Indebtedness of the Company or a Guarantor subordinated in right of payment to the Notes or the Guarantee of such Guarantor, as the case may be. "Subsidiary" of a Person means (i) any corporation more than 50% of the outstanding voting power of the Voting Stock of which is owned or controlled, directly or indirectly, by such Person or by one or more other Subsidiaries of such Person, or by such Person and one or more other Subsidiaries thereof, or (ii) any limited partnership of which such Person or any Subsidiary of such Person is a general partner, or (iii) any other Person in which such Person, or one or more other Subsidiaries of such Person, or such Person and one or more other Subsidiaries, directly or indirectly, has more than 50% of the outstanding partnership or similar interests or has the power, by contract or otherwise, to direct or cause the direction of the policies, management and affairs thereof. "Temporary Cash Investments" means (i) any evidence of Indebtedness, maturing not more than one year after the date of acquisition, issued by the United States of America, or an instrumentality or agency thereof, and guaranteed fully as to principal, premium, if any, and interest by the United States of America, (ii) any certificate of deposit, maturing not more than one year after the date of acquisition, issued by, or time deposit of, a commercial banking institution that is a member of the Federal Reserve System and that has combined capital and surplus and undivided profits of not less than $500 million, whose debt has a rating, at the time as of which any investment therein is made, of "P-1" (or higher) according to Moody's 110 Investors Service, Inc. ("Moody's") or any successor rating agency or "A-1" (or higher) according to Standard & Poor's Rating Group, a division of McGraw Hill, Inc. ("S&P") or any successor rating agency, (iii) commercial paper, maturing not more than one year after the date of acquisition, issued by a corporation (other than an Affiliate or Subsidiary of the Company) organized and existing under the laws of the United States of America with a rating, at the time as of which any investment therein is made, of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P and (iv) any money market deposit accounts issued or offered by a domestic commercial bank having capital and surplus in excess of $500 million; provided that the short term debt of such commercial bank has a rating, at the time of Investment, of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended, or any successor statute. "Unrestricted Subsidiary" means any Subsidiary of the Company (other than a Guarantor) designated as such pursuant to and in compliance with the covenant described under "Certain Covenants -- Limitation on Unrestricted Subsidiaries." "Unrestricted Subsidiary Indebtedness" of any Unrestricted Subsidiary means Indebtedness of such Unrestricted Subsidiary (i) as to which neither the Company nor any Restricted Subsidiary is directly or indirectly liable (by virtue of the Company or any such Restricted Subsidiary being the primary obligor on, guarantor of, or otherwise liable in any respect to, such Indebtedness), except Guaranteed Debt of the Company or any Restricted Subsidiary to any Affiliate, in which case (unless the incurrence of such Guaranteed Debt resulted in a Restricted Payment at the time of incurrence) the Company shall be deemed to have made a Restricted Payment equal to the principal amount of any such Indebtedness to the extent guaranteed at the time such Affiliate is designated an Unrestricted Subsidiary and (ii) which, upon the occurrence of a default with respect thereto, does not result in, or permit any holder of any Indebtedness of the Company or any Subsidiary to declare, a default on such Indebtedness of the Company or any Subsidiary or cause the payment thereof to be accelerated or payable prior to its Stated Maturity; provided that notwithstanding the foregoing any Unrestricted Subsidiary may guarantee the Notes. "Voting Stock" of a Person means Capital Stock of such Person of the class or classes pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of such Person (irrespective of whether or not at the time Capital Stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). "Wholly Owned Restricted Subsidiary" means a Restricted Subsidiary all the Capital Stock of which (other than directors' qualifying shares and shares of Capital Stock of a Restricted Subsidiary which a Manufacturer requires to be held by another Person and which Capital Stock (together with any related contractual arrangements) has no significant economic value with respect to distributions of profits and losses in ordinary circumstances) is owned by the Company or another Wholly Owned Restricted Subsidiary. Book-Entry Delivery and Form Notes will be issued only in fully registered form, without interest coupons, in denominations of $1,000 and integral multiples thereof. Notes will not be issued in bearer form. New Notes The New Notes will be represented by the New Global Note. The New Global Note will be deposited upon issuance with the Trustee as custodian for DTC, in New York, New York, and registered in the name of DTC or its nominee, in each case for credit to an account of a direct or indirect participant in DTC as described below. Except as set forth below, the New Global Note may be transferred, in whole and not in part, only to another nominee of DTC or to a successor of DTC or its nominee. In addition, transfer of beneficial interests in the New Global Note will be subject to the applicable rules and procedures of DTC and its direct or indirect participants which may change from time to time. Beneficial interests in the New Global Note may not be exchanged for New Notes in certificated form except in the limited circumstances described below. See " -- Exchanges of Book-Entry Notes for Certificated Notes." Initially, the Trustee will act as Paying Agent and Registrar. The Notes may be presented for registration of transfer and exchange at the offices of the Registrar. Exchange of Book-Entry Notes for Certificated Notes A beneficial interest in a Global Note may not be exchanged for a Note in certificated form unless (i) DTC (x) notifies the Company that it is unwilling or unable to continue as Depositary for the Global Note or (y) has ceased to be a clearing agency registered under the Exchange Act, and in either case the Company thereupon fails to appoint a successor Depositary, 111 (ii) the Company, at its option, notifies the Trustee in writing that it elects to cause the issuance of the Notes in certificated form or (iii) there shall have occurred and be continuing an Event of Default or any event which after notice or lapse of time or both would be an Event of Default with respect to the Notes. In all cases, certificated Notes delivered in exchange for any Global Note or beneficial interests therein will be registered in the names, and issued in any approved denominations, requested by or on behalf of the Depositary (in accordance with its customary procedures). Any certificated Note issued in exchange for an interest in a Global Note will bear the legend restricting transfers that is borne by such Global Note. Any such exchange will be effected through the DTC Deposit/Withdrawal at Custodian ("DWAC") system and an appropriate adjustment will be made in the records of the Registrar to reflect a decrease in the principal amount of the relevant Global Note. Certain Book-Entry Procedures for Global Notes The descriptions of the operations and procedures of DTC, that follow are provided solely as a matter of convenience. These operations and procedures are solely within the control of the respective settlement systems and are subject to change by them from time to time. The Company takes no responsibility for these operations and procedures and urges investors to contact the system or their participants directly to discuss these matters. DTC has advised the Company as follows: DTC is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code and a "Clearing Agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for its participants ("participants") and facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical transfer and delivery of certificates. Participants include securities brokers and dealers, banks, trust companies and clearing corporations and may include certain other organizations. Indirect access to the DTC system is available to other entities such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly ("indirect participants"). DTC has advised the Company that its current practice, upon the issuance of the Global Notes, is to credit, on its internal system, the respective principal amount of the individual beneficial interests represented by such Global Notes to the accounts with DTC of the participants through which such interests are to be held. Ownership of beneficial interest in the Global Notes will be shown on, and the transfer of that ownership will be effected only through, records maintained by DTC or its nominees (with respect to interest of participants) and the records of participants and indirect participants (with respect to interests of persons other than participants). As long as DTC, or its nominee, is the registered Holder of a Global Note, DTC or such nominee, as the case may be, will be considered the sole owner and Holder of the Notes represented by such Global Note for all purposes under the Indenture and the Notes. Except in the limited circumstances described above under " -- Exchanges of Book-Entry Notes for Certificated Notes," owners of beneficial interests in a Global Note will not be entitled to have any portions of such Global Note registered in their names, and will not receive or be entitled to receive physical delivery of Notes in definitive form and will not be considered the owners or Holders of the Global Note (or any Notes represented thereby) under the Indenture or the Notes. Investors may hold their interests in a Global Note directly through DTC, if they are participants in such system, or indirectly through organizations which are participants in such system. All interests in a Global Note will be subject to the procedures and requirements of DTC. The laws of some states require that certain persons take physical delivery in definitive form of securities that they own. Consequently, the ability to transfer beneficial interests in a Global Note to such persons may be limited to that extent. Because DTC can act only on behalf of its participants, which in turn act on behalf of indirect participants and certain banks, the ability of a person having beneficial interests in a Global Note to pledge such interest to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of such interests, may be affected by the lack of a physical certificate evidencing such interests. Payments of the principal, of, premium, if any, and interest on Global Notes will be made to DTC or its nominee as the registered owner thereof. Neither the Company, the Trustee nor any of their respective agents will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interest in the Global Notes or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. 112 The Company expects that DTC or its nominee, upon receipt of any payment of principal of, premium, if any, or interest in respect of a Global Note representing any Notes held by it or its nominee, will credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of such Global Note for such Notes as shown on the records of DTC or its nominee. The Company also expects that payments by participants to owners of beneficial interests in such Global Note held through such participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers registered in "street name." Such payments will be the responsibility of such participants. None of the Company or the Trustee will be liable for any delay by DTC or any of its participants in identifying the beneficial owners of the Notes, and the Company and the Trustee may conclusively rely on and will be protected in relying on instructions from DTC or its nominee as the registered owner of the Notes for all purposes. Interests in the Global Notes will trade in DTC's Same-Day Funds Settlement System and secondary market trading activity in such interests will therefore settle in immediately available funds, subject in all cases to the rules and procedures of DTC and its participants. Transfers between participants in DTC will be effected in accordance with DTC's procedures, and will be settled in same-day funds. DTC has advised the Company that it will take any action permitted to be taken by a holder of Notes only at the direction of one or more participants to whose accounts with DTC interests in the Global Notes are credited and only in respect of such portion of the aggregate principal amount of the Notes as to which such participant or participants has or have given such direction. However, if there is an Event of Default under the Notes, DTC reserves the right to exchange the Global Notes for legended Notes in certificated form, and to distribute such Notes to its participants. Although DTC, has agreed to the foregoing procedures in order to facilitate transfer of beneficial ownership interests in the Global Notes among participants of DTC, it is under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. None of the Company, the Trustee nor any of their respective agents will have any responsibility for the performance by DTC, or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations, including maintaining, supervising or reviewing the records relating to or payments made on account of, beneficial ownership interests in Global Notes. PLAN OF DISTRIBUTION Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired as a result of market-making activities or other trading activities. The Company has agreed that for a period of 180 days after the Expiration Date, it will make this Prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resales. In addition, the Company agreed that it would not for a period of 120 days from July 28, 1998, the date of the Offering Memorandum distributed in connection with the sale of the Old Notes, directly or indirectly offer, sell, grant any options to purchase or otherwise dispose of any debt securities other than in connection with this Exchange Offer. The Company will not receive any proceeds from any sale of New Notes by broker-dealers. New Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the New Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer that resells New Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such New Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of New Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. 113 LEGAL MATTERS Certain legal matters with respect to the legality of the New Notes being offered hereby will be passed upon for the Company by Parker, Poe, Adams & Bernstein L.L.P., Charlotte, North Carolina. EXPERTS The consolidated financial statements of Sonic Automotive, Inc. and Subsidiaries, the combined financial statements of Clearwater Dealerships and Affiliated Companies, the combined financial statements of Hatfield Automotive Group, the financial statements of Economy Honda Cars, the financial statements of Casa Ford of Houston, Inc., the combined financial statements of the Higginbotham Automotive Group, the financial statements of Dyer & Dyer, Inc., the combined financial statements of Bowers Dealerships and Affiliated Companies, 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. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Exchange Act and in accordance therewith files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information filed by the Company may be inspected and copied (at prescribed rates) at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the Commissions regional offices located at Seven World Trade Center, 13th Floor, New York, New York 10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission also maintains a World Wide Web site containing such reports, proxy statements and other information, at http://www.sec.gov. Quotations relating to the Company's Common Stock appear on the New York Stock Exchange and such reports, proxy statements and other information concerning the Company can also be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005. The Company has agreed that, if at any time while the Notes are restricted securities within the meaning of the Securities Act or the Company is not subject to the informational requirements of the Exchange Act, the Company will furnish to holders of the Notes and to prospective purchasers designated by such holders the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act to permit compliance with Rule 144A in connection with resales of the Notes. 114 INDEX TO FINANCIAL STATEMENTS
Page ----- SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES INDEPENDENT AUDITORS' REPORT ........................................................... F-4 CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets at December 31, 1996 and 1997 and unaudited at June 30, F-5 1998 Consolidated Statements of Income for the years ended December 31, 1995, 1996 and 1997 and unaudited for the six months ended June 30, 1997 and 1998 ...................................... F-6 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1996 and 1997 and unaudited for the six months ended June 30, 1998 ................................. F-7 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 and unaudited for the six months ended June 30, 1997 and 1998 ............................ F-8 Notes to Consolidated Financial Statements ............................................ F-9 CLEARWATER DEALERSHIPS AND AFFILIATED COMPANIES INDEPENDENT AUDITORS' REPORT ........................................................... F-26 COMBINED FINANCIAL STATEMENTS: Combined Balance Sheet at December 31, 1997 ........................................... F-27 Combined Statement of Income and Retained Earnings for the year ended December 31, F-28 1997 Combined Statement of Cash Flows for the year ended December 31, 1997 ................. F-29 Notes to Combined Financial Statements ................................................ F-30 HATFIELD AUTOMOTIVE GROUP INDEPENDENT AUDITORS' REPORT ........................................................... F-34 COMBINED FINANCIAL STATEMENTS: Combined Balance Sheets at December 31, 1996 and 1997 and unaudited at June 30, 1998 .. F-35 Combined Statements of Income for the years ended December 31, 1995, 1996 and 1997 and unaudited for the six months ended June 30, 1997 and 1998 .......................................... F-36 Combined Statements of Stockholders' Equity for the years ended December 31, 1995, 1996 and 1997 and unaudited for the six months ended June 30, 1998 ..................................... F-37 Combined Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 and unaudited for the six months ended June 30, 1997 and 1998. ..................................... F-38 Notes to Combined Financial Statements ................................................ F-39 ECONOMY HONDA CARS INDEPENDENT AUDITORS' REPORT ........................................................... F-44 FINANCIAL STATEMENTS: Balance Sheets at December 31, 1997 and unaudited at June 30, 1998 .................... F-45 Statements of Income for the year ended December 31, 1997 and unaudited for the six months ended June 30, 1997 and 1998 ............................................................... F-46 Statements of Stockholders' Equity for the year ended December 31, 1997 and unaudited for the six months ended June 30, 1998 .................................................................. F-47 Statements of Cash Flows for the year ended December 31, 1997 and unaudited for the six months ended June 30, 1997 and 1998 ............................................................... F-48 Notes to Financial Statements ......................................................... F-49 CASA FORD OF HOUSTON, INC. INDEPENDENT AUDITORS' REPORT ........................................................... F-53 FINANCIAL STATEMENTS: Balance Sheets at December 31, 1997 and unaudited at March 31, 1998 ................... F-54 Statements of Income for the year ended December 31, 1997 and unaudited for the three months ended March 31, 1997 and 1998 .............................................................. F-55 Statements of Stockholder's Equity for the year ended December 31, 1997 and unaudited for the three months ended March 31, 1998 .......................................................... F-56 Statements of Cash Flows for the year ended December 31, 1997 and unaudited for the three months ended March 31, 1997 and 1998 .............................................................. F-57 Notes to Financial Statements ......................................................... F-58
F-1
Page ------ HIGGINBOTHAM AUTOMOTIVE GROUP INDEPENDENT AUDITORS' REPORT ........................................................... F-63 COMBINED FINANCIAL STATEMENTS: Combined Balance Sheets at December 31, 1997 and unaudited at June 30, 1998 ........... F-64 Combined Statements of Income for the year ended December 31, 1997 and unaudited for the six months ended June 30, 1997 and 1998 ......................................................... F-65 Combined Statements of Stockholders' Equity for the year ended December 31, 1997 and unaudited for the six months ended June 30, 1998 ....................................................... F-66 Combined Statements of Cash Flows for the year ended December 31, 1997 and unaudited for the six months ended June 30, 1997 and 1998 .................................................. F-67 Notes to Combined Financial Statements ................................................ F-68 DYER & DYER, INC. INDEPENDENT AUDITORS' REPORT ........................................................... F-74 FINANCIAL STATEMENTS: Balance Sheets at December 31, 1995 and 1996 and unaudited at June 30, 1997 ........... F-75 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-76 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-77 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-78 Notes to Financial Statements ......................................................... F-79 BOWERS DEALERSHIPS AND AFFILIATED COMPANIES INDEPENDENT AUDITORS' REPORT ........................................................... F-83 COMBINED FINANCIAL STATEMENTS: Combined Balance Sheets at December 31, 1995 and 1996 and unaudited at June 30, 1997 .. F-84 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-85 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-86 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-87 Notes to Combined Financial Statements ................................................ F-88 LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES INDEPENDENT AUDITORS' REPORT ........................................................... F-95 COMBINED FINANCIAL STATEMENTS: Combined Balance Sheets at December 31, 1996 and unaudited at June 30, 1997 ........... F-96 Combined Statements of Income for the year ended December 31, 1996 and unaudited for the six months ended June 30, 1996 and 1997 ......................................................... F-97 Combined Statements of Stockholders' Equity for the year ended December 31, 1996 and unaudited for the six months ended June 30, 1997 ....................................................... F-98 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-99 Notes to Combined Financial Statements ................................................ F-100
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Page ------ KEN MARKS FORD, INC. INDEPENDENT AUDITORS' REPORT ........................................................... F-105 FINANCIAL STATEMENTS: Balance Sheets at April 30, 1997 and unaudited at July 31, 1997 ....................... F-106 Statements of Income for the year ended April 30, 1997 and unaudited for the three months ended July 31, 1996 and 1997 ........................................................................ F-107 Statements of Stockholders' Equity for the year ended April 30, 1997 and unaudited for the three months ended July 31, 1997 .................................................................. F-108 Statements of Cash Flows for the year ended April 30, 1997 and unaudited for the three months ended July 31, 1996 and 1997 ............................................................... F-109 Notes to Financial Statements ......................................................... F-110
F-3 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF SONIC AUTOMOTIVE, INC. Charlotte, North Carolina We have audited the accompanying consolidated balance sheets of Sonic Automotive, Inc. and Subsidiaries (the "Company") as of December 31, 1996 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1996 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Charlotte, North Carolina March 2, 1998 (March 24, 1998 as to Notes 2, 8 and 9) F-4 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1997 and June 30, 1998 (Dollars in thousands)
December 31, June 30, 1996 1997 1998 ----------- ---------- ------------ (Unaudited) ASSETS (Note 5) CURRENT ASSETS: Cash and cash equivalents (Note 1) ............................................ $ 6,679 $ 18,304 $ 27,228 Marketable equity securities .................................................. 639 270 -- Receivables (net of allowance for doubtful accounts of $225 and $523 at December 31, 1996 and 1997, respectively) .................................... 11,908 19,784 35,761 Inventories (Notes 1 and 3) ................................................... 71,550 156,514 175,515 Deferred income taxes (Note 6) ................................................ 280 405 669 Due from affiliates (Note 7) .................................................. -- 1,047 1,084 Other current assets .......................................................... 332 1,048 3,854 -------- -------- -------- Total current assets ......................................................... 91,388 197,372 244,111 PROPERTY AND EQUIPMENT, NET (Note 4) ............................................ 12,467 19,081 22,040 GOODWILL, NET (Note 1) .......................................................... 4,266 74,362 102,948 DUE FROM AFFILIATE (Note 7) ..................................................... 2,466 -- -- OTHER ASSETS .................................................................... 389 635 524 -------- -------- -------- TOTAL ASSETS .................................................................... $110,976 $291,450 $369,623 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable -- floor plan (Note 3) .......................................... $ 63,893 $133,236 $149,670 Trade accounts payable ........................................................ 3,643 6,612 7,971 Accrued interest .............................................................. 521 1,071 1,584 Other accrued liabilities (Note 6) ............................................ 3,032 10,748 17,949 Payable to affiliates (Note 7) ................................................ -- 445 445 Payable for acquisitions (Note 2) ............................................. -- -- 15,726 Current maturities of long-term debt (Note 5) ................................. 519 584 789 -------- -------- -------- Total current liabilities .................................................... 71,608 152,696 194,134 LONG-TERM DEBT (NOTE 5) ......................................................... 5,286 38,640 54,644 PAYABLE TO THE COMPANY'S CHAIRMAN (Notes 2 and 7) ............................... -- 5,500 5,500 PAYABLE TO AFFILIATES (Note 7) .................................................. 914 4,394 4,160 DEFERRED INCOME TAXES (Note 6) .................................................. 1,059 1,079 1,079 INCOME TAX PAYABLE (Note 6) ..................................................... 5,500 4,776 6,705 MINORITY INTEREST (Note 1) ...................................................... 314 -- -- COMMITMENTS AND CONTINGENCIES (Notes 7 and 10) STOCKHOLDERS' EQUITY (Notes 1, 8 and 9): Class A Preferred Stock, $.10 par, liquidation preference $1,000 per share, 3.0 million shares authorized, 13,034 shares issued and outstanding at June 30, 1998 ................................................................ -- -- 11,763 Class A Common Stock, $.01 par, 50.0 million shares authorized; 5.0 million shares issued and outstanding .................................... -- 50 50 Class B Common Stock, $.01 par, 15.0 million shares authorized; 6.25 million shares issued and outstanding ................................... 63 63 63 Paid-in capital ............................................................... 13,333 68,045 68,535 Retained earnings ............................................................. 12,993 16,186 22,990 Unrealized gain (loss) on marketable equity securities ........................ (94) 21 -- -------- -------- -------- Total stockholders' equity ................................................... 26,295 84,365 103,401 -------- -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................................... $110,976 $291,450 $369,623 ======== ======== ========
See notes to consolidated financial statements. F-5 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 1995, 1996 and 1997 and the six months ended June 30, 1997 and 1998 (Dollars and shares in thousands, except per share amounts)
Six months ended Years ended December 31, June 30, 1995 1996 1997 1997 1998 ----------- ----------- ------------- ----------- ------------- (Unaudited) REVENUES: Vehicle sales .................................. $267,650 $327,674 $ 467,858 $185,216 $ 567,279 Parts, service and collision repair ............ 35,860 42,075 57,537 22,907 68,020 Finance and insurance (Note 1) ................. 7,813 7,118 10,606 4,763 13,541 -------- -------- --------- -------- --------- Total revenues ................................ 311,323 376,867 536,001 212,886 648,840 COST OF SALES (Note 1) ........................... 272,130 332,122 473,003 189,254 566,392 -------- -------- --------- -------- --------- GROSS PROFIT ..................................... 39,193 44,745 62,998 23,632 82,448 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ....................................... 28,091 32,602 46,770 17,532 59,622 DEPRECIATION AND AMORTIZATION .................... 832 1,076 1,322 396 1,851 -------- -------- --------- -------- --------- OPERATING INCOME ................................. 10,270 11,067 14,906 5,704 20,975 OTHER INCOME AND EXPENSE: Interest expense, floor plan (Note 3) .......... 4,504 5,968 8,007 3,018 7,341 Interest expense, other ........................ 436 433 1,199 318 2,745 Other income ................................... 106 355 298 135 15 -------- -------- --------- -------- --------- Total other expense ........................... 4,834 6,046 8,908 3,201 10,071 -------- -------- --------- -------- --------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST ....................................... 5,436 5,021 5,998 2,503 10,904 PROVISION FOR INCOME TAXES (Note 6) .............. 2,176 1,924 2,249 916 4,100 -------- -------- --------- -------- --------- INCOME BEFORE MINORITY INTEREST .................. 3,260 3,097 3,749 1,587 6,804 MINORITY INTEREST IN EARNINGS OF SUBSIDIARY (Note 1) ....................................... 22 114 47 47 -- -------- -------- --------- -------- --------- NET INCOME ....................................... $ 3,238 $ 2,983 $ 3,702 $ 1,540 $ 6,804 ======== ======== ========= ======== ========= BASIC NET INCOME PER SHARE (Notes 1 and 8) ....... $ 0.53 $ 0.60 ========= ========= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING .................................... 6,949 11,264 ========= ========= DILUTED NET INCOME PER SHARE (Notes 1 and 8) ..... $ 0.53 $ 0.58 ========= ========= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING .................................... 6,949 11,637 ========= =========
See notes to consolidated financial statements. F-6 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended December 31, 1995, 1996 and 1997 and the six months ended June 30, 1998 (Dollars and shares in thousands)
Preferred Class A Class B Stock Common Stock Common Stock Shares Amount Shares Amount Shares Amount -------- ---------- -------- -------- -------- -------- BALANCE AT DECEMBER 31, 1994 ............ -- $ -- -- $-- 6,250 $63 Capital contributions ........ -- -- -- -- -- -- Net unrealized loss on marketable equity securities .................. -- -- -- -- -- -- Net income ................... -- -- -- -- -- -- BALANCE AT DECEMBER 31, 1995 ............ -- -- -- -- 6,250 63 Capital contributions ........ -- -- -- -- -- -- Net unrealized loss on marketable equity securities .................. -- -- -- -- -- -- Net income ................... -- -- -- -- -- -- -- ------- -- --- ----- --- BALANCE AT DECEMBER 31, 1996 ............ -- -- -- -- 6,250 63 Capital contribution (Note 1) .................... -- -- -- -- -- -- Public offering of common stock (Note 8) .................... -- -- 5,000 50 -- -- Stock redemption (Note 7) .................... -- -- -- -- -- -- Dividend (Note 7) ............ -- -- -- -- -- -- Net unrealized gain on marketable equity securities .................. -- -- -- -- -- -- Net income ................... -- -- -- -- -- -- -- ------- ----- --- ----- --- BALANCE AT DECEMBER 31, 1997 ............ -- -- 5,000 50 6,250 63 -- ------- ----- --- ----- --- Issuance of Preferred Stock (Note 2) (unaudited) ................. 13 11,763 -- -- -- -- Shares awarded under stock compensation plans (unaudited) ........... 27 -- Issuance of warrants (unaudited) (Note 8) ........ -- Net unrealized loss on marketable equity securities (unaudited) ...... -- -- -- -- -- -- Net income (unaudited) ....... -- -- -- -- -- -- -- ------- ----- --- ----- --- BALANCE AT JUNE 30, 1998 (unaudited) .................. 13 $11,763 5,027 $50 6,250 $63 == ======= ===== === ===== === Unrealized Gain/(Loss) on Marketable Total Paid-In Retained Equity Stockholders' Capital Earnings Securities Equity ----------- ---------- --------------- -------------- BALANCE AT DECEMBER 31, 1994 ............ $ 4,775 $ 6,772 $ -- $ 11,610 Capital contributions ........ 1,494 -- -- 1,494 Net unrealized loss on marketable equity securities .................. -- -- (35) (35) Net income ................... -- 3,238 -- 3,238 BALANCE AT DECEMBER 31, 1995 ............ 6,269 10,010 (35) 16,307 Capital contributions ........ 7,064 -- -- 7,064 Net unrealized loss on marketable equity securities .................. -- -- (59) (59) Net income ................... -- 2,983 -- 2,983 -------- ------- ------ -------- BALANCE AT DECEMBER 31, 1996 ............ 13,333 12,993 (94) 26,295 Capital contribution (Note 1) .................... 3,208 -- -- 3,208 Public offering of common stock (Note 8) .................... 53,627 -- -- 53,677 Stock redemption (Note 7) .................... (2,123) -- -- (2,123) Dividend (Note 7) ............ -- (509) -- (509) Net unrealized gain on marketable equity securities .................. -- -- 115 115 Net income ................... -- 3,702 -- 3,702 -------- ------- ------ -------- BALANCE AT DECEMBER 31, 1997 ............ 68,045 16,186 21 84,365 -------- ------- ------ -------- Issuance of Preferred Stock (Note 2) (unaudited) ................. -- -- -- 11,763 Shares awarded under stock compensation plans (unaudited) ........... 224 224 Issuance of warrants (unaudited) (Note 8) ........ 266 266 Net unrealized loss on marketable equity securities (unaudited) ...... -- -- (21) (21) Net income (unaudited) ....... -- 6,804 -- 6,804 -------- ------- ------ -------- BALANCE AT JUNE 30, 1998 (unaudited) .................. $ 68,535 $22,990 $ -- $103,401 ======== ======= ====== ========
See notes to consolidated financial statements. F-7 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1995, 1996 and 1997 and the six months ended June 30, 1997 and 1998 (Dollars in thousands)
Years ended December 31, 1995 1996 1997 ----------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income ..................................................................... $ 3,238 $ 2,983 $ 3,702 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................................. 832 1,076 1,322 Minority interest ............................................................. 22 114 47 (Gain) loss on disposal of property and equipment ............................. (39) 80 110 Gain on sale of marketable equity securities .................................. (106) (355) (298) Change in deferred income taxes ............................................... 450 (241) (27) Changes in assets and liabilities that relate to operations: Receivables .................................................................. (229) (2,421) (594) Inventories .................................................................. (5,025) (14,013) 1,430 Other assets ................................................................. 7 (80) (788) Notes payable -- floor plan .................................................. 3,431 12,985 1,632 Accounts payable and other current liabilities ............................... (42) 1,439 1,694 Income tax payable ........................................................... 501 524 (504) --------- ---------- ---------- Total adjustments ........................................................... (198) (892) 4,024 --------- ---------- ---------- Net cash provided by operating activities ..................................... 3,040 2,091 7,726 --------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of businesses, net of cash acquired ................................... -- (5,127) (85,650) Purchases of property and equipment ............................................ (1,509) (1,907) (2,007) Proceeds from sales of property and equipment .................................. 557 4 43 Purchase of marketable equity securities ....................................... (1,623) (207) -- Proceeds from sales of marketable equity securities ............................ 1,074 515 784 --------- ---------- ---------- Net cash used in investing activities ......................................... (1,501) (6,722) (86,830) --------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Capital contributions .......................................................... 1,494 7,064 -- Public offering of common stock ................................................ -- -- 53,677 Proceeds from long-term debt ................................................... 3 599 45,892 Payments of long-term debt ..................................................... (269) (576) (13,353) Issuance of shares under stock compensation plans .............................. -- -- -- Receipts from (advances to) affiliate companies ................................ 1,772 (4,771) (987) Advances from the Company's Chairman (Note 7) .................................. -- -- 5,500 --------- ---------- ---------- Net cash provided by financing activities ..................................... 3,000 2,316 90,729 --------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................. 4,539 (2,315) 11,625 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................... 4,455 8,994 6,679 --------- ---------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD ......................................... $ 8,994 $ 6,679 $ 18,304 ========= ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -- Cash paid during the period for: Interest ....................................................................... $ 4,777 $ 6,489 $ 8,761 Income taxes ................................................................... $ 1,522 $ 2,042 $ 1,392 SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: Purchase of minority interest through exchange of common stock (Note 1) -- -- $ 3,208 Cancellation of notes payable from affiliates in exchange for common stock (Note 7) ................................................................ -- -- $ 2,123 Cancellation of notes payable from affiliates pursuant to dividend (Note 7) -- -- $ 509 Preferred Stock issued pursuant to acquisition ................................. -- -- -- Payable for acquisitions (Note 2) .............................................. -- -- -- Issuance of warrants (Note 8) .................................................. -- -- -- Six months ended June 30, 1997 1998 ----------- ------------ (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income ..................................................................... $ 1,540 $ 6,804 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................................. 396 1,851 Minority interest ............................................................. 47 -- (Gain) loss on disposal of property and equipment ............................. -- 104 Gain on sale of marketable equity securities .................................. (135) -- Change in deferred income taxes ............................................... -- -- Changes in assets and liabilities that relate to operations: Receivables .................................................................. (989) (8,493) Inventories .................................................................. 2,800 29,384 Other assets ................................................................. (370) (1,245) Notes payable -- floor plan .................................................. 290 (25,867) Accounts payable and other current liabilities ............................... 1,310 1,003 Income tax payable ........................................................... (934) (545) --------- ---------- Total adjustments ........................................................... 2,438 (3,808) --------- ---------- Net cash provided by operating activities ..................................... 3,978 2,996 --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of businesses, net of cash acquired ................................... (3,627) (7,808) Purchases of property and equipment ............................................ (886) (1,261) Proceeds from sales of property and equipment .................................. -- -- Purchase of marketable equity securities ....................................... -- -- Proceeds from sales of marketable equity securities ............................ -- -- --------- ---------- Net cash used in investing activities ......................................... (4,513) (9,069) --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Capital contributions .......................................................... 3,209 -- Public offering of common stock ................................................ -- -- Proceeds from long-term debt ................................................... -- 23,688 Payments of long-term debt ..................................................... (180) (8,645) Issuance of shares under stock compensation plans .............................. -- 224 Receipts from (advances to) affiliate companies ................................ 65 (270) Advances from the Company's Chairman (Note 7) .................................. -- -- --------- ---------- Net cash provided by financing activities ..................................... 3,094 14,997 --------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................. 2,559 8,924 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................... 6,679 18,304 --------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD ......................................... $ 9,238 $ 27,228 ========= ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -- Cash paid during the period for: Interest ....................................................................... $ 3,317 $ 9,573 Income taxes ................................................................... $ 930 $ 3,949 SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: Purchase of minority interest through exchange of common stock (Note 1) -- -- Cancellation of notes payable from affiliates in exchange for common stock (Note 7) ................................................................ -- -- Cancellation of notes payable from affiliates pursuant to dividend (Note 7) -- -- Preferred Stock issued pursuant to acquisition ................................. -- $ 11,763 Payable for acquisitions (Note 2) .............................................. -- $ 15,726 Issuance of warrants (Note 8) .................................................. -- $ 266
See notes to consolidated financial statements. F-8 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All tables in thousands except per share amounts) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business -- Sonic Automotive, Inc ("Sonic" 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 (the "IPO") of the Company's Class A Common Stock par value $0.01 per share ("Class A Common Stock"). The Company owns and operates automobile dealerships in Florida, Georgia, North Carolina, South Carolina, Tennessee, and Texas and is in the business of selling new and used cars and light trucks, selling replacement parts, providing vehicle maintenance, warranty, paint, and repair services and arranging related financing and insurance. Pursuant to the Reorganization on June 30, 1997, certain companies affiliated through common ownership and control became wholly-owned subsidiaries of the Company through the exchange of their common stock or membership interests for approximately 6.3 million shares of the Company's Class B Common Stock, par value of $.01 per share ("Class B Common Stock"). The financial statements for the periods through the effective date of the Reorganization represent the combined data for these companies, which include the following: Town and Country Ford, Inc. ..................... Charlotte, North Carolina Lone Star Ford, Inc. ............................ Houston, Texas FMF Management, Inc. (d/b/a Fort Mill Ford) ..... Charlotte, North Carolina Town and Country Toyota, Inc. ................... Charlotte, North Carolina Frontier Oldsmobile-Cadillac, Inc. .............. Charlotte, North Carolina
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 Company's Chairman and Chief Executive Officer. Prior to the Reorganization, Town and Country Toyota, Inc. was 69% owned by Mr. Bruton Smith. 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. Bruton Smith and related family trusts. Town and Country Ford, Inc. was owned 80% by SFC and 20% by Mr. Scott Smith (Bruton Smith's son). FMF Management, Inc. was owned 50% by SFC and 50% by Mr. Bruton Smith. In connection with the Reorganization, the Company purchased the remaining 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 years ended December 31, 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. The 1997 consolidated financial statements include the accounts of the above five companies and also include the accounts and results of operations of certain dealerships and dealership groups acquired during the year from the respective dates of acquisition (see Note 2). Principles of Consolidation -- All material intercompany transactions have been eliminated in the consolidated financial statements. Revenue Recognition -- The Company records revenue when vehicles are delivered to customers, and when vehicle service work is performed. The Company arranges financing for customers through various financial institutions and receives a commission from the lender equal to the difference between the interest rates charged to customers over the predetermined interest rates set by the financing institution. The Company also receives commissions from the sale of credit life, accident, health and disability insurance and extended service contracts to customers. The Company may be assessed a chargeback fee in the event of early cancellation of a loan, insurance contract, or service contract by the customer. Finance and insurance commission revenue is recorded net of estimated chargebacks at the time the related contract is placed with the financial institution. Commissions expense related to finance and insurance commission revenue is charged to cost of sales upon recognition of such revenue, net of estimated chargebacks. Estimated commission expense charged to cost of sales was approximately $1.3 million, $1.1 million and $1.8 million for the years ended December 31, 1995, 1996, and 1997, respectively. Estimated F-9 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued commission expense charged to cost of sales was approximately $0.8 million and $2.2 million for the six months ended June 30, 1997 and 1998, respectively (unaudited). 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 vehicle inventory. Each dealership operates under a dealer agreement with the manufacturer which generally restricts the location, management and ownership of the respective dealership. The ability of 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 agreements. 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 $5.2 million and $12.1 million at December 31, 1996 and 1997, respectively. Inventories -- In connection with the Offering, the Company changed its method of accounting for inventories of new vehicles from the last-in-first-out method ("LIFO") to the first-in-first-out method ("FIFO"). 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. Property and Equipment -- Property and equipment are stated at cost. Depreciation is computed using straight-line methods over the estimated useful lives of the assets. The range of estimated useful lives is as follows:
Useful Lives ------------- Building and improvements .............. 5-40 Office equipment and fixtures .......... 5-15 Parts and service equipment ............ 15 Company vehicles ....................... 5
Goodwill -- Goodwill represents the excess purchase price over the estimated fair value of the tangible and separately measurable intangible net assets acquired. The cumulative amount of goodwill at December 31, 1996, December 31, 1997 and June 30, 1998 was $4.3 million, $75.0 million and $104.5 million, respectively. As a percentage of total assets and stockholders' equity, goodwill, net of accumulated amortization, represented 3.8% and 16.2%, respectively at December 31, 1996, 25.5% and 88.1%, respectively, at December 31, 1997, and 27.8% and 99.6%, respectively, at June 30, 1998. Generally accepted accounting principles require that goodwill and all other intangible assets be amortized over the period benefited. The Company has determined that the period benefited by the goodwill will be no less than 40 years and, accordingly, is amortizing goodwill over a 40 year period. If the Company were not to separately recognize a material intangible asset having a benefit period of less than 40 years, or were not to give effect to shorter benefit periods of factors giving rise to a material portion of the goodwill, earnings reported in periods immediately following the acquisition would be overstated. In later years, the Company would be burdened by a continuing charge against earnings without the associated benefit to income valued by management in arriving at the consideration paid for the businesses acquired. Earnings in later years also could be significantly affected if management then determined that the remaining balance of goodwill was impaired. The Company periodically compares the carrying value of goodwill with the anticipated undiscounted future cash flows from operations of the businesses acquired in order to evaluate the recoverability of goodwill. The Company has concluded that the anticipated future cash flows associated with intangible assets recognized in its acquisitions will continue indefinitely, and these is no pervasive evidence that any material portion will dissipate over a period shorter than 40 years. 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 F-10 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued 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. Stock-Based Compensation -- The Company measures the compensation cost of its stock-based compensation plans under the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," as permitted under Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." Under the provisions of APB No. 25, compensation cost is measured based on the intrinsic value of the equity instrument awarded. Under the provisions of SFAS No. 123, compensation cost is measured based on the fair value of the equity instrument awarded. 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. Fair Value of Financial Instruments -- As of December 31, 1996 and 1997 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 the Company's Chairman and long-term debt approximate their carrying values due either to length of maturity or existence of variable interest rates that approximate prevailing market rates. 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 $4.5 million, $5.0 million and $7.0 million for 1995, 1996 and 1997, 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, or cash flows. Net Income per Share -- Effective December 31, 1997, the Company adopted the provisions of SFAS No. 128, "Earnings per Share," which specifies the computation, presentation and disclosure requirements for basic and diluted earnings per share. The impact of adoption of SFAS No. 128 and required disclosures are discussed in Note 8. Impact of New Accounting Standards -- 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 $2.4 million, $2.1 million and $3.8 million for the years ended December 31, 1995, 1996 and 1997, respectively. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." This Standard redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. This Statement will be effective for the Company's fiscal year ending December 31, 1998, and the Company does not intend F-11 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued to adopt this Statement prior to the effective date. The Statement need not be applied to interim financial statements in the initial year of its application. The Company has not yet completed its analysis of which operating segments it will disclose, if any. Reclassification -- Certain prior year amounts have been reclassified to conform with current year presentation. Interim Financial Information -- The accompanying unaudited interim financial information for the six months ended June 30, 1997 and 1998 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 year. 2. BUSINESS ACQUISITIONS Acquisitions Completed During Year Ended December 31, 1997 In November 1997, the Company completed its previously announced acquisition of Dyer Volvo (the "Dyer Acquisition") located in Atlanta, Georgia for a total purchase price of $18.7 million. Also in November, the Company completed its previously announced acquisitions of the Bowers Dealerships and Affiliated Companies (the "Bowers Acquisition") located primarily in Chattanooga and Nashville, Tennessee, for a total purchase price of $30.8 million. In October, 1997, the Company completed its previously announced acquisition of Ken Marks Ford, Inc. (the "Ken Marks Acquisition") located in Clearwater, Florida for a total purchase price of $25.8 million. The Dyer Acquisition and the Bowers Acquisition were financed primarily with $45.5 million in cash obtained from proceeds of the Company's public offering and from operations, and with a $4 million promissory note that is payable in 28 equal quarterly installments to Nelson Bowers, former owner of the Bowers Dealerships, bearing interest at prime less 0.5%. The Ken Marks Acquisition was financed with $25 million in amounts borrowed under a revolving credit facility (see Note 5) and with cash obtained from operations. In October 1997, the Company completed its previously announced acquisition of Williams Motors, Inc., now Town and Country Chrysler, Plymouth, Jeep of Rock Hill, located in Rock Hill, South Carolina, for a total purchase price of $1.9 million. In September, 1997, the Company completed its previously announced acquisition of Lake Norman Dodge and Affiliates for a total purchase price of $17.9 million. These acquisitions were financed with amounts borrowed under a short-term line of credit maturing on February 15, 1998 (see Note 5). 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. The acquisition was financed primarily with a $3.5 million note payable to Mr. O. Bruton Smith (see Note 7). All of the above acquisitions have been accounted for using the purchase method of accounting, and the results of operations of each of the above dealerships have been included in the accompanying consolidated financial statements from their effective dates of acquisition. The purchase price of the above acquisitions has been allocated to the assets and liabilities acquired based on their estimated fair market value at the respective acquisition dates as follows: Working capital ......................... $ 28,247 Property and equipment .................. 3,969 Goodwill ................................ 69,528 Non-current liabilities assumed ......... (2,940) -------- Total purchase price .................... $ 98,804 ========
The following unaudited pro forma financial information presents a summary of consolidated results of operations as if the above transactions had occurred as of the beginning of each period presented after giving effect to certain adjustments, including amortization of goodwill, interest expense on acquisition debt and related income tax effects. The pro forma financial information does not give effect to adjustments relating to net reductions in floorplan interest expense resulting from re-negotiated floorplan financing agreements or to reductions in salaries and fringe benefits of former owners or officers of acquired F-12 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 2. BUSINESS ACQUISITIONS -- Continued dealerships who have not been retained by the Company or whose salaries have been reduced pursuant to employment agreements with the Company. Pro forma results for Town and Country Chrysler, Plymouth, Jeep of Rock Hill and Fort Mill Chrysler-Plymouth-Dodge are not included because Company management believes that the pro forma results of operations would not have been materially affected assuming these acquisitions had occurred on January 1, 1996. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results of operations that would have occurred had the acquisitions been completed on January 1, 1996. These results are also not necessarily indicative of the results of future operations.
Year ended December 31, --------------------------- 1996 1997 ------------- ------------- Total revenues ..................... $ 899,901 $ 949,081 Gross profit ....................... $ 113,772 $ 117,389 Net income ......................... $ 4,027 $ 5,439 Basic net income per share ......... $ 0.64 $ 0.78
Acquisitions Completed During the Year Ended December 31, 1996 On February 1, 1996, the Company acquired Fort Mill Ford for a total purchase price of $5.7 million. The acquisition has been accounted for using the purchase method of accounting and the results of operations of Fort Mill Ford have been included in the accompanying consolidated financial statements from the date of acquisition. The purchase price has been allocated to the assets and liabilities acquired based on their estimated fair market value at the acquisition date as follows: Working capital ......................... $ 822 Property and equipment .................. 3,022 Goodwill ................................ 4,364 Non-current liabilities assumed ......... (2,467) -------- Total purchase price .................... $ 5,741 ========
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:
December 31, 1995 ------------- Total revenues ..................... $ 345,199 Net income ......................... $ 2,875 Basic net income 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. F-13 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 3. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN Inventories consist of the following:
December 31, ---------------------- June 30, 1996 1997 1998 ---------- ----------- ------------ (Unaudited) New vehicles .................. $51,798 $118,751 $122,315 Used vehicles ................. 14,372 27,990 39,187 Parts and accessories ......... 4,940 9,085 12,467 Other ......................... 440 688 1,546 ------- -------- -------- Total ......................... $71,550 $156,514 $175,515 ======= ======== ========
The inventory balance is generally reduced by manufacturer's purchase discounts, and such reduction is not reflected in the related floor plan liability. All new and certain used vehicles are pledged to collateralize floor plan notes payable to financial institutions in the amount of $63.9 million and $133.2 million at December 31, 1996 and 1997, respectively, and $149.7 million at June 30, 1998. The floor plan notes bear interest, payable monthly on the outstanding balance, at an effective rate of prime less 0.9% (7.60% at June 30, 1998), subject to incentives and other adjustments. Total floor plan interest expense amounted to $4.5 million, $6.0 million and $8.0 million in 1995, 1996 and 1997, respectively, and $3.0 million and $7.3 million at June 30, 1997 and 1998, 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 consolidated balance sheets. 4. PROPERTY AND EQUIPMENT Property and equipment is comprised of the following:
December 31, ----------------------- 1996 1997 ----------- ----------- Land .................................. $ 2,678 $ 4,330 Building and improvements ............. 10,081 11,904 Office equipment and fixtures ......... 2,037 4,102 Parts and service equipment ........... 2,866 4,229 Company vehicles ...................... 437 727 -------- -------- Total, at cost ........................ 18,099 25,292 Less accumulated depreciation ......... (5,632) (6,211) -------- -------- Property and equipment, net ........... $ 12,467 $ 19,081 ======== ========
F-14 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 5. LONG-TERM DEBT Long-term debt consists of the following:
December 31, --------------------- 1996 1997 ---------- ---------- Amounts outstanding under $26.0 million revolving credit facility with Ford Motor Credit bearing interest at prime plus 1% (9.5% at December 31, 1997) and maturing in October 1999, collateralized by all assets of the Company ............................................. $ -- $25,070 Amounts outstanding under $20.0 million line of credit from NationsBank bearing interest at 7.75% and maturing February 15, 1998 .......................................................... -- 8,200 Mortgage note payable in monthly installments of $27,000, including interest at prime plus 1/2% (9.0% at December 31, 1997) through April 2001, at which time remaining principal balance is due, collateralized by building ......................................................... 3,063 2,999 Mortgage note payable in monthly installments of $12,000, plus interest at prime plus 3/4%, (9.25% at December 31, 1997) through May 2004, collateralized by building ......................... 1,088 940 Other notes payable ...................................................................... 1,654 2,015 ------ ------- 5,805 39,224 Less current maturities .................................................................. (519) (584) ------ ------- Long-term debt ........................................................................... $5,286 $38,640 ====== =======
Future maturities of debt at December 31, 1997 are as follows: Year ending December 31, 1998 ........................ $ 584 1999 ........................ 33,880 2000 ........................ 632 2001 ........................ 592 2002 ........................ 419 Thereafter .................. 3,117 ------- Total ....................... $39,224 =======
On October 15, 1997, the Company obtained a secured, revolving acquisition line of credit (the "Revolving Facility") from Ford Motor Credit with available principal of $26 million. In January 1998 the Company increased the aggregate amount available to borrow under this facility to $75 million pursuant to the agreement with Ford Motor Credit. 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 proceeds from the Revolving Facility were used in the consummation of the Ken Marks Acquisition in October 1997 and for the repayment in February 1998 of amounts borrowed under the Six-Month Facility (as defined below). Additional amounts to be drawn under the Revolving Facility are to be used for the acquisition of additional dealerships and to provide general working capital needs of the Company not to exceed $10 million. The Revolving Facility currently contains 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. Additional negative covenants include 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. The Company did not meet the specified debt to tangible equity ratio at December 31, 1997 and has obtained a waiver with regard to such requirement from Ford Motor Credit. See Note 12. 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). F-15 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 5. LONG-TERM DEBT -- Continued On August 28, 1997, the Company obtained from NationsBank, N.A. a short-term line of credit in an aggregate principal amount of up to $20 million ( the "Six-Month Facility"). Under the terms of the Six-Month Facility, amounts outstanding bore interest at 7.75% and matured on February 15, 1998. Proceeds from the Six-Month Facility were used to consummate the acquisitions of Lake Norman Dodge and Affiliates and Williams Motors, Inc. Amounts outstanding at December 31, 1997 have been classified as long-term as such amounts have been subsequently refinanced with funds obtained from the Revolving Facility. On February 16, 1998, the Company refinanced the $3 million mortgage note payable. The mortgage note now matures February 2003 and is payable in 59 consecutive monthly installments of $26,000 each with a final balloon installment for the unpaid balance due at maturity. The mortgage note bears interest at the prime interest rate and is collateralized by a building. 6. INCOME TAXES The provision for income taxes consists of the following components:
1995 1996 1997 --------- --------- ------------ Current: Federal ............................. $1,608 $1,857 $1,890 State ............................... 117 308 391 ------ ------ ------ 1,725 2,165 2,281 Deferred .............................. 427 (190) (27) Change in valuation allowance ......... 24 (51) (5) ------ ------ -------- Total ................................. $2,176 $1,924 $2,249 ====== ====== =======
The reconciliation of the statutory federal income tax rate with the Company's federal and state overall effective income tax rate is as follows:
1995 1996 1997 ----------- ----------- ----------- Statutory federal rate .......... 34.00% 34.00% 34.00% State income taxes .............. 3.84 3.60 3.70 Miscellaneous ................... 2.19 0.71 (0.21) ------ ----- ------ Effective tax rates ............. 40.03% 38.31% 37.49% ====== ====== ======
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:
1996 1997 ----------- ---------- Deferred tax assets: Allowance for bad debts ................... $ 86 $ 81 Inventory reserves ........................ 161 40 Net operating loss carryforwards .......... 75 120 Other ..................................... 76 151 -------- ------ Total deferred tax assets ................. 398 392 Valuation allowance ....................... (75) (70) -------- ------ Deferred tax assets, net .................. 323 322 -------- ------ Deferred tax liabilities: Basis difference in property and equipment (556) (799) Basis difference in goodwill .............. -- (172) Other ..................................... (546) (25) -------- ------ Total deferred tax liability ............... (1,102) (996) -------- ------ Net deferred tax liability ................. $ (779) $ (674) ======== ======
F-16 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 6. INCOME TAXES -- Continued The net changes in the valuation allowance against deferred tax assets were a decrease of $51,000 for the year ended December 31, 1996 and a decrease of $5,000 for the year ended December 31, 1997. The decrease was related primarily to the expiration of state net operating loss carryforwards. At December 31, 1997, the Company had state net operating loss carryforwards of $1.2 million which will expire primarily between 1998 and 2002. Certain of the Company's dealerships changed their method of accounting for inventories of new vehicles for income tax purposes from LIFO to FIFO (see Note 1) which resulted in an additional income tax liability. At December 31, 1996 and 1997, this liability was recorded as $5.5 million and $7.1 million, respectively. The liability is payable over a six year period beginning in January 1998. The current portion of the liability as of December 31, 1997 was $2.3 million and is included in other accrued liabilities. Certain subsidiaries of Sonic (such subsidiaries together with the Company and SFC being hereinafter referred to as the "Sonic Group") have joined with SFC in filing consolidated federal income tax returns for several years. Such subsidiaries have also joined with SFC in filing for 1996 and for the six months ending on June 30, 1997. Under applicable federal tax law, each corporation included in SFC'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 SFC, 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 SFC's consolidated group, less amounts previously recorded by the Company. Also pursuant to such agreement, SFC agreed to indemnify the Company for any additional amount determined to be due from SFC'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 SFC's consolidated group. 7. RELATED PARTIES The Smith Guaranties, Pledges, Advance and Subordinated Loan: In connection with the Company obtaining the NationsBank Facility, Mr. Bruton Smith guaranteed the obligations of the Company and secured his guarantee with a pledge of common stock of Speedway Motorsports Inc. ("SMI") owned directly by him. In February 1998, the Company repaid in full the amounts owed under the NationsBank Facility and Mr. Smith's guarantee was released. In connection with the Company obtaining the Revolving Facility and a global floor plan line of credit for all its dealership subsidiaries ("the Floor Plan Facility" and, together with the Revolving Facility, the "Ford Credit Facilities"), Mr. Smith personally guaranteed the obligations of the Company under the Ford Credit Facilities, and such obligations were further secured with a pledge of shares of common stock of SMI owned directly by him or through Sonic Financial Corporation and having an estimated value at December 31, 1997 of approximately $50.0 million (the "Revolving Pledge"). In December 1997, upon increase of the borrowing limit under the Revolving Facility to the maximum loan commitment of $75.0 million, the Revolving Pledge remained in place, Mr. Smith's guarantee of the Revolving Facility was released and Mr. Smith was required to lend $5.5 million (the "Subordinated Smith Loan") to the Company to increase its capitalization as the result of offering proceeds being significantly less than expected. The Subordinated Smith Loan was required by Ford Motor Credit as a condition to its agreement to increase the borrowing limit under the Revolving Facility. The Subordinated Smith Loan is evidenced by the Company's Subordinated Promissory Note dated December 1, 1997 in favor of Mr. Smith, bears interest at prime plus 0.5% and matures on November 30, 2000. All amounts owed by the Company to Mr. Smith under the Subordinated Smith Loan are subordinate in right of payment to all amounts owed by the Company under the Ford Credit Facilities pursuant to the terms of a Subordination Agreement dated as of December 5, 1997 between Mr. Smith and Ford Motor Credit. In connection with the acquisitions by the Company of Fort Mill Chrysler-Plymouth-Dodge, Bruton 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 this acquisition at closing. The Smith Advance was evidenced by a demand note F-17 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 7. RELATED PARTIES -- Continued bearing interest at the minimum statutory rate of 3.83% per annum. The Company repaid in full the principal of and interest on the Smith Advance from the proceeds of the IPO. 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 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 as part of the acquisition of the Bowers Dealerships and Affiliated Companies Acquisition in 1997 (the "Bowers Acquisition"), Volvo, among other things, conditioned its approval upon Nelson Bowers, the Company's Executive Vice President and a Director, 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 financed 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 is secured by Mr. Bowers' interest in Chattanooga Volvo. The Bowers Volvo Note is for a principal amount of $900,000 and bears interest at the lowest applicable federal rate as published by the U.S. Treasury Department in effect on November 17, 1997. Accrued interest is payable annually. The operating agreement of Chattanooga Volvo provides 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. Registration Rights Agreement: As part of the reorganization of the Company in connection with its initial public offering (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 Company's Amended and Restated Certificate of Incorporation, 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 Corporation ("SFC"), 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 F-18 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 7. RELATED PARTIES -- Continued the original selling security holders, as the case may be. The Registration Rights Agreement expires on the November 17, 2007. Sonic Financial is controlled by the Company's Chairman and Chief Executive Officer, Bruton Smith. Other Related Party Transactions Prior to June 30, 1997, two dealership subsidiaries of the Company had each made several non-interest bearing advances to SFC ($2.5 million at December 31, 1996). In preparation for the Reorganization, a demand promissory note by SFC evidencing $2.1 million of these advances was canceled in June 1997 in exchange for the redemption of certain shares of the capital stock of Town & Country Ford held by SFC. In addition, a demand promissory note by SFC evidencing $509,000 of these advances was canceled in June 1997 pursuant to a dividend. The Company had amounts receivable from affiliates of $1.0 million at December 31, 1997. Of this amount, $622,000 relates to advances made by the Company to SFC at December 31, 1997. The remaining $425,000 at December 31, 1997, primarily relates to receivables from executives of the Company who were former owners of certain dealerships acquired in 1997. These receivables resulted from differences in the negotiated and actual net book value of the dealerships at the date of acquisitions. The amounts receivable from affiliates are non-interest bearing and are classified as current based on the expected repayment dates. The Company had amounts payable to affiliates of $914,000, $4.8 million at December 31, 1996 and 1997 respectively. Amounts payable to affiliates includes a note payable to the Company's Executive Vice-President and former owner of the Bowers Dealerships resulting from the acquisition of the Bowers Dealerships. The note is payable in 28 equal quarterly installments bearing interest at prime less 0.5%. The balance outstanding under this note was $4.0 million at December 31, 1997. The current portion of this note amounted to $445,000 at December 31, 1997. The remaining portion of the amount payable to affiliates consisted of loans from affiliates, the majority of which bear interest at 8.75%, and is classified as noncurrent based upon the expected repayment dates. During the years ended December 31, 1995 and December 31, 1996, Town & Country Ford paid $48,000 to SFC as a management fee. SFC'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 SFC ceased in 1997. 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 and a wholly-owned subsidiary of SFC. Under these arrangements, the dealerships paid an aggregate of $576,000 to American Heritage in premiums for these policies for the twelve months ended December 31, 1997. The Company terminated this arrangement with American Heritage in 1997. 8. CAPITAL STRUCTURE, PUBLIC OFFERING OF COMMON STOCK, AND PER SHARE DATA Preferred Stock -- In 1997, the Company authorized 3 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. No preferred shares were issued and outstanding as of December 31, 1997. In March 1998, the Board of Directors designated 300,000 shares of preferred stock as Class A Convertible Preferred Stock, par value $0.10 per share, which was divided into 100,000 of Series I Convertible Preferred Stock, par value $0.10 per share (the "Series I Preferred Stock"), 100,000 shares of Series II Convertible Preferred Stock, par value $0.10 per share (the "Series II Preferred Stock"), and 100,000 shares of Series III Convertible Preferred Stock, par value $0.10 per share (the "Series III Preferred Stock" and together with the Series I Preferred Stock and the Series II Preferred Stock, collectively, the "Preferred Stock"). The Preferred Stock has a liquidation preference of $1,000 per share. Each share of Preferred Stock is convertible, at the option of the holder, into that number of shares of Class A Common Stock as is determined by dividing $1,000 by the F-19 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 8. CAPITAL STRUCTURE, PUBLIC OFFERING OF COMMON STOCK, AND PER SHARE DATA -- Continued average closing price for the Class A Common Stock on the NYSE for the 20 days preceding the date of issuance of the shares of Preferred Stock (the "Market Price"). Conversion of Series II Preferred Stock and Series III Preferred Stock is subject to certain adjustments which have the effect of limiting increases and decreases in the value of the Class A Common Stock receivable upon conversion by 10% of the original value of the shares of Series II Preferred Stock or Series III Preferred Stock. The Preferred Stock is redeemable at the Company's option at any time after the date of issuance. The redemption price of the Series I Preferred Stock is $1,000 per share. The redemption price for the Series II Preferred Stock and Series III Preferred Stock is as follows: (i) prior to the second anniversary of the date of issuance, the redemption price is the greater of $1,000 per share or the aggregate Market Price of the Class A Common Stock into which it could be converted at the time of redemption, and (ii) after the second anniversary of the date of issuance, the redemption price is the aggregate Market Price of the Class A Common Stock into which it could be converted at the time of redemption. Each share of Preferred Stock entitles its holder to a number of votes equal to that number of shares of Class A Common Stock into which it could be converted as of the record date for the vote. Holders of preferred stock are entitled to participate in dividends payable on the Class A Common Stock on an "as-if-converted" basis. The Preferred Stock has no preferential dividends. 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. Public Offering of Common Stock -- The Company completed an IPO of 5.0 million shares of its Class A Common Stock, par value $0.01 per share, on November 12, 1997 at a price of $12 per share. Net proceeds of the IPO of approximately $53.7 million were used to finance acquisitions (see Note 2) and to repay amounts borrowed under lines of credit related to the acquisitions. Class A Common Stock entitles its holder to one vote per share, while Class B Common Stock entitles its holder to ten votes per share, except in certain circumstances. Warrants -- In connection with the acquisition of Dyer Volvo in November 1997, the Company issued on January 15, 1998 warrants to purchase 44,391 shares of Class A Common Stock at $12 per share, which is currently exercisable and expires on January 15, 2003. The Company has recorded the issuance of such warrants at an estimated fair value pending completion of an independent valuation. Per Share Data -- The calculation of diluted net income per share considers the potential dilutive effect of options and shares under the Company's stock compensation plans, Class A Common Stock purchase warrants, and Class A Convertible Preferred Stock. The following table illustrates the dilutive effect of such items on EPS:
Unaudited For the twelve months ended For the six months ended December 31, 1997 June 30, 1998 ----------------------------- ---------------------------- Per-Share Per-Share Income Shares Amount Income Shares Amount -------- -------- ----------- -------- -------- ---------- (Dollars and Shares in thousands except per share amounts) Basic EPS Income available to common shareholders .......... $3,702 6,949 $ 0.53 $6,804 11,264 $ 0.60 ======= ======= Effect of Dilutive Securities Stock compensation plans ......................... -- -- -- 202 Warrants ......................................... -- -- -- 9 Convertible Preferred Stock ...................... -- -- -- 162 ------ ----- ------ ------ Diluted EPS Income available to common shareholders + assumed conversions ..................................... $3,702 6,949 $ 0.53 $6,804 11,637 $ 0.58 ====== ===== ======= ====== ====== =======
Options to purchase 588,000 shares of Class A Common Stock at $12 per share were outstanding in November and December of 1997, but were not included in the computation of diluted EPS because the options' were anti-dilutive. F-20 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 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. Formula Stock Option Plan In March 1998, the Board of Directors adopted the Formula Stock Option Plan for the benefit of the Company's outside directors. The plan authorized options to purchase up to an aggregate of 300,000 shares of Class A Common Stock. Under the plan, each outside director shall be awarded on or before March 31st of each year an option to purchase 10,000 shares at an exercise price equal to the fair market value of common stock at the date of the award. Employee Stock Purchase Plan Effective January 1, 1998, the Board of Directors and stockholders of the Company adopted the Employee Stock Purchase Plan (the "ESPP"). 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 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. Options will expire on the last exercise date of the calendar year in which granted. On March 20, 1998, the Board of Directors, pursuant to the Company's ESPP, increased the authorized shares from 150,000 to 300,000 and issued options exercisable for 150,000 shares of Class A Common Stock granting 310 shares per participant participating in the ESPP. 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") with respect to Common Stock in order to attract and retain key personnel. Under the Stock Option Plan, options to purchase up to an aggregate of 1.1 million 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. In November 1997, the Company granted options to purchase 588,000 shares of Class A Common Stock at an exercise price equal to the initial public offering price of $12.00 per share. 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. The Company has adopted the disclosure-only provisions of SFAS No. 123. The Company granted 588,000 options in 1997 with weighted average grant-date fair values of $5.66. No compensation cost has been recognized for the Stock Option Plan. Had compensation cost for the stock options been determined based on their fair value method as prescribed by SFAS No. 123, the Company's pro forma net income and basic net income per share would have been $3.6 million and $0.51, respectively, for 1997. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: expected volatility of 50% in 1997; risk-free interest rate of 5.6% in 1997; and expected lives of 5 years in 1997. The model reflects that no dividends were declared in 1997 and assumes that no dividends will be declared in the future. 10. COMMITMENTS AND CONTINGENCIES Operating Leases: The Company leases certain of its dealership facilities under noncancelable operating leases with terms ranging from one to twelve years, with renewal options of up to ten years. A majority of the dealership facilities are owned by officers, directors or holders of 5% or more of the Common Stock of the Company or their affiliates. Minimum future rental payments required under noncancelable operating leases are as follows: F-21 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 10. COMMITMENTS AND CONTINGENCIES -- Continued
Related Parties Third Parties Total Year ending December 31, ----------------- --------------- --------- 1998 ..................... $ 3,849 $ 2,023 $ 5,872 1999 ..................... 3,852 1,452 5,304 2000 ..................... 3,786 1,400 5,186 2001 ..................... 3,448 1,380 4,828 2002 ..................... 3,338 1,050 4,388 Thereafter ............... 16,146 4,480 20,626 ------- ------- ------- Total .................... $34,419 $11,785 $46,204 ======= ======= =======
Total rent expense for the years ended December 31, 1995, 1996, and 1997 was approximately $841,000, $870,000, and $2.4 million, respectively. Of these amounts, $841,000, $870,000 and $1.3 million, respectively, were paid to related parties. Other Contingencies: The Company is contingently liable for customer contracts placed with financial institutions of approximately $741,000 and $302,000 at December 31, 1996 and 1997, 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 $1.5 million 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. Amounts outstanding under these lines at December 31, 1996 and 1997 were $151,000 and $432,000, respectively. 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. The Company has not entered into any agreement with respect to the approval by Jaguar of the proposed acquisition of the assets of the Jaguar of Chattanooga dealership (the "Jaguar Dealership") by the Company as part of the Bowers Acquisition. The Company and Jaguar are continuing to negotiate with respect to this matter, although no assurance can be given that such negotiations will result in an arrangement that is favorable to the Company. If Jaguar refuses to give its approval to the Company, the Company may not be able to acquire the Jaguar Dealership. The Jaguar Dealership accounts for less than 1.5% of the Company's 1997 revenues and profits, respectively. 11. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED) The following table summarizes the Company's results of operations as presented in the Consolidated Statements of Income by quarter for 1996 and 1997. Amounts below reflect reclassifications of previously reported amounts to conform with current year presentation and exclude net income per share for those periods prior to the completion of the Offering. F-22 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 11. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED) -- Continued
First Second Third Fourth Quarter Quarter Quarter Quarter ----------- ----------- -------------- -------------- Year Ended December 31, 1996: Total revenues ........................... $ 85,684 $ 104,021 $ 93,910 $ 93,252 Gross profit ............................. $ 10,654 $ 11,860 $ 11,581 $ 11,725 Operating income ......................... $ 2,644 $ 2,920 $ 2,530 $ 2,973 Income before taxes and minority interest $ 1,604 $ 1,254 $ 1,121 $ 1,042 Year Ended December 31, 1997: Total revenues ........................... $ 98,785 $ 114,101 $ 127,356 $ 195,759 Gross profit ............................. $ 11,228 $ 13,236 $ 15,105 $ 25,179 Operating income ......................... $ 2,262 $ 3,393 $ 3,469 $ 5,782 Income before taxes and minority interest $ 926 $ 1,577 $ 1,526 $ 1,969 Net income ............................... $ 541 $ 999 $ 911 $ 1,251 Diluted net income per share ............. $ 0.15 $ 0.14
12. SUBSEQUENT EVENTS (UNAUDITED) Pending Acquisitions The Company has entered into definitive agreements to acquire a dealership located in Chattanooga, Tennessee and a dealership group comprised of three dealerships located in Daytona Beach, Florida for an aggregate purchase price of approximately $26.2 million plus the net book value of the assets acquired. The aggregate purchase price will be payable in approximately 12,183 shares of Preferred Stock with a liquidation preference of approximately $1,000 per share and the balance payable in cash obtained from the Company's existing opearations and from the private placement of the Company's 11% Senior Subordinated Notes in July 1998 (the "Offering" -- see Note 12). These acquisitions are expected to be consummated in the third quarter of 1998. Acquisitions Completed Subsequent to June 30, 1998 In July 1998, the Company completed its previously announced acquisition of Hatfield Automotive Group located in Columbus Ohio (the "Hatfield Acquisition") for a total purchase price of $48.6 million, paid with $34.6 million in cash and with 14,025 shares of Series I Preferred Stock (see Note 8) having a liquidation preference of approximately $14.0 million. Of the cash portion of the purchase price, $26.2 million was financed with borrowings under the Revolving Facility (see Note 5), which was subsequently repaid with proceeds from the Offering, and $8.4 million with proceeds from the Offering. Acquisitions Completed During the Six Months Ended June 30, 1998 On January 1, 1998, the Company began operation and obtained control of Clearwater Toyota, Clearwater Mitsubishi and Clearwater Collision Center (the "Clearwater Acquisition") located in Clearwater, Florida. On April 1, 1998, the Company began operation and obtained control of Capitol Chevrolet and Imports located in Montgomery, Alabama (the "Montgomery Acquisition"), Century BMW located in Greenville, South Carolina (the "Century Acquisition") and Heritage Lincoln-Mercury located in Greenville, South Carolina (the "Heritage Acquisition"). On May 1, 1998, the Company began operation and obtained control of Casa Ford of Houston, Inc. located in Houston, Texas (the "Casa Ford Acquisition"). The aggregate purchase price for the Clearwater Acquisition, the Montgomery Acquisition, the Century Acquisition, the Heritage Acquisition, and the Casa Ford Acquisition (collectively, the "1998 Acquisitions") was approximately $40.7 million, paid with $29.0 million in cash and with 13,034 shares of Preferred Stock (381 shares of Series I Preferred Stock, 6,380 shares of Series II Preferred Stock, and 6,273 shares of Series III Preferred Stock -- see Note 8) having an aggregate liquidation preference of approximately $13.0 million and an estimated fair value of approximately $11.7 million. Of the $29.0 million cash portion of the aggregate purchase price, $15.4 million was financed with borrowings under the Revolving Facility, which was subsequently repaid with the proceeds from the Offering, $12.9 million with the proceeds from the Offering, and $0.1 million with cash generated from the Company's existing operations. The remaining $0.6 million of the cash portion F-23 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 12. SUBSEQUENT EVENTS (UNAUDITED) -- Continued of the purchase price is payable to the seller of the Montgomery Acquisition on the first and second anniversaries of the closing date of the Montgomery Acquisition. In addition, the Company will issue to the seller of the Century Acquisition warrants to purchase 75,000 shares of the Company's Class A Common Stock at a purchase price equal to the market value of the Class A Common Stock on the date of grant. The Company will record these warrants at fair value at time of issuance. In accordance with terms of the Clearwater Acquisition and the Montgomery Acquisition, the Company may be required to pay additional amounts up to $5.1 million contingent on the future performance of the dealerships acquired in such acquisitions. In addition, in accordance with the terms of the Casa Ford Acquisition, the Company may be required to pay additional amounts to the seller equal to five times the amount by which the dealership's pre-tax earnings for 1998, if any, exceed $2.5 million, and five times the amount by which the dealership's pre-tax earnings for 1999, if any, exceed the greater of $2.5 million or the dealership's 1998 pre-tax earnings. Any additional amounts paid will be accounted for as additional goodwill. The Payable for Acquisitions in the amount of $16.1 million included in the accompanying consolidated financial statements represents the cash consideration paid for the Montgomery Acquisition, Century Acquisition, Heritage Acquisition, and Casa Ford Acquisition upon the closing of such acquisitions in July 1998. The 1998 Acquisitions have been accounted for using the purchase method of accounting and the results of operations of such acquisitions have been included in the accompanying unaudited consolidated financial statements from the date the Company began operation and obtained control. The purchase price of the 1998 Acquisitions has been allocated as shown below to the assets and liabilities acquired based on their estimated fair market value at the acquisition date. The purchase price and corresponding goodwill may ultimatley be different than amounts recorded depending on the actual fair value of tangible net assets acquired and changes in the estimated fair value of Preferred Stock (see Note 8). Working capital ........................ $ 11,826 Property and equipment ................. 2,462 Goodwill ............................... 29,147 Non-current liabilites assumed ......... (2,699) -------- Total purchase price ................... $ 40,736 ========
The following unaudited pro forma financial information presents a summary of consolidated results of operations as if the Clearwater Acquisition, Montgomery Acquisition, Century Acquisition, Heritage Acquisition, Casa Ford Acquisition, and acquisition of dealership groups completed in 1997 had occurred at the beginning of the period in which the acquisitions were completed and at the beginning of the immediately preceding period after giving effect to certain adjustments, including amortization of goodwill, interest expense on acquisition debt and related income tax effects. The pro forma financial information does not give effect to adjustments relating to net reductions in floor plan interest expense resulting from re-negotiated floor plan financing agreements or to reductions in salaries and fringe benefits of former owners or officers of acquired dealerships who have not been retained by the Company or whose salaries have been reduced pursuant to employment agreements with the Company. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results of operations that would have occurred had the acquisitions been completed at the beginning of the periods presented. These results are also not necessarily indicative of the results of future operations.
Three Months Ending Six Months Ending June 30, June 30, --------------------------- --------------------------- 1997 1998 1997 1998 ------------- ------------- ------------- ------------- Total revenues ....................... $ 359,659 $ 391,992 $ 689,565 $ 728,588 Gross profit ......................... $ 44,401 $ 50,376 $ 84,046 $ 94,551 Net Income ........................... $ 3,676 $ 5,043 $ 5,192 $ 6,901 Diluted net income per share ......... $ 0.30 $ 0.39 $ 0.42 $ 0.54
Manufacturer's Restrictions on Acquisitions In August 1998, in the course of acquiring Jaguar franchises associated with dealerships in Chattanooga, Tennessee and Greenville, South Carolina, Jaguar declined to consent to the Company's proposed acquisitions of those franchises. The Company therefore agreed with Jaguar not to acquire any Jaguar franchise until August 2001. F-24 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 12. SUBSEQUENT EVENTS (UNAUDITED) -- Continued Dealership Leases: On July 9, 1998, the Company entered into, subject to the approval of the Company's Board of Directors and the Company's independent directors, a Strategic Alliance Agreement and Agreement for the Mutual Referral of Acquisition Opportunities (the "Alliance Agreement") with an operating partnership controlled by Mar Mar Realty Trust, a Maryland real estate investment trust ("MMRT"). MMRT owns the real estate associated with various automobile dealerships, automotive aftermarket retailers and other automotive related businesses and leases such property to the business operators located thereon. O. Bruton Smith, the Company's Chairman and Chief Executive Officer, serves as the chairman of MMRT's board of trustees and is presently its controlling shareholder. Under the Alliance Agreement, the Company has agreed to refer real estate acquisition opportunities that arise in connection with its dealership acquisitions to MMRT. In exchange, MMRT has agreed to refer dealership acquisition opportunities to the Company and to provide to the Company, at the Company's cost, certain real estate development, maintenance, survey, and inspection services. Pursuant to the Alliance Agreement, the Company has entered into contracts to sell the real estate associated with Town and Country Toyota and Fort Mill Ford, two of the Company's dealerships, for an aggregate purchase price of $10.3 million. In addition, the Alliance Agreement provides for an agreed form of lease (the "Sonic Form Lease") pursuant to which MMRT would lease real estate to the Company should MMRT acquire real estate associated with any of the Company's operations. Presently, the Company leases or intends to lease from MMRT 18 parcels of land associated with 16 of its dealerships, including the real estate associated with Town and Country Toyota and Fort Mill Ford which the Company will lease back from MMRT pursuant to leases substantially similar to the Sonic Form Lease. The aggregate initial annual base rent to be paid by the Company for all 18 properties under the leases with MMRT is approximately $6.4 million. Preferred Stock reported in the accompanying Unaudited Consolidated Balance Sheet as of June 30, 1998 consists of 381 shares of Series I Preferred Stock, 6,380 shares of Series II Preferred Stock, and 6,273 shares of Series III Preferred Stock issued in connection with the consummation of the 1998 Acquisitions (see Note 2). These shares of Preferred Stock were preliminarily recorded at their estimated fair value pending completion of an independent valuation. In connection with the Century Acquisition, the Company will issue to the seller of the Century Acquisition warrants to purchase 75,000 shares of the Company's Class A Common Stock at a purchase price equal to the market value of the Class A Common Stock on the date of grant. The Company will record these warrants at fair value at time of issuance. Debt Covenants At March 31, 1998 and June 30, 1998, the Company was not in compliance with a financial covenant of the Revolving Facility. Ford Motor Credit has provided the Company with a waiver of this violation through December 31, 1998. Management expects to be in compliance with or to have amended the financial covenant such that subsequent to December 31, 1998 they will be in compliance. The Company did not meet the specified total debt to tangible equity ratios required by the Revolving Facility at March 31, 1998 and at June 30, 1998 and has obtained a waiver with regard to such requirement from Ford Motor Credit. The waiver is subject to certain requirements to the effect that the Company must meet modified ratios after December 31, 1998 and December 31, 1998. In connection with the Offering, the Company and Ford Motor Credit amended the Revolving Facility to provide that the Company's 11% Senior Subordinated Notes due 2008 (the "Notes"), which are subordinated to the Revolving Facility, will be treated as equity capital for purposes of this ratio and, accordingly, the Company is in compliance with this covenant after giving effect to the issuance of the Notes. Senior Notes In July 1998, the Company completed its private placement of the Notes. Interest is payable February 1 and August 1 of each year, commencing February 1, 1999. The Notes contain certain restrictive covenants and are unsecured senior subordinated obligations of the Company. F-25 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF CLEARWATER DEALERSHIPS AND AFFILIATED COMPANIES CLEARWATER, FLORIDA We have audited the accompanying combined balance sheet of Clearwater Dealerships and Affiliated Companies (the "Company"), which are under common ownership and management, as of December 31, 1997, and the related combined statement of income and retained earnings and of 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, such financial statements present fairly, in all material respects, the combined financial position of the Company as of December 31, 1997, and the combined results of its operations and its combined cash flows for the year then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Charlotte, North Carolina February 20, 1998 F-26 CLEARWATER DEALERSHIPS AND AFFILIATED COMPANIES COMBINED BALANCE SHEET December 31, 1997 ASSETS CURRENT ASSETS: Cash and cash equivalents .......................... $ 2,065,437 Accounts receivable ................................ 1,137,797 Inventories (Note 2) ............................... 9,214,628 Other current assets ............................... 282,148 ------------ Total current assets ............................. 12,700,010 PROPERTY AND EQUIPMENT, NET (Notes 3 and 4) ......... 7,829,463 GOODWILL ............................................ 1,736,154 ------------ TOTAL ASSETS ........................................ $ 22,265,627 ============ LIABILITIES AND EQUITY CURRENT LIABILITIES: Notes payable -- floor plan (Note 2) ............... $ 8,321,386 Notes payable -- stockholder (Note 4) .............. 500,000 Trade accounts payable ............................. 789,425 Other accrued liabilities .......................... 465,618 Current maturities of long-term debt ............... 1,089,830 ------------ Total current liabilities ........................ 11,166,259 ------------ LONG-TERM DEBT (Note 4) ............................. 6,116,808 ------------ CONTINGENCIES (Note 7) COMBINED EQUITY (Note 5): Common stock of combined companies ................. 1,202,064 Paid-in capital .................................... 1,210,334 Retained earnings .................................. 2,570,162 ------------ Total stockholders' equity ....................... 4,982,560 ------------ TOTAL LIABILITIES AND EQUITY ........................ $ 22,265,627 ============
See notes to combined financial statements. F-27 CLEARWATER DEALERSHIPS AND AFFILIATED COMPANIES COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS Year ended December 31, 1997 REVENUES: Vehicle sales .................................................... $ 108,811,979 Parts, service and collision repair .............................. 10,499,641 Finance and insurance (Note 1) ................................... 2,587,028 ------------- Total revenues ................................................. 121,898,648 COST OF SALES (Note 1) ............................................ 107,095,964 ------------- GROSS PROFIT ...................................................... 14,802,684 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ...................... 11,617,589 DEPRECIATION AND AMORTIZATION ..................................... 389,831 ------------- OPERATING INCOME .................................................. 2,795,264 ------------- OTHER INCOME AND EXPENSE: Interest expense -- floor plan, net (Note 2) ..................... 77,253 Interest expense -- other financing arrangements ................. 721,259 Other income ..................................................... (193,799) ------------- Total other expense ............................................ 604,713 ------------- NET INCOME ........................................................ 2,190,551 RETAINED EARNINGS, DECEMBER 31, 1996 .............................. 1,271,737 DISTRIBUTIONS ..................................................... (892,126) ------------- RETAINED EARNINGS, DECEMBER 31, 1997 .............................. $ 2,570,162 ============= Pro Forma Provision for Income Taxes (Note 1) (unaudited) ......... $ 876,000 ============= Pro Forma Net Income (Note 1) (unaudited) ......................... $ 1,314,551 =============
See notes to combined financial statements. F-28 CLEARWATER DEALERSHIPS AND AFFILIATED COMPANIES COMBINED STATEMENT OF CASH FLOWS Year ended December 31, 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income ........................................................................ $ 2,190,551 ------------ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................................... 389,831 Changes in assets and liabilities that related to operations: Decrease in receivables ........................................................ 14,836 Decrease in inventories ........................................................ 115,045 Increase in other current assets ............................................... (152,703) Decrease in other noncurrent assets ............................................ 11,280 Increase in notes payable -- floor plan ........................................ 432,528 Decrease in accounts payable and other accrued liabilities ..................... (1,058,983) ------------ Total adjustments ............................................................. (248,166) ------------ Net cash provided by operating activities ....................................... 1,942,385 ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ............................................... (497,762) ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Stockholder distributions ......................................................... (892,126) Payments of long-term debt ........................................................ (756,409) ------------ Net cash used in financing activities ........................................... (1,648,535) ------------ NET DECREASE IN CASH ............................................................... (203,912) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..................................... 2,269,349 ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD ........................................... $ 2,065,437 ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for interest .......................................... $ 1,608,448 ============
See notes to combined financial statements. F-29 CLEARWATER DEALERSHIPS AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS Year ended December 31, 1997 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business -- Clearwater Dealerships and Affiliated Companies (the "Company") operates two automobile dealerships and a body shop in Tampa, Florida. 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. The Company's two dealership locations sell new vehicles manufactured by Mitsubishi and Toyota. The accompanying combined financial statements include the accounts of the following entities: Clearwater Auto Resources, Inc. (Clearwater Toyota) M&S Auto Resources, Inc. (Clearwater Mitsubishi) Clearwater Collision Center, Inc. The accompanying combined financial statements reflect the financial position, results of operations, and cash flows of each of the above listed companies. 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. Revenue Recognition -- The Company records revenue when vehicles are delivered to customers, and when vehicle service work is performed. The Company arranges financing for customers through various financial institutions and receives a commission from the lender equal to the difference between the interest rates charged to customers over the predetermined interest rates set by the financing institution. The Company also receives commissions from the sale of credit life, accident, health and disability insurance and extended service contracts to customers. The Company may be assessed a chargeback fee in the event of early cancellation of a loan, insurance contract, or service contract by the customer. Finance and insurance commission revenue is recorded net of estimated chargebacks at the time the related contract is placed with the financial institution. Commissions expense related to finance and insurance commission revenue is charged to cost of sales upon recognition of such revenue, net of estimated chargebacks. Estimated commission expense charged to cost of sales was approximately $608,362 for the year ended December 31, 1997. 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 vehicle inventory. Each dealership operates under a dealer agreement with the manufacturer. 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 a vehicle purchase and was $1,728,343 at December 31, 1997. Inventories -- Inventories of new and used vehicles, including demonstrators and parts and accessories, are valued at the lower of specific cost or market. F-30 CLEARWATER DEALERSHIPS AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued Property and Equipment -- Property and equipment are stated at cost. Depreciation is computed using straight-line methods over the estimated useful lives of the assets. The range of estimated useful lives is as follows:
Useful Lives ------------- Buildings and improvements .................. 31.5 - 39 Office equipment and fixtures ............... 3 - 7 Parts, service equipment and vehicles ....... 5 - 7 Company vehicles ............................ 5 - 7 Computer equipment .......................... 5 - 7
Expenditures for maintenance and repairs are expensed as incurred. Significant betterments are capitalized. Goodwill -- Goodwill represents the excess purchase price over the estimated fair value of the net assets acquired and is being amortized over a 15 year period. 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. Income Taxes -- All entities included in the accompanying combined financial statements are S Corporations. As such, these entities do not pay federal or state corporate income taxes on their taxable income. The stockholders are liable for individual income taxes on their respective shares of the Company's taxable income. The pro forma provision for income taxes and the pro forma net income for the year ended December 31, 1997 reflect the amounts that would have been recorded had the Company 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 Company's market area of Tampa Bay, Florida. 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. Fair Value of Financial Instruments -- As of December 31, 1997 the fair value of the Company's financial instruments including receivables, notes payable-floor plan, trade accounts payable, notes payable stockholder and long-term debt approximate their book values. Advertising -- The Company expenses advertising costs in the period incurred. Advertising expense for 1997 amounted to $2,085,797. 2. INVENTORIES AND RELATED NOTES PAYABLE-FLOOR PLAN Inventories at December 31, 1997 consist of the following: New vehicles .................. $ 6,661,309 Used vehicles ................. 1,901,207 Parts and accessories ......... 652,112 ----------- Total ......................... $ 9,214,628 ===========
F-31 CLEARWATER DEALERSHIPS AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 2. INVENTORIES AND RELATED NOTES PAYABLE-FLOOR PLAN -- Continued All new and certain used vehicles are pledged to collateralize floor plan notes payable to financial institutions in the amount of $8,321,386 at December 31, 1997. The floor plan notes bear interest (8.5% at December 31, 1997) that fluctuates with prime and are payable monthly on the outstanding balance. Total floor plan interest expense amounted to $779,671 in 1997, which is offset by $702,418 of floor plan assistance provided by the manufacturer. 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 sheet. 3. PROPERTY AND EQUIPMENT Property and equipment at December 31, 1997 is comprised of the following: Land .................................. $ 1,800,024 Buildings and improvements ............ 5,934,205 Office equipment and fixtures ......... 365,050 Parts and service equipment ........... 360,514 Leasehold improvements ................ 84,206 Company vehicles ...................... 36,304 Computer equipment .................... 9,753 ----------- 8,590,056 Less accumulated depreciation ......... (760,593) ----------- Property and equipment, net ........... $ 7,829,463 ===========
4. FINANCING ARRANGEMENTS The Company has an unsecured demand note payable outstanding from a stockholder in the amount of $500,000 at December 31, 1997. Interest on this demand note is charged at 10%. Long-term debt at December 31, 1997 consists of the following: Mortgage note payable, due in monthly principal and interest installments of $33,839, interest payable at prime plus 1.0% (8.5% at December 31, 1997), with the unpaid principal balance due May $ 5,339,809 31, 2001 Mortgage note payable in monthly principal and interest installments of $6,090, interest payable at 9.0%, with the unpaid prinicipal balance due February 28, 1999 .......................... 550,203 Notes payable in monthly principal and interest installments of $16,667, interest payable at prime plus 0.5%, matures January 1, 2002 ........................................................... 800,000 Installment note payable in monthly principal and interest installments of $16,667, interest payable at prime plus 1.5%, with the unpaid principal balance due February 1, 2001 ................. 516,626 ----------- 7,206,638 Less current maturities .................................................................. 1,089,830 ----------- Long-term debt ........................................................................... $ 6,116,808 ===========
Future maturities of long-term debt at December 31, 1997 are as follows: Year Ending December 31: 1998 ........................ $ 1,089,830 1999 ........................ 1,131,896 2000 ........................ 606,068 2001 ........................ 4,362,177 2002 ........................ 16,667 ----------- Total ....................... $ 7,206,638 ===========
F-32 CLEARWATER DEALERSHIPS AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 5. COMBINED EQUITY The capital structure of the entities included in the combined financial statements of the Company at December 31, 1997 is as follows:
Common Stock ----------------------------------------- Shares Additional Shares Issued and Paid-in Retained Authorized Outstanding Amount Capital Earnings ------------ ------------- -------------- -------------- -------------- Clearwater Auto Resources ....... 5,000 5,000 $ 200,000 $ -- $ 1,163,380 M & S Auto Resources ............ 1,000 1,000 1,000,000 1,210,334 1,197,699 Clearwater Collision Center ..... -- -- 2,064 -- 209,083 ----------- ----------- ----------- Total ........................... $ 1,202,064 $ 1,210,334 $ 2,570,162 =========== =========== ===========
6. EMPLOYEE BENEFIT PLAN The Company has a 401(k) plan, whereby substantially all of the employees of the Company meeting certain service requirements are eligible to participate. Contributions in 1997 by the Company were not significant. 7. 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. 8. SUBSEQUENT EVENT (UNAUDITED) The Company entered into an agreement with Sonic Automotive, Inc. ("Sonic") whereby Sonic purchased the net assets of the Company for a total purchase price of approximately $14.9 million subject to adjustment based on the net book value of the purchased assets and assumed liabilities as of the closing date. This purchase price is comprised of $11.5 million of cash, approximately $4 million in convertible preferred stock (3,960 shares) of Sonic and a maximum of $1.8 million in additional cash pursuant to an earnings based earnout provision included in the definitive purchase agreement. The purchase price attributable to the convertible preferred stock will range from a low of the $4 million shown above, to $4.4 million depending upon the market value of the underlying common stock at date of conversion. F-33 INDEPENDENT AUDITORS' REPORT TO THE STOCKHOLDERS OF HATFIELD AUTOMOTIVE GROUP Columbus, Ohio We have audited the accompanying combined balance sheets of Hatfield Automotive Group (the "Company"), which are under common ownership and management, as of December 31, 1996 and 1997, and the related combined statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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, such financial statements present fairly, in all material respects, the combined financial position of the Company as of December 31, 1996 and 1997, and the combined results of its operations and its combined cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Charlotte, North Carolina May 22, 1998 F-34 HATFIELD AUTOMOTIVE GROUP COMBINED BALANCE SHEETS December 31, 1996 and 1997 and June 30, 1998
December 31, --------------------------------- June 30, 1996 1997 1998 --------------- --------------- -------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents ............................ $ 11,630,711 $ 12,238,729 $14,200,066 Accounts receivable (no allowance necessary) ......... 3,014,936 3,391,406 3,294,135 Inventories (Note 3) ................................. 30,855,389 34,563,796 33,733,029 Other current assets (Note 6) ........................ 5,526,214 6,592,010 480,409 ------------ ------------ ----------- Total current assets ............................... 51,027,250 56,785,941 51,707,639 PROPERTY AND EQUIPMENT, NET (Note 4) .................. 817,960 1,064,104 952,309 GOODWILL, NET (Notes 1 and 2) ......................... -- 983,333 970,833 ------------ ------------ ----------- TOTAL ASSETS .......................................... $ 51,845,210 $ 58,833,378 $53,630,781 ============ ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable -- floor plan (Note 3) ................. $ 28,941,767 $ 33,705,904 $35,343,179 Trade accounts payable ............................... 3,182,685 2,035,848 1,374,248 Other accrued liabilities ............................ 1,543,879 1,461,131 1,351,151 Payable to stockholder's -- current (Note 6) ......... 5,986,706 7,162,864 608,939 ------------ ------------ ----------- Total current liabilities .......................... 39,655,037 44,365,747 38,677,517 ------------ ------------ ----------- PAYABLE TO STOCKHOLDERS -- NON-CURRENT (Note 6) ............................................. 6,815,121 8,176,482 8,325,052 COMMITMENTS AND CONTINGENCIES (Notes 6 and 8) STOCKHOLDERS' EQUITY (Note 5): Common stock of combined companies ................... 2,825,000 2,825,000 2,825,000 Paid-in capital ...................................... 804,000 1,744,000 1,744,000 Retained earnings .................................... 1,746,052 1,722,149 2,059,212 ------------ ------------ ----------- Total stockholders' equity ......................... 5,375,052 6,291,149 6,628,212 ------------ ------------ ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............ $ 51,845,210 $ 58,833,378 $53,630,781 ============ ============ ===========
See notes to combined financial statements. F-35 HATFIELD AUTOMOTIVE GROUP COMBINED STATEMENTS OF INCOME For the years ended December 31, 1995, 1996 and 1997 and the six months ended June 30, 1997 and 1998
Six months ended Year ended December 31, June 30, ----------------------------------------------- ------------------------------- 1995 1996 1997 1997 1998 --------------- --------------- --------------- --------------- --------------- (Unaudited) REVENUES: Vehicle sales ........................... $164,216,610 $213,251,842 $251,980,884 $126,422,557 $133,660,846 Parts, service and collision repair ..... 11,905,030 13,971,959 16,399,819 7,601,130 8,774,251 Finance and insurance (Notes 1 and 6) ....................... 4,748,018 6,113,302 6,898,899 3,415,232 4,190,125 ------------ ------------ ------------ ------------ ------------ Total revenues ........................ 180,869,658 233,337,103 275,279,602 137,438,919 146,625,222 COST OF SALES (Note 1) ................... 160,396,271 206,201,099 244,329,244 122,650,266 130,220,430 ------------ ------------ ------------ ------------ ------------ GROSS PROFIT ............................. 20,473,387 27,136,004 30,950,358 14,788,653 16,404,792 SELLING, GENERAL AND ADMINIS- TRATIVE (Note 6) ........................ 13,694,632 16,250,976 20,193,275 9,855,048 11,308,119 MANAGEMENT BONUS (Note 6) ................ 3,809,573 6,339,005 7,120,875 3,735,000 3,181,319 DEPRECIATION AND AMORTIZATION ............................ 38,836 107,461 221,463 106,565 158,210 ------------ ------------ ------------ ------------ ------------ OPERATING INCOME ......................... 2,930,346 4,438,562 3,414,745 1,092,040 1,757,144 OTHER INCOME AND EXPENSE: Interest expense -- floor plan .......... 2,926,256 3,036,515 3,662,711 1,439,607 1,245,500 Interest income ......................... (102,265) (155,804) (225,802) (57,897) (130,399) Other (income) expense .................. 37,313 196,030 1,739 (55,134) (114,878) ------------ ------------ ------------ ------------ ------------ Total other expense ................... 2,861,304 3,076,741 3,438,648 1,326,576 1,000,223 ------------ ------------ ------------ ------------ ------------ NET INCOME (LOSS) ........................ $ 69,042 $ 1,361,821 $ (23,903) $ (234,536) $ 756,921 ============ ============ ============ ============ ============ Pro Forma Provision (Benefit) for Income Taxes (Note 1) (unaudited)........ $ 27,000 $ 531,000 $ (9,000) $ (95,667) $ 308,748 ============ ============ ============ ============ ============ Pro Forma Net Income (Loss) (Note 1) (unaudited) ............................. $ 42,042 $ 830,821 $ (14,903) $ (330,203) $ 448,173 ============ ============ ============ ============ ============
See notes to combined financial statements. F-36 HATFIELD AUTOMOTIVE GROUP COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTE 5) For the years ended December 31, 1995, 1996 and 1997 and the six months ended June 30, 1998
Common Total Stock of Combined Retained Stockholders' Companies Paid-in Capital Earnings Equity ------------------- ----------------- -------------- -------------- BALANCE AT DECEMBER 31, 1994 ............ $1,525,000 $ 354,000 $ 1,402,130 $ 3,281,130 Issuance of common stock ............... 700,000 -- -- 700,000 Dividends declared ..................... -- -- (1,086,941) (1,086,941) Net income ............................. -- -- 69,042 69,042 ---------- ----------- ------------ ------------ BALANCE DECEMBER 31, 1995 ............... 2,225,000 354,000 384,231 2,963,231 Issuance of common stock ............... 600,000 -- -- 600,000 Capital contribution ................... -- 450,000 -- 450,000 Net income ............................. -- -- 1,361,821 1,361,821 ---------- ----------- ------------ ------------ BALANCE DECEMBER 31, 1996 ............... 2,825,000 804,000 1,746,052 5,375,052 Capital contribution ................... -- 940,000 -- 940,000 Net loss ............................... -- -- (23,903) (23,903) ---------- ----------- ------------ ------------ BALANCE AT DECEMBER 31, 1997 ............ 2,825,000 1,744,000 1,722,149 6,291,149 Net income (unaudited) ................. -- -- 756,921 756,921 ---------- ----------- ------------ ------------ Dividends declared (unaudited) ......... -- -- 419,858 419,858 BALANCE AT JUNE 30, 1998 (unaudited) $2,825,000 $ 1,744,000 $ 2,059,212 $ 6,628,212 ========== =========== ============ ============
See notes to combined financial statements. F-37 HATFIELD AUTOMOTIVE GROUP COMBINED STATEMENTS OF CASH FLOWS For the years ended December 31, 1995, 1996 and 1997 and the six months ended June 30, 1997 and 1998
Year ended December 31, Six months ended June 30, ----------------------------------------------- ------------------------------ 1995 1996 1997 1997 1998 --------------- --------------- --------------- -------------- --------------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ............................. $ 69,042 $ 1,361,821 $ (23,903) $ (234,536) $ 756,921 ------------ ------------ ------------ ------------ ------------ Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization ............... 38,836 107,461 221,463 106,565 158,210 Changes in assets and liabilities that related to operations: (Increase) decrease in receivables ......... (135,483) (1,503,996) (376,470) 55,647 97,271 Decrease (increase) in inventories ......... 130,645 (8,769,439) (3,624,241) 200,487 830,767 Decrease (increase) in other current assets .................................... (3,000,000) (2,525,214) (1,065,796) (1,497,867) 6,111,601 Increase in notes payable -- floor plan 264,242 7,356,921 4,764,137 3,540,914 1,637,275 Increase (decrease) in accounts payable and other accrued liabilities ............. 1,041,176 1,106,795 (1,229,584) (113,253) (771,580) ------------ ------------ ------------ ------------ ------------ Total adjustments ......................... (1,660,584) (4,227,472) (1,310,491) 2,292,493 8,063,544 ------------ ------------ ------------ ------------ ------------ Net cash (used in) provided by operating activities .................... (1,591,542) (2,865,651) (1,334,394) 2,057,957 8,820,465 ------------ ------------ ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ........... (138,936) (702,124) (423,048) -- (33,914) Proceeds from sale of assets .................. -- -- -- 27,892 -- Purchase of business .......................... -- -- (1,112,058) (1,112,058) -- ------------ ------------ ------------ ------------ ------------ Net cash used in investing activities (138,936) (702,124) (1,535,106) (1,084,166) (33,914) ------------ ------------ ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in amounts payable to stockholders ............................. 2,306,507 5,144,349 3,037,518 2,190,503 (6,405,354) Capital contribution .......................... -- -- 440,000 440,000 Distributions ................................. -- -- -- -- (419,859) ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities .................... 2,306,507 5,144,349 3,477,518 2,630,503 (6,825,213) ------------ ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......................... 576,029 1,576,574 608,018 3,604,294 1,961,337 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........................... 9,478,108 10,054,137 11,630,711 11,630,711 12,238,729 ------------ ------------ ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD ..................................... $ 10,054,137 $ 11,630,711 $ 12,238,729 $ 15,235,005 $ 14,200,066 ============ ============ ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest ...... $ 1,746,200 $ 1,053,437 $ 1,263,618 $ 669,404 $ 470,878 ============ ============ ============ ============ ============ NON-CASH FINANCING ACTIVITIES: Dividends declared but not paid ............... $ 1,086,941 -- -- -- -- Issuance of common stock in exchange for amounts payable to stockholders ............. $ 700,000 $ 600,000 -- -- -- Contribution to paid-in capital in exchange for amounts payable to stockholders ......... -- $ 450,000 $ 500,000 $ 500,000 --
See notes to combined financial statements. F-38 HATFIELD AUTOMOTIVE GROUP NOTES TO COMBINED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business -- Hatfield Automotive Group (the "Company") operates six automobile dealerships and a body shop in Columbus, Ohio. The Company sells new and used cars and light trucks, sells replacement parts, provides maintenance, warranty, paint and repair services and arranges related financing and insurance. The Company's six dealerships sell new vehicles manufactured by Toyota, Lincoln, Mercury, Jeep, Eagle, Volkswagen, Hyundai, Subaru, Isuzu, Chrysler, Plymouth, KIA and Dodge. The accompanying combined financial statements include the accounts of the following entities: Hatfield Jeep Eagle, Inc., d/b/a Volkswagen West, Jeep Eagle West, Hatfield KIA and Trader Bud's Westside Chrysler Plymouth Hatfield Lincoln Mercury, Inc., d/b/a Hatfield Lincoln Mercury Westside Dodge, Inc., d/b/a Westside Dodge Toyota West, Inc., d/b/a Toyota West Hatfield Hyundai, Inc., d/b/a Hatfield Hyundai, Hatfield Isuzu and Hatfield Subaru The accompanying combined financial statements reflect the financial position, results of operations, and cash flows of each of the above listed companies. 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. Revenue Recognition -- The Company records revenue when vehicles are delivered to customers, and when vehicle service work is performed. The Company arranges financing for customers through various financial institutions and receives a commission from the lender equal to the difference between the interest rates charged to customers over the predetermined interest rates set by the financing institution. The Company also receives commissions from the sale of credit life, accident, health and disability insurance and extended service contracts to customers. The Company may be assessed a chargeback fee in the event of early cancellation of a loan, insurance contract, or service contract by the customer. Finance and insurance commission revenue is recorded net of estimated chargebacks at the time the related contract is placed with the financial institution. Commissions expense related to finance and insurance commission revenue is charged to cost of sales upon recognition of such revenue, net of estimated chargebacks. Estimated commission expense charged to cost of sales was approximately $680,378, $718,927 and $959,426 for the years ended December 31, 1995, 1996, and 1997, respectively. Estimated commission expense charged to cost of sales was approximately $426,848 and $534,533 for the six months ended June 30, 1997 and 1998, respectively (unaudited). 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 vehicle inventory. Each dealership operates under a dealer agreement with the manufacturer. The Company's dealer agreement does not give it the exclusive right to sell the manufacturer's product within a given geographic area. The Company could be materially adversely affected if the manufacturer awards franchises to others in the same market where the Company is operating. A similar adverse affect could occur if existing competing franchised dealers increase their market share in the Company's market. The ability of the Company to acquire additional franchises from a particular manufacturer may be limited due to certain restrictions imposed by manufacturers. Additionally, ownership of the Company's stock by third parties may be limited by the terms of the franchise agreements. 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 were $8,171,520 and $6,270,709 at December 1996 and 1997, respectively. F-39 HATFIELD AUTOMOTIVE GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued Inventories -- Vehicle inventories are valued at the lower of specific cost or market. Parts and accessories are valued at the lower of first-in, first-out ("FIFO") cost or market. 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 amortized at December 31, 1997 was $16,667. 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. Property and Equipment -- Property and equipment are stated at cost. Depreciation is computed using straight-line methods over the estimated useful lives of the assets. The range of estimated useful lives is as follows:
Useful Lives ------------- Office equipment and fixtures .......... 5 Parts and service equipment ............ 5 Leasehold improvements ................. 10 Computer equipment ..................... 5
Expenditures for maintenance and repairs are expensed as incurred. Significant betterments are capitalized. Income taxes -- All of the Company's dealerships are organized as S Corporations for federal and state income tax purposes. As such, the Company's taxable income is included in the stockholders' annual income tax return. Accordingly, no provision for federal or state income taxes has been included in the Company's statements of income. The pro forma provision for income taxes and the pro forma net income for the years ended December 31, 1995, 1996 and 1997, and for the six months ended June 30, 1997 and 1998, 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. Concentration 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 Company's principal market area of Columbus, Ohio. 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 expenses for 1995, 1996 and 1997 amount to $2,619,348, $3,941,810 and $4,475,943, respectively. Interim Financial Information -- The accompanying unaudited interim financial information for the six months ended June 30, 1997 and 1998 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 year. 2. BUSINESS ACQUISITION On May 1, 1997, the Company acquired Trader Bud's Westside Chrysler Plymouth for a total purchase price of $1,112,058. The acquisition has been accounted for using purchase accounting and the results of operations of this dealership have been included in the accompanying combined financial statements from the date of acquisition. The total purchase price has been F-40 HATFIELD AUTOMOTIVE GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 2. BUSINESS ACQUISITION -- Continued allocated to the assets and liabilities acquired at their estimated fair market value at acquisition date as follows: Inventory ...................... $ 84,166 Property and equipment ......... 27,892 Goodwill ....................... 1,000,000 ---------- $1,112,058 ==========
The following unaudited pro forma financial information is presented as if Trader Bud's Westside Chrysler Plymouth were acquired on January 1, 1996 and January 1, 1997, respectively.
Year ended December 31, ------------------------------- 1996 1997 --------------- --------------- Revenues .................. $259,336,000 $281,718,000 Gross profit .............. 30,612,000 32,684,000 Net income (loss) ......... 1,257,000 (67,000)
The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the operating results that would have occurred had Trader Bud's Westside Chrysler Plymouth been acquired on January 1, 1996 and 1997, respectively. 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, ----------------------------- 1998 1996 1997 (Unaudited) -------------- -------------- -------------- New vehicles .................. $24,597,294 $ 29,227,278 $29,088,954 Used vehicles ................. 5,263,444 4,181,804 3,272,038 Parts and accessories ......... 966,895 1,125,050 1,333,942 Other ......................... 27,756 29,664 38,095 ----------- ------------ ----------- Total ......................... $30,855,389 $ 34,563,796 $33,733,029 =========== ============ ===========
All new and certain used vehicles are pledged to collateralize floor plan notes payable to financial institutions in the amount of $28,941,767 and $33,705,904 at December 31, 1996 and 1997, respectively. The floor plan notes bear interest that fluctuates with prime. Interest is payable monthly on the outstanding balance, ranging from 7.94% to 9.25% and 8.00% to 9.50% at December 31, 1996 and 1997, respectively. The notes payable are due when the related vehicles are sold. As such, these floor plan notes payable are shown as a current liability in the accompanying combined balance sheets. F-41 HATFIELD AUTOMOTIVE GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 4. PROPERTY AND EQUIPMENT Property and equipment is comprised of the following:
December 31, June 30, ------------------------------- 1998 1996 1997 (Unaudited) --------------- --------------- --------------- Parts and service equipment ........... $ 1,173,892 $ 1,404,291 $ 1,412,254 Office equipment and fixtures ......... 424,894 504,973 530,926 Leasehold improvements ................ 303,407 422,616 360,104 Computer equipment .................... 35,999 57,252 57,252 ------------ ------------ ------------ 1,938,192 2,389,132 2,360,536 Less accumulated depreciation ......... (1,120,232) (1,325,028) (1,408,227) ------------ ------------ ------------ Property and equipment, net ........... $ 817,960 $ 1,064,104 $ 952,309 ============ ============ ============
5. COMBINED EQUITY 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 Par Shares Issued and Paid-In Value Authorized Outstanding Amount Capital ------------- ------------ ------------- ------------- ----------- Hatfield Jeep Eagle, Inc. .............. No Par 5,000 100 $ 225,000 $354,000 Hatfield Lincoln Mercury, Inc. ......... $ 100 10,000 6,000 600,000 450,000 Westside Dodge, Inc. Voting ............ No par 5,000 4,000 800,000 -- Non-voting ............................. No par 5,000 1,000 200,000 -- Toyota West, Inc. Voting .............. No par 250 250 250,000 -- Non-voting ............................. No par 250 250 250,000 -- Hatfield Hyundai, Inc. ................. No par 750 750 500,000 -- ---------- -------- Total .................................. $2,825,000 $804,000 ========== ========
The capital structure of the entities included in the combined financial statements of the Company at December 31, 1997 is as follows:
Common Stock ------------------------------------------------------------ Shares Par Shares Issued and Paid-In Value Authorized Outstanding Amount Capital ------------- ------------ ------------- ------------- ------------- Hatfield Jeep Eagle, Inc. .............. No Par 5,000 100 $ 225,000 $1,294,000 Hatfield Lincoln Mercury, Inc. ......... $ 100 10,000 6,000 600,000 450,000 Westside Dodge, Inc. Voting ............ No par 5,000 4,000 800,000 -- Non-voting ............................. No par 5,000 1,000 200,000 -- Toyota West, Inc. Voting ............... No par 250 250 250,000 -- Non-voting ............................. No par 250 250 250,000 -- Hatfield Hyundai, Inc. ................. No par 750 750 500,000 -- ---------- ---------- Total .................................. $2,825,000 $1,744,000 ========== ==========
6. RELATED PARTIES The management bonuses were paid to Company stockholders and certain management companies owned by a Company stockholder. Unpaid bonuses and dividends are included in the amounts payable to stockholders -- non-current. F-42 HATFIELD AUTOMOTIVE GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 6. RELATED PARTIES -- Continued Included in finance and insurance revenues are $433,599, $489,005 and $480,875 for 1995, 1996 and 1997, respectively, in commissions generated from selling credit life policies to customers which have been distributed to a company owned by a stockholder. Other current assets at December 31, 1996 and 1997 include $5,525,214 and $6,653,925, respectively, of cash owned by stockholders on deposit in the Company's cash management account. A liability for this amount is included in amounts payable to stockholders -- current. The Company leases all of its operating facilities directly from a Company stockholder or from a corporation which is owned by that stockholder. Rent expense under these leases was $1,680,000 in 1995 and 1996 and $2,360,000 in 1997. The Company also paid $166,756, $190,500 and $216,332 to these related parties for property taxes for the years ended December 31, 1995, 1996 and 1997, respectively. Total rent expense was $1,746,050 in 1995, $1,724,660 in 1996, and $2,469,859 in 1997. Other leases consist primarily of leases for office and computer equipment. Future minimum rental payments required under noncancelable operating leases at December 31, 1997 are as follows:
Related Party Other Total --------------- ----------- ------------- Year ending December 31: 1998 ................... $2,460,000 $189,835 $2,649,835 1999 ................... 2,460,000 128,435 2,588,435 2000 ................... 2,335,000 109,618 2,444,618 2001 ................... 300,000 29,080 329,080 2002 ................... -- 15,798 15,798 ---------- -------- ---------- Total .................. $7,555,000 $472,766 $8,027,766 ========== ======== ==========
7. EMPLOYEE BENEFIT 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 6% of participant contributions. Company contributions amounted to $47,528, $63,015 and $76,922 in 1995, 1996, and 1997, respectively. 8. CONTINGENCIES The Company is involved 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 results of operations and cash flows. 9. SUBSEQUENT EVENT (UNAUDITED) In February 1998, the Company signed an asset purchase agreement with Sonic Automotive, Inc. ("Sonic") whereby Sonic would purchase substantially all of the Company's assets for a total price of approximately $48.6 million plus the assumption of certain liabilities of the Company. This acquisition was consummated in July 1998. The total purchase price is subject to adjustment based on a final determination of the value of the net current assets of the Company. Of the total purchase price Sonic paid approximately $34.6 million in cash and the balance was paid by the issuance of preferred stock with a liquidation preference of approximately $14.0 million as of the closing date of the acquisition. The acquisition of the assets of Toyota West, Inc. was closed in escrow pending the approval of Toyota for the acquisition of this dealership. F-43 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF ECONOMY CARS, INC. CHATTANOOGA, TENNESSEE We have audited the accompanying balance sheet of Economy Cars, Inc., d/b/a Economy Honda Cars (the "Company"), as of December 31, 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, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 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 May 11, 1998 F-44 ECONOMY HONDA CARS BALANCE SHEETS December 31, 1997 and June 30, 1998
December 31, June 30, 1997 1998 -------------- ---------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents ............................................ $ 3,834,184 $ 7,266,329 Accounts receivable (net of allowance for doubtful accounts of $13,505 at December 31, 1997) .............................................. 842,907 496,292 Note receivable (Note 2) ............................................. 238,960 0 Inventories (Note 3) ................................................. 6,541,972 4,022,603 Other current assets ................................................. 4,477 57,898 ----------- ------------ Total current assets ............................................... 11,462,500 11,843,121 PROPERTY AND EQUIPMENT, NET (Note 4) .................................. 1,791,974 1,730,670 ----------- ------------ TOTAL ASSETS .......................................................... $13,254,474 $ 13,573,791 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable ............................................... $ 148,073 $ 205,299 Income taxes payable (Note 6) ........................................ 251,237 0 Deferred income taxes (Note 6) ....................................... 173,511 173,511 Other taxes payable .................................................. 215,619 208,058 Accrued payroll and bonuses .......................................... 105,174 450,245 Liability for finance chargebacks .................................... 95,550 68,764 Other accrued liabilities ............................................ 6,879 1,338 ----------- ------------ Total current liabilities .......................................... 996,043 1,107.215 ----------- ------------- DEFERRED INCOME TAXES (Note 6) ........................................ 78,449 78,449 ----------- ------------- STOCKHOLDERS' EQUITY: Common stock (no par, 2,000 shares authorized, 500 shares issued and 450 shares outstanding) ............................................ 50,000 50,000 Retained earnings .................................................... 12,329,982 12,538,121 Treasury stock (50 shares) ........................................... (200,000) (200,000) ----------- ------------- Total stockholders' equity ......................................... 12,179,982 12,388,128 ----------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................ $13,254,474 $ 13,573,792 =========== =============
See notes to financial statements. F-45 ECONOMY HONDA CARS STATEMENTS OF INCOME Year ended December 31, 1997 and the six months ended June 30, 1997 and 1998
Six months Year ended ended June 30, December 31, ------------------------------ 1997 1997 1998 --------------- -------------- -------------- (Unaudited) REVENUES: Vehicle sales ................................... $41,032,638 $21,020,878 $19,459,700 Parts, service and collision repair ............. 5,855,509 2,970,118 2,756,494 Finance and insurance (Note 1) .................. 1,383,106 801,745 472,438 ----------- ----------- ----------- Total revenues ................................ 48,271,253 24,792,741 22,688,632 COST OF SALES (Note 1) ........................... 41,542,860 21,145,724 19,820,152 ----------- ----------- ----------- GROSS PROFIT ..................................... 6,728,393 3,647,017 2,868,480 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ..... 5,142,472 2,611,619 2,584,792 DEPRECIATION ..................................... 130,996 64,518 70,857 ----------- ----------- ----------- OPERATING INCOME ................................. 1,454,925 970,880 212,831 ----------- ----------- ----------- OTHER INCOME (EXPENSE): Interest expense -- floor plan (Note 3) ......... (2,791) (679) (3,102) Interest income ................................. 75,852 13,886 88,584 Other income .................................... 119,261 39,750 37,190 ----------- ----------- ----------- Total other income ............................ 192,322 52,957 122,672 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES ....................... 1,647,247 1,023,837 335,503 PROVISION FOR INCOME TAXES (Note 6) .............. 626,062 388,649 127,357 ----------- ----------- ----------- NET INCOME ....................................... $ 1,021,185 $ 635,188 $ 208,146 =========== =========== ===========
See notes to financial statements. F-46 ECONOMY HONDA CARS STATEMENTS OF STOCKHOLDERS' EQUITY Year Ended December 31, 1997 and the six months ended June 30, 1998
Total Common Retained Treasury Stockholders' Stock Earnings Stock Equity ---------- -------------- -------------- -------------- BALANCE AT DECEMBER 31, 1996 ................. $50,000 $11,308,797 $ (200,000) $11,158,797 Net income .................................. -- 1,021,185 -- 1,021,185 ------- ----------- ---------- ----------- BALANCE AT DECEMBER 31, 1997 ................. 50,000 12,329,982 (200,000) 12,179,982 Net income (unaudited) ...................... -- 208,146 -- 208,146 ------- ----------- ---------- ----------- BALANCE AT JUNE 30, 1998 (unaudited) ......... $50,000 $12,538,128 $ (200,000) $12,388,128 ======= =========== ========== ===========
See notes to financial statements. F-47 ECONOMY HONDA CARS STATEMENTS OF CASH FLOWS Year ended December 31, 1997 and the six months ended June 30, 1997 and 1998
Six months ended Year ended June 30, December 31, ---------------------------- 1997 1997 1998 ------------- ------------- ------------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income .............................................................. $1,021,185 $ 635,188 $ 208,146 ---------- ---------- ---------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation .......................................................... 130,996 64,518 70,857 Loss on disposal of fixed assets ...................................... 2,258 -- -- Deferred income taxes ................................................. (39,266) 0 0 Changes in assets and liabilities that related to operations: (Increase) decrease in accounts receivables .......................... (432,900) (109,163) 346,615 Decrease in inventories .............................................. 789,447 (179,870) 2,519,369 Decrease in prepaids and other current assets ........................ 330,940 304,268 (53,421) Increase in trade accounts payable and accrued liabilities ........... 142,753 547,579 111,173 ---------- ---------- ---------- Total adjustments ................................................... 924,228 627,332 2,994,593 ---------- ---------- ---------- Net cash provided by operating activities ........................... 1,945,413 1,262,520 3,202,739 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ..................................... (196,016) (170,252) (9,554) Proceeds from sale of assets ............................................ 4,685 -- -- Principal collected on notes receivable ................................. 47,358 24,739 238,960 ---------- ---------- ---------- Net cash provided by (used in) investing activities ................. (143,973) (145,513) 229,406 ---------- ---------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS ................................ 1,801,440 1,117,007 3,432,145 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........................... 2,032,744 2,032,744 3,834,184 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD ................................. $3,834,184 $3,149,751 $7,266,329 ========== ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -- Cash paid during the period for: Interest ................................................................ $ 89,984 $ 63,880 $ 8,756 Income taxes ............................................................ $ 258,869 $ 98,914 $ 434,614
See notes to financial statements. F-48 ECONOMY HONDA CARS NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business -- Economy Honda Cars (the "Company") operates an automotive dealership, service department, body shop and parts and accessories department in Chattanooga, Tennessee. The Company sells new and used cars and light trucks, sells replacement parts and accessories, provides vehicle maintenance, warranty, paint and repair services and arranges related financing and insurance. The Company sells new vehicles manufactured by Honda. Revenue Recognition -- The Company records revenue when vehicles are delivered to customers, and when vehicle service work is performed. The Company arranges financing for customers through various financial institutions and receives a commission from the lender equal to the difference between the interest rates charged to customers over the predetermined interest rates set by the financing institution. The Company also receives commissions from the sale of credit life, accident, health and disability insurance and extended service contracts to customers. The Company may be assessed a chargeback fee in the event of early cancellation of a loan, insurance contract, or service contract by the customer. Finance and insurance commission revenue is recorded net of estimated chargebacks at the time the related contract is placed with the financial institution. Commissions expense related to finance and insurance commission revenue is charged to cost of sales upon recognition of such revenue, net of estimated chargebacks. Estimated commission expense charged to cost of sales was approximately $251,233 for the year ended December 31, 1997. Estimated commission expense charged to cost of sales was approximately $144,827 and $89,333 for the six months ended June 30, 1997 and 1998, respectively (unaudited). 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 vehicle inventory. The Company operates under a dealer agreement with the manufacturer. The Company's dealer agreement does not give it the exclusive right to sell the manufacturer's product within a given geographic area. The Company could be materially adversely affected if the manufacturer awards franchises to others in the same market where the Company is operating. A similar adverse affect could occur if existing competing franchised dealers increase their market share in the Company's market. 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 were $919,251 at December 31, 1997. Inventories -- Inventories of new and used vehicles, including demonstrators and parts and accessories, are valued at the lower of specific cost or market. Cost is determined using the last-in, first-out method ("LIFO") for new vehicles and parts and accessories. Property and Equipment -- Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The range of estimated useful lives is as follows:
Useful Lives ------------- Buildings and improvements ............. 7-31.5 Office equipment and fixtures .......... 5-7 Parts and service equipment ............ 5-10 Company vehicles ....................... 5
Expenditures for maintenance and repairs are expensed as incurred. Significant betterments are capitalized. Income Taxes -- The provision for income taxes includes federal and state taxes currently payable and deferred taxes. Deferred taxes are determined utilizing an asset and liability approach as required by Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. This method gives consideration to the future tax consequences associated with differences between financial accounting and tax basis of assets and liabilities. This method gives immediate effect to F-49 ECONOMY HONDA CARS NOTES TO FINANCIAL STATEMENTS -- Continued 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued changes in income tax laws upon enactment. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized. 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 Company's market area of Chattanooga, Tennessee. Fair Value of Financial Instruments -- As of December 31, 1997 the fair value of the Company's financial instruments including accounts and notes receivables and trade accounts payable approximate their book 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 for 1997 amounted to $531,473. Interim Financial Information -- The accompanying unaudited financial information for the six months ended June 30, 1997 and 1998 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 year. 2. NOTE RECEIVABLE At December 31, 1997, the Company had a note receivable from an unrelated party totaling $238,960. The note bore interest at 12% per annum and was payable in monthly installments of $6,293. On April 7, 1998, the note was purchased for cash by one of the Company's principal stockholders at the recorded book value of $231,115 at that date. 3. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN Inventories consist of the following:
December 31, June 30, 1997 1998 -------------- -------------- (Unaudited) New vehicles .................. $ 1,798,172 $2,390,339 Used vehicles ................. 4,902,142 1,910,137 Parts and accessories ......... 365,630 324,379 ----------- ---------- 7,065,944 4,624,855 LIFO reserve .................. (523,972) (602,252) ----------- ---------- Total ......................... $ 6,541,972 $4,022,603 =========== ==========
Had the Company used the first-in, first-out method of valuing new vehicles, parts and accessories inventory, pretax earnings would have been $1,819,742 in 1997. From time to time certain vehicles are pledged to collateralize floor plan notes payable to financial institutions. The floor plan notes bear interest, payable monthly on the outstanding balance at a rate that fluctuates with prime (8.5% at F-50 ECONOMY HONDA CARS NOTES TO FINANCIAL STATEMENTS -- Continued 3. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN -- Continued December 31, 1997). Total floor plan interest expense amounted to $2,791 in 1997. The notes payable are due when the related vehicle is sold; however, the Company generally pays floor plan as invoiced for vehicles during the year. There is no balance outstanding under such floor plan notes at December 31, 1997. 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
December 31, June 30, 1997 1998 -------------- --------------- (Unaudited) Land .................................. $ 624,430 $ 624,430 Buildings and improvements ............ 1,922,175 1,928,017 Office equipment and fixtures ......... 299,278 302,844 Parts and service equipment ........... 358,961 358,961 Company vehicles ...................... 62,254 62,254 ------------ ------------ 3,267,098 3,276,506 Less accumulated depreciation ......... (1,475,124) (1,545,836) ------------ ------------ Property and equipment, net ........... $ 1,791,974 $ 1,730,670 ============ ============
5. EMPLOYEE BENEFIT PLAN The Company has 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 in 1997 were approximately $39,000. 6. INCOME TAXES The provision for income taxes consists of the following components for the year ended December 31, 1997: Current: Federal ................ $ 559,667 State .................. 105,663 --------- 665,330 --------- Deferred: Federal ................ (33,061) State .................. (6,207) --------- 39,268 --------- Total .................. $ 626,062 =========
The reconciliation of the statutory federal income tax rate with the Company's federal and state overall effective income tax rate is as follows for the year ending December 31, 1997: Statutory federal rate ......... 34.00% State income taxes ............. 3.98% Miscellaneous .................. 0.03% ----- Effective tax rates ............ 38.01% =====
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. F-51 ECONOMY HONDA CARS NOTES TO FINANCIAL STATEMENTS -- Continued 6. INCOME TAXES -- Continued Deferred income tax assets and liabilities consist of the following at December 31, 1997: Deferred tax assets, primarily from differences relating to chargebacks ........... $ 85,528 Deferred tax liabilities, primarily from differences relating to used car inventory reserve .......................................................................... (337,488) ---------- Net deferred tax liabilities ...................................................... $ 251,960 ==========
7. SUBSEQUENT EVENT On March 16, 1998, the Company entered into an agreement with Sonic Automotive, Inc. ("Sonic") whereby Sonic will purchase all of the outstanding capital stock of the Company for a total purchase price of $7.5 million plus an amount equal to the net book value of the assets of the Company. This purchase price will be paid in cash and convertible preferred stock of Sonic. Preferred stock will be issued for 51% of the total purchase price, not to exceed $5.1 million in liquidation preference as of the closing of the acquisition. F-52 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF CASA FORD OF HOUSTON, INC. Houston, Texas We have audited the accompanying balance sheet of Casa Ford of Houston, Inc. (the "Company") as of December 31, 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, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 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 June 4, 1998 F-53 CASA FORD OF HOUSTON, INC. BALANCE SHEETS December 31, 1997 and March 31, 1998
December 31, March 31, 1997 1998 -------------- -------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents (Note 1) .................................. $ 1,386,749 $ 1,685,197 Accounts receivable (net of allowance for doubtful accounts of $1,553 at December 31, 1997) ............................................. 822,335 495,339 Inventories (Note 3) ................................................ 8,743,629 6,430,778 Other current assets ................................................ 283,717 315,144 ----------- ----------- Total current assets .............................................. 11,236,430 8,926,458 PROPERTY AND EQUIPMENT, NET (Notes 4 and 5) .......................... 911,615 872,323 DEFERRED INCOME TAXES (Note 8) ....................................... 264,307 264,307 GOODWILL (Note 1) .................................................... 617,518 603,795 ----------- ----------- TOTAL ASSETS ......................................................... $13,029,870 $10,666,883 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable -- floor plan (Note 3) ................................ $ 8,681,340 $ 6,149,209 Trade accounts payable .............................................. 432,860 294,196 Current maturities -- long-term debt (Note 5) ....................... 782,098 770,425 Income taxes payable (Note 8) ....................................... 149,725 233,795 Accrued payroll and bonuses ......................................... 188,080 24,255 Other accrued liabilities ........................................... 538,430 837,295 ----------- ----------- Total current liabilities ......................................... 10,772,533 8,309,175 ----------- ----------- LONG-TERM DEBT (Note 5) .............................................. 1,020,867 857,732 ----------- ----------- COMMITMENTS (Notes 6 and 9) STOCKHOLDERS' EQUITY: Receivable from stockholder (Note 2) ................................ (428,310) (441,309) Common stock ($100 par, 12,500 shares authorized, issued and outstanding) ...................................................... 1,250,000 1,250,000 Retained earnings ................................................... 414,780 691,285 ----------- ----------- Total stockholders' equity ........................................ 1,236,470 1,499,976 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................... $13,029,870 $10,666,883 =========== ===========
See notes to financial statements. F-54 CASA FORD OF HOUSTON, INC. STATEMENTS OF INCOME Year ended December 31, 1997 and the three months ended March 31, 1997 and 1998
Three months Year ended ended March 31, December 31, ----------------------------- 1997 1997 1998 --------------- -------------- -------------- (Unaudited) REVENUES: Vehicle sales ................................... $ 58,239,109 $12,889,721 $15,165,697 Parts, service and collision repair ............. 6,025,033 1,290,680 1,498,063 Finance and insurance (Note 1) .................. 2,252,297 479,359 534,451 ------------ ----------- ----------- Total revenues ................................ 66,516,439 14,659,760 17,198,211 COST OF SALES (Note 1) ........................... 57,164,094 12,656,805 14,629,714 ------------ ----------- ----------- GROSS PROFIT ..................................... 9,352,345 2,002,955 2,568,497 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ..... 6,929,277 1,428,740 1,778,333 DEPRECIATION AND AMORTIZATION .................... 299,456 74,864 76,014 ------------ ----------- ----------- OPERATING INCOME ................................. 2,123,612 499,351 714,150 ------------ ----------- ----------- OTHER INCOME (EXPENSE): Interest expense -- floor plan (Note 3) ......... (885,573) (202,407) (216,937) Interest expense -- other ....................... (301,995) (71,332) (59,624) Other income .................................... 129,518 89 9,541 ------------ ----------- ----------- Total other expense ........................... (1,058,050) (273,650) (267,020) ------------ ----------- ----------- INCOME BEFORE INCOME TAXES ....................... 1,065,562 225,701 447,130 PROVISION FOR INCOME TAXES (Note 8) .............. 406,579 86,178 170,625 ------------ ----------- ----------- NET INCOME ....................................... $ 658,983 $ 139,523 $ 276,505 ============ =========== ===========
See notes to financial statements. F-55 CASA FORD OF HOUSTON, INC. STATEMENTS OF STOCKHOLDERS' EQUITY Year ended December 31, 1997 and the three months ended March 31, 1998
Retained Total Receivable Common Earnings Stockholders' from Shareholder Stock (Deficit) Equity ------------------ -------------- --------------- -------------- BALANCE AT DECEMBER 31, 1996 ........... (352,101) $ 1,250,000 $ (244,203) $ 653,696 Amounts loaned to stockholder ......... (76,209) -- -- (76,209) Net income ............................ -- -- 658,983 658,983 -------- ----------- ----------- ---------- BALANCE AT DECEMBER 31, 1997 ........... (428,310) 1,250,000 414,780 1,236,470 Amounts loaned to stockholder ......... (12,999) -- -- (12,999) Net income (unaudited) ................ -- -- 276,505 276,505 -------- ----------- ----------- ---------- BALANCE AT MARCH 31, 1998 (unaudited) $ (441,309) $ 1,250,000 $ 691,285 $1,499,976 ========== =========== =========== ==========
See notes to financial statements. F-56 CASA FORD OF HOUSTON, INC. STATEMENTS OF CASH FLOWS Year ended December 31, 1997 and the three months ended March 31, 1997 and 1998
Three months ended Year ended March 31, December 31, --------------------------------- 1997 1997 1998 --------------- --------------- --------------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income ............................................................. $ 658,983 $ 139,523 $ 276,505 ------------ ------------ ------------ Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization ........................................ 354,346 74,864 76,014 Deferred income taxes ................................................ (140,290) (69,860) -- Changes in assets and liabilities that related to operations: (Increase) decrease in accounts receivables ......................... 60,637 302,948 326,996 (Increase) decrease in inventories .................................. (369,151) 2,520,131 2,312,851 Increase in other current assets .................................... (69,385) (309,711) (31,427) Increase (decrease) in income tax payable ........................... (40,341) (103,888) 84,070 Payments of floor plan notes payable ................................ (690,969) (2,952,473) (2,532,131) Increase (decrease) in trade accounts payable and accrued liabilities 29,941 392,792 (3,624) ------------ ------------ ------------ Total adjustments .................................................. (865,212) (145,197) 232,749 ------------ ------------ ------------ Net cash (used in) provided by operating activities ................ (206,229) (5,674) 509,254 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment .................................... (290,996) (17,338) (22,999) ------------ ------------ ------------ Net cash used in investing activities .............................. (290,996) (17,338) (22,999) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Payments of long-term debt ............................................. (529,853) (253,428) (174,808) ------------ ------------ ------------ Amounts (loaned to) received from stockholder .......................... (76,209) 3,065 (12,999) Net cash used in financing activities .............................. (606,062) (250,363) (187,807) ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................... (1,103,287) (273,375) 298,448 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .......................... 2,490,036 2,490,036 1,386,749 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD ................................ $ 1,386,749 $ 2,216,661 $ 1,685,197 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -- Cash paid during the period for: Interest ............................................................... $ 64,241 $ 112,862 $ 89,417 ============ ============ ============ Income taxes ........................................................... $ 597,500 $ 330,000 $ 86,555 ============ ============ ============
See notes to financial statements. F-57 CASA FORD OF HOUSTON, INC. NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business -- Casa Ford of Houston, Inc. (the "Company") operates an automotive dealership, service department, body shop and parts and accessories department in Houston, Texas. The Company sells new and used cars and light trucks, sells replacement parts and accessories, provides vehicle maintenance, warranty, paint and repair services and arranges related financing and insurance. The Company sells new vehicles manufactured by Ford. Revenue Recognition -- The Company records revenue when vehicles are delivered to customers, and when vehicle service work is performed. The Company arranges financing for customers through various financial institutions and receives a commission from the lender equal to the difference between the interest rates charged to customers over the predetermined interest rates set by the financing institution. The Company also receives commissions from the sale of credit life, accident, health and disability insurance and extended service contracts to customers. The Company may be assessed a chargeback fee in the event of early cancellation of a loan, insurance contract, or service contract by the customer. Finance and insurance commission revenue is recorded net of estimated chargebacks at the time the related contract is placed with the financial institution. Commissions expense related to finance and insurance commission revenue is charged to cost of sales upon recognition of such revenue, net of estimated chargebacks. Estimated commission expense charged to cost of sales was approximately $290,267 for the year ended December 31, 1997. Estimated commission expense charged to cost of sales was approximately $60,827 and $80,195 for the six months ended March 31, 1997 and 1998, respectively (unaudited). 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 vehicle inventory. The Company operates under a dealer agreement with the manufacturer. The Company's dealer agreement does not give it the exclusive right to sell the manufacturer's product within a given geographic area. The Company could be materially adversely affected if the manufacturer awards franchises to others in the same market where the Company is operating. A similar adverse effect could occur if existing competing franchised dealers increase their market share in the Company's market. 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 $761,776 at December 31, 1997. Inventories -- Inventories of new and demonstrator vehicles are valued at the lower of last-in, first-out method ("LIFO") cost or market. Inventories of used vehicles are stated at the lower of specific cost or market. All other inventories are generally stated at replacement cost, which approximates cost on the first-in, first-out method ("FIFO"). Property and Equipment -- Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The range of estimated useful lives is as follows:
Useful Lives ------------- Leasehold improvements ................. 7-31.5 Office equipment and fixtures .......... 5-7 Parts and service equipment ............ 5-10 Company vehicles ....................... 5
Expenditures for maintenance and repairs are expensed as incurred. Significant betterments are capitalized. Income Taxes -- The provision for income taxes includes federal and state taxes currently payable and deferred taxes. Deferred taxes are determined utilizing an asset and liability approach as required by Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. This method gives consideration to the future tax consequences associated with differences between financial accounting and tax basis of assets and liabilities. This method gives immediate effect to F-58 CASA FORD OF HOUSTON, INC. NOTES TO FINANCIAL STATEMENTS -- Continued 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued changes in income tax laws upon enactment. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized. Goodwill -- Goodwill is being amortized on a straight-line basis over a period of 15 years. Accumulated amortization at December 31, 1997 was $205,839. 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. 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 Company's market area of Houston, Texas. 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. Fair Value of Financial Instruments -- As of December 31, 1997 the fair value of the Company's financial instruments including accounts receivable, receivable from shareholder, trade accounts payable, and long-term debt approximate their book values. Advertising -- The Company expenses advertising costs in the period incurred. Advertising expense for 1997 amounted to $581,752. Interim Financial Information -- The accompanying unaudited financial information for the three months ended March 31, 1997 and 1998 have 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. RECEIVABLE FROM STOCKHOLDER At December 31, 1997, the Company had a receivable due from a related party totaling $428,310, bearing no stated interest rate. The receivable was paid in full as of April 1998 pursuant to a dividend. 3. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN Inventories consist of the following:
December 31, March 31, 1997 1998 -------------- -------------- (Unaudited) New and demonstrator vehicles ......... $ 7,969,681 $ 4,980,041 Used vehicles ......................... 996,821 1,484,967 Parts and accessories ................. 412,757 432,264 Other ................................. 77,896 247,032 ----------- ----------- 9,457,155 7,144,304 LIFO reserve .......................... (713,526) (713,526) ----------- ----------- Total ................................. $ 8,743,629 $ 6,430,778 =========== ===========
F-59 CASA FORD OF HOUSTON, INC. NOTES TO FINANCIAL STATEMENTS -- Continued 3. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN -- Continued Had the Company used the first-in, first-out method of valuing new vehicles and parts inventory, pretax earnings would have been $1,304,193 in 1997. All new and certain used vehicles are pledged to collateralize floor plan notes payable to financial institutions in the amount of $8,681,340 at December 31, 1997. The floor plan notes bear interest, payable monthly on the outstanding balance at the prime rate plus 1% to 1-1/2% (prime rate was 8.5% at December 31, 1997). Total floor plan interest expense amounted to $885,573 in 1997. 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. The maximum credit available under the financing arrangement is $7,800,000 for 1997. 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
December 31, March 31, 1997 1998 -------------- ------------ (Unaudited) Leasehold improvements ................ $ 221,132 $ 222,496 Office equipment and fixtures ......... 780,133 785,025 Parts and service equipment ........... 437,504 454,163 Company vehicles ...................... 219,547 219,631 ---------- ---------- 1,658,317 1,681,315 Less accumulated depreciation ......... (746,701) (808,992) ---------- ---------- Property and equipment, net ........... $ 911,615 $ 872,323 ========== ==========
5. LONG-TERM DEBT Long-term debt consists of the following:
December 31, March 31, 1997 1998 -------------- ------------ (Unaudited) Unsecured note payable to a related party, in monthly installments of $25,500, plus interest at prime .............................................................................. $ 864,000 $ 787,500 Unsecured note payable in monthly installments of $14,880, plus interest at prime plus 1 1/2%, through February 2001 ......................................................... 570,960 524,237 Notes payable in monthly installments totaling $7,670, plus interest ranging from 9.7% to 10.7%, through December 2000 .......................................................... 104,433 92,389 Unsecured note payable in monthly installments of $2,083, plus interest at 8.55%, through March 1999 ............................................................................ 31,250 27,083 Notes payable in monthly installments totaling $5,501, including interest at rates ranging from 4.748% to 9.312%, maturities from December 1998 to November 2000, collateralized by Company vehicles .................................................... 156,921 142,934 Other notes payable ..................................................................... 75,401 54,014 ----------- ---------- 1,802,965 1,628,157 Less current maturities ................................................................. 782,098 770,425 ----------- ---------- Long-term debt .......................................................................... $ 1,020,867 $ 857,732 =========== ==========
F-60 CASA FORD OF HOUSTON, INC. NOTES TO FINANCIAL STATEMENTS -- Continued 5. LONG-TERM DEBT -- Continued Future maturities of debt at December 31, 1997 are as follows:
Year ending December 31, - -------------------------- 1998 ................... $ 782,098 1999 ................... 544,503 2000 ................... 441,084 2001 ................... 35,280 ----------- Total .................. $ 1,802,965 ===========
6. OPERATING LEASES The Company leases its business premises, modular space and various equipment under non-cancelable operating leases with terms up to 10 years. Future minimum rental payments required under non-cancelable leases at December 31, 1997 are as follows: Year Ending December 31, 1998 ................... $ 305,560 1999 ................... 304,452 2000 ................... 304,452 2001 ................... 304,452 2002 ................... 304,452 Thereafter ............. 989,469 ---------- Total .................. $2,512,837 ==========
Rent expense under all operating leases was $297,592 during 1997. 7. EMPLOYEE BENEFIT PLAN The Company has a qualified 401(k) Profit Sharing Plan (the "Plan"), whereby substantially all of the employees of the Company meeting certain service requirements are eligible to participate. Contributions by the Company in 1997 were $20,733. 8. INCOME TAXES The provision (benefit) for income taxes consists of the following components at December 31, 1997: Current: Federal .............. $ 482,949 State ................ 63,920 ---------- 546,869 Deferred: Federal .............. (123,213) State ................ (17,077) ---------- (140,290) ---------- Total ................ $ 406,579 ==========
F-61 CASA FORD OF HOUSTON, INC. NOTES TO FINANCIAL STATEMENTS -- Continued 8. INCOME TAXES -- Continued The reconciliation of the statutory federal income tax rate with the Company's federal and state overall effective income tax rate is as follows for the year ending December 31, 1997: Statutory federal rate ......... 34.00% State income taxes ............. 2.90% Miscellaneous .................. 1.26% ----- Effective tax rate ............. 38.16% =====
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. Deferred income tax assets and liabilities consist of the following at December 31, 1997: Deferred tax assets -- primarily from differences relating to amortization of extended warranties ....................................................................... $ 522,261 Deferred tax liabilities -- primarily from differences relating to depreciation .... (29,389) --------- Net deferred tax assets ............................................................ $ 492,872 =========
9. COMMITMENTS 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 $902,057 at December 31, 1997. 10. SUBSEQUENT EVENT (UNAUDITED) In April 1998, the Company entered into an agreement with Sonic Automotive, Inc. ("Sonic") whereby Sonic purchased all of the outstanding capital stock of the Company for a total purchase price of approximately $11.3 million. The initial purchase price was subject to adjustment based upon a final determination of the net working capital of the Company. Of the total purchase price approximately $9.0 million was paid in cash and the balance was paid in 2,313 shares of Sonic preferred stock with a liquidation preference of approximately $2.3 million. F-62 INDEPENDENT AUDITORS' REPORT TO THE STOCKHOLDERS OF HIGGINBOTHAM AUTOMOTIVE GROUP New Smyrna Beach, Florida We have audited the accompanying combined balance sheet of Higginbotham Automotive Group (the "Company"), which are under common ownership and management, as of December 31, 1997, and the related combined 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, such financial statements present fairly, in all material respects, the combined financial position of the Company as of December 31, 1997, and the combined results of its operations and its combined cash flows for the year then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Charlotte, North Carolina August 21, 1998 F-63 HIGGINBOTHAM AUTOMOTIVE GROUP COMBINED BALANCE SHEETS December 31, 1997 and June 30, 1998
December 31, June 30, 1997 1998 -------------- -------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents ............................. $ 4,653,226 $ 4,627,800 Accounts receivable ................................... 2,694,069 2,292,400 Finance notes receivable, net (Note 3) ................ 2,157,078 2,479,858 Inventories, net (Note 4) ............................. 14,442,063 9,893,278 Other current assets .................................. 449,690 556,828 ----------- ----------- Total current assets ................................ 24,396,126 19,850,164 PROPERTY AND EQUIPMENT, NET (Notes 5 and 6) ............ 2,942,142 2,921,787 FINANCE NOTES RECEIVABLE, NET (Note 3) ................. 1,407,762 1,564,234 GOODWILL, NET (Note 1) ................................. 884,000 847,167 OTHER ASSETS ........................................... 364,936 373,918 ----------- ----------- TOTAL ASSETS ........................................... $29,994,966 $25,557,270 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable -- floor plan (Note 4) .................. $16,217,355 $11,032,690 Notes payable -- other (Note 6) ....................... 3,237,083 3,034,879 Trade accounts payable ................................ 1,328,672 980,135 Dividends payable ..................................... 275,000 250,000 Current maturities -- long-term debt (Note 6) ......... 111,986 111,986 Accrued payroll and bonuses ........................... 299,996 135,284 Liability for finance chargebacks ..................... 287,160 306,568 Other accrued liabilities ............................. 717,179 1,464,300 ----------- ----------- Total current liabilities ........................... 22,474,431 17,315,842 ----------- ----------- LONG-TERM DEBT (Note 6) ................................ 1,117,533 1,063,720 ----------- ----------- COMMITMENTS (Notes 8 and 10) STOCKHOLDERS' EQUITY (Notes 2, 7 and 10): Receivable from stockholder (Note 2) .................. (117,647) Common stock of combined companies .................... 704,101 704,101 Paid-in capital ....................................... 2,360,301 2,360,301 Retained earnings ..................................... 3,456,247 4,113,306 ----------- ----------- Total stockholders' equity .......................... 6,403,002 7,177,708 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............. $29,994,966 $25,557,270 =========== ===========
See notes to combined financial statements. F-64 HIGGINBOTHAM AUTOMOTIVE GROUP COMBINED STATEMENTS OF INCOME Year ended December 31, 1997 and the six months ended June 30, 1997 and 1998
Six months Year ended ended June 30, December 31, ----------------------------- 1997 1997 1998 --------------- -------------- -------------- (Unaudited) REVENUES: Vehicle sales ................................................ $102,594,217 $51,721,258 $57,829,376 Parts, service and collision repair .......................... 10,496,298 5,083,979 5,362,859 Finance and insurance (Note 1) ............................... 3,060,356 1,667,583 1,583,384 ------------ ----------- ----------- Total revenues ............................................. 116,150,871 58,472,820 64,775,619 COST OF SALES (Note 1) ........................................ 98,429,984 49,530,115 55,166,730 ------------ ----------- ----------- GROSS PROFIT .................................................. 17,720,887 8,942,705 9,608,889 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Notes 3 and 8) .............................................. 13,099,284 6,617,958 6,948,065 DEPRECIATION AND AMORTIZATION ................................. 338,064 155,315 143,966 ------------ ----------- ----------- OPERATING INCOME .............................................. 4,283,539 2,169,432 2,516,858 ------------ ----------- ----------- OTHER INCOME (EXPENSE): Interest expense -- floor plan, net (Note 3) ................. (1,207,774) (635,061) (565,843) Interest expense -- other .................................... (303,126) (163,605) (144,532) Other income ................................................. 20,283 9,622 19,870 ------------ ----------- ----------- Total other expense ........................................ (1,490,617) (789,044) (690,505) ------------ ----------- ----------- NET INCOME .................................................... $ 2,792,922 $ 1,380,388 $ 1,826,353 ============ =========== =========== Pro forma provision for income taxes (Note 1) (unaudited) ..... $ 1,077,509 $ 532,554 $ 704,606 ============ =========== =========== Pro forma net income (Note 1) (unaudited) ..................... $ 1,715,413 $ 847,834 $ 1,121,747 ============ =========== ===========
See notes to combined financial statements. F-65 HIGGINBOTHAM AUTOMOTIVE GROUP COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTE 7) Year ended December 31, 1997 and the six months ended June 30, 1998
Common Stock of Total Receivable Combined Paid-in Retained Stockholders' from Stockholder Companies Capital Earnings Equity ------------------ ----------- ------------- --------------- -------------- BALANCE AT DECEMBER 31, 1996 .................... $ -- $680,101 $1,994,301 $ 2,397,619 $ 5,072,021 Amounts loaned to stockholder .................. (117,647) -- -- -- (117,647) Dividends declared ............................. -- -- (1,734,294) (1,734,294) Capital contributions .......................... 24,000 366,000 -- 390,000 Net income ..................................... -- -- -- 2,792,922 2,792,922 ---------- -------- ---------- ------------ ------------ BALANCE AT DECEMBER 31, 1997 .................... (117,647) 704,101 2,360,301 3,456,247 6,403,002 Stockholder loan repayment (unaudited) ......... 117,647 117,647 Dividends declared (unaudited) ................. (1,169,294) (1,169,294) Net income (unaudited) ......................... 1,826,353 1,826,353 ---------- -------- ---------- ------------ ------------ BALANCE AT JUNE 30, 1998 (unaudited) ............ $ 0 $704,101 $2,360,301 $ 4,113,306 $ 7,177,708 ========== ======== ========== ============ ============
See notes to combined financial statements. F-66 HIGGINBOTHAM AUTOMOTIVE GROUP STATEMENTS OF CASH FLOWS For the Year ended December 31, 1997 and the six months ended June 30, 1997 and 1998
Six months ended Year ended June 30, December 31, --------------------------------- 1997 1997 1998 --------------- --------------- --------------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income ............................................................ $ 2,792,922 $ 1,380,388 $ 1,826,353 ------------ ------------ ------------ Adjustments to reconcile net income to net cash provided by operating activities: Gain on disposal of property and equipment .......................... (8,196) (31,163) Depreciation and amortization ....................................... 338,064 155,315 143,966 Changes in assets and liabilities that relate to operations: Decrease in accounts receivable .................................... 1,240,999 1,330,251 401,669 (Increase) decrease in inventories ................................. (1,818,431) 2,196,261 4,548,785 (Increase) in other current assets ................................. (313,642) (202,157) (107,138) (Increase) decrease in noncurrent assets ........................... (35,178) 7,725 (8,982) Increase (decrease) in floor plan notes payable .................... 1,897,022 (2,766,136) (5,184,665) Increase in trade accounts payable and accrued liabilities ......... 329,888 482,122 253,280 Other .............................................................. (11,473) -- -- ------------ ------------ ------------ Total adjustments ................................................. 1,619,053 1,172,218 46,915 ------------ ------------ ------------ Net cash provided by operating activities ......................... 4,411,975 2,552,606 1,873,268 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ................................... (171,106) (38,360) (100,039) Proceeds from disposal of property and equipment ...................... 43,800 13,261 Notes receivable ...................................................... (3,672,375) (2,215,490) (2,253,734) Principal collected on notes receivable ............................... 4,246,561 2,230,071 1,774,482 ------------ ------------ ------------ Net cash provided by (used in) investing activities ............... 446,880 (23,779) (566,030) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt .......................................... 20,144 267,998 -- Payments of long-term debt ............................................ (107,500) -- (53,813) Dividends paid ........................................................ (1,491,294) (1,166,294) (1,194,294) Amounts (advanced to) received from stockholder ....................... (958,922) (775,028) (84,557) Issuance of common stock .............................................. 390,000 390,000 ------------ ------------ Net cash provided by (used in) financing activities ............... (2,147,572) (1,283,324) (1,332,664) ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................... 2,711,283 1,245,503 (25,426) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ......................... 1,941,943 1,941,943 4,653,226 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD ............................... $ 4,653,226 $ 3,187,446 $ 4,627,800 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -- Cash paid during the period for interest ........................... $ 321,763 $ 135,679 $ 165,050 ============ ============ ============
See notes to combined financial statements. F-67 HIGGINBOTHAM AUTOMOTIVE GROUP NOTES TO COMBINED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business -- Higginbotham Automotive Group (the "Company") operates three automobile dealerships, one stand-alone used car facility, three service departments, a body shop, and a finance company in the Daytona Beach area of Florida. The Company sells new and used cars and light trucks, sells replacement parts, provides maintenance, warranty, paint and repair services and arranges related financing and insurance. The Company's three new vehicle dealership locations sell vehicles manufactured by Acura, Mercedes, Chevrolet, Oldsmobile, Ford and Mercury. The accompanying combined financial statements include the accounts of the following entities: Higginbotham Automobiles, Inc. Higginbotham Chevrolet-Oldsmobile, Inc. Halifax Ford-Mercury, Inc. Sunrise Auto World, Inc. HMC Finance Corporation The accompanying combined financial statements reflect the financial position, results of operations, and cash flows of each of the above listed companies. The combination of these entities has been accounted for at historical cost in a manner similar to a pooling-of-interests because the entities are under common management and control. All material intercompany transactions have been eliminated. Revenue Recognition -- The Company records revenue when vehicles are delivered to customers, and when vehicle service work is performed. The Company arranges financing for customers through various financial institutions and receives a commission from the lender equal to the difference between the interest rates charged to customers over the predetermined interest rates set by the financing institution. The Company also receives commissions from the sale of credit life, accident, health and disability insurance and extended service contracts to customers. The Company may be assessed a chargeback fee in the event of early cancellation of a loan, insurance contract, or service contract by the customer. Finance and insurance commission revenue is recorded net of estimated chargebacks at the time the related contract is placed with the financial institution. Commissions expense related to finance and insurance commission revenue is charged to cost of sales upon recognition of such revenue, net of estimated chargebacks. Estimated commission expense charged to cost of sales was approximately $519,405 for the year ended December 31, 1997. Estimated commission expense charged to cost of sales was approximately $275,417 and $270,806 for the six months ended June 30, 1997 and 1998, respectively (unaudited). Dealer Agreements -- The Company purchases substantially all of its new vehicles from the manufacturers at the prevailing prices charged by the manufacturers to their franchised dealers. The Company's sales could be unfavorably impacted by the manufacturers' unwillingness or inability to supply the dealerships with an adequate supply of new vehicle inventory. The Company operates under dealer agreements with each manufacturer. The Company's dealer agreements do not give it the exclusive right to sell the manufacturers' product within a given geographic area. The Company could be materially adversely affected if the manufacturers award franchises to others in the same market where the Company is operating. A similar adverse effect could occur if existing competing franchised dealers increase their market share in the Company's market. 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 agreements. 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 were approximately $1,516,000 at December 31, 1997. Allowances for Credit Losses -- The Company provides for credit losses using the allowance method. Accordingly, credit losses are charged to the related allowance, and recoveries are credited to the allowance. Additions to the allowance for credit losses are provided by charges to operations based on various factors, including historical losses and existing F-68 HIGGINBOTHAM AUTOMOTIVE GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued economic conditions, which, in management's judgment, deserve current recognition in estimating losses. Because of the uncertainty inherent in the estimation process, management's estimate of the allowance for credit losses may change in the near term. Inventories -- Inventories of new and used vehicles, including demonstrators, and parts and accessories are valued at the lower of specific cost or market. Cost is determined using the last-in, first-out method ("LIFO") for new vehicles and certain parts and accessories, and the first-in, first-out method ("FIFO") for all other inventories. 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 ------------- Buildings and improvements ............. 5-40 Office equipment and fixtures .......... 5-7 Parts and service equipment ............ 5-7 Company vehicles ....................... 5
Expenditures for maintenance and repairs are expensed as incurred. Significant betterments are capitalized. Goodwill -- Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired and is being amortized on a straight-line basis over a 15 year period. The cumulative amount of goodwill amortization was approximately $221,000 at December 31, 1997. 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. Income Taxes -- All of the entities included in the Company's accompanying combined financial statements are organized as S Corporations for federal and state income tax purposes. As such, the Company's taxable income is included in the stockholders' annual income tax returns. Accordingly, no provision for federal or state income taxes has been included in the Company's combined statement of income. The pro forma provision for income taxes and the pro forma net income for the year ended December 31, 1997, and for the six months ended June 30, 1997 and 1998, 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. Fair Value of Financial Instruments -- As of December 31, 1997 the fair values of the Company's financial instruments including accounts and finance notes receivables, receivables from stockholders, notes payable - floor plan, trade accounts payable, payables to affiliated companies and long-term debt approximate their carrying values due to either their length to maturity or the existence of variable interest rates that approximate prevailing market rates. Advertising -- The Company expenses advertising costs in the period incurred. Advertising expenses for 1997 amounted to approximately $1,081,000. 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 market area of Daytona Beach, Florida. 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. F-69 HIGGINBOTHAM AUTOMOTIVE GROUP NOTES TO COMBINED 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, 1997 and 1998 has been prepared on substantially the same basis as the audited financial statements, and includes 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. RECEIVABLES FROM STOCKHOLDERS At December 31, 1997, the Company had receivables due from stockholders totaling $117,647, bearing no stated interest rate. The receivable was paid in full as of June 1998 pursuant to a dividend. 3. FINANCE NOTES RECEIVABLE The Company regularly provides financing to customers purchasing used vehicles under a Buy-Here-Pay-Here installment note program. These customer finance notes receivable have terms up to 36 months and provide for interest at the rate of approximately 29%. As of December 31, 1997, the balances due on finance notes totaled $4,265,946. The Company's allowance for credit losses for these finance notes was approximately $701,000 at January 1, 1997 and December 31, 1997. The Company provided for and charged against the allowance losses of approximately $739,000 during 1997. 4. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN Inventories consist of the following:
December 31, June 30, 1997 1998 -------------- --------------- (Unaudited) New and demonstrator vehicles ......... $ 14,320,621 $ 9,828,062 Used vehicles ......................... 2,802,854 2,738,187 Parts and accessories ................. 542,185 571,440 Other ................................. 40,268 19,454 ------------ ------------ 17,705,928 13,157,143 LIFO reserve .......................... (3,263,865) (3,263,865) ------------ ------------ Inventories, net ...................... $ 14,442,063 $ 9,893,278 ============ ============
Had the Company used the first-in, first-out method of valuing new vehicles and certain parts and accessories, pretax earnings would have been $2,869,044 in 1997. All new and certain used vehicles are pledged to collateralize floor plan notes payable to financial institutions in the amount of $16,217,355 at December 31, 1997. The floor plan notes bear interest, payable monthly on the outstanding balances at rates ranging from prime to prime plus 1% (prime rate was 8.5% at December 31, 1997). Total floor plan interest expense amounted to $1,207,774 in 1997. 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 sheet. F-70 HIGGINBOTHAM AUTOMOTIVE GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 5. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
December 31, June 30, 1997 1998 -------------- --------------- (Unaudited) Land .................................. $ 254,592 $ 254,592 Buildings and improvements ............ 3,489,286 3,479,508 Office equipment and fixtures ......... 870,494 948,030 Parts and service equipment ........... 674,746 711,461 Company vehicles ...................... 77,877 97,774 ------------ ------------ 5,366,995 5,491,365 Less accumulated depreciation ......... (2,424,853) (2,569,578) ------------ ------------ Property and equipment, net ........... $ 2,942,142 $ 2,921,787 ============ ============
6. FINANCING ARRANGEMENTS Notes payable - other consists principally of a promissory note and advances from a stockholder and advances from an affiliate company under common ownership by a Company stockholder. The Company routinely finances its finance notes receivable (see Note 3) through the issuance of short-term promissory notes which are payable to a Company stockholder. The maximum amount that can be advanced under the note is $3,000,000. This note has been and is expected to be renewed on an annual basis. Notes payable - other consists of the following:
December 31, June 30, 1997 1998 -------------- ------------ (Unaudited) Unsecured short-term promissory note to the principal stockholder - due on demand, interest at 10% ................................................................ $2,857,792 $2,657,792 Unsecured non-interest bearing note to the principal stockholder - due on demand . 163,503 160,699 Unsecured non-interest bearing advances from an affiliate company - due on demand 215,788 216,388 ---------- ---------- Notes payable - other ............................................................ $3,237,083 $3,034,879 ========== ==========
Long-term debt consists of the following:
December 31, June 30, 1997 1998 -------------- -------------- (Unaudited) Mortgage note payable to Barnett Bank of Volusia County, FL, due in monthly principal installments of $8,958, plus interest at the bank's prime rate (8.0% at December 31, 1997) with the unpaid balance due September 9, 1999, secured by the Company's real property located at 1307 North Dixie Freeway, New Smyrna Beach, FL ................. $1,209,375 $1,155,633 Other ................................................................................ 20,144 20,073 ---------- ---------- 1,229,519 1,175,706 Less current maturities .............................................................. (111,986) (111,986) ---------- ---------- Long-term debt ....................................................................... $1,117,533 $1,063,720 ========== ==========
F-71 HIGGINBOTHAM AUTOMOTIVE GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 6. FINANCING ARRANGEMENTS -- Continued Future maturities of long-term debt at December 31, 1997 are as follows:
Year ending December 31, - -------------------------- 1998 ................... $ 111,986 1999 ................... 1,106,709 2000 ................... 5,209 2001 ................... 5,615 ---------- Total .................. $1,229,519 ==========
7. COMBINED STOCKHOLDERS' EQUITY The capital structure of the entities included in the combined financial statements of the Company at December 31, 1997 is as follows:
Common Stock ----------------------------------------------- Shares Par Shares Issued and Paid-In Value Authorized Outstanding Amount Capital Higginbotham Automobiles, Inc. ................. $ 1 100 100 $ 100 $1,994,301 Higginbotham Chevrolet -- Oldsmobile, Inc...... 100 3,000 2,400 224,000 366,000 Halifax Ford -- Mercury, Inc. .................. No Par 100 100 289,795 -- Sunrise Auto World, Inc. ....................... No Par 100 100 25,000 -- HMC Finance Corporation ........................ No Par 100 100 165,206 -- -------- ---------- Total .......................................... $704,101 $2,360,301 ======== ==========
8. RELATED PARTY TRANSACTIONS Management bonuses of $276,834 were paid to Company stockholders and certain management companies owned by the Company's principal stockholder in 1997. Unpaid bonuses and dividends are included in accrued payroll and bonuses and dividends payable, respectively, in the accompanying combined balance sheet. The Company has entered into short-term management and expense reimbursement agreements with Higginbotham Management Company ("HMC") for management and consultation services. HMC is an affiliated entity owned by the Company's principal stockholder. Under these agreements, fixed monthly management fees together with certain contingency payments based on the number of new and used vehicles sold during the month and provisions for reimbursement for expenditures are incurred by HMC on the Company's behalf. The Company paid fees under these agreements totaling approximately $1,120,000 in 1997 which are included in selling, general and administrative expenses in the accompanying combined statement of income. The Company leases substantially all of its facilities directly from the Company's principal stockholder or from a corporation which is owned by that stockholder. Rent expense under these leases was approximately $517,000 in 1997. Other leases consist primarily of leases for certain business premises, modular space and various equipment with terms up to twenty years. Rent expense under all operating leases was approximately $569,000 during 1997. Future minimum rental payments required under non-cancelable operating leases at December 31, 1997 are as follows: F-72 HIGGINBOTHAM AUTOMOTIVE GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 8. RELATED PARTY TRANSACTIONS -- Continued
Related Year Ending December 31, Party Other Total 1998 ..................... $ 465,572 $142,138 $ 607,710 1999 ..................... 461,676 100,707 562,383 2000 ..................... 329,176 66,630 395,806 2001 ..................... 302,676 59,038 361,714 2002 ..................... 292,818 23,447 316,265 Thereafter ............... 1,559,786 894 1,560,680 ---------- -------- ---------- Total .................... $3,411,704 $392,854 $3,804,558 ========== ======== ==========
9. EMPLOYMENT BENEFIT PLANS The Company has a qualified 401(k) Profit Sharing Plan (the "Plan"), whereby substantially all of the employees of the Company meeting certain service requirements are eligible to participate. Contributions by the Company in 1997 were approximately $19,000. 10. STOCK COMPENSATION ARRANGEMENT Effective January 1, 1997, the Company entered into an incentive stock plan agreement with a Company stockholder who owns 360 shares of Higginbotham Chevrolet-Oldsmobile, Inc. This agreement provides a base salary and bonus with an option to use this compensation along with any other compensation earned from the Company and any entity controlled by the principal stockholder, to purchase up to 25% of the outstanding stock of Higginbotham Chevrolet -- Oldsmobile, Inc.(see Note 7). As of December 31, 1997, no stock has been purchased under this agreement. 11. SUBSEQUENT EVENT (UNAUDITED) In July 1998, the Company signed an asset purchase agreement with Sonic Automotive, Inc. ("Sonic") whereby Sonic will purchase the Company's assets for a total price of approximately $27.0 million including the repayment of approximately $2.7 million in indebtedness. The total purchase price was paid with approximately $18.2 million in cash and Class A Common Stock with a market value of approximately $8.3 million as of the closing date of the acquisition. The remaining $0.5 million of the cash portion of the purchase price is payable in December 1998. F-73 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 the Company as of December 31, 1995 and 1996, and the results of its operations and its 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-74 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-75 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 (Note 1) .......... 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 (Note 1) ................... 54,127,162 55,784,883 62,559,885 31,975,433 32,381,114 ----------- ----------- ----------- ----------- ----------- GROSS PROFIT ............................. 7,002,423 6,330,865 10,016,738 4,487,012 5,081,522 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ................................ 6,154,468 5,613,128 6,984,895 3,347,148 3,494,565 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-76 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-77 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
Year ended December 31, Six months ended June 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-78 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 Automotive 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. The Company arranges financing for customers through various financial institutions and receives a commission from the lender equal to the difference between the interest rates charged to customers over the predetermined interest rates set by the financing institution. The Company also receives commissions from the sale of credit life, accident, health and disability insurance and extended service contracts to customers. The Company may be assessed a chargeback fee in the event of early cancellation of a loan, insurance contract, or service contract by the customer. Finance and insurance commission revenue is recorded net of estimated chargebacks at the time the related contract is placed with the financial institution. Commissions expense related to finance and insurance commission revenue is charged to cost of sales upon recognition of such revenue, net of estimated chargebacks. Estimated commission expense charged to cost of sales was approximately $6,096, $8,215 and $12,388 for the years ended December 31, 1994, 1995, and 1996, respectively. Estimated commission expense charged to cost of sales was approximately $6,411 and $3,867 for the six months ended June 30, 1996 and 1997, respectively (unaudited). 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. F-79 DYER & DYER, INC. NOTES TO FINANCIAL STATEMENTS -- Continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued 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
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. F-80 DYER & DYER, INC. NOTES TO FINANCIAL STATEMENTS -- Continued 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. 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 ============ ============ ============
F-81 DYER & DYER, INC. NOTES TO FINANCIAL STATEMENTS -- Continued 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. 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-82 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 the Company as of December 31, 1995 and 1996, and the combined results of its operations and its 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-83 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 (Note 4) .................... 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-84 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 (Note 1) ................... 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 (Note 1) ............................ 63,860,705 88,137,717 35,724,354 64,206,340 ----------- ------------ ----------- ----------- GROSS PROFIT ...................................... 9,241,035 13,352,093 5,854,745 10,347,802 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ...... 7,724,640 11,426,205 4,887,868 8,032,401 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-85 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 Common Earnings Stock of and Members' Combined and 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-86 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
Year ended December 31, Six months ended June 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-87 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. The Company arranges financing for customers through various financial institutions and receives a commission from the lender equal to the difference between the interest rates charged to customers over the predetermined interest rates set by the financing institution. The Company also receives commissions from the sale of credit life, accident, health and disability insurance and extended service contracts to customers. The Company may be assessed a chargeback fee in the event of early cancellation of a loan, insurance contract, or service contract by the customer. Finance and insurance commission revenue is recorded net of estimated chargebacks at the time the related contract is placed with the financial institution. Commissions expense related to finance and insurance commission revenue is charged to cost of sales upon recognition of such revenue, net of estimated chargebacks. Estimated commission expense charged to cost of sales was approximately $279,480 and $380,903 for the years ended December 31, 1995 and 1996, respectively. Estimated commission expense charged to cost of sales was approximately $192,285 and $261,319 for the six months ended June 30, 1996 and 1997, respectively (unaudited). F-88 BOWERS DEALERSHIPS AND AFFILIATED COMPANIES NOTES TO COMBINED 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 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. 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. F-89 BOWERS DEALERSHIPS AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued 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. 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 ==========
F-90 BOWERS DEALERSHIPS AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 2. BUSINESS ACQUISITIONS -- Continued 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, 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. F-91 BOWERS DEALERSHIPS AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 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. 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 noncancelable 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. F-92 BOWERS DEALERSHIPS AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 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 ========== ========== ==========
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. F-93 BOWERS DEALERSHIPS AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 7. RELATED PARTIES -- Continued 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. 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 ======== ==========
F-94 BOWERS DEALERSHIPS AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 8. EQUITY -- Continued 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-95 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 the Company as of December 31, 1996, and the combined results of its operations and its 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-96 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-97 LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES COMBINED STATEMENTS OF INCOME Year ended December 31, 1996 and the 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 (Note 1) ............. 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 (Note 1) ...................... 122,144,997 54,058,544 68,487,590 ------------ ----------- ----------- GROSS PROFIT ................................ 15,554,364 7,157,508 8,582,000 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 13,876,217 6,523,200 6,721,836 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-98 LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY Year ended December 31, 1996 and the 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-99 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
Year ended Six months ended June 30, 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-100 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. The Company arranges financing for customers through various financial institutions and receives a commission from the lender equal to the difference between the interest rates charged to customers over the predetermined interest rates set by the financing institution. The Company also receives commissions from the sale of credit life, accident, health and disability insurance and extended service contracts to customers. The Company may be assessed a chargeback fee in the event of early cancellation of a loan, insurance contract, or service contract by the customer. Finance and insurance commission revenue is recorded net of estimated chargebacks at the time the related contract is placed with the financial institution. Commissions expense related to finance and insurance commission revenue is charged to cost of sales upon recognition of such revenue, net of estimated chargebacks. Estimated commission expense charged to cost of sales was approximately $338,785 for the year ended December 31, 1996. Estimated commission expense charged to cost of sales was approximately $213,529 and $215,235 for the six months ended June 30, 1996 and 1997, respectively (unaudited). 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. F-101 LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued 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
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. F-102 LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 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 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 ========== ==========
F-103 LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 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 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 ========
F-104 LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 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-105 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 the Company 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-106 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-107 KEN MARKS FORD, INC. STATEMENTS OF INCOME Year ended April 30, 1997 and the three months ended July 31, 1996 and 1997
Year ended Three months ended July 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 (Note 1) ........................... 2,188,071 596,854 529,109 ------------ ----------- ----------- Total revenues ......................................... 145,349,441 38,081,277 36,627,309 COST OF SALES (Note 1) .................................... 127,281,076 33,231,739 32,296,634 ------------ ----------- ----------- GROSS PROFIT .............................................. 18,068,365 4,849,538 4,330,675 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 7) ..... 15,333,774 3,914,881 3,542,942 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-108 KEN MARKS FORD, INC. STATEMENTS OF STOCKHOLDERS' EQUITY Year ended April 30, 1997 and the 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-109 KEN MARKS FORD, INC. STATEMENTS OF CASH FLOWS Year ended April 30, 1997 and the three months ended July 31, 1996 and 1997
Three months ended July 31, Year ended --------------------------- April 30, 1997 1996 1997 --------------- ------------- ------------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income .............................................................. $ 470,280 $ 276,219 $ 198,154 ------------ ---------- ---------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ......................................... 100,771 20,846 20,302 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) 323,213 816,067 (Increase) decrease in inventories ................................... 5,197,288 1,129,058 (593,075) (Increase) decrease in prepaid expenses .............................. 429,467 (595,810) 264,511 Decrease in due from related parties ................................. 134,141 -- -- Increase (decrease) in notes payable, floor plan ..................... (3,401,971) (663,355) 162,611 Increase in trade accounts payable ................................... 322,319 219,902 13,285 Decrease in accrued payroll and bonuses .............................. (284,875) (400,442) (117,658) Increase (decrease) in accrued expenses and other payables ........... (848,544) 484,719 (235,888) Decrease in allowance for insurance, service contract and finance income chargebacks .................................................. (85,107) -- -- Increase (decrease) in income tax payable ............................ (39,839) 112,049 (15,161) ------------ ---------- ---------- Total adjustments ................................................... 549,462 636,780 314,994 ------------ ---------- ---------- Net cash provided by operating activities ............................. 1,019,742 912,999 513,148 ------------ ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ..................................... (183,674) (5,060) (79,821) ------------ ---------- ---------- Net cash used in investing activities ................................. (183,674) (5,060) (79,821) ------------ ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid to stockholders .......................................... (20,000) -- -- ------------ ---------- ---------- Net cash used in financing activities ................................. (20,000) -- -- ------------ ---------- ---------- NET INCREASE IN CASH ..................................................... 816,068 907,939 433,327 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............................. 1,688,034 1,688,034 2,504,102 ------------ ---------- ---------- CASH AND CASH EQUIVALENTS, END OF YEAR ................................... $ 2,504,102 $2,595,973 $2,937,429 ============ ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest .............................................................. $ 2,008,468 $ 480,132 $ 485,358 Income taxes .......................................................... $ 322,064 $ 55,000 $ 144,000
See notes to financial statements. F-110 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. The Company arranges financing for customers through various financial institutions and receives a commission from the lender equal to the difference between the interest rates charged to customers over the predetermined interest rates set by the financing institution. The Company also receives commissions from the sale of credit life, accident, health and disability insurance and extended service contracts to customers. The Company may be assessed a chargeback fee in the event of early cancellation of a loan, insurance contract, or service contract by the customer. Finance and insurance commission revenue is recorded net of estimated chargebacks at the time the related contract is placed with the financial institution. Commissions expense related to finance and insurance commission revenue is charged to cost of sales upon recognition of such revenue, net of estimated chargebacks. Estimated commission expense charged to cost of sales was approximately $410,166 for the year ended April 30, 1997. Estimated commission expense charged to cost of sales was approximately $120,059 and $101,237 for the three months ended July 31, 1996 and 1997, respectively (unaudited). 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. F-111 KEN MARKS FORD, INC. NOTES TO 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 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. 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-112 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 (17,705) --------- depreciation 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-113 ================================================================================ No dealer, salesperson or 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 Issuers or the Initial Purchasers. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, the Notes or Guarantees 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 Issuers since the date hereof. -------------------------------- TABLE OF CONTENTS
Page --------- Prospectus Summary ................................. 3 Risk Factors ....................................... 15 The Exchange Offer ................................. 27 Use of Proceeds .................................... 33 The 1998 Acquisitions .............................. 33 Capitalization ..................................... 36 Selected Consolidated Financial Data ............... 37 Unaudited Pro Forma Consolidated Financial Data ............................................ 40 Management's Discussion and Analysis of Financial Condition and Results of Operations ...................................... 48 Business ........................................... 58 Management ......................................... 71 Certain Transactions ............................... 75 Principal Stockholders ............................. 80 Description of Certain Other Indebtedness .......... 82 Description of the New Notes ....................... 84 Plan of Distribution ............................... 113 Legal Matters ...................................... 114 Experts ............................................ 114 Available Information .............................. 114 Index to Financial Statements ...................... F-1
================================================================================ ================================================================================ (SONIC logo) Offer to exchange all outstanding 11% Senior Subordinated Notes Due 2008, Series A ($125,000,000 Principal Amount) for 11% Senior Subordinated Notes Due 2008, Series B -------------------------------- PROSPECTUS -------------------------------- ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND REQUESTS FOR ASSISTANCE AND REQUESTS FOR ADDITIONAL COPIES OF THE PROSPECTUS, THE LETTER OF TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE ADDRESSED TO THE EXCHANGE AGENT AS FOLLOWS: BY REGISTERED OR CERTIFIED MAIL: U.S. Bank Trust National Association 180 East Fifth Street Mail Code: SPFT0210 St. Paul, Minnesota 55101 Attn: Specialized Finance BY HAND OR OVERNIGHT COURIER: U.S. Bank Trust National Association 180 East Fifth Street Mail Code: SPFT0210 St. Paul, Minnesota 55101 Attn: Specialized Finance BY FACSIMILE: (612) 244-1537 (MN) Confirm by Telephone (612) 244-5011 (MN) (Originals of all documents submitted by facsimile should be sent promptly by hand, overnight courier, or registered or certified mail) , 1998 ================================================================================ PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS Item 20. Indemnification of Directors and Officers The Company's Bylaws effectively provide that the Company 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 Company's 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 a 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 interests 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 indemnity for such expenses despite such adjudication of liability. Section 102(b)(7) provides that a corporation may eliminate or limit that personal liability of a director to the corporation or its stockholders for monetary damages for breach 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 of 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 provision 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 maintains insurance against liabilities under the Securities Act of 1933 for the benefit of its officers and directors. Section 4(b) of the Registration Rights Agreement (filed as Exhibit 4.1 to this Registration Statement) provides that the holders of the Old Notes covered by this Registration Statement severally and not jointly will indemnify and hold harmless the Company, the Guarantors, and their respective officers, directors, partners, employees, representatives and agents from and against any loss, liability, claim, damage or expense caused by any untrue statement or omission, or alleged untrue statement or omission, in the Registration Statement, in the Prospectus or in any amendment or supplement thereto, in each case to the extent that the statement or omission was made in reliance upon and in conformity with written information furnished to the Company by the holders of the Old Notes covered by this Registration Statement expressly for use therein, provided, however, that no such holder of the Old Notes shall be liable for any claims hereunder in excess of the amount of net proceeds received by such holder of the Old Notes from the sale of Registrable Securities pursuant to such Registration Statement. II-1 Item 21. Exhibits and Financial Statement Schedules
Exhibit No. Description - ------------- ------------------------------------------------------------------------------------------------------ 3.1* Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (File No. 333-33295) of the Company (the "Form S-1")). 3.2* Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Form S-1). 4.1 Registration Rights Agreement dated as of July 31, 1998 among Sonic Automotive, Inc., the Guarantors named therein and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith, Incorporated, NationsBanc Montgomery Securities LLC and BancAmerica Robertson Stephens. 4.2 Indenture dated as of July 1, 1998 between Sonic Automotive, Inc. and U.S. Bank Trust National Association. 4.3 Form of 11% Senior Subordinated Note Due 2008, Series B. 5.1* * Opinion of Parker, Poe, Adams & Bernstein L.L.P. regarding the legality of the securities being 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 (incorporated by reference to Exhibit 10.1 to the Form S-1). 10.2* Form of Lease Agreement to be entered into between the Company (or its subsidiaries) and Marks Holding Company, Inc. (incorporated by reference to Exhibit 10.2 to the Form S-1). 10.3* Lease Agreement dated as of January 1, 1995 between Lone Star Ford, Inc. and Viking Investment Associates (incorporated by reference to Exhibit 10.3 to the Form S-1). 10.4* Lease Agreement dated as of October 23, 1979 between O. Bruton Smith, Bonnie Smith and Town and Country Ford, Inc. (incorporated by reference to Exhibit 10.4 to the Form S-1). 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 (incorporated by reference to Exhibit 10.5 to the Form S-1). 10.6* Lease dated January 13, 1995 between JAG Properties LLC and Jaguar of Chattanooga LLC (incorporated by reference to Exhibit 10.6 to the Form S-1). 10.7* Lease dated October 18, 1991 by and between Nelson E. Bowers II, Thomas M. Green, Jr., and Infiniti of Chattanooga, Inc. (incorporated by reference to Exhibit 10.7 to the Form S-1). 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. (incorporated by reference to Exhibit 10.8 to the Form S-1). 10.9* Lease dated March 15, 1996 between Cleveland Properties LLC and Cleveland Chrysler-Plymouth- Jeep-Eagle LLC (incorporated by reference to Exhibit 10.9 to the Form S-1). 10.10* Lease Agreement dated January 2, 1993 among Nelson E. Bowers II, Thomas M. Green, Jr. and Cleveland Village Imports, Inc. (incorporated by reference to Exhibit 10.10 to the Form S-1). 10.11* Ford Motor Credit Company Automotive Wholesale Plan Application for Wholesale Financing dated August 10, 1972 by Lone Star Ford, Inc. (incorporated by reference to Exhibit 10.11 to the Form S-1). 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. (incorporated by reference to Exhibit 10.12 to the Form S-1). 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. (incorporated by reference to Exhibit 10.13 to the Form S-1). 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. (incorporated by reference to Exhibit 10.14 to the Form S-1). 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 (incorporated by reference to Exhibit 10.15 to the Form S-1). 10.15a* Promissory Note dated April 21, 1995 in favor of Chrysler Credit Corporation by Cleveland Chrysler Plymouth Jeep Eagle, LLC (incorporated by reference to Exhibit 10.15a to the Form S-1). 10.16* Promissory Note dated April 21, 1995 in favor of Chrysler Credit Corporation by Saturn of Chattanooga, Inc. (incorporated by reference to Exhibit 10.16a to the Form S-1). 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 (incorporated by reference to Exhibit 10.17 to the Form S-1). 10.17a* Promissory Note dated April 21, 1995 in favor of Chrysler Credit Corporation by Nelson Bowers Ford L.P. (incorporated by reference to Exhibit 10.17a to the Form S-1).
II-2
Exhibit No. Description - ------------- ---------------------------------------------------------------------------------------------------- 10.18* Floor Plan Agreement dated May 6, 1996 between European Motors, LLC and NationsBank, N.A. (incorporated by reference to Exhibit 10.18 to the Form S-1). 10.19* Floor Plan Agreement dated April 11, 1996 between KIA of Chattanooga, LLC and NationsBank, N.A. (incorporated by reference to Exhibit 10.19 to the Form S-1). 10.19a* Security Agreement dated April 11, 1996 between KIA of Chattanooga, LLC and NationsBank, N.A. (incorporated by reference to Exhibit 10.19a to the Form S-1). 10.20* Floor Plan Agreement dated October 17, 1996 between European Motors of Nashville, LLC and NationsBank, N.A. (incorporated by reference to Exhibit 10.20 to the Form S-1). 10.20a* Security Agreement dated October 17, 1996 between European Motors of Nashville, LLC and NationsBank, N.A. (incorporated by reference to Exhibit 10.20a to the Form S-1). 10.21* Floor Plan Agreement dated March 5, 1997 between Nelson Bowers Dodge, LLC (d/b/a Dodge of Chattanooga) and NationsBank, N.A. (incorporated by reference to Exhibit 10.21 to the Form S-1). 10.22* Security Agreement and Master Credit Agreement dated May 15, 1996 between Lake Norman Chrysler Plymouth Jeep Eagle, LLC and Chrysler Financial Corporation (incorporated by reference to Exhibit 10.22 to the Form S-1). 10.22a* Promissory Note dated May 15, 1996 in favor of Chrysler Financial Corporation by Lake Norman Chrysler Plymouth Jeep Eagle, LLC (incorporated by reference to Exhibit 10.22a to the Form S-1). 10.23* Security Agreement & Capital Loan Agreement dated May 15, 1996 between Lake Norman Dodge, Inc. and Chrysler Financial Corp. (incorporated by reference to Exhibit 10.23 to the Form S-1). 10.23a* Promissory Note dated May 15, 1996 in favor of Chrysler Financial Corporation by Lake Norman Dodge, Inc. (incorporated by reference to Exhibit 10.23a to the Form S-1). 10.23b* Promissory Note dated May 15, 1996 in favor of Chrysler Financial Corporation by Lake Norman Dodge, Inc. (incorporated by reference to Exhibit 10.23b to the Form S-1). 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 (incorporated by reference to Exhibit 10.24 to the Form S-1). 10.24a* Promissory Note dated May 15, 1996 in favor of Chrysler Financial Corporation by Lake Norman Chrysler Plymouth Jeep Eagle, LLC (incorporated by reference to Exhibit 10.24a to the Form S-1). 10.25* Floor Plan Agreement dated September 1, 1996 between NationsBank, N.A. and Dyer & Dyer, Inc. (incorporated by reference to Exhibit 10.25 to the Form S-1). 10.25a* Security Agreement dated September 1, 1996 between NationsBank, N.A. and Dyer & Dyer, Inc. (incorporated by reference to Exhibit 10.25a to the Form S-1). 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 (incorporated by reference to Exhibit 10.26 to the Form S-1). 10.27* Jaguar Credit Corporation Automotive Wholesale Plan Application for Wholesale Financing and Security Agreement dated March 14, 1995 by Jaguar of Chattanooga LLC (incorporated by reference to Exhibit 10.27 to the Form S-1). 10.28* Assignment of Joint Venture Interest in Chartown dated as of June 30, 1997 among Town and Country Ford, Inc., SMDA LLC and Sonic Financial Corporation (incorporated by reference to Exhibit 10.28 to the Form S-1). 10.29* Form of Employment Agreement between the Company and O. Bruton Smith (incorporated by reference to Exhibit 10.29 to the Form S-1). 10.30* Form of Employment Agreement between the Company and Bryan Scott Smith (incorporated by reference to Exhibit 10.30 to the Form S-1). 10.31* Form of Employment Agreement between the Company and Theodore M. Wright (incorporated by reference to Exhibit 10.31 to the Form S-1). 10.32* Form of Employment Agreement between the Company and Nelson E. Bowers, II (incorporated by reference to Exhibit 10.32 to the Form S-1). 10.33* Tax Allocation Agreement dated as of June 30, 1997 between the Company and Sonic Financial Corporation (incorporated by reference to Exhibit 10.33 to the Form S-1). 10.34* Form of Sonic Automotive, Inc. Stock Option Plan (incorporated by reference to Exhibit 10.34 to the Form S-1). 10.35* Form of Sonic Automotive, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.35 to the Form S-1). 10.36* Subscription Agreement dated as of June 30, 1997 between O. Bruton Smith and the Company (incorporated by reference to Exhibit 10.36 to the Form S-1). 10.37* Subscription Agreement dated as of June 30, 1997 between Sonic Financial Corporation and the Company (incorporated by reference to Exhibit 10.37 to the Form S-1).
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Exhibit No. Description - ------------- ------------------------------------------------------------------------------------------------------- 10.38* Subscription Agreement dated as of June 30, 1997 between Bryan Scott Smith and the Company (incorporated by reference to Exhibit 10.38 to the Form S-1). 10.39* Subscription Agreement dated as of June 30, 1997 between William S. Egan and the Company (incorporated by reference to Exhibit 10.39 to the Form S-1). 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) (incorporated by reference to Exhibit 10.40 to the Form S-1). 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) (incorporated by reference to Exhibit 10.41 to the Form S-1). 10.41 a* Amendment to Asset Purchase Agreement dated October 16, 1997 re: Bowers Acquisition (incorporated by reference to Exhibit 10.41a to the Form S-1). 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) (incorporated by reference to Exhibit 10.42 to the Form S-1). 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) (incorporated by reference to Exhibit 10.43 to the Form S-1). 10.43 a* Amendment to Asset Purchase Agreement dated October 16, 1997 re: Dyer Acquisition (incorporated by reference to Exhibit 10.43a to the Form S-1). 10.44* Security Agreement and Master Credit Agreement dated April 21, 1995 between Cleveland Chrysler Plymouth Jeep Eagle and Chrysler Credit Corporation (incorporated by reference to Exhibit 10.44 to the Form S-1). 10.45* Promissory Note dated as of August 28, 1997 by Sonic Automotive, Inc. in favor of NationsBank, N.A. (incorporated by reference to Exhibit 10.45 to the Form S-1). 10.46* Credit Agreement dated October 15, 1997 by and between Sonic Automotive, Inc. and Ford Motor Credit Company (incorporated by reference to Exhibit 10.46 to the Form S-1). 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. (incorporated by reference to Exhibit 10.47 to the Form S-1). 10.48* Supplemental Agreement between the Company and Ford Motor Company (incorporated by reference to Exhibit 10.48 to the Form S-1). 10.49* Agreement between Toyota Motors Sales USA and the Company (incorporated by reference to Exhibit 10.49 to the Form S-1). 10.50* Ford Sales and Service Agreement with Town and Country Ford (incorporated by reference to Exhibit 10.50 to the Form S-1). 10.51* Ford Sales and Service Agreement with Lone Star Ford (incorporated by reference to Exhibit 10.51 to the Form S-1). 10.52* Ford Sales and Service Agreement with Fort Mill Ford (incorporated by reference to Exhibit 10.52 to the Form S-1). 10.53* Ford Sales and Service Agreement with Ken Marks Ford (incorporated by reference to Exhibit 10.53 to the Form S-1). 10.54* Ford Sales and Service Agreement with Nelson Bowers Ford (incorporated by reference to Exhibit 10.54 to the Form S-1). 10.55* Chrysler Sales and Service Agreement with Fort Mill Chrysler-Plymouth-Dodge (incorporated by reference to Exhibit 10.55 to the Form S-1). 10.56* Plymouth Sales and Service Agreement with Fort Mill Chrysler-Plymouth-Dodge (incorporated by reference to Exhibit 10.56 to the Form S-1). 10.57* Dodge Sales and Service Agreement with Fort Mill Chrysler-Plymouth-Dodge (incorporated by reference to Exhibit 10.57 to the Form S-1). 10.58* Dodge Sales and Service Agreement with Sonic Dodge, LLC d/b/a Lake Norman Dodge (incorporated by reference to Exhibit 10.58 to the Form S-1). 10.59* Chrysler Sales and Service Agreement with Sonic Chrysler-Plymouth-Jeep-Eagle, LLC d/b/a Lake Norman Chrysler-Plymouth-Jeep-Eagle (incorporated by reference to Exhibit 10.59 to the Form S-1).
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Exhibit No. Description - ------------- ---------------------------------------------------------------------------------------------------------- 10.60* Plymouth Sales and Service Agreement with Sonic Chrysler-Plymouth-Jeep-Eagle, LLC d/b/a Lake Norman Chrysler-Plymouth-Jeep-Eagle (incorporated by reference to Exhibit 10.60 to the Form S-1). 10.61* Jeep Sales and Service Agreement with Sonic Chrysler-Plymouth-Jeep-Eagle, LLC d/b/a Lake Norman Chrysler-Plymouth-Jeep-Eagle (incorporated by reference to Exhibit 10.61 to the Form S-1). 10.62* Chrysler Sales and Service Agreement with Cleveland Chrysler-Plymouth-Jeep-Eagle (incorporated by reference to Exhibit 10.62 to the Form S-1). 10.63* Plymouth Sales and Service Agreement with Cleveland Chrysler-Plymouth-Jeep-Eagle (incorporated by reference to Exhibit 10.63 to the Form S-1). 10.64* Jeep Sales and Service Agreement with Cleveland Chrysler-Plymouth-Jeep-Eagle (incorporated by reference to Exhibit 10.64 to the Form S-1). 10.65* Dodge Sales and Service Agreement with Nelson Bowers Dodge (incorporated by reference to Exhibit 10.65 to the Form S-1). 10.66* Volvo Authorized Retailer Agreement with European Motors, LLC d/b/a Volvo of Chattanooga (incorporated by reference to Exhibit 10.66 to the Form S-1). 10.67* Volvo Sales Agreement with Dyer & Dyer, Inc. (incorporated by reference to Exhibit 10.67 to the Form S-1). 10.68* Toyota Dealer Agreement with Marcus David Corporation d/b/a Town & Country Toyota (incorporated by reference to Exhibit 10.68 to the Form S-1). 10.69* Sonic Automotive, Inc. Formula Stock Option Plan for Independent Directors (incorporated by reference to Exhibit 10.69 to the Company's Amended Annual Report on Form 10-K/A for the year ended December 31, 1997 (the "1997 Form 10-K/A")). 10.70* Amended and Restated Credit Agreement dated as of December 15, 1997 (the "Credit Agreement") between Sonic Automotive, Inc., as borrower, and Ford Motor Credit Company, as lender (incorporated by reference to Exhibit 10.70 to the 1997 Form 10-K/A). 10.71* Promissory Note dated December 15, 1997 in the amount of $75 million by Sonic Automotive, Inc., as borrower, in favor of Ford Motor Credit Company, as lender, under the Credit Agreement (incorporated by reference to Exhibit 10.71 to the 1997 Form 10-K/A). 10.72* Subordinated Promissory Note dated December 1, 1997 in the amount of $5.5 million by Sonic Automotive, Inc., as borrower, in favor of O. Bruton Smith, as lender (incorporated by reference to Exhibit 10.72 to the 1997 Form 10-K/A). 10.73* Subordination Agreement dated as of December 15, 1997 between O. Bruton Smith and Ford Motor Credit Company and acknowledged by Sonic Automotive, Inc. (incorporated by reference to Exhibit 10.73 to the 1997 Form 10-K/A). 10.74* Asset Purchase Agreement dated December 31, 1997 between Sonic Automotive, Inc., as buyer, and M & S Resources, Inc., Clearwater Auto Resources, Inc., and Clearwater Collision Center, Inc., as sellers and Scott Fink, Michael Cohen, Jeffrey Schumon, and Timothy McCabe as shareholders of the sellers (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated March 30, 1998 (the "March 1998 Form 8-K")). 10.75* Amendment No. 1 and Supplement to Asset Purchase Agreement dated as of March 24, 1998 between Sonic Automotive, Inc., as buyer, and M & S Resources, Inc., Clearwater Auto Resources, Inc., and Clearwater Collision Center, Inc., as sellers and Scott Fink, Michael Cohen, Jeffrey Schumon, and Timothy McCabe as shareholders of the sellers (incorporated by reference to Exhibit 99.2 to the March 1998 Form 8-K). 10.76* Asset Purchase Agreement dated as of February 4, 1998 between Sonic Automotive, Inc., as buyer, and Hatfield Jeep Eagle, Inc., Hatfield Lincoln Mercury, Inc., Trader Bud's Westside Dodge, Inc., Toyota West, Inc., and Hatfield Hyundai Inc., as sellers and Bud C. Hatfield, Dan E. Hatfield and Dan E. Hatfield, as Trustee of the Bud C. Hatfield, Sr. Special Irrevocable Trust as shareholders of the sellers (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (the "1998 First Quarter Form 10-Q"). 10.77* Agreement and Plan of Merger dated as of February 10, 1998 between Sonic Automotive, Inc., as buyer, and Capitol Chevrolet, Inc., Capitol Imports, LTD., and Frank E. McGough, Jr., as sellers (incorporated by reference to Exhibit 10.4 to the 1998 First Quarter Form 10-Q). 10.78* Stock Purchase Agreement dated as of March 16, 1998 between Sonic Automotive, Inc., as buyer, and Freeman Smith, as stockholder and the other stockholders named therein (incorporated by reference to Exhibit 10.5 to the 1998 First Quarter Form 10-Q).
II-5
Exhibit No. Description - ------------- --------------------------------------------------------------------------------------------------------- 10.79* Amendment No. 1 and Supplement to Asset Purchase Agreement dated as of May 28, 1998 by and among Sonic Automotive, Inc., Hatfield Jeep Eagle, Inc., Hatfield Lincoln Mercury, Inc., Westside Dodge, Inc., Toyota West, Inc., Hatfield Hyundai, Inc., Bud C. Hatfield, Dan E. Hatfield and Dan E. Hatfield, as Trustee of The Bud C. Hatfield, Sr. Special Irrevocable Trust (incorporated by reference to Exhibit 99.6 to the Company's Current Report on Form 8-K dated July 9, 1998 (the "July 9, 1998 Form 8-K")). 10.80* Asset Purchase Agreement dated April 10, 1998 by and among Sonic Automotive, Inc., Century Auto Sales, Inc., and A. Foster McKissick, III and Murray P. McKissick (incorporated by reference to Exhibit 99.9 to the July 9, 1998 Form 8-K). 10.81* Contract to Purchase and Sell Real Property dated as of April 10, 1998 by and between the Company, Century Auto Sales, Inc. and Fairway Investments, LLC (incorporated by reference to Exhibit 99.10 to the July 9, 1998 Form 8-K). 10.82* Asset Purchase Agreement dated April 10, 1998 by and among the Company, Fairway Management Company d/b/a Heritage Lincoln-Mercury-Jaguar, and Fairway Ford, Inc (incorporated by reference to Exhibit 99.11 to the July 9, 1998 Form 8-K). 10.83* Contract to Purchase and Sell Real Property dated as of April 10, 1998 by and between the Company and Fairway Ford, Inc (incorporated by reference to Exhibit 99.12 to the July 9, 1998 Form 8-K). 10.84* Stock Purchase Agreement dated as of April 30, 1998 by and among the Company, Aldo B. Paret and Casa Ford of Houston, Inc (incorporated by reference to Exhibit 99.13 to the July 9, 1998 Form 8-K). 10.85* Asset Purchase Agreement dated as of July 7, 1998 by and among the Company, HMC Finance Corporation, Inc., Halifax Ford-Mercury, Inc., Higginbotham Automobiles, Inc., Higginbotham Chevrolet-Oldsmobile, Inc., Sunrise Auto World, Inc. and Dennis D. Higginbotham (the "Higginbotham Purchase Agreement") (incorporated by reference to Exhibit 99.14 to the July 9, 1998 Form 8-K). 10.85a Amendment No. 1 and Supplement to Higginbotham Purchase Agreement dated as of September 16, 1998. 10.86* Amendment No. 2 and Supplement to Asset Purchase Agreement dated as of July 8, 1998 between Sonic Automotive, Inc. Hatfield Jeep Eagle, Inc. Hatfield Lincoln Mercury, Inc. and Hatfield Hyundai, Inc., Bud C. Hatfield, Dan E. Hatfield and Dan E. Hatfield, as trustee of The Bud C. Hatfield Sr. Special Irrevocable Trust (incorporated by reference to Exhibit 99.3 to the Company's Current Report on Form 8-K dated July 24, 1998 (the "July 24, 1998 Form 8-K")). 10.87* Strategic Alliance Agreement and Agreement for the Mutual Referral of Acquisition Opportunities dated July 9, 1998, between Sonic Automotive, Inc. and Mar Mar Realty, L.P. (incorporated by reference to Exhibit 99.7 to the July 24, 1998 Form 8-K). 10.88 Purchase Agreement dated as of July 28, 1998 between Sonic Automotive, Inc., the Guarantors named therein and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith, Incorporated, NationsBanc Montgomery Securities LLC and BancAmerica Robertson Stephens. 10.89 Subordination Agreement dated as of July 31, 1998 between O. Bruton Smith and U.S. Bank Trust National Association. 10.90 Employment Agreement between the Company and Dennis D. Higginbotham. 11.1* Statement regarding computation of per share earnings (incorporated by reference to Exhibit 11.1 to the 1996 Form 10-K). 12.1* Statement regarding computation of ratios. 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). 24.1 Powers of Attorney (included on the signature pages of this Registration Statement). 25.1 Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939 of U.S. Bank Trust National Association. 27.1 Financial Data Schedule. 99.1** Form of Letter of Transmittal reporting Exchange Offer. 99.2** Notice of Guaranteed Delivery.
- --------- * Filed previously. ** To be filed by amendment. Item 22. Undertakings Each of the undersigned Registrants hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of such Registrant's annual report pursuant to section 13(a) or section 15 (d) of the Exchange Act (and, II-6 where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Exchange Act) that is incorporated by reference in the registration statement 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 may be permitted to directors, officers and controlling persons of the Registrants pursuant to the foregoing provisions, or otherwise, each of the Registrants has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by a Registrant of expenses incurred or paid by a director, officer or controlling person of such 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, such 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 Securities Act and will be governed by the final adjudication of such issue. Each of the undersigned Registrants hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. Each of the undersigned Registrants hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-7 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE, INC. By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith Chairman and Chief Executive Officer POWER OF ATTORNEY We, the undersigned directors and officers of Sonic Automotive, Inc., do hereby constitute and appoint Messrs. O. Bruton Smith, Bryan Scott Smith, and Theodore M. Wright, each with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things either of them may deem necessary or advisable to enable Sonic Automotive, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that they shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - --------------------------------------- ---------------------------------------- ------------------- /s/ O. BRUTON SMITH Chairman, Chief Executive Officer and September 25, 1998 ---------------------------------- Director (principal executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH President, Chief Operating Officer and September 25, 1998 ---------------------------------- Director Bryan Scott Smith /s/ NELSON E. BOWERS, II Executive Vice President and Director September 25, 1998 ---------------------------------- Nelson E. Bowers, II /s/ THEODORE M. WRIGHT Chief Financial Officer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Vice President -- Finance, Treasurer, Secretary and Director /s/ WILLIAM P. BENTON Director September 25, 1998 ---------------------------------- William P. Benton /s/ WILLIAM R. BROOKS Director September 25, 1998 ---------------------------------- William R. Brooks /s/ WILLIAM I. BELK Director September 25, 1998 ---------------------------------- William I. Belk
II-8 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. CAPITOL CHEVROLET AND IMPORTS, INC. By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Capitol Chevrolet and Imports, Inc., do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Capitol Chevrolet and Imports, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Director (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-9 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. CASA FORD OF HOUSTON, INC. By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Casa Ford of Houston, Inc., do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Casa Ford of Houston, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Director (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-10 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. FORT MILL CHRYSLER-PLYMOUTH-DODGE INC. By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Fort Mill Chrysler-Plymouth-Dodge Inc., do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Fort Mill Chrysler-Plymouth-Dodge Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Director (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-11 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. FORT MILL FORD, INC. By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Fort Mill Ford, Inc., do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Fort Mill Ford, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Director (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-12 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. FREEDOM FORD, INC. By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Freedom Ford, Inc., do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Freedom Ford, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Director (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-13 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. FRONTIER OLDSMOBILE-CADILLAC, INC. By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Frontier Oldsmobile-Cadillac, Inc., do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Frontier Oldsmobile-Cadillac, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Director (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-14 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. LONE STAR FORD, INC. By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Lone Star Ford, Inc., do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Lone Star Ford, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Director (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-15 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. MARCUS DAVID CORPORATION By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Marcus David Corporation, do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Marcus David Corporation to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Director (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-16 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE OF CHATTANOOGA, LLC By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned governors and officers of Sonic Automotive of Chattanooga, LLC, do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive of Chattanooga, LLC to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- ----------------------------------------- ------------------- /s/ O. BRUTON SMITH President (principal executive officer) September 25, 1998 ---------------------------------- O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Governor September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Governor
II-17 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE-CLEARWATER, INC. By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Sonic Automotive-Clearwater, Inc., do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive-Clearwater, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- ----------------------------------------- ------------------- /s/ O. BRUTON SMITH President (principal executive officer) September 25, 1998 ---------------------------------- O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-18 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE COLLISION CENTER OF CLEARWATER, INC. By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Sonic Automotive Collision Center of Clearwater, Inc., do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive Collision Center of Clearwater, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- ----------------------------------------- ------------------- /s/ O. BRUTON SMITH President (principal executive officer) September 25, 1998 ---------------------------------- O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-19 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE OF GEORGIA, INC. By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Sonic Automotive of Georgia, Inc., do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive of Georgia, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- ----------------------------------------- ------------------- /s/ O. BRUTON SMITH President (principal executive officer) September 25, 1998 ---------------------------------- O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-20 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE - HWY. 153 AT SHALLOWFORD ROAD, CHATTANOOGA, INC. By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Sonic Automotive - Hwy. 153 at Shallowford Road, Chattanooga, Inc. do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive - Hwy. 153 at Shallowford Road, Chattanooga, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- ----------------------------------------- ------------------- /s/ O. BRUTON SMITH President (principal executive officer) September 25, 1998 ---------------------------------- O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-21 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE OF NASHVILLE, LLC By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned governors and officers of Sonic Automotive of Nashville, LLC, do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive of Nashville, LLC, to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- ----------------------------------------- ------------------- /s/ O. BRUTON SMITH President (principal executive officer) September 25, 1998 ---------------------------------- O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Governor September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Governor
II-22 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE OF NEVADA, INC. By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith Chief Executive Officer POWER OF ATTORNEY We, the undersigned directors and officers of Sonic Automotive of Nevada, Inc., do hereby constitute and appoint Mr. Bryan Scott Smith, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive of Nevada, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - ------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH Chief Executive Officer and Director September 25, 1998 ---------------------------------- (principal executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH President (principal financial and September 25, 1998 ---------------------------------- accounting officer) and Director Bryan Scott Smith
II-23 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE OF TENNESSEE, INC. By: /s/ BRYAN SCOTT SMITH ------------------------------------- Bryan Scott Smith President and Chief Executive Officer POWER OF ATTORNEY We, the undersigned directors and officers of Sonic Automotive of Tennessee, Inc., do hereby constitute and appoint Mr. Bryan Scott Smith, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive of Tennessee, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- ------------------------------------ ------------------- /s/ BRYAN SCOTT SMITH President, Chief Executive Officer September 25, 1998 ---------------------------------- (principal executive officer) and Bryan Scott Smith Director /s/ THEODORE M. WRIGHT Treasurer (principal financial and September 25, 1998 ---------------------------------- accounting officer), Secretary and Theodore M. Wright Director
II-24 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE - 1307 N. DIXIE HWY., NSB, INC. By: /s/ O. BRUTON SMITH --------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Sonic Automotive - 1307 N. Dixie Hwy., NSB, Inc., do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive - 1307 N. Dixie Hwy., NSB, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Director (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-25 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE - 1400 AUTOMALL DRIVE, COLUMBUS, INC. By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Sonic Automotive - 1400 Automall Drive, Columbus, Inc., do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive - 1400 Automall Drive, Columbus, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Director (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-26 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE - 1455 AUTOMALL DRIVE, COLUMBUS, INC. By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Sonic Automotive - 1455 Automall Drive, Columbus, Inc., do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive - 1455 Automall Drive, Columbus, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Director (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-27 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE - 1495 AUTOMALL DRIVE, COLUMBUS, INC. By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Sonic Automotive - 1495 Automall Drive, Columbus, Inc., do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive - 1495 Automall Drive, Columbus, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Director (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-28 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE - 1500 AUTOMALL DRIVE, COLUMBUS, INC. By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Sonic Automotive - 1500 Automall Drive, Columbus, Inc., do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive - 1500 Automall Drive, Columbus, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Director (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-29 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE - 1720 MASON AVE., DB, INC. By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Sonic Automotive - 1720 Mason Ave., DB, Inc., do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive - 1720 Mason Ave., DB, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Director (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-30 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE - 1720 MASON AVE., DB, LLC By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned governors and officers of Sonic Automotive - 1720 Mason Ave., DB, LLC do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive - 1720 Mason Ave., DB, LLC to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Governor (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Governor September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Governor
II-31 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE - 1919 N. DIXIE HWY., NSB, INC. By: /s/ O. BRUTON SMITH --------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Sonic Automotive - 1919 N. Dixie Hwy., NSB, Inc., do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive - 1919 N. Dixie Hwy., NSB, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Director (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-32 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE - 21699 U.S. HWY 19 N., INC. By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Sonic Automotive - 21699 U.S. Hwy 19 N., Inc., do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive - 21699 U.S. Hwy 19 N., Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Director (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-33 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE - 241 RIDGEWOOD AVE., HH, INC. By: /s/ O. BRUTON SMITH --------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Sonic Automotive - 241 Ridgewood Ave., HH, Inc., do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive - 241 Ridgewood Ave., HH, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Director (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-34 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE 2424 LAURENS RD., GREENVILLE, INC. By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Sonic Automotive 2424 Laurens Rd., Greenville, Inc., do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive 2424 Laurens Rd., Greenville, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Director (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-35 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE - 2490 SOUTH LEE HIGHWAY, LLC By: /s/ O. BRUTON SMITH --------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned governors and officers of Sonic Automotive - 2490 South Lee Highway, LLC, do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive - 2490 South Lee Highway, LLC to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- ----------------------------------------- ------------------- /s/ O. BRUTON SMITH President (principal executive officer) September 25, 1998 ---------------------------------- O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Governor September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Governor
II-36 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE 2752 LAURENS RD., GREENVILLE, INC. By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Sonic Automotive 2752 Laurens Rd., Greenville, Inc., do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive 2752 Laurens Rd., Greenville, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Director (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-37 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE - 3700 WEST BROAD STREET, COLUMBUS, INC. By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Sonic Automotive - 3700 West Broad Street, Columbus, Inc. do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive - 3700 West Broad Street, Columbus, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Director (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-38 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE - 3741 S. NOVA RD. PO, INC. By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Sonic Automotive - 3741 S. Nova Rd., PO, Inc., do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive - 3741 S. Nova Rd., PO, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Director (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-39 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE - 4000 WEST BROAD STREET, COLUMBUS, INC. By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Sonic Automotive - 4000 West Broad Street, Columbus, Inc., do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive - 4000 West Broad Street, Columbus, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Director (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-40 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE 5260 PEACHTREE INDUSTRIAL BLVD., LLC By: /s/ O. BRUTON SMITH --------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned governors and officers of Sonic Automotive 5260 Peachtree Industrial Blvd., LLC, do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive 5260 Peachtree Industrial Blvd., LLC to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- ----------------------------------------- ------------------- /s/ O. BRUTON SMITH President (principal executive officer) September 25, 1998 ---------------------------------- O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Governor September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Governor
II-41 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE - 5585 PEACHTREE INDUSTRIAL BLVD., LLC By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned governors and officers of Sonic Automotive - 5585 Peachtree Industrial Blvd., LLC, do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive - 5585 Peachtree Industrial Blvd., LLC to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- ----------------------------------------- ------------------- /s/ O. BRUTON SMITH President (principal executive officer) September 25, 1998 ---------------------------------- O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Governor September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Governor
II-42 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC AUTOMOTIVE - 6025 INTERNATIONAL DRIVE, LLC By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned governors and officers of Sonic Automotive - 6025 International Drive, LLC, do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Automotive - 6025 International Drive, LLC to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- ----------------------------------------- ------------------- /s/ O. BRUTON SMITH President (principal executive officer) September 25, 1998 ---------------------------------- O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Governor September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Governor
II-43 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC CHRYSLER-PLYMOUTH-JEEP-EAGLE, LLC By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned managers and officers of Sonic Chrysler-Plymouth-Jeep-Eagle, LLC, do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Chrysler-Plymouth-Jeep-Eagle, LLC to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Director (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-44 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC DODGE, LLC By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned managers and officers of Sonic Dodge, LLC, do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Sonic Dodge, LLC to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Manager (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Manager September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Manager
II-45 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. TOWN AND COUNTRY CHRYSLER-PLYMOUTH-JEEP, LLC By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned governors and officers of Town and Country Chrysler-Plymouth-Jeep, LLC, do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Town and Country Chrysler-Plymouth-Jeep, LLC to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- ----------------------------------------- ------------------- /s/ O. BRUTON SMITH President (principal executive officer) September 25, 1998 ---------------------------------- O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Governor September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Governor
II-46 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. TOWN AND COUNTRY CHRYSLER-PLYMOUTH-JEEP OF ROCK HILL, INC. By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Town and Country Chrysler-Plymouth-Jeep of Rock Hill, Inc., do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Town and Country Chrysler-Plymouth-Jeep of Rock Hill, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Director (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-47 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. TOWN AND COUNTRY DODGE OF CHATTANOOGA, LLC By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned governors and officers of Town and Country Dodge of Chattanooga, LLC, do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Town and Country Dodge of Chattanooga, LLC to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- ----------------------------------------- ------------------- /s/ O. BRUTON SMITH President (principal executive officer) September 25, 1998 ---------------------------------- O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Governor September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Governor
II-48 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. TOWN AND COUNTRY FORD, INCORPORATED By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned directors and officers of Town and Country Ford, Incorporated, do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Town and Country Ford, Incorporated to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- -------------------------------------- ------------------- /s/ O. BRUTON SMITH President and Director (principal September 25, 1998 ---------------------------------- executive officer) O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Director
II-49 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. TOWN AND COUNTRY FORD OF CLEVELAND, LLC By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned governors and officers of Town and Country Ford of Cleveland, LLC, do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Town and Country Ford of Cleveland, LLC to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- ----------------------------------------- ------------------- /s/ O. BRUTON SMITH President (principal executive officer) September 25, 1998 ---------------------------------- O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Governor September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Governor
II-50 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. TOWN AND COUNTRY JAGUAR, LLC By: /s/ O. BRUTON SMITH ------------------------------------- O. Bruton Smith President POWER OF ATTORNEY We, the undersigned governors and officers of Town and Country Jaguar, LLC, do hereby constitute and appoint Mr. Theodore M. Wright, with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things he may deem necessary or advisable to enable Town and Country Jaguar, LLC to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that he shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- ----------------------------------------- ------------------- /s/ O. BRUTON SMITH President (principal executive officer) September 25, 1998 ---------------------------------- O. Bruton Smith /s/ BRYAN SCOTT SMITH Vice President and Governor September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Vice President, Treasurer (principal September 25, 1998 ---------------------------------- financial and accounting officer), Theodore M. Wright Secretary and Governor
II-51 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Charlotte, state of North Carolina, on September 25, 1998. SONIC PEACHTREE INDUSTRIAL BLVD., L.P. By: /s/ O. BRUTON SMITH ------------------------------------- Sonic Automotive of Georgia, Inc. General Partner O. Bruton Smith, President POWER OF ATTORNEY We, the undersigned directors and officers of Sonic Automotive of Georgia, Inc., as the sole General Partner of Sonic Peachtree Industrial Blvd., L.P., do hereby constitute and appoint Messrs. O. Bruton Smith, Bryan Scott Smith, and Theodore M. Wright, each with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things either of them may deem necessary or advisable to enable Sonic Peachtree Industrial Blvd., L.P. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any and all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and we do hereby ratify and confirm all that they shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - -------------------------------------- ---------------------------------------- ------------------- /s/ O. BRUTON SMITH President (principal executive officer September 25, 1998 ---------------------------------- of Sonic Automotive of Georgia, Inc. O. Bruton Smith and Sonic Peachtree Industrial Blvd., L.P.) /s/ BRYAN SCOTT SMITH Vice President and Director September 25, 1998 ---------------------------------- Bryan Scott Smith /s/ THEODORE M. WRIGHT Treasurer (principal financial and September 25, 1998 ---------------------------------- accounting officer of Sonic Theodore M. Wright Automotive of Georgia, Inc. and Sonic Peachtree Industrial Blvd., L.P.), Vice President, Secretary and Director
II-52 EX-4 2 EXHIBIT 4.1 EXHIBIT 4.1 Registration Rights Agreement Dated As of July 31, 1998 among Sonic Automotive, Inc. TOWN AND COUNTRY FORD INCORPORATED, MARCUS DAVID CORPORATION, FRONTIER OLDSMOBILE--CADILLAC, INC., SONIC DODGE, LLC, SONIC CHRYSLER--PLYMOUTH--JEEP--EAGLE, LLC, FORT MILL FORD, INC., TOWN AND COUNTRY CHRYSLER--PLYMOUTH--JEEP OF ROCK HILL, INC., FORT MILL CHRYSLER--PLYMOUTH--DODGE INC., LONE STAR FORD, INC., SONIC AUTOMOTIVE OF NEVADA, INC., SONIC AUTOMOTIVE OF TENNESSEE, INC., SONIC AUTOMOTIVE - 6025 INTERNATIONAL DRIVE, LLC, SONIC AUTOMOTIVE OF NASHVILLE, LLC, SONIC AUTOMOTIVE OF CHATTANOOGA, LLC, TOWN AND COUNTRY JAGUAR, LLC, TOWN AND COUNTRY CHRYSLER--PLYMOUTH--JEEP, LLC, TOWN AND COUNTRY DODGE OF CHATTANOOGA, LLC, SONIC AUTOMOTIVE - 2490 SOUTH LEE HIGHWAY, LLC, TOWN AND COUNTRY FORD OF CLEVELAND, LLC, FREEDOM FORD, INC., SONIC AUTOMOTIVE 5260 PEACHTREE INDUSTRIAL BLVD., LLC, SONIC AUTOMOTIVE OF GEORGIA, INC., SONIC PEACHTREE INDUSTRIAL BLVD., L.P., SONIC AUTOMOTIVE - CLEARWATER, INC., SONIC AUTOMOTIVE 21699 U.S. HWY. 19 N., INC., SONIC AUTOMOTIVE COLLISION CENTER OF CLEARWATER, INC., SONIC AUTOMOTIVE - 1400 AUTOMALL DRIVE, COLUMBUS, INC., SONIC AUTOMOTIVE - 1455 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE - 1495 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE - 1500 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE - 3700 WEST BROAD STREET, COLUMBUS, INC. SONIC AUTOMOTIVE - 4000 WEST BROAD STREET, COLUMBUS, INC. SONIC AUTOMOTIVE 2424 LAURENS RD., GREENVILLE, INC., SONIC AUTOMOTIVE 2752 LAURENS RD., GREENVILLE, INC., SONIC AUTOMOTIVE - 5585 PEACHTREE INDUSTRIAL BLVD., LLC, CAPITOL CHEVROLET AND IMPORTS, INC., SONIC AUTOMOTIVE - 1919 N. DIXIE HWY., NSB, INC., SONIC AUTOMOTIVE - 1307 N. DIXIE HWY., NSB, INC., SONIC AUTOMOTIVE - 1720 MASON AVE., DB, INC., SONIC AUTOMOTIVE - 3741 S. NOVA RD., PO, INC. and SONIC AUTOMOTIVE -241 RIDGEWOOD AVE., HH, INC.. SONIC AUTOMOTIVE-HWY. 153 at SHALLOWFORD ROAD, CHATTANOOGA, INC. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, NationsBanc Montgomery Securities LLC and BancAmerica Robertson Stephens REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (the "Agreement") is made and entered into this 31st day of 1998, among Sonic Automotive, Inc., a Delaware corporation (the "Company"), and Town and Country Ford, Inc., a North Carolina corporation, Marcus David Corporation, a North Carolina corporation, Frontier Oldsmobile-Cadillac, Inc., a North Carolina corporation, Sonic Dodge, LLC, a North Carolina limited liability company, Sonic Chrysler-Plymouth-Jeep-Eagle, LLC, a North Carolina limited liability company, Fort Mill Ford, Inc., a South Carolina corporation, Town and Country Chrysler-Plymouth-Jeep of Rock Hill, Inc., a South Carolina corporation, Fort Mill Chrysler-Plymouth-Dodge, Inc., a South Carolina corporation, Lone Star Ford, Inc., a Texas corporation, Sonic Automotive of Nevada, Inc., a Nevada corporation, Sonic Automotive of Tennessee, Inc., a Tennessee corporation, Sonic Automotive-6025 International Drive, LLC, a Tennessee limited liability company, Sonic Automotive of Nashville, LLC, a Tennessee limited liability company, Sonic Automotive of Chattanooga, LLC, a Tennessee limited liability company, Town and Country Jaguar, LLC, a Tennessee limited liability company, Town and Country Chrysler-Plymouth-Jeep, LLC, a Tennessee limited liability company, Town and Country Dodge of Chattanooga, LLC, a Tennessee limited liability company, Sonic Automotive-2490 South Lee Highway, LLC, a Tennessee limited liability company, Town and Country Ford of Cleveland, LLC, an Ohio limited liability company, Freedom Ford, Inc., a Florida corporation, Sonic Automotive 5260 Peachtree Industrial Blvd, LLC, a Georgia limited liability company, Sonic Automotive of Georgia, Inc., a Georgia corporation, Sonic Peachtree Industrial Blvd., L.P., a Georgia limited partnership, Sonic Automotive - Clearwater, Inc., a Florida corporation, Sonic Automotive 21699 U.S. Hwy 19 N., Inc., a Florida corporation, Sonic Automotive Collision Center of Clearwater, Inc., a Florida corporation, Sonic Automotive - 1400 Automall Drive, Columbus, Inc., an Ohio corporation, Sonic Automotive - 1455 Automall Drive, Columbus, Inc., an Ohio corporation, Sonic Automotive - 1495 Automall Drive, Columbus, Inc., an Ohio corporation, Sonic Automotive - 1500 Automall Drive, Columbus, Inc., an Ohio corporation, Sonic Automotive - 3700 West Broad Street, Columbus, Inc., an Ohio corporation, Sonic Automotive - 4000 West Broad Street, Columbus, Inc., an Ohio corporation, Sonic Automotive 2424 Laurens Rd., Greenville, Inc., a South Carolina corporation, Sonic Automotive 2752 Laurens Rd., Greenville, Inc., a South Carolina corporation, Sonic Automotive - 5585 Peachtree Industrial Blvd., LLC, a Georgia limited liability company, Capitol Chevrolet and Imports, Inc., an Alabama corporation, Sonic Automotive - 1919 N. Dixie Hwy., NSB, Inc., a Florida corporation, Sonic Automotive - 1307 N. Dixie Hwy., NSB, Inc., a Florida corporation, Sonic Automotive - 1720 Mason Ave., DB, Inc., Inc., a Florida corporation, Sonic Automotive - 3741 S. Nova Rd., PO, Inc., a Florida corporation, Sonic Automotive - - 241 Ridgewood Ave., HH, Inc., a Florida corporation and Sonic Automotive-Hwy. 153 at Shallowford Road, Chattanooga, Inc., a Tennessee corporation (each a "Guarantor" and collectively, the "Guarantors") and Merrill Lynch, Pierce, Fenner & Smith Incorporated, NationsBanc Montgomery -1- Securities LLC and BancAmerica Robertson Stephens (collectively, the "Initial Purchasers"). This Agreement is made pursuant to the Purchase Agreement, dated July 31, 1998, among the Company, the Guarantors and the Initial Purchasers (the "Purchase Agreement"), which provides for the sale by the Company to the Initial Purchasers of an aggregate of $125 million principal amount of the Company's 11% Senior Subordinated Notes due 2008, Series A, and related guarantees (collectively, the "Securities"). In order to induce the Initial Purchasers to enter into the Purchase Agreement, the Company has agreed to provide to the Initial Purchasers and their direct and indirect transferees the registration rights set forth in this Agreement. The execution of this Agreement is a condition to the closing under the Purchase Agreement. In consideration of the foregoing, the parties hereto agree as follows: 1. Definitions. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "1933 Act" shall mean the Securities Act of 1933, as amended from time to time. "1934 Act" shall mean the Securities Exchange Act of l934, as amended from time to time. "Closing Date" shall mean the Closing Time as defined in the Purchase Agreement. "Company" shall have the meaning set forth in the preamble and shall also include the Company's successors. "Depositary" shall mean The Depository Trust Company, or any other depositary appointed by the Company, provided, however, that such depositary must have an address in the Borough of Manhattan, in the City of New York. "Exchange Offer" shall mean the exchange offer by the Company of Exchange Securities for Registrable Securities pursuant to Section 2.1 hereof. "Exchange Offer Registration" shall mean a registration under the 1933 Act effected pursuant to Section 2.1 hereof. "Exchange Offer Registration Statement" shall mean an exchange offer registration statement on Form S-4 (or, if applicable, on another appropriate form), and all amendments and supplements to such registration statement, including the Prospectus contained therein, all exhibits thereto and all documents incorporated by reference therein. -2- "Exchange Period" shall have the meaning set forth in Section 2.1 hereof. "Exchange Securities" shall mean (i) the 11% Senior Subordinated Notes due 2008, Series B issued by the Company and (ii) the related guarantees issued by the Guarantors, in each case under the Indenture containing terms identical to the Securities in all material respects (except for references to certain interest rate provisions, restrictions on transfers and restrictive legends), to be offered to Holders of Securities in exchange for Registrable Securities pursuant to the Exchange Offer. "Holder" shall mean an Initial Purchaser, for so long as it owns any Registrable Securities, and each of its successors, assigns and direct and indirect transferees who become registered owners of Registrable Securities under the Indenture and each Participating Broker-Dealer that holds Exchange Securities for so long as such Participating Broker-Dealer is required to deliver a prospectus meeting the requirements of the 1933 Act in connection with any resale of such Exchange Securities. "Indenture" shall mean the Indenture relating to the Securities, the Exchange Securities and the Private Exchange Securities, dated as of July 1, 1998, between the Company and U.S. Bank Trust National Association, as trustee, as the same may be amended, supplemented, waived or otherwise modified from time to time in accordance with the terms thereof. "Initial Purchaser" or "Initial Purchasers" shall have the meaning set forth in the preamble. "Majority Holders" shall mean the Holders of a majority of the aggregate principal amount of Outstanding (as defined in the Indenture) Registrable Securities; provided that whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Company and other obligors on the Securities or any Affiliate (as defined in the Indenture) of the Company shall be disregarded in determining whether such consent or approval was given by the Holders of such required percentage amount. "Participating Broker-Dealer" shall mean any of Merrill Lynch, Pierce, Fenner & Smith Incorporated, NationsBanc Montgomery Securities LLC and BancAmerica Robertson Stephens and any other broker-dealer which makes a market in the Securities and exchanges Registrable Securities in the Exchange Offer for Exchange Securities. "Person" shall mean an individual, partnership (general or limited), corporation, limited liability company, trust or unincorporated organization, or a government or agency or political subdivision thereof. "Private Exchange" shall have the meaning set forth in Section 2.1 hereof. -3- "Private Exchange Securities" shall have the meaning set forth in Section 2.1 hereof. "Prospectus" shall mean the prospectus included in a Registration Statement, including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus supplement, including any such prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by a Shelf Registration Statement, and by all other amendments and supplements to a prospectus, including post-effective amendments, and in each case including all material incorporated by reference therein. "Purchase Agreement" shall have the meaning set forth in the preamble. "Registrable Securities" shall mean the Securities and, if issued, the Private Exchange Securities; provided, however, that the Securities and, if issued, the Private Exchange Securities, shall cease to be Registrable Securities when (i) a Registration Statement with respect to such Securities and, if issued, such Private Exchange Securities, shall have been declared effective under the 1933 Act and such Securities or Private Exchange Securities, as the case may be, shall have been disposed of pursuant to such Registration Statement, (ii) such Securities and, if issued, such Private Exchange Securities have been sold to the public pursuant to Rule l44 (or any similar provision then in force, but not Rule 144A) under the 1933 Act, (iii) such Securities or Private Exchange Securities, as the case may be, shall have ceased to be outstanding or (iv) the Exchange Offer is consummated (except in the case of Securities purchased from the Company and continued to be held by the Initial Purchasers). "Registration Expenses" shall mean any and all expenses incident to performance of or compliance by the Company with this Agreement, including without limitation: (i) all SEC, stock exchange or National Association of Securities Dealers, Inc. (the "NASD") registration and filing fees, including, if applicable, the fees and expenses of any "qualified independent underwriter" (and the reasonable fees and expenses of its counsel) that is required to be retained by any holder of Registrable Securities in accordance with the rules and regulations of the NASD, (ii) all fees and expenses incurred in connection with compliance with state securities or blue sky laws and compliance with the rules of the NASD (including reasonable fees and disbursements of counsel for any underwriters or Holders in connection with blue sky qualification of any of the Exchange Securities or Registrable Securities and any filings with the NASD), (iii) all expenses of any Persons in preparing or assisting in preparing, word processing, printing and distributing any Registration Statement, any Prospectus, any amendments or supplements thereto, any underwriting agreements, securities sales agreements and other documents relating to the performance of and compliance with this Agreement, (iv) all fees and expenses incurred in connection with the listing, if any, of any of the Registrable Securities on any securities exchange or -4- exchanges, (v) all rating agency fees, (vi) the fees and disbursements of counsel for the Company and of the independent public accountants of the Company, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance, (vii) the fees and expenses of the Trustee, and any escrow agent or custodian, (viii) the reasonable fees and expenses of the Initial Purchasers in connection with the Exchange Offer, including the reasonable fees and expenses of counsel to the Initial Purchasers in connection therewith, (ix) the reasonable fees and disbursements of Fried, Frank, Harris, Shriver & Jacobson, special counsel representing the Holders of Registrable Securities and (x) any fees and disbursements of the underwriters customarily required to be paid by issuers or sellers of securities and the fees and expenses of any special experts retained by the Company in connection with any Registration Statement, but excluding underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Registrable Securities by a Holder. "Registration Statement" shall mean any registration statement of the Company which covers any of the Exchange Securities or Registrable Securities pursuant to the provisions of this Agreement, and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "SEC" shall mean the Securities and Exchange Commission or any successor agency or government body performing the functions currently performed by the United States Securities and Exchange Commission. "Shelf Registration" shall mean a registration effected pursuant to Section 2.2 hereof. "Shelf Registration Statement" shall mean a "shelf" registration statement of the Company pursuant to the provisions of Section 2.2 of this Agreement which covers all of the Registrable Securities or all of the Private Exchange Securities on an appropriate form under Rule 415 under the 1933 Act, or any similar rule that may be adopted by the SEC, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Trustee" shall mean the trustee with respect to the Securities, the Exchange Securities and the Private Exchange Securities under the Indenture. 2. Registration Under the 1933 Act. 2.1 Exchange Offer. The Company and the Guarantors shall, for the benefit of the Holders, at the Company's and the Guarantors' cost, use their reasonable best efforts to (A) prepare and, as soon as practicable but not later than 60 days following -5- the Closing Date, file with the SEC an Exchange Offer Registration Statement on an appropriate form under the 1933 Act with respect to a proposed Exchange Offer and the issuance and delivery to the Holders, in exchange for the Registrable Securities (other than Private Exchange Securities), of a like principal amount of Exchange Securities, (B) to cause the Exchange Offer Registration Statement to be declared effective under the 1933 Act within 135 days of the Closing Date, (C) keep the Exchange Offer Registration Statement effective until the closing of the Exchange Offer and (D) cause the Exchange Offer to be consummated not later than 165 days following the Closing Date. The Exchange Securities will be issued under the Indenture. Upon the effectiveness of the Exchange Offer Registration Statement, the Company and the Guarantors shall promptly commence the Exchange Offer, it being the objective of such Exchange Offer to enable each Holder eligible and electing to exchange Registrable Securities for Exchange Securities (assuming that such Holder (a) is not an affiliate of the Company within the meaning of Rule 405 under the 1933 Act, (b) is not a broker-dealer tendering Registrable Securities acquired directly from the Company for its own account, (c) acquired the Exchange Securities in the ordinary course of such Holder's business and (d) has no arrangements or understandings with any Person to participate in the Exchange Offer for the purpose of distributing the Exchange Securities) to transfer such Exchange Securities from and after their receipt without any limitations or restrictions under the 1933 Act and under state securities or blue sky laws. In connection with the Exchange Offer, the Company and the Guarantors shall: (a) mail as promptly as practicable to each Holder a copy of the Prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents; (b) keep the Exchange Offer open for acceptance for a period of not less than 30 calendar days after the date notice thereof is mailed to the Holders (or longer if required by applicable law) (such period referred to herein as the "Exchange Period"); (c) utilize the services of the Depositary for the Exchange Offer; (d) permit Holders to withdraw tendered Registrable Securities at any time prior to 5:00 p.m. (Eastern Standard Time), on the last business day of the Exchange Period, by sending to the institution specified in the notice, a telegram, telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Registrable Securities delivered for exchange, and a statement that such Holder is withdrawing such Holder's election to have such Securities exchanged; (e) notify each Holder that any Registrable Security not tendered will remain outstanding and continue to accrue interest, but will not retain any rights under this Agreement (except in the case of the Initial Purchasers and Participating Broker-Dealers as provided herein); and -6- (f) otherwise comply in all respects with all applicable laws relating to the Exchange Offer. If, prior to consummation of the Exchange Offer, the Initial Purchasers hold any Securities acquired by them and having the status of an unsold allotment in the initial distribution, the Company and the Guarantors upon the request of any Initial Purchaser shall, simultaneously with the delivery of the Exchange Securities in the Exchange Offer, issue and deliver to such Initial Purchaser in exchange (the "Private Exchange") for the Securities held by such Initial Purchaser, a like principal amount of debt securities of the Company, guaranteed by the Guarantors on a senior basis, that are identical (except that such securities shall bear appropriate transfer restrictions) to the Exchange Securities (the "Private Exchange Securities"). The Exchange Securities and the Private Exchange Securities shall be issued under (i) the Indenture or (ii) an indenture identical in all material respects to the Indenture and which, in either case, has been qualified under the Trust Indenture Act of 1939, as amended (the "TIA"), or is exempt from such qualification and shall provide that the Exchange Securities shall not be subject to the transfer restrictions set forth in the Indenture but that the Private Exchange Securities shall be subject to such transfer restrictions. The Indenture or such indenture shall provide that the Exchange Securities, the Private Exchange Securities and the Securities shall vote and consent together on all matters as one class and that none of the Exchange Securities, the Private Exchange Securities or the Securities will have the right to vote or consent as a separate class on any matter. The Private Exchange Securities shall be of the same series as and the Company and the Guarantors shall use all commercially reasonable efforts to have the Private Exchange Securities bear the same CUSIP number as the Exchange Securities. Neither the Company nor any of the Guarantors shall have any liability under this Agreement solely as a result of such Private Exchange Securities not bearing the same CUSIP number as the Exchange Securities. As soon as practicable after the close of the Exchange Offer and/or the Private Exchange, the Company and the Guarantors shall: (i) accept for exchange all Registrable Securities duly tendered and not validly withdrawn pursuant to the Exchange Offer in accordance with the terms of the Exchange Offer Registration Statement and the letter of transmittal which shall be an exhibit thereto; (ii) accept for exchange all Securities properly tendered pursuant to the Private Exchange; (iii)deliver, or cause to be delivered, to the Trustee for cancellation all Registrable Securities so accepted for exchange; and (iv) cause the Trustee promptly to authenticate and deliver Exchange Securities or Private Exchange Securities, as the case may be, to each Holder of Registrable Securities so accepted for exchange in a -7- principal amount equal to the principal amount of the Registrable Securities of such Holder so accepted for exchange. Interest on each Exchange Security and Private Exchange Security will accrue from the last date on which interest was paid on the Registrable Securities surrendered in exchange therefor or, if no interest has been paid on the Registrable Securities, from the date of original issuance. The Exchange Offer and the Private Exchange shall not be subject to any conditions, other than (i) that the Exchange Offer or the Private Exchange, or the making of any exchange by a Holder, does not violate applicable law or any applicable interpretation of the staff of the SEC, (ii) the due tendering of Registrable Securities in accordance with the Exchange Offer and the Private Exchange, (iii) that each Holder of Registrable Securities exchanged in the Exchange Offer shall have represented that all Exchange Securities to be received by it shall be acquired in the ordinary course of its business and that at the time of the consummation of the Exchange Offer it shall have no arrangement or understanding with any person to participate in the distribution (within the meaning of the 1933 Act) of the Exchange Securities and shall have made such other representations as may be reasonably necessary under applicable SEC rules, regulations or interpretations to render the use of Form S-4 or other appropriate form under the 1933 Act available and (iv) that no action or proceeding shall have been instituted or threatened in any court or by or before any governmental agency with respect to the Exchange Offer or the Private Exchange which, in the Company's and the Guarantors' judgment, would reasonably be expected to impair the ability of the Company and the Guarantors to proceed with the Exchange Offer or the Private Exchange. The Company and the Guarantors shall inform the Initial Purchasers of the names and addresses of the Holders to whom the Exchange Offer is made, and the Initial Purchasers shall have the right to contact such Holders and otherwise facilitate the tender of Registrable Securities in the Exchange Offer. 2.2 Shelf Registration. (i) If, because of any changes in law, SEC rules or regulations or applicable interpretations thereof by the staff of the SEC, the Company and the Guarantors are not permitted to effect the Exchange Offer as contemplated by Section 2.1 hereof, (ii) if for any other reason the Exchange Offer Registration Statement is not declared effective within 135 days following the original issue of the Registrable Securities or the Exchange Offer is not consummated within 165 days after the original issue of the Registrable Securities, (iii) upon the request of any of the Initial Purchasers or (iv) if a Holder is not permitted by applicable law to participate in the Exchange Offer or elects to participate in the Exchange Offer but does not receive fully tradeable Exchange Securities pursuant to the Exchange Offer, then in case of each of clauses (i) through (iv) the Company and the Guarantors shall, at their cost: (a) As promptly as practicable, file with the SEC, and thereafter shall use their reasonable best efforts to cause to be declared effective within 165 days after the original issue of the Registrable Securities, a Shelf Registration Statement relating to the offer and sale of the Registrable Securities by the Holders from time to time in accordance with the methods -8- of distribution elected by the Majority Holders participating in the Shelf Registration and set forth in such Shelf Registration Statement. (b) Use their reasonable best efforts to keep the Shelf Registration Statement continuously effective in order to permit the Prospectus forming part thereof to be usable by Holders for a period of two years from the date the Shelf Registration Statement is declared effective by the SEC, or for such shorter period that will terminate when all Registrable Securities covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement or cease to be outstanding or otherwise to be Registrable Securities (the "Effectiveness Period"); provided, however, that the Effectiveness Period in respect of the Shelf Registration Statement shall be extended to the extent required to permit dealers to comply with the applicable prospectus delivery requirements of Rule 174 under the 1933 Act and as otherwise provided herein. (c) Notwithstanding any other provisions hereof, use their reasonable best efforts to ensure that (i) any Shelf Registration Statement and any amendment thereto and any Prospectus forming part thereof and any supplement thereto complies in all material respects with the 1933 Act and the rules and regulations thereunder, (ii) any Shelf Registration Statement and any amendment thereto does not, when it becomes effective, 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 (iii) any Prospectus forming part of any Shelf Registration Statement, and any supplement to such Prospectus (as amended or supplemented from time to time), does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements, in light of the circumstances under which they were made, not misleading. The Company and the Guarantors shall not permit any securities other than Registrable Securities to be included in the Shelf Registration Statement. The Company and the Guarantors further agree, if necessary, to supplement or amend the Shelf Registration Statement, as required by Section 3(b) below, and to furnish to the Holders of Registrable Securities copies of any such supplement or amendment promptly after its being used or filed with the SEC. 2.3 Expenses. The Company and the Guarantors shall pay all Registration Expenses in connection with the registration pursuant to Section 2.1 or 2.2. Each Holder shall pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder's Registrable Securities pursuant to the Shelf Registration Statement. 2.4. Effectiveness. (a) The Company and the Guarantors will be deemed not have used their reasonable best efforts to cause the Exchange Offer Registration Statement or the Shelf Registration Statement, as the case may be, to become, or to -9- remain, effective during the requisite period if the Company or any of the Guarantors voluntarily takes any action that would, or omits to take any action which omission would, result in any such Registration Statement not being declared effective or in the Holders of Registrable Securities covered thereby not being able to exchange or offer and sell such Registrable Securities during that period as and to the extent contemplated hereby, unless such action is required by applicable law. (b) An Exchange Offer Registration Statement pursuant to Section 2.1 hereof or a Shelf Registration Statement pursuant to Section 2.2 hereof will not be deemed to have become effective unless it has been declared effective by the SEC; provided, however, that if, after it has been declared effective, the offering of Registrable Securities pursuant to an Exchange Offer Registration Statement or a Shelf Registration Statement is interfered with by any stop order, injunction or other order or requirement of the SEC or any other governmental agency or court, such Registration Statement will be deemed not to have become effective during the period of such interference, until the offering of Registrable Securities pursuant to such Registration Statement may legally resume. 2.5 Interest. The Indenture executed in connection with the Securities will provide that in the event that either (a) the Exchange Offer Registration Statement is not filed with the Commission on or prior to the 60th calendar day following the date of original issue of the Securities, (b) the Exchange Offer Registration Statement has not been declared effective on or prior to the 135th calendar day following the date of original issue of the Securities or (c) the Exchange Offer is not consummated or a Shelf Registration Statement is not declared effective, in either case, on or prior to the 165th calendar day following the date of original issue of the Securities (each such event referred to in clauses (a) through (c) above, a "Registration Default"), the interest rate borne by the Securities and the Private Exchange Securities shall be increased ("Additional Interest") by one-quarter of one percent per annum upon the occurrence of each Registration Default, which rate will increase by one quarter of one percent each 90-day period that such Additional Interest continues to accrue under any such circumstance, provided that the maximum aggregate increase in the interest rate will in no event exceed one percent (1%) per annum. Following the cure of all Registration Defaults the accrual of Additional Interest will cease and the interest rate will revert to the original rate. If the Shelf Registration Statement is declared effective but shall thereafter become unusable by the Holders for any reason, and the aggregate number of days in any consecutive twelve-month period for which the Shelf Registration Statement shall not be usable exceeds 30 days in the aggregate, then the interest rate borne by the Securities and the Private Exchange Securities (so long as the Private Exchange Securities have the status of an unsold -10- allotment at the time of the Exchange Offer) will be increased by 0.25% per annum of the principal amount of the Securities and the Private Exchange Securities for the first 90-day period (or portion thereof) beginning on the 31st such date that such Shelf Registration Statement ceases to be usable, which rate shall be increased by an additional 0.25% per annum of the principal amount of the Securities and the Private Exchange (so long as the Private Exchange Securities have the status of an unsold allotment at the time of the Exchange Offer) at the beginning of each subsequent 90-day period, provided that the maximum aggregate increase in the interest rate will in no event exceed one percent (1%) per annum. Any amounts payable under this paragraph shall also be deemed "Additional Interest" for purposes of this Agreement. Upon the Shelf Registration Statement once again becoming usable, the interest rate borne by the Securities and the Private Exchange Securities will be reduced to the original interest rate if the Company is otherwise in compliance with this Agreement at such time. Additional Interest shall be computed based on the actual number of days elapsed in each 90-day period in which the Shelf Registration Statement is unusable. The Company and the Guarantors shall notify the Trustee within five business days after each and every date on which an event occurs in respect of which Additional Interest is required to be paid (an "Event Date"). Additional Interest shall be paid by depositing with the Trustee, in trust, for the benefit of the Holders of Registrable Securities, on or before the applicable semiannual interest payment date, immediately available funds in sums sufficient to pay the Additional Interest then due. The Additional Interest due shall be payable on each interest payment date to the record Holder of Securities and Private Exchange Securities entitled to receive the interest payment to be paid on such date as set forth in the Indenture. Each obligation to pay Additional Interest shall be deemed to accrue from and including the day following the applicable Event Date. 3. Registration Procedures. In connection with the obligations of the Company and the Guarantors with respect to Registration Statements pursuant to Sections 2.1 and 2.2 hereof, the Company and the Guarantors shall: (a) prepare and file with the SEC a Registration Statement, within the relevant time period specified in Section 2, on the appropriate form under the 1933 Act, which form (i) shall be selected by the Company and the Guarantors, (ii) shall, in the case of a Shelf Registration, be available for the sale of the Registrable Securities by the selling Holders thereof, (iii) shall comply as to form in all material respects with the requirements of the applicable form and include or incorporate by reference all financial statements required by the SEC to be filed therewith or incorporated by reference therein, and (iv) shall comply in all respects with the requirements of Regulation S-T under the 1933 Act, and use their reasonable best efforts to cause such Registration Statement to become effective and remain effective in accordance with Section 2 hereof; (b) prepare and file with the SEC such amendments and post-effective amendments to each Registration Statement as may be necessary under applicable law to keep such Registration Statement effective for the applicable period; and cause each Prospectus to be supplemented by any required prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 (or any similar provision then in force) under the 1933 Act and comply with the provisions of the 1933 Act, the 1934 Act and the rules and regulations thereunder applicable to them with respect to the disposition of all securities covered by each Registration Statement during the applicable period in -11- accordance with the intended method or methods of distribution by the selling Holders thereof (including sales by any Participating Broker-Dealer); (c) in the case of a Shelf Registration, (i) notify each Holder of Registrable Securities, at least five business days prior to filing, that a Shelf Registration Statement with respect to the Registrable Securities is being filed and advising such Holders that the distribution of Registrable Securities will be made in accordance with the method selected by the Majority Holders participating in the Shelf Registration; (ii) furnish to each Holder of Registrable Securities and to each underwriter of an underwritten offering of Registrable Securities, if any, without charge, as many copies of each Prospectus, including each preliminary Prospectus, and any amendment or supplement thereto and such other documents as such Holder or underwriter may reasonably request, including financial statements and schedules and, if the Holder so requests, all exhibits, in order to facilitate the public sale or other disposition of the Registrable Securities; and (iii) hereby consent to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders of Registrable Securities in connection with the offering and sale of the Registrable Securities covered by the Prospectus or any amendment or supplement thereto; (d) use their reasonable best efforts to register or qualify the Registrable Securities under all applicable state securities or "blue sky" laws of such jurisdictions as any Holder of Registrable Securities covered by a Registration Statement and each underwriter of an underwritten offering of Registrable Securities shall reasonably request by the time the applicable Registration Statement is declared effective by the SEC, and do any and all other acts and things which may be reasonably necessary or advisable to enable each such Holder and underwriter to consummate the disposition in each such jurisdiction of such Registrable Securities owned by such Holder; provided, however, that none of the Company and the Guarantors shall be required to (i) qualify as a foreign corporation or as a dealer in securities in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), or (ii) take any action which would subject it to general service of process or taxation in any such jurisdiction where it is not then so subject; (e) notify promptly each Holder of Registrable Securities under a Shelf Registration or any Participating Broker-Dealer who has notified the Company and the Guarantors that it is utilizing the Exchange Offer Registration Statement as provided in paragraph (f) below and, if requested by such Holder or Participating Broker-Dealer, confirm such advice in writing promptly (i) when a Registration Statement has become effective and when any post-effective amendments and supplements thereto become effective, (ii) of any request by the SEC or any state securities authority for post-effective amendments and supplements to a Registration Statement and Prospectus or for additional information after the Registration Statement has become effective, (iii) of the issuance by the SEC or any state securities authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose, (iv) in the case of a Shelf Registration, if, between the effective date of such Registration Statement and the closing of any sale of Registrable Securities covered -12- thereby, the representations and warranties of the Company and the Guarantors contained in any underwriting agreement, securities sales agreement or other similar agreement, if any, relating to the offering cease to be true and correct in all material respects, (v) of the happening of any event or the discovery of any facts during the period a Shelf Registration Statement is effective which makes any statement made in such Registration Statement or the related Prospectus untrue in any material respect or which requires the making of any changes in such Registration Statement or Prospectus in order to make the statements therein not misleading, (vi) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities or the Exchange Securities, as the case may be, for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose and (vii) of any determination by the Company that a post-effective amendment to such Registration Statement would be appropriate; (f) (A) in the case of the Exchange Offer Registration Statement (i) include in the Exchange Offer Registration Statement a section entitled "Plan of Distribution" which section shall be reasonably acceptable to Merrill Lynch on behalf of the Participating Broker-Dealers, and which shall contain a summary statement of the positions taken or policies made by the staff of the SEC with respect to the potential "underwriter" status of any broker-dealer that holds Registrable Securities acquired for its own account as a result of market-making activities or other trading activities and that will be the beneficial owner (as defined in Rule 13d-3 promulgated under the 1934 Act) of Exchange Securities to be received by such broker-dealer in the Exchange Offer, whether such positions or policies have been publicly disseminated by the staff of the SEC or such positions or policies, in the reasonable judgment of Merrill Lynch on behalf of the Participating Broker-Dealers and its counsel, represent the prevailing views of the staff of the SEC, including a statement that any such broker-dealer who receives Exchange Securities for Registrable Securities pursuant to the Exchange Offer may be deemed a statutory underwriter and must deliver a prospectus meeting the requirements of the 1933 Act in connection with any resale of such Exchange Securities, (ii) furnish to each Participating Broker-Dealer who has delivered to the Company the notice referred to in Section 3(e), without charge, as many copies of each Prospectus included in the Exchange Offer Registration Statement, including any preliminary prospectus, and any amendment or supplement thereto, as such Participating Broker-Dealer may reasonably request, (iii) hereby consent to the use of the Prospectus forming part of the Exchange Offer Registration Statement or any amendment or supplement thereto, by any Person subject to the prospectus delivery requirements of the SEC, including all Participating Broker- Dealers, in connection with the sale or transfer of the Exchange Securities covered by the Prospectus or any amendment or supplement thereto, and (iv) include in the transmittal letter or similar documentation to be executed by an exchange offeree in order to participate in the Exchange Offer (x) the following provision: "If the exchange offeree is a broker-dealer holding Registrable Securities acquired for its own account as a result of market-making activities or other trading activities, it will deliver a prospectus meeting the requirements of the 1933 Act in connection with any resale of Exchange Securities received -13- in respect of such Registrable Securities pursuant to the Exchange Offer;" and (y) a statement to the effect that by a broker-dealer making the acknowledgment described in clause (x) and by delivering a Prospectus in connection with the exchange of Registrable Securities, the broker-dealer will not be deemed to admit that it is an underwriter within the meaning of the 1933 Act; and (B) in the case of any Exchange Offer Registration Statement, the Company and the Guarantors agree to deliver to the Initial Purchasers on behalf of the Participating Broker-Dealers upon the effectiveness of the Exchange Offer Registration Statement (i) an opinion of counsel or opinions of counsel substantially in the form attached hereto as Exhibit A, (ii) officers' certificates substantially in the form customarily delivered in a public offering of debt securities and (iii) a comfort letter or comfort letters in customary form to the extent permitted by Statement on Auditing Standards No. 72 of the American Institute of Certified Public Accountants (or if such a comfort letter is not permitted, an agreed upon procedures letter in customary form) from the Company's independent certified public accountants (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements are, or are required to be, included in the Registration Statement) at least as broad in scope and coverage as the comfort letter or comfort letters delivered to the Initial Purchasers in connection with the initial sale of the Securities to the Initial Purchasers; (g) (i) in the case of an Exchange Offer, furnish counsel for the Initial Purchasers and (ii) in the case of a Shelf Registration, furnish counsel for the Holders of Registrable Securities copies of any comment letters received from the SEC or any other request by the SEC or any state securities authority for amendments or supplements to a Registration Statement and Prospectus or for additional information; (h) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement at the earliest possible moment; (i) in the case of a Shelf Registration, furnish to each Holder of Registrable Securities, and each underwriter, if any, without charge, at least one conformed copy of each Registration Statement and any post-effective amendment thereto, including financial statements and schedules (without documents incorporated therein by reference and all exhibits thereto, unless requested); (j) in the case of a Shelf Registration, cooperate with the selling Holders of Registrable Securities to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends; and enable such Registrable Securities to be in such denominations (consistent with the provisions of the Indenture) and registered in such names as the selling Holders or the underwriters, if any, may reasonably request at least three business days prior to the closing of any sale of Registrable Securities; -14- (k) in the case of a Shelf Registration, upon the occurrence of any event or the discovery of any facts, each as contemplated by Sections 3(e)(v) and 3(e)(vi) hereof, as promptly as practicable after the occurrence of such an event, use their best efforts to prepare a supplement or post-effective amendment to the Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities or Participating Broker-Dealers, such Prospectus will not contain at the time of such delivery any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading or will remain so qualified. At such time as such public disclosure is otherwise made or the Company determines that such disclosure is not necessary, in each case to correct any misstatement of a material fact or to include any omitted material fact, the Company agrees promptly to notify each Holder of such determination and to furnish each Holder such number of copies of the Prospectus as amended or supplemented, as such Holder may reasonably request; (l) in the case of a Shelf Registration, within a reasonable time prior to the filing of any Registration Statement, any Prospectus, any amendment to a Registration Statement or amendment or supplement to a Prospectus or any document which is to be incorporated by reference into a Registration Statement or a Prospectus after initial filing of a Registration Statement, provide copies of such document to the Initial Purchasers on behalf of such Holders; and make representatives of the Company and the Guarantors as shall be reasonably requested by the Holders of Registrable Securities, or the Initial Purchasers on behalf of such Holders, available for discussion of such document; (m) use their reasonable best efforts to obtain a CUSIP number for all Exchange Securities, Private Exchange Securities or Registrable Securities, as the case may be, not later than the effective date of a Registration Statement, and provide the Trustee with printed certificates for the Exchange Securities, Private Exchange Securities or the Registrable Securities, as the case may be, in a form eligible for deposit with the Depositary; (n) (i) cause the Indenture to be qualified under the TIA in connection with the registration of the Exchange Securities or Registrable Securities, as the case may be, (ii) cooperate with the Trustee and the Holders to effect such changes to the Indenture as may be required for the Indenture to be so qualified in accordance with the terms of the TIA and (iii) execute, and use their reasonable best efforts to cause the Trustee to execute, all documents as may be required to effect such changes, and all other forms and documents required to be filed with the SEC to enable the Indenture to be so qualified in a timely manner; (o) in the case of a Shelf Registration, enter into agreements (including underwriting agreements) and take all other customary and appropriate actions in order to expedite or facilitate the disposition of such Registrable Securities and in such connection whether or not an underwriting agreement is entered into and whether or not the registration is an underwritten registration: -15- (i) make such representations and warranties to the Holders of such Registrable Securities and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in similar underwritten offerings as may be reasonably requested by them; (ii) obtain opinions of counsel to the Company and the Guarantors and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriters, if any, and the holders of a majority in principal amount of the Registrable Securities being sold) addressed to each selling Holder and the underwriters, if any, covering the matters customarily covered in opinions requested in sales of securities or underwritten offerings and such other matters as may be reasonably requested by such Holders and underwriters; (iii) obtain "cold comfort" letters and updates thereof from the Company's and the Guarantors' independent certified public accountants (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements are, or are required to be, included in the Registration Statement) addressed to the underwriters, if any, and use reasonable efforts to have such letter addressed to the selling Holders of Registrable Securities (to the extent consistent with Statement on Auditing Standards No. 72 of the American Institute of Certified Public Accounts), such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters to underwriters in connection with similar underwritten offerings; (iv) enter into a securities sales agreement with the Holders and an agent of the Holders providing for, among other things, the appointment of such agent for the selling Holders for the purpose of soliciting purchases of Registrable Securities, which agreement shall be in form, substance and scope customary for similar offerings; (v) if an underwriting agreement is entered into, cause the same to set forth indemnification provisions and procedures substantially equivalent to the indemnification provisions and procedures set forth in Section 4 hereof with respect to the underwriters and all other parties to be indemnified pursuant to said Section or, at the request of any underwriters, in the form customarily provided to such underwriters in similar types of transactions; provided such underwriting agreement shall contain customary provisions regarding indemnification of the Company and the Guarantors with the respect to information provided by the underwriters; and (vi) deliver such documents and certificates as may be reasonably requested and as are customarily delivered in similar offerings to the Holders of a majority in principal amount of the Registrable Securities being sold and the managing underwriters, if any. -16- The above shall be done at (i) the effectiveness of such Registration Statement (and each post-effective amendment thereto) and (ii) each closing under any underwriting or similar agreement as and to the extent required thereunder. In the case of any underwritten offering, the Company and the Guarantors shall provide written notice to the Holders of all Registrable Securities of such underwritten offering at least 15 days prior to the filing of a prospectus supplement for such underwritten offering. Such notice shall (x) offer each such Holder the right to participate in such underwritten offering, (y) specify a date, which shall be no earlier than 10 days following the date of such notice, by which such Holder must inform the Company of its intent to participate in such underwritten offering and (z) include the instructions such Holder must follow in order to participate in such underwritten offering; (p) in the case of a Shelf Registration or if a Prospectus is required to be delivered by any Participating Broker-Dealer in the case of an Exchange Offer, make available for inspection by representatives of the Holders of the Registrable Securities, any underwriters participating in any disposition pursuant to a Shelf Registration Statement, any Participating Broker-Dealer and any counsel or accountant retained by any of the foregoing, all financial and other records, pertinent corporate documents and properties of the Company and the Guarantors reasonably requested by any such persons, and cause the respective officers, directors, employees, and any other agents of the Company and the Guarantors to supply all information reasonably requested by any such representative, underwriter, special counsel or accountant in connection with a Registration Statement, and make such representatives of the Company and the Guarantors available for discussion of such documents as shall be reasonably requested by the Initial Purchasers; (q) (i) in the case of an Exchange Offer Registration Statement, within a reasonable time prior to the filing of any Exchange Offer Registration Statement, any Prospectus forming a part thereof, any amendment to an Exchange Offer Registration Statement or amendment or supplement to such Prospectus, provide copies of such document to the Initial Purchasers and to counsel to the Holders of Registrable Securities and make such changes in any such document prior to the filing thereof as the Initial Purchasers or counsel to the Holders of Registrable Securities may reasonably request and, except as otherwise required by applicable law, not file any such document in a form to which the Initial Purchasers on behalf of the Holders of Registrable Securities and counsel to the Holders of Registrable Securities shall not have previously been advised and furnished a copy of or to which the Initial Purchasers on behalf of the Holders of Registrable Securities or counsel to the Holders of Registrable Securities shall reasonably object, and make the representatives of the Company and the Guarantors available for discussion of such documents as shall be reasonably requested by the Initial Purchasers; and (ii) in the case of a Shelf Registration, within a reasonable time prior to filing any Shelf Registration Statement, any Prospectus forming a part thereof, any amendment to such Shelf Registration Statement or amendment or supplement to such Prospectus, provide copies of such document to the Holders of Registrable -17- Securities, to the Initial Purchasers, to counsel for the Holders and to the underwriter or underwriters of an underwritten offering of Registrable Securities, if any, make such changes in any such document prior to the filing thereof as the Initial Purchasers, the counsel to the Holders or the underwriter or underwriters reasonably request and not file any such document in a form to which the Majority Holders, the Initial Purchasers on behalf of the Holders of Registrable Securities, counsel for the Holders of Registrable Securities or any underwriter shall not have previously been advised and furnished a copy of or to which the Majority Holders, the Initial Purchasers of behalf of the Holders of Registrable Securities, counsel to the Holders of Registrable Securities or any underwriter shall reasonably object, and make the representatives of the Company and the Guarantors available for discussion of such document as shall be reasonably requested by the Holders of Registrable Securities, the Initial Purchasers on behalf of such Holders, counsel for the Holders of Registrable Securities or any underwriter. (r) in the case of a Shelf Registration, use their reasonable best efforts to cause all Registrable Securities to be listed on any securities exchange on which similar debt securities issued by the Company are then listed if requested by the Majority Holders, or if requested by the underwriter or underwriters of an underwritten offering of Registrable Securities, if any; (s) in the case of a Shelf Registration, use their reasonable best efforts to cause the Registrable Securities to be rated by the appropriate rating agencies, if so requested by the Majority Holders, or if requested by the underwriter or underwriters of an underwritten offering of Registrable Securities, if any; (t) otherwise comply with all applicable rules and regulations of the SEC and make available to its security holders, as soon as reasonably practicable, an earnings statement covering at least 12 months which shall satisfy the provisions of Section 11(a) of the 1933 Act and Rule 158 promulgated thereunder; (u) cooperate and assist in any filings required to be made with the NASD and, in the case of a Shelf Registration, in the performance of any due diligence investigation by any underwriter and its counsel (including any "qualified independent underwriter" that is required to be retained in accordance with the rules and regulations of the NASD); and (v) upon consummation of an Exchange Offer or a Private Exchange, obtain (i) a customary opinion of counsel to the Company and the Guarantors addressed to the Trustee for the benefit of all Holders of Registrable Securities participating in the Exchange Offer or a Private Exchange, and which includes an opinion that (A) each of the Company and the Guarantors has duly authorized, executed and delivered the Exchange Securities and/or Private Exchange Securities, as applicable, and the related indenture, and (B) each of the Exchange Securities and related indenture constitute legal, valid and binding obligations of each of the Company and the Guarantors, enforceable against the Company and the Guarantors in accordance with its respective terms (with customary exceptions) and (ii) an officers' certificate containing the certifications substantially similar to those set forth in Section 5(c) of the Purchase Agreement. -18- In the case of a Shelf Registration Statement, the Company and the Guarantors may (as a condition to such Holder's participation in the Shelf Registration) require each Holder of Registrable Securities to furnish to the Company and the Guarantors such information regarding the Holder and the proposed distribution by such Holder of such Registrable Securities as the Company and the Guarantors may from time to time reasonably request in writing. In the case of a Shelf Registration Statement, each Holder agrees that, upon receipt of any notice from the Company and the Guarantors of the happening of any event or the discovery of any facts, each of the kind described in Section 3(e)(v) and 3(e)(vi) hereof, such Holder will forthwith discontinue disposition of Registrable Securities pursuant to a Registration Statement until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(k) hereof, and, if so directed by the Company and the Guarantors, such Holder will deliver to the Company and the Guarantors (at their expense) all copies in such Holder's possession, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event that the Company and the Guarantors fail to effect the Exchange Offer or file any Shelf Registration Statement and maintain the effectiveness of any Shelf Registration Statement as provided herein, the Company and the Guarantors shall not file any Registration Statement with respect to any securities (within the meaning of Section 2(1) of the 1933 Act) of the Company and the Guarantors other than Registrable Securities. If any of the Registrable Securities covered by any Shelf Registration Statement are to be sold in an underwritten offering, the underwriter or underwriters and manager or managers that will manage such offering will be selected by the Majority Holders of such Registrable Securities included in such offering and shall be acceptable to the Company and the Guarantors. No Holder of Registrable Securities may participate in any underwritten registration hereunder unless such Holder (a) agrees to sell such Holder's Registrable Securities on the basis provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. 4. Indemnification; Contribution. (a) The Company and the Guarantors, jointly and severally, agree to indemnify and hold harmless the Initial Purchasers, each Holder, each Participating Broker-Dealer, each Person who participates as an underwriter (any such Person being an "Underwriter") and each Person, if any, who controls any Holder or Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows: -19- (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 any Registration Statement (or any amendment or supplement thereto) pursuant to which Exchange Securities or Registrable Securities were registered under the 1933 Act, including all documents incorporated therein by reference, 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 contained in any Prospectus (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, or any such alleged untrue statement or omission; provided that (subject to Section 4(d) below) any such settlement is effected with the written consent of the Company and the Guarantors; and (iii)against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by any indemnified party), 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 subparagraph (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 and the Guarantors by the Holder, Participating Broker-Dealer or Underwriter expressly for use in a Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto). (b) Each Holder severally, but not jointly, agrees to indemnify and hold harmless the Company, the Guarantors, the Initial Purchasers, each Underwriter and the other selling Holders, and each of their respective directors and officers, and each Person, if any, who controls the Company, the Guarantors, the Initial Purchasers, any Underwriter or any other selling Holder 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 Section 4(a) hereof, as incurred, but only -20- with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Shelf Registration Statement (or any amendment thereto) or any Prospectus included therein (or any amendment or supplement thereto) in reliance upon and in conformity with written information with respect to such Holder furnished to the Company by such Holder expressly for use in the Shelf Registration Statement (or any amendment thereto) or such Prospectus (or any amendment or supplement thereto); provided, however, that no such Holder shall be liable for any claims hereunder in excess of the amount of net proceeds received by such Holder from the sale of Registrable Securities pursuant to such Shelf Registration Statement. (c) Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action or proceeding commenced against it in respect of which indemnity may be sought hereunder, but failure so to 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. An indemnifying party may participate at its own expense in the defense of 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 party or parties be liable for the 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 4 (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) 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 4(a)(ii) 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 party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. (e) If the indemnification provided for in this Section 4 is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any -21- 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, in such proportion as is appropriate to reflect the relative fault of the Company and the Guarantors on the one hand and the Holders and the Initial Purchasers each 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 fault of the Company and the Guarantors on the one hand and the Holders and the Initial Purchasers each 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 and the Guarantors, the Holders or the Initial Purchasers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Guarantors the Holders and the Initial Purchasers agree that it would not be just and equitable if contribution pursuant to this Section 4 were determined by pro rata allocation (even if the Initial Purchasers 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 4. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 4 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 4, no Initial Purchaser shall be required to contribute any amount in excess of the amount by which the total price at which the Securities sold by it were offered exceeds the amount of any damages which such Initial Purchaser has otherwise been required to pay by reason of 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 4, each Person, if any, who controls an Initial Purchaser or Holder 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 Initial Purchaser or Holder, and each director of the Company and such Guarantor, as the case may be, and each Person, if any, who controls the Company and such Guarantor, as the case may be, 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 Initial Purchasers' respective obligations to contribute pursuant to this Section 4 are several in proportion to the -22- principal amount of Securities set forth opposite their respective names in Schedule A to the Purchase Agreement and not joint. 5. Miscellaneous. 5.1 Rule 144 and Rule 144A. For so long as the Company is subject to the reporting requirements of Section 13 or 15 of the 1934 Act, the Company and the Guarantors covenant that they will file the reports required to be filed by them under the 1933 Act and Section 13(a) or 15(d) of the 1934 Act and the rules and regulations adopted by the SEC thereunder. If the Company ceases to be so required to file such reports, the Company and the Guarantors covenant that they will upon the request of any Holder of Registrable Securities (a) make publicly available such information as is necessary to permit sales pursuant to Rule 144 under the 1933 Act, (b) deliver such information to a prospective purchaser as is necessary to permit sales pursuant to Rule 144A under the 1933 Act and it will take such further action as any Holder of Registrable Securities may reasonably request, and (c) take such further action that is reasonable in the circumstances, in each case, to the extent required from time to time to enable such Holder to sell its Registrable Securities without registration under the 1933 Act within the limitation of the exemptions provided by (i) Rule 144 under the 1933 Act, as such Rule may be amended from time to time, (ii) Rule 144A under the 1933 Act, as such Rule may be amended from time to time, or (iii) any similar rules or regulations hereafter adopted by the SEC. Upon the request of any Holder of Registrable Securities, the Company and the Guarantors will deliver to such Holder a written statement as to whether they have complied with such requirements. 5.2 No Inconsistent Agreements. The Company and the Guarantors have not entered into and the Company and the Guarantors will not after the date of this Agreement enter into any agreement which is inconsistent with the rights granted to the Holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not in any way conflict with the rights granted to the holders of the Company's and the Guarantor's other issued and outstanding securities under any such agreements. 5.3 Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company and the Guarantors have obtained the written consent of Holders of at least a majority in aggregate principal amount of the outstanding Registrable Securities affected by such amendment, modification, supplement, waiver or departure. 5.4 Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand delivery, registered first-class mail, telex, telecopier, or any courier guaranteeing overnight delivery (a) if to a Holder, at the most current address given by such Holder to the Company and the Guarantors by means of a notice given in accordance with the provisions of this Section 5.4, which address initially is the address set forth in the Purchase Agreement with respect to the Initial -23- Purchasers; and (b) if to the Company and the Guarantors, initially at the Company's address set forth in the Purchase Agreement, and thereafter at such other address of which notice is given in accordance with the provisions of this Section 5.4. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; two business days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt is acknowledged, if telecopied; and on the next business day if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands, or other communications shall be concurrently delivered by the person giving the same to the Trustee under the Indenture, at the address specified in such Indenture. 5.5 Successor and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders; provided that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Registrable Securities in violation of the terms of the Purchase Agreement or the Indenture. If any transferee of any Holder shall acquire Registrable Securities, in any manner, whether by operation of law or otherwise, such Registrable Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Registrable Securities such person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement, including the restrictions on resale set forth in this Agreement and, if applicable, the Purchase Agreement, and such person shall be entitled to receive the benefits hereof. 5.6 Third Party Beneficiaries. The Initial Purchasers (even if the Initial Purchasers are not Holders of Registrable Securities) shall be third party beneficiaries to the agreements made hereunder between the Company and the Guarantors, on the one hand, and the Holders, on the other hand, and shall have the right to enforce such agreements directly to the extent they deem such enforcement necessary or advisable to protect their rights or the rights of Holders hereunder. Each Holder of Registrable Securities shall be a third party beneficiary to the agreements made under this Registration Rights Agreement between the Company and the Guarantors, on the one hand, and the Initial Purchasers, on the other hand, and shall have the right to enforce such agreements directly to the extent it deems such enforcement necessary or advisable to protect its rights hereunder. 5.7. Specific Enforcement. Without limiting the remedies available to the Initial Purchasers and the Holders, the Company and the Guarantors acknowledge that any failure by the Company and the Guarantors to comply with their obligations under Sections 2.1 through 2.4 hereof may result in material irreparable injury to the Initial Purchasers or the Holders for which there is no adequate remedy at law, that it would not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Initial Purchasers or any Holder may obtain such relief as may be -24- required to specifically enforce the Company's and the Guarantor's obligations under Sections 2.1 through 2.4 hereof. 5.8. Restriction on Resales. Until the expiration of two years after the original issuance of the Securities and the Guarantees, the Company and the Guarantors will not, and will cause their "affiliates" (as such term is defined in Rule 144(a)(1) under the 1933 Act) not to, resell any Securities and Guarantees which are "restricted securities" (as such term is defined under Rule 144(a)(3) under the 1933 Act) that have been reacquired by any of them and shall immediately upon any purchase of any such Securities and Guarantees submit such Securities and Guarantees to the Trustee for cancellation. 5.9 Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 5.10 Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 5.11 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS THEREOF. 5.12 Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. -25- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. SONIC AUTOMOTIVE, INC. By: /s/ B. Scott Smith ---------------------------- Name: B. Scott Smith Title: President and Chief Operating Officer TOWN AND COUNTRY FORD INCORPORATED MARCUS DAVID CORPORATION FRONTIER OLDSMOBILE--CADILLAC, INC. SONIC DODGE, LLC SONIC CHRYSLER--PLYMOUTH--JEEP-- EAGLE, LLC FORT MILL FORD, INC. TOWN AND COUNTRY CHRYSLER--PLYMOUTH--JEEP OF ROCK HILL, INC. FORT MILL CHRYSLER--PLYMOUTH--DODGE INC. LONE STAR FORD, INC. SONIC AUTOMOTIVE OF NEVADA, INC. SONIC AUTOMOTIVE OF TENNESSEE, INC. SONIC AUTOMOTIVE - 6025 INTERNATIONAL DRIVE, LLC SONIC AUTOMOTIVE OF NASHVILLE, LLC SONIC AUTOMOTIVE OF CHATTANOOGA, LLC TOWN AND COUNTRY JAGUAR, LLC TOWN AND COUNTRY CHRYSLER --PLYMOUTH--JEEP, LLC TOWN AND COUNTRY DODGE OF CHATTANOOGA, LLC SONIC AUTOMOTIVE - 2490 SOUTH LEE HIGHWAY, LLC, TOWN AND COUNTRY FORD OF CLEVELAND, LLC FREEDOM FORD, INC. SONIC AUTOMOTIVE 5260 PEACHTREE INDUSTRIAL BLVD., LLC SONIC AUTOMOTIVE OF GEORGIA, INC. SONIC PEACHTREE INDUSTRIAL BLVD., L.P. SONIC AUTOMOTIVE - CLEARWATER, INC. SONIC AUTOMOTIVE 21699 U.S. HWY. 19 N., INC. SONIC AUTOMOTIVE COLLISION CENTER OF CLEARWATER, INC. SONIC AUTOMOTIVE - 1400 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE - 1455 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE - 1495 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE - 1500 AUTOMALL DRIVE,
-26- COLUMBUS, INC. SONIC AUTOMOTIVE - 3700 WEST BROAD STREET, COLUMBUS, INC. SONIC AUTOMOTIVE - 4000 WEST BROAD STREET, COLUMBUS, INC. SONIC AUTOMOTIVE 2424 LAURENS RD., GREENVILLE, INC. SONIC AUTOMOTIVE 2752 LAURENS RD., GREENVILLE, INC. SONIC AUTOMOTIVE - 5585 PEACHTREE INDUSTRIAL BLVD., LLC CAPITOL CHEVROLET AND IMPORTS, INC., SONIC AUTOMOTIVE - 1919 N. DIXIE HWY., NSB, INC. SONIC AUTOMOTIVE - 1307 N. DIXIE HWY., NSB, INC. SONIC AUTOMOTIVE - 1720 MASON AVE., DB, INC. SONIC AUTOMOTIVE -3741 S. NOVA RD., PO, INC. SONIC AUTOMOTIVE - 241 RIDGEWOOD AVE., HH, INC. SONIC AUTOMOTIVE-HWY. 153 at SHALLOWFORD ROAD, CHATTANOOGA, INC. By: /s/ B. Scott Smith --------------------------- Name: B. Scott Smith Title: Authorized Officer -27- Confirmed and accepted as of the date first above written: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED NATIONSBANC MONTGOMERY SECURITIES LLC BANCAMERICA ROBERTSON STEPHENS BY: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: /s/ Barry S. Price ----------------------------- Name: Title: -28- EX-4 3 EXHIBIT 4.2 exhibit 4.2 SONIC AUTOMOTIVE, INC., as Issuer, TOWN AND COUNTRY FORD INCORPORATED, MARCUS DAVID CORPORATION, FRONTIER OLDSMOBILE--CADILLAC, INC., SONIC DODGE, LLC, SONIC CHRYSLER--PLYMOUTH--JEEP--EAGLE, LLC, FORT MILL FORD, INC., TOWN AND COUNTRY CHRYSLER--PLYMOUTH--JEEP OF ROCK HILL, INC., FORT MILL CHRYSLER--PLYMOUTH--DODGE INC., LONE STAR FORD, INC., SONIC AUTOMOTIVE OF NEVADA, INC., SONIC AUTOMOTIVE OF TENNESSEE, INC., SONIC AUTOMOTIVE - 6025 INTERNATIONAL DRIVE, LLC, SONIC AUTOMOTIVE OF NASHVILLE, LLC, SONIC AUTOMOTIVE OF CHATTANOOGA, LLC, TOWN AND COUNTRY JAGUAR, LLC, TOWN AND COUNTRY CHRYSLER--PLYMOUTH--JEEP, LLC, TOWN AND COUNTRY DODGE OF CHATTANOOGA, LLC, SONIC AUTOMOTIVE - 2490 SOUTH LEE HIGHWAY, LLC, TOWN AND COUNTRY FORD OF CLEVELAND, LLC, FREEDOM FORD, INC., SONIC AUTOMOTIVE 5260 PEACHTREE INDUSTRIAL BLVD., LLC, SONIC AUTOMOTIVE OF GEORGIA, INC., SONIC PEACHTREE INDUSTRIAL BLVD., L.P., SONIC AUTOMOTIVE - CLEARWATER, INC., SONIC AUTOMOTIVE 21699 U.S. HWY. 19 N., INC., SONIC AUTOMOTIVE COLLISION CENTER OF CLEARWATER, INC., SONIC AUTOMOTIVE - 1400 AUTOMALL DRIVE, COLUMBUS, INC., SONIC AUTOMOTIVE - 1455 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE - 1495 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE - 1500 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE - 3700 WEST BROAD STREET, COLUMBUS, INC. SONIC AUTOMOTIVE - 4000 WEST BROAD STREET, COLUMBUS, INC. SONIC AUTOMOTIVE 2424 LAURENS RD., GREENVILLE, INC., SONIC AUTOMOTIVE 2752 LAURENS RD., GREENVILLE, INC., SONIC AUTOMOTIVE - 5585 PEACHTREE INDUSTRIAL BLVD., LLC, CAPITOL CHEVROLET AND IMPORTS, INC., SONIC AUTOMOTIVE - 1919 N. DIXIE HWY., NSB, INC., SONIC AUTOMOTIVE - 1307 N. DIXIE HWY., NSB, INC., SONIC AUTOMOTIVE - 1720 MASON AVE., DB, INC., SONIC AUTOMOTIVE - 3741 S. NOVA RD., PO, INC. SONIC AUTOMOTIVE -241 RIDGEWOOD AVE., HH, INC. and SONIC AUTOMOTIVE - HWY. 153 at SHALLOWFORD ROAD, CHATTANOOGA, INC. as Guarantors, and U.S. Bank Trust National Association, as Trustee INDENTURE Dated as of July 1, 1998 11% Senior Subordinated Notes due 2008 Reconciliation and tie between Trust Indenture Act of 1939, as amended, and Indenture, dated as of July 1, 1998
Trust Indenture Indenture Act Section Section ----------- ------- ss.310 (a)(1)...............................................609 (a)(2)...............................................609 (b)..................................................608, 610 ss.311 (a)..................................................613 ss.312 (a)..................................................701 (c)..................................................702 ss.313 (a)..................................................703 (c)..................................................703, 704 ss.314 (a)..................................................704 (a)(4)...............................................1018 (c)(1)...............................................103 (c)(2)...............................................103 (e)..................................................103 ss.315 (a)..................................................601(b) (b)..................................................602 (c)..................................................601(a) (d)..................................................601(c), 603 (e)..................................................514 ss.316 (a)(last sentence)...................................101 ("Outstanding") (a)(1)(A)............................................502, 512 (a)(1)(B)............................................513 (b)..................................................508 (c)..................................................105 ss.317 (a)(1) 503 (a)(2) 504 (b)..................................................1003 ss.318 (a)..................................................108 Note: This reconciliation and tie shall not, for any purpose, be deemed to be a part of this Indenture.
- 1 - TABLE OF CONTENTS ----------------- PAGE ---- PARTIES......................................................................1 RECITALS.....................................................................1 ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION .................................2 Section 101. Definitions. ...................................................2 "Acquired Indebtedness"....................................3 "Affiliate"................................................3 "Applicable Procedures"....................................3 "Asset Sale"...............................................4 "Average Life to Stated Maturity"..........................4 "Bankruptcy Law"...........................................4 "Board of Directors".......................................5 "Board Resolution".........................................5 "Book-Entry Security"......................................5 "Business Day".............................................5 "Capital Lease Obligation".................................5 "Capital Stock"............................................5 "Cash Equivalents".........................................5 "Cedel"....................................................6 "Change of Control"........................................6 "Class A Common Stock".....................................7 "Code".....................................................7 "Commission"...............................................7 "Commodity Price Protection Agreement".....................7 "Company"..................................................8 "Company Request" or "Company Order".......................8 "Consolidated Fixed Charge Coverage Ratio".................8 "Consolidated Income Tax Expense"..........................9 "Consolidated Interest Expense"............................9 "Consolidated Net Income (Loss)"...........................9 "Consolidated Non-cash Charges"...........................10 "Consolidated Tangible Assets"............................10 "Consolidation"...........................................10 "Corporate Trust Office"..................................10 "Currency Hedging Agreements".............................11 "Default".................................................11 "Depositary"..............................................11 -i- PAGE ---- "Designated Senior Indebtedness"..........................10 "Disinterested Director"..................................10 "Euroclear"...............................................11 "Event of Default"........................................12 "Exchange Act"............................................12 "Exchange Offer"..........................................12 "Exchange Offer Registration Statement"...................12 "Fair Market Value".......................................12 "Floor Plan Facility".....................................12 "Generally Accepted Accounting Principles" or "GAAP"..................................................12 "Global Securities".......................................13 "Guarantee"...............................................13 "Guaranteed Debt".........................................13 "Guarantor"...............................................13 "Holder"..................................................13 "Indebtedness"............................................14 "Indenture"...............................................15 "Indenture Obligations"...................................16 "Initial Securities"......................................16 "Initial Purchasers"......................................16 "Interest Payment Date"...................................16 "Interest Rate Agreements"................................16 "Inventory Facility"......................................16 "Investment"..............................................16 "Issue Date"..............................................17 "Lien"....................................................17 "Manufacturer"............................................17 "Maturity"................................................17 "Moody's".................................................17 "Net Cash Proceeds".......................................17 "Non-U.S. Person".........................................18 "Officers' Certificate"...................................18 "Opinion of Counsel"......................................18 "Opinion of Independent Counsel"..........................19 "Outstanding".............................................19 "Pari Passu Indebtedness".................................20 "Paying Agent"............................................20 "Permitted Holders".......................................20 "Permitted Investment"....................................20 "Person"..................................................21 "Predecessor Security"....................................21 "Preferred Stock".........................................21 - ii - PAGE "Prospectus"..............................................21 "Public Equity Offering"..................................22 "Purchase Money Obligation"...............................22 "QIB".....................................................22 "Qualified Capital Stock".................................22 "Redeemable Capital Stock"................................23 "Redemption Date".........................................24 "Redemption Price"........................................24 "Registration Rights Agreement"...........................24 "Registration Statement"..................................24 "Regular Record Date".....................................24 "Regulation S"............................................24 "Regulation S Global Securities"..........................25 "Responsible Officer".....................................25 "Replacement Assets"......................................25 "Restricted Subsidiary"...................................25 "Revolving Facility"......................................25 "Rule 144A"...............................................25 "Rule 144A Global Securities".............................26 "S&P".....................................................26 "Securities Act"..........................................26 "Senior Guarantor Indebtedness"...........................26 "Senior Indebtedness".....................................27 "Senior Representative"...................................27 "Series B Global Securities"..............................27 "Shelf Registration Statement"............................27 "Significant Restricted Subsidiary".......................28 "Smith Subordinated Loan".................................28 "Special Record Date".....................................28 "Stated Maturity".........................................28 "Subordinated Indebtedness"...............................28 "Subsidiary"..............................................28 "Successor Security"......................................29 "Temporary Cash Investments"..............................29 "Trustee".................................................29 "Trust Indenture Act".....................................29 "Unrestricted Subsidiary".................................30 "Unrestricted Subsidiary Indebtedness"....................30 "Voting Stock"............................................30 "Wholly Owned Restricted Subsidiary"......................30 Section 102. Other Definitions. ............................................31 Section 103. Compliance Certificates and Opinions. .........................31 Section 104. Form of Documents Delivered to Trustee. .......................32 - iii - PAGE Section 105. Acts of Holders. ..............................................33 Section 106. Notices, etc., to the Trustee, the Company and any Guarantor. ...............................................35 Section 107. Notice to Holders; Waiver. ....................................35 Section 108. Conflict with Trust Indenture Act. ............................36 Section 109. Effect of Headings and Table of Contents. .....................36 Section 110. Successors and Assigns. .......................................36 Section 111. Separability Clause. ..........................................36 Section 112. Benefits of Indenture. ........................................36 SECTION 113. GOVERNING LAW. ................................................37 Section 114. Legal Holidays. ...............................................37 Section 115. Independence of Covenants. ....................................37 Section 116. Schedules and Exhibits. .......................................37 Section 117. Counterparts.. ................................................37 ARTICLE TWO SECURITY FORMS ....................................38 Section 201. Forms Generally. ..............................................38 Section 202. Form of Face of Security. .....................................39 Section 203. Form of Reverse of Securities. ................................53 Section 204. Form of Guarantee. ..........................................61 ARTICLE THREE THE SECURITIES ...................................63 Section 301. Title and Terms. ..............................................63 Section 302. Denominations. ................................................64 Section 303. Execution, Authentication, Delivery and Dating. ...............64 Section 304. Temporary Securities. .........................................66 Section 305. Registration, Registration of Transfer and Exchange. ..........66 Section 306. Book Entry Provisions for Global Securities. ..................68 Section 307. Special Transfer and Exchange Provisions. .....................70 Section 308. Mutilated, Destroyed, Lost and Stolen Securities. .............73 Section 309. Payment of Interest; Interest Rights Preserved. ...............74 Section 310. CUSIP Numbers. ................................................75 Section 311. Persons Deemed Owners. ........................................75 Section 312. Cancellation. .................................................76 Section 313. Computation of Interest. ......................................76 - iii - PAGE ARTICLE FOUR DEFEASANCE AND COVENANT DEFEASANCE ............................................76 Section 401. Company's Option to Effect Defeasance or Covenant Defeasance. ..............................................76 Section 402. Defeasance and Discharge. .....................................76 Section 403. Covenant Defeasance. ..........................................77 Section 404. Conditions to Defeasance or Covenant Defeasance. ..............77 Section 405. Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions. ........80 Section 406. Reinstatement. ................................................80 ARTICLE FIVE REMEDIES .......................................81 Section 501. Events of Default. ............................................81 Section 502. Acceleration of Maturity; Rescission and Annulment. ...........83 Section 503. Collection of Indebtedness and Suits for Enforcement by Trustee. .................................................84 Section 504. Trustee May File Proofs of Claim. .............................85 Section 505. Trustee May Enforce Claims without Possession of Securities. ..............................................86 Section 506. Application of Money Collected. ...............................86 Section 507. Limitation on Suits. ..........................................87 Section 508. Unconditional Right of Holders to Receive Principal, Premium and Interest. ....................................88 Section 509. Restoration of Rights and Remedies. ...........................88 Section 510. Rights and Remedies Cumulative. ...............................88 Section 511. Delay or Omission Not Waiver. .................................88 Section 512. Control by Holders. ...........................................89 Section 513. Waiver of Past Defaults. ......................................89 Section 514. Undertaking for Costs. ........................................89 Section 515. Waiver of Stay, Extension or Usury Laws. ......................90 Section 516. Remedies Subject to Applicable Law. ...........................90 ARTICLE SIX THE TRUSTEE ......................................90 Section 601. Duties of Trustee. ............................................90 Section 602. Notice of Defaults. ...........................................92 Section 603. Certain Rights of Trustee. ....................................92 Section 604. Trustee Not Responsible for Recitals, Dispositions of Securities or Application of Proceeds Thereof. ...........94 Section 605. Trustee and Agents May Hold Securities; Collections; etc. .....................................................94 Section 606. Money Held in Trust. ..........................................94 -v- PAGE Section 607. Compensation and Indemnification of Trustee and Its Prior Claim. .............................................95 Section 608. Conflicting Interests. ........................................95 Section 609. Trustee Eligibility. ..........................................96 Section 610. Resignation and Removal; Appointment of Successor Trustee. .................................................96 Section 611. Acceptance of Appointment by Successor. .......................98 Section 612. Merger, Conversion, Consolidation or Succession to Business. ................................................98 Section 613. Preferential Collection of Claims Against Company. ............99 ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY ......................................99 Section 701. Company to Furnish Trustee Names and Addresses of Holders. .................................................99 Section 702. Disclosure of Names and Addresses of Holders. ................100 Section 703. Reports by Trustee. ..........................................100 Section 704. Reports by Company and Guarantors. ...........................100 ARTICLE EIGHT CONSOLIDATION, MERGER, SALE OF ASSETS ............................................101 Section 801. Company and Guarantors May Consolidate, etc., Only on Certain Terms. ..........................................102 Section 802. Successor Substituted. .......................................104 ARTICLE NINE SUPPLEMENTAL INDENTURES ...............................105 Section 901. Supplemental Indentures and Agreements without Consent of Holders. .....................................105 Section 902. Supplemental Indentures and Agreements with Consent of Holders. .............................................106 Section 903. Execution of Supplemental Indentures and Agreements. ..........................................................................107 Section 904. Effect of Supplemental Indentures. ...........................108 Section 905. Conformity with Trust Indenture Act. .........................108 Section 906. Reference in Securities to Supplemental Indentures. ..........108 Section 907. Notice of Supplemental Indentures. ...........................108 ARTICLE TEN COVENANTS ......................................108 Section 1001. Payment of Principal, Premium and Interest. .................109 - vi - PAGE Section 1002. Maintenance of Office or Agency. ............................109 Section 1003. Money for Security Payments to Be Held in Trust. ............109 Section 1004. Corporate Existence. ........................................111 Section 1005. Payment of Taxes and Other Claims. ..........................111 Section 1006. Maintenance of Properties. ..................................112 Section 1007. Maintenance of Insurance. ...................................112 Section 1008. Limitation on Indebtedness. .................................112 Section 1009. Limitation on Restricted Payments. ..........................115 Section 1010. Limitation on Transactions with Affiliates. .................120 Section 1011. Limitation on Liens. ........................................121 Section 1012. Limitation on Sale of Assets. ...............................122 Section 1013. Limitation on Issuances of Guarantees of and Pledges for Indebtedness. .......................................127 Section 1014. Purchase of Securities upon a Change of Control. ............128 Section 1015. Limitation on Subsidiary Preferred Stock. ...................132 Section 1016. Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries. ....................133 Section 1017. Limitation on Senior Subordinated Indebtedness. .............134 Section 1018. Limitations on Unrestricted Subsidiaries. ...................134 Section 1019. Provision of Financial Statements. ..........................136 Section 1020. Statement by Officers as to Default. ........................137 Section 1021. Waiver of Certain Covenants. ................................138 ARTICLE ELEVEN REDEMPTION OF SECURITIES .............................138 Section 1101. Rights of Redemption. .......................................139 Section 1102. Applicability of Article. ...................................139 Section 1103. Election to Redeem; Notice to Trustee. ......................139 Section 1104. Selection by Trustee of Securities to Be Redeemed. ..........139 Section 1105. Notice of Redemption. .......................................140 Section 1106. Deposit of Redemption Price. ................................141 Section 1107. Securities Payable on Redemption Date. ......................141 Section 1108. Securities Redeemed or Purchased in Part. ...................142 ARTICLE TWELVE SATISFACTION AND DISCHARGE ............................................142 Section 1201. Satisfaction and Discharge of Indenture. ....................142 Section 1202. Application of Trust Money. .................................143 ARTICLE THIRTEEN GUARANTEES ...................................144 Section 1301. Guarantors' Guarantee. .....................................144 - vii - PAGE Section 1302. Continuing Guarantee; No Right of Set-Off; Independent Obligation. .................................144 Section 1303. Guarantee Absolute. ........................................145 Section 1304. Right to Demand Full Performance. ..........................148 Section 1305. Waivers. ...................................................148 Section 1306. The Guarantors Remain Obligated in Event the Company Is No Longer Obligated to Discharge Indenture Obligations. ..................................149 Section 1307. Fraudulent Conveyance; Contribution; Subrogation. ..........150 Section 1308. Guarantee Is in Addition to Other Security. ................151 Section 1309. Release of Security Interests. .............................151 Section 1310. No Bar to Further Actions. .................................151 Section 1311. Failure to Exercise Rights Shall Not Operate as a Waiver; No Suspension of Remedies. ......................151 Section 1312. Trustee's Duties; Notice to Trustee. .......................152 Section 1313. Successors and Assigns. ....................................153 Section 1314. Release of Guarantee. ......................................153 Section 1315. Execution of Guarantee. ....................................154 ARTICLE FOURTEEN SUBORDINATION OF SECURITIES ............................................154 Section 1401. Securities Subordinate to Senior Indebtedness. ..............154 Section 1402. Payment Over of Proceeds Upon Dissolution, etc. .............155 Section 1403. Suspension of Payment When Designated Senior Indebtedness in Default. ................................156 Section 1404. Payment Permitted if No Default. ............................158 Section 1405. Subrogation to Rights of Holders of Senior Indebtedness. ...........................................158 Section 1406. Provisions Solely to Define Relative Rights. ................158 Section 1407. Trustee to Effectuate Subordination. ........................159 Section 1408. No Waiver of Subordination Provisions. ......................159 Section 1409. Notice to Trustee. ..........................................160 Section 1410. Reliance on Judicial Orders or Certificates. ................161 Section 1411. Rights of Trustee as a Holder of Senior Indebtedness; Preservation of Trustee's Rights. .......................161 Section 1412. Article Applicable to Paying Agents. ........................161 Section 1413. No Suspension of Remedies. ..................................162 Section 1414. Trustee's Relation to Senior Indebtedness. ..................162 TESTIMONIUM SIGNATURES AND SEALS ACKNOWLEDGMENTS - viii - PAGE ANNEX A Form of Intercompany Note SCHEDULE I Existing Indebtedness EXHIBIT A Regulation S Certificate EXHIBIT B Restricted Security Certificate EXHIBIT C Unrestricted Security Certificate APPENDIX I Form of Transferee Certificate for Series A Securities APPENDIX II Form of Transferee Certificate for Series B Securities - ix - INDENTURE, dated as of July 1, 1998, between Sonic Automotive, Inc., a Delaware corporation (the "Company"), and Town and Counrty Ford, Inc., a North Carolina corporation, Marcus David Corporation, a North Carolina corporation, Frontier Oldsmobile-Cadillac, Inc., a North Carolina corporation, Sonic Dodge, LLC, a North Carolina limited liability company, Sonic Chrysler-Plymouth-Jeep-Eagle, LLC, a North Carolina limited liability company, Fort Mill Ford, Inc., a South Carolina corporation, Town and Country Chrysler-Plymouth-Jeep of Rock Hill, Inc., a South Carolina corporation, Fort Mill Chrysler-Plymouth-Dodge, Inc., a South Carolina corporation, Lone Star Ford, Inc., a Texas corporation, Sonic Automotive of Nevada, Inc., a Nevada corporation, Sonic Automotive of Tennessee, Inc., a Tennessee corporation, Sonic Automotive-6025 International Drive, LLC, a Tennessee limited liability company, Sonic Automotive of Nashville, LLC, a Tennessee limited liability company, Sonic Automotive of Chattanooga, LLC, a Tennessee limited liability company, Town and Country Jaguar, LLC, a Tennessee limited liability company, Town and Country Chrysler-Plymouth-Jeep, LLC, a Tennessee limited liability company, Town and Country Dodge of Chattanooga, LLC, a Tennessee limited liability company, Sonic Automotive-2490 South Lee Highway, LLC, a Tennessee limited liability company, Town and Country Ford of Cleveland, LLC, an Ohio limited liability company, Freedom Ford, Inc., a Florida corporation, Sonic Automotive 5260 Peachtree Industrial Blvd, LLC, a Georgia limited liability company, Sonic Automotive of Georgia, Inc., a Georgia corporation, Sonic Peachtree Industrial Blvd., L.P., a Georgia limited partnership, Sonic Automotive - Clearwater, Inc., a Florida corporation, Sonic Automotive 21699 U.S. Hwy 19 N., Inc., a Florida corporation, Sonic Automotive Collision Center of Clearwater, Inc., a Florida corporation, Sonic Automotive - 1400 Automall Drive, Columbus, Inc., an Ohio corporation, Sonic Automotive - 1455 Automall Drive, Columbus, Inc., an Ohio corporation, Sonic Automotive - 1495 Automall Drive, Columbus, Inc., an Ohio corporation, Sonic Automotive - 1500 Automall Drive, Columbus, Inc., an Ohio corporation, Sonic Automotive - 3700 West Broad Street, Columbus, Inc., an Ohio corporation, Sonic Automotive - 4000 West Broad Street, Columbus, Inc., an Ohio corporation, Sonic Automotive 2424 Laurens Rd., Greenville, Inc., a South Carolina corporation, Sonic Automotive 2752 Laurens Rd., Greenville, Inc., a South Carolina corporation, Sonic Automotive - 5585 Peachtree Industrial Blvd., LLC, a Georgia limited liability company, Capitol Chevrolet and Imports, Inc., an Alabama corporation, Sonic Automotive - 1919 N. Dixie Hwy., NSB, Inc., a Florida corporation, Sonic Automotive - 1307 N. Dixie Hwy., NSB, Inc., a Florida corporation, Sonic Automotive - 1720 Mason Ave, DB, Inc., a Florida corporation, Sonic Automotive - 3741 S. Nova Rd., PO, Inc., a Florida corporation, Sonic Automotive - 241 Ridgewood Ave., HH, Inc., a Florida corporation and Sonic Automotive - Hwy. 153 at Shallowford Road, Chattanooga, Inc., a Tennessee corporation (each a "Guarantor" and collectively, the "Guarantors") and U.S. Bank Trust National Association, as Trustee (the "Trustee"). - 1 - RECITALS OF THE COMPANY AND THE GUARANTORS The Company has duly authorized the creation of an issue of 11% Senior Subordinated Notes due 2008, Series A (the "Series A Securities" or the "Initial Securities"), and an issue of 11% Senior Subordinated Notes due 2008, Series B (the "Series B Securities" and, together with the Series A Securities, the "Securities"), of substantially the tenor and amount hereinafter set forth, and to provide therefor the Company has duly authorized the execution and delivery of this Indenture and the Securities; Each Guarantor has duly authorized the issuance of a Guarantee of the Securities, of substantially the tenor hereinafter set forth, and to provide therefor, each Guarantor has duly authorized the execution and delivery of this Indenture and its Guarantee; This Indenture is subject to, and shall be governed by, the provisions of the Trust Indenture Act that are required to be part of and to govern indentures qualified under the Trust Indenture Act; All acts and things necessary have been done to make (i) the Securities, when duly issued and executed by the Company and authenticated and delivered hereunder, the valid obligations of the Company, (ii) the Guarantees, when executed by each of the Guarantors and delivered hereunder, the valid obligation of each of the Guarantors and (iii) this Indenture a valid agreement of the Company and each of the Guarantors in accordance with the terms of this Indenture; NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities, as follows: ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION Section 101. Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; - 2 - (b) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (c) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP; (d) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; (e) all references to $, US$, dollars or United States dollars shall refer to the lawful currency of the United States of America; and (f) all references herein to particular Sections or Articles refer to this Indenture unless otherwise so indicated. Certain terms used principally in Article Four are defined in Article Four. "Acquired Indebtedness" means Indebtedness of a Person (i) existing at the time such Person becomes a Restricted Subsidiary or (ii) assumed in connection with the acquisition of assets from such Person, in each case, other than Indebtedness incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary or such acquisition, as the case may be. Acquired Indebtedness shall be deemed to be incurred on the date of the related acquisition of assets from any Person or the date the acquired Person becomes a Restricted Subsidiary, as the case may be. "Affiliate" means, with respect to any specified Person: (i) any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person; (ii) any other Person that owns, directly or indirectly, 5% or more of such specified Person's Capital Stock or any officer or director of any such specified Person or other Person or, with respect to any natural Person, any person having a relationship with such Person by blood, marriage or adoption not more remote than first cousin; or (iii) any other Person 5% or more of the Voting Stock of which is beneficially owned or held directly or indirectly by such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. - 3 - "Applicable Procedures" means, with respect to any transfer or transaction involving a Global Security or beneficial interest therein, the rules and procedures of the Depositary for such Security, Euroclear and Cedel, in each case to the extent applicable to such transaction and as in effect at the time of such transfer or transaction. "Asset Sale" means any sale, issuance, conveyance, transfer, lease or other disposition (including, without limitation, by way of merger, consolidation or sale and leaseback Transaction) (collectively, a "transfer"), directly or indirectly, in one or a series of related transactions, of: (i) any Capital Stock of any Restricted Subsidiary (other than directors' qualifying shares and transfers of Capital Stock required by a Manufacturer to the extent the Company does not receive cash or Cash Equivalents for such Capital Stock); (ii) all or substantially all of the properties and assets of any division or line of business of the Company or any Restricted Subsidiary; or (iii) any other properties or assets of the Company or any Restricted Subsidiary other than in the ordinary course of business. For the purposes of this definition, the term "Asset Sale" shall not include any transfer of properties and assets (A) that is governed by the provisions described under Article Eight hereof, (B) that is by the Company to any Wholly Owned Restricted Subsidiary, or by any Restricted Subsidiary to the Company or any Wholly Owned Restricted Subsidiary in accordance with the terms of this Indenture, (C) that is of obsolete equipment, (D) that consists of defaulted receivables for collection or any sale, transfer or other disposition of defaulted receivables for collection, or (E) the Fair Market Value of which in the aggregate does not exceed $2.5 million in any transaction or series of related transactions. "Average Life to Stated Maturity" means, as of the date of determination with respect to any Indebtedness, the quotient obtained by dividing (i) the sum of the products of (a) the number of years from the date of determination to the date or dates of each successive scheduled principal payment of such Indebtedness multiplied by (b) the amount of each such principal payment; by (ii) the sum of all such principal payments. "Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as amended, or any similar United States federal or state law relating to bankruptcy, insolvency, receivership, winding up, liquidation, reorganization or relief of debtors or any amendment to, succession to or change in any such law. "Board of Directors" means the board of directors of the Company or any Guarantor, as the case may be, or any duly authorized committee of such board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company or any Guarantor, as the case may be, to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. - 4 - "Book-Entry Security" means any Global Securities bearing the legend specified in Section 202 evidencing all or part of a series of Securities, authenticated and delivered to the Depositary for such series or its nominee, and registered in the name of such Depositary or nominee. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions or trust companies in The City of New York or the city in which the Corporate Trust Office of the Trustee is located are authorized or obligated by law, regulation or executive order to close. "Capital Lease Obligation" of any Person means any obligation of such Person and its Subsidiaries on a Consolidated basis under any capital lease of real or personal property which, in accordance with GAAP, has been recorded as a capitalized lease obligation. "Capital Stock" of any Person means any and all shares, interests, participations or other equivalents (however designated) of such Person's capital stock or other equity interests whether now outstanding or issued after the date hereof, partnership interests (whether general or limited), any other interest or participation that confers on a Person that right to receive a share of the profits and losses of, or distributions of assets of (other than a distribution in respect of Indebtedness), the issuing Person and any rights (other than debt securities convertible into Capital Stock), warrants or options exchangeable for or convertible into such Capital Stock. -5- "Cash Equivalents" means (i) marketable direct obligations, maturing not more than one year after the date of acquisition, issued by the United States of America, or an instrumentality or agency thereof, and guaranteed fully as to principal, premium, if any, and interest by the United States of America, (ii) any certificate of deposit, maturing not more than one year after the date of acquisition, issued by a commercial banking institution that is a member of the Federal Reserve System and that has combined capital and surplus and undivided profits of not less than $500 million, whose debt has a rating, at the time as of which any investment therein is made, of "P- 1" (or higher) according to Moody's or any successor rating agency or "A-1" (or higher) according to S&P or successor rating agency, (iii) commercial paper, maturing not more than180 days after the date of acquisition, issued by a corporation (other than an Affiliate or Subsidiary of the Company) organized and existing under the laws of the United States of America with a rating, at the time as of which any investment therein is made, of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P and (iv) any money market deposit accounts issued or offered by a domestic commercial bank having capital and surplus in excess of $500 million; provided that the short term debt of such commercial bank has a rating, at the time of Investment, of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P. "Cedel" means Cedel, S.A. (or any successor securities clearing agency). "Change of Control" means the occurrence of any of the following events: (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), other than Permitted Holders, is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person shall be deemed to have beneficial ownership of all shares that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 35% of the total outstanding Voting Stock of the Company; (ii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election to such board or whose nomination for election by the stockholders of the Company was approved by a vote of 66 2/3% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved), cease for any reason to constitute a majority of such Board of Directors then in office; (iii) the Company consolidates with or merges with or into any Person or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any Person, or any Person consolidates with or merges into or with the Company, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company is converted into or exchanged for cash, securities or other property, other than any such transaction where (A) the outstanding Voting Stock of the Company is changed into or exchanged for (x) Voting Stock of the surviving corporation which is not Redeemable Capital Stock or (y) cash, securities and other property (other than Capital Stock of the surviving corporation) in an -6- amount which could be paid by the Company as a Restricted Payment as described in Section 1009 herein (and such amount shall be treated as a Restricted Payment subject to the provisions in this Indenture described in Section 1009 herein) and (B) immediately after such transaction, no "person" or "group," other than Permitted Holders, is the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to have beneficial ownership of all securities that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, more than 35% of the total outstanding Voting Stock of the surviving corporation; or (iv) the Company is liquidated or dissolved or adopts a plan of liquidation or dissolution other than in a transaction which complies with the provisions described under Article Eight herein. For purposes of this definition, any transfer of an equity interest of an entity that was formed for the purpose of acquiring voting stock of the Company will be deemed to be a transfer of such portion of such voting stock as corresponds to the portion of the equity of such entity that has been so transferred. "Class A Common Stock" means the Company's Class A Common Stock, par value $.01 per share, or any successor common stock thereto. "Code" means the Internal Revenue Code of 1986, as amended. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or if at any time after the execution of this Indenture such Commission is not existing and performing the duties now assigned to it under the Securities Act, Exchange Act and Trust Indenture Act then the body performing such duties at such time. "Commodity Price Protection Agreement" means any forward contract, commodity swap, commodity option or other similar financial agreement or arrangement relating to, or the value which is dependent upon, fluctuations in commodity prices. "Company" means Sonic Automotive, Inc., a corporation incorporated under the laws of Delaware, until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by any one of its Chairman of the Board, its President, its Chief Executive Officer, its Chief Financial Officer or a Vice President (regardless of Vice Presidential designation), and by any one of its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered to the Trustee. "Consolidated Fixed Charge Coverage Ratio" of any Person means, for any period, the ratio of (a) the sum of Consolidated Net Income (Loss), and in each case to - 7 - the extent deducted in computing Consolidated Net Income (Loss) for such period, Consolidated Interest Expense, Consolidated Income Tax Expense and Consolidated Non-cash Charges for such period, of such Person and its Restricted Subsidiaries on a Consolidated basis, all determined in accordance with GAAP, less all noncash items increasing Consolidated Net Income for such period and less all cash payments during such period relating to noncash charges that were added back to Consolidated Net Income in determining the Consolidated Fixed Charge Coverage Ratio in any prior period to (b) the sum of Consolidated Interest Expense for such period and cash and noncash dividends paid on any Preferred Stock of such Person during such period, in each case after giving pro forma effect to (i) the incurrence of the Indebtedness giving rise to the need to make such calculation and (if applicable) the application of the net proceeds therefrom, including to refinance other Indebtedness, as if such Indebtedness was incurred, and the application of such proceeds occurred, on the first day of such period; (ii) the incurrence, repayment or retirement of any other Indebtedness by the Company and its Restricted Subsidiaries since the first day of such period as if such Indebtedness was incurred, repaid or retired at the beginning of such period (except that, in making such computation, the amount of Indebtedness under any revolving credit facility shall be computed based upon the average daily balance of such Indebtedness during such period); (iii) in the case of Acquired Indebtedness or any acquisition occurring at the time of the incurrence of such Indebtedness, the related acquisition, assuming such acquisition had been consummated on the first day of such period; and (iv) any acquisition or disposition by the Company and its Restricted Subsidiaries of any company or any business or any assets out of the ordinary course of business, whether by merger, stock purchase or sale or asset purchase or sale, or any related repayment of Indebtedness, in each case since the first day of such period, assuming such acquisition or disposition had been consummated on the first day of such period; provided that (i) in making such computation, the Consolidated Interest Expense attributable to interest on any Indebtedness computed on a pro forma basis and (A) bearing a floating interest rate shall be computed as if the rate in effect on the date of computation had been the applicable rate for the entire period and (B) which was not outstanding during the period for which the computation is being made but which bears, at the option of such Person, a fixed or floating rate of interest, shall be computed by applying at the option of such Person either the fixed or floating rate and (ii) in making such computation, the Consolidated Interest Expense of such Person attributable to interest on any Indebtedness under a revolving credit facility computed on a pro forma basis shall be computed based upon the average daily balance of such Indebtedness during the applicable period. "Consolidated Income Tax Expense" of any Person means, for any period, the provision for federal, state, local and foreign income taxes of such Person and its Consolidated Restricted Subsidiaries for such period as determined in accordance with GAAP. -8- "Consolidated Interest Expense" of any Person means, without duplication, for any period, the sum of (a) the interest expense of such Person and its Restricted Subsidiaries for such period, on a Consolidated basis (other than interest expense under any Inventory Facility), including, without limitation, (i) amortization of debt discount, (ii) the net costs associated with Interest Rate Agreements, Currency Hedging Agreements and Commodity Price Protection Agreements (including amortization of discounts), (iii) the interest portion of any deferred payment obligation, (iv) all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers acceptance financing and (v) accrued interest, plus (b) (i) the interest component of the Capital Lease Obligations paid, accrued and/or scheduled to be paid or accrued by such Person and its Restricted Subsidiaries during such period and (ii) all capitalized interest of such Person and its Restricted Subsidiaries, plus (c) the interest expense under any Guaranteed Debt of such Person and any Restricted Subsidiary to the extent not included under clause (a)(iv) above, whether or not paid by such Person or its Restricted Subsidiaries. "Consolidated Net Income (Loss)" of any Person means, for any period, the Consolidated net income (or loss) of such Person and its Restricted Subsidiaries for such period on a Consolidated basis as determined in accordance with GAAP, adjusted, to the extent included in calculating such net income (or loss), by excluding, without duplication, (i) all extraordinary gains or losses net of taxes (less all fees and expenses relating thereto), (ii) the portion of net income (or loss) of such Person and its Restricted Subsidiaries on a Consolidated basis allocable to minority interests in unconsolidated Persons or Unrestricted Subsidiaries to the extent that cash dividends or distributions have not actually been received by such Person or one of its Consolidated Restricted Subsidiaries, (iii) net income (or loss) of any Person combined with such Person or any of its Restricted Subsidiaries on a "pooling of interests" basis attributable to any period prior to the date of combination, (iv) any gain or loss, net of taxes, realized upon the termination of any employee pension benefit plan, (v) gains or losses, net of taxes (less all fees and expenses relating thereto), in respect of dispositions of assets other than in the ordinary course of business, (vi) the net income of any Restricted Subsidiary to the extent that the declaration of dividends or similar distributions by that Restricted Subsidiary of that income is not at the time permitted, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Restricted Subsidiary or its stockholders, (vii) any restoration to net income of any contingency reserve, except to the extent provision for such reserve was made out of income accrued at any time following the Issue Date, or (viii) any net gain arising from the acquisition of any securities or extinguishment, under GAAP, of any Indebtedness of such Person. "Consolidated Non-cash Charges" of any Person means, for any period, the aggregate depreciation, amortization and other non-cash charges of such Person and its subsidiaries on a Consolidated basis for such period, as determined in accordance with -9- GAAP (excluding any non-cash charge which requires an accrual or reserve for cash charges for any future period). "Consolidated Tangible Assets" of any Person means (a) all amounts that would be shown as assets on a Consolidated balance sheet of such Person and its Restricted Subsidiaries prepared in accordance with GAAP, less (b) the amount thereof constituting goodwill and with intangible assets as calculated in accordance with GAAP. "Consolidation" means, with respect to any Person, the consolidation of the accounts of such Person and each of its subsidiaries if and to the extent the accounts of such Person and each of its subsidiaries would normally be consolidated with those of such Person, all in accordance with GAAP. The term "Consolidated" shall have a similar meaning. "Corporate Trust Office" means the office of the Trustee or an affiliate or agent thereof at which at any particular time the corporate trust business for the purposes of this Indenture shall be principally administered, which office at the date of execution of this Indenture is located at 100 Wall Street, 20th Floor, New York, New York 10005. "Currency Hedging Agreements" means one or more of the following agreements which shall be entered into by one or more financial institutions: foreign exchange contracts, currency swap agreements or other similar agreements or arrangements designed to protect against the fluctuations in currency values. "Default" means any event which is, or after notice or passage of any time or both would be, an Event of Default. "Depositary" means, with respect to the Securities issued in the form of one or more Book-Entry Securities, The Depository Trust Company ("DTC"), its nominees and successors, or another Person designated as Depositary by the Company, which must be a clearing agency registered under the Exchange Act. "Designated Senior Indebtedness" means (i) all Senior Indebtedness under the Floor Plan Facility or the Revolving Facility and (ii) any other Senior Indebtedness which at the time of determination has an aggregate principal amount outstanding of at least $25 million and which is specifically designated in the instrument evidencing such Senior Indebtedness or the agreement under which such Senior Indebtedness arises as "Designated Senior Indebtedness" by the Company. "Disinterested Director" means, with respect to any transaction or series of related transactions, a member of the Board of Directors of the Company who does not have any material direct or indirect financial interest in or with respect to such transaction or series of related transactions. -10- "Euroclear" means the Euroclear Clearance System (or any successor securities clearing agency). "Event of Default" has the meaning specified in Section 501. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor statute, and the rules and regulations promulgated by the Commission thereunder. "Exchange Offer" means the exchange offer by the Company and the Guarantors of Series B Securities for Series A Securities to be effected pursuant to Section 2.1 of the Registration Rights Agreement. "Exchange Offer Registration Statement" means the registration statement under the Securities Act contemplated by Section 2.1 of the Registration Rights Agreement. "Fair Market Value" means, with respect to any asset or property, the sale value that would be obtained in an arm's-length free market transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer under no compulsion to buy. Fair Market Value shall be determined by the Board of Directors of the Company acting in good faith and shall be evidenced by a Board Resolution. "Floor Plan Facility" means an agreement from Ford Motor Credit Company or any other bank or asset-based lender pursuant to which the Company or any Restricted Subsidiary incurs Indebtedness all of the net proceeds of which are used to purchase, finance or refinance vehicles and/or vehicle parts and supplies to be sold in the ordinary course of business of the Company and its Restricted Subsidiaries and which may not be secured except by a Lien that does not extend to or cover any property other than the property of the dealership(s) which use the proceeds of the Floor Plan Facility. "Generally Accepted Accounting Principles" or "GAAP" means generally accepted accounting principles in the United States, consistently applied, which (i) for the purpose of determining compliance with the covenants contained in this Indenture, are in effect as of the Issue Date, and (ii) for purposes of compliance with the reporting requirements contained in this Indenture, are in effect from time to time. "Global Securities" means the Rule 144A Global Securities, the Regulation S Global Securities and the Series B Global Securities to be issued as Book-Entry Securities issued to the Depositary in accordance with Section 306. "Guarantee" means the guarantee by any Guarantor of the Company's Indenture Obligations. -11- "Guaranteed Debt" of any Person means, without duplication, all Indebtedness of any other Person referred to in the definition of Indebtedness below guaranteed directly or indirectly in any manner by such Person, or in effect guaranteed directly or indirectly by such Person through an agreement (i) to pay or purchase such Indebtedness or to advance or supply funds for the payment or purchase of such Indebtedness, (ii) to purchase, sell or lease (as lessee or lessor) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such Indebtedness or to assure the holder of such Indebtedness against loss, (iii) to supply funds to, or in any other manner invest in, the debtor (including any agreement to pay for property or services without requiring that such property be received or such services be rendered), (iv) to maintain working capital or equity capital of the debtor, or otherwise to maintain the net worth, solvency or other financial condition of the debtor or to cause such debtor to achieve certain levels of financial performance or (v) otherwise to assure a creditor against loss; provided that the term "guarantee" shall not include endorsements for collection or deposit, in either case in the ordinary course of business. "Guarantor" means any Subsidiary which is a guarantor of the Securities, including any Person that is required after the Issue Date to execute a guarantee of the Securities pursuant to Section 1011 or Section 1013 until a successor replaces such party pursuant to the applicable provisions of this Indenture and, thereafter, shall mean such successor. "Holder" means a Person in whose name a Security is registered in the Security Register. -12- "Indebtedness" means, with respect to any Person, without duplication, (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services, excluding any trade payables and other accrued current liabilities arising in the ordinary course of business, but including, without limitation, all obligations, contingent or otherwise, of such Person in connection with any letters of credit issued under letter of credit facilities, acceptance facilities or other similar facilities, (ii) all obligations of such Person evidenced by bonds, notes, debentures or other similar instruments, (iii) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even if the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), but excluding trade payables arising in the ordinary course of business, (iv) all obligations of such Person under Interest Rate Agreements, Currency Hedging Agreements or Commodity Price Protection Agreements of such Person, (v) all Capital Lease Obligations of such Person, (vi) all Indebtedness referred to in clauses (i) through (v) above of other Persons and all dividends of other Persons, the payment of which is secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien, upon or with respect to property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness, (vii) all Guaranteed Debt of such Person, (viii) all Redeemable Capital Stock issued by such Person valued at the greater of its voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid dividends, (ix) Preferred Stock of any Restricted Subsidiary of the Company which is not a Guarantor and (x) any amendment, supplement, modification, deferral, renewal, extension, refunding or refinancing of any liability of the types referred to in clauses (i) through (ix) above. For purposes hereof, the "maximum fixed repurchase price" of any Redeemable Capital Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Redeemable Capital Stock as if such Redeemable Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to this Indenture, and if such price is based upon, or measured by, the Fair Market Value of such Redeemable Capital Stock, such Fair Market Value to be determined in good faith by the board of directors of the issuer of such Redeemable Capital Stock. "Indenture" means this instrument as originally executed (including all exhibits and schedules thereto) and as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof. "Indenture Obligations" means the obligations of the Company and any other obligor under this Indenture or under the Securities, including any Guarantor, to pay principal of, premium, if any, and interest when due and payable, and all other amounts due or to become due under or in connection with this Indenture, the Securities and the -13- performance of all other obligations to the Trustee and the Holders under this Indenture and the Securities, according to the respective terms hereof and thereof. "Initial Securities" has the meaning stated in the first recital of this Indenture. "Initial Purchasers" means Merrill Lynch, Pierce, Fenner & Smith Incorporated, NationsBanc Montgomery Securities LLC and BancAmerica Robertson Stephens. "Interest Payment Date" means the Stated Maturity of an installment of interest on the Securities. "Interest Rate Agreements" means one or more of the following agreements which shall be entered into by one or more financial institutions: interest rate protection agreements (including, without limitation, interest rate swaps, caps, floors, collars and similar agreements) and/or other types of interest rate hedging agreements from time to time. "Inventory Facility" means any Floor Plan Facility or any other agreement (including pursuant to a commercial paper program) pursuant to which the Company or any Restricted Subsidiary incurs Indebtedness, the net proceeds of which are used to purchase, finance or refinance vehicles and/or vehicle parts and supplies to be sold in the ordinary course of business of the Company and its Restricted Subsidiaries and which may not be secured except by Lien that does not extend to or cover any property other than the property of the dealership(s) which use the proceeds of the Inventory Facility. "Investment" means, with respect to any Person, directly or indirectly, any advance, loan (including guarantees), or other extension of credit or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase, acquisition or ownership by such Person of any Capital Stock, bonds, notes, debentures or other securities issued or owned by any other Person and all other items that would be classified as investments on a balance sheet prepared in accordance with GAAP. "Issue Date" means the original issue date of the Securities under this Indenture. "Lien" means any mortgage or deed of trust, charge, pledge, lien (statutory or otherwise), privilege, security interest, assignment, deposit, arrangement, easement, hypothecation, claim, preference, priority or other encumbrance upon or with respect to any property of any kind (including any conditional sale, capital lease or other title retention agreement, any leases in the nature thereof, and any agreement to give any security interest), real or personal, movable or immovable, now owned or hereafter -14- acquired. A Person will be deemed to own subject to a Lien any property which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, Capitalized Lease Obligation or other title retention agreement. "Manufacturer" means a vehicle manufacturer which is a party to a dealership franchise agreement with the Company or any Restricted Subsidiary. "Maturity" means, when used with respect to the Securities, the date on which the principal of the Securities becomes due and payable as therein provided or as provided in this Indenture, whether at Stated Maturity, the Offer Date or the Redemption Date and whether by declaration of acceleration, Offer in respect of Excess Proceeds, Change of Control Offer in respect of a Change of Control, call for redemption or otherwise. "Moody's" means Moody's Investors Service, Inc. or any successor rating agency. "Net Cash Proceeds" means (a) with respect to any Asset Sale by any Person, the proceeds thereof (without duplication in respect of all Asset Sales) in the form of cash or Temporary Cash Investments including payments in respect of deferred payment obligations when received in the form of, or stock or other assets when disposed of for, cash or Temporary Cash Investments (except to the extent that such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary) net of (i) brokerage commissions and other reasonable fees and expenses (including fees and expenses of counsel and investment bankers) related to such Asset Sale, (ii) provisions for all taxes payable as a result of such Asset Sale, (iii) payments made to retire Indebtedness where payment of such Indebtedness is secured by the assets or properties the subject of such Asset Sale, (iv) amounts required to be paid to any Person (other than the Company or any Restricted Subsidiary) owning a beneficial interest in the assets subject to the Asset Sale and (v) appropriate amounts to be provided by the Company or any Restricted Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against any liabilities associated with such Asset Sale and retained by the Company or any Restricted Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as reflected in an Officers' Certificate delivered to the Trustee and (b) with respect to any issuance or sale of Capital Stock or options, warrants or rights to purchase Capital Stock, or debt securities or Capital Stock that have been converted into or exchanged for Capital Stock as referred to in Section 1009, the proceeds of such issuance or sale in the form of cash or Temporary Cash Investments including payments in respect of deferred payment obligations when received in the form of, or stock or other assets when disposed of for, cash or Temporary Cash Investments (except to the extent that such obligations are financed or sold with recourse to the Company or any Restricted -15- Subsidiary), net of attorney's fees, accountant's fees and brokerage, consultation, underwriting and other fees and expenses actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "Non-U.S. Person" means a Person that is not a "U.S. person" as defined in Regulation S under the Securities Act. "Officers' Certificate" means a certificate signed by the Chairman of the Board, the President, the Chief Executive Officer, the Chief Financial Officer or a Vice President (regardless of Vice Presidential designation), and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, of the Company or any Guarantor, as the case may be, and in form and substance reasonably satisfactory to, and delivered to, the Trustee. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Company, any Guarantor or the Trustee, unless an Opinion of Independent Counsel is required pursuant to the terms of this Indenture, and who shall be acceptable to the Trustee, and which opinion shall be in form and substance reasonably satisfactory to the Trustee. "Opinion of Independent Counsel" means a written opinion of counsel which is issued by a Person who is not an employee, director or consultant (other than non-employee legal counsel) of the Company or any Guarantor and who shall be acceptable to the Trustee, and which opinion shall be in form and substance reasonably satisfactory to the Trustee. "Outstanding" when used with respect to Securities means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: (a) Securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation; (b) Securities, or portions thereof, for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company or an Affiliate thereof) in trust or set aside and segregated in trust by the Company or an Affiliate thereof (if the Company or an Affiliate thereof shall act as its own Paying Agent) for the Holders of such Securities; provided that if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor reasonably satisfactory to the Trustee has been made; -16- (c) Securities, to the extent provided in Sections 402 and 403, with respect to which the Company has effected defeasance or covenant defeasance as provided in Article Four; and (d) Securities in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee and the Company proof reasonably satisfactory to each of them that such Securities are held by a bona fide purchaser in whose hands the Securities are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company, any Guarantor, or any other obligor upon the Securities or any Affiliate of the Company, any Guarantor or such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which the Trustee knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the reasonable satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company, any Guarantor or any other obligor upon the Securities or any Affiliate of the Company, any Guarantor or such other obligor. "Pari Passu Indebtedness" means (a) any Indebtedness of the Company that is pari passu in right of payment to the Securities and (b) with respect to any Guarantee, Indebtedness which ranks pari passu in right of payment to such Guarantee. "Paying Agent" means any Person (including the Company) authorized by the Company to pay the principal of, premium, if any, or interest on, any Securities on behalf of the Company. "Permitted Holders" means (i) Mr. Bruton Smith or Mr. William S. Egan and their respective guardians, conservators, committees, or attorneys-in-fact; (ii) lineal descendants of Mr. Smith or Mr. Egan (in either case, a "Descendant") and their respective guardians, conservators, committees or attorneys-in-fact; and (iii) each "Family Controlled Entity" (as defined herein). The term "Family Controlled Entity" means (a) any not-for-profit corporation if at least 80% of its board of directors is composed of Mr. Smith, Mr. Egan and/or Descendants; (b) any other corporation if at least 80% of the value of its outstanding equity is owned by a Permitted Holder; (c) any partnership if at least 80% of the value of the partnership interests are owned by a Permitted Holder; (d) any limited liability or similar company if at least 80% of the value of the company is -17- owned by a Permitted Holder; and (e) any trusts created for the benefit of any of the persons listed in (i) or (ii) of the prior sentence. "Permitted Investment" means (i) Investments in any Wholly Owned Restricted Subsidiary or any Person which, as a result of such Investment, (a) becomes a Wholly Owned Restricted Subsidiary or (b) is merged or consolidated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or any Wholly Owned Restricted Subsidiary; (ii) Indebtedness of the Company or a Restricted Subsidiary described under clauses (v), (vi) and (vii) of the definition of "Permitted Indebtedness"; (iii) Investments in any of the Securities; (iv) Temporary Cash Investments; (v) Investments acquired by the Company or any Restricted Subsidiary in connection with an Asset Sale permitted under Section 1012 herein to the extent such Investments are non-cash proceeds as permitted under such covenant; (vi) any Investment to the extent the consideration therefor consists of Qualified Capital Stock of the Company or any Restricted Subsidiary; (vii) Investments representing Capital Stock or obligations issued to the Company or any Restricted Subsidiary in the ordinary course of the good faith settlement of claims against any other Person by reason of a composition or readjustment of debt or a reorganization of any debtor or any Restricted Subsidiary; (viii) prepaid expenses advanced to employees in the ordinary course of business or other loans or advances to employees in the ordinary course of business not to exceed $1 million in the aggregate at any one time outstanding; (ix) Investments in existence on the Issue Date; and (x) in addition to the Investments described in clauses (i) through (x) above, Investments in an amount not to exceed $10 million in the aggregate at any one time outstanding. In connection with any assets or property contributed or transferred to any Person as an Investment, such property and assets shall be equal to the Fair Market Value (as determined by the Company's Board of Directors) at the time of Investment. "Person" means any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 308 in exchange for a mutilated Security or in lieu of a lost, destroyed or stolen Security shall be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Security. "Preferred Stock" means, with respect to any Person, any Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends or distributions, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over the Capital Stock of any other class in such Person. -18- "Prospectus" means the prospectus included in a Registration Statement, including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus supplement, including any such prospectus supplement with respect to the terms of the offering of any portion of the Series A Securities covered by a Shelf Registration Statement, and by all other amendments and supplements to a prospectus, including post-effective amendments, and in each case including all material incorporated by reference therein. "Public Equity Offering" means an underwritten public offering of common stock (other than Redeemable Capital Stock) of the Company with gross proceeds to the Company of at least $50 million pursuant to a registration statement that has been declared effective by the Commission pursuant to the Securities Act (other than a registration statement on Form S-4, Form S-8 or otherwise relating to equity securities issuable under any employee benefit plan of the Company). "Purchase Money Obligation" means any Indebtedness secured by a Lien on assets related to the business of the Company and any additions and accessions thereto, which are purchased by the Company at any time after the Securities are issued; provided that (i) the security agreement or conditional sales or other title retention contract pursuant to which the Lien on such assets is created (collectively a "Purchase Money Security Agreement") shall be entered into within 90 days after the purchase or substantial completion of the construction of such assets and shall at all times be confined solely to the assets so purchased or acquired, any additions and accessions thereto and any proceeds therefrom, (ii) at no time shall the aggregate principal amount of the outstanding Indebtedness secured thereby be increased, except in connection with the purchase of additions and accessions thereto and except in respect of fees and other obligations in respect of such Indebtedness and (iii) (A) the aggregate outstanding principal amount of Indebtedness secured thereby (determined on a per asset basis in the case of any additions and accessions) shall not at the time such Purchase Money Security Agreement is entered into exceed 100% of the purchase price to the Company of the assets subject thereto or (B) the Indebtedness secured thereby shall be with recourse solely to the assets so purchased or acquired, any additions and accessions thereto and any proceeds therefrom. "QIB" means a "Qualified Institutional Buyer" under Rule 144A under the Securities Act. "Qualified Capital Stock" of any Person means any and all Capital Stock of such Person other than Redeemable Capital Stock. -19- "Redeemable Capital Stock" means any Capital Stock that, either by its terms or by the terms of any security into which it is convertible or exchangeable or otherwise, is or upon the happening of an event or passage of time would be, required to be redeemed prior to the final Stated Maturity of the principal of the Securities or is redeemable at the option of the holder thereof at any time prior to such final Stated Maturity (other than upon a change of control of the Company in circumstances where a Holder would have similar rights), or is convertible into or exchangeable for debt securities at any time prior to any such Stated Maturity at the option of the holder thereof. "Redemption Date" when used with respect to any Security to be redeemed pursuant to any provision in this Indenture means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price" when used with respect to any Security to be redeemed pursuant to any provision in this Indenture means the price at which it is to be redeemed pursuant to this Indenture. "Registration Rights Agreement" means the Registration Rights Agreement, dated as of July 31, 1998, among the Company, the Guarantors and the Initial Purchasers. "Registration Statement" means any registration statement of the Company and the Guarantors which covers any of the Series A Securities (and related guarantees) or Series B Securities (and related guarantees) pursuant to the provisions of the Registration Rights Agreement, and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Regular Record Date" for the interest payable on any Interest Payment Date means the January 15 or July 15 (whether or not a Business Day) next preceding such Interest Payment Date. - 20 - "Regulation S" means Regulation S under the Securities Act, as amended from time to time. "Regulation S Global Securities" means one or more permanent global Securities in registered form representing the aggregate principal amount of Securities sold in reliance on Regulation S under the Securities Act. "Responsible Officer" when used with respect to the Trustee means any officer or employee assigned to the Corporate Trust Office or any agent of the Trustee appointed hereunder, including any vice president, assistant vice president, secretary, assistant secretary, or any other officer or assistant officer of the Trustee or any agent of the Trustee appointed hereunder to whom any corporate trust matter is referred because of his or her knowledge of and familiarity with the particular subject. "Replacement Assets" means properties and assets (other than cash or any Capital Stock or other security) that will be used in a business of the Company or its Restricted Subsidiaries existing on the Issue Date or in business reasonably related thereto. "Restricted Subsidiary" means any Subsidiary of the Company that has not been designated by the Board of Directors of the Company by a Board Resolution delivered to the Trustee as an Unrestricted Subsidiary pursuant to and in compliance with Section 1018 herein. "Revolving Facility" means the Credit Agreement among the Company, the Guarantors and Ford Motor Credit Company as of December 15, 1997, as such agreement, in whole or in part, may be amended, renewed, extended, substituted, refinanced, restructured, replaced, supplemented or otherwise modified from time to time (including, without limitation, any successive renewals, extensions, substitutions, refinancings, restructurings, replacements, supplementations or other modifications of the foregoing). "Rule 144A" means Rule 144A under the Securities Act, as amended from time to time. "Rule 144A Global Securities" means one or more permanent global Securities in registered form representing the aggregate principal amount of Securities sold in reliance on Rule 144A under the Securities Act. "S&P" means Standard & Poor's Rating Group, a division of McGraw Hill, Inc. or any successor rating agency. -21- "Securities Act" means the Securities Act of 1933, as amended, or any successor statute and the rules and regulations promulgated by the Commission thereunder. "Senior Guarantor Indebtedness" means the principal of, premium, if any, and interest (including interest, to the extent allowable, accruing after the filing of a petition initiating any proceeding under any state, federal or foreign bankruptcy law) on any Indebtedness of any Guarantor (other than as otherwise provided in this definition), whether outstanding on the Issue Date or thereafter created, incurred or assumed, and whether at any time owing, actually or contingent, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to any Guarantee. Notwithstanding the foregoing, "Senior Guarantor Indebtedness" shall (x) include the Floor Plan Facility and the Revolving Facility to the extent any Guarantor is a party thereto and (y) not include (i) Indebtedness evidenced by the Guarantees, (ii) Indebtedness that is subordinated or junior in right of payment to any Indebtedness of any Guarantor, (iii) Indebtedness which when incurred and without respect to any election under Section 1111(b) of Title 11 United States Code is without recourse to any Guarantor, (iv) Indebtedness which is represented by Redeemable Capital Stock, (v) any liability for foreign, federal, state, local or other taxes owed or owing by any Guarantor to the extent such liability constitutes Indebtedness, (vi) Indebtedness of any Guarantor to a Subsidiary or any other Affiliate of the Company or any of such Affiliate's Subsidiaries, (vii) to the extent it might constitute Indebtedness, amounts owing for goods, materials or services purchased in the ordinary course of business or consisting of trade accounts payable owed or owing by such Guarantor, and amounts owed by such Guarantor for compensation to employees or services rendered to such Guarantor, (viii) that portion of any Indebtedness which at the time of issuance is issued in violation of this Indenture and (ix) Indebtedness evidenced by any guarantee of any Subordinated Indebtedness or Pari Passu Indebtedness. "Senior Indebtedness" means the principal of, premium, if any, and interest (including interest, to the extent allowable, accruing after the filing of a petition initiating any proceeding under any state, federal or foreign bankruptcy law) on any Indebtedness of the Company (other than as otherwise provided in this definition), whether outstanding on the Issue Date or thereafter created, incurred or assumed, and whether at any time owing, actually or contingent, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to the Notes. Notwithstanding the foregoing, "Senior Indebtedness" shall (x) include the Floor Plan Facility and the Revolving Facility to the extent the Company is a party thereto and (y) not include (i) Indebtedness evidenced by the Securities, (ii) Indebtedness that is subordinate or junior in right of payment to any Indebtedness of the Company, (iii) Indebtedness which when incurred and without respect to any election under -22- Section 1111(b) of Title 11 United States Code is without recourse to the Company, (iv) Indebtedness which is represented by Redeemable Capital Stock, (v) any liability for foreign, federal, state, local or other taxes owed or owing by the Company to the extent such liability constitutes Indebtedness, (vi) Indebtedness of the Company to a Subsidiary or any other Affiliate of the Company or any of such Affiliate's Subsidiaries, (vii) to the extent it might constitute Indebtedness, amounts owing for goods, materials or services purchased in the ordinary course of business or consisting of trade accounts payable owed or owing by the Company, and amounts owed by the Company for compensation to employees or services rendered to the Company, (viii) that portion of any Indebtedness which at the time of issuance is issued in violation of this Indenture and (ix) Indebtedness evidenced by any guarantee of any Subordinated Indebtedness or Pari Passu Indebtedness. "Senior Representative" means the agent, indenture trustee or other trustee or representative for any Senior Indebtedness. "Series B Global Securities" means one or more permanent Global Securities in registered form representing the aggregate principal amount of Series B Securities exchanged for Series A Securities pursuant to the Exchange Offer. "Shelf Registration Statement" means a "shelf" registration statement of the Company and the Guarantors pursuant to Section 2.2 of the of the Registration Rights Agreement, which covers all of the Registrable Securities (as defined in the Registration Rights Agreement) on an appropriate form under Rule 415 under the Securities Act, or any similar rule that may be adopted by the Commission, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Significant Restricted Subsidiary" means, at any particular time, any Restricted Subsidiary that, together with the Restricted Subsidiaries of such Restricted Subsidiary (i) accounted for more than 5% of the Consolidated revenues of the Company and its Restricted Subsidiaries for their most recently completed fiscal year or (ii) is or are the owner(s) of more than 5% of the Consolidated assets of the Company and its Restricted Subsidiaries as at the end of such fiscal year, all as calculated in accordance with GAAP and as shown on the Consolidated financial statements of the Company and its Restricted Subsidiaries for such fiscal year. "Smith Subordinated Loan" means the subordinated loan from Bruton Smith to the Company in the principal amount of $5.5 million in existence on the Issue Date. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 309. -23- "Stated Maturity" means, when used with respect to any Indebtedness or any installment of interest thereon, the dates specified in such Indebtedness as the fixed date on which the principal of such Indebtedness or such installment of interest, as the case may be, is due and payable. "Subordinated Indebtedness" means Indebtedness of the Company or a Guarantor subordinated in right of payment to the Securities or the Guarantee of such Guarantor, as the case may be. "Subsidiary" of a Person means (i) any corporation more than 50% of the outstanding voting power of the Voting Stock of which is owned or controlled, directly or indirectly, by such Person or by one or more other Subsidiaries of such Person, or by such Person and one or more other Subsidiaries thereof, or (ii) any limited partnership of which such Person or any Subsidiary of such Person is a general partner, or (iii) any other Person in which such Person, or one or more other Subsidiaries of such Person, or such Person and one or more other Subsidiaries, directly or indirectly, has more than 50% of the outstanding partnership or similar interests or has the power, by contract or otherwise, to direct or cause the direction of the policies, management and affairs thereof. "Successor Security" of any particular Security means every Security issued after, and evidencing all or a portion of the same debt as that evidenced by, such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 307 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security. "Temporary Cash Investments" means (i) any evidence of Indebtedness, maturing not more than one year after the date of acquisition, issued by the United States of America, or an instrumentality or agency thereof, and guaranteed fully as to principal, premium, if any, and interest by the United States of America, (ii) any certificate of deposit, maturing not more than one year after the date of acquisition, issued by, or time deposit of, a commercial banking institution that is a member of the Federal Reserve System and that has combined capital and surplus and undivided profits of not less than $500 million, whose debt has a rating, at the time as of which any investment therein is made, of "P-1" (or higher) according to Moody's or any successor rating agency or "A-1" (or higher) according to S&P or any successor rating agency, (iii) commercial paper, maturing not more than one year after the date of acquisition, issued by a corporation (other than an Affiliate or Subsidiary of the Company) organized and existing under the laws of the United States of America with a rating, at the time as of which any investment therein is made, of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P, and (iv) any money market deposit accounts issued or offered by a domestic commercial bank having capital and surplus in excess of $500 million; provided -24- that the short term debt of such commercial bank has a rating, at the time of Investment, of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P. "Trustee" means the Person named as the "Trustee" in the first paragraph of this Indenture, until a successor trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor trustee. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended, or any successor statute. "Unrestricted Subsidiary" means any Subsidiary of the Company (other than a Guarantor) designated as such pursuant to and in compliance with Section 1018 herein. "Unrestricted Subsidiary Indebtedness" of any Unrestricted Subsidiary means Indebtedness of such Unrestricted Subsidiary (i) as to which neither the Company nor any Restricted Subsidiary is directly or indirectly liable (by virtue of the Company or any such Subsidiary being the primary obligor on, guarantor of, or otherwise liable in any respect to, such Indebtedness), except Guaranteed Debt of the Company or any Restricted Subsidiary to any Affiliate, in which case (unless the incurrence of such Guaranteed Debt resulted in a Restricted Payment at the time of incurrence) the Company shall be deemed to have made a Restricted Payment equal to the principal amount of any such Indebtedness to the extent guaranteed at the time such Affiliate is designated an Unrestricted Subsidiary and (ii) which, upon the occurrence of a default with respect thereto, does not result in, or permit any holder of any Indebtedness of the Company or any Subsidiary to declare, a default on such Indebtedness of the Company or any Subsidiary or cause the payment thereof to be accelerated or payable prior to its Stated Maturity; provided that notwithstanding the foregoing any Unrestricted Subsidiary may guarantee the Securities. "Voting Stock" means Capital Stock of the class or classes pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of such Person (irrespective of whether or not at the time Capital Stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). "Wholly Owned Restricted Subsidiary" means a Restricted Subsidiary all the Capital Stock of which (other than directors' qualifying shares and shares of Capital Stock of a Restricted Subsidiary which a Manufacturer requires to be held by another Person and which Capital Stock (together with any related contractual arrangements) has no significant economic value (with respect to distributions of profits or losses in ordinary circumstances) is owned by the Company or another Wholly Owned Restricted Subsidiary (other than directors' qualifying shares). -25- Section 102. Other Definitions. Term Defined in Section ---- ------------------ "Act" 105 "Agent Members" 306 "Change of Control Offer" 1014 "Change of Control Purchase Date" 1014 "Change of Control Purchase Notice" 1014 "Change of Control Purchase Price" 1014 "covenant defeasance" 403 "Defaulted Interest" 309 "defeasance" 402 "Defeasance Redemption Date" 404 "Defeased Securities" 401 "Excess Proceeds" 1012 "incur" 1008 "Offer" 1012 "Offer Date" 1012 "Offered Price" 1012 "Pari Passu Debt Amount" 1012 "Pari Passu Offer" 1012 "Permitted Indebtedness" 1008 "Permitted Payment" 1009 "Private Placement Legend" 202 "Purchase Money Security Agreement" 101 "refinancing" 1008 "Required Filing Date" 1019 "Restricted Payments" 1009 "Securities" Recitals "Security Amount" 1012 "Security Register" 305 "Security Registrar" 305 "Series A Securities" Recitals "Series B Securities" Recitals "Special Payment Date" 309 "Surviving Entity" 801 "Surviving Guarantor Entity" 801 "U.S. Government Obligations" 404 Section 103. Compliance Certificates and Opinions. ------------------------------------ Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture and as may be requested by the Trustee, the -26- Company and any Guarantor (if applicable) and any other obligor on the Securities (if applicable) shall furnish to the Trustee an Officers' Certificate in a form and substance reasonably acceptable to the Trustee stating that all conditions precedent, if any, provided for in this Indenture (including any covenant compliance with which constitutes a condition precedent) relating to the proposed action have been complied with, and an Opinion of Counsel in a form and substance reasonably acceptable to the Trustee stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that, in the case of any such application or request as to which the furnishing of such certificates or opinions is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or Opinion of Counsel with respect to compliance with a condition or covenant provided for in this Indenture shall include: (a) a statement that each individual signing such certificate or individual or firm signing such opinion has read and understands such covenant or condition and the definitions herein relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of each such individual or such firm, he or it has made such examination or investigation as is necessary to enable him or it to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such individual or such firm, such condition or covenant has been complied with. Section 104. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. -27- Any certificate of an officer of the Company, any Guarantor or other obligor on the Securities may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer has actual knowledge that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or opinion may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company, any Guarantor or other obligor on the Securities stating that the information with respect to such factual matters is in the possession of the Company, any Guarantor or other obligor on the Securities, unless such officer or counsel has actual knowledge that the certificate or opinion or representations with respect to such matters are erroneous. Opinions of Counsel required to be delivered to the Trustee may have qualifications customary for opinions of the type required and counsel delivering such Opinions of Counsel may rely on certificates of the Company or government or other officials customary for opinions of the type required, including certificates certifying as to matters of fact, including that various financial covenants have been complied with. Any certificate or opinion of an officer of the Company, any Guarantor or other obligor on the Securities may be based, insofar as it relates to accounting matters, upon a certificate or opinion of, or representations by, an accountant or firm of accountants in the employ of the Company, unless such officer has actual knowledge that the certificate or opinion or representations with respect to the accounting matters upon which his certificate or opinion may be based are erroneous. Any certificate or opinion of any independent firm of public accountants filed with the Trustee shall contain a statement that such firm is independent with respect to the Company. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. Section 105. Acts of Holders. --------------- (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such -28- instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section 105. (b) The ownership of Securities shall be proved by the Security Register. (c) Any request, demand, authorization, direction, notice, consent, waiver or other Act by the Holder of any Security shall bind every future Holder of the same Security or the Holder of every Security issued upon the transfer thereof or in exchange therefor or in lieu thereof, in respect of anything done, suffered or omitted to be done by the Trustee, any Paying Agent or the Company, any Guarantor or any other obligor of the Securities in reliance thereon, whether or not notation of such action is made upon such Security. (d) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. (e) If the Company shall solicit from the Holders any request, demand, authorization, direction, notice, consent, waiver or other Act, the Company may, at its option, by or pursuant to a Board Resolution, fix in advance a record date for the determination of such Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Company shall have no obligation to do so. Notwithstanding Trust Indenture Act Section 316(c), any such record date shall be the record date specified in or pursuant to such Board Resolution, which shall be a date not more than 30 days prior to the first solicitation of Holders generally in connection therewith and no later than the date such first solicitation is completed. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holders of record at the close of business on such record date shall be deemed to be Holders for purposes of determining whether Holders of the requisite proportion of Securities then Outstanding have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other Act, and for this purpose the Securities then Outstanding shall be computed as of such record date; provided that no such request, demand, authorization, direction, notice, consent, waiver or other Act by the Holders on such record date shall -29- be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after such record date. (f) For purposes of this Indenture, any action by the Holders which may be taken in writing may be taken by electronic means or as otherwise reasonably acceptable to the Trustee. Section 106. Notices, etc., to the Trustee, the Company and any Guarantor. ------------------------------------------------------------ Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with: (a) the Trustee by any Holder or by the Company or any Guarantor or any other obligor on the Securities shall be sufficient for every purpose (except as provided in Section 501(c)) hereunder if in writing and mailed, first-class postage prepaid, or delivered by recognized overnight courier, to or with the Trustee at its Corporate Trust Office, or at any other address previously furnished in writing to the Holders or the Company, any Guarantor or any other obligor on the Securities by the Trustee; or (b) the Company or any Guarantor by the Trustee or any Holder shall be sufficient for every purpose (except as provided in Section 501(c)) hereunder if in writing and mailed, first-class postage prepaid, or delivered by recognized overnight courier, to the Company or such Guarantor addressed to it c/o Sonic Automotive, Inc., 5401 East Independence Boulevard, Charlotte, North Carolina 28218, Attention: Chief Financial Officer or at any other address previously furnished in writing to the Trustee by the Company or such Guarantor. Section 107. Notice to Holders; Waiver. ------------------------- Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, or delivered by recognized overnight courier, to each Holder affected by such event, at its address as it appears in the Security Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Any notice when mailed to a Holder in the aforesaid manner shall be conclusively deemed to -30- have been received by such Holder whether or not actually received by such Holder. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause, it shall be impracticable to mail notice of any event as required by any provision of this Indenture, then any method of giving such notice as shall be reasonably satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice. Section 108. Conflict with Trust Indenture Act. --------------------------------- If any provision hereof limits, qualifies or conflicts with any provision of the Trust Indenture Act or another provision which is required or deemed to be included in this Indenture by any of the provisions of the Trust Indenture Act, the provision or requirement of the Trust Indenture Act shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be. Section 109. Effect of Headings and Table of Contents. ---------------------------------------- The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. Section 110. Successors and Assigns. ---------------------- All covenants and agreements in this Indenture by the Company and the Guarantors shall bind their respective successors and assigns, whether so expressed or not. Section 111. Separability Clause. ------------------- In case any provision in this Indenture or in the Securities or Guarantees shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 112. Benefits of Indenture. --------------------- Nothing in this Indenture or in the Securities or Guarantees, express or implied, shall give to any Person (other than the parties hereto and their successors hereunder, any Paying Agent and the Holders) any benefit or any legal or equitable right, remedy or claim under this Indenture. -31- SECTION 113. GOVERNING LAW. ------------- THIS INDENTURE, THE SECURITIES AND THE GUARANTEES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF. Section 114. Legal Holidays. -------------- In any case where any Interest Payment Date, Redemption Date, Maturity or Stated Maturity of any Security shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Securities) payment of interest or principal or premium, if any, need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on such Interest Payment Date or Redemption Date, or at the Maturity or Stated Maturity and no interest shall accrue with respect to such payment for the period from and after such Interest Payment Date, Redemption Date, Maturity or Stated Maturity, as the case may be, to the next succeeding Business Day. Section 115. Independence of Covenants. ------------------------- All covenants and agreements in this Indenture shall be given independent effect so that if a particular action or condition is not permitted by any such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of a Default or an Event of Default if such action is taken or condition exists. Section 116. Schedules and Exhibits. ---------------------- All schedules and exhibits attached hereto are by this reference made a part hereof with the same effect as if herein set forth in full. Section 117. Counterparts. ------------ This Indenture may be executed in any number of counterparts, each of which shall be deemed an original; but all such counterparts shall together constitute but one and the same instrument. ARTICLE TWO SECURITY FORMS Section 201. Forms Generally. --------------- -32- The Securities, the Guarantees and the Trustee's certificate of authentication thereon shall be in substantially the forms set forth in this Article Two, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted hereby and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange, any organizational document or governing instrument or applicable law or as may, consistently herewith, be determined by the officers executing such Securities and Guarantees, as evidenced by their execution of the Securities and Guarantees. Any portion of the text of any Security may be set forth on the reverse thereof, with an appropriate reference thereto on the face of the Security. The definitive Securities shall be printed, lithographed or engraved or produced by any combination of these methods or may be produced in any other manner permitted by the rules of any securities exchange on which the Securities may be listed, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities. Initial Securities offered and sold in reliance on Rule 144A shall be issued initially in the form of one or more Rule 144A Global Securities, substantially in the form set forth in Section 202, deposited upon issuance with the Trustee, as custodian for the Depositary, registered in the name of the Depositary, or its nominee, in each case for credit to an account of a direct or indirect participant of the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the Rule 144A Global Securities may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary or its nominee, as hereinafter provided. Initial Securities offered and sold in reliance on Regulation S shall be issued in the form of one or more Regulation S Global Securities, substantially in the form set forth in Section 202, deposited upon issuance with the Trustee, as custodian for the Depositary, registered in the name of the Depositary, or its nominee in each case for credit by the Depositary to an account of a direct or indirect participant of the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided; provided, however, that upon such deposit through and including the 40th day after the later of the commencement of the Offering and the original issue date of the Securities (such period through and including such 40th day, the "Restricted Period"), all such Securities shall be credited to or through accounts maintained at the Depositary by or on behalf of Euroclear or Cedel unless exchanged for interests in the Rule 144A Global Securities in accordance with the transfer and certification requirements described below. The aggregate principal amount of the Regulation S Global Securities may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary or its nominee, as hereinafter provided. -33- Series B Securities exchanged for Series A Securities shall be issued initially in the form of one or more Series B Global Securities, substantially in the form set forth in Section 202, deposited upon issuance with the Trustee, as custodian for the Depositary, registered in the name of the Depositary or its nominee, in each case for credit to an account of a direct or indirect participant of the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the Series B Global Securities may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary or its nominee, as hereinafter provided. Section 202. Form of Face of Security. ------------------------ (a) The form of the face of any Series A Securities authenticated and delivered hereunder shall be substantially as follows: Unless and until (i) an Initial Security is sold under an effective Registration Statement or (ii) an Initial Security is exchanged for a Series B Security in connection with an effective Registration Statement, in each case pursuant to the Registration Rights Agreement, then such Initial Security shall bear the legend set forth below (the "Private Placement Legend") on the face thereof: THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION AS SET FORTH BELOW. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT ("RULE 144A")) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION, (2) AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY PRIOR TO THE DATE WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS -34- THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF THIS SECURITY) ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A INSIDE THE UNITED STATES, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) OUTSIDE THE UNITED STATES PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS IN AN OFFSHORE TRANSACTION WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (I) PURSUANT TO CLAUSES (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (II) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. AS USED HEREIN, THE TERMS "UNITED STATES," "OFFSHORE TRANSACTION," AND "U.S. PERSON" HAVE THE RESPECTIVE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. [Legend if Security is a Global Security] THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE OF A DEPOSITARY OR A SUCCESSOR DEPOSITARY. TRANSFERS OF THIS -35- GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTIONS 306 AND 307 OF THE INDENTURE. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT AND ANY SUCH CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THE OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATE IN THE MANNER AND TO THE EXTENT SET FORTH IN ARTICLE FOURTEEN OF THE INDENTURE TO THE OBLIGATIONS (INCLUDING INTEREST) OWED BY THE COMPANY AND CERTAIN OF ITS SUBSIDIARIES TO ALL SENIOR INDEBTEDNESS; AND EACH HOLDER HEREOF BY ITS ACCEPTANCE HEREOF, SHALL BE BOUND BY THE PROVISIONS OF THE SUBORDINATION AS SET FORTH IN SAID ARTICLE FOURTEEN OF THE INDENTURE." -36- SONIC AUTOMOTIVE, INC. ------------------ 11% SENIOR SUBORDINATED NOTE DUE 2008, SERIES A CUSIP NO. 83545GAA0 No. 1 $125,000,000 Sonic Automotive, Inc., a Delaware corporation (herein called the "Company," which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to ___________ or registered assigns, the principal sum of $125,000,000 United States dollars on August 1, 2008, at the office or agency of the Company referred to below, and to pay interest thereon from July 31, 1998, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semiannually on February 1 and August 1 in each year, commencing February 1, 1999 at the rate of 11% per annum, subject to adjustments as described in the second following paragraph, in United States dollars, until the principal hereof is paid or duly provided for. Interest shall be computed on the basis of a 360-day year comprised of twelve 30-day months. The Holder of this Series A Security is entitled to the benefits of the Registration Rights Agreement among the Company, the Guarantors and the Initial Purchasers, dated July 31, 1998, pursuant to which, subject to the terms and conditions thereof, the Company and the Guarantors are obligated to consummate the Exchange Offer pursuant to which the Holder of this Security (and related Guarantees) shall have the right to exchange this Security (and related Guarantees) for 11% Senior Subordinated Notes due 2008, Series B and related Guarantees (herein called the "Series B Securities") in like principal amount as provided therein. The Series A Securities and the Series B Securities are together (including related Guarantees) referred to as the "Securities." The Series A Securities rank pari passu in right of payment with the Series B Securities. In the event that (a) the Exchange Offer Registration Statement is not filed with the Commission on or prior to the 60th calendar day following the date of original issue of the Series A Securities, (b) the Exchange Offer Registration Statement has not been declared effective on or prior to the 135th calendar day following the date of original issue of the Series A Securities, (c) the Exchange Offer is not consummated or a Shelf Registration Statement is not declared effective, in either case, on or prior to the 165th calendar day following the date of original issue of the Series A Securities or (d) the Shelf Registration Statement is declared effective but shall thereafter become unusable for more than 30 days in the aggregate (each such event referred to in clauses (a) through (d) above, a "Registration Default"), the interest rate borne by the Series A -37- Securities shall be increased by one-quarter of one percent per annum upon the occurrence of each Registration Default, which rate (as increased aforesaid) will increase by an additional one quarter of one percent each 90-day period that such additional interest continues to accrue under any such circumstance, with an aggregate maximum increase in the interest rate equal to one percent (1%) per annum. The Shelf Registration Statement will be required to remain effective until the second anniversary of the Series A Securities. Following the cure of all Registration Defaults, the accrual of additional interest will cease and the interest rate will revert to the original rate. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or any Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the January 15 or July 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid, or duly provided for, and interest on such defaulted interest at the interest rate borne by the Series A Securities, to the extent lawful, shall forthwith cease to be payable to the Holder on such Regular Record Date, and may either be paid to the Person in whose name this Security (or any Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such defaulted interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by this Indenture not inconsistent with the requirements of such exchange, all as more fully provided in this Indenture. Payment of the principal of, premium, if any, and interest on, this Security, and exchange or transfer of the Security, will be made at the office or agency of the Company in The City of New York maintained for that purpose (which initially will be a corporate trust office of the Trustee located at 100 Wall Street, 20th Floor, New York, New York, 10005), or at such other office or agency as may be maintained for such purpose, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by check mailed to the address of the Person entitled thereto as such address shall appear on the Security Register. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. This Security is entitled to the benefits of the Guarantees by the Guarantors of the punctual payment when due and performance of the Indenture Obligations made in -38- favor of the Trustee for the benefit of the Holders. Reference is made to Article Thirteen of the Indenture for a statement of the respective rights, limitations of rights, duties and obligations under the Guarantees of the Guarantors. Unless the certificate of authentication hereon has been duly executed by the Trustee referred to on the reverse hereof or by the authenticating agent appointed as provided in the Indenture by manual signature of an authorized signer, this Security shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed by the manual or facsimile signature of its authorized officers. Sonic Automotive, Inc. By:______________________________________ Name: Title: Attest: _________________________________ Name: Title: -39- TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the 11% Senior Subordinated Notes due 2008, Series A referred to in the within-mentioned Indenture. U.S Bank Trust National Association, as Trustee By: _________________________________ Authorized Signer Dated: OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Security purchased by the Company pursuant to Section 1012 or Section 1014, as applicable, of the Indenture, check the Box: [ ]. If you wish to have a portion of this Security purchased by the Company pursuant to Section 1012 or Section 1014 as applicable, of the Indenture, state the amount (in original principal amount): $ ________________ Your Date: ____________________________ Signature:___________________________ (Sign exactly as your name appears on the other side of this Security) Signature Guarantee:________________________________________ -40- [Signature must be guaranteed by an eligible Guarantor Institution (banks, stock brokers, savings and loan associations and credit unions) with membership in an approved guarantee medallion program pursuant to Securities and Exchange Commission Rule 17Ad-15] (b) The form of the face of any Series B Securities authenticated and delivered hereunder shall be substantially as follows: [Legend if Security is a Global Security] THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE OF A DEPOSITARY OR A SUCCESSOR DEPOSITARY. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTIONS 306 AND 307 OF THE INDENTURE. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT AND ANY SUCH CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THE OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATE IN THE MANNER AND TO THE EXTENT -41- SET FORTH IN ARTICLE FOURTEEN OF THE INDENTURE TO THE OBLIGATIONS (INCLUDING INTEREST) OWED BY THE COMPANY AND CERTAIN OF ITS SUBSIDIARIES TO ALL SENIOR INDEBTEDNESS; AND EACH HOLDER HEREOF BY ITS ACCEPTANCE HEREOF, SHALL BE BOUND BY THE PROVISIONS OF THE SUBORDINATION AS SET FORTH IN SAID ARTICLE FOURTEEN OF THE INDENTURE." -42- Sonic Automotive, Inc. ------------------ 11% SENIOR SUBORDINATED NOTE DUE 2008, SERIES B CUSIP NO. 83545GAB8 No. __________ $_____________________ Sonic Automotive, Inc., a Delaware corporation (herein called the "Company," which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to ______________________ or registered assigns, the principal sum of _____________________ United States dollars on August 1, 2008, at the office or agency of the Company referred to below, and to pay interest thereon from July 31, 1998, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semiannually on February 1 and July 1 in each year, commencing February 1, 1999 at the rate of 11% per annum, in United States dollars, until the principal hereof is paid or duly provided for; provided that to the extent interest has not been paid or duly provided for with respect to the Series A Security exchanged for this Series B Security, interest on this Series B Security shall accrue from the most recent Interest Payment Date to which interest on the Series A Security which was exchanged for this Series B Security has been paid or duly provided for. Interest shall be computed on the basis of a 360-day year comprised of twelve 30-day months. This Series B Security was issued pursuant to the Exchange Offer pursuant to which the 11% Senior Subordinated Notes due 2008, Series A and related Guarantees (herein called the "Series A Securities") in like principal amount were exchanged for the Series B Securities and related Guarantees. The Series B Securities rank pari passu in right of payment with the Series A Securities. In addition, for any period in which the Series A Security exchanged for this Series B Security was outstanding, in the event that (a) the Exchange Offer Registration Statement is not filed with the Commission on or prior to the 30th calendar day following the date of original issue of the Series A Security, (b) the Exchange Offer Registration Statement has not been declared effective on or prior to the 135th calendar day following the date after the original issue of the Series A Security, (c) the Exchange Offer is not consummated or a Shelf Registration Statement is not declared effective, in either case, on or prior to the 135th calendar day following the date of original issue of the Series A Security or (d) the Shelf Registration Statement is declared effective but shall thereafter become unusable for more than 30 days in the aggregate (each such event referred to in clauses (a) through (d) above, a "Registration Default"), the interest rate borne by the Series A Securities shall be increased by one-quarter of one percent per -43- annum upon the occurrence of each Registration Default, which rate (as increased as aforesaid) will increase by an additional one quarter of one percent each 90-day period that such additional interest continues to accrue under any such circumstance, with an aggregate maximum increase in the interest rate equal to one percent (1%) per annum. The Shelf Registration Statement will be required to remain effective until the second anniversary of the Securities. Following the cure of all Registration Defaults the accrual of additional interest will cease and the interest rate will revert to the original rate; provided that, to the extent interest at such increased interest rate has been paid or duly provided for with respect to the Series A Security, interest at such increased interest rate, if any, on this Series B Security shall accrue from the most recent Interest Payment Date to which such interest on the Series A Security has been paid or duly provided for; provided, however, that, if after any such reduction in interest rate, a different event specified in clause (a), (b), (c) or (d) above occurs, the interest rate shall again be increased pursuant to the foregoing provisions. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or any Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the January 15 or July 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid, or duly provided for, and interest on such defaulted interest at the interest rate borne by the Series B Securities, to the extent lawful, shall forthwith cease to be payable to the Holder on such Regular Record Date, and may either be paid to the Person in whose name this Security (or any Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such defaulted interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in this Indenture. Payment of the principal of, premium, if any, and interest on, this Security, and exchange or transfer of the Security, will be made at the office or agency of the Company in The City of New York maintained for such purpose (which initially will be a corporate trust office of the Trustee located at 100 Wall Street, 20th Floor, New York, New York, 10005, or at such other office or agency as may be maintained for such purpose, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by check mailed to the address of the Person entitled thereto as such address shall appear on the Security Register. -44- Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. This Security is entitled to the benefits of the Guarantees by the Guarantors of the punctual payment when due and performance of the Indenture Obligations made in favor of the Trustee for the benefit of the Holders. Reference is made to Article Thirteen of the Indenture for a statement of the respective rights, limitations of rights, duties and obligations under the Guarantees of the Guarantors. Unless the certificate of authentication hereon has been duly executed by the Trustee referred to on the reverse hereof or by the authenticating agent appointed as provided in the Indenture by manual signature of an authorized signer, this Security shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed by the manual or facsimile signature of its authorized officers. Sonic Automotive, Inc. By:__________________________________ Title:_______________________________ Attest: - -------------------------------- Authorized Officer TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the 11% Senior Subordinated Notes due 2008, Series B referred to in the within-mentioned Indenture. U.S. Bank Trust National Association, as Trustee -45- By: _________________________________ Authorized Signer Dated: OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Security purchased by the Company pursuant to Section 1012 or Section 1014, as applicable, of the Indenture, check the Box: [ ]. -46- If you wish to have a portion of this Security purchased by the Company pursuant to Section 1012 or Section 1014 as applicable, of the Indenture, state the amount (in original principal amount): $ ___________________ Your Date:_______________________________ Signature:__________________________ (Sign exactly as your name appears on the other side of this Security) Signature Guarantee:_____________________________________ [Signature must be guaranteed by an eligible Guarantor Institution (banks, stock brokers, savings and loan associations and credit unions) with membership in an approved guarantee medallion program pursuant to Securities and Exchange Commission Rule 17Ad-15] Section 203. Form of Reverse of Securities. ----------------------------- (a) The form of the reverse of the Series A Securities shall be substantially as follows: Sonic Automotive, Inc. 11% Senior Subordinated Note due 2008, Series A This Security is one of a duly authorized issue of Securities of the Company designated as its 11% Senior Subordinated Notes due 2008, Series A (herein called the "Securities"), limited (except as otherwise provided in the Indenture referred to below) in aggregate principal amount to $125,000,000, issued under and subject to the terms of an indenture (herein called the "Indenture") dated as of July 1, 1998, among the Company, the Guarantors and U.S. Bank Trust National Association, as trustee (herein called the "Trustee," which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties, obligations and immunities thereunder of the Company, the Guarantors, the Trustee and the Holders of the Securities, and of the terms upon which the Securities are, and are to be, authenticated and delivered. -47- The Securities are subject to redemption at any time on or after August 1, 2003, at the option of the Company, in whole or in part, on not less than 30 nor more than 60 days' prior notice, in amounts of $1,000 or an integral multiple thereof, at the following redemption prices (expressed as percentages of the principal amount), if redeemed during the 12-month period beginning August 1 of the years indicated below: Redemption Year Price - ---- 2003........................... 105.50% 2004........................... 103.667% 2005........................... 101.833% and thereafter at 100% of the principal amount, in each case, together with accrued and unpaid interest, if any, to the Redemption Date (subject to the rights of Holders of record on relevant record dates to receive interest due on an Interest Payment Date). In addition, at any time on or prior to August 1, 2001, the Company may, at its option, use the net proceeds of one or more Public Equity Offerings to redeem up to an aggregate of 35% of the aggregate principal amount of Securities originally issued under the Indenture at a redemption price equal to 111% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if any, to the Redemption Date; provided that at least 65% aggregate principal amount the of Securities initially issued remains outstanding immediately after the occurrence of such redemption. In order to effect the foregoing redemption, the Company must mail a notice of redemption no later than 30 days after the closing of the related Public Equity Offering and must consummate such redemption within 60 days of the closing of the Public Equity Offering. If less than all of the Securities are to be redeemed, the Trustee shall select the Securities or portions thereof to be redeemed pro rata, by lot or by any other method the Trustee shall deem fair and reasonable. Upon the occurrence of a Change of Control, each Holder may require the Company to purchase such Holder's Securities in whole or in part in integral multiples of $1,000, at a purchase price in cash in an amount equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase, pursuant to a Change of Control Offer in accordance with the procedures set forth in the Indenture. Under certain circumstances, in the event the Net Cash Proceeds received by the Company from any Asset Sale, which proceeds are not used to repay permanently any Senior Indebtedness or Senior Guarantor Indebtedness or invested in Replacement Assets or exceeds a specified amount the Company will be required to apply such proceeds to the repayment of the Securities and certain Indebtedness ranking pari passu in right of payment to the Securities. -48- In the case of any redemption or repurchase of Securities in accordance with the Indenture, interest installments whose Stated Maturity is on or prior to the Redemption Date will be payable to the Holders of such Securities of record as of the close of business on the relevant Regular Record Date or Special Record Date referred to on the face hereof. Securities (or portions thereof) for whose redemption and payment provision is made in accordance with the Indenture shall cease to bear interest from and after the Redemption Date. In the event of redemption or repurchase of this Security in accordance with the Indenture in part only, a new Security or Securities for the unredeemed portion hereof shall be issued in the name of the Holder hereof upon the cancellation hereof. If an Event of Default shall occur and be continuing, the principal amount of all the Securities may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture contains provisions for defeasance at any time of (a) the entire Indebtedness on the Securities and (b) certain restrictive covenants and related Defaults and Events of Default, in each case upon compliance with certain conditions set forth therein. The Indenture permits, with certain exceptions (including certain amendments permitted without the consent of any Holders and certain amendments which require the consent of all the Holders) as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the Guarantors and the rights of the Holders under the Indenture and the Securities and the Guarantees at any time by the Company and the Trustee with the consent of the Holders of at least a majority in aggregate principal amount of the Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of at least a majority in aggregate principal amount of the Securities (100% of the Holders in certain circumstances) at the time Outstanding, on behalf of the Holders of all the Securities, to waive compliance by the Company and the Guarantors with certain provisions of the Indenture and the Securities and the Guarantees and certain past Defaults under the Indenture and the Securities and the Guarantees and their consequences. Any such consent or waiver by or on behalf of the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Security. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, any Guarantor or any other obligor on the Securities (in the event such Guarantor or such other obligor is obligated to make payments in respect of the Securities), which is absolute and -49- unconditional, to pay the principal of, premium, if any, and interest on, this Security at the times, place, and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in the Borough of Manhattan, The City of New York, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or its attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. Certificated securities shall be transferred to all beneficial holders in exchange for their beneficial interests in the Rule 144A Global Securities or the Regulation S Global Securities if (x) the Depositary notifies the Company that it is unwilling or unable to continue as Depositary for such Global Security and a successor Depositary is not appointed by the Company within 90 days or (y) there shall have occurred and be continuing an Event of Default and the Security Registrar has received a request from the Depositary. Upon any such issuance, the Trustee is required to register such certificated Series A Securities in the name of, and cause the same to be delivered to, such Person or Persons (or the nominee of any thereof). All such certificated Series A Securities would be required to include the Private Placement Legend. Series A Securities in certificated form are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, the Series A Securities are exchangeable for a like aggregate principal amount of Securities of a differing authorized denomination, as requested by the Holder surrendering the same. At any time when the Company is not subject to Sections 13 or 15(d) of the Exchange Act, upon the written request of a Holder of a Series A Security, the Company will promptly furnish or cause to be furnished such information as is specified pursuant to Rule 144A(d)(4) under the Securities Act (or any successor provision thereto) to such Holder or to a prospective purchaser of such Series A Security who such Holder informs the Company is reasonably believed to be a "Qualified Institutional Buyer" within the meaning of Rule 144A under the Securities Act, as the case may be, in order to permit compliance by such Holder with Rule 144A under the Securities Act. No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Company, any Guarantor, the Trustee and any agent of the Company, any Guarantor or -50- the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security is overdue, and neither the Company, any Guarantor, the Trustee nor any such agent shall be affected by notice to the contrary. THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES THEREOF. All terms used in this Security which are defined in the Indenture and not otherwise defined herein shall have the meanings assigned to them in the Indenture. [The Transferee Certificate, in the form of Appendix I hereto, will be attached to the Series A Security.] (b) The form of the reverse of the Series B Securities shall be substantially as follows: Sonic Automotive, Inc. 11% Senior Subordinated Note due 2008, Series B This Security is one of a duly authorized issue of Securities of the Company designated as its 11% Senior Subordinated Notes due 2008, Series B (herein called the "Securities"), limited (except as otherwise provided in the Indenture referred to below) in aggregate principal amount to $125,000,000, issued under and subject to the terms of an indenture (herein called the "Indenture") dated as of July 1, 1998, among the Company, the Guarantors and U.S. Bank Trust National Association, as trustee (herein called the "Trustee," which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties, obligations and immunities thereunder of the Company, the Guarantors, the Trustee and the Holders of the Securities, and of the terms upon which the Securities are, and are to be, authenticated and delivered. -51- The Securities are subject to redemption at any time on or after August 1, 2003, at the option of the Company, in whole or in part, on not less than 30 nor more than 60 days' prior notice, in amounts of $1,000 or an integral multiple thereof, at the following redemption prices (expressed as percentages of the principal amount), if redeemed during the 12-month period beginning August of the years indicated below: Redemption Year Price - ---- -------------- 2003........................... 105.50% 2004........................... 103.667% 2005........................... 101.833% and thereafter at 100% of the principal amount, in each case, together with accrued and unpaid interest, if any, to the Redemption Date (subject to the rights of Holders of record on relevant record dates to receive interest due on an Interest Payment Date). In addition, at any time on or prior to August 1, 2001, the Company may, at its option, use the net proceeds of one or more Public Equity Offerings to redeem up to an aggregate of 35% of the aggregate principal amount of Securities originally issued under the Indenture at a redemption price equal to 111% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if any, to the Redemption Date; provided that at least 65% aggregate principal amount of the Securities initially issued remains outstanding immediately after the occurrence of such redemption. In order to effect the foregoing redemption, the Company must mail a notice of redemption no later than 45 days after the closing of the related Public Equity Offering and must consummate such redemption within 60 days of the closing of the Public Equity Offering. If less than all of the Securities are to be redeemed, the Trustee shall select the Securities or portions thereof to be redeemed pro rata, by lot or by any other method the Trustee shall deem fair and reasonable. Upon the occurrence of a Change of Control, each Holder may require the Company to purchase such Holder's Securities in whole or in part in integral multiples of $1,000, at a purchase price in cash in an amount equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase, pursuant to Change of Control Offer and in accordance with the procedures set forth in the Indenture. Under certain circumstances, in the event the Net Cash Proceeds received by the Company from any Asset Sale, which proceeds are not used to repay permanently any Senior Indebtedness or Senior Guarantor Indebtedness or invested in Replacement Assets or exceeds a specified amount, the Company will be required to apply such proceeds to the repayment of the Securities and certain Indebtedness ranking pari passu in right of payment to the Securities. -52- In the case of any redemption or repurchase of Securities in accordance with the Indenture, interest installments whose Stated Maturity is on or prior to the Redemption Date will be payable to the Holders of such Securities of record as of the close of business on the relevant Regular Record Date or Special Record Date referred to on the face hereof. Securities (or portions thereof) for whose redemption and payment provision is made in accordance with the Indenture shall cease to bear interest from and after the Redemption Date. In the event of redemption or repurchase of this Security in accordance with the Indenture in part only, a new Security or Securities for the unredeemed portion hereof shall be issued in the name of the Holder hereof upon the cancellation hereof. If an Event of Default shall occur and be continuing, the principal amount of all the Securities may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture contains provisions for defeasance at any time of (a) the entire Indebtedness on the Securities and (b) certain restrictive covenants and related Defaults and Events of Default, in each case upon compliance with certain conditions set forth therein. The Indenture permits, with certain exceptions (including certain amendments permitted without the consent of any Holders and certain amendments which required the consent of all of the Holders) as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the Guarantors and the rights of the Holders under the Indenture and the Securities and the Guarantees at any time by the Company and the Trustee with the consent of the Holders of at least a majority in aggregate principal amount of the Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of at least a majority in aggregate principal amount of the Securities (100% of the Holders in certain circumstances) at the time Outstanding, on behalf of the Holders of all the Securities, to waive compliance by the Company and the Guarantors with certain provisions of the Indenture and the Securities and the Guarantees and certain past Defaults under the Indenture and the Securities and the Guarantees and their consequences. Any such consent or waiver by or on behalf of the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Security. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, any Guarantor or any other obligor on the Securities (in the event such Guarantor or such other obligor is obligated to make payments in respect of the Securities), which is absolute and -53- unconditional, to pay the principal of, and premium, if any, and interest on, this Security at the times, place, and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in the Borough of Manhattan, The City of New York, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or its attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. Certificated securities shall be transferred to all beneficial holders in exchange for their beneficial interests in the Rule 144A Global Securities or the Regulation S Global Securities if (x) the Depositary notifies the Company that it is unwilling or unable to continue as Depositary for such Global Security and a successor Depositary is not appointed by the Company within 90 days or (y) there shall have occurred and be continuing an Event of Default and the Security Registrar has received a request from the Depositary. Upon any such issuance, the Trustee is required to register such certificated Series B Securities in the name of, and cause the same to be delivered to, such Person or Persons (or the nominee of any thereof). Series B Securities in certificated form are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, the Series B Securities are exchangeable for a like aggregate principal amount of Securities of a differing authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Company, any Guarantor, the Trustee and any agent of the Company, any Guarantor or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security is overdue, and neither the Company, any Guarantor, the Trustee nor any such agent shall be affected by notice to the contrary. THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES THEREOF. All terms used in this Security which are defined in the Indenture and not otherwise defined herein shall have the meanings assigned to them in the Indenture. -54- [The Transferee Certificate, in the form of Appendix II hereto, will be attached to the Series B Security.] Section 204. Form of Guarantee. ----------------- The form of Guarantee shall be set forth on the Securities substantially as follows: GUARANTEE For value received, each of the undersigned hereby absolutely, fully and unconditionally and irrevocably guarantees, jointly and severally with each other Guarantor, to the holder of this Security the payment of principal of, premium, if any, and interest on this Security upon which these Guarantees are endorsed in the amounts and at the time when due and payable whether by declaration thereof, or otherwise, and interest on the overdue principal and interest, if any, of this Security, if lawful, and the payment or performance of all other obligations of the Company under the Indenture or the Securities, to the holder of this Security and the Trustee, all in accordance with and subject to the terms and limitations of this Security and Article Thirteen of the Indenture. This Guarantee will not become effective until the Trustee duly executes the certificate of authentication on this Security. These Guarantees shall be governed by and construed in accordance with the laws of the State of New York, without regard to conflict of law principles thereof. Dated: TOWN AND COUNTRY FORD INCORPORATED MARCUS DAVID CORPORATION FRONTIER OLDSMOBILE--CADILLAC, INC. SONIC DODGE, LLC SONIC CHRYSLER--PLYMOUTH--JEEP--EAGLE, LLC FORT MILL FORD, INC. TOWN AND COUNTRY CHRYSLER--PLYMOUTH--JEEP OF ROCK HILL, INC. FORT MILL CHRYSLER--PLYMOUTH--DODGE INC. LONE STAR FORD, INC. SONIC AUTOMOTIVE OF NEVADA, INC. SONIC AUTOMOTIVE OF TENNESSEE, INC. SONIC AUTOMOTIVE - 6025 INTERNATIONAL DRIVE, LLC SONIC AUTOMOTIVE OF NASHVILLE, LLC SONIC AUTOMOTIVE OF CHATTANOOGA, LLC TOWN AND COUNTRY JAGUAR, LLC TOWN AND COUNTRY CHRYSLER -55- --PLYMOUTH--JEEP, LLC TOWN AND COUNTRY DODGE OF CHATTANOOGA, LLC SONIC AUTOMOTIVE - 2490 SOUTH LEE HIGHWAY, LLC, TOWN AND COUNTRY FORD OF CLEVELAND, LLC FREEDOM FORD, INC. SONIC AUTOMOTIVE 5260 PEACHTREE INDUSTRIAL BLVD., LLC SONIC AUTOMOTIVE OF GEORGIA, INC. SONIC PEACHTREE INDUSTRIAL BLVD., L.P. SONIC AUTOMOTIVE - CLEARWATER, INC. SONIC AUTOMOTIVE 21699 U.S. HWY. 19 N., INC. SONIC AUTOMOTIVE COLLISION CENTER OF CLEARWATER, INC. SONIC AUTOMOTIVE - 1400 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE - 1455 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE - 1495 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE - 1500 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE - 3700 WEST BROAD STREET, COLUMBUS, INC. SONIC AUTOMOTIVE - 4000 WEST BROAD STREET, COLUMBUS, INC. SONIC AUTOMOTIVE 2424 LAURENS RD., GREENVILLE, INC. SONIC AUTOMOTIVE 2752 LAURENS RD., GREENVILLE, INC. SONIC AUTOMOTIVE - 5585 PEACHTREE INDUSTRIAL BLVD., LLC CAPITOL CHEVROLET AND IMPORTS, INC., SONIC AUTOMOTIVE - 1919 N. DIXIE HWY., NSB, INC. SONIC AUTOMOTIVE - 1307 N. DIXIE HWY., NSB, INC. SONIC AUTOMOTIVE - 1720 MASON AVE., DB, INC. SONIC AUTOMOTIVE - 3741 S. NOVA RD., PO,INC. SONIC AUTOMOTIVE - 241 RIDGEWOOD AVE., HH, INC. -56- SONIC AUTOMOTIVE - HWY. 153 at SHALLOWFORD ROAD, CHATTANOOGA, INC. By______________________________________________ Name: Title: Attest: ________________________ Name: Title: ARTICLE THREE THE SECURITIES Section 301. Title and Terms. --------------- The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is limited to $125,000,000 in principal amount of Securities, except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities pursuant to Section 303, 304, 305, 306, 307, 308, 906, 1012, 1015 or 1108. The Securities shall be known and designated as the "11% Senior Subordinated Notes due 2008" of the Company. The Stated Maturity of the Securities shall be August 1, 2008, and the Securities shall each bear interest at the rate of 11% per annum, as such interest rate may be adjusted as set forth in the Securities, from July 31, 1998, or from the most recent Interest Payment Date to which interest has been paid, payable semiannually on February 1 and August 1 in each year, commencing February 1, 1999, until the principal thereof is paid or duly provided for. Interest on any overdue principal, interest (to the extent lawful) or premium, if any, shall be payable on demand. The principal of, premium, if any, and interest on, the Securities shall be payable and the Securities shall be exchangeable and transferable at an office or agency of the Company in The City of New York maintained for such purposes (which initially will be a corporate trust office of the Trustee located at 100 Wall Street, 20th Floor, New York, New York, 10005); provided, however, that payment of interest may be made at the option of the Company by check mailed to addresses of the Persons entitled thereto as shown on the Security Register. -57- For all purposes hereunder, the Series A Securities and the Series B Securities will be treated as one class and are together referred to as the "Securities." The Series A Securities rank pari passu in right of payment with the Series B Securities. The Securities shall be subject to repurchase by the Company pursuant to an Offer as provided in Section 1012. Holders shall have the right to require the Company to purchase their Securities, in whole or in part, in the event of a Change of Control pursuant to Section 1014. The Securities shall be redeemable as provided in Article Eleven and in the Securities. The Indebtedness evidenced by these Securities shall be subordinated in right of payment with all other Senior Indebtedness. At the election of the Company, the entire Indebtedness on the Securities or certain of the Company's obligations and covenants and certain Events of Default thereunder may be defeased as provided in Article Four. Section 302. Denominations. -------------- The Securities shall be issuable only in fully registered form without coupons and only in denominations of $1,000 and any integral multiple thereof. Section 303. Execution, Authentication, Delivery and Dating. ---------------------------------------------- The Securities shall be executed on behalf of the Company by one of its Chairman of the Board, its President, its Chief Executive Officer, its Chief Financial Officer or one of its Vice Presidents under its corporate seal reproduced thereon attested by its Secretary or one of its Assistant Secretaries. The signatures of any of these officers on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities executed by the Company to the Trustee (with or without Guarantees endorsed thereon) for authentication, together with a Company Order for the authentication and delivery of such Securities; and the Trustee in -58- accordance with such Company Order shall authenticate and make available for delivery such Securities as provided in this Indenture and not otherwise. Each Security shall be dated the date of its authentication. No Security or Guarantee endorsed thereon shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein duly executed by the Trustee by manual signature of an authorized officer, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture. In case the Company or any Guarantor, pursuant to Article Eight, shall, in a single transaction or through a series of related transactions, be consolidated or merged with or into any other Person or shall sell, assign, convey, transfer, lease or otherwise dispose of all or substantially all of its properties and assets to any Person, and the successor Person resulting from such consolidation or surviving such merger, or into which the Company or such Guarantor shall have been merged, or the successor Person which shall have participated in the sale, assignment, conveyance, transfer, lease or other disposition as aforesaid, shall have executed an indenture supplemental hereto with the Trustee pursuant to Article Eight, any of the Securities authenticated or delivered prior to such consolidation, merger, sale, assignment, conveyance, transfer, lease or other disposition may, from time to time, at the request of the successor Person, be exchanged for other Securities executed in the name of the successor Person with such changes in phraseology and form as may be appropriate, but otherwise in substance of like tenor as the Securities surrendered for such exchange and of like principal amount; and the Trustee, upon Company Request of the successor Person, shall authenticate and deliver Securities as specified in such request for the purpose of such exchange. If Securities shall at any time be authenticated and delivered in any new name of a successor Person pursuant to this Section 303 in exchange or substitution for or upon registration of transfer of any Securities, such successor Person, at the option of the Holders but without expense to them, shall provide for the exchange of all Securities at the time Outstanding for Securities authenticated and delivered in such new name. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Securities on behalf of the Trustee. Unless limited by the terms of such appointment, an authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as any Security Registrar or Paying Agent to deal with the Company and its Affiliates. - 59 - If an officer whose signature is on a Security no longer holds that office at the time the Trustee authenticates such Security such Security shall be valid nevertheless. Section 304. Temporary Securities. Pending the preparation of definitive Securities, the Company may execute, and upon Company Order the Trustee shall authenticate and make available for delivery, temporary Securities which are printed, lithographed, typewritten or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as conclusively evidenced by their execution of such Securities. If temporary Securities are issued, the Company will cause definitive Securities to be prepared without unreasonable delay. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at the office or agency of the Company designated for such purpose pursuant to Section 1002, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities, the Company shall execute and the Trustee (in accordance with a Company Order for the authentication of such Securities) shall authenticate and make available for delivery in exchange therefor a like principal amount of definitive Securities of authorized denominations. Until so exchanged the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. Section 305. Registration, Registration of Transfer and Exchange. The Company shall cause the Trustee to keep, so long as it is the Security Registrar, at the Corporate Trust Office of the Trustee, or such other office as the Trustee may designate, a register (the register maintained in such office or in any other office or agency designated pursuant to Section 1002 being herein sometimes referred to as the "Security Register") in which, subject to such reasonable regulations as the Security Registrar may prescribe, the Company shall provide for the registration of Securities and of transfers of Securities. The Trustee shall initially be the "Security Registrar" for the purpose of registering Securities and transfers of Securities as herein provided. The Company may change the Security Registrar or appoint one or more co-Security Registrars without notice. Upon surrender for registration of transfer of any Security at the office or agency of the Company designated pursuant to Section 1002, the Company shall execute, and the Trustee shall (in accordance with a Company Order for the authentication of such Securities) authenticate and make available for delivery, in the name of the designated transferee or transferees, one or more new Securities of the same series of any authorized denomination or denominations, of a like aggregate principal amount. - 60 - Furthermore, any Holder of the Global Security shall, by acceptance of such Global Security, agree that transfers of beneficial interests in such Global Security may be effected only through a book-entry system maintained by the Holder of such Global Security (or its agent), and that ownership of a beneficial interest in a Security shall be required to be reflected in a book entry. At the option of the Holder, Securities may be exchanged for other Securities of any authorized denomination or denominations, of a like aggregate principal amount, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall (in accordance with a Company Order for the authentication of such Securities) authenticate and make available for delivery, Securities of the same series which the Holder making the exchange is entitled to receive; provided that no exchange of Series A Securities for Series B Securities shall occur until an Exchange Offer Registration Statement shall have been declared effective by the Commission and that the Series A Securities exchanged for the Series B Securities shall be canceled. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same Indebtedness, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Every Security presented or surrendered for registration of transfer, or for exchange, repurchase or redemption, shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made to a Holder for any registration of transfer, exchange or redemption of Securities, except for any tax or other governmental charge that may be imposed in connection therewith, other than exchanges pursuant to Sections 303, 304, 305, 308, 906, 1012, 1014 or 1108 not involving any transfer. The Company shall not be required (a) to issue, register the transfer of or exchange any Security during a period beginning at the opening of business 15 days before the mailing of a notice of redemption of the Securities selected for redemption under Section 1104 and ending at the close of business on the day of such mailing or (b) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of Securities being redeemed in part. Every Security shall be subject to the restrictions on transfer provided in the legend required to be set forth on the face of each Security pursuant to Section 202, and the restrictions set forth in this Section 305, and the Holder of each Security, by such - 61 - Holder's acceptance thereof (or interest therein), agrees to be bound by such restrictions on transfer. Except as provided in the preceding paragraph, any Security authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, any Global Security, whether pursuant to this Section 305, Section 304, 308, 906 or 1108 or otherwise, shall also be a Global Security and bear the legend specified in Section 202. Section 306. Book Entry Provisions for Global Securities. (a) Each Global Security initially shall (i) be registered in the name of the Depositary for such Global Security or the nominee of such Depositary, (ii) be deposited with, or on behalf of, the Depositary or with the Trustee as custodian for such Depositary and (iii) bear legends as set forth in Section 202. Members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Indenture with respect to any Global Security held on their behalf by the Depositary, or the Trustee as its custodian, or under such Global Security, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or shall impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of a holder of any Security. (b) Notwithstanding any other provision in this Indenture, no Global Security may be exchanged in whole or in part for Securities registered, and no transfer of a Global Security in whole or in part may be registered, in the name of any Person other than the Depositary for such Global Security or a nominee thereof unless (i) such Depositary (A) has notified the Company that it is unwilling or unable to continue as Depositary for such Global Security or (B) has ceased to be a clearing agency registered as such under the Exchange Act, and in either case the Company fails to appoint a successor Depositary, (ii) the Company, at its option, executes and delivers to the Trustee a Company Order stating that it elects to cause the issuance of the Securities in certificated form and that all Global Securities shall be exchanged in whole for Securities that are not Global Securities (in which case such exchange shall be effected by the Trustee) or (iii) there shall have occurred and be continuing an Event of Default or any event which after notice or lapse of time or both would be an Event of Default with respect to such Global Security. - 62 - (c) If any Global Security is to be exchanged for other Securities or canceled in whole, it shall be surrendered by or on behalf of the Depositary or its nominee to the Trustee, as Security Registrar, for exchange or cancellation as provided in this Article Three. If any Global Security is to be exchanged for other Securities or canceled in part, or if another Security is to be exchanged in whole or in part for a beneficial interest in any Global Security, then either (i) such Global Security shall be so surrendered for exchange or cancellation as provided in this Article Three or (ii) the principal amount thereof shall be reduced or increased by an amount equal to the portion thereof to be so exchanged or canceled, or equal to the principal amount of such other Security to be so exchanged for a beneficial interest therein, as the case may be, by means of an appropriate adjustment made on the records of the Trustee, as Security Registrar, whereupon the Trustee, in accordance with the Applicable Procedures, shall instruct the Depositary or its authorized representative to make a corresponding adjustment to its records. Upon any such surrender or adjustment of a Global Security, the Trustee shall, subject to this Section 306(c) and as otherwise provided in this Article Three, authenticate and deliver any Securities issuable in exchange for such Global Security (or any portion thereof) to or upon the order of, and registered in such names as may be directed by, the Depositary or its authorized representative. Upon the request of the Trustee in connection with the occurrence of any of the events specified in the preceding paragraph, the Company shall promptly make available to the Trustee a reasonable supply of Securities that are not in the form of Global Securities. The Trustee shall be entitled to rely upon any order, direction or request of the Depositary or its authorized representative which is given or made pursuant to this Article Three if such order, direction or request is given or made in accordance with the Applicable Procedures. (d) Every Security authenticated and delivered upon registration of transfer of, or in exchange for or in lieu of, a Global Security or any portion thereof, whether pursuant to this Article Three or otherwise, shall be authenticated and delivered in the form of, and shall be, a Global Security, unless such Security is registered in the name of a Person other than the Depositary for such Global Security or a nominee thereof. (e) The Depositary or its nominee, as registered owner of a Global Security, shall be the Holder of such Global Security for all purposes under this Indenture and the Securities, and owners of beneficial interests in a Global Security shall hold such interests pursuant to the Applicable Procedures. Accordingly, any such owner's beneficial interest in a Global Security will be shown only on, and the transfer of such interest shall be effected only through, records maintained by the Depositary or its nominee or its Agent Members. - 63 - Section 307. Special Transfer and Exchange Provisions. (a) Certain Transfers and Exchanges. Transfers and exchanges of Securities and beneficial interests in a Global Security of the kinds specified in this Section 307 shall be made only in accordance with this Section 307. (i) Rule 144A Global Security to Regulation S Global Security. If the owner of a beneficial interest in the Rule 144A Global Security wishes at any time to transfer such interest to a Person who wishes to acquire the same in the form of a beneficial interest in the Regulation S Global Security, such transfer may be effected only in accordance with the provisions of this paragraph and paragraph (iv) below and subject to the Applicable Procedures. Upon receipt by the Trustee, as Security Registrar, of (a) an order given by the Depositary or its authorized representative directing that a beneficial interest in the Regulation S Global Security in a specified principal amount be credited to a specified Agent Member's account and that a beneficial interest in the Rule 144A Global Security in an equal principal amount be debited from another specified Agent Member's account and (b) a Regulation S Certificate in the form of Exhibit A hereto, satisfactory to the Trustee and duly executed by the owner of such beneficial interest in the Rule 144A Global Security or his attorney duly authorized in writing, then the Trustee, as Security Registrar but subject to paragraph (iv) below, shall reduce the principal amount of the Rule 144A Global Security and increase the principal amount of the Regulation S Global Security by such specified principal amount as provided in Section 306(c). (ii) Regulation S Global Security to Rule 144A Global Security. If the owner of a beneficial interest in the Regulation S Global Security wishes at any time to transfer such interest to a Person who wishes to acquire the same in the form of a beneficial interest in the Rule 144A Global Security, such transfer may be effected only in accordance with this paragraph (ii) and subject to the Applicable Procedures. Upon receipt by the Trustee, as Security Registrar, of (a) an order given by the Depositary or its authorized representative directing that a beneficial interest in the Rule 144A Global Security in a specified principal amount be credited to a specified Agent Member's account and that a beneficial interest in the Regulation S Global Security in an equal principal amount be debited from another specified Agent Member's account and (b) if such transfer is to occur during the Restricted Period, a Restricted Securities Certificate in the form of Exhibit B hereto, satisfactory to the Trustee and duly executed by the owner of such beneficial interest in the Regulation S Global Security or his attorney duly authorized in writing, then the Trustee, as Security - 64 - Registrar, shall reduce the principal amount of the Regulation S Global Security and increase the principal amount of the Rule 144A Global Security by such specified principal amount as provided in Section 306(c). (iii) Exchanges between Global Security and Non-Global Security. A beneficial interest in a Global Security may be exchanged for a Security that is not a Global Security as provided in Section 307(b), provided that, if such interest is a beneficial interest in the Rule 144A Global Security, or if such interest is a beneficial interest in the Regulation S Global Security and such exchange is to occur during the Restricted Period, then such interest shall bear the Private Placement Legend (subject in each case to Section 307(b). (iv) Regulation S Global Security to be Held Through Euroclear or Cedel during Restricted Period. The Company shall use its best efforts to cause the Depositary to ensure that, until the expiration of the Restricted Period, beneficial interests in the Regulation S Global Security may be held only in or through accounts maintained at the Depositary by Euroclear or Cedel (or by Agent Members acting for the account thereof), and no person shall be entitled to effect any transfer or exchange that would result in any such interest being held otherwise than in or through such an account; provided that this paragraph (iv) shall not prohibit any transfer or exchange of such an interest in accordance with paragraph (ii) above. (b) Private Placement Legends. Rule 144A Securities and their Successor Securities and Regulation S Securities and their Successor Securities shall bear a Private Placement Legend, subject to the following: (i) subject to the following clauses of this Section 307(b), a Security or any portion thereof which is exchanged, upon transfer or otherwise, for a Global Security or any portion thereof shall bear the Private Placement Legend borne by such Global Security while represented thereby; (ii) subject to the following Clauses of this Section 307(b), a new Security which is not a Global Security and is issued in exchange for another Security (including a Global Security) or any portion thereof, upon transfer or otherwise, shall bear the Private Placement Legend borne by such other Security; (iii) Exchange Securities, and all other Securities sold or otherwise disposed of pursuant to an effective registration statement under the Securities Act, together with their respective Successor Securities, shall not bear a Private Placement Legend; - 65 - (iv) at any time after the Securities may be freely transferred without registration under the Securities Act or without being subject to transfer restrictions pursuant to the Securities Act, a new Security which does not bear a Private Placement Legend may be issued in exchange for or in lieu of a Security (other than a Global Security) or any portion thereof which bears such a legend if the Trustee has received an Unrestricted Securities Certificate substantially in the form of Exhibit C hereto, satisfactory to the Trustee and duly executed by the Holder of such legended Security or his attorney duly authorized in writing, and after such date and receipt of such certificate, the Trustee shall authenticate and deliver such a new Security in exchange for or in lieu of such other Security as provided in this Article Three; (v) a new Security which does not bear a Private Placement Legend may be issued in exchange for or in lieu of a Security (other than a Global Security) or any portion thereof which bears such a legend if, in the Company's judgment, placing such a legend upon such new Security is not necessary to ensure compliance with the registration requirements of the Securities Act, and the Trustee, at the direction of the Company, shall authenticate and deliver such a new Security as provided in this Article Three; and (vi) notwithstanding the foregoing provisions of this Section 307(b), a Successor Security of a Security that does not bear a particular form of Private Placement Legend shall not bear such form of legend unless the Company has reasonable cause to believe that such Successor Security is a "restricted security" within the meaning of Rule 144, in which case the Trustee, at the direction of the Company, shall authenticate and deliver a new Security bearing a Private Placement Legend in exchange for such Successor Security as provided in this Article Three. By its acceptance of any Security bearing the Private Placement Legend, each Holder of such a Security acknowledges the restrictions on transfer of such Security set forth in this Indenture and in the Private Placement Legend and agrees that it will transfer such Security only as provided in this Indenture. The Security Registrar shall retain copies of all letters, notices and other written communications received pursuant to Section 306 or this Section 307. The Company shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time upon the giving of reasonable written notice to the Security Registrar. - 66 - In the event that Regulation S is amended during the term of this Indenture to alter the applicable holding period, all reference in this Indenture to a holding period for Non-U.S. Persons will be deemed to include such amendment. Section 308. Mutilated, Destroyed, Lost and Stolen Securities. If (a) any mutilated Security is surrendered to the Trustee, or (b) the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Security, and there is delivered to the Company, any Guarantor and the Trustee, such security or indemnity, in each case, as may be required by them to save each of them harmless, then, in the absence of notice to the Company, any Guarantor or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and upon a Company Request the Trustee shall authenticate and deliver, in exchange for any such mutilated Security or in lieu of any such destroyed, lost or stolen Security, a replacement Security of like tenor and principal amount, bearing a number not contemporaneously outstanding and each Guarantor shall execute a replacement Guarantee. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a replacement Security, pay such Security. Upon the issuance of any replacement Securities under this Section, the Company may require the payment of a sum sufficient to pay all documentary, stamp or similar issue or transfer taxes or other governmental charges that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every replacement Security and Guarantee issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company and any Guarantor, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. Section 309. Payment of Interest; Interest Rights Preserved. Interest on any Security which is payable, and is punctually paid or duly provided for, on the Stated Maturity of such interest shall be paid to the Person in whose - 67 - name the Security (or any Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest payment. Any interest on any Security which is payable, but is not punctually paid or duly provided for, on the Stated Maturity of such interest, and interest on such defaulted interest at the then applicable interest rate borne by the Securities, to the extent lawful (such defaulted interest and interest thereon herein collectively called "Defaulted Interest"), shall forthwith cease to be payable to the Holder on the Regular Record Date; and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in Subsection (a) or (b) below: (a) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities (or any relevant Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security and the date (not less than 30 days after such notice) of the proposed payment (the "Special Payment Date"), and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the Special Payment Date, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this Subsection provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the Special Payment Date and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company in writing of such Special Record Date. In the name and at the expense of the Company, the Trustee shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder at its address as it appears in the Security Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date and Special Payment Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities are registered on such Special Record Date and shall no longer be payable pursuant to the following Subsection (b). (b) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as - 68 - may be required by this Indenture not inconsistent with the requirements of such exchange, if, after written notice given by the Company to the Trustee of the proposed payment pursuant to this Subsection, such payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section 309, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. Section 310. CUSIP Numbers. The Company in issuing the Securities may use "CUSIP" numbers (if then generally in use), and the Company, or the Trustee on behalf of the Company, shall use CUSIP numbers in notices of redemption or exchange as a convenience to Holders; provided, however, that any such notice shall state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of redemption or exchange and that reliance may be placed only on the other identification numbers printed on the Securities; and provided further, however, that failure to use CUSIP numbers in any notice of redemption or exchange shall not affect the validity or sufficiency of such notice. Section 311. Persons Deemed Owners. Prior to due presentment of a Security for registration of transfer, the Company, any Guarantor, the Trustee and any agent of the Company, any Guarantor or the Trustee may treat the Person in whose name any Security is registered as the owner of such Security for the purpose of receiving payment of principal of, premium, if any, and (subject to Section 309) interest on, such Security and for all other purposes whatsoever, whether or not such Security is overdue, and neither the Company, any Guarantor, the Trustee nor any agent of the Company, any Guarantor or the Trustee shall be affected by notice to the contrary. Section 312. Cancellation. All Securities surrendered for payment, purchase, redemption, registration of transfer or exchange shall be delivered to the Trustee and, if not already canceled, shall be promptly canceled by it. The Company and any Guarantor may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company or such Guarantor may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly canceled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities canceled as provided in this Section 312, except as expressly permitted by this Indenture. All canceled Securities held by the Trustee shall be returned to the Company. The Trustee - 69 - shall provide the Company a list of all Securities that have been canceled from time to time as requested by the Company. Section 313. Computation of Interest. Interest on the Securities shall be computed on the basis of a 360-day year comprised of twelve 30-day months. ARTICLE FOUR DEFEASANCE AND COVENANT DEFEASANCE Section 401. Company's Option to Effect Defeasance or Covenant Defeasance. The Company may, at its option by Board Resolution, at any time, with respect to the Securities, elect to have either Section 402 or Section 403 be applied to all of the Outstanding Securities (the "Defeased Securities"), upon compliance with the conditions set forth below in this Article Four. Section 402. Defeasance and Discharge. Upon the Company's exercise under Section 401 of the option applicable to this Section 402, the Company, each Guarantor and any other obligor upon the Securities, if any, shall be deemed to have been discharged from its obligations with respect to the Defeased Securities on the date the conditions set forth in Section 404 below are satisfied (hereinafter, "defeasance"). For this purpose, such defeasance means that the Company, each Guarantor and any other obligor under this Indenture shall be deemed to have paid and discharged the entire Indebtedness represented by the Defeased Securities, which shall thereafter be deemed to be "Outstanding" only for the purposes of Section 405 and the other Sections of this Indenture referred to in (a) and (b) below, and to have satisfied all its other obligations under such Securities and this Indenture insofar as such Securities are concerned (and the Trustee, at the expense of the Company and upon Company Request, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of Defeased Securities to receive, solely from the trust fund described in Section 404 and as more fully set forth in such Section, payments in respect of the principal of, premium, if any, and interest on, such Securities, when such payments are due, (b) the Company's obligations with respect to such Defeased Securities under Sections 304, 305, 308, 1002 and 1003, (c) the rights, powers, trusts, duties and immunities of the Trustee hereunder, including, without limitation, the Trustee's rights under Section 607, and (d) this Article Four. Subject to compliance with this Article - 70 - Four, the Company may exercise its option under this Section 402 notwithstanding the prior exercise of its option under Section 403 with respect to the Securities. Section 403. Covenant Defeasance. Upon the Company's exercise under Section 401 of the option applicable to this Section 403, the Company and each Guarantor shall be released from itsobligations under any covenant or provision contained or referred to in Sections 1005 through 1020, inclusive, and the provisions of clause (iii) of Section 801(a), with respect to the Defeased Securities, on and after the date the conditions set forth in Section 404 below are satisfied (hereinafter, "covenant defeasance"), and the Defeased Securities shall thereafter be deemed to be not "Outstanding" for the purposes of any direction, waiver, consent or declaration or Act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "Outstanding" for all other purposes hereunder. For this purpose, such covenant defeasance means that, with respect to the Defeased Securities, the Company and each Guarantor may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such Section, whether directly or indirectly, by reason of any reference elsewhere herein to any such Section or by reason of any reference in any such Section to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 501(c), (d), (f) or (g) but, except as specified above, the remainder of this Indenture and such Defeased Securities shall be unaffected thereby. Section 404. Conditions to Defeasance or Covenant Defeasance. The following shall be the conditions to application of either Section 402 or Section 403 to the Defeased Securities: (1) The Company shall irrevocably have deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Securities, (a) cash in United States dollars, (b) U.S. Government Obligations, or (c) a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants or a nationally recognized investment banking firm expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee to pay and discharge, the principal of, premium, if any, and interest on, the Defeased Securities, on the Stated Maturity of such principal or interest (or on any date after August 1, 2003 (such date being referred to as the "Defeasance Redemption Date") if at or prior to electing to exercise either its option applicable to Section 402 or its option applicable to Section 403, the Company has delivered to the Trustee an irrevocable notice to redeem the Defeased Securities on the Defeasance Redemption Date). For this purpose, "U.S. - 71 - Government Obligations" means securities that are (i) direct obligations of the United States of America for the timely payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the timely payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a Depositary receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act), as custodian with respect to any such U.S. Government Obligation or a specific payment of principal of or interest on any such U.S. Government Obligation held by such custodian for the account of the holder of such Depositary receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such Depositary receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal of or interest on the U.S. Government Obligation evidenced by such Depositary receipt; (2) In the case of an election under Section 402, the Company shall have delivered to the Trustee an Opinion of Independent Counsel in the United States stating that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date hereof, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such Opinion of Independent Counsel in the United States shall confirm that, the Holders of the Outstanding Securities will not recognize income, gain or loss for federal income tax purposes as a result of such defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred; (3) In the case of an election under Section 403, the Company shall have delivered to the Trustee an Opinion of Independent Counsel in the United States to the effect that the Holders of the Outstanding Securities will not recognize income, gain or loss for federal income tax purposes as a result of such covenant defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; (4) No Default or Event of shall have occurred and be continuing on the date of such deposit or insofar as Section 501(h) or (i) is concerned, at any time during the period ending on the 91st day after the date of deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period) (other than a Default which results from the borrowing of amounts to finance the defeasance and which borrowing does not result in a breach or violation of, or constitute a default, under any other material agreement or instrument to which the Company or any Restricted Subsidiary is a party or to which it is bound); - 72 - (5) Such defeasance or covenant defeasance shall not cause the Trustee for the Securities to have a conflicting interest in violation of and for purposes of the Trust Indenture Act with respect to any other securities of the Company or any Guarantor; (6) Such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a Default under, this Indenture or any other material agreement or instrument to which the Company, any Guarantor or any Restricted Subsidiary is a party or by which it is bound; (7) Such defeasance or covenant defeasance shall not result in the trust arising from such deposit constituting an investment company within the meaning of the Investment Company Act of 1940, as amended, unless such trust shall be registered under such Act or exempt from registration thereunder; (8) The Company shall have delivered to the Trustee an Opinion of Independent Counsel in the United States to the effect that (assuming that no Holder of any Securities would be considered an insider of the Company under any applicable bankruptcy or insolvency law) after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (9) The Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the holders of the Securities or any Guarantee over the other creditors of the Company or any Guarantor with the intent of defeating, hindering, delaying or defrauding creditors of the Company, any Guarantor or others; (10) No event or condition shall exist that would prevent the Company from making payments of the principal of, premium, if any, and interest on the Securities on the date of such deposit or at any time ending on the 91st day after the date of such deposit; and (11) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Independent Counsel, each stating that all conditions precedent provided for relating to either the defeasance under Section 402 or the covenant defeasance under Section 403 (as the case may be) have been complied with. Opinions of Counsel or Opinions of Independent Counsel required to be delivered under this Section shall be in form and substance reasonably satisfactory to the Trustee may have qualifications customary for opinions of the type required and counsel delivering such opinions may rely on certificates of the Company or government or other officials customary for opinions of the type required, which certificates shall be limited as to matters of fact, including that various financial covenants have been complied with. - 73 - Section 405. Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions. Subject to the provisions of the last paragraph of Section 1003, all United States dollars and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee pursuant to Section 404 in respect of the Defeased Securities shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any Paying Agent (excluding the Company or any of its Affiliates acting as Paying Agent), as the Trustee may determine, to the Holders of such Securities of all sums due and to become due thereon in respect of principal, premium, if any, and interest, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 404 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is imposed, assessed or for the account of the Holders of the Defeased Securities. Anything in this Article Four to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any United States dollars or U.S. Government Obligations held by it as provided in Section 404 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect defeasance or covenant defeasance. Section 406. Reinstatement. If the Trustee or Paying Agent is unable to apply any United States dollars or U.S. Government Obligations in accordance with Section 402 or 403, as the case may be, by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under this Indenture and the Securities and any Guarantor's obligations under any Guarantee shall be revived and reinstated, with present and prospective effect, as though no deposit had occurred pursuant to Section 402 or 403, as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such United States dollars or U.S. Government Obligations in accordance with Section 402 or 403, as the case may be; provided, however, that if the Company makes any payment to the Trustee or Paying Agent of principal of, premium, if any, or interest on any Security following the reinstatement of its obligations, the Trustee or Paying Agent shall promptly pay any such amount to the Holders of the Securities and the Company shall be subrogated to the rights - 74 - of the Holders of such Securities to receive such payment from the United States dollars and U.S. Government Obligations held by the Trustee or Paying Agent. ARTICLE FIVE REMEDIES Section 501. Events of Default. "Event of Default," wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) there shall be a default in the payment of any interest on any Security when it becomes due and payable, and such default shall continue for a period of 30 days (whether or not prohibited by the subordination provisions of this Indenture); (b) there shall be a default in the payment of the principal of (or premium, if any, on) any Security at its Maturity (upon acceleration, optional or mandatory redemption, required repurchase or otherwise) (whether or not prohibited by the subordination provisions of this Indenture); (c) (i) there shall be a default in the performance, or breach, of any covenant or agreement of the Company or any Guarantor under this Indenture or any Guarantee (other than a default in the performance, or breach, of a covenant or agreement which is specifically dealt with in clause (a), (b) or in clause (ii), (iii) or (iv) of this clause (c)) and such default or breach shall continue for a period of 60 days after written notice (30 days in the case of a default under Section 1008 or Section 1009 herein) has been given, by certified mail, (x) to the Company by the Trustee or (y) to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the outstanding Securities; (ii) there shall be a default in the performance or breach of the provisions of Article Eight; (iii) the Company shall have failed to consummate an Offer in accordance with the provisions of Section 1012; or (iv) the Company shall have failed to consummate a Change of Control Offer in accordance with the provisions of Section 1014; (d) one or more defaults, individually or in the aggregate, shall have occurred under any of the agreements, indentures or instruments under which the Company or any Restricted Subsidiary then has outstanding Indebtedness in excess of $20 million in principal amount, individually or in the aggregate, and either (i) such default results from the failure to pay such Indebtedness at its stated final maturity or (ii) such default or defaults resulted in the acceleration of the maturity of such Indebtedness; - 75 - (e) any Guarantee shall for any reason cease to be, or shall for any reason be asserted in writing by any Guarantor or the Company not to be, in full force and effect and enforceable in accordance with its terms, except to the extent contemplated by this Indenture and any such Guarantee; (f) one or more final judgments, orders or decrees (not subject to appeal) of any court or regulatory or administrative agency for the payment of money in excess of $20 million, either individually or in the aggregate (exclusive of any portion of any such payment covered by insurance, if and to the extent the insurer has acknowledged in writing its liability therefor), shall be rendered against the Company, any Guarantor or any Subsidiary or any of their respective properties and shall not be discharged or fully binded and there shall have been a period of 60 consecutive days during which a stay of enforcement of such judgment or order, by reason of an appeal or otherwise, shall not be in effect; (g) any holder or holders of at least $20 million in aggregate principal amount of Indebtedness of the Company, any Guarantor or any Restricted Subsidiary after a default under such Indebtedness shall notify the Trustee of the intended sale or disposition of any assets of the Company, any Guarantor or any Subsidiary that have been pledged to or for the benefit of such holder or holders to secure such Indebtedness or shall commence proceedings, or take any action (including by way of set-off), to retain in satisfaction of such Indebtedness or to collect on, seize, dispose of or apply in satisfaction of Indebtedness, assets of the Company, any Guarantor or any Restricted Subsidiary (including funds on deposit or held pursuant to lock-box and other similar arrangements); (h) there shall have been the entry by a court of competent jurisdiction of (i) a decree or order for relief in respect of the Company or any Significant Restricted Subsidiary in an involuntary case or proceeding under any applicable Bankruptcy Law or (ii) a decree or order adjudging the Company or any Significant Restricted Subsidiary bankrupt or insolvent, or seeking reorganization, arrangement, adjustment or composition of or in respect of the Company or any Significant Restricted Subsidiary under any applicable federal or state law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or any Significant Restricted Subsidiary or of any substantial part of their respective properties, or ordering the winding up or liquidation of their respective affairs, and any such decree or order for relief shall continue to be in effect, or any such other decree or order shall be unstayed and in effect, for a period of 60 consecutive days; or (i) (i) the Company or any Significant Restricted Subsidiary commences a voluntary case or proceeding under any applicable Bankruptcy Law or any other case or proceeding to be adjudicated bankrupt or insolvent, (ii) the Company or any Significant Restricted Subsidiary consents to the entry of a decree or order for relief in respect of the Company or such Significant Restricted Subsidiary in an involuntary case or proceeding - 76 - under any applicable Bankruptcy Law or to the commencement of any bankruptcy or insolvency case or proceeding against it, (iii) the Company or any Significant Restricted Subsidiary files a petition or answer or consent seeking reorganization or relief under any applicable federal or state law, (iv) the Company or any Significant Restricted Subsidiary (1) consents to the filing of such petition or the appointment of, or taking possession by, a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of the Company or such Significant Restricted Subsidiary or of any substantial part of their respective properties, (2) makes an assignment for the benefit of creditors or (3) admits in writing its inability to pay its debts generally as they become due or (v) the Company or any Significant Restricted Subsidiary takes any corporate action in furtherance of any such actions in this paragraph (i). Section 502. Acceleration of Maturity; Rescission and Annulment. If an Event of Default (other than an Event of Default specified in Sections 501(h) and (i) shall occur and be continuing with respect to this Indenture, the Trustee or the Holders of not less than 25% in aggregate principal amount of the Securities then Outstanding may, and the Trustee at the request of such Holders shall, declare all unpaid principal of, premium, if any, and accrued interest on all Securities to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by the Holders of the Securities) and upon any such declaration, such principal, premium, if any, and interest shall become due and payable immediately. If an Event of Default specified in clause (h) or (i) of Section 501 occurs and is continuing, then all the Securities shall ipso facto become and be due and payable immediately in an amount equal to the principal amount of the Securities, together with accrued and unpaid interest, if any, to the date the Securities become due and payable, without any declaration or other act on the part of the Trustee or any Holder. Thereupon, the Trustee may, at its discretion, proceed to protect and enforce the rights of the Holders of the Securities by appropriate judicial proceedings. After a declaration of acceleration with respect to the Securities, but before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in aggregate principal amount of the Securities Outstanding, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if: (a) the Company has paid or deposited with the Trustee a sum sufficient to pay (i) all sums paid or advanced by the Trustee under this Indenture and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, (ii) all overdue interest on all Outstanding Securities, - 77 - (iii) the principal of and premium, if any, on any Outstanding Securities which have become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Securities, and (iv) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate borne by the Securities; (b) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction; and (c) all Events of Default, other than the non-payment of principal of, premium, if any, and interest on the Securities which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513. No such rescission shall affect any subsequent Default or impair any right consequent thereon. Section 503. Collection of Indebtedness and Suits for Enforcement by Trustee. The Company and each Guarantor covenant that if (a) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or (b) default is made in the payment of the principal of or premium, if any, on any Security at the Stated Maturity thereof or otherwise, the Company and such Guarantor will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal and premium, if any, and interest, with interest upon the overdue principal and premium, if any, and, to the extent that payment of such interest shall be legally enforceable, upon overdue installments of interest, at the rate borne by the Securities; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company or any Guarantor, as the case may be, fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid and may prosecute such proceeding to judgment or final decree, and may enforce the same against the Company or any Guarantor or any other obligor upon the Securities and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company, any Guarantor or any other obligor upon the Securities, wherever situated. - 78 - If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders under this Indenture or any Guarantee by such appropriate private or judicial proceedings as the Trustee shall deem most effectual to protect and enforce such rights, including seeking recourse against any Guarantor pursuant to the terms of any Guarantee, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein or therein, or to enforce any other proper remedy, including, without limitation, seeking recourse against any Guarantor pursuant to the terms of a Guarantee, or to enforce any other proper remedy, subject however to Section 512. No recovery of any such judgment upon any property of the Company or any Guarantor shall affect or impair any rights, powers or remedies of the Trustee or the Holders. Section 504. Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor, including any Guarantor, upon the Securities or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of principal, and premium, if any, and interest owing and unpaid in respect of the Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (b) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 607. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of - 79 - reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. Section 505. Trustee May Enforce Claims without Possession of Securities. All rights of action and claims under this Indenture, the Securities or the Guarantees may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name and as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. Section 506. Application of Money Collected. Any money collected by the Trustee pursuant to this Article or otherwise on behalf of the Holders or the Trustee pursuant to this Article or through any proceeding or any arrangement or restructuring in anticipation or in lieu of any proceeding contemplated by this Article shall be applied, subject to applicable law, in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal, premium, if any, or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 607; SECOND: To the payment of the amounts then due and unpaid upon the Securities for principal, premium, if any, and interest, in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal, premium, if any, and interest; and THIRD: The balance, if any, to the Person or Persons entitled thereto, including the Company, provided that all sums due and owing to the Holders and the Trustee have been paid in full as required by this Indenture. Section 507. Limitation on Suits. No Holder of any Securities shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture or the Securities, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless - 80 - (a) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (b) the Holders of not less than 25% in aggregate principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as trustee hereunder; (c) such Holder or Holders have offered to the Trustee a reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (d) the Trustee for 15 days after its receipt of such notice, request and offer (and if requested, provision) of indemnity has failed to institute any such proceeding; and (e) no direction inconsistent with such written request has been given to the Trustee during such 15-day period by the Holders of a majority in principal amount of the Outstanding Securities; it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture, any Security or any Guarantee to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, any Security or any Guarantee, except in the manner provided in this Indenture and for the equal and ratable benefit of all the Holders. Section 508. Unconditional Right of Holders to Receive Principal, Premium and Interest. Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right based on the terms stated herein, which is absolute and unconditional, to receive payment of the principal of, premium, if any, and (subject to Section 309) interest on such Security on the respective Stated Maturities expressed in such Security (or, in the case of redemption or repurchase, on the Redemption Date or the repurchase date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. Section 509. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture or any Guarantee and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case the Company, any Guarantor, any other obligor on the Securities, the Trustee and the Holders shall, subject to any - 81 - determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. Section 510. Rights and Remedies Cumulative. No right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. Section 511. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. Section 512. Control by Holders. The Holders of not less than a majority in aggregate principal amount of the Outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, provided that (a) such direction shall not be in conflict with any rule of law or with this Indenture (including, without limitation, Section 507) or any Guarantee, expose the Trustee to personal liability, or be unduly prejudicial to Holders not joining therein; and (b) subject to the provisions of Section 315 of the Trust Indenture Act, the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. Section 513. Waiver of Past Defaults. The Holders of not less than a majority in aggregate principal amount of the Outstanding Securities may on behalf of the Holders of all Outstanding Securities waive any past Default hereunder and its consequences, except a Default - 82 - (a) in the payment of the principal of, premium, if any, or interest on any Security (which may only be waived with the consent of each Holder of the Securities affected); or (b) in respect of a covenant or a provision hereof which under this Indenture cannot be modified or amended without the consent of the Holder of each Security Outstanding affected by such modification or amendment. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. Section 514. Undertaking for Costs. All parties to this Indenture agree, and each Holder of any Security by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant, but the provisions of this Section shall not apply to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of the Outstanding Securities, or to any suit instituted by any Holder for the enforcement of the payment of the principal of, premium, if any, or interest on, any Security on or after the respective Stated Maturities expressed in such Security (or, in the case of redemption, on or after the Redemption Date). Section 515. Waiver of Stay, Extension or Usury Laws. Each of the Company and the Guarantors covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury or other law wherever enacted, now or at any time hereafter in force, which would prohibit or forgive the Company or any Guarantor from paying all or any portion of the principal of, premium, if any, or interest on the Securities contemplated herein or in the Securities or which may affect the covenants or the performance of this Indenture; and each of the Company and the Guarantors (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. - 83 - Section 516. Remedies Subject to Applicable Law. All rights, remedies and powers provided by this Article Five may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law in the premises, and all the provisions of this Indenture are intended to be subject to all applicable mandatory provisions of law which may be controlling in the premises and to be limited to the extent necessary so that they will not render this Indenture invalid, unenforceable or not entitled to be recorded, registered or filed under the provisions of any applicable law. ARTICLE SIX THE TRUSTEE Section 601. Duties of Trustee. Subject to the provisions of Trust Indenture Act Sections 315(a) through 315(d): (a) if a Default or an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture and use the same degree of care and skill in its exercise thereof as a prudent person would exercise or use under the circumstances in the conduct of his own affairs; (b) except during the continuance of a Default or an Event of Default: (1) the Trustee need perform only those duties as are specifically set forth in this Indenture and no covenants or obligations shall be implied in this Indenture that are adverse to the Trustee; and (2) in the absence of bad faith or willful misconduct on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture; (c) the Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (1) this Subsection (c) does not limit the effect of Subsection (b) of this Section 601; - 84 - (2) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (3) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith, in accordance with a direction of the Holders of a majority in principal amount of Outstanding Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power confirmed upon the Trustee under this Indenture; (d) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it; (e) whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to Subsections (a), (b), (c) and (d) and (f) of this Section 601; and (f) the Trustee shall not be liable for interest on any money or assets received by it except as the Trustee may agree with the Company. Assets held in trust by the Trustee need not be segregated from other assets except to the extent required by law. Section 602. Notice of Defaults. Within 30 days after a Responsible Officer of the Trustee receives notice of the occurrence of any Default, the Trustee shall transmit by mail to all Holders and any other Persons entitled to receive reports pursuant to Section 313(c) of the Trust Indenture Act, as their names and addresses appear in the Security Register, notice of such Default hereunder known to the Trustee, unless such Default shall have been cured or waived; provided, however, that, except in the case of a Default in the payment of the principal of, premium, if any, or interest on any Security, the Trustee shall be protected in withholding such notice if and so long as a trust committee of Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interest of the Holders. Section 603. Certain Rights of Trustee. Subject to the provisions of Section 601 hereof and Trust Indenture Act Sections 315(a) through 315(d): (a) the Trustee may rely and shall be protected in acting or refraining from acting upon receipt by it of any resolution, certificate, statement, instrument, - 85 - opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of Indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (c) the Trustee may consult with counsel of its selection and any advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee security or indemnity satisfactory to the Trustee against the costs, expenses and liabilities which might be incurred therein or , (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion, rights or powers conferred upon it by this Indenture other than any liabilities arising out of the negligence, bad faith or willful misconduct of the Trustee; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, approval, appraisal, bond, debenture, note, coupon, security or other paper or document unless requested in writing to do so by the Holders of not less than a majority in aggregate principal amount of the Securities then Outstanding; provided that, if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expenses or liabilities as a condition to proceeding; the reasonable expenses of every such investigation so requested by the Holders of not less than 25% in aggregate principal amount of the Securities Outstanding shall be paid by the Company or, if paid by the Trustee or any predecessor Trustee, shall be repaid by the Company upon demand; provided, further, the Trustee in its discretion may make such further inquiry or investigation into such facts or matters as it may deem fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; and - 86 - (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. (h) Except with respect to Section 1001, the Trustee shall have no duty to inquire as to the performance of the Company with respect to the covenants contained in Article 10. In addition, the Trustee shall not be deemed to have knowledge of an Event of Default except (i) any Default or Event of Default occurring pursuant to Sections 1001, 501(a) or 50l(b) or (ii) any Default or Event of Default of which the Trustee shall have received written notification or obtained actual knowledge. (i) Delivery of reports, information and documents to the Trustee under Section 1019 is for informational purposes only and the Trustee's receipt of the foregoing shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of their covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officer's Certificates). Section 604. Trustee Not Responsible for Recitals, Dispositions of Securities or Application of Proceeds Thereof. The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Guarantors, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities, except that the Trustee represents that it is duly authorized to execute and deliver this Indenture, authenticate the Securities and perform its obligations hereunder and that the statements made by it in any Statement of Eligibility and Qualification on Form T-1 supplied to the Company are true and accurate subject to the qualifications set forth therein. The Trustee shall not be accountable for the use or application by the Company of Securities or the proceeds thereof. Section 605. Trustee and Agents May Hold Securities; Collections; etc. The Trustee, any Paying Agent, Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities, with the same rights it would have if it were not the Trustee, Paying Agent, Security Registrar or such other agent and, subject to Trust Indenture Act Sections 310 and 311, may otherwise deal with the Company and receive, collect, hold and retain collections from the Company with the same rights it would have if it were not the Trustee, Paying Agent, Security Registrar or such other agent. - 87 - Section 606. Money Held in Trust. All moneys received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated from other funds except to the extent required by mandatory provisions of law. Except for funds or securities deposited with the Trustee pursuant to Article Four, the Trustee shall be required to invest all moneys received by the Trustee, until used or applied as herein provided, in Temporary Cash Investments in accordance with the directions of the Company. Section 607. Compensation and Indemnification of Trustee and Its Prior Claim. The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, such compensation as the parties shall agree in writing from time to time for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust) and the Company covenants and agrees to pay or reimburse the Trustee and each predecessor Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by or on behalf of the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all agents and other persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence, bad faith or willful misconduct. The Company also covenants and agrees to indemnify the Trustee and each predecessor Trustee for, and to hold it harmless against, any claim, loss, liability, tax, assessment or other governmental charge (other than taxes applicable to the Trustee's compensation hereunder) or expense incurred without negligence, bad faith or willful misconduct on its part, arising out of or in connection with the acceptance or administration of this Indenture or the trusts hereunder and its duties hereunder, including enforcement of this Section 607 and also including any liability which the Trustee may incur as a result of failure to withhold, pay or report any tax, assessment or other governmental charge, and the costs and expenses of defending itself against or investigating any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligations of the Company under this Section 607 to compensate and indemnify the Trustee and each predecessor Trustee and to pay or reimburse the Trustee and each predecessor Trustee for reasonable expenses, disbursements and advances shall constitute an additional obligation hereunder and shall survive the satisfaction and discharge of this Indenture and the resignation or removal of the Trustee and each predecessor Trustee. - 88 - Section 608. Conflicting Interests. The Trustee shall comply with the provisions of Section 310(b) of the Trust Indenture Act. Section 609. Trustee Eligibility. There shall at all times be a Trustee hereunder which shall be eligible to act as trustee under Trust Indenture Act Section 310(a) and is a member of a bank holding company which shall have a combined capital and surplus of at least $250,000,000, to the extent there is an institution eligible and willing to serve. If the Trustee does not have a Corporate Trust Office in The City of New York, the Trustee may appoint an agent in The City of New York reasonably acceptable to the Company to conduct any activities which the Trustee may be required under this Indenture to conduct in The City of New York. If such Trustee publishes reports of condition at least annually, pursuant to law or to the requirements of federal, state, territorial or District of Columbia supervising or examining authority, then for the purposes of this Section 609, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 609, the Trustee shall resign immediately in the manner and with the effect hereinafter specified in this Article. Section 610. Resignation and Removal; Appointment of Successor Trustee. (a) No resignation or removal of the Trustee and no appointment of a successor trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor trustee under Section 611. (b) The Trustee, or any trustee or trustees hereafter appointed, may at any time resign by giving written notice thereof to the Company no later than 20 Business Days prior to the proposed date of resignation. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee by written instrument executed by authority of the Board of Directors of the Company, a copy of which shall be delivered to the resigning Trustee and a copy to the successor trustee. If an instrument of acceptance by a successor trustee shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may, or any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper, appoint and prescribe a successor trustee. - 89 - (c) The Trustee may be removed at any time for any cause or for no cause by an Act of the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities, delivered to the Trustee and to the Company. (d) If at any time: (1) the Trustee shall fail to comply with the provisions of Trust Indenture Act Section 310(b) after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, (2) the Trustee shall cease to be eligible under Section 609 and shall fail to resign after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any case, (i) the Company by a Board Resolution may remove the Trustee, or (ii) subject to Section 514, the Holder of any Security who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution, shall promptly appoint a successor trustee and shall comply with the applicable requirements of Section 611. If, within 60 days after such resignation, removal or incapability, or the occurrence of such vacancy, the Company has not appointed a successor Trustee, a successor trustee shall be appointed by the Act of the Holders of a majority in principal amount of the Outstanding Securities delivered to the Company and the retiring Trustee. Such successor trustee so appointed shall forthwith upon its acceptance of such appointment become the successor trustee and supersede the successor trustee appointed by the Company. If no successor trustee shall have been so appointed by the Company or the Holders of the Securities and accepted appointment in the manner hereinafter provided, the Trustee or the Holder of any Security who has been a bona fide Holder for at least six months may, subject to Section 514, on behalf of - 90 - himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor trustee by mailing written notice of such event by first-class mail, postage prepaid, to the Holders of Securities as their names and addresses appear in the Security Register. Each notice shall include the name of the successor trustee and the address of its Corporate Trust Office or agent hereunder. Section 611. Acceptance of Appointment by Successor. Every successor trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee as if originally named as Trustee hereunder; but, nevertheless, on the written request of the Company or the successor trustee, upon payment of its charges pursuant to Section 607 then unpaid, such retiring Trustee shall pay over to the successor trustee all moneys at the time held by it hereunder and shall execute and deliver an instrument transferring to such successor trustee all such rights, powers, duties and obligations. Upon request of any such successor trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. No successor trustee with respect to the Securities shall accept appointment as provided in this Section 611 unless at the time of such acceptance such successor trustee shall be eligible to act as trustee under the provisions of Trust Indenture Act Section 310(a) and this Article Six and shall have a combined capital and surplus of at least $250,000,000 and have a Corporate Trust Office or an agent selected in accordance with Section 609. Upon acceptance of appointment by any successor trustee as provided in this Section 611, the Company shall give notice thereof to the Holders of the Securities, by mailing such notice to such Holders at their addresses as they shall appear on the Security Register. If the acceptance of appointment is substantially contemporaneous with the appointment, then the notice called for by the preceding sentence may be combined with the notice called for by Section 610. If the Company fails to give such notice within 10 days after acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be given at the expense of the Company. - 91 - Section 612. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee (including the trust created by this Indenture) shall be the successor of the Trustee hereunder, provided that such corporation shall be eligible under Trust Indenture Act Section 310(a) and this Article Six and shall have a combined capital and surplus of at least $250,000,000 and have a Corporate Trust Office or an agent selected in accordance with Section 609, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Securities shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor Trustee and deliver such Securities so authenticated; and, in case at that time any of the Securities shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor trustee; and in all such cases such certificate shall have the full force which it is anywhere in the Securities or in this Indenture provided that the certificate of the Trustee shall have; provided that the right to adopt the certificate of authentication of any predecessor Trustee or to authenticate Securities in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. Section 613. Preferential Collection of Claims Against Company. If and when the Trustee shall be or become a creditor of the Company (or other obligor under the Securities), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any such other obligor). A Trustee who has resigned or been removed shall be subject to Trust Indenture Act Section 311(a) to the extent indicated therein. ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY Section 701. Company to Furnish Trustee Names and Addresses of Holders. The Company will furnish or cause to be furnished to the Trustee - 92 - (a) semiannually, not more than 10 days after each Regular Record Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of such Regular Record Date; and (b) at such other times as the Trustee may reasonably request in writing, within 30 days after receipt by the Company of any such request, a list of similar form and content to that in subsection (a) hereof as of a date not more than 15 days prior to the time such list is furnished; provided, however, that if and so long as the Trustee shall be the Security Registrar, no such list need be furnished. Section 702. Disclosure of Names and Addresses of Holders. Holders may communicate pursuant to Trust Indenture Act Section 312(b) with other Holders with respect to their rights under this Indenture or the Securities, and the Trustee shall comply with Trust Indenture Act Section 312(b). The Company, the Trustee, the Security Registrar and any other Person shall have the protection of Trust Indenture Act Section 312(c). Further, every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee or any agent of either of them shall be held accountable by reason of the disclosure of any information as to the names and addresses of the Holders in accordance with Trust Indenture Act Section 312, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under Trust Indenture Act Section 312. Section 703. Reports by Trustee. (a) Within 60 days after May 15 of each year commencing with the first May 15 after the issuance of Securities, the Trustee, if so required under the Trust Indenture Act, shall transmit by mail to all Holders, in the manner and to the extent provided in Trust Indenture Act Section 313(c), a brief report dated as of such May 15 in accordance with and with respect to the matters required by Trust Indenture Act Section 313(a). The Trustee shall also transmit by mail to all Holders, in the manner and to the extent provided in Trust Indenture Act Section 313(c), a brief report in accordance with and with respect to the matters required by Trust Indenture Act Section 313(b)(2). (b) A copy of each report transmitted to Holders pursuant to this Section 703 shall, at the time of such transmission, be mailed to the Company and filed with each stock exchange, if any, upon which the Securities are listed and also with the Commission. The Company will notify the Trustee promptly if the Securities are listed on any stock exchange. - 93 - Section 704. Reports by Company and Guarantors. The Company and each Guarantor, as the case may be, shall: (a) file with the Trustee, within 15 days after the Company or any Guarantor, as the case may be, is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Company or any Guarantor may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if the Company or any Guarantor, as the case may be, is not required to file information, documents or reports pursuant to either of said Sections, then it shall (i) deliver to the Trustee annual audited financial statements of the Company and its Subsidiaries, prepared on a Consolidated basis in conformity with GAAP, within 120 days after the end of each fiscal year of the Company, and (ii) file with the Trustee and, to the extent permitted by law, the Commission, in accordance with the rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports which may be required pursuant to Section 13 of the Exchange Act in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations; (b) file with the Trustee and the Commission, in accordance with the rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company or any Guarantor, as the case may be, with the conditions and covenants of this Indenture as are required from time to time by such rules and regulations (including such information, documents and reports referred to in Trust Indenture Act Section 314(a)); and (c) within 15 days after the filing thereof with the Trustee, transmit by mail to all Holders in the manner and to the extent provided in Trust Indenture Act Section 313(c), such summaries of any information, documents and reports required to be filed by the Company or any Guarantor, as the case may be, pursuant to Section 1019 hereunder and subsections (a) and (b) of this Section as are required by rules and regulations prescribed from time to time by the Commission. - 94 - ARTICLE EIGHT CONSOLIDATION, MERGER, SALE OF ASSETS Section 801. Company and Guarantors May Consolidate, etc., Only on Certain Terms. (a) The Company will not, in a single transaction or through a series of related transactions, consolidate with or merge with or into any other Person or sell, assign, convey, transfer, lease or otherwise dispose of all or substantially all of its properties and assets to any Person or group of Persons, or permit any of its Restricted Subsidiaries to enter into any such transaction or series of related transactions if such transaction or series of related transactions, in the aggregate, would result in a sale, assignment, conveyance, transfer, lease or disposition of all or substantially all of the properties and assets of the Company and its Restricted Subsidiaries on a Consolidated basis to any other Person or group of Persons, unless at the time and after giving effect thereto: (i) either (a) the Company will be the continuing corporation (in the case of a consolidation or merger involving the Company) or (b) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person which acquires by sale, assignment, conveyance, transfer, lease or disposition all or substantially all of the properties and assets of the Company and its Restricted Subsidiaries on a Consolidated basis (the "Surviving Entity") will be a corporation duly organized and validly existing under the laws of the United States of America, any state thereof or the District of Columbia and such Person expressly assumes, by a supplemental indenture, in a form reasonably satisfactory to the Trustee, all the obligations of the Company under the Securities and this Indenture and the Registration Rights Agreement, as the case may be, and the Securities and this Indenture and the Registration Rights Agreement will remain in full force and effect as so supplemented; (ii) immediately before and immediately after giving effect to such transaction on a pro forma basis (and treating any Indebtedness not previously an obligation of the Company or any of its Restricted Subsidiaries which becomes the obligation of the Company or any of its Restricted Subsidiaries as a result of such transaction as having been incurred at the time of such transaction), no Default or Event of Default will have occurred and be continuing; (iii) immediately before and immediately after giving effect to such transaction on a pro forma basis (on the assumption that the - 95 - transaction occurred on the first day of the four-quarter period for which financial statements are available ending immediately prior to the consummation of such transaction with the appropriate adjustments with respect to the transaction being included in such pro forma calculation), the Company (or the Surviving Entity if the Company is not the continuing obligor hereunder) could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) under Section 1008; (iv) at the time of the transaction, each Guarantor, if any, unless it is the other party to the transactions described above, will have by supplemental indenture confirmed that its Guarantee shall apply to such Person's obligations under this Indenture and under the Securities; (v) at the time of the transaction if any of the property or assets of the Company or any of its Restricted Subsidiaries would thereupon become subject to any Lien, the provisions of Section 1011 are complied with; and (vi) at the time of the transaction the Company or the Surviving Entity will have delivered, or caused to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an Officers' Certificate and an Opinion of Counsel, each to the effect that such consolidation, merger, transfer, sale, assignment, conveyance, transfer, lease or other transaction and the supplemental indenture in respect thereof comply with this Indenture and that all conditions precedent herein provided for relating to such transaction have been complied with. (b) Each Guarantor will not, and the Company will not permit a Guarantor to, in a single transaction or through a series of related transactions, consolidate with or merge with or into any other Person (other than the Company or any Guarantor) or sell, assign, convey, transfer, lease or otherwise dispose of all or substantially all of its properties and assets on a Consolidated basis to any Person or group of Persons (other than the Company or any Guarantor), or permit any of its Restricted Subsidiaries to enter into any such transaction or series of transactions if such transaction or series of transactions, in the aggregate, would result in a sale, assignment, conveyance, transfer, lease or disposition of all or substantially all of the properties and assets of the Guarantor and its Restricted Subsidiaries on a Consolidated basis to any other Person or group of Persons (other than the Company or any Guarantor), unless at the time and after giving effect thereto: (i) either (1) the Guarantor will be the continuing corporation (in the case of a consolidation or merger involving the Guarantor) or (2) the Person (if other than the Guarantor) formed by such consolidation or into - 96 - which such Guarantor is merged or the Person which acquires by sale, assignment, conveyance, transfer, lease or disposition all or substantially all of the properties and assets of the Guarantor and its Restricted Subsidiaries on a Consolidated basis (the "Surviving Guarantor Entity") duly organized and validly existing under the laws of the United States of America, any state thereof or the District of Columbia and such Person expressly assumes, by a supplemental indenture, in a form satisfactory to the Trustee, all the obligations of such Guarantor under its Guarantee of the Securities and this Indenture and the Registration Rights Agreement and such Guarantee, Indenture and Registration Rights Agreement will remain in full force and effect; (ii) immediately before and immediately after giving effect to such transaction, on a pro forma basis, no Default or Event of Default will have occurred and be continuing; and (iii) at the time of the transaction such Guarantor or the Surviving Guarantor Entity will have delivered, or caused to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an Officers' Certificate and an Opinion of Counsel, each to the effect that such consolidation, merger, transfer, sale, assignment, conveyance, lease or other transaction and the supplemental indenture in respect thereof comply with this Indenture and that all conditions precedent therein provided for relating to such transaction have been complied with. (c) Notwithstanding the foregoing, the provisions of Section 801(b) shall not apply to any Guarantor whose Guarantee of the Notes is unconditionally released and discharged in accordance with paragraph (b) under Section 1013. Section 802. Successor Substituted. Upon any consolidation or merger, or any sale, assignment, conveyance, transfer, lease or disposition of all or substantially all of the properties and assets of the Company or any Guarantor, if any, in accordance with Section 801, the successor Person formed by such consolidation or into which the Company or such Guarantor, as the case may be, is merged or the successor Person to which such sale, assignment, conveyance, transfer, lease or disposition is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company or such Guarantor, as the case may be, under this Indenture, the Securities and/or the related Guarantee, as the case may be, with the same effect as if such successor had been named as the Company or such Guarantor, as the case may be, herein, in the Securities and/or in the Guarantee, as the case may be, and the Company or such Guarantor, as the case may be, shall be discharged from all obligations and covenants under this Indenture and the Securities or its Guarantee, as the - 97 - case may be; provided that in the case of a transfer by lease or a sale of substantially all of the assets of the Company or a Guarantor that results in the sale, assignment, conveyance, transfer or other disposition of assets constituting or accounting for less than 95% of the consolidated assets , revenues or Consolidated Net Income (Loss) of the Company or such Guarantor, as the case may be, the predecessor shall not be released from the payment of principal and interest on the Securities or its Guarantee, as the case may be. ARTICLE NINE SUPPLEMENTAL INDENTURES Section 901. Supplemental Indentures and Agreements without Consent of Holders. Without the consent of any Holders, the Company, the Guarantors, if any, and any other obligor under the Securities when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto or agreements or other instruments with respect to this Indenture, the Securities or any Guarantee, in form and substance satisfactory to the Trustee, for any of the following purposes: (a) to evidence the succession of another Person to the Company or a Guarantor or any other obligor upon the Securities, and the assumption by any such successor of the covenants of the Company or such Guarantor or obligor herein and in the Securities and in any Guarantee in accordance with Article Eight; (b) to add to the covenants of the Company, any Guarantor or any other obligor upon the Securities for the benefit of the Holders, or to surrender any right or power conferred upon the Company or any Guarantor or any other obligor upon the Securities, as applicable, herein, in the Securities or in any Guarantee; (c) to cure any ambiguity, or to correct or supplement any provision herein or in any supplemental indenture, the Securities or any Guarantee which may be defective or inconsistent with any other provision herein or in the Securities or any Guarantee or to make any other provisions with respect to matters or questions arising under this Indenture, the Securities or the Guarantees; provided that, in each case, such provisions shall not adversely affect the interest of the Holders; (d) to comply with the requirements of the Commission in order to effect or maintain the qualification of this Indenture under the Trust Indenture Act, as contemplated by Section 905 or otherwise; - 98 - (e) to add a Guarantor pursuant to the requirements of Section 1013 hereof or otherwise; (f) to evidence and provide the acceptance of the appointment of a successor trustee hereunder; or (g) to mortgage, pledge, hypothecate or grant a security interest in favor of the Trustee for the benefit of the Holders as additional security for the payment and performance of the Company's or any Guarantor's Indenture Obligations, in any property, or assets, including any of which are required to be mortgaged, pledged or hypothecated, or in which a security interest is required to be granted to the Trustee pursuant to this Indenture or otherwise. Section 902. Supplemental Indentures and Agreements with Consent of Holders. Except as permitted by Section 901, with the consent of the Holders of at least a majority in aggregate principal amount of the Outstanding Securities, by Act of said Holders delivered to the Company, each Guarantor, if any, and the Trustee, the Company and each Guarantor (if a party thereto) when authorized by Board Resolutions, and the Trustee may (i) enter into an indenture or indentures supplemental hereto or agreements or other instruments with respect to any Guarantee in form and substance satisfactory to the Trustee, for the purpose of adding any provisions to or amending, modifying or changing in any manner or eliminating any of the provisions of this Indenture, the Securities or any Guarantee (including but not limited to, for the purpose of modifying in any manner the rights of the Holders under this Indenture, the Securities or any Guarantee) or (ii) waive compliance with any provision in this Indenture, the Securities or any Guarantee (other than waivers of past Defaults covered by Section 513 and waivers of covenants which are covered by Section 1021); provided, however, that no such supplemental indenture, agreement or instrument shall, without the consent of the Holder of each Outstanding Security affected thereby: (a) change the Stated Maturity of the principal of, or any installment of interest on, or change to an earlier date any Redemption Date of, or waive a default in the payment of the principal of, premium, if any, or interest on, any such Security or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change the coin or currency in which the principal of any Security or any premium or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date); (b) amend, change or modify the obligation of the Company to make and consummate an Offer with respect to any Asset Sale or Asset Sales in accordance with Section 1012 or the obligation of the Company to make and consummate a Change - 99 - of Control Offer in the event of a Change of Control in accordance with Section 1014, including, in each case, amending, changing or modifying any definitions relating thereto but only to the extent such definitions relate thereto; (c) reduce the percentage in principal amount of the Outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver or compliance with certain provisions of this Indenture; (d) modify any of the provisions of this Section 902 or Section 513 or 1022, except to increase the percentage of such Outstanding Securities required for any such actions or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each such Security affected thereby; (e) except as otherwise permitted under Article Eight, consent to the assignment or transfer by the Company or any Guarantor of any of its rights and obligations hereunder; or (f) amend or modify any of the provisions of this Indenture in any manner which subordinates the Securities issued hereunder in right of payment to any other Indebtedness of the Company or which subordinates any Guarantee in right of payment to any other Indebtedness of the Guarantor issuing such Guarantee. Upon the written request of the Company and each Guarantor, if any, accompanied by a copy of Board Resolutions authorizing the execution of any such supplemental indenture or Guarantee, and upon the filing with the Trustee of evidence of the consent of Holders as aforesaid, the Trustee shall join with the Company and each Guarantor in the execution of such supplemental indenture or Guarantee. It shall not be necessary for any Act of Holders under this Section 902 to approve the particular form of any proposed supplemental indenture or Guarantee or agreement or instrument relating to any Guarantee, but it shall be sufficient if such Act shall approve the substance thereof. Section 903. Execution of Supplemental Indentures and Agreements. In executing, or accepting the additional trusts created by, any supplemental indenture, agreement, instrument or waiver permitted by this Article Nine or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Trust Indenture Act Sections 315(a) through 315(d) and Section 603(a) hereof) shall be fully protected in relying upon, an Opinion of Counsel and an Officers' Certificate stating that the execution of such supplemental indenture, agreement or instrument (a) is authorized or permitted by this Indenture and (b) does not - 100 - violate the provisions of any agreement or instrument evidencing any other Indebtedness of the Company, any Guarantor or any other Restricted Subsidiary. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture, agreement or instrument which affects the Trustee's own rights, duties or immunities under this Indenture, any Guarantee or otherwise. Section 904. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. Section 905. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article Nine shall conform to the requirements of the Trust Indenture Act as then in effect. Section 906. Reference in Securities to Supplemental Indentures. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article Nine may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any such supplemental indenture may be prepared and executed by the Company and each Guarantor and authenticated and delivered by the Trustee in exchange for Outstanding Securities. Section 907. Notice of Supplemental Indentures. Promptly after the execution by the Company, any Guarantor and the Trustee of any supplemental indenture pursuant to the provisions of Section 902, the Company shall give notice thereof to the Holders of each Outstanding Security affected, in the manner provided for in Section 106, setting forth in general terms the substance of such supplemental indenture. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. - 101 - ARTICLE TEN COVENANTS Section 1001. Payment of Principal, Premium and Interest. The Company shall duly and punctually pay the principal of, premium, if any, and interest on the Securities in accordance with the terms of the Securities and this Indenture. Section 1002. Maintenance of Office or Agency. The Company shall maintain an office or agency where Securities may be presented or surrendered for payment. The Company also will maintain in The City of New York an office or agency where Securities may be surrendered for registration of transfer, redemption or exchange and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The office of the Trustee, at its Corporate Trust Office initially located at 100 Wall Street, 20th Floor, New York, New York 10005, will be such office or agency of the Company, unless the Company shall designate and maintain some other office or agency for one or more of such purposes. The Company will give prompt written notice to the Trustee of the location and any change in the location of any such offices or agencies. If at any time the Company shall fail to maintain any such required offices or agencies or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the office of the Trustee and the Company hereby appoints the Trustee such agent as its agent to receive all such presentations, surrenders, notices and demands. The Company may from time to time designate one or more other offices or agencies (in or outside of The City of New York) where the Securities may be presented or surrendered for any or all such purposes, and may from time to time rescind such designation. The Company will give prompt written notice to the Trustee of any such designation or rescission and any change in the location of any such office or agency. The Trustee shall initially act as Paying Agent for the Securities. Section 1003. Money for Security Payments to Be Held in Trust. If the Company or any of its Affiliates shall at any time act as Paying Agent, it will, on or before each due date of the principal of, premium, if any, or interest on any of the Securities, segregate and hold in trust for the benefit of the Holders entitled thereto a sum sufficient to pay the principal, premium, if any, or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided, and will promptly notify the Trustee of its action or failure so to act. - 102 - If the Company or any of its Affiliates is not acting as Paying Agent, the Company will, on or before each due date of the principal of, premium, if any, or interest on any of the Securities, deposit with a Paying Agent a sum in same day funds sufficient to pay the principal, premium, if any, or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of such action or any failure so to act. If the Company is not acting as Paying Agent, the Company will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: (a) hold all sums held by it for the payment of the principal of, premium, if any, or interest on the Securities in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (b) give the Trustee notice of any Default by the Company or any Guarantor (or any other obligor upon the Securities) in the making of any payment of principal, premium, if any, or interest on the Securities; (c) at any time during the continuance of any such Default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent; and (d) acknowledge, accept and agree to comply in all aspects with the provisions of this Indenture relating to the duties, rights and liabilities of such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium, if any, or interest on any Security and remaining unclaimed for two years after such principal and premium, if any, or interest has become due and payable shall promptly be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look - 103 - only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in the New York Times and The Wall Street Journal (national edition), and mail to each such Holder, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification, publication and mailing, any unclaimed balance of such money then remaining will promptly be repaid to the Company. Section 1004. Corporate Existence. Subject to Article Eight, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect the corporate existence and related rights and franchises (charter and statutory) of the Company and each Restricted Subsidiary; provided, however, that the Company shall not be required to preserve any such right or franchise or the corporate existence of any such Restricted Subsidiary if the Board of Directors of the Company shall determine that the preservation thereof is no longer necessary or desirable in the conduct of the business of the Company and its Restricted Subsidiaries as a whole; and provided, further, however, that the foregoing shall not prohibit a sale, transfer or conveyance of a Restricted Subsidiary or any of its assets in compliance with the terms of this Indenture. Section 1005. Payment of Taxes and Other Claims. The Company shall pay or discharge or cause to be paid or discharged, on or before the date the same shall become due and payable, (a) all taxes, assessments and governmental charges levied or imposed upon the Company or any of its Restricted Subsidiaries shown to be due on any return of the Company or any of its Restricted Subsidiaries or otherwise assessed or upon the income, profits or property of the Company or any of its Restricted Subsidiaries if failure to pay or discharge the same could reasonably be expected to have a material adverse effect on the ability of the Company or any Guarantor to perform its obligations hereunder and (b) all lawful claims for labor, materials and supplies, which, if unpaid, would by law become a Lien upon the property of the Company or any of its Restricted Subsidiaries, except for any Lien permitted to be incurred under Section 1011, if failure to pay or discharge the same could reasonably be expected to have a material adverse effect on the ability of the Company or any Guarantor to perform its obligations hereunder; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings properly instituted and diligently conducted and in respect of which appropriate reserves (in the good faith judgment of management of the Company) are being maintained in accordance with GAAP. - 104 - Section 1006. Maintenance of Properties. The Company shall cause all material properties owned by the Company or any of its Restricted Subsidiaries or used or held for use in the conduct of its business or the business of any of its Restricted Subsidiaries to be maintained and kept in good condition, repair and working order (ordinary wear and tear excepted) and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the reasonable judgment of the Company may be consistent with sound business practice and necessary so that the business carried on in connection therewith may be properly conducted at all times; provided, however, that nothing in this Section shall prevent the Company from discontinuing the maintenance of any of such properties if such discontinuance is, in the reasonable judgment of the Company, desirable in the conduct of its business or the business of any of its Restricted Subsidiaries; and provided, further, however, that the foregoing shall not prohibit a sale, transfer or conveyance of a Restricted Subsidiary or any of its properties or assets in compliance with the terms of this Indenture. Section 1007. Maintenance of Insurance. The Company shall at all times keep all of its and its Restricted Subsidiaries' properties which are of an insurable nature insured with insurers, believed by the Company in good faith to be financially sound and responsible, against loss or damage to the extent that property of similar character is usually so insured by corporations similarly situated and owning like properties in the same general geographic areas in which the Company and its Restricted Subsidiaries operate, except where the failure to do so could not reasonably be expected to have a material adverse effect on the condition (financial or otherwise), earnings, business affairs or prospects of the Company and its Restricted Subsidiaries, taken as a whole. Section 1008. Limitation on Indebtedness. The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, create, issue, incur, assume, guarantee or otherwise in any manner become directly or indirectly liable for the payment of or otherwise incur, contingently or otherwise (collectively, "incur"), any Indebtedness (including any Acquired Indebtedness), unless such Indebtedness is incurred by the Company or any Guarantor or constitutes Acquired Indebtedness of a Restricted Subsidiary and, in each case, the Company's Consolidated Fixed Charge Coverage Ratio for the most recent four full fiscal quarters for which financial statements are available immediately preceding the incurrence of such Indebtedness taken as one period is at least equal to or greater than 2.0:1. - 105 - Notwithstanding the foregoing, the Company and, to the extent specifically set forth below, the Restricted Subsidiaries may incur each and all of the following (collectively, the "Permitted Indebtedness"): (i) Indebtedness of the Company and the Guarantors under the Revolving Facility (including any refinancing (as defined below) thereof) in an aggregate principal amount at any one time outstanding not to exceed the greater of (a) $75 million or (b) 20% of the Company's Consolidated Tangible Assets, in any case under the Revolving Facility (including any refinancing thereof) or in respect of letters of credit thereunder; (ii) Indebtedness of the Company and the Guarantors under any Inventory Facility. (iii) Indebtedness of the Company pursuant to the Securities and Indebtedness of any Guarantor pursuant to a Guarantee of the Securities; (iv) Indebtedness of the Company or any Restricted Subsidiary outstanding on the Issue Date and listed on Schedule I hereto and not otherwise referred to in this definition of Permitted Indebtedness; (v) Indebtedness of the Company owing to a Restricted Subsidiary; provided that any Indebtedness of the Company owing to a Restricted Subsidiary that is not a Guarantor is made pursuant to an intercompany note in the form attached as Annex A to this Indenture and is unsecured and subordinated in right of payment from and after such time as the Securities shall become due and payable (whether at Stated Maturity, acceleration or otherwise) to the payment and performance of the Company's obligations under the Securities; provided, further, that any disposition, pledge or transfer of any such Indebtedness to a Person (other than a disposition, pledge or transfer to a Restricted Subsidiary) shall be deemed to be an incurrence of such Indebtedness by the Company or other obligor not permitted by this clause (v); (vi) Indebtedness of a Wholly Owned Restricted Subsidiary owing to the Company or another Wholly Owned Restricted Subsidiary; provided that any such Indebtedness is made pursuant to an intercompany note in the form attached as Annex A to this Indenture; provided, further, that (a) any disposition, pledge or transfer of any such Indebtedness to a Person (other than a disposition, pledge or transfer to the Company or a Wholly Owned Restricted Subsidiary) shall be deemed to be an incurrence of such Indebtedness by the obligor not permitted by this clause (vi), and (b) any transaction pursuant to which any Wholly Owned Restricted Subsidiary, which has Indebtedness owing to the Company or any other Wholly Owned Restricted Subsidiary, ceases to be a Wholly Owned Restricted Subsidiary shall be deemed to be the incurrence of Indebtedness by such Wholly Owned Restricted Subsidiary that is not permitted by this clause (vi); - 106 - (vii) guarantees of any Restricted Subsidiary made in accordance with the provisions of Section 1013; (viii)obligations of the Company or any Guarantor entered into in the ordinary course of business (a) pursuant to Interest Rate Agreements designed to protect the Company or any Restricted Subsidiary against fluctuations in interest rates in respect of Indebtedness of the Company or any Restricted Subsidiary as long as such obligations do not exceed the aggregate principal amount of such Indebtedness then outstanding, (b) under any Currency Hedging Agreements, relating to (i) Indebtedness of the Company or any Restricted Subsidiary and/or (ii) obligations to purchase or sell assets or properties, in each case, incurred in the ordinary course of business of the Company or any Restricted Subsidiary; provided, however, that such Currency Hedging Agreements do not increase the Indebtedness or other obligations of the Company or any Restricted Subsidiary outstanding other than as a result of fluctuations in foreign currency exchange rates or by reason of fees, indemnities and compensation payable thereunder or (c) under any Commodity Price Protection Agreements which do not increase the amount of Indebtedness or other obligations of the Company or any Restricted Subsidiary outstanding other than as a result of fluctuations in commodity prices or by reason of fees, indemnities and compensation payable thereunder; (ix) Indebtedness of the Company or any Restricted Subsidiary represented by Capital Lease Obligations or Purchase Money Obligations or other Indebtedness incurred or assumed in connection with the acquisition or development of real or personal, movable or immovable, property in each case incurred for the purpose of financing or refinancing all or any part of the purchase price or cost of construction or improvement of property used in the business of the Company, in an aggregate principal amount pursuant to this clause (ix) not to exceed $20 million outstanding at any time; provided that the principal amount of any Indebtedness permitted under this clause (ix) did not in each case at the time of incurrence exceed the Fair Market Value, as determined by the Board of Directors of the Company in good faith, of the acquired or constructed asset or improvement so financed; (x) obligations arising from agreements by the Company or a Restricted Subsidiary to provide for indemnification, customary purchase price closing adjustments, earn-outs or other similar obligations, in each case, incurred in connection with the acquisition or disposition of any business or assets of a Restricted Subsidiary; (xi) Indebtedness evidenced by letters of credit in the ordinary course of business to support the Company's or any Restricted Subsidiary's insurance or self-insurance obligations for workers' compensation and other similar insurance coverages; (xii) any renewals, extensions, substitutions, refundings, refinancings or replacements (collectively, a "refinancing") of any Indebtedness described in clauses (iii) - 107 - and (iv) of this definition of "Permitted Indebtedness," including any successive refinancings so long as the borrower under such refinancing is the Company or, if not the Company, the same as the borrower of the Indebtedness being refinanced and the aggregate principal amount of Indebtedness represented thereby (or if such Indebtedness provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the maturity thereof, the original issue price of such Indebtedness plus any accreted value attributable thereto since the original issuance of such Indebtedness) does not exceed the initial principal amount of such Indebtedness plus the lesser of (I) the stated amount of any premium or other payment required to be paid in connection with such a refinancing pursuant to the terms of the Indebtedness being refinanced or (II) the amount of premium or other payment actually paid at such time to refinance the Indebtedness, plus, in either case, the amount of expenses of the Company incurred in connection with such refinancing and (A) in the case of any refinancing of Indebtedness that is Subordinated Indebtedness, such new Indebtedness is made subordinated to the Securities at least to the same extent as the Indebtedness being refinanced and (B) in the case of Pari Passu Indebtedness or Subordinated Indebtedness, as the case may be, such refinancing does not reduce the Average Life to Stated Maturity or the Stated Maturity of such Indebtedness; and (xiii)Indebtedness of the Company and its Restricted Subsidiaries or any Guarantor in addition to that described in clauses (i) through (xii) above, and any renewals, extensions, substitutions, refinancings or replacements of such Indebtedness, so long as the aggregate principal amount of all such Indebtedness shall not exceed $10 million outstanding at any one time in the aggregate. For purposes of determining compliance with this Section 1008, in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness permitted by this Section 1008, the Company in its sole discretion shall classify such item of Indebtedness and only be required to include the amount of such Indebtedness as one of such types. Section 1009. Limitation on Restricted Payments. (a) The Company will not, and will not cause or permit any Restricted Subsidiary to, directly or indirectly: (i) declare or pay any dividend on, or make any distribution to holders of, any shares of the Company's Capital Stock (other than dividends or distributions payable solely in shares of its Qualified Capital Stock or in options, warrants or other rights to acquire shares of such Qualified Capital Stock); (ii) purchase, redeem, defease or otherwise acquire or retire for value, directly or indirectly, the Company's Capital Stock or any Capital - 108 - Stock of any Affiliate of the Company, including any Subsidiary of the Company (other than Capital Stock of any Wholly Owned Restricted Subsidiary of the Company), or options, warrants or other rights to acquire such Capital Stock; (iii) make any principal payment on, or repurchase, redeem, defease, retire or otherwise acquire for value, prior to any scheduled principal payment, sinking fund payment or maturity, any Subordinated Indebtedness; (iv) declare or pay any dividend or distribution on any Capital Stock of any Restricted Subsidiary to any Person (other than (a) to the Company or any of its Wholly Owned Restricted Subsidiaries or (b) dividends and distributions made by a Restricted Subsidiary (i) organized as a partnership, limited liability company or similar pass-through entity to the holders of its Capital Stock in amounts sufficient to satisfy the tax liabilities arising from their ownership of such Capital Stock or (ii) on a pro rata basis to all stockholders of such Restricted Subsidiary); or (v) make any Investment in any Person (other than any Permitted Investments) (any of the foregoing actions described in clauses (i) through (v), other than any such action that is a Permitted Payment (as defined below), collectively, "Restricted Payments") (the amount of any such Restricted Payment, if other than cash, shall be the Fair Market Value of the assets proposed to be transferred, as determined by the board of directors of the Company, whose determination shall be conclusive and evidenced by a board resolution), unless (1) immediately before and immediately after giving effect to such proposed Restricted Payment on a pro forma basis, no Default or Event of Default shall have occurred and be continuing and such Restricted Payment shall not be an event which is, or after notice or lapse of time or both, would be, an "event of default" under the terms of any Indebtedness of the Company or its Restricted Subsidiaries; (2) immediately before and immediately after giving effect to such Restricted Payment on a pro forma basis, the Company could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) under Section 1008 herein; and (3) after giving effect to the proposed Restricted Payment, the aggregate amount of all such Restricted Payments declared or made after the Issue Date and all Designation Amounts does not exceed the sum of: (A) $5 million; (B) 50% of the aggregate Consolidated Net Income of the Company accrued on a cumulative basis during the period beginning on the first day of the - 109 - Company's fiscal quarter in which the Issue Date occurs and ending on the last day of the Company's last fiscal quarter in which the Issue Date occurs ending prior to the date of the Restricted Payment (or, if such aggregate cumulative Consolidated Net Income shall be a loss, minus 100% of such loss); (C) the aggregate Net Cash Proceeds received after the Issue Date by the Company either (x) as capital contributions in the form of common equity to the Company or (y) from the issuance or sale (other than to any of its Subsidiaries) of Qualified Capital Stock of the Company or any options, warrants or rights to purchase such Qualified Capital Stock of the Company (except, in each case, to the extent such proceeds are used to purchase, redeem or otherwise retire Capital Stock or Subordinated Indebtedness as set forth below in clause (ii) or (iii) of paragraph (b) below) (and excluding the Net Cash Proceeds from the issuance of Qualified Capital Stock financed, directly or indirectly, using funds borrowed from the Company or any Subsidiary until and to the extent such borrowing is repaid); (D) the aggregate Net Cash Proceeds received after the Issue Date by the Company (other than from any of its Subsidiaries) upon the exercise of any options, warrants or rights to purchase Qualified Capital Stock of the Company (and excluding the Net Cash Proceeds from the exercise of any options, warrants or rights to purchase Qualified Capital Stock financed, directly or indirectly, using funds borrowed from the Company or any Subsidiary until and to the extent such borrowing is repaid); (E) the aggregate Net Cash Proceeds received after the Issue Date by the Company from the conversion or exchange, if any, of debt securities or Redeemable Capital Stock of the Company or its Restricted Subsidiaries into or for Qualified Capital Stock of the Company plus, to the extent such debt securities or Redeemable Capital Stock were issued after the Issue Date, upon the conversion or exchange of such debt securities or Redeemable Capital Stock the aggregate of Net Cash Proceeds from their original issuance (and excluding the Net Cash Proceeds from the conversion or exchange of debt securities or Redeemable Capital Stock financed, directly or indirectly, using funds borrowed from the Company or any Subsidiary until and to the extent such borrowing is repaid); and (F) (a) in the case of the disposition or repayment of any Investment constituting a Restricted Payment made after the Issue Date, an amount (to the extent not included in Consolidated Net Income) equal to the lesser of the return of capital with respect to such Investment and the initial amount of such Investment, in either case, less the cost of the disposition of such - 110 - Investment and net of taxes, and (b) in the case of the designation of an Unrestricted Subsidiary as a Restricted Subsidiary (as long as the designation of such Subsidiary as an Unrestricted Subsidiary was deemed a Restricted Payment), the Fair Market Value of the Company's interest in such Subsidiary provided that such amount shall not in any case exceed the amount of the Restricted Payment deemed made at the time the Subsidiary was designated as an Unrestricted Subsidiary. (b) Notwithstanding the foregoing, and in the case of clauses (ii) through (iv) below, so long as no Default or Event of Default is continuing or would arise therefrom, the foregoing provisions shall not prohibit the following actions (each of clauses (i) through (iv) and (viii) being referred to as a "Permitted Payment"): (i) the payment of any dividend within 60 days after the date of declaration thereof, if at such date of declaration such payment was permitted by the provisions of paragraph (a) of this Section and such payment shall have been deemed to have been paid on such date of declaration and shall not have been deemed a "Permitted Payment" for purposes of the calculation required by paragraph (a) of this Section 1009; (ii) the repurchase, redemption, or other acquisition or retirement for value of any shares of any class of Capital Stock of the Company in exchange for (including any such exchange pursuant to the exercise of a conversion right or privilege in connection with which cash is paid in lieu of the issuance of fractional shares or scrip), or out of the Net Cash Proceeds of a substantially concurrent issuance and sale for cash (other than to a Subsidiary) of, other shares of Qualified Capital Stock of the Company; provided that the Net Cash Proceeds from the issuance of such shares of Qualified Capital Stock are excluded from clause (3)(C) of paragraph (a) of this Section 1009; (iii) the repurchase, redemption, defeasance, retirement or acquisition for value or payment of principal of any Subordinated Indebtedness or Redeemable Capital Stock in exchange for, or in an amount not in excess of the Net Cash Proceeds of, a substantially concurrent issuance and sale for cash (other than to any Subsidiary of the Company) of any Qualified Capital Stock of the Company, provided that the Net Cash Proceeds from the issuance of such shares of - 111 - Qualified Capital Stock are excluded from clause (3)(C) of paragraph (a) of this Section 1009; (iv) the repurchase, redemption, defeasance, retirement, refinancing, acquisition for value or payment of principal of any Subordinated Indebtedness (other than Redeemable Capital Stock) (a "refinancing") through the substantially concurrent issuance of new Subordinated Indebtedness of the Company, provided that any such new Subordinated Indebtedness (1) shall be in a principal amount that does not exceed the principal amount so refinanced (or, if such Subordinated Indebtedness provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration thereof, then such lesser amount as of the date of determination), plus the lesser of (I) the stated amount of any premium or other payment required to be paid in connection with such a refinancing pursuant to the terms of the Indebtedness being refinanced or (II) the amount of premium or other payment actually paid at such time to refinance the Indebtedness, plus, in either case, the amount of expenses of the Company incurred in connection with such refinancing; (2) has an Average Life to Stated Maturity greater than the remaining Average Life to Stated Maturity of the Securities; (3) has a Stated Maturity for its final scheduled principal payment later than the Stated Maturity for the final scheduled principal payment of the Securities; and (4) is expressly subordinated in right of payment to the Securities at least to the same extent as the Subordinated Indebtedness to be refinanced; (v) the purchase, redemption, or other acquisition or retirement for value of any class of Capital Stock of the Company from employees, former employees, directors or former directors of the Company or any Subsidiary pursuant to the terms of the agreements to which such Capital Stock was acquired in an amount not to exceed $1.0 million in the aggregate in any calendar year; (vi) the repurchase, redemption or other acquisition or retirement for value of Capital Stock of the Company issued pursuant to acquisitions by the Company to the extent required by or needed to comply with the requirements of any of the - 112 - Manufacturers with which the Company or a Restricted Subsidiary is a party to a franchise agreement; (vii) the repurchase, redemption, defeasance, retirement or acquisition for value or payment of principal on the Smith Subordinated Loan; and (viii) the payment of the contingent purchase price of an acquisition to the extent such payment would be deemed a Restricted Payment. Section 1010. Limitation on Transactions with Affiliates. The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, enter into any transaction or series of related transactions (including, without limitation, the sale, purchase, exchange or lease of assets, property or services) with or for the benefit of any Affiliate of the Company (other than the Company or a Wholly Owned Restricted Subsidiary) unless such transaction or series of related transactions is entered into in good faith and in writing and (a) such transaction or series of related transactions is on terms that are no less favorable to the Company or such Restricted Subsidiary, as the case may be, than those that would be available in a comparable transaction in arm's-length dealings with an unrelated third party, (b) with respect to any transaction or series of related transactions involving aggregate value in excess of $500,000, the Company delivers an Officers' Certificate to the Trustee certifying that such transaction or series of related transactions complies with clause (a) above or such transaction or series of related transactions is approved by a majority of the Disinterested Directors of the Board of Directors, or in the event there is only one Disinterested Director, by such Disinterested Director, and (c) with respect to any transaction or series of related transactions involving aggregate value in excess of $1 million, either (A) such transaction or series of related transactions has been approved by a majority of the Disinterested Directors of the Company, or in the event there is only one Disinterested Director, by such Disinterested Director, or (B) the Company delivers to the Trustee a written opinion of an investment banking firm of national standing or other recognized independent expert with experience appraising the terms and conditions of the type of transaction or series of related transactions for which an opinion is required stating that the transactions or series of related transactions is fair to the Company or such Restricted Subsidiary from a financial point of view; provided, however, that this provision shall not apply to (i) compensation and employee benefit arrangements with any officer or director of the Company, including under any stock option or stock incentive plans, entered into in the ordinary course of business; (ii) any transaction permitted as a Restricted Payment pursuant to Section 1009; (iii) the payment of customary fees to directors of the Company and its Restricted Subsidiaries; (iv) any transaction with any officer or member of the Board of Directors of the Company - 113 - involving indemnification arrangements; and (v) loans or advances to officers of the Company in the ordinary course of business not to exceed $1 million in any calendar year. Section 1011. Limitation on Liens. The Company will not, and will not cause or permit any Restricted Subsidiary to, directly or indirectly, create, incur or affirm any Lien of any kind securing any Pari Passu Indebtedness or Subordinated Indebtedness (including any assumption, guarantee or other liability with respect thereto by any Restricted Subsidiary) upon any property or assets (including any intercompany notes) of the Company or any Restricted Subsidiary owned on the Issue Date or acquired after the Issue Date, or assign or convey any right to receive any income or profits therefrom, unless the Securities or a Guarantee in the case of Liens of a Guarantor are directly secured equally and ratably with (or, in the case of Subordinated Indebtedness, prior or senior thereto, with the same relative priority as the Securities shall have with respect to such Subordinated Indebtedness) the obligation or liability secured by such Lien except for Liens (A) securing any Indebtedness which became Indebtedness pursuant to a transaction permitted under Article Eight or securing Acquired Indebtedness which was created prior to (and not created in connection with, or in contemplation of) the incurrence of such Pari Passu Indebtedness or Subordinated Indebtedness (including any assumption, guarantee or other liability with respect thereto by any Restricted Subsidiary) and which Indebtedness is permitted under the provisions of Section 1008 or (B) securing any Indebtedness incurred in connection with any refinancing, renewal, substitutions or replacements of any such Indebtedness described in clause (A), so long as the aggregate principal amount of Indebtedness represented thereby (or if such Indebtedness provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the maturity thereof, the original issue price of such Indebtedness plus any accreted value attributable thereto since the original issuance of such Indebtedness) is not increased by such refinancing by an amount greater than the lesser o (i) the stated amount of any premium or other payment required to be paid in connection with such a refinancing pursuant to the terms of the Indebtedness being refinanced or (ii) the amount of premium or other payment actually paid at such time to refinance the Indebtedness, plus, in either case, the amount of expenses of the Company incurred in connection with such refinancing; provided, however, that in the case of clauses (A) and (B), any such Lien only extends to the assets that were subject to such Lien securing such Indebtedness prior to the related acquisition by the Company or its Restricted Subsidiaries. Notwithstanding the foregoing, any Lien securing the Securities granted pursuant to this covenant shall be automatically and unconditionally released and discharged upon the release by the holders of the Pari Passu Indebtedness or Subordinated Indebtedness described above of their Lien on the property or assets of the Company or any Restricted Subsidiary (including any deemed release upon payment in full of all obligations under such Indebtedness), at such time as the holders of all such Pari Passu Indebtedness or - 114 - Subordinated Indebtedness also release their Lien on the property or assets of the Company or such Restricted Subsidiary, or upon any sale, exchange or transfer to any Person not an Affiliate of the Company of the property or assets secured by such Lien, or of all of the Capital Stock held by the Company or any Restricted Subsidiary in, or all or substantially all the assets of, any Restricted Subsidiary creating such Lien. Section 1012. Limitation on Sale of Assets. (a) The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, consummate an Asset Sale unless (i) at least 80% of the consideration from such Asset Sale consists of (A) cash or Cash Equivalents, (B) the assumption of Senior Indebtedness or Senior Guarantor Indebtedness by the party acquiring the assets from the Company of any Restricted Subsidiary, (C) Replacement Assets or (D) a combination of any of the foregoing; and (ii) the Company or such Restricted Subsidiary receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the shares or assets subject to such Asset Sale (as determined by the Board of Directors of the Company and evidenced in a Board Resolution); provided that any notes or other obligations received by the Company or any such Restricted Subsidiary from any transferee of assets from the Company or such Restricted Subsidiary that are converted by the Company or such Restricted Subsidiary into cash at Fair Market Value within 30 days after receipt shall be deemed to be cash for purposes of this provision. (b) If all or a portion of the Net Cash Proceeds of any Asset Sale are not required to be applied to repay permanently any Senior Indebtedness or Senior Guarantor Indebtedness then outstanding as required by the terms thereof, or the Company determines not to apply such Net Cash Proceeds to the permanent prepayment of such Senior Indebtedness or Senior Guarantor Indebtedness, or if no such Senior Indebtedness or Senior Guarantor Indebtedness is then outstanding, then the Company or a Restricted Subsidiary may within 365 days of the Asset Sale invest the Net Cash Proceeds in Replacement Assets. The amount of such Net Cash Proceeds not used or invested within 365 days of the Asset Sale as set forth in this paragraph constitutes "Excess Proceeds." (c) When the aggregate amount of Excess Proceeds exceeds $10 million or more, the Company will apply the Excess Proceeds to the repayment of the Securities and any other Pari Passu Indebtedness outstanding with similar provisions requiring the Company to make an offer to purchase such Indebtedness with the proceeds from any Asset Sale as follows: (A) the Company will make an offer to purchase (an "Offer") from all holders of the Securities in accordance with the procedures set forth in this Indenture in the maximum principal amount (expressed as a multiple of $1,000) of Securities that may be purchased out of an amount (the "Security Amount") equal to the product of such Excess Proceeds multiplied by a fraction, the numerator of which is the outstanding principal amount of the Securities, and the denominator of which is the sum of the - 115 - outstanding principal amount of the Securities and such Pari Passu Indebtedness (subject to proration in the event such amount is less than the aggregate Offered Price (as defined herein) of all Securities tendered) and (B) to the extent required by such Pari Passu Indebtedness to permanently reduce the principal amount of such Pari Passu Indebtedness, the Company will make an offer to purchase or otherwise repurchase or redeem Pari Passu Indebtedness (a "Pari Passu Offer") in an amount (the "Pari Passu Debt Amount") equal to the excess of the Excess Proceeds over the Security Amount; provided that in no event will the Company be required to make a Pari Passu Offer in a Pari Passu Debt Amount exceeding the principal amount of such Pari Passu Indebtedness plus the amount of any premium required to be paid to repurchase such Pari Passu Indebtedness. The offer price for the Securities will be payable in cash in an amount equal to 100% of the principal amount of the Securities plus accrued and unpaid interest, if any, to the date (the "Offer Date") such Offer is consummated (the "Offered Price"), in accordance with the procedures set forth herein. To the extent that the aggregate Offered Price of the Securities tendered pursuant to the Offer is less than the Security Amount relating thereto or the aggregate amount of Pari Passu Indebtedness that is purchased in a Pari Passu Offer is less than the Pari Passu Debt Amount, the Company may use any remaining Excess Proceeds for general corporate purposes. If the aggregate principal amount of Securities and Pari Passu Indebtedness surrendered by holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Securities to be purchased on a pro rata basis. Upon the completion of the purchase of all the Securities tendered pursuant to an Offer and the completion of a Pari Passu Offer, the amount of Excess Proceeds, if any, shall be reset at zero. (d) When the aggregate amount of Excess Proceeds exceeds $10 million, such Excess Proceeds will, prior to any purchase of Securities described in paragraph (c) above, be set aside by the Company in a separate account pending (i) deposit with the Depositary or a paying agent of the amount required to purchase the Securities tendered in an Offer or Pari Passu Indebtedness tendered in a Pari Passu Offer, (ii) delivery by the Company of the Offered Price to the holders of the Securities tendered in an Offer or Pari Passu Indebtedness tendered in a Pari Passu Offer and (iii) the completion of the purchase of all the Securities tendered pursuant to the Offer and the completion of the Pari Passu Offer. Such Excess Proceeds may be invested in Temporary Cash Investments, provided that the maturity date of any such investment made after the amount of Excess Proceeds exceeds $10 million shall not be later than the Offer Date. The Company shall be entitled to any interest or dividends accrued, earned or paid on such Temporary Cash Investments; provided that the Company shall not withdraw such interest from the separate account if an Event of Default has occurred and is continuing. (e) If the Company becomes obligated to make an Offer pursuant to clause (c) above, the Securities and the Pari Passu Indebtedness shall be purchased by the Company, at the option of the holders thereof, in whole or in part in integral multiples of $1,000, on a date that is not earlier than 30 days and not later than 60 days from the date - 116 - the notice of the Offer is given to holders, or such later date as may be necessary for the Company to comply with the requirements under the Exchange Act. (f) The Company will comply with the applicable tender offer rules, including Rule 14e-1 under the Exchange Act, and any other applicable securities laws or regulations in connection with an Offer. (g) Subject to paragraph (e) above, within 30 days after the date on which the amount of Excess Proceeds equals or exceeds $10 million, the Company shall send or cause to be sent by first-class mail, postage prepaid, to the Trustee and to each Holder, at his address appearing in the Security Register, a notice stating or including: (1) that the Holder has the right to require the Company to repurchase, subject to proration, such Holder's Securities at the Offered Price; (2) the Offer Date; (3) the instructions a Holder must follow in order to have his Securities purchased in accordance with paragraph (c) of this Section; (4) (i) the most recently filed Annual Report on Form 10-K (including audited consolidated financial statements) of the Company, the most recent subsequently filed Quarterly Report on Form 10-Q, as applicable, and any Current Report on Form 8-K of the Company filed subsequent to such Quarterly Report, other than Current Reports describing Asset Sales otherwise described in the offering materials (or corresponding successor reports) (or in the event the Company is not required to prepare any of the foregoing Forms, the comparable information required pursuant to Section 1020), (ii) a description of material developments, if any, in the Company's business subsequent to the date of the latest of such reports, (iii) if material, appropriate pro forma financial information, and (iv) such other information, if any, concerning the business of the Company which the Company in good faith believes will enable such Holders to make an informed investment decision regarding the Offer; (5) the Offered Price; (6) the names and addresses of the Paying Agent and the offices or agencies referred to in Section 1002; (7) that Securities must be surrendered prior to the Offer Date to the Paying Agent at the office of the Paying Agent or to an office or agency referred to in Section 1002 to collect payment; - 117 - (8) that any Securities not tendered will continue to accrue interest and that unless the Company defaults in the payment of the Offered Price, any Security accepted for payment pursuant to the Offer shall cease to accrue interest on and after the Offer Date; (9) the procedures for withdrawing a tender; and (10) that the Offered Price for any Security which has been properly tendered and not withdrawn and which has been accepted for payment pursuant to the Offer will be paid promptly following the Offered Date. (g) Holders electing to have Securities purchased hereunder will be required to surrender such Securities at the address specified in the notice prior to the Offer Date. Holders will be entitled to withdraw their election to have their Securities purchased pursuant to this Section 1012 if the Company receives, not later than one Business Day prior to the Offer Date, a telegram, telex, facsimile transmission or letter setting forth (1) the name of the Holder, (2) the certificate number of the Security in respect of which such notice of withdrawal is being submitted, (3) the principal amount of the Security (which shall be $1,000 or an integral multiple thereof) delivered for purchase by the Holder as to which his election is to be withdrawn, (4) a statement that such Holder is withdrawing his election to have such principal amount of such Security purchased, and (5) the principal amount, if any, of such Security (which shall be $1,000 or an integral multiple thereof) that remains subject to the original notice of the Offer and that has been or will be delivered for purchase by the Company. (h) The Company shall (i) not later than the Offer Date, accept for payment Securities or portions thereof tendered pursuant to the Offer, (ii) not later than 10:00 a.m. (New York time) on the Offer Date, deposit with the Trustee or with a Paying Agent an amount of money in same day funds (or New York Clearing House funds if such deposit is made prior to the Offer Date) sufficient to pay the aggregate Offered Price of all the Securities or portions thereof which are to be purchased on that date and (iii) not later than 10:00 a.m. (New York time) on the Offer Date, deliver to the Paying Agent an Officers' Certificate stating the Securities or portions thereof accepted for payment by the Company. The Paying Agent shall promptly mail or deliver to Holders of Securities so accepted payment in an amount equal to the Offered Price of the Securities purchased from each such Holder, and the Company shall execute and the Trustee shall promptly authenticate and mail or deliver to such Holders a new Security equal in principal amount to any unpurchased portion of the Security surrendered. Any Securities not so accepted shall be promptly mailed or delivered by the Paying Agent at the Company's expense to the Holder thereof. For purposes of this Section 1012, the Company shall choose a Paying Agent which shall not be the Company. - 118 - Subject to applicable escheat laws, the Trustee and the Paying Agent shall return to the Company any cash that remains unclaimed, together with interest, if any, thereon, held by them for the payment of the Offered Price; provided, however, that (x) to the extent that the aggregate amount of cash deposited by the Company with the Trustee in respect of an Offer exceeds the aggregate Offered Price of the Securities or portions thereof to be purchased, then the Trustee shall hold such excess for the Company and (y) unless otherwise directed by the Company in writing, promptly after the Business Day following the Offer Date the Trustee shall return any such excess to the Company together with interest or dividends, if any, thereon. (i) Securities to be purchased shall, on the Offer Date, become due and payable at the Offered Price and from and after such date (unless the Company shall default in the payment of the Offered Price) such Securities shall cease to bear interest. Such Offered Price shall be paid to such Holder promptly following the later of the Offer Date and the time of delivery of such Security to the relevant Paying Agent at the office of such Paying Agent by the Holder thereof in the manner required. Upon surrender of any such Security for purchase in accordance with the foregoing provisions, such Security shall be paid by the Company at the Offered Price; provided, however, that installments of interest whose Stated Maturity is on or prior to the Offer Date shall be payable to the Person in whose name the Securities (or any Predecessor Securities) is registered as such on the relevant Regular Record Dates according to the terms and the provisions of Section 309; provided, further, that Securities to be purchased are subject to proration in the event the Excess Proceeds are less than the aggregate Offered Price of all Securities tendered for purchase, with such adjustments as may be appropriate by the Trustee so that only Securities in denominations of $1,000 or integral multiples thereof, shall be purchased. If any Security tendered for purchase shall not be so paid upon surrender thereof by deposit of funds with the Trustee or a Paying Agent in accordance with paragraph (h) above, the principal thereof (and premium, if any, thereon) shall, until paid, bear interest from the Offer Date at the rate borne by such Security. Any Security that is to be purchased only in part shall be surrendered to a Paying Agent at the office of such Paying Agent (with, if the Company, the Security Registrar or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Security Registrar or the Trustee duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing), and the Company shall execute and the Trustee shall authenticate and deliver to the Holder of such Security, without service charge, one or more new Securities of any authorized denomination as requested by such Holder in an aggregate principal amount equal to, and in exchange for, the portion of the principal amount of the Security so surrendered that is not purchased. The Company shall publicly announce the results of the Offer on or as soon as practicable after the Offer Date. - 119 - Section 1013. Limitation on Issuances of Guarantees of and Pledges for Indebtedness. (a) The Company will not cause or permit any Restricted Subsidiary, other than a Guarantor, directly or indirectly, to secure the payment of any Senior Indebtedness of the Company and the Company will not, and will not permit any Restricted Subsidiary to, pledge any intercompany notes representing obligations of any Restricted Subsidiary (other than a Guarantor) to secure the payment of any Senior Indebtedness unless in each case such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to this Indenture providing for a guarantee of payment of the Securities by such Restricted Subsidiary, which guarantee shall be on the same terms as the guarantee of the Senior Indebtedness (if a guarantee of Senior Indebtedness is granted by any such Restricted Subsidiary) except that the guarantee of the Securities need not be secured and shall be subordinated to the claims against such Restricted Subsidiary in respect of Senior Indebtedness to the same extent as the Securities are subordinated to Senior Indebtedness of the Company under this Indenture. (b) The Company will not cause or permit any Restricted Subsidiary (which is not a Guarantor), directly or indirectly, to guarantee, assume or in any other manner become liable with respect to any Indebtedness of the Company or any Restricted Subsidiary unless such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to this Indenture providing for a Guarantee of the Securities on the same terms as the guarantee of such Indebtedness except that (A) such guarantee need not be secured unless required pursuant to Section 1011, (B) if such Indebtedness is by its terms Senior Indebtedness, any such assumption, guarantee or other liability of such Restricted Subsidiary with respect to such Indebtedness shall be senior to such Restricted Subsidiary's Guarantee of the Securities to the same extent as such Senior Indebtedness is senior to the Securities and (C) if such Indebtedness is by its terms expressly subordinated to the Securities, any such assumption, guarantee or other liability of such Restricted Subsidiary with respect to such Indebtedness shall be subordinated to such Restricted Subsidiary's Guarantee of the Securities at least to the same extent as such Indebtedness is subordinated to the Securities. (c) Notwithstanding the foregoing, any Guarantee by a Restricted Subsidiary of the Securities shall provide by its terms that it (and all Liens securing the same) shall be automatically and unconditionally released and discharged upon (i) any sale, exchange or transfer, to any Person not an Affiliate of the Company, of all of the Company's Capital Stock in, or all or substantially all the assets of, such Restricted Subsidiary, which transaction is in compliance with the terms of this Indenture and pursuant to which transaction such Subsidiary is released from all guarantees, if any, by it of other Indebtedness of the Company or any Restricted Subsidiaries or (ii) the release by the holders of the Indebtedness of the Company of their security interest or their guarantee by such Restricted Subsidiary (including any deemed release upon payment in - 120 - full of all obligations under such Indebtedness), at such time as (A) no other Indebtedness of the Company has been secured or guaranteed by such Restricted Subsidiary, as the case may be, or (B) the holders of all such other Indebtedness which is secured or guaranteed by such Restricted Subsidiary also release their security interest in or guarantee by such Restricted Subsidiary (including any deemed release upon payment in full of all obligations under such Indebtedness). Section 1014. Purchase of Securities upon a Change of Control. (a) If a Change of Control shall occur at any time, then each Holder shall have the right to require that the Company purchase such Holder's Securities in whole or in part in integral multiples of $1,000, at a purchase price (the "Change of Control Purchase Price") in cash in an amount equal to 101% of the principal amount of such Securities, plus accrued and unpaid interest, if any, to the date of purchase (the "Change of Control Purchase Date"), pursuant to the offer described below in this Section 1014 (the "Change of Control Offer") and in accordance with the other procedures set forth in subsections (b), (c), (d) and (e) of this Section 1014. (b) Within 30 days of any Change of Control, the Company shall notify the Trustee thereof and give written notice (a "Change of Control Purchase Notice") of such Change of Control to each Holder by first-class mail, postage prepaid, at his address appearing in the Security Register, stating among other things: (1) that a Change of Control has occurred, the date of such event, and that such Holder has the right to require the Company to repurchase such Holder's Securities at the Change of Control Purchase Price; (2) the circumstances and relevant facts regarding such Change of Control (including, but not limited to, information with respect to pro forma historical income, cash flow and capitalization after giving effect to such Change of Control); (3) (i) the most recently filed Annual Report on Form 10-K (including audited consolidated financial statements) of the Company, the most recent subsequently filed Quarterly Report on Form 10-Q, as applicable, and any Current Report on Form 8-K of the Company filed subsequent to such Quarterly Report (or in the event the Company is not required to prepare any of the foregoing Forms, the comparable information required to be prepared by the Company and any Guarantor pursuant to Section 1020), (ii) a description of material developments, if any, in the Company's business subsequent to the date of the latest of such reports and (iii) such other information, if any, concerning the business of the Company which the Company in good faith believes will enable such Holders to - 121 - make an informed investment decision regarding the Change of Control Offer; (4) that the Change of Control Offer is being made pursuant to this Section 1014 and that all Securities properly tendered pursuant to the Change of Control Offer will be accepted for payment at the Change of Control Purchase Price; (5) the Change of Control Purchase Date, which shall be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed, or such later date as is necessary to comply with requirements under the Exchange Act; (6) the Change of Control Purchase Price; (7) the names and addresses of the Paying Agent and the offices or agencies referred to in Section 1002; (8) that Securities must be surrendered on or prior to the Change of Control Purchase Date to the Paying Agent at the office of the Paying Agent or to an office or agency referred to in Section 1002 to collect payment; (9) that the Change of Control Purchase Price for any Security which has been properly tendered and not withdrawn will be paid promptly following the Change of Control Offer Purchase Date; (10) the procedures that a Holder must follow to accept a Change of Control Offer or to withdraw such acceptance; (11) that any Security not tendered will continue to accrue interest; and (12) that, unless the Company defaults in the payment of the Change of Control Purchase Price, any Securities accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Purchase Date. (c) Upon receipt by the Company of the proper tender of Securities, the Holder of the Security in respect of which such proper tender was made shall (unless the tender of such Security is properly withdrawn) thereafter be entitled to receive solely the Change of Control Purchase Price with respect to such Security. Upon surrender of any such Security for purchase in accordance with the foregoing provisions, such Security shall be paid by the Company at the Change of Control Purchase Price; provided, - 122 - however, that installments of interest whose Stated Maturity is on or prior to the Change of Control Purchase Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such on the relevant Regular Record Dates according to the terms and the provisions of Section 309. If any Security tendered for purchase in accordance with the provisions of this Section 1015 shall not be so paid upon surrender thereof, the principal thereof (and premium, if any, thereon) shall, until paid, bear interest from the Change of Control Purchase Date at the rate borne by such Security. Holders electing to have Securities purchased will be required to surrender such Securities to the Paying Agent at the address specified in the Change of Control Purchase Notice at least one Business Day prior to the Change of Control Purchase Date. Any Security that is to be purchased only in part shall be surrendered to a Paying Agent at the office of such Paying Agent (with, if the Company, the Security Registrar or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Security Registrar or the Trustee, as the case may be, duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing), and the Company shall execute and the Trustee shall authenticate and deliver to the Holder of such Security, without service charge, one or more new Securities of any authorized denomination as requested by such Holder in an aggregate principal amount equal to, and in exchange for, the portion of the principal amount of the Security so surrendered that is not purchased. (d) The Company shall (i) not later than the Change of Control Purchase Date, accept for payment Securities or portions thereof tendered pursuant to the Change of Control Offer, (ii) not later than 10:00 a.m. (New York time) on the Change of Control Purchase Date, deposit with the Trustee or with a Paying Agent an amount of money in same day funds sufficient to pay the aggregate Change of Control Purchase Price of all the Securities or portions thereof which are to be purchased as of the Change of Control Purchase Date and (iii) not later than 10:00 a.m. (New York time) on the Change of Control Purchase Date, deliver to the Paying Agent an Officers' Certificate stating the Securities or portions thereof accepted for payment by the Company. The Paying Agent shall promptly mail or deliver to Holders of Securities so accepted payment in an amount equal to the Change of Control Purchase Price of the Securities purchased from each such Holder, and the Company shall execute and the Trustee shall promptly authenticate and mail or deliver to such Holders a new Security equal in principal amount to any unpurchased portion of the Security surrendered. Any Securities not so accepted shall be promptly mailed or delivered by the Paying Agent at the Company's expense to the Holder thereof. The Company will publicly announce the results of the Change of Control Offer on the Change of Control Purchase Date. For purposes of this Section 1014, the Company shall choose a Paying Agent which shall not be the Company. (e) A tender made in response to a Change of Control Purchase Notice may be withdrawn if the Company receives, not later than one Business Day prior to the - 123 - Change of Control Purchase Date, a telegram, telex, facsimile transmission or letter, specifying, as applicable: (1) the name of the Holder; (2) the certificate number of the Security in respect of which such notice of withdrawal is being submitted; (3) the principal amount of the Security (which shall be $1,000 or an integral multiple thereof) delivered for purchase by the Holder as to which such notice of withdrawal is being submitted; (4) a statement that such Holder is withdrawing his election to have such principal amount of such Security purchased; and (5) the principal amount, if any, of such Security (which shall be $1,000 or an integral multiple thereof) that remains subject to the original Change of Control Purchase Notice and that has been or will be delivered for purchase by the Company. (f) Subject to applicable escheat laws, the Trustee and the Paying Agent shall return to the Company any cash that remains unclaimed, together with interest or dividends, if any, thereon, held by them for the payment of the Change of Control Purchase Price; provided, however, that, (x) to the extent that the aggregate amount of cash deposited by the Company pursuant to clause (ii) of paragraph (d) above exceeds the aggregate Change of Control Purchase Price of the Securities or portions thereof to be purchased, then the Trustee shall hold such excess for the Company and (y) unless otherwise directed by the Company in writing, promptly after the Business Day following the Change of Control Purchase Date the Trustee shall return any such excess to the Company together with interest, if any, thereon. (g) The Company shall comply, to the extent applicable, with the applicable tender offer rules, including Rule 14e-1 under the Exchange Act, and any other applicable securities laws or regulations in connection with a Change of Control Offer. (h) Notwithstanding the foregoing, the Company will not be required to make a Change of Control Offer if a third party makes the Change of Control Offer, in the manner, at the times and otherwise in compliance with the requirements set forth in this Indenture applicable to a Change of Control Offer made by the Company and purchases all the Securities validly tendered and not withdrawn under such Change of Control Offer. - 124 - Section 1015. Limitation on Subsidiary Preferred Stock. The Company will not permit (a) any Restricted Subsidiary of the Company to issue, sell or transfer any Preferred Stock, except for (i) Preferred Stock issued or sold to, held by or transferred to the Company or a Wholly Owned Restricted Subsidiary, and (ii) Preferred Stock issued by a Person prior to the time (A) such Person becomes a Restricted Subsidiary, (B) such Person merges with or into a Restricted Subsidiary or (C) a Restricted Subsidiary merges with or into such Person; provided that such Preferred Stock was not issued or incurred by such Person in anticipation of the type of transaction contemplated by subclause (A), (B) or (C) or (b) any Person (other than the Company or a Wholly Owned Restricted Subsidiary) to acquire Preferred Stock of any Restricted Subsidiary from the Company or any Restricted Subsidiary, except, in the case of clause (a) or (b), upon the acquisition of all the outstanding Capital Stock of such Restricted Subsidiary in accordance with the terms of this Indenture. Section 1016. Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries. The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to (i) pay dividends or make any other distribution on its Capital Stock, or any other interest or participation in or measured by its profits, (ii) pay any Indebtedness owed to the Company or any other Restricted Subsidiary, (iii) make any Investment in the Company or any other Restricted Subsidiary or (iv) transfer any of its properties or assets to the Company or any other Restricted Subsidiary, except for: (a) any encumbrance or restriction pursuant to an agreement in effect on the Issue Date; (b) any encumbrance or restriction, with respect to a Restricted Subsidiary that is not a Restricted Subsidiary of the Company on the Issue Date, in existence at the time such Person becomes a Restricted Subsidiary of the Company and not incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary, provided that such encumbrances and restrictions are not applicable to the Company or any Restricted Subsidiary or the properties or assets of the Company or any Restricted Subsidiary other than such Subsidiary which is becoming a Restricted Subsidiary; (c) customary provisions contained in an agreement that has been entered into for the sale or other disposition of all or substantially all of the Capital Stock or assets of a Restricted Subsidiary; provided, however, that the restrictions are applicable only to such Restricted Subsidiary or assets; (d) any encumbrance or restriction existing under or by reason of applicable law; (e) customary provisions restricting subletting or assignment of any lease governing any leasehold interest of any Restricted Subsidiary; (f) covenants in franchise agreements with Manufacturers customary for franchise agreements in the automobile retailing industry; (g) any encumbrance or restriction contained in any Purchase Money Obligations for property to the extent such restriction or encumbrance restricts the - 125 - transfer of such property; (h) any encumbrances or restrictions in security agreements securing Indebtedness (other than Subordinated Indebtedness) of a Guarantor (including any Inventory Facility) (to the extent that such Liens are otherwise incurred in accordance with Section 1011) that restrict the transfer of property subject to such agreements, provided that any such encumbrance or restriction is released to the extent the underlying Lien is released or the related Indebtedness is repaid; and (i) any encumbrance or restriction existing under any agreement that extends, renews, refinances or replaces the agreements containing the encumbrances or restrictions in the foregoing clauses (a) and (b), or in this clause (i), provided that the terms and conditions of any such encumbrances or restrictions are no more restrictive in any material respect than those under or pursuant to the agreement evidencing the Indebtedness so extended, renewed, refinanced or replaced. Section 1017. Limitation on Senior Subordinated Indebtedness. The Company will not, and will not permit or cause any Guarantor to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise in any manner become directly or indirectly liable for or with respect to or otherwise permit to exist any Indebtedness that is subordinate in right of payment to any Indebtedness of the Company or such Guarantor, as the case may be, unless such Indebtedness is also pari passu with the Securities or the Guarantee of such Guarantor or subordinated in right of payment to the Securities or such Guarantee at least to the same extent as the Securities or such Guarantee are subordinated in right of payment to Senior Indebtedness or Senior Indebtedness of such Guarantor, as the case may be, as set forth in this Indenture. Section 1018. Limitations on Unrestricted Subsidiaries. The Company may designate after the Issue Date any Subsidiary as an "Unrestricted Subsidiary" under this Indenture (a "Designation") only if: (a) no Default shall have occurred and be continuing at the time of or after giving effect to such Designation; (b) the Company would be permitted to make an Investment (other than a Permitted Investment) at the time of Designation (assuming the effectiveness of such Designation) pursuant to the first paragraph of Section 1009 herein in an amount (the "Designation Amount") equal to the greater of (1) the net book value of the Company's interest in such Subsidiary calculated in accordance with GAAP or (2) the Fair Market Value of the Company's interest in such Subsidiary as determined in good faith by the Company's board of directors; (c) the Company would be permitted to incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to Section 1008 at the time of such Designation (assuming the effectiveness of such Designation); - 126 - (d) such Unrestricted Subsidiary does not own any Capital Stock in any Restricted Subsidiary of the Company which is not simultaneously being designated an Unrestricted Subsidiary; (e) such Unrestricted Subsidiary is not liable, directly or indirectly, with respect to any Indebtedness other than Unrestricted Subsidiary Indebtedness, provided that an Unrestricted Subsidiary may provide a Guarantee for the Securities; and (f) such Unrestricted Subsidiary is not a party to any agreement, contract, arrangement or understanding at such time with the Company or any Restricted Subsidiary unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company or, in the event such condition is not satisfied, the value of such agreement, contract, arrangement or understanding to such Unrestricted Subsidiary shall be deemed a Restricted Payment. In the event of any such Designation, the Company shall be deemed to have made an Investment constituting a Restricted Payment pursuant to Section 1009 for all purposes of this Indenture in the Designation Amount. The Company shall not and shall not cause or permit any Restricted Subsidiary to at any time (x) provide credit support for, or subject any of its property or assets (other than the Capital Stock of any Unrestricted Subsidiary) to the satisfaction of, any Indebtedness of any Unrestricted Subsidiary (including any undertaking, agreement or instrument evidencing such Indebtedness) (other than Permitted Investments in Unrestricted Subsidiaries) or (y) be directly or indirectly liable for any Indebtedness of any Unrestricted Subsidiary. For purposes of the foregoing, the Designation of a Subsidiary of the Company as an Unrestricted Subsidiary shall be deemed to be the Designation of all of the Subsidiaries of such Subsidiary. The Company may revoke any Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation") if: (a) no Default shall have occurred and be continuing at the time of and after giving effect to such Revocation; (b) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding immediately following such Revocation would, if incurred at such time, have been permitted to be incurred for all purposes of this Indenture; and (c) unless such redesignated Subsidiary shall not have any Indebtedness outstanding (other than Indebtedness that would be Permitted Indebtedness), immediately after giving effect to such proposed Revocation, and after giving pro forma effect to the - 127 - incurrence of any such Indebtedness of such redesignated Subsidiary as if such Indebtedness was incurred on the date of the Revocation, the Company could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to Section 1008 herein. All Designations and Revocations must be evidenced by a resolution of the Board of Directors of the Company delivered to the Trustee certifying compliance with the foregoing provisions. Section 1019. Provision of Financial Statements. Whether or not the Company is subject to Section 13(a) or 15(d) of the Exchange Act, the Company and each Guarantor (to the extent such Guarantor would be required if subject to Section 13(a) or 15(d) of the Exchange Act) will, to the extent permitted under the Exchange Act, file with the Commission the annual reports, quarterly reports and other documents which the Company and such Guarantor would have been required to file with the Commission pursuant to Sections 13(a) or 15(d) if the Company or such Guarantor were so subject, such documents to be filed with the Commission on or prior to the date (the "Required Filing Date") by which the Company and such Guarantor would have been required so to file such documents if the Company and such Guarantor were so subject. The Company will also in any event (x) within 15 days of each Required Filing Date (i) transmit by mail to all Holders, as their names and addresses appear in the Security Register, without cost to such Holders and (ii) file with the Trustee copies of the annual reports, quarterly reports and other documents which the Company and such Guarantor would have been required to file with the Commission pursuant to Sections 13(a) or 15(d) of the Exchange Act if the Company and such Guarantor were subject to either of such Sections and (y) if filing such documents by the Company and such Guarantor with the Commission is not permitted under the Exchange Act, promptly upon written request and payment of the reasonable cost of duplication and delivery, supply copies of such documents to any prospective Holder at the Company's cost. If any Guarantor's financial statements would be required to be included in the financial statements filed or delivered pursuant to this Indenture if the Company were subject to Section 13(a) or 15(d) of the Exchange Act, the Company shall include such Guarantor's financial statements in any filing or delivery pursuant to this Indenture. In addition, so long as any of the Securities remain outstanding, the Company will make available to any prospective purchaser of Securities or beneficial owner of Securities in connection with any sale thereof the information required by Rule 144A(d)(4) under the Securities Act, until such time as the Company has either exchanged the Securities for securities identical in all material respects which have been registered under the Securities Act or until such time as the Holders thereof have disposed of such Securities pursuant to an effective registration statement under the Securities Act. - 128 - Section 1020. Statement by Officers as to Default. (a) The Company will deliver to the Trustee, on or before a date not more than 120 days after the end of each fiscal year of the Company ending after the date hereof, and 60 days after the end of each fiscal quarter ending after the date hereof, a written statement signed by two executive officers of the Company and the Guarantors, one of whom shall be the principal executive officer, principal financial officer or principal accounting officer of the Company and the Guarantors, as to compliance herewith, including whether or not, after a review of the activities of the Company during such year and of the Company's and each Guarantor's performance under this Indenture, to the best knowledge, based on such review, of the signers thereof, the Company and each Guarantor have fulfilled all of their respective obligations and are in compliance with all conditions and covenants under this Indenture throughout such year and, if there has been a Default specifying each Default and the nature and status thereof and any actions being taken by the Company with respect thereto. (b) When any Default or Event of Default has occurred and is continuing, or if the Trustee or any Holder or the trustee for or the holder of any other evidence of Indebtedness of the Company or any Subsidiary gives any notice or takes any other action with respect to a claimed default the Company shall deliver to the Trustee by registered or certified mail or facsimile transmission followed by an originally executed copy of an Officers' Certificate specifying such Default, Event of Default, notice or other action, the status thereof and what actions the Company is taking or proposes to take with respect thereto, within five Business Days after the occurrence of such Default or Event of Default. Section 1021. Waiver of Certain Covenants. The Company may omit in any particular instance to comply with any covenant or condition set forth in Sections 1006 through 1011, 1013 and 1015 through 1020, if, before or after the time for such compliance, the Holders of not less than a majority in aggregate principal amount of the Securities at the time Outstanding shall, by Act of such Holders, waive such compliance in such instance with such covenant or provision, but no such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such covenant or condition shall remain in full force and effect. - 129 - ARTICLE ELEVEN REDEMPTION OF SECURITIES Section 1101. Rights of Redemption. (a) The Securities are subject to redemption at any time on or after August 1, 2003, at the option of the Company, in whole or in part, subject to the conditions, and at the Redemption Prices, specified in the form of Security, together with accrued and unpaid interest, if any, to the Redemption Date (subject to the right of Holders of record on relevant Regular Record Dates and Special Record Dates to receive interest due on relevant Interest Payment Dates and Special Payment Dates). (b) In addition, at any time prior to August 1, 2001, the Company may, at its option, use the net proceeds of one or more Public Equity Offerings to redeem up to an aggregate of 35% of the aggregate principal amount of Securities originally issued under this Indenture at a redemption price equal to 111% of the of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the Redemption Date; provided that at least 65% of the initial aggregate principal amount of Securities remains outstanding immediately after the occurrence of such redemption. In order to effect the foregoing redemption, the Company must mail a notice of redemption no later than 30 days after the closing of the related Public Equity Offering and must consummate such redemption within 60 days of the closing of the Public Equity Offering. Section 1102. Applicability of Article. Redemption of Securities at the election of the Company or otherwise, as permitted or required by any provision of this Indenture, shall be made in accordance with such provision and this Article Eleven. Section 1103. Election to Redeem; Notice to Trustee. The election of the Company to redeem any Securities pursuant to Section 1101 shall be evidenced by a Company Order and an Officers' Certificate. In case of any redemption at the election of the Company, the Company shall, not less than 45 nor more than 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice period shall be satisfactory to the Trustee), notify the Trustee in writing of such Redemption Date and of the principal amount of Securities to be redeemed. Section 1104. Selection by Trustee of Securities to Be Redeemed. If less than all the Securities are to be redeemed, the particular Securities or portions thereof to be redeemed in compliance with the national security exchange, if any, on which the securities are listed, or if the securities are not so listed, on a pro rata - 130 - basis, by lot or by any other method the Trustee shall deem fair and reasonable; provided, further, that any such redemption pursuant to the provisions relating to a Public Equity offering shall be made on a pro rata basis or on as nearly a pro rata basis as practicable (subject to the procedures of The Depositary Trust Company or any other Depositary). The Trustee shall promptly notify the Company and the Security Registrar in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to redemption of Securities shall relate, in the case of any Security redeemed or to be redeemed only in part, to the portion of the principal amount of such Security which has been or is to be redeemed. Section 1105. Notice of Redemption. Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 30 days nor more than 60 days prior to the Redemption Date, to each Holder of Securities to be redeemed, at its address appearing in the Security Register. All notices of redemption shall state: (a) the Redemption Date; (b) the Redemption Price; (c) if less than all Outstanding Securities are to be redeemed, the identification of the particular Securities to be redeemed; (d) in the case of a Security to be redeemed in part, the principal amount of such Security to be redeemed and that after the Redemption Date upon surrender of such Security, new Security or Securities in the aggregate principal amount equal to the unredeemed portion thereof will be issued; (e) that Securities called for redemption must be surrendered to the Paying Agent to collect the Redemption Price; (f) that on the Redemption Date the Redemption Price will become due and payable upon each such Security or portion thereof to be redeemed, and that (unless the Company shall default in payment of the Redemption Price) interest thereon shall cease to accrue on and after said date; (g) the names and addresses of the Paying Agent and the offices or agencies referred to in Section 1002 where such Securities are to be surrendered for payment of the Redemption Price; - 131 - (h) the CUSIP number, if any, relating to such Securities; and (i) the procedures that a Holder must follow to surrender the Securities to be redeemed. Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company's written request, by the Trustee in the name and at the expense of the Company. If the Company elects to give notice of redemption, it shall provide the Trustee with a certificate stating that such notice has been given in compliance with the requirements of this Section 1105. The notice if mailed in the manner herein provided shall be conclusively presumed to have been given, whether or not the Holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the Holder of any Security designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Security. Section 1106. Deposit of Redemption Price. On or prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company or any of its Affiliates is acting as Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money in same day funds sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date or Special Payment Date) accrued interest on, all the Securities or portions thereof which are to be redeemed on that date. The Paying Agent shall promptly mail or deliver to Holders of Securities so redeemed payment in an amount equal to the Redemption Price of the Securities purchased from each such Holder. All money, if any, earned on funds held in trust by the Trustee or any Paying Agent shall be remitted to the Company. For purposes of this Section 1106, the Company shall choose a Paying Agent which shall not be the Company. Section 1107. Securities Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Securities shall cease to bear interest. Holders will be required to surrender the Securities to be redeemed to the Paying Agent at the address specified in the notice of redemption at least one Business Day prior to the Redemption Date. Upon surrender of any such Security for redemption in accordance with said notice, such Security shall be paid by the Company at the Redemption Price together with accrued interest to the Redemption Date; provided, however, that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more - 132 - Predecessor Securities, registered as such on the relevant Regular Record Dates and Special Record Dates according to the terms and the provisions of Section 309. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal and premium, if any, shall, until paid, bear interest from the Redemption Date at the rate borne by such Security. Section 1108. Securities Redeemed or Purchased in Part. Any Security which is to be redeemed or purchased only in part shall be surrendered to the Paying Agent at the office or agency maintained for such purpose pursuant to Section 1002 (with, if the Company, the Security Registrar or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company, the Security Registrar or the Trustee, as the case may be, duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities, of any authorized denomination as requested by such Holder in aggregate principal amount equal to, and in exchange for, the unredeemed portion of the principal of the Security so surrendered that is not redeemed or purchased. ARTICLE TWELVE SATISFACTION AND DISCHARGE Section 1201. Satisfaction and Discharge of Indenture. This Indenture shall be discharged and shall cease to be of further effect (except as to surviving rights of registration of transfer or exchange of Securities as expressly provided for herein) as to all Outstanding Securities hereunder, and the Trustee, upon Company Request and at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (a) either (1) all the Securities theretofore authenticated and delivered (except (i) lost, stolen or destroyed Securities which have been replaced or paid as provided in Section 308 or (ii) all Securities whose payment has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust as provided in Section 1003) have been delivered to the Trustee for cancellation; or - 133 - (2) all Securities not theretofore delivered to the Trustee for cancellation (i) have become due and payable, (ii) will become due and payable at their Stated Maturity within one year or (iii) are to be called for redemption within one year under arrangements reasonably satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company; and the Company or any Guarantor has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust an amount in United States dollars sufficient to pay and discharge the entire Indebtedness on the Securities not theretofore delivered to the Trustee for cancellation, including the principal of, premium, if any, and accrued interest on, such Securities at such Maturity, Stated Maturity or Redemption Date; (b) the Company or any Guarantor has paid or caused to be paid all other sums payable hereunder by the Company and any Guarantor; and (c) the Company have delivered to the Trustee an Officers' Certificate and an Opinion of Independent Counsel, in form and substance reasonably satisfactory to the Trustee, each stating that (i) all conditions precedent herein relating to the satisfaction and discharge hereof have been complied with and (ii) such satisfaction and discharge will not result in a breach or violation of, or constitute a default under, this Indenture or any other material agreement or instrument to which the Company, any Guarantor or any Restricted Subsidiary is a party or by which the Company, any Guarantor or any Restricted Subsidiary is bound. Notwithstanding the satisfaction and discharge hereof, the obligations of the Company to the Trustee under Section 607 and, if United States dollars shall have been deposited with the Trustee pursuant to subclause (2) of subsection (a) of this Section 1201, the obligations of the Trustee under Section 1202 and the last paragraph of Section 1003 shall survive. Section 1202. Application of Trust Money. Subject to the provisions of the last paragraph of Section 1003, all United States dollars deposited with the Trustee pursuant to Section 1201 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal of, premium, if any, and interest on, the Securities for whose payment such United States dollars have been deposited with the Trustee. - 134 - ARTICLE THIRTEEN GUARANTEES Section 1301. Guarantors' Guarantee. For value received, each of the Guarantors, in accordance with this Article Thirteen, hereby absolutely, fully, unconditionally and irrevocably guarantees, jointly and severally with each other and with each other Person which may become a Guarantor hereunder, to the Trustee and the Holders, as if the Guarantors were the principal debtor, the punctual payment and performance when due of all Indenture Obligations (which for purposes of this Guarantee shall also be deemed to include all commissions, fees, charges, costs and other expenses (including reasonable legal fees and disbursements of one counsel) arising out of or incurred by the Trustee or the Holders in connection with the enforcement of this Guarantee). Section 1302. Continuing Guarantee; No Right of Set-Off; Independent Obligation. (a) This Guarantee shall be a continuing guarantee of the payment and performance of all Indenture Obligations and shall remain in full force and effect until the payment in full of all of the Indenture Obligations and shall apply to and secure any ultimate balance due or remaining unpaid to the Trustee or the Holders; and this Guarantee shall not be considered as wholly or partially satisfied by the payment or liquidation at any time or from time to time of any sum of money for the time being due or remaining unpaid to the Trustee or the Holders. Each Guarantor, jointly and severally, covenants and agrees to comply with all obligations, covenants, agreements and provisions applicable to it in this Indenture including those set forth in Article Eight. Without limiting the generality of the foregoing, each Guarantor's liability shall extend to all amounts which constitute part of the Indenture Obligations and would be owed by the Company under this Indenture and the Securities but for the fact that they are unenforceable, reduced, limited, impaired, suspended or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving the Company. (b) Each Guarantor, jointly and severally, hereby guarantees that the Indenture Obligations will be paid to the Trustee without set-off or counterclaim or other reduction whatsoever (whether for taxes, withholding or otherwise) in lawful currency of the United States of America. (c) Each Guarantor, jointly and severally, guarantees that the Indenture Obligations shall be paid strictly in accordance with their terms regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of the holders of the Securities. - 135 - (d) Each Guarantor's liability to pay or perform or cause the performance of the Indenture Obligations under this Guarantee shall arise forthwith after demand for payment or performance by the Trustee has been given to the Guarantors in the manner prescribed in Section 106 hereof. (e) Except as provided herein, the provisions of this Article Thirteen cover all agreements between the parties hereto relative to this Guarantee and none of the parties shall be bound by any representation, warranty or promise made by any Person relative thereto which is not embodied herein; and it is specifically acknowledged and agreed that this Guarantee has been delivered by each Guarantor free of any conditions whatsoever and that no representations, warranties or promises have been made to any Guarantor affecting its liabilities hereunder, and that the Trustee shall not be bound by any representations, warranties or promises now or at any time hereafter made by the Company to any Guarantor. (f) This Guarantee is a guarantee of payment, performance and compliance and not of collectibility and is in no way conditioned or contingent upon any attempt to collect from or enforce performance or compliance by the Company or upon any event or condition whatsoever. (g) The obligations of the Guarantors set forth herein constitute the full recourse obligations of the Guarantors enforceable against them to the full extent of all their assets and properties. Section 1303. Guarantee Absolute. The obligations of the Guarantors hereunder are independent of the obligations of the Company under the Securities and this Indenture and a separate action or actions may be brought and prosecuted against any Guarantor whether or not an action or proceeding is brought against the Company and whether or not the Company is joined in any such action or proceeding. The liability of the Guarantors hereunder is irrevocable, absolute and unconditional and (to the extent permitted by law) the liability and obligations of the Guarantors hereunder shall not be released, discharged, mitigated, waived, impaired or affected in whole or in part by: (a) any defect or lack of validity or enforceability in respect of any Indebtedness or other obligation of the Company or any other Person under this Indenture or the Securities, or any agreement or instrument relating to any of the foregoing; - 136 - (b) any grants of time, renewals, extensions, indulgences, releases, discharges or modifications which the Trustee or the Holders may extend to, or make with, the Company, any Guarantor or any other Person, or any change in the time, manner or place of payment of, or in any other term of, all or any of the Indenture Obligations, or any other amendment or waiver of, or any consent to or departure from, this Indenture or the Securities, including any increase or decrease in the Indenture Obligations; (c) the taking of security from the Company, any Guarantor or any other Person, and the release, discharge or alteration of, or other dealing with, such security; (d) the occurrence of any change in the laws, rules, regulations or ordinances of any jurisdiction by any present or future action of any governmental authority or court amending, varying, reducing or otherwise affecting, or purporting to amend, vary, reduce or otherwise affect, any of the Indenture Obligations and the obligations of any Guarantor hereunder; (e) the abstention from taking security from the Company, any Guarantor or any other Person or from perfecting, continuing to keep perfected or taking advantage of any security; (f) any loss, diminution of value or lack of enforceability of any security received from the Company, any Guarantor or any other Person, and including any other guarantees received by the Trustee; (g) any other dealings with the Company, any Guarantor or any other Person, or with any security; (h) the Trustee's or the Holders' acceptance of compositions from the Company or any Guarantor; (i) the application by the Holders or the Trustee of all monies at any time and from time to time received from the Company, any Guarantor or any other Person on account of any indebtedness and liabilities owing by the Company or any Guarantor to the Trustee or the Holders, in such manner as the Trustee or the Holders deems best and the changing of such application in whole or in part and at any time or from time to time, or any manner of application of collateral, - 137 - or proceeds thereof, to all or any of the Indenture Obligations, or the manner of sale of any collateral; (j) the release or discharge of the Company or any Guarantor of the Securities or of any Person liable directly as surety or otherwise by operation of law or otherwise for the Securities, other than an express release in writing given by the Trustee, on behalf of the Holders, of the liability and obligations of any Guarantor hereunder; (k) any change in the name, business, capital structure or governing instrument of the Company or any Guarantor or any refinancing or restructuring of any of the Indenture Obligations; (l) the sale of the Company's or any Guarantor's business or any part thereof; (m) subject to Section 1314, any merger or consolidation, arrangement or reorganization of the Company, any Guarantor, any Person resulting from the merger or consolidation of the Company or any Guarantor with any other Person or any other successor to such Person or merged or consolidated Person or any other change in the corporate existence, structure or ownership of the Company or any Guarantor or any change in the corporate relationship between the Company and any Guarantor, or any termination of such relationship; (n) the insolvency, bankruptcy, liquidation, winding-up, dissolution, receivership, arrangement, readjustment, assignment for the benefit of creditors or distribution of the assets of the Company or its assets or any resulting discharge of any obligations of the Company (whether voluntary or involuntary) or of any Guarantor (whether voluntary or involuntary) or the loss of corporate existence; (o) subject to Section 1314, any arrangement or plan of reorganization affecting the Company or any Guarantor; (p) any failure, omission or delay on the part of the Company to conform or comply with any term of this Indenture; (q) any limitation on the liability or obligations of the Company or any other Person under this Indenture, or any discharge, termination, cancellation, distribution, irregularity, invalidity or unenforceability in whole or in part of this Indenture; - 138 - (r) any other circumstance (including any statute of limitations) that might otherwise constitute a defense available to, or discharge of, the Company or any Guarantor; or (s) any modification, compromise, settlement or release by the Trustee, or by operation of law or otherwise, of the Indenture Obligations or the liability of the Company or any other obligor under the Securities, in whole or in part, and any refusal of payment by the Trustee, in whole or in part, from any other obligor or other guarantor in connection with any of the Indenture Obligations, whether or not with notice to, or further assent by, or any reservation of rights against, each of the Guarantors. Section 1304. Right to Demand Full Performance. In the event of any demand for payment or performance by the Trustee from any Guarantor hereunder, the Trustee or the Holders shall have the right to demand its full claim and to receive all dividends or other payments in respect thereof until the Indenture Obligations have been paid in full, and the Guarantors shall continue to be jointly and severally liable hereunder for any balance which may be owing to the Trustee or the Holders by the Company under this Indenture and the Securities. The retention by the Trustee or the Holders of any security, prior to the realization by the Trustee or the Holders of its rights to such security upon foreclosure thereon, shall not, as between the Trustee and any Guarantor, be considered as a purchase of such security, or as payment, satisfaction or reduction of the Indenture Obligations due to the Trustee or the Holders by the Company or any part thereof. Each Guarantor, promptly after demand, will reimburse the Trustee and the Holders for all costs and expenses of collecting such amount under, or enforcing this Guarantee, including, without limitation, the reasonable fees and expenses of counsel. Section 1305. Waivers. (a) Each Guarantor hereby expressly waives (to the extent permitted by law) notice of the acceptance of this Guarantee and notice of the existence, renewal, extension or the non-performance, non-payment, or non-observance on the part of the Company of any of the terms, covenants, conditions and provisions of this Indenture or the Securities or any other notice whatsoever to or upon the Company or such Guarantor with respect to the Indenture Obligations, whether by statute, rule of law or otherwise. Each Guarantor hereby acknowledges communication to it of the terms of this Indenture and the Securities and all of the provisions therein contained and consents to and - 139 - approves the same. Each Guarantor hereby expressly waives (to the extent permitted by law) diligence, presentment, protest and demand for payment with respect to (i) any notice of sale, transfer or other disposition of any right, title to or interest in the Securities by the Holders or in this Indenture, (ii) any release of any Guarantor from its obligations hereunder resulting from any loss by it of its rights of subrogation hereunder and (iii) any other circumstances whatsoever that might otherwise constitute a legal or equitable discharge, release or defense of a guarantor or surety or that might otherwise limit recourse against such Guarantor. (b) Without prejudice to any of the rights or recourses which the Trustee or the Holders may have against the Company, each Guarantor hereby expressly waives (to the extent permitted by law) any right to require the Trustee or the Holders to: (i) enforce, assert, exercise, initiate or exhaust any rights, remedies or recourse against the Company, any Guarantor or any other Person under this Indenture or otherwise; (ii) value, realize upon, or dispose of any security of the Company or any other Person held by the Trustee or the Holders; (iii) initiate or exhaust any other remedy which the Trustee or the Holders may have in law or equity; or (iv) mitigate the damages resulting from any default under this Indenture; before requiring or becoming entitled to demand payment from such Guarantor under this Guarantee. Section 1306. The Guarantors Remain Obligated in Event the Company Is No Longer Obligated to Discharge Indenture Obligations. It is the express intention of the Trustee and the Guarantors that if for any reason the Company has no legal existence, is or becomes under no legal obligation to discharge the Indenture Obligations owing to the Trustee or the Holders by the Company or if any of the Indenture Obligations owing by the Company to the Trustee or the Holders becomes irrecoverable from the Company by operation of law or for any reason whatsoever, this Guarantee and the covenants, agreements and obligations of the Guarantors contained in this Article Thirteen shall nevertheless be binding upon the Guarantors, as principal debtor, until such time as all such Indenture Obligations have been paid in full to the Trustee and all Indenture Obligations owing to the Trustee or the - 140 - Holders by the Company have been discharged, or such earlier time as Section 402 shall apply to the Securities and the Guarantors shall be responsible for the payment thereof to the Trustee or the Holders upon demand. Section 1307. Fraudulent Conveyance; Contribution; Subrogation. (a) Each Guarantor that is a Subsidiary of the Company, and by its acceptance hereof each Holder, hereby confirms that it is the intention of all such parties that the Guarantee by such Guarantor pursuant to its Guarantee not constitute a fraudulent transfer or conveyance for purposes of the Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law. To effectuate the foregoing intention, the Holders and such Guarantor hereby irrevocably agree that the obligations of such Guarantor under its Guarantee shall be limited to the maximum amount which, after giving effect to all other contingent and fixed liabilities of such Guarantor, and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under its Guarantee or pursuant to its contribution obligations under this Indenture, will result in the obligations of such Guarantor under its Guarantee not constituting such fraudulent transfer or conveyance. (b) Each Guarantor that makes a payment or distribution under its Guarantee shall be entitled to a contribution from each other Guarantor, if any, in a pro rata amount based on the net assets of each Guarantor, determined in accordance with GAAP. (c) Each Guarantor hereby waives all rights of subrogation or contribution, whether arising by contract or operation of law (including, without limitation, any such right arising under federal bankruptcy law) or otherwise by reason of any payment by it pursuant to the provisions of this Article Thirteen until payment in full of all Indenture Obligations. Section 1308. Guarantee Is in Addition to Other Security. This Guarantee shall be in addition to and not in substitution for any other guarantees or other security which the Trustee may now or hereafter hold in respect of the Indenture Obligations owing to the Trustee or the Holders by the Company and (except as may be required by law) the Trustee shall be under no obligation to marshal in favor of each of the Guarantors any other guarantees or other security or any moneys or other assets which the Trustee may be entitled to receive or upon which the Trustee or the Holders may have a claim. - 141 - Section 1309. Release of Security Interests. Without limiting the generality of the foregoing and except as otherwise provided in this Indenture, each Guarantor hereby consents and agrees, to the fullest extent permitted by applicable law, that the rights of the Trustee hereunder, and the liability of the Guarantors hereunder, shall not be affected by any and all releases for any purpose of any collateral, if any, from the Liens and security interests created by any collateral document and that this Guarantee shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Indenture Obligations is rescinded or must otherwise be returned by the Trustee upon the insolvency, bankruptcy or reorganization of the Company or otherwise, all as though such payment had not been made. Section 1310. No Bar to Further Actions. Except as provided by law, no action or proceeding brought or instituted under Article Thirteen and this Guarantee and no recovery or judgment in pursuance thereof shall be a bar or defense to any further action or proceeding which may be brought under Article Thirteen and this Guarantee by reason of any further default or defaults under Article Thirteen and this Guarantee or in the payment of any of the Indenture Obligations owing by the Company. Section 1311. Failure to Exercise Rights Shall Not Operate as a Waiver; No Suspension of Remedies. (a) No failure to exercise and no delay in exercising, on the part of the Trustee or the Holders, any right, power, privilege or remedy under this Article Thirteen and this Guarantee shall operate as a waiver thereof, nor shall any single or partial exercise of any rights, power, privilege or remedy preclude any other or further exercise thereof, or the exercise of any other rights, powers, privileges or remedies. The rights and remedies herein provided for are cumulative and not exclusive of any rights or remedies provided in law or equity. (b) Nothing contained in this Article Thirteen shall limit the right of the Trustee or the Holders to take any action to accelerate the maturity of the Securities pursuant to Article Five or to pursue any rights or remedies hereunder or under applicable law. - 142 - Section 1312. Trustee's Duties; Notice to Trustee. (a) Any provision in this Article Thirteen or elsewhere in this Indenture allowing the Trustee to request any information or to take any action authorized by, or on behalf of any Guarantor, shall be permissive and shall not be obligatory on the Trustee except as the Holders may direct in accordance with the provisions of this Indenture or where the failure of the Trustee to request any such information or to take any such action arises from the Trustee's negligence, bad faith or willful misconduct. (b) The Trustee shall not be required to inquire into the existence, powers or capacities of the Company, any Guarantor or the officers, directors or agents acting or purporting to act on their respective behalf. Section 1313. Successors and Assigns. All terms, agreements and conditions of this Article Thirteen shall extend to and be binding upon each Guarantor and its successors and permitted assigns and shall enure to the benefit of and may be enforced by the Trustee and its successors and assigns; provided, however, that the Guarantors may not assign any of their rights or obligations hereunder other than in accordance with Article Eight. Section 1314. Release of Guarantee. Concurrently with the payment in full of all of the Indenture Obligations, the Guarantors shall be released from and relieved of their obligations under this Article Thirteen. Upon the delivery by the Company to the Trustee of an Officers' Certificate and, if requested by the Trustee, an Opinion of Counsel to the effect that the transaction giving rise to the release of this Guarantee was made by the Company in accordance with the provisions of this Indenture and the Securities, the Trustee shall execute any documents reasonably required in order to evidence the release of the Guarantors from their obligations under this Guarantee. If any of the Indenture Obligations are revived and reinstated after the termination of this Guarantee, then all of the obligations of the Guarantors under this Guarantee shall be revived and reinstated as if this Guarantee had not been terminated until such time as the Indenture Obligations are paid in full, and each Guarantor shall enter into an amendment to this Guarantee, reasonably satisfactory to the Trustee, evidencing such revival and reinstatement. This Guarantee shall terminate with respect to each Guarantor and shall be automatically and unconditionally released and discharged as provided in Section 1013(b). - 143 - Section 1315. Execution of Guarantee. (a) To evidence the Guarantee, each Guarantor hereby agrees to execute the guarantee substantially in the form set forth in Section 205, to be endorsed on each Security authenticated and delivered by the Trustee and that this Indenture shall be executed on behalf of each Guarantor by its Chairman of the Board, its President, its Chief Executive Officer, Chief Operating Officer or one of its Vice Presidents, under its corporate seal reproduced thereon attested by its Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Securities may be manual or facsimile. (b) Any person that was not a Guarantor on the Issue Date may become a Guarantor by executing and delivering to the Trustee (i) a supplemental indenture in form and substance satisfactory to the Trustee, which subjects such person to the provisions (including the representations and warranties) of this Indenture as a Guarantor, (ii) in the event that as of the date of such supplemental indenture any Registrable Securities are outstanding, an instrument in form and substance satisfactory to the Trustee which subjects such person to the provisions of the Registration Rights Agreement with respect to such outstanding Registrable Securities, and (iii) an Opinion of Counsel to the effect that such supplemental indenture has been duly authorized and executed by such person and constitutes the legal, valid and binding obligation of such person (subject to such customary assumptions and exceptions as may be acceptable to the Trustee in its reasonable discretion). (c) If an officer whose signature is on this Indenture no longer holds that office at the time the Trustee authenticates a Security on which this Guarantee is endorsed, such Guarantee shall be valid nevertheless. ARTICLE FOURTEEN SUBORDINATION OF SECURITIES Section 1401. Securities Subordinate to Senior Indebtedness. The Company covenants and agrees, and each Holder of a Security, by his acceptance thereof, likewise covenants and agrees, that, to the extent and in the manner hereinafter set forth in this Article, the Indebtedness represented by the Securities and the payment of the principal of, premium, if any, and interest on, the Securities are hereby expressly made subordinate and subject in right of payment as provided in this Article to the prior payment in full of all Senior Indebtedness. - 144 - This Article Thirteen shall constitute a continuing offer to all Persons who, in reliance upon such provisions, become holders of, or continue to hold Senior Indebtedness; and such provisions are made for the benefit of the holders of Senior Indebtedness; and such holders are made obligees hereunder and they or each of them may enforce such provisions. Section 1402. Payment Over of Proceeds Upon Dissolution, etc. In the event of (a) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding in connection therewith, relative to the Company or its assets, or (b) any liquidation, dissolution or other winding up of the Company, whether voluntary or involuntary, or whether or not involving insolvency or bankruptcy, or (c) any assignment for the benefit of creditors or any other marshaling of assets or liabilities of the Company, then and in any such event: (1) the holders of Senior Indebtedness shall be entitled to receive payment in full of all amounts due on or in respect of Senior Indebtedness before the Holders of the Securities are entitled to receive any payment or distribution of any kind or character (excluding securities of the Company or any other corporation that are equity securities or are subordinated in right of payment to all Senior Indebtedness, that may be outstanding, to substantially the same extent as, or to a greater extent than, the Securities are so subordinated as provided in this Article ("Permitted Junior Securities")) on account of the principal of, premium, if any, or interest on the Securities or on account of the purchase, redemption, defeasance or other acquisition of, or in respect of, the Securities (other than amounts previously set aside with the Trustee, or payments previously made, in either case, pursuant to the provisions of Sections 402 and 403 of this Indenture); and (2) any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (excluding Permitted Junior Securities), by set-off or otherwise, to which the Holders or the Trustee would be entitled but for the provisions of this Article shall be paid by the liquidating trustee or agent or other Person making such payment or distribution, whether a trustee in bankruptcy, a receiver or liquidating trustee or otherwise, directly to the holders of Senior Indebtedness or their representative or representatives or to the trustee or trustees under any indenture under which any instruments evidencing any of such Senior Indebtedness may have been issued, ratably according to the aggregate amounts remaining unpaid on account of the Senior Indebtedness held or represented by each, to the extent necessary to make payment in full, of all Senior Indebtedness remaining unpaid, after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness; and (3) in the event that, notwithstanding the foregoing provisions of this Section, the Trustee or the Holder of any Security shall have received any payment or - 145 - distribution of assets of the Company of any kind or character, whether in cash, property or securities (excluding Permitted Junior Securities), in respect of principal, premium, if any, and interest on the Securities before all Senior Indebtedness is paid in full, then and in such event such payment or distribution (excluding Permitted Junior Securities) shall be paid over or delivered forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payments or distributions of assets of the Company for application to the payment of all Senior Indebtedness remaining unpaid, to the extent necessary to pay all Senior Indebtedness in full after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. The consolidation of the Company with, or the merger of the Company with or into, another Person or the liquidation or dissolution of the Company following the sale, assignment, conveyance, transfer, lease or other disposal of its properties and assets substantially as an entirety to another Person upon the terms and conditions set forth in Article Eight shall not be deemed a dissolution, winding up, liquidation, reorganization, assignment for the benefit of creditors or marshaling of assets and liabilities of the Company for the purposes of this Section if the Person formed by such consolidation or the surviving entity of such merger or the Person which acquires by sale, assignment, conveyance, transfer, lease or other disposal of such properties and assets substantially as an entirety, as the case may be, shall, as a part of such consolidation, merger, sale, assignment, conveyance, transfer, lease or other disposal, comply with the conditions set forth in Article Eight. Section 1403. Suspension of Payment When Designated Senior Indebtedness in Default. (a) Unless Section 1402 shall be applicable, upon the occurrence and during the continuance of any default in the payment of any Designated Senior Indebtedness beyond any applicable grace period (a "Payment Default") and after the receipt by the Trustee from a Senior Representative of any Designated Senior Indebtedness of written notice of such default, no payment (other than amounts previously set aside with the Trustee or payments previously made, in either case, pursuant to Section 402 or 403 in this Indenture) or distribution of any assets of the Company or any Subsidiary of any kind or character (excluding Permitted Junior Securities) may be made by the Company on account of the principal of, premium, if any, or interest on, the Securities, or on account of the purchase, redemption, defeasance or other acquisition of or in respect of, the Securities unless and until such Payment Default shall have been cured or waived or shall have ceased to exist or such Designated Senior Indebtedness shall have been discharged or paid in full, after which the Company shall (subject to the other provisions of this Article Thirteen) resume making any and all required payments in respect of the Securities, including any missed payments. - 146 - (b) Unless Section 1402 shall be applicable, (1) upon the occurrence and during the continuance of any non-payment default with respect to any Designated Senior Indebtedness pursuant to which the maturity thereof may then be accelerated immediately (a "Non-payment Default") and (2) after the receipt by the Trustee and the Company from a Senior Representative of any Designated Senior Indebtedness of written notice of such Non-payment Default, no payment (other than any amounts previously set aside with the Trustee, or payments previously made, in either case, pursuant to the provisions of Sections 402 or 403 in this Indenture) or distribution of any assets of the Company of any kind or character (excluding Permitted Junior Securities) may be made by the Company or any Subsidiary on account of the principal of, premium, if any, or interest on, the Securities, or on account of the purchase, redemption, defeasance or other acquisition of, or in respect of, the Securities for the period specified below ("Payment Blockage Period"). (c) The Payment Blockage Period shall commence upon the receipt of notice of the Non-payment Default by the Trustee and the Company from a Senior Representative and shall end on the earliest of (i) the 179th day after such commencement, (ii) the date on which such Non-payment Default (and all Nonpayment Defaults as to which notice is given after such Payment Blockage Period is initiated) is cured, waived or ceases to exist or on which such Designated Senior Indebtedness is discharged or paid in full, or (iii) the date on which such Payment Blockage Period (and all Non-payment Defaults as to which notice is given after such Payment Blockage Period is initiated) shall have been terminated by written notice to the Company or the Trustee from the Senior Representative initiating such Payment Blockage Period, after which, in the case of clauses (i), (ii) and (iii), the Company shall promptly resume making any and all required payments in respect of the Securities, including any missed payments. In no event will a Payment Blockage Period extend beyond 179 days from the date of the receipt by the Company and the Trustee of the notice initiating such Payment Blockage Period (such 179-day period referred to as the "Initial Period"). Any number of notices of Non-payment Defaults may be given during the Initial Period; provided that during any period of 365 consecutive days only one Payment Blockage Period, during which payment of principal of, premium, if any, or interest on, the Securities may not be made, may commence and the duration of such period may not exceed 179 days. No Nonpayment Default with respect to any Designated Senior Indebtedness that existed or was continuing on the date of the commencement of any Payment Blockage Period will be, or can be, made the basis for the commencement of a second Payment Blockage Period, whether or not within a period of 365 consecutive days, unless such default has been cured or waived for a period of not less than 90 consecutive days. The Company shall deliver a notice to the Trustee promptly after the date on which any Non-payment Default is cured or waived or ceases to exist or on which the Designated Senior Indebtedness related thereto is discharged or paid in full, and the Trustee is authorized to act in reliance on such notice. - 147 - (d) In the event that, notwithstanding the foregoing, the Company shall make any payment to the Trustee or the Holder of any Security prohibited by the foregoing provisions of this Section, then and in such event such payment shall be paid over and delivered forthwith to a Senior Representative of the holders of the Designated Senior Indebtedness or as a court of competent jurisdiction shall direct. Section 1404. Payment Permitted if No Default. Nothing contained in this Article, elsewhere in this Indenture or in any of the Securities shall prevent the Company, at any time except during the pendency of any case, proceeding, dissolution, liquidation or other winding-up, assignment for the benefit of creditors or other marshaling of assets and liabilities of the Company referred to in Section 1402 or under the conditions described in Section 1403, from making payments at any time of principal of, premium, if any, or interest on the Securities. Section 1405. Subrogation to Rights of Holders of Senior Indebtedness. After the payment in full, the Holders of the Securities shall be subrogated to the rights of the holders of such Senior Indebtedness to receive payments and distributions of cash, property and securities applicable to the Senior Indebtedness until the principal of, premium, if any, and interest on, the Securities shall be paid in full. For purposes of such subrogation, no payments or distributions to the holders of Senior Indebtedness of any cash, property or securities to which the Holders of the Securities or the Trustee would be entitled except for the provisions of this Article, and no payments over pursuant to the provisions of this Article to the holders of Senior Indebtedness by Holders of the Securities or the Trustee, shall, as among the Company, its creditors other than holders of Senior Indebtedness, and the Holders of the Securities, be deemed to be a payment or distribution by the Company to or on account of the Senior Indebtedness. Section 1406. Provisions Solely to Define Relative Rights. The provisions of this Article are intended solely for the purpose of defining the relative rights of the Holders of the Securities on the one hand and the holders of Senior Indebtedness on the other hand. Nothing contained in this Article or elsewhere in this Indenture or in the Securities is intended to or shall (a) impair, as among the Company, its creditors other than holders of Senior Indebtedness and the Holders of the Securities, the obligation of the Company, which is absolute and unconditional, to pay to the Holders of the Securities the principal of, premium, if any, and interest on, the Securities as and when the same shall become due and payable in accordance with their terms; or (b) affect the relative rights against the Company or the Holders of the Securities and creditors of the Company other than the holders of Senior Indebtedness; or - 148 - (c) prevent the Trustee or the Holder of any Security from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article of the holders of Senior Indebtedness (1) in any case, proceeding, dissolution, liquidation or other winding up, assignment for the benefit of creditors or other marshaling of assets and liabilities of the Company referred to in Section 1402, to receive, pursuant to and in accordance with such Section, cash, property and securities otherwise payable or deliverable to the Trustee or such Holder, or (2) under the conditions specified in Section 1303, to prevent any payment prohibited by such Section or enforce their rights pursuant to Section 1303(d). Section 1407. Trustee to Effectuate Subordination. Each Holder of a Security by his acceptance thereof authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article and appoints the Trustee his attorney-in-fact for any and all such purposes, including, in the event of any dissolution, winding-up, liquidation or reorganization of the Company whether in bankruptcy, insolvency, receivership proceedings, or otherwise, the timely filing of a claim for the unpaid balance of the indebtedness of the Company owing to such Holder in the form required in such proceedings and the causing of such claim to be approved. Section 1408. No Waiver of Subordination Provisions. (a) No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any non-compliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof any such holder may have or be otherwise charged with. (b) Without limiting the generality of subsection (a) of this Section, the holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders of the Securities, without incurring responsibility to the Holders of the Securities and without impairing or releasing the subordination provided in this Article or the obligations hereunder of the Holders of the Securities to the holders of Senior Indebtedness, do any one or more of the following: (1) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding; (2) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (3) release any Person liable in any manner for the collection or payment of - 149 - Senior Indebtedness; and (4) exercise or refrain from exercising any rights against the Company and any other Person; provided, however, that in no event shall any such actions limit the right of the Holders of the Securities to take any action to accelerate the maturity of the Securities pursuant to Article Five of this Indenture or to pursue any rights or remedies hereunder or under applicable laws if the taking of such action does not otherwise violate the terms of this Article. Section 1409. Notice to Trustee. (a) The Company shall give prompt written notice to the Trustee of any fact known to the Company which would prohibit the making of any payment to or by the Trustee in respect of the Securities. Notwithstanding the provisions of this Article or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment to or by the Trustee in respect of the Securities, unless and until the Trustee shall have received written notice thereof from the Company or a holder of Senior Indebtedness or from a Senior Representative or any trustee, fiduciary or agent therefor; and, prior to the receipt of any such written notice, the Trustee shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received the notice provided for in this Section by Noon, Eastern Time, on the Business Day prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of, premium, if any, or interest on any Security), then, anything herein contained to the contrary notwithstanding but without limiting the rights and remedies of the holders of Senior Indebtedness, a Senior Representative or any trustee, fiduciary or agent thereof, the Trustee shall have full power and authority to receive such money and to apply the same to the purpose for which such money was received and shall not be affected by any notice to the contrary which may be received by it after such date; nor shall the Trustee be charged with knowledge of the curing of any such default or the elimination of the act or condition preventing any such payment unless and until the Trustee shall have received an Officers' Certificate to such effect. (b) The Trustee shall be entitled to rely on the delivery to it of a written notice to the Trustee and the Company by a Person representing himself to be a Senior Representative or a holder of Senior Indebtedness (or a trustee, fiduciary or agent therefor) to establish that such notice has been given by a Senior Representative or a holder of Senior Indebtedness (or a trustee, fiduciary or agent therefor); provided, however, that failure to give such notice to the Company shall not affect in any way the ability of the Trustee to rely on such notice. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article, the Trustee may request such Person to furnish evidence to the reasonable - 150 - satisfaction of the Trustee as to the amount of Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article, and if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. Section 1410. Reliance on Judicial Orders or Certificates. Upon any payment or distribution of assets of the Company referred to in this Article, the Trustee and the Holders of the Securities shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other person making such payment or distribution, or a certificate of a Senior Representative, delivered to the Trustee or to the Holders of Securities for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article, provided that the foregoing shall apply only if such court has been fully apprised of the provisions of this Article. Section 1411. Rights of Trustee as a Holder of Senior Indebtedness; Preservation of Trustee's Rights. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article with respect to any Senior Indebtedness which may at any time be held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. Nothing in this Article shall apply to claims of, or payments to, the Trustee under or pursuant to Section 607. Section 1412. Article Applicable to Paying Agents. In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting under this Indenture, the term "Trustee" as used in this Article shall in such case (unless the context otherwise requires) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article in addition to or in place of the Trustee; provided, however, that Section 1411 shall not apply to the Company or any Affiliate of the Company if it or such Affiliate acts as Paying Agent. - 151 - Section 1413. No Suspension of Remedies. Nothing contained in this Article shall limit the right of the Trustee or the Holders of Securities to take any action to accelerate the maturity of the Securities pursuant to Article Five of this Indenture or to pursue any rights or remedies hereunder or under applicable law, subject to the rights, if any, under this Article of the holders, from time to time, of Senior Indebtedness to receive the cash, property or securities receivable upon the exercise of such rights or remedies. Section 1414. Trustee's Relation to Senior Indebtedness. With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article, and no implied covenants or obligations with respect to the holders of Senior Indebtedness shall be read into this Article against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness and the Trustee shall not be liable to any holder of Senior Indebtedness if it shall in good faith mistakenly (absent negligence or willful misconduct) pay over or deliver to Holders, the Company or any other Person moneys or assets to which any holder of Senior Indebtedness shall be entitled by virtue of this Article or otherwise. * * * - 152 - IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the day and year first above written. SONIC AUTOMOTIVE, INC. By: /s/ B. Scott Smith ---------------------------------- Name: B. Scott Smith Title: Authorized Office3r Attest: /s/ Theodore M. Wright --------------------------- Name: Theodore M. Wright Title: Authorized Officer TOWN AND COUNTRY FORD INCORPORATED MARCUS DAVID CORPORATION FRONTIER OLDSMOBILE--CADILLAC, INC. SONIC DODGE, LLC SONIC CHRYSLER--PLYMOUTH--JEEP--EAGLE, LLC FORT MILL FORD, INC. TOWN AND COUNTRY CHRYSLER--PLYMOUTH--JEEP OF ROCK HILL, INC. FORT MILL CHRYSLER--PLYMOUTH--DODGE INC. LONE STAR FORD, INC. SONIC AUTOMOTIVE OF NEVADA, INC. SONIC AUTOMOTIVE OF TENNESSEE, INC. SONIC AUTOMOTIVE - 6025 INTERNATIONAL DRIVE, LLC SONIC AUTOMOTIVE OF NASHVILLE, LLC SONIC AUTOMOTIVE OF CHATTANOOGA, LLC TOWN AND COUNTRY JAGUAR, LLC TOWN AND COUNTRY CHRYSLER --PLYMOUTH--JEEP, LLC TOWN AND COUNTRY DODGE OF CHATTANOOGA, LLC SONIC AUTOMOTIVE - 2490 SOUTH LEE HIGHWAY, LLC, TOWN AND COUNTRY FORD OF CLEVELAND, LLC FREEDOM FORD, INC. SONIC AUTOMOTIVE 5260 PEACHTREE INDUSTRIAL BLVD., LLC SONIC AUTOMOTIVE OF GEORGIA, INC. SONIC PEACHTREE INDUSTRIAL BLVD., L.P. SONIC AUTOMOTIVE - CLEARWATER, INC. SONIC AUTOMOTIVE 21699 U.S. HWY. 19 N., INC. SONIC AUTOMOTIVE COLLISION CENTER OF CLEARWATER, INC. SONIC AUTOMOTIVE - 1400 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE - 1455 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE - 1495 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE - 1500 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE - 3700 WEST BROAD STREET, COLUMBUS, INC. SONIC AUTOMOTIVE - 4000 WEST BROAD STREET, COLUMBUS, INC. SONIC AUTOMOTIVE 2424 LAURENS RD., GREENVILLE, INC. SONIC AUTOMOTIVE 2752 LAURENS RD., GREENVILLE, INC. SONIC AUTOMOTIVE - 5585 PEACHTREE INDUSTRIAL BLVD., LLC CAPITOL CHEVROLET AND IMPORTS, INC., SONIC AUTOMOTIVE - 1919 N. DIXIE HWY., NSB, INC. SONIC AUTOMOTIVE - 1307 N. DIXIE HWY., NSB, INC. SONIC AUTOMOTIVE - 1720 MASON AVE., DB, INC. SONIC AUTOMOTIVE - 3741 S. NOVA RD., PO, INC. SONIC AUTOMOTIVE - 241 RIDGEWOOD AVE., HH, INC. SONIC AUTOMOTIVE - HWY. 153 at SHALLOWFORD ROAD, CHATTANOOGA, INC. By: /s/ B. Scott Smith ------------------------------ Name: B. Scott Smith Title: Authorized Officer Attest: /s/ Theodore M. Wright -------------------------- Name: Theodore M. Wright Title: Authorized Officer U.S. BANK TRUST NATIONAL ASSOCIATION By: /s/ Judith M. Zuzek ---------------------------- Name: Title: STATE OF NORTH CAROLINA ) ) ss.: COUNTY OF UNION ) On the 29th day of July, 1998, before me personally came Theodore M. Wright, to me known, who, being by me duly sworn, did depose and say that he resides at Charlotte, NC; that he is Authorized Officer of Sonic Automotive, Inc., a corporation described in and which executed the foregoing instrument; and that he signed his name thereto pursuant to authority of the Board of Directors of such corporation. (NOTARIAL SEAL) /s/Donna M. Bowen My Comm. exp. 8-12-98 -------------------------------------------- SONIC AUTOMOTIVE, INC STATE OF NORTH CAROLINA ) ) ss.: COUNTY OF UNION ) On the 29th day of July, 1998, before me personally came Theodore M. Wright, to me known, who, being by me duly sworn, did depose and say that he resides at Charlotte, NC; that he is Authorized Officer of the corporations listed below, corporations described in and which executed the foregoing instrument; and that he signed his name thereto pursuant to authority of the Board of Directors of such corporations. (NOTARIAL SEAL) /s/ Donna M. Bowen My Comm. exp. 8-12-98 -------------------------------------------- TOWN AND COUNTRY FORD INCORPORATED MARCUS DAVID CORPORATION FRONTIER OLDSMOBILE--CADILLAC, INC. FORT MILL FORD, INC. TOWN AND COUNTRY CHRYSLER--PLYMOUTH--JEEP OF ROCK HILL, INC. FORT MILL CHRYSLER--PLYMOUTH--DODGE INC. LONE STAR FORD, INC. SONIC AUTOMOTIVE OF NEVADA, INC. SONIC AUTOMOTIVE OF TENNESSEE, INC. FREEDOM FORD, INC. SONIC AUTOMOTIVE OF GEORGIA, INC. SONIC AUTOMOTIVE - CLEARWATER, INC. SONIC AUTOMOTIVE 21699 U.S. HWY. 19 N., INC. SONIC AUTOMOTIVE COLLISION CENTER OF CLEARWATER, INC. SONIC AUTOMOTIVE - 1400 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE - 1455 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE - 1495 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE - 1500 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE - 3700 WEST BROAD STREET, COLUMBUS, INC. SONIC AUTOMOTIVE - 4000 WEST BROAD STREET, COLUMBUS, INC. SONIC AUTOMOTIVE 2424 LAURENS RD., GREENVILLE, INC. SONIC AUTOMOTIVE 2752 LAURENS RD., GREENVILLE, INC. CAPITOL CHEVROLET AND IMPORTS, INC., SONIC AUTOMOTIVE - 1919 N. DIXIE HWY., NSB, INC. SONIC AUTOMOTIVE - 1307 N. DIXIE HWY., NSB, INC. SONIC AUTOMOTIVE - 1720 MASON AVE., DB, INC. SONIC AUTOMOTIVE - 3741 S. NOVA RD., PO, INC. SONIC AUTOMOTIVE - 241 RIDGEWOOD AVE., HH, INC. SONIC AUTOMOTIVE - HWY. 153 at SHALLOWFORD ROAD, CHATTANOOGA, INC. STATE OF NORTH CAROLINA ) ) ss.: COUNTY OF UNION ) On the 29th day of July, 1998, before me personally came Theodore M. Wright, to me known, who, being by me duly sworn, did depose and say that he resides at Charlotte, NC; that he is Authorized Officer of the limited liability corporations listed below, limited liability corporations described in and which executed the foregoing instrument; and that he signed his name thereto pursuant to authority of the Board of Directors of such limited liability corporations. (NOTARIAL SEAL) /s/ Donna M. Bowen My Comm. exp. 8-12-98 ----------------------------------------- SONIC DODGE, LLC SONIC CHRYSLER--PLYMOUTH--JEEP--EAGLE, LLC SONIC AUTOMOTIVE - 6025 INTERNATIONAL DRIVE, LLC SONIC AUTOMOTIVE OF NASHVILLE, LLC SONIC AUTOMOTIVE OF CHATTANOOGA, LLC TOWN AND COUNTRY JAGUAR, LLC TOWN AND COUNTRY CHRYSLER --PLYMOUTH--JEEP, LLC TOWN AND COUNTRY DODGE OF CHATTANOOGA, LLC SONIC AUTOMOTIVE - 2490 SOUTH LEE HIGHWAY, LLC, TOWN AND COUNTRY FORD OF CLEVELAND, LLC SONIC AUTOMOTIVE 5260 PEACHTREE INDUSTRIAL BLVD., LLC STATE OF NORTH CAROLINA ) ) ss.: COUNTY OF UNION ) On the 29th day of July, 1998, before me personally came Theodore M. Wright, to me known, who, being by me duly sworn, did depose and say that he resides at Charlotte, NC; that he is Authorized Officer of Sonic Peachtree Industrial Blvd., L.P., a limited partnership described in and which executed the foregoing instrument; and that he signed his name thereto pursuant to authority of the partners of such limited partnership. (NOTARIAL SEAL) /s/ Donna M. Bowen My Comm. exp. 8-12-98 ----------------------------------------- SONIC PEACHTREE INDUSTRIAL BLVD., L.P. EX-4 4 EXHIBIT 4.3 Exhibit 4.3 THE OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATE IN THE MANNER AND TO THE EXTENT SET FORTH IN ARTICLE FOURTEEN OF THE INDENTURE TO THE OBLIGATIONS (INCLUDING INTEREST) OWED BY THE COMPANY AND CERTAIN OF ITS SUBSIDIARIES TO ALL SENIOR INDEBTEDNESS; AND EACH HOLDER HEREOF BY ITS ACCEPTANCE HEREOF, SHALL BE BOUND BY THE PROVISIONS OF THE SUBORDINATION AS SET FORTH IN SAID ARTICLE FOURTEEN OF THE INDENTURE. SONIC AUTOMOTIVE, INC. ------------------ 11% SENIOR SUBORDINATED NOTE DUE 2008, SERIES B CUSIP NO. 83545GAB8 No. __________ $_________________ Sonic Automotive, Inc., a Delaware corporation (herein called the "Company," which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to Cede & Co. or registered assigns, the principal sum of $______________ United States dollars on August 1, 2008, at the office or agency of the Company referred to below, and to pay interest thereon from July 31, 1998, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semiannually on February 1 and August 1 in each year, commencing February 1, 1999 at the rate of 11% per annum, subject to adjustments as described in the second following paragraph, in United States dollars, until the principal hereof is paid or duly provided for; PROVIDED that to the extent interest has not been paid or duly provided for with respect to the Series A Security exchanged for this Series B Security, interest on this Series B Security shall accrue from the most recent Interest Payment Date to which interest on the Series A Security which was exchanged for this Series B Security has been paid or duly provided for. Interest shall be computed on the basis of a 360-day year comprised of twelve 30-day months. This Series B Security was issued pursuant to the Exchange Offer pursuant to which the 11% Senior Subordinated Notes due 2008, Series A and related Guarantees (herein called the "Series A Securities") in like principal amount were exchanged for the Series B Securities and related Guarantees. The Series A Securities and the Series B Securities are together (including related Guarantees) referred to as the "Securities." The Series B Securities rank PARI PASSU in right of payment with the Series A Securities. In addition, for any period in which the Series A Security exchanged for this Series B Security was outstanding, in the event that (a) the Exchange Offer Registration Statement is not filed with the Commission on or prior to the 60th calendar day following the date of original issue of the Series A Security, (b) the Exchange Offer Registration Statement has not been declared effective on or prior to the 135th calendar day following the date of original issue of the Series A Security, (c) the Exchange Offer is not consummated or a Shelf Registration Statement is not declared effective, in either case, on or prior to the 165th calendar day following the date of original issue of the Series A Security or (d) the Shelf Registration Statement is declared effective but shall thereafter become unusable for more than 30 days in the aggregate (each such event referred to in clauses (a) through (d) above, a "Registration Default"), the interest rate borne by the Series A Securities shall be increased by one-quarter of one percent per annum upon the occurrence of each Registration Default, which rate (as increased aforesaid) will increase by an additional one quarter of one percent each 90-day period that such additional interest continues to accrue under any such circumstance, with an aggregate maximum increase in the interest rate equal to one percent (1%) per annum. The Shelf Registration Statement will be required to remain effective until the second anniversary of the Series A Securities. Following the cure of all Registration Defaults, the accrual of additional interest will cease and the interest rate will revert to the original rate; PROVIDED that, to the extent interest at such increased interest rate has been paid or duly provided for with respect to the Series A Security, interest at such increased interest rate, if any, on this Series B Security shall accrue from the most recent Interest Payment Date to which such interest on the Series A Security has been paid or duly provided for; PROVIDED, HOWEVER, that, if after any such reduction in interest rate, a different event specified in clause (a), (b), (c) or (d) above occurs, the interest rate shall again be increased pursuant to the foregoing provisions. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or any Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the January 15 or July 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid, or duly provided for, and interest on such defaulted interest at the interest rate borne by the Series B Securities, to the extent lawful, shall forthwith cease to be payable to the Holder on such Regular Record Date, and may either be paid to the Person in whose name this Security (or any Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such defaulted interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in this Indenture. Payment of the principal of, premium, if any, and interest on, this Security, and exchange or transfer of the Security, will be made at the office or agency of the Company in The City of New York maintained for such purpose (which initially will be a corporate trust office of the Trustee located at 100 Wall Street, 20th Floor, New York, New York, 10005), or at such other office or agency as may be maintained for such purpose, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; PROVIDED, HOWEVER, that payment of interest may be made at the option of the Company by check mailed to the address of the Person entitled thereto as such address shall appear on the Security Register. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. This Security is entitled to the benefits of the Guarantees by the Guarantors of the punctual payment when due and performance of the Indenture Obligations made in favor of the Trustee for the benefit of the Holders. Reference is made to Article Thirteen of the Indenture for a statement of the respective rights, limitations of rights, duties and obligations under the Guarantees of the Guarantors. Unless the certificate of authentication hereon has been duly executed by the Trustee referred to on the reverse hereof or by the authenticating agent appointed as provided in the Indenture by manual signature of an authorized signer, this Security shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed by the manual or facsimile signature of its authorized officers. Sonic Automotive, Inc. By: __________________________________ Name: Title: Attest: - ---------------------------- Name: Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the 11% Senior Subordinated Notes due 2008, Series B referred to in the within-mentioned Indenture. U.S Bank Trust National Association, as Trustee By: _________________________________ Authorized Signer Dated: Sonic Automotive, Inc. 11% Senior Subordinated Note due 2008, Series B This Security is one of a duly authorized issue of Securities of the Company designated as its 11% Senior Subordinated Notes due 2008, Series B (herein called the "Securities"), limited (except as otherwise provided in the Indenture referred to below) in aggregate principal amount to $125,000,000, issued under and subject to the terms of an indenture (herein called the "Indenture") dated as of July 1, 1998, among the Company, the Guarantors and U.S. Bank Trust National Association, as trustee (herein called the "Trustee," which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties, obligations and immunities thereunder of the Company, the Guarantors, the Trustee and the Holders of the Securities, and of the terms upon which the Securities are, and are to be, authenticated and delivered. The Securities are subject to redemption at any time on or after August 1, 2003, at the option of the Company, in whole or in part, on not less than 30 nor more than 60 days' prior notice, in amounts of $1,000 or an integral multiple thereof, at the following redemption prices (expressed as percentages of the principal amount), if redeemed during the 12-month period beginning August 1 of the years indicated below: Redemption Year Price ---- ------ 2003........................... 105.500% 2004........................... 103.667% 2005........................... 101.833% and thereafter at 100% of the principal amount, in each case, together with accrued and unpaid interest, if any, to the Redemption Date (subject to the rights of Holders of record on relevant record dates to receive interest due on an Interest Payment Date). In addition, at any time on or prior to August 1, 2001, the Company may, at its option, use the net proceeds of one or more Public Equity Offerings to redeem up to an aggregate of 35% of the aggregate principal amount of Securities originally issued under the Indenture at a redemption price equal to 111% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if any, to the Redemption Date; provided that at least 65% aggregate principal amount of the Securities initially issued remains outstanding immediately after the occurrence of such redemption. In order to effect the foregoing redemption, the Company must mail a notice of redemption no later than 30 days after the closing of the related Public Equity Offering and must consummate such redemption within 60 days of the closing of the Public Equity Offering. If less than all of the Securities are to be redeemed, the Trustee shall select the Securities or portions thereof to be redeemed pro rata, by lot or by any other method the Trustee shall deem fair and reasonable. Upon the occurrence of a Change of Control, each Holder may require the Company to purchase such Holder's Securities in whole or in part in integral multiples of $1,000, at a purchase price in cash in an amount equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase, pursuant to a Change of Control Offer in accordance with the procedures set forth in the Indenture. Under certain circumstances, in the event the Net Cash Proceeds received by the Company from any Asset Sale, which proceeds are not used to repay permanently any Senior Indebtedness or Senior Guarantor Indebtedness or invested in Replacement Assets or exceeds a specified amount, the Company will be required to apply such proceeds to the repayment of the Securities and certain Indebtedness ranking PARI PASSU in right of payment to the Securities. In the case of any redemption or repurchase of Securities in accordance with the Indenture, interest installments whose Stated Maturity is on or prior to the Redemption Date will be payable to the Holders of such Securities of record as of the close of business on the relevant Regular Record Date or Special Record Date referred to on the face hereof. Securities (or portions thereof) for whose redemption and payment provision is made in accordance with the Indenture shall cease to bear interest from and after the Redemption Date. In the event of redemption or repurchase of this Security in accordance with the Indenture in part only, a new Security or Securities for the unredeemed portion hereof shall be issued in the name of the Holder hereof upon the cancellation hereof. If an Event of Default shall occur and be continuing, the principal amount of all the Securities may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture contains provisions for defeasance at any time of (a) the entire Indebtedness on the Securities and (b) certain restrictive covenants and related Defaults and Events of Default, in each case upon compliance with certain conditions set forth therein. The Indenture permits, with certain exceptions (including certain amendments permitted without the consent of any Holders and certain amendments which require the consent of all the Holders) as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the Guarantors and the rights of the Holders under the Indenture and the Securities and the Guarantees at any time by the Company and the Trustee with the consent of the Holders of at least a majority in aggregate principal amount of the Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of at least a majority in aggregate principal amount of the Securities (100% of the Holders in certain circumstances) at the time Outstanding, on behalf of the Holders of all the Securities, to waive compliance by the Company and the Guarantors with certain provisions of the Indenture and the Securities and the Guarantees and certain past Defaults under the Indenture and the Securities and the Guarantees and their consequences. Any such consent or waiver by or on behalf of the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Security. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, any Guarantor or any other obligor on the Securities (in the event such Guarantor or such other obligor is obligated to make payments in respect of the Securities), which is absolute and unconditional, to pay the principal of, premium, if any, and interest on, this Security at the times, place, and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in the Borough of Manhattan, The City of New York, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or its attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. Certificated securities shall be transferred to all beneficial holders in exchange for their beneficial interests in the Rule 144A Global Securities or the Regulation S Global Securities if (x) the Depositary notifies the Company that it is unwilling or unable to continue as Depositary for such Global Security and a successor Depositary is not appointed by the Company within 90 days or (y) there shall have occurred and be continuing an Event of Default and the Security Registrar has received a request from the Depositary. Upon any such issuance, the Trustee is required to register such certificated Series B Securities in the name of, and cause the same to be delivered to, such Person or Persons (or the nominee of any thereof). Series B Securities in certificated form are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, the Series B Securities are exchangeable for a like aggregate principal amount of Securities of a differing authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Company, any Guarantor, the Trustee and any agent of the Company, any Guarantor or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security is overdue, and neither the Company, any Guarantor, the Trustee nor any such agent shall be affected by notice to the contrary. THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES THEREOF. All capitalized terms used in this Security which are defined in the Indenture and not otherwise defined herein shall have the meanings assigned to them in the Indenture. GUARANTEES For value received, each of the undersigned hereby absolutely, fully and unconditionally and irrevocably guarantees, jointly and severally with each other Guarantor, to the holder of this Security the payment of principal of, premium, if any, and interest on this Security upon which these Guarantees are endorsed in the amounts and at the time when due and payable whether by declaration thereof, or otherwise, and interest on the overdue principal and interest, if any, of this Security, if lawful, and the payment or performance of all other obligations of the Company under the Indenture or the Securities, to the holder of this Security and the Trustee, all in accordance with and subject to the terms and limitations of this Security and Article Thirteen of the Indenture. This Guarantee will not become effective until the Trustee duly executes the certificate of authentication on this Security. These Guarantees shall be governed by and construed in accordance with the laws of the State of New York, without regard to conflict of law principles thereof. Dated: TOWN AND COUNTRY FORD INCORPORATED MARCUS DAVID CORPORATION FRONTIER OLDSMOBILE--CADILLAC, INC. SONIC DODGE, LLC SONIC CHRYSLER--PLYMOUTH--JEEP--EAGLE, LLC FORT MILL FORD, INC. TOWN AND COUNTRY CHRYSLER--PLYMOUTH--JEEP OF ROCK HILL, INC. FORT MILL CHRYSLER--PLYMOUTH--DODGE INC. LONE STAR FORD, INC. SONIC AUTOMOTIVE OF NEVADA, INC. SONIC AUTOMOTIVE OF TENNESSEE, INC. SONIC AUTOMOTIVE - 6025 INTERNATIONAL DRIVE, LLC SONIC AUTOMOTIVE OF NASHVILLE, LLC SONIC AUTOMOTIVE OF CHATTANOOGA, LLC TOWN AND COUNTRY JAGUAR, LLC TOWN AND COUNTRY CHRYSLER--PLYMOUTH--JEEP, LLC TOWN AND COUNTRY DODGE OF CHATTANOOGA, LLC SONIC AUTOMOTIVE - 2490 SOUTH LEE HIGHWAY, LLC TOWN AND COUNTRY FORD OF CLEVELAND, LLC FREEDOM FORD, INC. SONIC AUTOMOTIVE 5260 PEACHTREE INDUSTRIAL BLVD., LLC SONIC AUTOMOTIVE OF GEORGIA, INC. SONIC PEACHTREE INDUSTRIAL BLVD., L.P. SONIC AUTOMOTIVE - CLEARWATER, INC. SONIC AUTOMOTIVE 21699 U.S. HWY. 19 N., INC. SONIC AUTOMOTIVE COLLISION CENTER OF CLEARWATER, INC. SONIC AUTOMOTIVE - 1400 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE - 1455 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE - 1495 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE - 1500 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE - 3700 WEST BROAD STREET, COLUMBUS, INC. SONIC AUTOMOTIVE - 4000 WEST BROAD STREET, COLUMBUS, INC. SONIC AUTOMOTIVE 2424 LAURENS RD., GREENVILLE, INC. SONIC AUTOMOTIVE 2752 LAURENS RD., GREENVILLE, INC. SONIC AUTOMOTIVE - 5585 PEACHTREE INDUSTRIAL BLVD., LLC CAPITOL CHEVROLET AND IMPORTS, INC. SONIC AUTOMOTIVE - 1919 N. DIXIE HWY., NSB, INC. SONIC AUTOMOTIVE - 1307 N. DIXIE HWY., NSB, INC. SONIC AUTOMOTIVE - 1720 MASON AVE., DB, INC. SONIC AUTOMOTIVE - 3741 S. NOVA RD., PO, INC. SONIC AUTOMOTIVE - 241 RIDGEWOOD AVE., HH, INC. SONIC AUTOMOTIVE - HWY. 153 at SHALLOWFORD ROAD, CHATTANOOGA, INC. CASA FORD OF HOUSTON, INC. SONIC AUTOMOTIVE - 1720 MASON AVE., DB, LLC By: ______________________________________ Name: ______________________________ Title: _______________________________ Attest: _______________________ Name: ________________________ Title: _________________________ OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Security purchased by the Company pursuant to Section 1012 or Section 1014, as applicable, of the Indenture, check the Box: [ ]. If you wish to have a portion of this Security purchased by the Company pursuant to Section 1012 or Section 1014 as applicable, of the Indenture, state the amount (in original principal amount): $___________________ Date: ____________________ Your Signature: ____________________________ (Sign exactly as your name appears on the other side of this Security) Signature Guarantee: ___________________________________________________ [Signature must be guaranteed by an eligible Guarantor Institution (banks, stock brokers, savings and loan associations and credit unions) with membership in an approved guarantee medallion program pursuant to Securities and Exchange Commission Rule 17Ad-15] FORM OF TRANSFEREE CERTIFICATE I or we assign and transfer this Security to: Please insert social security or other identifying number of assignee - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ Print or type name, address and zip code of assignee and irrevocably appoint - ------------------------------------------------------------------------ [Agent], to transfer this Security on the books of the Company. The Agent may substitute another to act for him. Dated ___________________ Signed ___________________________ (Sign exactly as name appears on the other side of this Security) [Signature must be guaranteed by an eligible Guarantor Institution (banks, stock brokers, savings and loan associations and credit unions) with membership in an approved guarantee medallion program pursuant to Securities and Exchange Commission Rule 17Ad-15] EX-10 5 EXHIBIT 10.85A AMENDMENT NO. 1 AND SUPPLEMENT TO ASSET PURCHASE AGREEMENT THIS AMENDMENT NO. 1 AND SUPPLEMENT TO ASSET PURCHASE AGREEMENT (this "AMENDMENT") is made and entered into as of this 16th day of September, 1998, by and among SONIC AUTOMOTIVE, INC., a Delaware corporation (the "BUYER"), and HMC FINANCE CORPORATION, INC., a Florida corporation ("HMC"), HALIFAX FORD-MERCURY, INC., a Florida corporation ("HALIFAX"), HIGGINBOTHAM AUTOMOBILES, INC., a Florida corporation ("HAI"), HIGGINBOTHAM CHEVROLET-OLDSMOBILE, INC., a Florida corporation ("HCO"), and SUNRISE AUTO WORLD, INC., a Florida corporation ("SUNRISE" and, together with HMC, HALIFAX, HAI, and HCO, collectively, the "SELLERS" and each, individually, a "SELLER"), and DENNIS D. HIGGINBOTHAM (the "STOCKHOLDER"). WITNESSETH: WHEREAS, the parties hereto have entered into the Asset Purchase Agreement dated as of July 7, 1998 (the "ASSET PURCHASE AGREEMENT"); capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Asset Purchase Agreement; WHEREAS, the parties hereto wish to amend and supplement the Asset Purchase Agreement as hereinafter provided; NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter contained, the receipt and legal sufficiency of which are hereby acknowledged. and intending to be legally bound, the parties hereto hereby agree as follows: 1. Schedules; Issuance of Preferred Stock. All of the Schedules to the Asset Purchase Agreement (including a revised Index thereof) have been agreed to by the parties and are attached to this Amendment. Such Schedules include a new Schedule 3.5 - Used Vehicles, and a new Schedule 5.5 - Prepaid Expenses and Deposits. All shares of Preferred Stock shall be issued to Dennis D. Higginbotham, as trustee; accordingly, Part III of Schedule 2.2 is hereby deleted. Such shares of Preferred Stock shall be issued by the Buyer on September 18, 1998 unless otherwise mutually agreed in writing by the Buyer and Dennis D. Higginbotham prior to September 18, 1998. 2. Assumption of Certain Floor Planning Indebtedness: Reduction of New Vehicle Purchase Price. The parties acknowledge and agree that, notwithstanding the disclosure of any Retained Liabilities in the Schedules, the Buyer is not assuming any Retained Liabilities including, without limitation, all liabilities or obligations of the Sellers under lines of credit, long and short term indebtedness; provided, however, the parties agree that the "Liabilities" do include all "floor planning" indebtedness outstanding to NationsBank and Ford Motor Credit as of the Closing ("INDEBTEDNESS"). Accordingly, the New Vehicle Purchase Price shall be reduced by the amount of the Indebtedness. At the Closing, the Sellers' Agent will deliver estoppel and/or payoff letters from Ford Motor Credit and NationsBank and the Buyer shall assume the Indebtedness and be obligated to pay the Indebtedness in accordance with its respective terms. 3. Real Property Purchase Agreements. The parties hereby waive the respective conditions to the Closing set forth in Sections 8.14 and 9.7 of the Asset Purchase Agreement; provided, however, such waiver shall not be construed as a waiver of the respective rights and obligations of the parties under the Real Property Purchase Agreements. Contemporaneously herewith, the Buyer and the Owners are entering into a lease or leases of the Real Property pending the closings under the Real Property Purchase Agreements. The Sellers and the Stockholder acknowledge that the Buyer may assign the Real Property Purchase Agreements to Mar Mar Realty Trust, or an affiliate thereof, it being understood that such assignment shall not relieve the Buyer of its obligations under the Real Property Purchase Agreements. 4. Amendments. The definition of "CLOSING DATE" in Article I of the Asset Purchase Agreement is hereby amended to be the date of this Amendment. 5. Release from Personal Guarantees. The Buyer shall use its best reasonable efforts to obtain the release of Dennis D. Higginbotham from his personal guarantees of those Liabilities specified in Schedule 9.12 to the Asset Purchase Agreement, as well as any such personal guarantees of the Indebtedness. If necessary in order to obtain such release of any particular personal guaranty, the Buyer shall substitute a guaranty by the Buyer of the Liability in question. Pending such release of Dennis D. Higginbotham, the Buyer will indemnify and hold harmless Dennis D. Higginbotham from and against all Liabilities (including the Indebtedness) personally guaranteed by him. 6. Asset Purchase Agreement Confirmed. Except as provided in this Amendment, the Asset Purchase Agreement is hereby confirmed, as amended hereby, and shall continue in full force and effect. [SIGNATURES ON NEXT PAGE] 2 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the day, month and year first above written. THE BUYER: SONIC AUTOMOTIVE, INC. By: /s/ Theodore M. Wright --------------------------------------- Name: Theodore M. Wright Title: Vice President Federal Taxpayer I.D.: 51-0363307 THE SELLERS: HMC FINANCE CORPORATION, INC. By: /s/ Dennis D. Higginbotham ----------------------------------------- Name: Dennis D. Higginbotham Title: President Federal Taxpayer I.D.: 59-3095116 HALIFAX FORD-MERCURY, INC. By: /s/ Dennis D. Higginbotham ----------------------------------------- Name: Dennis D. Higginbotham Title: President Federal Taxpayer I.D.: 59-2806650 HIGGINBOTHAM AUTOMOBILES, INC. By: /s/ Dennis D. Higginbotham ----------------------------------------- Name: Dennis D. Higginbotham Title: President Federal Taxpayer I.D.: 59-3278207 HIGGINBOTHAM CHEVROLET- OLDSMOBILE, INC. By: /s/ Dennis D. Higginbotham ----------------------------------------- Name: Dennis D. Higginbotham Title: President Federal Taxpayer I.D.: 59-1671876 3 SUNRISE AUTO WORLD, INC. By: /s/ Dennis D. Higginbotham ----------------------------------------- Name: Dennis D. Higginbotham Title: President Federal Taxpayer I.D.: 59-3297730 THE STOCKHOLDER: /s/ Dennis D. Higginbotham (SEAL) ------------------------------- DENNIS D. HIGGINBOTHAM 4 INDEX OF SCHEDULES AND EXHIBITS TO ASSET PURCHASE AGREEMENT Schedules ---------
Schedule 2.2 Part I - Allocation of Purchase Price Among Sellers Part II - Allocation of Purchase Price and Liabilities to Assets Part III - [Intentionally Deleted] Schedule 2.4 Part I - Liabilities Part II - Retained Liabilities Schedule 2.5 Promissory Note from HMC to Dennis D. Higginbotham Schedule 3.1 New Vehicles Schedule 3.2 Demonstrators Schedule 3.5 Used Vehicles Schedule 5.4 Fixtures and Equipment (Book Depreciation Schedule) Schedule 5.5 Prepaid Expenses and Deposits Schedule 5.9 HMC Receivables Schedule 6.2 Compliance re: Buyer Schedule 7.1 Stockholders Schedule 7.2 Compliance re: Seller and Stockholder Schedule 7.3 Pending or Threatened Actions, Suits or Proceedings Schedule 7.4 Encumbrances on the Assets Schedule 7.5 Permits and Approvals Schedule 7.7 Employees Schedule 7.10 Compliance with Laws Schedule 9.12 Personal Guarantees by Dennis D. Higginbotham
Exhibits A Form of Bills of Sale B Statement of Rights and Preferences C Form of Non-Competition Agreement D Form of Employment Agreement - Dennis Higginbotham 5 EX-10 6 EXHIBIT 10.88 EXHIBIT 10.88 SONIC AUTOMOTIVE, INC. (a Delaware corporation) TOWN AND COUNTRY FORD INCORPORATED (a North Carolina corporation), MARCUS DAVID CORPORATION (a North Carolina corporation), FRONTIER OLDSMOBILE--CADILLAC, INC. (a North Carolina corporation), SONIC DODGE, LLC (a North Carolina limited liability company), SONIC CHRYSLER--PLYMOUTH--JEEP--EAGLE, LLC (a North Carolina limited liability company), FORT MILL FORD, INC. (a South Carolina corporation), TOWN AND COUNTRY CHRYSLER--PLYMOUTH--JEEP OF ROCK HILL, INC. (a South Carolina corporation), FORT MILL CHRYSLER--PLYMOUTH--DODGE INC. (a South Carolina corporation), LONE STAR FORD, INC. (a Texas corporation), SONIC AUTOMOTIVE OF NEVADA, INC. (a Nevada corporation), SONIC AUTOMOTIVE OF TENNESSEE, INC.(a Tennessee corporation), SONIC AUTOMOTIVE--6025 INTERNATIONAL DRIVE, LLC (a Tennessee limited liability company), SONIC AUTOMOTIVE OF NASHVILLE, LLC (a Tennessee limited liability company), SONIC AUTOMOTIVE OF CHATTANOOGA, LLC (a Tennessee limited liability company), TOWN AND COUNTRY JAGUAR, LLC (a Tennessee limited liability company), TOWN AND COUNTRY CHRYSLER--PLYMOUTH--JEEP, LLC (a Tennessee limited liability company), TOWN AND COUNTRY DODGE OF CHATTANOOGA, LLC (a Tennessee limited liability company), SONIC AUTOMOTIVE--2490 SOUTH LEE HIGHWAY, LLC (a Tennessee limited liability company), TOWN AND COUNTRY FORD OF CLEVELAND, LLC (an Ohio limited liability company), FREEDOM FORD, INC. (a Florida corporation), SONIC AUTOMOTIVE 5260 PEACHTREE INDUSTRIAL BLVD., LLC (a Georgia limited liability company), SONIC AUTOMOTIVE OF GEORGIA, INC. (a Georgia corporation), SONIC PEACHTREE INDUSTRIAL BLVD., L.P. (a Georgia limited partnership), SONIC AUTOMOTIVE -- CLEARWATER, INC. (a Florida corporation), SONIC AUTOMOTIVE 21699 U.S. HWY. 19 N., INC. (a Florida corporation), SONIC AUTOMOTIVE COLLISION CENTER OF CLEARWATER, INC. (a Florida corporation), SONIC AUTOMOTIVE -- 1400 AUTOMALL DRIVE, COLUMBUS, INC. (an Ohio corporation), SONIC AUTOMOTIVE -- 1455 AUTOMALL DRIVE, COLUMBUS, INC. (an Ohio corporation) SONIC AUTOMOTIVE -- 1495 AUTOMALL DRIVE, COLUMBUS, INC. (an Ohio corporation) SONIC AUTOMOTIVE -- 1500 AUTOMALL DRIVE, COLUMBUS, INC. (an Ohio corporation) SONIC AUTOMOTIVE -- 3700 WEST BROAD STREET, COLUMBUS, INC. (an Ohio corporation) SONIC AUTOMOTIVE -- 4000 WEST BROAD STREET, COLUMBUS, INC. (an Ohio corporation) SONIC AUTOMOTIVE 2424 LAURENS RD., GREENVILLE, INC. (a South Carolina corporation), SONIC AUTOMOTIVE 2752 LAURENS RD., GREENVILLE, INC. (a South Carolina corporation), SONIC AUTOMOTIVE -- 5585 PEACHTREE INDUSTRIAL BLVD., LLC (a Georgia limited liability company), CAPITOL CHEVROLET AND IMPORTS, INC. (an Alabama corporation), SONIC AUTOMOTIVE - 1919 N. DIXIE HWY., NSB, INC. (a Florida corporation), SONIC AUTOMOTIVE - 1307 N. DIXIE HWY., NSB, INC. (a Florida corporation), SONIC AUTOMOTIVE - 1720 MASON AVE., DB, INC. (a Florida corporation), SONIC AUTOMOTIVE - 3741 S. NOVA RD., PO, INC. (a Florida corporation) SONIC AUTOMOTIVE -241 RIDGEWOOD AVE., HH, INC. (a Florida corporation) and SONIC AUTOMOTIVE - HWY. 153 at SHALLOWFORD ROAD, CHATTANOOGA, INC. $125,000,000 11% Senior Subordinated Notes due 2008 PURCHASE AGREEMENT Dated: July 28, 1998
================================================================================ PURCHASE AGREEMENT............................................................2 SECTION 1. Representations and Warranties.....................................4 (a) Representations and Warranties by the Company and the Guarantors................................................4 (i) Similar Offerings........................................4 (ii) Offering Memorandum......................................4 (iii) Independent Accountants..................................4 (iv) Financial Statements.....................................4 (v) No Material Adverse Change in Business...................5 (vi) Good Standing of the Company.............................5 (vii) Good Standing of Subsidiaries............................5 (viii) Capitalization...........................................6 (ix) Authorization of Offering under the Ford Motor Credit Facility..........................................6 --------------- (x) Authorization of Agreements..............................6 --------------------------- (xi) Authorization of the Indenture...........................6 ------------------------------ (xii) Authorization of the Securities, the Guarantees ----------------------------------------------- and the Exchange Securities..............................7 (xiii) Description of the Securities, the Guarantees, the Indenture, the Registration Rights Agreement and the Exchange Securities..............................7 --------------------------- (xiv) Absence of Defaults and Conflicts........................7 --------------------------------- (xv) Absence of Labor Disputes................................8 --------------------------------- (xvi) Absence of Proceedings...................................8 --------------------------------- (xvii) Possession of Intellectual Property......................9 ----------------------------------- (xviii) Absence of Further Requirements..........................9 ------------------------------- (xix) Possession of Licenses and Permits.......................9 ---------------------------------- (xx) Title to Property........................................10 ----------------- (xxi) Tax Returns..............................................10 ----------- (xxii) Insurance................................................11 --------- (xxiii) Solvency.................................................11 -------- (xxiv) Stabilization or Manipulation............................11 ----------------------------- -i- (xxv) Related Party Transactions...............................11 (xxvi) Suppliers................................................11 --------- (xxvii) Environmental Laws.......................................11 ------------------ (xxviii) Registration Rights......................................12 ------------------- (xxix) Accounting Controls......................................12 ------------------- (xxx) Investment Company Act...................................12 ---------------------- (xxxi) Rule 144A Eligibility....................................13 --------------------- (xxxii) No General Solicitation..................................13 ----------------------- (xxxiii) No Registration Required.................................13 ------------------------ (xxxiv) No Directed Selling Efforts..............................13 --------------------------- (xxxv) PORTAL...................................................13 ------ (xxxvi) Acquisition Agreements...................................13 ---------------------- (xxxvii) Franchise Agreements.....................................14 (xxxviii)Year 2000................................................14 --------- (b) Officer's Certificates..............................................14 SECTION 2. Sale and Delivery to Initial Purchasers; Closing...................14 ------------------------------------------------ (a) Securities and Guarantees.........................................14 (b) Payment...........................................................14 (c) Qualified Institutional Buyer.....................................15 (d) Denominations; Registration.......................................15 SECTION 3. Covenants of the Company and the Guarantors........................15 ------------------------------------------- (a) Offering Memorandum...............................................15 (b) Notice and Effect of Material Events..............................15 (c) Amendment to Offering Memorandum and Supplements..................16 (d) Qualification of Securities and Guarantees for Offer and Sale.....16 (e) Integration.......................................................16 (f) Rating of Securities..............................................16 -ii- (g) Rule 144A Information.............................................17 (h) Restriction on Resales............................................17 (i) Use of Proceeds...................................................17 (j) Restriction on Sale of Securities.................................17 (k) DTC Clearance.....................................................17 (l) Legends...........................................................17 (m) Interim Financial Statements......................................18 (n) Periodic Reports..................................................18 SECTION 4. Payment of Expenses................................................18 ------------------- (a) Expenses..........................................................18 (b) Termination of Agreement..........................................19 SECTION 5. Conditions of Initial Purchasers' Obligations......................19 --------------------------------------------- (a) Opinion of Counsel for the Company and the Guarantors.............19 (b) Opinion of Counsel for the Initial Purchasers.....................19 (c) Officers' Certificate.............................................19 (d) Accountants' Letters and Consents.................................20 (e) Bring-down Letters................................................20 (f) Maintenance of Rating.............................................20 (g) PORTAL............................................................20 (h) Chief Financial Officer's Certificate.............................20 (i) Registration Rights Agreement and Indenture.......................21 (j) Manufacturers' Consents...........................................21 (k) Ford Motor Credit.................................................21 (l) Smith Subordination Agreement.....................................21 -iii- (m) Additional Documents..............................................21 (n) Termination of Agreement..........................................21 SECTION 6. Indemnification....................................................21 --------------- (a) Indemnification of Initial Purchasers.............................21 (b) Indemnification of Company, Guarantors, and Directors.............22 (c) Actions against Parties; Notification............................22 (d) Settlement without Consent if Failure to Reimburse................23 SECTION 7. Contribution.......................................................23 SECTION 8. Representations, Warranties and Agreements to Survive Delivery.....25 -------------------------------------------------------------- SECTION 9. Termination of Agreement...........................................25 ------------------------ (a) Termination; General..............................................25 (b) Liabilities.......................................................25 SECTION 10. Default by One or More of the Initial Purchasers..................25 ------------------------------------------------ SECTION 11. Notices...........................................................26 ------- SECTION 12. Parties...........................................................26 ------- SECTION 13. Governing Law And Time............................................27 ---------------------- SECTION 14. Effect of Headings................................................27 ------------------ Schedule A--Initial Purchasers Schedule B--Subsidiaries which are Guarantors Schedule C--Securities Exhibit A--Form of Opinion Exhibit B--Form of Comfort Letter -iv-
$125,000,000 11 % Senior Subordinated Notes due 2008 SONIC AUTOMOTIVE, INC. (a Delaware corporation) TOWN AND COUNTRY FORD INCORPORATED (a North Carolina corporation), MARCUS DAVID CORPORATION (a North Carolina corporation), FRONTIER OLDSMOBILE--CADILLAC, INC. (a North Carolina corporation), SONIC DODGE, LLC (a North Carolina limited liability company), SONIC CHRYSLER--PLYMOUTH--JEEP--EAGLE, LLC (a North Carolina limited liability company), FORT MILL FORD, INC. (a South Carolina corporation), TOWN AND COUNTRY CHRYSLER--PLYMOUTH--JEEP OF ROCK HILL, INC. (a South Carolina corporation), FORT MILL CHRYSLER--PLYMOUTH--DODGE INC. (a South Carolina corporation), LONE STAR FORD, INC. (a Texas corporation), SONIC AUTOMOTIVE OF NEVADA, INC. (a Nevada corporation), SONIC AUTOMOTIVE OF TENNESSEE, INC.(a Tennessee corporation), SONIC AUTOMOTIVE -- 6025 INTERNATIONAL DRIVE, LLC (a Tennessee limited liability company), SONIC AUTOMOTIVE OF NASHVILLE, LLC (a Tennessee limited liability company), SONIC AUTOMOTIVE OF CHATTANOOGA, LLC (a Tennessee limited liability company), TOWN AND COUNTRY JAGUAR, LLC (a Tennessee limited liability company), TOWN AND COUNTRY CHRYSLER--PLYMOUTH--JEEP, LLC (a Tennessee limited liability company), TOWN AND COUNTRY DODGE OF CHATTANOOGA, LLC (a Tennessee limited liability company), SONIC AUTOMOTIVE -- 2490 SOUTH LEE HIGHWAY, LLC (a Tennessee limited liability company), TOWN AND COUNTRY FORD OF CLEVELAND, LLC (an Ohio limited liability company), FREEDOM FORD, INC. (a Florida corporation), SONIC AUTOMOTIVE 5260 PEACHTREE INDUSTRIAL BLVD., LLC (a Georgia limited liability company), SONIC AUTOMOTIVE OF GEORGIA, INC. (a Georgia corporation), SONIC PEACHTREE INDUSTRIAL BLVD., L.P. (a Georgia limited partnership), SONIC AUTOMOTIVE -- CLEARWATER, INC. (a Florida corporation), SONIC AUTOMOTIVE 21699 U.S. HWY. 19 N., INC. (a Florida corporation), SONIC AUTOMOTIVE COLLISION CENTER OF CLEARWATER, INC. (a Florida corporation), SONIC AUTOMOTIVE -- 1400 AUTOMALL DRIVE, COLUMBUS, INC. (an Ohio corporation), SONIC AUTOMOTIVE -- 1455 AUTOMALL DRIVE, COLUMBUS, INC. (an Ohio corporation) SONIC AUTOMOTIVE -- 1495 AUTOMALL DRIVE, COLUMBUS, INC. (an Ohio corporation) SONIC AUTOMOTIVE -- 1500 AUTOMALL DRIVE, COLUMBUS, INC. (an Ohio corporation) SONIC AUTOMOTIVE -- 3700 WEST BROAD STREET, COLUMBUS, INC. (an Ohio corporation) SONIC AUTOMOTIVE -- 4000 WEST BROAD STREET, COLUMBUS, INC. (an Ohio corporation) SONIC AUTOMOTIVE 2424 LAURENS RD., GREENVILLE, INC. (a South Carolina corporation), SONIC AUTOMOTIVE 2752 LAURENS RD., GREENVILLE, INC. (a South Carolina corporation), SONIC AUTOMOTIVE -- 5585 PEACHTREE INDUSTRIAL BLVD., LLC (a Georgia limited liability company), CAPITOL CHEVROLET AND IMPORTS, INC. (an Alabama corporation), SONIC AUTOMOTIVE - 1919 N. DIXIE HWY., NSB, INC. (a Florida corporation), SONIC AUTOMOTIVE - 1307 N. DIXIE HWY., NSB, INC. (a Florida corporation), SONIC AUTOMOTIVE - 1720 MASON AVE., DB, INC. (a Florida corporation), SONIC AUTOMOTIVE - 3741 S. NOVA RD., PO, INC. (a Florida corporation) SONIC AUTOMOTIVE -241 RIDGEWOOD AVE., HH, INC. (a Florida corporation) and SONIC AUTOMOTIVE - HWY. 153 at SHALLOWFORD ROAD, CHATTANOOGA, INC.
-1- PURCHASE AGREEMENT July 28, 1998 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated NationsBanc Montgomery Securities LLC BancAmerica Robertson Stephens 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"), and each of the Guarantors listed on Schedule B hereto (the "Guarantors") confirm their respective agreements with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and each of the other Initial Purchasers named in Schedule A hereto (collectively, the "Initial Purchasers," which term shall also include any initial purchaser substituted as hereinafter provided in Section 10 hereof), for whom Merrill Lynch is acting as representative (in such capacity, the "Representative"), with respect to (i) the issue and sale by the Company and the purchase by the Initial Purchasers, acting severally and not jointly, of the respective principal amounts set forth in said Schedule A of $125,000,000 aggregate principal amount of the Company's 11% Senior Subordinated Notes due 2008 (the "Securities") and (ii) the issue and sale by the Guarantors and the purchase by the Initial Purchasers, acting severally and not jointly, of the senior subordinated guarantees (the AGuarantees@) of the Company's obligations under the Securities. The Securities and the Guarantees are to be issued pursuant to an indenture dated as of July 1, 1998 (the "Indenture") among the Company, the Guarantors and U.S. Bank Trust, as trustee (the "Trustee"). Securities issued in book-entry form will be issued to Cede & Co. as nominee of The Depository Trust Company ("DTC") pursuant to a letter agreement, to be dated as of the Closing Time (as defined in Section 2(b)) (the "DTC Agreement"), among the Company, the Trustee and DTC. The Company and the Guarantors understand that the Initial Purchasers propose to make an offering of the Securities (together with the related Guarantees) on the terms and in the manner set forth herein and agree that the Initial Purchasers may resell, subject to the conditions set forth herein, all or a portion of the Securities and the Guarantees to purchasers ("Subsequent Purchasers") at any time after the date of this Agreement. The Securities and the Guarantees are to be offered and sold through the Initial Purchasers without being registered under the Securities Act of 1933, as amended (the "1933 Act"), in reliance upon exemptions therefrom. Pursuant to -2- the terms of the Securities, the Guarantees and the Indenture, investors that acquire Securities and Guarantees may only resell or otherwise transfer such Securities and Guarantees if such Securities and Guarantees are hereafter registered under the 1933 Act or if an exemption from the registration requirements of the 1933 Act is available (including the exemption afforded by Rule 144A ("Rule 144A") or Regulation S ("Regulation S") pursuant to the rules and regulations promulgated under the 1933 Act by the Securities and Exchange Commission (the "Commission")). The Company and the Guarantors have prepared and delivered to each Initial Purchaser copies of a preliminary offering memorandum dated July 8, 1998 (the "Preliminary Offering Memorandum") and have prepared and will deliver to each Initial Purchaser, on the date hereof or the next succeeding day, copies of a final offering memorandum dated July 28, 1998 (the "Final Offering Memorandum"), each to be used by such Initial Purchaser in connection with its solicitation of, purchases of, or offering of the Securities and the Guarantees. "Offering Memorandum" means, with respect to any date or time referred to in this Agreement, the most recent offering memorandum (whether the Preliminary Offering Memorandum or the Final Offering Memorandum, or any amendment or supplement to either such document), including exhibits thereto and any documents incorporated therein by reference, which has been prepared and delivered by the Company and the Guarantors to the Initial Purchasers in connection with their solicitation of, purchases of, or offering of the Securities and the Guarantees. All references in this Agreement to financial statements and schedules and other information which is "contained," "included" or "stated" in the Offering Memorandum (or other references of like import) shall be deemed to mean and include all such financial statements and schedules and other information which are incorporated by reference in the Offering Memorandum; and all references in this Agreement to amendments or supplements to the Offering Memorandum shall be deemed to mean and include the filing of any document under the Securities Exchange Act of 1934, as amended (the "1934 Act") which is incorporated by reference in the Offering Memorandum. The holders of the Securities and the Guarantees will be entitled to the benefits of the registration rights agreement to be dated as of the Closing Time (the "Registration Rights Agreement"), among the Company, the Guarantors and the Initial Purchasers, pursuant to which the Company and the Guarantors will agree to file, as soon as practicable after the Closing Time but in any event within 30 days of the Closing Time, a registration statement with the Commission registering the Exchange Securities (as defined in the Registration Rights Agreement) under the 1933 Act. -3- SECTION 1. Representations and Warranties. (a) Representations and Warranties by the Company and the Guarantors. The Company and each of the Guarantors, jointly and severally, represent and warrant to each Initial Purchaser as of the date hereof and as of the Closing Time referred to in Section 2(b) hereof, and agrees with each Initial Purchaser as follows: (i) Similar Offerings. The Company and the Guarantors have not, directly or indirectly, solicited any offer to buy or offered to sell, and will not, directly or indirectly, solicit any offer to buy or offer to sell, in the United States or to any United States citizen or resident, any security which is or would be integrated with the sale of the Securities and the Guarantees in a manner that would require the Securities or the Guarantees to be registered under the 1933 Act. (ii) Offering Memorandum. The Offering Memorandum does not, and at the Closing Time will not, include an untrue statement of a material fact or 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; provided, that this representation, warranty and agreement shall not apply to statements in or omissions from the Offering Memorandum made in reliance upon and in conformity with information furnished to the Company and the Guarantors in writing by any Initial Purchaser through Merrill Lynch expressly for use in the Offering Memorandum. (iii) Independent Accountants. Each of the accountants who certified the financial statements and supporting schedules (of (i) the Company, (ii) its Subsidiaries (as defined below in Section (a)(vii)) or (iii) any entities acquired or to be acquired by the Company or any of its Subsidiaries or any of whose assets were or are to be acquired by the Company or any of its Subsidiaries) included in the Offering Memorandum are independent certified public accountants within the meaning of Regulation S-X under the 1933 Act with respect to the Company, the Guarantors, their respective Subsidiaries and any such entities acquired or to be acquired by or whose assets were or are to be acquired by the Company or its Subsidiaries. (iv)Financial Statements. The financial statements of the Company, together with the related schedules and notes, included in the Offering Memorandum present fairly the financial position of the Company and its consolidated Subsidiaries at the dates indicated and the combined statements of income, statements of stockholders' equity and statements of cash flows of the Company and its consolidated Subsidiaries for the periods specified; said financial statements have been prepared in conformity with United States generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved. The financial statements of the entities acquired or to be acquired by the Company or any of its Subsidiaries or any of whose assets were or are to be acquired by the Company or any of its Subsidiaries, together with the related schedules and notes, included in the Offering Memorandum present fairly the financial position of the entities covered thereby at the dates indicated and the statements of income, changes in shareholders' equity and cash flows of the entities covered thereby for the periods specified; said financial statements have been prepared in conformity with United States -4- GAAP applied on a consistent basis throughout the periods involved. The selected financial data and the summary financial information included in the Offering Memorandum present fairly the information shown therein and have been compiled on a basis consistent with that of the audited financial statements included in the Offering Memorandum. The consolidating pro forma financial statements and other pro forma financial information (including the summary pro forma financial information) of the Company, its Subsidiaries and entities acquired or to be acquired by the Company or its Subsidiaries and the related notes thereto included in the Offering Memorandum present fairly the information shown therein, have been prepared in accordance with the Commission=s published rules and guidelines with respect to pro forma financial statements and pro forma financial information 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. (v) No Material Adverse Change in Business. Since the respective dates as of which information is given in the Offering Memorandum, 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. (vi) 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 Offering Memorandum and to enter into and perform its obligations under this Agreement, the Registration Rights Agreement, the Indenture, the Securities, the Exchange Securities, and the DTC Agreement and to enter into and consummate all the transactions in connection therewith as contemplated in the Offering Memorandum; 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. (vii) Good Standing of Subsidiaries. Each subsidiary of the Company (each a "Subsidiary" and collectively the "Subsidiaries") is listed on Schedule B attached hereto. Each Subsidiary is a corporation, limited liability company or limited partnership duly organized, as the case may be, validly existing and in good standing under the laws of the jurisdiction of its organization, has corporate, limited liability company or limited partnership, as the case may be, power and authority to own, lease and operate its properties and to conduct its business as described in the Offering Memorandum and is -5- 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 Offering Memorandum, 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 is owned by the Company, directly or through the Subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital stock of the Subsidiaries was issued in violation of any preemptive or similar rights arising by operation of law, or under the charter or by-laws of any Subsidiary or under any agreement to which the Company or any Subsidiary is a party. (viii) Capitalization. The authorized, issued and outstanding capital stock of the Company is as set forth in the Offering Memorandum in the column entitled "Actual" under the caption ACapitalization@ (except for subsequent issuances, if any, pursuant to employee benefit plans referred to in the Offering Memorandum or pursuant to the exercise of convertible securities or options referred to in the Offering Memorandum). 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; and except as disclosed in the Offering Memorandum, 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 arising by operation of law, under the charter or by-laws of the Company, under any agreement to which the Company or any of the Subsidiaries is a party or otherwise. (ix) Authorization of Offering under the Ford Motor Credit Facility. The Company shall have received the consent of Ford Motor Credit Company ("Ford Motor Credit") under the Amended and Restated Credit Agreement dated as of December 15, 1997 (the "Revolving Credit Facility") between the Company and Ford Motor Credit to permit the issuance and sale of the Securities pursuant to the terms of this Agreement and the Indenture, in any case in a form reasonably acceptable to the Initial Purchasers. (x) Authorization of Agreements. This Agreement and the Registration Rights Agreement have each been duly authorized by the Company and each of the Guarantors. This Agreement has been, and as of the Closing Time the Registration Rights Agreement will have been, duly executed and delivered by the Company and each of the Guarantors. Upon the execution and delivery thereof by the Company and each of the Guarantors, the Registration Rights Agreement will constitute a valid and binding obligation of the Company and each of the Guarantors, enforceable against the Company and each of the Guarantors in accordance with its terms. The DTC Agreement has been duly authorized by the Company; as of the Closing Time, the DTC Agreement will have been duly executed and delivered by the Company; and, upon the execution and delivery thereof by the Company, the DTC Agreement will constitute a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. (xi) Authorization of the Indenture. The Indenture has been duly authorized by the Company and each of the Guarantors and, at the Closing Time, will have been duly executed and delivered by the Company and each of the Guarantors and will constitute a -6- valid and binding agreement of the Company and each of the Guarantors, enforceable against the Company and each of the Guarantors in accordance with its terms. (xii) Authorization of the Securities, the Guarantees and the Exchange Securities. The Securities have been duly authorized by the Company and, at the Closing Time, will have been duly executed by the Company and, when authenticated in the manner provided for in the Indenture and delivered against payment of the purchase price therefor, will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms and will be in the form contemplated by, and entitled to the benefits of, the Indenture. The Guarantees have been duly authorized by each of the Guarantors and, at the Closing Time, will have been duly executed by each of the Guarantors and, when authenticated in the manner provided for in the Indenture and delivered against payment of the purchase price therefor, will constitute valid and binding obligations of each of the Guarantors, enforceable against each of the Guarantors in accordance with their terms, and will be in the form contemplated by, and entitled to the benefits of, the Indenture. The Exchange Securities (as defined in the Registration Rights Agreement) have been duly authorized by the Company and each of the Guarantors and, when executed and authenticated and issued and delivered by the Company and each of the Guarantors in exchange for the Securities and the Guarantees pursuant to the Exchange Offer (as defined in the Registration Rights Agreement), will constitute valid and binding obligations of the Company and each of the Guarantors. (xiii) Description of the Securities, the Guarantees, the Indenture, the Registration Rights Agreement and the Exchange Securities. The Securities, the Guarantees, the Indenture, the Registration Rights Agreement, the Revolving Credit Facility and the floor plan credit facilities between Ford Motor Credit and the Guarantors (the AFloor Plan Facilities@ and, together with the Revolving Facilities, the AFord Credit Facilities@) conform and will conform in all material respects to the respective statements relating thereto contained in the Offering Memorandum and will be in substantially the respective forms previously delivered to the Initial Purchasers. The Exchange Securities will conform in all material respects to the statements relating thereto contained in the Offering Memorandum and the Registration Statement (as defined in the Registration Rights Agreement) at the time it becomes effective. There are no contracts or documents which are required to be described or referred to in a registration statement on Form S-1 under the 1933 Act which have not been described or referred to in the Offering Memorandum. (xiv) Absence of Defaults and Conflicts. (1) Except as disclosed in the Offering Memorandum, neither the Company nor any of the 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, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of the Subsidiaries is a party or by which any of them may be bound, or to which any of the property or assets of the Company or any of the Subsidiaries is subject (collectively, "Agreements and Instruments") or has violated or is in violation of any applicable law, statute, rule, regulation, judgment, order, writ or decree of any -7- government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of the Subsidiaries or any of their assets or properties, except in each case for such defaults or violations that would not result in a Material Adverse Effect. (2) Except as disclosed in the Offering Memorandum, the execution, delivery and performance of this Agreement, the Registration Rights Agreement, the Indenture, the DTC Agreement, the Securities, the Guarantees, the Exchange Securities and any other agreement or instrument entered into or issued or to be entered into or issued by the Company or any of the Guarantors in connection with the transactions contemplated hereby or thereby or in the Offering Memorandum or in connection with the consummation of the transactions contemplated herein and in the Offering Memorandum (including the issuance and sale of the Securities and the Guarantees and the use of the proceeds from the sale of the Securities (together with the related Guarantees as described in the Offering Memorandum under the caption "Use of Proceeds" and consummation of the 1998 Acquisitions (as defined in the Offering Memorandum)) and compliance by the Company and the Guarantors with their respective obligations hereunder have been duly authorized by all necessary corporate or partnership action and do not and will not, whether with or without the giving of notice or passage of time or both, conlict with or constitute a breach of, or default or a 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 of the Subsidiaries (other than existing liens on properties being acquired in the 1998 Acquisitions) 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 of the Subsidiaries 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 of the Subsidiaries or any of their assets or properties. 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 of the Subsidiaries. (xv)Absence of Labor Disputes. No material labor dispute with the employees of the Company or any of the Subsidiaries exists or, to the knowledge of the Company and the Guarantors, is imminent, and except as disclosed in the Offering Memorandum, the Company and the Guarantors are not aware of any existing or imminent labor disturbance by the employees of any of their or any of the Subsidiaries' principal suppliers, manufacturers, customers or contractors, which, in either case, may reasonably be expected to result in a Material Adverse Effect. (xvi) Absence of Proceedings. Except as disclosed in the Offering Memorandum, there is no action, suit, proceeding, inquiry or investigation, in each case before or by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company or any Guarantor, threatened, against or affecting the Company or any Subsidiary thereof which, singly or in the aggregate, might reasonably be expected to result in a Material Adverse Effect, or which, singly or in the aggregate, might reasonably be expected to materially and adversely affect the properties -8- or assets of the Company or any of the Subsidiaries or the consummation of this Agreement or the performance by the Company and the Guarantors of their respective obligations hereunder or under the Securities, the Guarantees or the Exchange Securities. The aggregate of all pending legal or governmental proceedings to which the Company or any Subsidiary thereof is a party or of which any of their respective property or assets is the subject which are not described in the Offering Memorandum, including ordinary routine litigation incidental to the business, could not reasonably be expected to result in a Material Adverse Effect. (xvii) Possession of Intellectual Property. The Company and the Subsidiaries own, possess or license, 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") presently employed by them in connection with the business now operated by them, and neither the Company nor any of the 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 (including Intellectual Property which is licensed) 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 the 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 reasonably be expected to result in a Material Adverse Effect. (xviii) Absence of Further Requirements. Except as may be required under state securities laws, 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 or any of the Guarantors of their respective obligations hereunder, in connection with the offering, issuance or sale of the Securities and the Guarantees hereunder or the consummation of the transactions contemplated by or for the due execution, delivery or performance of this Agreement, the Registration Rights Agreement, the Indenture, the DTC Agreement, the Securities, the Guarantees, the Exchange Securities or any other agreement or instrument entered into or issued or to be entered into or issued by the Company or any of the Subsidiaries in connection with the consummation of the transactions contemplated herein and in the Offering Memorandum (including the issuance and sale of the Securities and the Guarantees and the use of the proceeds from the sale of the Securities and the Guarantees as described in the Offering Memorandum under the caption "Use of Proceeds" and the consummation of the 1998 Acquisitions). (xix) Possession of Licenses and Permits. The Company and the Subsidiaries possess such permits, licenses, approvals, consents, certificates 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, except where the failure to possess such Governmental Licenses would not, singly or in the aggregate, have a Material Adverse Effect, the Company and the Subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses and with -9- the rules and regulations of the regulatory authorities and governing bodies having jurisdiction with respect thereto, 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 the Subsidiaries has received any written notice of proceedings relating to the revocation or modification of any such Governmental Licenses, nor are there, to the knowledge of the Company or any Guarantor, pending or threatened actions, suits, claims or proceedings against the Company or any Subsidiary before any court, governmental agency or body or otherwise that, if successful, would limit, revoke, cancel, suspend or cause not to be renewed any Governmental License, in each case, which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect. (xx) Title to Property. The Company and the Subsidiaries have good and marketable title to all real property owned by the Company and the Subsidiaries and good title to all other properties owned by them, in each case, (except for pledges of real property pursuant to the Ford Credit Facilities and the existing deed of trust on the real property owned by Fort Mill Ford) 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 Offering Memorandum 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 the Subsidiaries; and all of the leases and subleases material to the business of the Company and the Subsidiaries, considered as one enterprise, and under which the Company or any of the Subsidiaries holds properties described in the Offering Memorandum, are in full force and effect, and neither the Company nor any of the Subsidiaries 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 of the Subsidiaries under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or any Subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease. (xxi) Tax Returns. All United States federal income tax returns of the Company and the Subsidiaries required by law to be filed have been filed and all taxes shown by such returns or pursuant to any assessment received by the Company or any Subsidiary, which are due and payable, have been paid, except assessments against which appeals have been or will be promptly taken and as to which adequate reserves have been provided. The Company and the Subsidiaries have filed all other tax returns that are required to have been filed by them pursuant to applicable foreign, federal, state, local or other law, and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Company and the Subsidiaries, except for such taxes, if any, as are being contested in good faith and by appropriate proceedings and as to which adequate reserves have been provided. The charges, accruals and reserves on the books of the Company in respect of all federal, state, local and foreign tax liabilities of the Company and each Subsidiary for any years not finally determined are adequate to meet any assessments or re-assessments -10- for additional income tax for any years not finally determined, except to the extent of any inadequacy that would not result in a Material Adverse Effect. (xxii) Insurance. The Company and the 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. (xxiii) Solvency. The Company and each of the Guarantors is, and immediately after the Closing will be, Solvent. As used herein, the term "Solvent" means, with respect to the Company and each Guarantor, as the case may be, on a particular date, that on such date (A) the fair market value of the assets of the Company or such Guarantor is greater than the total amount of liabilities (including contingent liabilities) of the Company or such Guarantor, (B) the present fair salable value of the assets of the Company or such Guarantor is greater than the amount that will be required to pay the probable liabilities of the Company or such Guarantor on its debts as they become absolute and mature, (C) the Company or such Guarantor is able to realize upon its assets and pay its debts and other liabilities, including contingent obligations, as they mature, and (D) the Company or such Guarantor does not have unreasonably small capital. (xxiv) Stabilization or Manipulation. Neither the Company nor any Guarantor nor any of their respective officers, directors or controlling persons has taken, directly or indirectly, any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company or any Guarantor in order to facilitate the sale or resale of the Securities or the Guarantees. The Company and the Guarantors have not distributed and, prior to the later to occur of (i) the Closing Time and (ii) completion of the distribution of the Securities and the Guarantees, will not distribute any offering material in connection with the offering and sale of the Securities and the Guarantees other than the Offering Memorandum or other materials, if any, permitted by the 1933 Act and approved by the Representative. (xxv) Related Party Transactions. No relationship, direct or indirect, exists between or among any of the Company, the Guarantors or any affiliate of the Company or any Guarantor, on the one hand, and any director, officer, stockholder, customer or supplier of any of them, on the other hand, which is required by the 1933 Act or by the rules and regulations enacted thereunder to be described in a registration statement on Form S-1 which is not so described or is not described as required in the Offering Memorandum. (xxvi) Suppliers. No supplier of merchandise to the Company or any of the Subsidiaries has ceased shipments of merchandise to the Company or any of the Subsidiaries, other than in the normal and ordinary course of business consistent with past practices, which cessation would not result in a Material Adverse Effect. (xxvii) Environmental Laws. Except as described in the Offering Memorandum and except for such matters as would not, singly or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor any of the Subsidiaries is in violation of any -11- 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 or nuclear or radioactive material (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 the Subsidiaries have all permits, licenses, authorizations and approvals required for their respective businesses 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 the Subsidiaries and (D) there are no events, facts or circumstances that might reasonably be expected to form the basis of any liability or obligation of the Company or any of the Subsidiaries, including, without limitation, any order, decree, plan or agreement requiring clean-up or remediation, or any action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of the Subsidiaries relating to any Hazardous Materials or Environmental Laws. (xxviii) Registration Rights. Except as described in the Offering Memorandum, there are no holders of securities (debt or equity) of the Company or any Guarantor, or holders of rights (including, without limitation, preemptive rights), warrants or options to obtain securities of the Company or any Guarantor, who in connection with the issuance, sale and delivery of the Securities, the Guarantees and the Exchange Securities, if any, and the execution, delivery and performance of this Agreement and the Registration Rights Agreement, have the right to request the Company or any Guarantor to register securities held by them under the 1933 Act. (xxix) Accounting Controls. The Company and its consolidated Subsidiaries 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 United States 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. (xxx) Investment Company Act. The Company and each of the Guarantors is not, and upon the issuance and sale of the Securities and the Guarantees as herein contemplated and the application of the net proceeds therefrom as described in the Offering Memorandum will not be, an "investment company" or an entity "controlled" by -12- an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended (the "1940 Act"). (xxxi) Rule 144A Eligibility. The Securities and the Guarantees are eligible for resale pursuant to Rule 144A and will not be, at the Closing Time, of the same class as securities listed on a national securities exchange registered under Section 6 of the 1934 Act, or quoted in a U.S. automated interdealer quotation system. (xxxii) No General Solicitation. None of the Company, the Guarantors, any of their respective affiliates, as such term is defined in Rule 501(b) under the 1933 Act ("Affiliates"), or any person acting on any of their behalf (other than the Initial Purchasers, as to whom the Company and the Guarantors make no representation) has engaged or will engage, in connection with the offering of the Securities and the Guarantees, in any form of general solicitation or general advertising within the meaning of Rule 502(c) under the 1933 Act. (xxxiii) No Registration Required. Subject to compliance by the Initial Purchasers with the representations and warranties set forth in Section 2, it is not necessary in connection with the offer, sale and delivery of the Securities and the Guarantees to the Initial Purchasers and to each Subsequent Purchaser in the manner contemplated by this Agreement and the Offering Memorandum to register the Securities and the Guarantees under the 1933 Act or to qualify the Indenture under the Trust Indenture Act of 1939, as amended. (xxxiv) No Directed Selling Efforts. With respect to those Securities and Guarantees sold in reliance on Regulation S, if any, (A) none of the Company, the Guarantors, any of their respective Affiliates or any person acting on their behalf (other than the Initial Purchasers, as to whom the Company and the Guarantors make no representation) has engaged or will engage in any directed selling efforts within the meaning of Regulation S and (B) each of the Company, the Guarantors, any of their respective Affiliates and any person acting on their behalf (other than the Initial Purchasers, as to whom the Company and the Guarantors make no representation) has complied and will comply with the offering restrictions requirement of Regulation S. (xxxv) PORTAL. There are no securities of the Company or any of the Guarantors which are of the same class as the Securities or the Guarantees that are listed on a national securities exchange registered under Section 6 of the 1934 Act, or quoted in a United States automated inter dealer quotation system. The Company and the Guarantors have been advised by the National Association of Securities Dealers, Inc. PORTAL Market that the Securities and the Guarantees will be designated Private Offerings, Resales and Trading Through Automated Linkages ("PORTAL") eligible securities in accordance with the rules and regulations of the National Association of Securities Dealers, Inc. (xxxvi) Acquisition Agreements. The acquisition agreements related to the 1998 Acquisitions as described in the Offering Memorandum (the "Acquisition Agreements"), have been duly authorized, executed and delivered by the Company and, assuming the due authorization, execution and delivery thereof by the parties thereto other than the Company, constitutes a valid and binding obligation of the parties thereto, enforceable -13- against the parties thereto in accordance with its terms. All of the representations and warranties of all parties included in such Acquisition Agreements are true and correct, and the Company and the Guarantors have no reason to believe that any of the covenants included in such Acquisition Agreements have been breached or that the conditions to closing included in such Acquisition Agreements have not been or will not be satisfied prior to the Closing Date and the Company has received manufacturers consents to the 1998 Acquisitions, except as disclosed in the Offering Memorandum. (xxxvii) Franchise Agreements. Each franchise agreement, in each case between a Subsidiary and the applicable Manufacturer (as defined in the Offering Memorandum) has been duly authorized by the Company and such Subsidiaries, and, as of the Closing Time, the Company shall have obtained all consents, authorizations and approvals from the Manufacturers required to consummate the Offering and the 1998 Acquisitions except as disclosed in the Offering Memorandum. (xxxviii) Year 2000. All disclosure regarding Year 2000 compliance that is appropriate to be described in a registration statement on Form S-1 under the 1933 Act (including information required by Staff Legal Bulletin Number 5) has been included in the Offering Memorandum. Neither the Company nor any of the Subsidiaries will incur significant operating expenses or costs to ensure that its information systems will be year 2000 compliant, other than as disclosed in the Offering Memorandum. The Company is not aware of any Year 2000 issues effecting its customers or suppliers that could have a Material Adverse Effect. (b) Officer's Certificates. Any certificate signed by any officer of the Company or any of the Subsidiaries delivered to the Initial Purchasers or to counsel for the Initial Purchasers shall be deemed a representation and warranty by the Company or any of the Subsidiaries to each Initial Purchaser as to the matters covered thereby. SECTION 2. Sale and Delivery to Initial Purchasers; Closing. (a) Securities and Guarantees. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company and the Guarantors agree to sell to each Initial Purchaser, severally and not jointly, and each Initial Purchaser, severally and not jointly, agrees to purchase from the Company and the Guarantors, at the price set forth in Schedule C, the aggregate principal amount of Securities (including the Guarantees) set forth in Schedule A opposite the name of such Initial Purchaser, plus any additional principal amount of Securities (including the Guarantees) which such Initial Purchaser may become obligated to purchase pursuant to the provisions of Section 10 hereof. (b) Payment. Payment of the purchase price for, and delivery of certificates for, the Securities and the Guarantees shall be made at the office of Fried, Frank, Harris, Shriver & Jacobson, or at such other place as shall be agreed upon by the Representative and the Company and the Guarantors at 9:00 A.M. (New York Time) on the fourth 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 Representative and the -14- Company and the Guarantors (such time and date of payment and delivery being herein called the "Closing Time"). Payment shall be made to the Company and the Guarantors by wire transfer of immediately available funds to a bank account designated by the Company and the Guarantors, against delivery to the respective accounts of the Initial Purchasers of certificates for the Securities and the Guarantees to be purchased by them. It is understood that each Initial Purchaser has authorized the Representative, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Securities and the Guarantees which it has agreed to purchase. Merrill Lynch, individually and not as representative of the Initial Purchasers, may (but shall not be obligated to) make payment of the purchase price for the Securities and the Guarantees to be purchased by any Initial Purchaser whose funds have not been received by the Closing Time, but such payment shall not relieve such Initial Purchaser from its obligations hereunder. The certificates representing the Securities and the Guarantees shall be registered in the name of Cede & Co. pursuant to the DTC Agreement, or physical certificates representing the Securities and the Guarantees shall be registered in the names and denominations requested by the Initial Purchasers, and in either case shall be made available for examination and packaging by the Initial Purchasers in The City of New York not later than 9:00 A.M. on the last business day prior to the Closing Time. (c) Qualified Institutional Buyer. Each Initial Purchaser severally and not jointly represents and warrants to, and agrees with, the Company and each of the Guarantors that it is a "qualified institutional buyer" within the meaning of Rule 144A under the 1933 Act (a "Qualified Institutional Buyer"). (d) Denominations; Registration. Certificates representing the Securities (including the Guarantees) shall be in such denominations ($1,000 or integral multiples thereof) and registered in such names as the Representative may request in writing at least one full business day before the Closing Time. SECTION 3. Covenants of the Company and the Guarantors. The Company and the Guarantors, jointly and severally, covenant with each Initial Purchaser as follows: (a) Offering Memorandum. The Company and the Guarantors, as promptly as possible, will furnish to each Initial Purchaser, without charge, such number of copies of the Preliminary Offering Memorandum, the Final Offering Memorandum and any amendments and supplements thereto as such Initial Purchaser may reasonably request. (b) Notice and Effect of Material Events. The Company and the Guarantors will immediately notify each Initial Purchaser, and confirm such notice in writing, of (x) any filing made by the Company or any Guarantor of information relating to the offering of the Securities and the Guarantees with any securities exchange or any other regulatory body in the United States or any other jurisdiction, and (y) prior to the completion of the placement of the Securities and the Guarantees by the Initial Purchasers, any material changes in or affecting the earnings, business affairs or business prospects of the Company and the Subsidiaries which (i) make any statement in -15- the Offering Memorandum false or misleading or (ii) are not disclosed in the Offering Memorandum. In such event or if during such time any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of the Company and the Guarantors, their counsel, the Initial Purchasers or counsel for the Initial Purchasers, to amend or supplement the Final Offering Memorandum in order that the Final Offering Memorandum not include any untrue statement 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 then existing, the Company will forthwith amend or supplement the Final Offering Memorandum by preparing and furnishing to each Initial Purchaser an amendment or amendments of, or a supplement or supplements to, the Final Offering Memorandum (in form and substance satisfactory in the opinion of counsel for the Initial Purchasers) so that, as so amended or supplemented, the Final Offering Memorandum will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time it is delivered to a Subsequent Purchaser, not misleading. (c) Amendment to Offering Memorandum and Supplements. The Company and the Guarantors will advise each Initial Purchaser promptly of any proposal to amend or supplement the Offering Memorandum and will not effect such amendment or supplement without the consent of the Initial Purchasers. Neither the consent of the Initial Purchasers to, nor the Initial Purchasers= delivery of, any such amendment or supplement, shall constitute a waiver of any of the conditions set forth in Section 5 hereof. (d) Qualification of Securities and Guarantees for Offer and Sale. The Company and the Guarantors will endeavor, in cooperation with the Initial Purchasers, to register or qualify the Securities and the Guarantees for offering and sale under the applicable securities laws of such jurisdictions as the Representative may designate and will maintain such qualifications in effect as long as required for the sale of the Securities and the Guarantees; provided, however, that the Company and the Guarantors 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. (e) Integration. The Company and the Guarantors agree that they will not and will cause their affiliates not to make any offer or sale of securities of the Company or any Guarantor of any class if, as a result of the doctrine of "integration" referred to in Rule 502 promulgated under the 1933 Act, such offer or sale could be deemed to render invalid (for the purpose of (i) the sale of the Securities and the Guarantees by the Company and the Guarantors to the Initial Purchasers, (ii) the resale of the Securities and the Guarantees by the Initial Purchasers to Subsequent Purchasers or (iii) the resale of the Securities and the Guarantees by such Subsequent Purchasers to others) the exemption from the registration requirements of the 1933 Act provided by Section 4(2) thereof or by Rule 144A or by Regulation S thereunder or otherwise. (f) Rating of Securities. The Company and the Guarantors shall take all reasonable action necessary to enable Standard & Poor's Ratings Group, a division of McGraw Hill, Inc. -16- ("S&P"), and Moody's Investors Service, Inc. ("Moody's"), to provide their respective credit ratings of the Securities and the Guarantees. (g) Rule 144A Information. The Company and the Guarantors agree that, in order to render the Securities and the Guarantees eligible for resale pursuant to Rule 144A under the 1933 Act, while any of the Securities and the Guarantees remain outstanding, it will make available, upon request, to any holder of Securities and Guarantees or prospective purchasers of Securities and Guarantees the information specified in Rule 144A(d)(4), unless the Company and the Guarantors furnish information to the Commission pursuant to Section 13 or 15(d) of the 1934 Act (such information, whether made available to holders or prospective purchasers or furnished to the Commission, is hereinafter referred to as "Additional Information"). (h) Restriction on Resales. Until the expiration of two years after the original issuance of the Securities and the Guarantees, the Company and the Guarantors will not, and will cause their "affiliates" (as such term is defined in Rule 144(a)(1) under the 1933 Act) not to, resell any Securities and Guarantees which are "restricted securities" (as such term is defined under Rule 144(a)(3) under the 1933 Act) that have been reacquired by any of them and shall immediately upon any purchase of any such Securities and Guarantees submit such Securities and Guarantees to the Trustee for cancellation. (i) Use of Proceeds. The Company and the Guarantors will use the net proceeds received by them from the sale of the Securities and the Guarantees in the manner specified in the Offering Memorandum under "Use of Proceeds." (j) Restriction on Sale of Securities . During a period of 180 days from the date of the Offering Memorandum, the Company and the Guarantors will not, without the prior written consent of Merrill Lynch, directly or indirectly, issue, sell, offer to sell, grant any option for the sale of, or otherwise dispose of, any debt securities or guarantees of debt securities of the Company or any of the Guarantors, or any securities convertible or exchangeable into or exercisable for any debt securities or guarantees of debt securities of the Company or any of the Guarantors, and will not file a registration statement in connection therewith (other than a registration statement registering solely the Securities, the Guarantees and/or the Exchange Securities); provided, however, the Company may incur indebtedness under the Ford Motor Credit Facility and the Guarantors may incur indebtedness under their respective floor plan facilities with Ford Motor Credit. (k) DTC Clearance . The Company and the Guarantors will use all reasonable efforts in cooperation with the Initial Purchasers to permit the Securities and the Guarantees to be eligible for clearance and settlement through DTC. (l) Legends. Each certificate representing a Security (including a Guarantee) will bear the legend contained in "Notices to Investors" in the Offering Memorandum for the time period and upon the other terms stated in the Offering Memorandum. -17- (m) Interim Financial Statements. Prior to the Closing Time, the Company shall furnish to the Initial Purchasers any unaudited interim financial statements of the Company, promptly after they have been completed, for any periods subsequent to the periods covered by the financial statements appearing in the Offering Memorandum. (n) Periodic Reports. For a period of three years after the Closing Time, the Company and the Guarantors will furnish to the Initial Purchasers copies of all annual reports, quarterly reports and current reports (excluding exhibits) filed with the Commission on Forms 10-K, 10-Q and 8-K, or such other similar forms as may be designated by the Commission, and such other documents, reports and information as shall be furnished by the Company and the Guarantors generally to the holders of the Securities and the Guarantees or to security holders of its publicly issued securities generally. SECTION 4. Payment of Expenses. (a) Expenses . The Company and the Guarantors, jointly and severally, will pay all expenses incident to the performance of their respective obligations under this Agreement, including (i) the preparation, printing and any filing of the Offering Memorandum and the Registration Statement (including financial statements and any schedules or exhibits) and of each amendment or supplement thereto, including the preliminary prospectuses and the prospectus to be contained in the Registration Statement, (ii) the preparation, printing and delivery to the Initial Purchasers of this Agreement, the Registration Rights Agreement, the Indenture and such other documents as may be required in connection with the offering, purchase, sale and delivery of the Securities and the Guarantees, (iii) the preparation, issuance and delivery of the certificates for the Securities and the Guarantees to the Initial Purchasers, including any charges of DTC in connection therewith, (iv) the fees and disbursements of the Company's and the Guarantors' counsel, accountants and other advisors, (v) the qualification of the Securities and the Guarantees under securities laws in accordance with the provisions of Section 3(d) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Initial Purchasers in connection therewith and in connection with the preparation of any memorandum related to blue sky matters, any supplement thereto or any survey of investment qualifications, (vi) the fees and expenses of the Trustee, including the fees and disbursements of counsel for the Trustee in connection with the Indenture and the Securities and the Guarantees, (vii) any fees payable in connection with the rating of the Securities and the Guarantees and the listing of the Securities and the Guarantees with the PORTAL market, and (viii) any filing fees incident to, and any reasonable fees and disbursements of counsel to the Initial Purchasers in connection with, the review by the National Association of Securities Dealers, Inc. of the terms of th sale of the Securities and the Guarantees. -18- (b) Termination of Agreement. If this Agreement is terminated by the Representative in accordance with the provisions of Section 5 or Section 9(a)(i) or 9(a)(ii) hereof, the Company and the Guarantors, jointly and severally, shall reimburse the Initial Purchasers for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the Initial Purchasers. SECTION 5. Conditions of Initial Purchasers' Obligations. The obligations of the several Initial Purchasers hereunder are subject to the accuracy of the representations and warranties of the Company and the Guarantors contained in Section 1 hereof or in certificates of any officer of the Company or any of the Subsidiaries delivered pursuant to the provisions hereof, to the performance by the Company and the Guarantors of their covenants and other obligations hereunder, and to the following further conditions: (a) Opinion of Counsel for the Company and the Guarantors. At the Closing Time, the Initial Purchasers shall have received the favorable opinion, dated as of the Closing Time, of Parker, Poe, Adams & Bernstein L.L.P., counsel for the Company and the Guarantors, in form and substance satisfactory to counsel for the Initial Purchasers, together with signed or reproduced copies of such letters for each of the other Initial Purchasers, to the effect set forth in Exhibit A hereto and to such further effect as counsel for the Initial Purchasers may reasonably request. In giving such opinion such counsel may rely, as to certain matters governed by the law of New York, upon the opinions of counsel satisfactory to the Representative. (b) Opinion of Counsel for the Initial Purchasers. At the Closing Time, the Initial Purchasers shall have received the favorable opinion, dated as of the Closing Time, of Fried, Frank, Harris, Shriver & Jacobson, counsel for the Initial Purchasers, together with signed or reproduced copies of such letter for each of the other Initial Purchasers, with respect to certain matters set forth in paragraphs (i), (ii), (iii), (iv), (v), (vi), (vii) (solely as to the information in the Offering Memorandum under "Description of the Notes"), (x) 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 Representative. 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, the Guarantors and the Subsidiaries and certificates of public officials. (c) Officers' Certificate. At the Closing Time, (i) the Offering Memorandum, as it may then be amended or supplemented, including any documents incorporated by reference therein, shall 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; (ii) there shall not have been, since the date hereof or since the respective dates as of which information is given in the Offering Memorandum, any 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; (iii) the Company and the Guarantors shall have complied with all agreements and satisfied all conditions -19- on its part to be performed or satisfied at or prior to the Closing Time; and (iv) the representations and warranties of the Company and the Guarantors in Section 1 shall be accurate and true and correct as though expressly made at and as of the Closing Time. At the Closing Time, the Initial Purchasers shall have received a certificate of the Chief Executive Officer of the Company and the Chief Financial Officer of the Company, and equivalent officials of each Guarantor, dated as of the Closing Time, to such effect. (d) Accountants' Letters and Consents. At the time of the execution of this Agreement, the Initial Purchasers shall have received from Deloitte & Touche LLP, Elliot Davis LLP and Cherry ? letters dated such date, in form and substance satisfactory to the Representative and to counsel for the Initial Purchasers, together with signed or reproduced copies of such letters for each of the other Initial Purchasers, containing statements and information of the type ordinarily included in accountants' "comfort letters" to Initial Purchasers with respect to the financial statements and certain financial information contained in the Offering Memorandum and in the form included in Exhibit B attached hereto. To the extent an audit report of Deloitte & Touche LLP, Elliot Davis & Co. or Cherry Beckert is included in the Offering Memorandum, such accounting firm shall include either in such letter or in a separate writing a consent to the inclusion of its report in the Offering Memorandum and to the reference to it under the caption "Independent Public Accountants" in the Offering Memorandum. (e) Bring-down Letters. At the Closing Time, the Initial Purchasers shall have received from Deloitte & Touche LLP, Elliot Davis & Co. and Cherry Beckert letters, dated as of the Closing Time, to the effect that it reaffirms the statements made in such letters furnished pursuant to subsection (d) of this Section, except that the specified date referred to shall be a date not more than three business days prior to the Closing Time. (f) Maintenance of Rating. At the Closing Time, the Securities and the Guarantees shall be rated at least B-3 by Moody's and B-__ by S&P, and the Company and the Guarantors shall have delivered to the Representative a letter dated the Closing Time, from each such rating agency, or other evidence satisfactory to the Representative, confirming that the Securities and the Guarantees have such ratings; and since the date of this Agreement, there shall not have occurred a downgrading in the rating assigned to the Securities and the Guarantees or any of the Company's and the Guarantor's other debt securities by any nationally recognized securities rating agency, and no such securities rating agency shall have publicly announced that it has under surveillance or review, with possible negative implications, its rating of the Securities and the Guarantees or any of the Company's and the Guarantor's other debt securities. (g) PORTAL. At the Closing Time, the Securities and the Guarantees shall have been designated for trading on PORTAL. (h) Chief Financial Officer's Certificate. At the Closing Time, the Initial Purchasers shall have received a certificate of the principal financial officer of the Company and the Guarantors as to certain agreed upon accounting matters. -20- (i) Registration Rights Agreement and Indenture. The Company and each of the Guarantors shall have duly authorized, executed and delivered the Registration Rights Agreement and the Indenture to the Initial Purchasers in a form and substance satisfactory to the Representative and counsel for the Initial Purchasers. (j) Manufacturers' Consents. The Representative shall have received on or as of the Closing Time, as the case may be, a certificate, in a form and substance satisfactory to the 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 1998 Acquisitions and the Offering and such consents and approvals shall be in a form satisfactory to the Representatives other than those consents not received as described in the Offering Memorandum. (k) Ford Motor Credit. Prior to or at the Closing Time, the Company shall have received the consent of Ford Motor Credit under the Ford Motor Credit Facility for the issuance and sale of the Securities pursuant to the terms of this Agreement and the Indenture. (l) Smith Subordination Agreement. Prior to or at the Closing Time, the Representative shall have received a subordination agreement, in form and substance satisfactory to the Representative, subordinating the indebtedness represented by the Subordinated Smith Loan (as defined in the Offering Memorandum) to the Securities. (m) Additional Documents. At the Closing Time, counsel for the Initial Purchasers shall have been furnished with such documents and opinions as they may require (including any consents under any agreements to which the Company or any Guarantor is a party) for the purpose of enabling them to pass upon the issuance and sale of the Securities and the Guarantees 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 and the Guarantors in connection with the issuance and sale of the Securities and the Guarantees as herein contemplated shall be satisfactory in form and substance to the Initial Purchasers and counsel for the Initial Purchasers. (n) Termination of Agreement. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement may be terminated by the Representative by notice to the Company at any time at or prior to the Closing Time, 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 and 7 shall survive any such termination and remain in full force and effect. SECTION 6. Indemnification. (a) Indemnification of Initial Purchasers. The Company and each of the Guarantors, jointly and severally, agree to indemnify and hold harmless each Initial Purchaser and each person, -21- if any, who controls any Initial Purchaser 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 any Preliminary Offering Memorandum or the Final Offering Memorandum (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, or any such alleged 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 the Representative), 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 or the Guarantors by any Initial Purchaser through Merrill Lynch expressly for use in the Offering Memorandum (or any amendment thereto). (b) Indemnification of Company, Guarantors, and Directors. Each Initial Purchaser severally agrees to indemnify and hold harmless the Company, the Guarantors and their directors, and each person, if any, who controls the Company or the Guarantors 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 Offering Memorandum in reliance upon and in conformity with written information furnished to the Company or the Guarantors by such Initial Purchaser through Merrill Lynch expressly for use in the Offering Memorandum. (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 -22- 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 the Representative, 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) 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 party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. 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 and the Guarantors on the one hand and the Initial Purchasers on the other hand from the offering of the Securities and the Guarantees 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 and the Guarantors on the one hand and of the Initial Purchasers 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. -23- The relative benefits received by the Company and the Guarantors on the one hand and the Initial Purchasers on the other hand in connection with the offering of the Securities and the Guarantees pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Securities and the Guarantees pursuant to this Agreement (before deducting expenses) received by the Company and the Guarantors and the total underwriting discount received by the Initial Purchasers, bear to the aggregate initial offering price of the Securities and the Guarantees. The relative fault of the Company and the Guarantors on the one hand and the Initial Purchasers 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 the Guarantors, or by the Initial Purchasers, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Guarantors and the Initial Purchasers 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 Initial Purchasers 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 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 Initial Purchaser shall be required to contribute any amount in excess of the amount by which the total price at which the Securities (including the Guarantees) purchased by it and distributed to the public were offered to the public exceeds the amount of any damages which such Initial Purchaser has otherwise been required to pay by reason of 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 Initial Purchaser 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 Initial Purchaser, and each director of the Company and each Guarantor, and each person, if any, who controls the Company and each Guarantor 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 and each Guarantor. The Initial Purchasers' respective obligations to contribute pursuant to this Section 7 are several in proportion to the principal amount of Securities (including the Guarantees) set forth opposite their respective names in Schedule A hereto and not joint. -24- 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 the Subsidiaries submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any Initial Purchaser or controlling person, or by or on behalf of the Company or any Guarantor, and shall survive delivery of the Securities (including the Guarantees) to the Initial Purchasers. SECTION 9. Termination of Agreement. (a) Termination; General. The Representative may terminate this Agreement, by notice to the Company and the Guarantors, at any time at or prior to the 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 Offering Memorandum, any material adverse change in the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and the Subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there shall have occurred a downgrading in the rating assigned to the Securities or the Guarantees or any of the Company's or any Guarantor's other debt securities by any nationally recognized securities rating agency, or if such securities rating agency shall have publicly announced that it has under surveillance or review, with possible negative implications, its rating of the Securities, the Guarantees or any of the Company's or Guarantor's other debt securities or guarantees of debt securities, or (iii) 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 Representative, impracticable to market the Securities or the Guarantees or to enforce contracts for the sale of the Securities or the Guarantees, or (iv) if trading in any securities of the Company or any Guarantor has been suspended or limited by the Commission or the NASDAQ National Market System, or if trading generally on the American Stock Exchange or the New York Stock Exchange or in the NASDAQ National Market System has been suspended or 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 (v) if a banking moratorium has been declared by either Federal, Delaware 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 and 7 shall survive such termination and remain in full force and effect. SECTION 10. Default by One or More of the Initial Purchasers. If one or more of the Initial Purchasers shall fail at Closing Time to purchase the Securities which it or they are obligated to purchase under this Agreement (the "Defaulted Securities"), the Representative shall have the right, but not the obligation, within 24 hours thereafter, to make arrangements for one or -25- more of the non-defaulting Initial Purchasers, or any other initial purchasers, 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 Representative 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 aggregate principal amount of the Securities to be purchased hereunder, each of the non-defaulting Initial Purchasers shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective obligations hereunder bear to the obligations of all non-defaulting Initial Purchasers, or (b) if the number of Defaulted Securities exceeds 10% of the aggregate principal amount of the Securities to be purchased hereunder, this Agreement shall terminate without liability on the part of any non-defaulting Initial Purchaser. No action taken pursuant to this Section shall relieve any defaulting Initial Purchaser from liability in respect of its default. In the event of any such default which does not result in a termination of this Agreement, either the Representative, the Company or the Guarantors shall have the right to postpone the Closing Time for a period not exceeding seven days in order to effect any required changes in the Offering Memorandum or in any other documents or arrangements. As used herein, the term "Initial Purchaser" includes any person substituted for an Initial Purchaser 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 Initial Purchasers shall be directed to the Representative at North Tower, World Financial Center, New York, New York 10281-1209, attention of Pascal Maeter, with a copy to Fried, Frank, Harris, Shriver & Jacobson, 1 New York Plaza, New York, New York 10004, attention of Stuart H. Gelfond, Esq.; notices to the Company or the Guarantors shall be directed to them at Sonic Automotive, Inc., 5401 East Independence Boulevard, P.O. Box 18747, Charlotte, North Carolina 28218, attention of Theodore Wright; with a copy to Peter J. Shea, Esq., Parker, Poe, Adams & Bernstein L.L.P, 2500 Charlotte Plaza, Charlotte, North Carolina 28244. SECTION 12. Parties. This Agreement shall inure to the benefit of and be binding upon the Initial Purchasers, the Company and the Guarantors 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 Initial Purchasers, the Company and the Guarantors 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 Initial Purchasers, the Company and the Guarantors and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the -26- benefit of no other person, firm or corporation. No purchaser of Securities and Guarantees from any Initial Purchaser 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 HEREIN 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 and the Guarantors a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the Initial Purchasers, the Company and the Guarantors in accordance with its terms. Very truly yours, SONIC AUTOMOTIVE, INC. By: /s/ O. Bruton Smith ------------------------------ Name: O. Bruton Smith Title: Chief Executive Officer TOWN AND COUNTRY FORD INCORPORATED MARCUS DAVID CORPORATION FRONTIER OLDSMOBILE--CADILLAC, INC. SONIC DODGE, LLC SONIC CHRYSLER--PLYMOUTH--JEEP--EAGLE, LLC FORT MILL FORD, INC. TOWN AND COUNTRY CHRYSLER--PLYMOUTH--JEEP OF ROCK HILL, INC. FORT MILL CHRYSLER--PLYMOUTH--DODGE INC. LONE STAR FORD, INC. SONIC AUTOMOTIVE OF NEVADA, INC. SONIC AUTOMOTIVE OF TENNESSEE, INC. SONIC AUTOMOTIVE -- 6025 INTERNATIONAL DRIVE, LLC SONIC AUTOMOTIVE OF NASHVILLE, LLC SONIC AUTOMOTIVE OF CHATTANOOGA, LLC TOWN AND COUNTRY JAGUAR, LLC TOWN AND COUNTRY CHRYSLER--PLYMOUTH--JEEP, LLC TOWN AND COUNTRY DODGE OF CHATTANOOGA, LLC SONIC AUTOMOTIVE B 2490 SOUTH LEE HIGHWAY, LLC, TOWN AND COUNTRY FORD OF CLEVELAND, LLC FREEDOM FORD, INC. SONIC AUTOMOTIVE 5260 PEACHTREE INDUSTRIAL BLVD., LLC SONIC AUTOMOTIVE OF GEORGIA, INC. SONIC PEACHTREE INDUSTRIAL BLVD., L.P. SONIC AUTOMOTIVE -- CLEARWATER, INC. SONIC AUTOMOTIVE 21699 U.S. HWY. 19 N., INC. SONIC AUTOMOTIVE COLLISION CENTER OF CLEARWATER, INC. SONIC AUTOMOTIVE -- 1400 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE -- 1455 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE -- 1495 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE -- 1500 AUTOMALL DRIVE, COLUMBUS, INC. SONIC AUTOMOTIVE -- 3700 WEST BROAD STREET, COLUMBUS, INC. SONIC AUTOMOTIVE -- 4000 WEST BROAD STREET, COLUMBUS, INC. SONIC AUTOMOTIVE 2424 LAURENS RD., GREENVILLE, INC. SONIC AUTOMOTIVE 2752 LAURENS RD., GREENVILLE, INC. SONIC AUTOMOTIVE - HWY. 153 at SHALLOWFORD ROAD, CHATTANOOGA, INC.
SONIC AUTOMOTIVE -- 5585 PEACHTREE INDUSTRIAL BLVD., LLC CAPITOL CHEVROLET AND IMPORTS, INC., SONIC AUTOMOTIVE - 1919 N. DIXIE HWY., NSB, INC. SONIC AUTOMOTIVE - 1307 N. DIXIE HWY., NSB, INC. SONIC AUTOMOTIVE - 1720 MASON AVE., DB, INC. SONIC AUTOMOTIVE - 3741 S. NOVA RD., PO, INC. SONIC AUTOMOTIVE - 241 RIDGEWOOD AVE., HH, INC.
By: /s/ B. Scott Smith ------------------------------------- Name: B. Scott Smith Title: Authorized Officer CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED NATIONSBANC MONTGOMERY SECURITIES LLC BANCAMERICA ROBERTSON STEPHENS By: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: /s/ Barry S. Price ------------------------------------- Authorized Signatory For itself and the other Initial Purchasers named in Schedule A hereto. SONIC AUTOMOTIVE -- 5585 PEACHTREE INDUSTRIAL BLVD., LLC CAPITOL CHEVROLET AND IMPORTS, INC., SONIC AUTOMOTIVE - 1919 N. DIXIE HWY., NSB, INC. SONIC AUTOMOTIVE - 1307 N. DIXIE HWY., NSB, INC. SONIC AUTOMOTIVE - 1720 MASON AVE., DB, INC. SONIC AUTOMOTIVE - 3741 S. NOVA RD., PO, INC. SONIC AUTOMOTIVE - 241 RIDGEWOOD AVE., HH, INC. By: ------------------------------------- Name: Title: CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED NATIONSBANC MONTGOMERY SECURITIES LLC BANCAMERICA ROBERTSON STEPHENS By: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: /s/ Barry S. Price ------------------------------------- Authorized Signatory For itself and the other Initial Purchasers named in Schedule A hereto. EX-10 7 EXHIBIT 10.89 EXHIBIT 10.89 SUBORDINATION AGREEMENT This Subordination Agreement (as the same may from time to time be amended, modified or restated, the "Agreement") is dated as of July 31, 1998 and is entered into by and between O. BRUTON SMITH (the "Junior Creditor") and U.S. Bank Trust National Association (the "Trustee"), a bank organized under the laws of the United States, as Trustee under an Indenture dated as of July 1, 1998 (the "Indenture") among Sonic Automotive, Inc. (the "Issuer"), the Guarantors named therein (the "Guarantors"), and the Trustee, and acting hereunder for the benefit of the holders (the "Holders") of the Issuer's $125,000,000 in principal amount of Senior Subordinated Notes Due 2008 (the "Issuer's Senior Notes") issued pursuant to the Indenture (in such capacity, "Senior Creditor"). W I T N E S S E T H: WHEREAS, the Junior Creditor has a financial interest in the Issuer relating to the Issuer's obligation to repay the Junior Creditor a debt in the principal amount of $5,500,000 evidenced by the Issuer's Subordinated Promissory Note dated December 15, 1997 (collectively with any instrument that may be substituted for such note, the "Subordinated Note"); WHEREAS, the Issuer and the Trustee have entered into the Indenture for the benefit of the Holders and providing for the issuance by the Issuer's Senior Notes; WHEREAS, the Junior Creditor acknowledges that the issuance of the Issuer's Senior Notes and the Issuer's receipt of the proceeds from the sale thereof is of direct pecuniary value to the Junior Creditor; NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged by the Junior Creditor, and in order to induce the Holders to purchase the Issuer's Senior Notes for the benefit of the Issuer and to provide the ranking of the Issuer's Senior Notes among the Issuer's debt as disclosed in the Issuer's Final Offering Memorandum dated July 28, 1998 relating to the sale of the Issuer's Senior Notes, the Junior Creditor hereby agrees with Trustee, for the benefit of the Holders, as hereinafter set forth. 1. Certain Defined Terms. In addition to the terms defined above and elsewhere in this Agreement, the following terms used in this Agreement shall have the following meanings, applicable both to the singular and the plural forms of the terms defined: As used in this Agreement: "Ford Subordination Agreement" shall mean that certain Subordination Agreement between the Junior Creditor and Ford Motor Credit Company dated December 15, 1997. "Issuer" shall mean Sonic Automotive, Inc., a Delaware corporation or any successor assign or assign of Sonic Automotive, Inc., including, without limitation, a receiver, trustee or debtor-in-possession. "Senior Debt" shall mean (a) the indebtedness evidenced by the Issuer's Senior Notes and all other obligations, liabilities, and indebtedness issued or arising pursuant to the Indenture, in each case whether now existing or hereafter arising (and whether such indebtedness arises or accrues before or after the commencement of any bankruptcy, insolvency or receivership proceedings) directly between Issuer and the Senior Creditor, or acquired outright, conditionally or as collateral security from another by the Senior Creditor, including, without limitation, interest and fees accruing pre-petition or post-petition at the rate or rates prescribed in Issuer's Senior Notes and costs, expenses, and attorneys' and paralegals' fees, whenever incurred (and whether or not such claims, interest, costs, expenses or fees are allowed or allowable in any such proceeding); and (b) amounts disbursed or advanced (including, without limitation in connection with the provision of any financing or other financial accommodations pursuant to Section 364 of the Bankruptcy Code) by the Senior Creditor which the Senior Creditor, in its good faith discretion and to the extent the same may be permitted under the Indenture, deems necessary or desirable to preserve or protect any collateral now or hereafter securing all or any portion of the Senior Debt or to enhance the likelihood or maximize the amount of repayment of the Senior Debt, including, but not limited to, all protective advances, costs, expenses, and attorneys' and paralegals' fees, whensoever made, advanced or incurred by the Senior Creditor in connection with the Senior Debt or the collateral therefor ("Preservation Debt"). "Subordinated Debt" shall mean (a) all principal of, and premium, if any, and interest on, the Subordinated Note, and (b) all other indebtedness, fees, expenses, obligations and liabilities of the Issuer (or any other person, firm, partnership or corporation for the benefit of Issuer) to the Junior Creditor, whether now existing or hereafter incurred or created, under or with respect to the Subordinated Note, in each case, whether such amounts are due or not due, direct or indirect, absolute or contingent. 2. Standby; Subordination. The payment and performance of the Subordinated Debt is hereby subordinated to the Senior Debt and, except as set forth in Section 3 below, the Junior Creditor will not accelerate, ask, demand, sue for, take or receive from Issuer, by setoff or in any other manner, the whole or any part of the Subordinated Debt, including, without limitation, the taking of any negotiable instruments evidencing such amounts, nor any security for any of the Subordinated Debt, unless and until all of the Senior Debt shall have been fully and indefeasibly paid and satisfied in cash. The Junior Creditor also hereby agrees that, regardless of whether the Senior Debt is secured or unsecured, upon satisfaction in full of the Senior Debt (in this one instance, as this term is defined in the Ford - 2 - Subordination Agreement) and the termination of all financing arrangements between the Issuer and/or any of its affiliates and Ford Motor Credit Company, then the Senior Creditor shall be subrogated for the Junior Creditor with respect to the Junior Creditor's claims against the Issuer and the Junior Creditor's rights, liens and security interests, if any, in any of the Issuer's assets or any other assets securing the Senior Debt and the proceeds thereof until all of the Senior Debt has been fully and indefeasibly paid and satisfied in cash. 3. Permitted Payments. Notwithstanding the provisions of Section 2 of this Agreement, until the occurrence of a "Default" or an "Event of Default" (as these terms are defined in the Indenture), and provided that (i) there shall not then exist any breach of this Agreement by the Junior Creditor which has not been waived, in writing, by the Senior Creditor, and (ii) the payment described below, if made, would not give rise to the occurrence of an Event of Default, Issuer may pay to the Junior Creditor, and the Junior Creditor may accept from Issuer, regularly scheduled payments of interest, when due, on an unaccelerated basis, pursuant to the Subordinated Note provided the maximum interest rate at which such payments shall be permitted shall not exceed the "Prime Rate" announced from time to time by NationsBank N.A. in Charlotte, North Carolina, or any successor, plus 0.5% per annum ("Permitted Payments"), it being understood and agreed by the Junior Creditor that the Subordinated Note may not be modified or amended without the prior written consent of the Senior Creditor. 4. Enforcement Rights. Prior to the indefeasible payment in full in cash of the Senior Debt and the termination of all financing arrangements between Issuer and the Senior Creditor, the Junior Creditor shall not have any right to enforce any claim with respect to the Subordinated Debt, including, without limitation, any Permitted Payment, or otherwise to take any action against the Issuer or the Issuer's property without the Senior Creditor's prior written consent. 5. Liens; Permitted Transfers. The Junior Creditor hereby represents as of the date hereof that the Junior Creditor has not been granted or obtained any liens or security interests in any assets of the Debtor Parties or any other assets securing the Senior Debt. The Junior Creditor agrees that, without the prior written consent of the Senior Creditor, the Junior Creditor shall not take any liens on or security interests in any assets of the Issuer or any other assets securing the Senior Debt. The Junior Creditor acknowledges and agrees that, to the extent the terms and provisions of this Agreement are inconsistent with the Subordinated Note, the Subordinated Note shall be deemed to be subject to this Agreement. The Junior Creditor agrees that, without the prior written consent of the Senior Creditor, the Junior Creditor shall not take any liens on or security interests in any assets of the Issuer or any other assets securing the Senior Debt. In the event that the Issuer proposes to sell, assign, transfer, lease, convey or otherwise dispose of any of its property (a "Transfer") and such Transfer is either permitted pursuant to the Indenture or pursuant to a separate consent executed by the Senior Creditor, then such Transfer shall be deemed to be permitted and consented to by the Junior Creditor and shall not constitute a violation or breach of any terms contained in the Subordinated Note. The Junior Creditor acknowledges and agrees that, to the extent the terms and provisions of this Agreement are inconsistent with the Subordinated Note, the Subordinated Note shall be deemed to be subject to this Agreement. - 3 - 6. Subordinated Debt Owed Only to the Junior Creditor. The Junior Creditor warrants and represents that (a) the Junior Creditor has not previously assigned (other than to the extent set forth in the Ford Subordination Agreement) any interest in the Subordinated Debt or any security interest in connection therewith, if any; (b) no other party owns an interest in the Subordinated Debt or security therefor other than the Junior Creditor (whether as joint holders of the Subordinated Debt, participants or otherwise); and that the entire Subordinated Debt is owing only to the Junior Creditor. The Junior Creditor covenants that the entire Subordinated Debt shall continue to be owing only to the Junior Creditor and all security therefor, if any, shall continue to be held solely for the benefit of the Junior Creditor. 7. Senior Creditor Priority. In the event of any distribution, division, or application, partial or complete, voluntary or involuntary, by operation of law or otherwise, of all or any part of the assets of Issuer or the proceeds thereof to the creditors of Issuer or readjustment of the obligations and Subordinated Debt of Issuer, whether by reason of liquidation, bankruptcy, arrangement, receivership, assignment for the benefit of creditors or any other action or proceeding involving the readjustment of all or any part of the Senior Debt or the Subordinated Debt, or the application of the assets of Issuer to the payment or liquidation thereof, or upon the dissolution or other winding up of Issuer's business, or upon the sale of all or substantially all of Issuer's assets (an "Insolvency or Liquidation Proceeding"), then, and in any such event, (i) the Senior Creditor shall be entitled to receive indefeasible payment in full in cash of any and all of the Senior Debt prior to the payment of all or any part of the Subordinated Debt, and (ii) any payment or distribution of any kind or character, whether in cash, securities or other property, subject to the rights of others under the Ford Subordination Agreement, which shall be payable or deliverable upon or with respect to any or all of the Subordinated Debt shall be paid or delivered directly to the Senior Creditor for application on any of the Senior Debt, due or not due, until the Senior Debt shall have first been fully and indefeasibly paid and satisfied in cash. 8. Grant of Authority to the Senior Creditor. Subject to the prior and superior rights of the holders of the Senior Debt (in this one instance as such term is defined in the Ford Subordination Agreement) and further in the event of the occurrence of any Insolvency or Liquidation Proceeding, and in order to enable the Senior Creditor to enforce its rights hereunder in any of the aforesaid actions or proceedings, the Senior Creditor is hereby irrevocably authorized and empowered, in the Senior Creditor's discretion, to file, make and present for and on behalf of the Junior Creditor such proofs of claims against the Issuer on account of the Subordinated Debt or other motions or pleadings as the Senior Creditor may deem expedient or proper and to vote such proofs of claims in any such proceeding and to receive and collect any and all dividends or other payments or disbursements made thereon in whatever form the same may be paid or issued and to apply the same on account of any portion of the Senior Debt. Subject to the prior and superior rights of the holders of the Senior Debt (in this one instance as such term is defined in the Ford Subordination Agreement), in voting such proofs of claim in any proceeding, the Senior Creditor may act in a manner consistent with its sole interest and shall have no duty to take any action to optimize or maximize the Junior Creditor's recovery with respect to its claim. Subject to the prior and superior rights of the holders of the Senior Debt (in this one instance as such term - 4 - is defined in the Ford Subordination Agreement), the Junior Creditor irrevocably authorizes and empowers the Senior Creditor to demand, sue for, collect and receive each of the aforesaid payments and distributions described in Section 7 above and give acquittance therefor and to file claims and take such other actions, in the Senior Creditor's own name or in the name of the Junior Creditor or otherwise, as the Senior Creditor may deem necessary or advisable. Subject to the prior and superior rights of the holders of the Senior Debt (in this one instance as such term is defined in the Ford Subordination Agreement), to the extent that payments or distributions are made in property other than cash, the Junior Creditor authorizes the Senior Creditor to sell such property to such buyers and on such terms as the Senior Creditor, in its sole discretion, shall determine. Subject to the prior and superior rights of the holders of the Senior Debt (in this one instance as such term is defined in the Ford Subordination Agreement), the Junior Creditor will execute and deliver to the Senior Creditor such powers of attorney, assignments and other instruments or documents, including notes and stock certificates (together with such assignments or endorsements as the Senior Creditor shall deem necessary), as may be requested by the Senior Creditor in order to enable the Senior Creditor and to enforce any and all claims of the Senior Creditor upon or with respect to any or all of the Subordinated Debt and to collect and receive any and all payments and distributions which may be payable or deliverable at any time upon or with respect to the Subordinated Debt, all for the Senior Creditor's own benefit. Subject to the prior and superior rights of the holders of the Senior Debt (in this one instance as such term is defined in the Ford Subordination Agreement), following the indefeasible payment in full in cash of the Senior Debt, the Senior Creditor shall remit to the Junior Creditor, all dividends or other payments or distributions paid to and held by the Senior Creditor in excess of the Senior Debt. Each of the powers and authorizations granted to the Senior Creditor in this Section 8, being coupled with an interest, is irrevocable. 9. Payments Received by the Junior Creditor. Subject to the rights of Ford Motor Credit Company under the Ford Subordination Agreement, and except for Permitted Payments received by the Junior Creditor prior to the occurrence of an a "Default" or "Event of Default" as provided in Section 3 above, should any payment or distribution or security or instrument or proceeds thereof be received by the Junior Creditor upon or with respect to the Subordinated Debt or any other obligations of the Issuer to the Junior Creditor prior to the indefeasible payment in full in cash of all of the Senior Debt and termination of all financing arrangements between the Issuer and the Senior Creditor, the Junior Creditor shall receive and hold the same in a segregated account in trust, as trustee, for the benefit of the Senior Creditor, and shall forthwith deliver the same to the Senior Creditor, in precisely the form received (except for the endorsement or assignment of the Junior Creditor where necessary), for application on any of Senior Debt, due or not due, and, until so delivered, the same shall be held in trust by the Junior Creditor as the property of the Senior Creditor. Subject to the rights of Ford Motor Credit Company under the Ford Subordination Agreement, in the event of the failure of the Junior Creditor to make any such endorsement or assignment to the Senior Creditor, the Senior Creditor, or any of its officers or employees, is hereby irrevocably authorized to make the same (which authorization, being coupled with an interest, is irrevocable). - 5 - 10. Instrument Legend. Any instrument evidencing any of the Subordinated Debt (including, without limitation, the Subordinated Note), or any portion thereof, will, on the date hereof, be inscribed with a legend conspicuously indicating that payment thereof is subordinated to the claims of the Senior Creditor pursuant to the terms of this Agreement, and a copy thereof will be delivered to the Senior Creditor on the date hereof. Any instrument evidencing any of the Subordinated Debt, or any portion thereof, which is hereafter executed by Issuer, will, on the date thereof, be inscribed with the aforesaid legend and a copy thereof will be delivered to the Senior Creditor on the date of its execution or within five (5) business days thereafter. 11. Reimbursements for Expenses and Borrowings from Issuer; Restriction on Assignment of Claims. Except as permitted in Section 3 hereof, the Junior Creditor agrees that until the Senior Debt has been indefeasibly paid in full in cash and satisfied and all financing arrangements between the Debtor Parties and the Senior Creditor have been terminated, the Junior Creditor will not, directly or indirectly, accept or receive the benefit of any remuneration or reimbursement for expenses on account of the Subordinated Debt from or on behalf of any Debtor Party and will not assign or transfer to others any claim the Junior Creditor has or may have against Issuer, unless such assignment or transfer is made expressly subject to this Agreement. 12. Continuing Nature of Subordination. This Agreement shall be effective and may not be terminated or otherwise revoked by the Junior Creditor until the Senior Debt shall have been indefeasibly paid in full in cash and satisfied and all financing arrangements among Debtor Parties and the Senior Creditor have been terminated. The Junior Creditor hereby waives to the fullest extent permitted by applicable law any right it may have to terminate or revoke this Agreement or any of the provisions of this Agreement. In the event the Junior Creditor shall have any right under applicable law otherwise to terminate or revoke this Agreement which right cannot be waived, such termination or revocation shall not be effective until written notice of such termination or revocation, signed by the Junior Creditor, is actually received by the Senior Creditor's officer responsible for such matters. In the absence of the circumstances described in the immediately preceding sentence, this is a continuing agreement of subordination and the Senior Creditor may continue, at any time and without notice to the Junior Creditor, to extend credit or other financial accommodations and loan monies to or for the benefit of a Debtor Party on the faith hereof. Any termination or revocation described hereinabove shall not affect this Agreement in relation to (a) any of the Senior Debt which arose or was committed to prior to receipt thereof, or (b) any of the Senior Debt created after receipt thereof if such Senior Debt is Preservation Debt. 13. Additional Agreements between the Senior Creditor and Issuer. The Senior Creditor at any time and from time to time, either before or after any such aforesaid notice of termination or revocation, may enter into such agreement or agreements with a Issuer as the Senior Creditor may deem proper, extending the time of payment of or renewing or otherwise altering the terms, including, without limitation increasing the principal amount thereof, of all or any portion of the Senior Debt or affecting the security underlying any or all of the Senior Debt, and may exchange, sell, release, surrender or otherwise deal with any such security, without in any way thereby impairing or affecting this Agreement. - 6 - 14. Junior Creditor's Waivers. All of the Senior Debt shall be deemed to have been made or incurred in reliance upon this Agreement. The Junior Creditor expressly waives all notice of the acceptance by the Senior Creditor of the subordination and other provisions of this Agreement and all other notices not specifically required pursuant to the terms of this Agreement whatsoever, and the Junior Creditor expressly waives reliance by the Senior Creditor upon the subordination and other agreements as herein provided. In the event that the Junior Creditor has or at any time acquires any lien upon or security interest in the assets securing the Senior Debt, or any part thereof, to the fullest extent permitted by applicable law, the Junior Creditor hereby waives any right that the Junior Creditor may have whether such right arises under Sections 9-504 or 9-505 of the Uniform Commercial Code or other applicable law, to receive notice of the Senior Creditor's intended disposition of such assets (or a portion thereof) or of the Senior Creditor's proposed retention of such assets in satisfaction of the Senior Debt (or a portion thereof). The Junior Creditor further agrees that in the event Issuer consents or fails to object to a proposed retention of such assets (or a portion thereof) by the Senior Creditor in satisfaction of the Senior Debt (or a portion thereof), the Junior Creditor hereby consents to such proposed retention regardless of whether the Junior Creditor is provided with notice of such proposed retention. The Junior Creditor agrees that the Junior Creditor will not interfere with or in any manner oppose a disposition of any assets securing the Senior Debt by the Senior Creditor. The Junior Creditor agrees that the Senior Creditor has not made any warranties or representations with respect to the due execution, legality, validity, completeness or enforceability of the Issuer's Senior Notes, or the collectibility of the Senior Debt, that the Senior Creditor shall be entitled to manage and supervise its financial accommodations to Issuer in accordance with applicable law and its usual practices, modified from time to time as deemed appropriate under the circumstances, without regard to the existence of any rights that the Junior Creditor may now or hereafter have in or to any of the assets of Issuer, and that Senior Creditor shall have no liability to the Junior Creditor for, and waive any claim which the Junior Creditor may now or hereafter have against, the Senior Creditor arising out of any and all actions which the Senior Creditor, in good faith, takes or omits to take (including, without limitation, actions with respect to the creation, perfection or continuation of liens or security interests in any collateral now or hereafter securing any of the Senior Debt, actions with respect to the occurrence of an Event of Default, actions with respect to the foreclosure upon, sale, release, or depreciation of, or failure to realize upon, any of the Collateral and actions with respect to the collection of any claim for all or any part of the Senior Debt from any account debtor, guarantor or any other party) with respect to the Senior Debt or any agreement related thereto or to the collection of the Senior Debt or the valuation, use, protection or release of the collateral now or hereafter securing any of the Senior Debt for the Senior Debt. 15. Invalidated Payments. To the extent that the Senior Creditor receives payments on, or proceeds of collateral for, the Senior Debt which are subsequently invalidated, declared to be fraudulent or preferential, set aside, avoided and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law, equitable cause or pursuant to the Indenture, then, to the extent of such payment or proceeds received, the Senior Debt, or part thereof, intended to be satisfied shall be revived - 7 - and continue in full force and effect as if such payments or proceeds had not been received by the Senior Creditor. 16. Bankruptcy Issues. The Junior Creditor agrees that the Senior Creditor may consent to the use of cash collateral or provide financing to a Issuer (under Section 363 or Section 364 of the Bankruptcy Code or otherwise) on such terms and conditions and in such amounts as the Senior Creditor, in its sole discretion, may decide and that, in connection with such cash collateral usage or such financing, the Issuer (or a trustee appointed for the estate of the Issuer) may grant to the Senior Creditor liens and security interests upon all assets of the Issuer, which liens and security interests (i) shall secure payment of all Senior Debt (whether such Senior Debt arose prior to the filing of the petition for relief or arise thereafter); and (ii) shall be superior in priority to the liens and security interests, if any, held by the Junior Creditor on the assets of the Debtor Parties. All allocations of payments between the Senior Creditor and the Junior Creditor shall, subject to any court order, continue to be made after the filing or other commencement of any Insolvency or Liquidation Proceeding on the same basis that the payments were to be allocated prior to the date of such filing or commencement. The Junior Creditor agrees that he will not object to or oppose a sale or other disposition of any assets securing the Senior Debt (or any portion thereof) free and clear of security interests, liens or other claims of the Junior Creditor, if any, under Section 363 of the Bankruptcy Code or any other provision of the Bankruptcy Code if the Senior Creditor has consented to such sale or disposition of such assets. In the event that the Junior Creditor has or at any time acquires any security for the Subordinated Debt, the Junior Creditor agrees not to assert any right it may have to "adequate protection" of its interest in such security in any Insolvency or Liquidation Proceeding and agrees that he will not seek to have the automatic stay lifted with respect to such security, without the prior written consent of the Senior Creditor. The Junior Creditor waives any claim he may now or hereafter have arising out of the Senior Creditor's election, in any proceeding instituted under Chapter 11 of the Bankruptcy Code, of the application of Section 1111(b)(2) of the Bankruptcy Code, and/or any borrowing or grant of a security interest under Section 364 of the Bankruptcy Code by a Issuer, as debtor in possession. The Junior Creditor agrees not to initiate or prosecute or encourage any other person to initiate or prosecute any claim, action or other proceeding (i) challenging the enforceability of the Senior Creditor's claim, (ii) challenging the enforceability of any liens or security interests in assets securing the Senior Debt or (iii) asserting any claims which the Issuer may hold with respect to the Senior Creditor. The Junior Creditor agrees that he will not seek participation or participate on any creditors' committee without the Senior Creditor's prior written consent. In the event that the Senior Creditor consents to such participation, at the request of the Senior Creditor, the Junior Creditor will resign from his position on such committee. To the extent that the Senior Creditor receives payments on, or proceeds of collateral for, the Senior Debt which are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law, or equitable cause, then, to the extent of such payment or proceeds received, the Senior Debt, or part thereof, intended to be satisfied shall be revived and continue in full force and effect as if such payments or proceeds had not been received by the Senior Creditor. - 8 - 17. Senior Creditor's Waivers. No right of the Senior Creditor to enforce the subordination or other terms as provided in this Agreement shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of Issuer or by any act or failure to act by the Senior Creditor, or by any noncompliance by Issuer with the terms, provisions and covenants of this Agreement, or the Subordinated Note, regardless of any knowledge thereof which the Senior Creditor may have or be otherwise charged with. No waiver shall be deemed to be made by the Senior Creditor of any of the Senior Creditor's rights hereunder, unless the same shall be in writing signed on behalf of the Senior Creditor, and each waiver, if any, shall be a waiver only with respect to the specific instance involved and shall in no way impair the rights of the Senior Creditor or the obligations of the Junior Creditor to the Senior Creditor in any other respect at any other time. The failure of the Senior Creditor to enforce at any time any provision of this Agreement shall not be construed to be a waiver of such provisions, nor in any way to affect the validity of this Agreement or any part hereof or the right of the Senior Creditor thereafter to enforce each and every such provision. No waiver by the Senior Creditor of any breach of this Agreement shall be held to constitute a waiver of any other or subsequent breach. 18. Information Concerning Financial Condition of Issuer. The Junior Creditor hereby assumes responsibility for keeping informed of the financial condition of Issuer, any and all endorsers and any and all guarantors of the Senior Debt and of all other circumstances bearing upon the risk of nonpayment of the Senior Debt and/or Subordinated Debt that diligent inquiry would reveal, and the Junior Creditor hereby agrees that the Senior Creditor shall not have any duty to advise the Junior Creditor of information known to the Senior Creditor regarding such condition or any such circumstances. In the event the Senior Creditor, in its sole discretion, undertakes, at any time or from time to time, to provide any such information to the Junior Creditor, the Senior Creditor shall be under no obligation (i) to provide any such information to the Junior Creditor on any subsequent occasion, or (ii) to undertake any investigation not a part of Senior Creditor's regular business routine and shall be under no obligation to disclose any information which, pursuant to accepted or reasonable commercial finance practices, the Senior Creditor wishes to maintain confidential. The Junior Creditor hereby agrees that all payments received by the Senior Creditor may be applied, reversed, and reapplied, in whole or in part, to any portion of the Senior Debt, as the Senior Creditor, in its sole discretion, deem appropriate and assent to any extension or postponement of the time of payment of the Senior Debt or to any other indulgence with respect thereto, to any substitution, exchange or release of collateral which may at any time secure the Senior Debt and to the addition or release of any other party or person primarily or secondarily liable therefor. Without in any way limiting the generality of the foregoing paragraph, the Senior Creditor, may, at any time and from time to time, without the consent of, or notice to, the Junior Creditor without incurring any liabilities to the Junior Creditor and without impairing or releasing the subordination and other benefits provided in this Agreement (even if any right of subrogation or other right or remedy of the Junior Creditor is affected, impaired or extinguished thereby) do any one or more of the following: - 9 - (i) change the manner, place or terms of payment or change or extent the time of payment of, or renew, exchange, amend, increase or alter, the terms of any of the Senior Debt or any lien in any of any collateral now or hereafter securing all or any portion of the Senior Debt or guaranty thereof or any liability of a Issuer or any guarantor, or any liability incurred directly or indirectly in respect thereof (including, without limitation, any extension of the Senior Debt, without any restriction as to the tenor or terms of any such extension), or otherwise amend, renew, exchange, extend, modify, supplement in any manner the Senior Debt or any related documents. (ii) sell, exchange, release, surrender, realize upon, enforce or otherwise deal with in any manner and in any order any part of the Collateral or other property securing the Senior Debt or any liability of a Issuer or any guarantor to such holder, or any liability incurred directly or indirectly in respect thereof; (iii) settle or compromise any Senior Debt or any other liability of a Issuer or any guarantor or any security therefor or any liability incurred directly or indirectly in respect thereof and apply any sums by whomsoever paid and however realized to any liability (including, without limitation, the Senior Debt) in any manner or order; and (iv) exercise or delay in or refrain from exercising any right or remedy against a Issuer or any security or any guarantor or any other Person, elect any remedy and otherwise deal freely with a Issuer and the collateral and any security and any guarantor or any liability of a Issuer or any guarantor to such holder or any liability incurred directly or indirectly in respect thereof. The Senior Creditor shall have no duty to the Junior Creditor with respect to the preservation or maintenance of any collateral now or hereafter securing all or any portion of the Senior Debt or the manner in which Senior Creditor enforces its rights in such collateral or to preserve or maintain the rights of any Person in such collateral, and the Junior Creditor hereby waive any and all claims which the Junior Creditor may now or hereafter have against the Senior Creditor which relate to such preservation, maintenance or enforcement. The Junior Creditor agrees not to assert and hereby waives, to the fullest extent permitted by law: any right to demand, request, plead or otherwise assert or otherwise claim the benefit of, any marshalling, appraisement, valuation or other similar right that may otherwise be available under applicable law or any other similar rights a junior creditor may have under applicable law. 19. CONSENT TO JURISDICTION; SERVICE OF PROCESS. (A) THE JUNIOR CREDITOR CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN NEW YORK AND WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT, AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY REGISTERED MAIL DIRECTED TO THE JUNIOR CREDITOR AT THE ADDRESS STATED BELOW AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED THREE (3) DAYS - 10 - AFTER THE SAME SHALL HAVE BEEN POSTED AS AFORESAID. THE JUNIOR CREDITOR WAIVES ANY OBJECTION BASED UPON FORUM NON CONVENIENS, AND ANY OBJECTION TO VENUE OF ANY ACTION INSTITUTED HEREUNDER. NOTHING IN THIS SECTION 17 SHALL AFFECT THE RIGHT OF THE SENIOR CREDITOR TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF THE SENIOR CREDITOR TO BRING ANY ACTION OR PROCEEDING AGAINST THE JUNIOR CREDITOR OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION. (B) ADVICE OF COUNSEL. EACH OF THE PARTIES REPRESENTS TO EACH OTHER PARTY HERETO THAT IT HAS DISCUSSED THIS AGREEMENT AND, SPECIFICALLY, THE PROVISIONS OF SECTIONS 17, 18, 19 AND 21, WITH COUNSEL OF ITS CHOICE AND IS FULLY AWARE OF THE LEGAL CONSEQUENCES AND EFFECTS OF AND HAS KNOWINGLY AGREED TO THE PROVISIONS HEREOF. 20. ARM'S LENGTH AGREEMENT. EACH OF THE PARTIES TO THIS AGREEMENT AGREES AND ACKNOWLEDGES THAT THIS AGREEMENT HAS BEEN NEGOTIATED IN GOOD FAITH, AT ARM'S LENGTH, AND NOT BY ANY MEANS FORBIDDEN BY LAW. 21. INJUNCTIVE RELIEF. THE JUNIOR CREDITOR ACKNOWLEDGES AND AGREES THAT ITS COVENANTS AND OBLIGATIONS UNDER THIS AGREEMENT AND THE OTHER DOCUMENTS, INSTRUMENTS AND AGREEMENTS EXECUTED IN CONNECTION HEREWITH ARE INTEGRAL TO THE SENIOR CREDITOR'S REALIZATION OF ITS RIGHTS AGAINST, AND THE VALUE OF ITS INTEREST IN, THE ASSETS OF A DEBTOR PARTY AND ITS AFFILIATES, THAT A BREACH OF ANY OF THE COVENANTS AND OBLIGATIONS OF THE JUNIOR CREDITOR HEREUNDER OR UNDER THE OTHER DOCUMENTS, INSTRUMENTS AND AGREEMENTS EXECUTED IN CONNECTION HEREWITH SHALL ENTITLE THE SENIOR CREDITOR TO INJUNCTIVE RELIEF AND SPECIFIC PERFORMANCE WITHOUT THE NECESSITY OF PROVING IRREPARABLE INJURY TO THE SENIOR CREDITOR OR THAT THE SENIOR CREDITOR DO NOT HAVE AN ADEQUATE REMEDY AT LAW IN RESPECT OF SUCH BREACH (EACH OF WHICH ELEMENTS THE JUNIOR CREDITOR ADMITS EXIST) AND, AS A CONSEQUENCE, THE JUNIOR CREDITOR AGREES THAT EACH AND EVERY COVENANT AND OBLIGATION APPLICABLE TO IT AND CONTAINED IN THIS AGREEMENT OR THE OTHER DOCUMENTS INSTRUMENTS AND AGREEMENTS EXECUTED IN CONNECTION HEREWITH SHALL BE SPECIFICALLY ENFORCEABLE AGAINST IT. THE JUNIOR CREDITOR HEREBY WAIVES AND AGREES NOT TO ASSERT ANY DEFENSES AGAINST AN ACTION FOR SPECIFIC PERFORMANCE OF ITS RESPECTIVE COVENANTS AND OBLIGATIONS HEREUNDER AND/OR UNDER THE OTHER DOCUMENTS, INSTRUMENTS AND AGREEMENTS EXECUTED IN CONNECTION HEREWITH. 22. Notices. Except as otherwise provided for herein, whenever it is provided herein that any notice, demand, request, consent, approval, declaration or other communication shall or may be given to or served upon either of the parties by the other, or whenever either of the parties desires to give or serve upon the other communication with respect to this Agreement, - 11 - such notice, demand, request, consent, approval, declaration or other communication shall be in writing (including, but not limited to, facsimile communication), and shall either be delivered in person, telecopied, telegraphed, sent by reputable overnight courier or mailed by first class mail, or registered or certified mail, return receipt requested, postage prepaid or provided for, addressed as follows: (i) If to the Senior Creditor at: c/o U.S. Bank Trust National Association Corporate Trust Services U.S. Bank Trust Center Mail Code SPFT0210 180 East Fifth Street St. Paul, Minnesota 55101 (ii) If to the Junior Creditor at: O. Bruton Smith 5401 East Independence Boulevard P.O. Box 18747 Charlotte, North Carolina 78218 or to such other address as any party designates to the other parties in the manner herein prescribed. 23. GOVERNING LAW. ANY DISPUTE BETWEEN ANY OF THE JUNIOR CREDITOR AND THE SENIOR CREDITOR ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH, THIS AGREEMENT OR ANY OF THE OTHER DOCUMENTS, INSTRUMENTS OR AGREEMENTS EXECUTED IN CONNECTION HEREWITH AND WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED IN ACCORDANCE WITH THE LAWS (WITHOUT REGARD TO THE CONFLICTS OF LAWS PROVISIONS) OF THE STATE OF NEW YORK. 24. Counterparts; Facsimile Effectiveness. This Agreement may be executed in one or more counterparts, each of which shall be considered an original counterpart, and shall become a binding agreement when the Senior Creditor and the Junior Creditor and Issuer have each executed one counterpart. Each of the parties hereto agrees that a signature transmitted to the Senior Creditor or its counsel by facsimile transmission shall be effective to bind the party so transmitting its signature. 25. Complete Agreement; Merger. This Agreement, including the schedules and exhibits hereto, contain the entire understanding of the parties hereto with regard to the subject matter contained herein. This Agreement supersedes all prior or contemporaneous negotiations, promises, covenants, agreements and representations of every nature whatsoever with respect to - 12 - the matters referred to in this Agreement, all of which have become merged and finally integrated into this Agreement. Each of the parties understands that in the event of any subsequent litigation, controversy or dispute concerning any of the terms, conditions or provisions of this Agreement, no party shall be entitled to offer or introduce into evidence any oral promises or oral agreements between the parties relating to the subject matter of this Agreement not included or referred to herein and not reflected by a writing included or referred to herein. 26. No Third Party Beneficiaries. This Agreement is solely for the benefit of the Senior Creditor and its respective successors and assigns and the Junior Creditor and its successors and is not intended to confer upon the Issuer or any other third party any rights or benefits. 27. Severability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 28. Section Titles. The section titles contained in this Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. 29. No Strict Construction. The parties (directly and through their counsel) hereto have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement. 30. No Conflict with Ford Subordination Agreement. Senior Creditor acknowledges the existence of the Ford Subordination Agreement and has been provided with copy of the Ford Subordination Agreement by Junior Creditor. Senior Creditor agrees that notwithstanding any provision contained in this Subordination Agreement, to the extent of a conflict between the terms of the Ford Subordination Agreement and this Subordination Agreement, the terms of the Ford Subordination Agreement shall control. [Signatures begin on following page] - 13 - IN WITNESS WHEREOF, this Subordination Agreement has been signed as of this 29th day July, 1998. /s/ O. Bruton Smith ------------------------- O. BRUTON SMITH Acknowledged and accepted as of this 30th day of July, 1998, by: U.S. BANK TRUST NATIONAL ASSOCIATION AS TRUSTEE UNDER THAT CERTAIN INDENTURE DATED AS OF JULY 1, 1998 FOR THE BENEFIT OF THE HOLDERS OF SONIC AUTOMOTIVE, INC. SENIOR SUBORDINATED NOTE DUE 2008 By: /s/ Judith M. Zuzek - -------------------------------------- Title: Trust Officer Without in any way establishing any rights with respect to the terms thereof on behalf of any of the undersigned, the undersigned acknowledges receipt of a copy of the foregoing Subordination Agreement this 31st day of July, 1998 and agrees to take no action or refrain from taking action inconsistent with the terms thereof. SONIC AUTOMOTIVE, INC. By: /s/ B. Scott Smith ------------------------------- Its: President ------------------------ - 14 - EX-10 8 EXHIBIT 10.90 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") made this 16th day of September, 1998 between SONIC AUTOMOTIVE, INC., a Delaware corporation (the "Employer") and DENNIS D. HIGGINBOTHAM ("Employee"). R E C I T A L S WHEREAS, Employer desires to acquire certain of the automobile dealership assets of Employee within the State of Florida; and WHEREAS, Employer desires to retain the services of Employee in order to manage the existing dealerships and acquire and manage additional dealerships; and WHEREAS, Employee is prepared to perform those duties as set forth in this Agreement. NOW, THEREFORE, the parties intending to be legally bound agree as follows: 1. Term of Employment Employer hereby employs Employee, and Employee hereby accepts employment from Employer, for the period commencing with the closing of the sale transferring those assets in which Employee has an interest in various dealerships in the State of Florida to Employer (the "Commencement Date") and ending three (3) years thereafter, unless sooner terminated pursuant to the provisions of paragraph 5 hereof (the "Employment Period"). 2. Duties of Employee. Employee shall be employed by Employer as President of Retail Operations for Sonic Automotive, Inc. Employee shall report to Employer's Chief Executive Officer and the Employer's Board of Directors. Employee shall be proposed as a nominee for election to Employer's Board of Directors as promptly as reasonably practicable after the Closing. Employee shall assist in the management and supervision of all Employerowned dealerships. Employee shall serve Employer faithfully in the performance of Employee's duties and shall devote his full time and best efforts to his employment, including the regularly established working hours and such additional time as the requirements of Employer and the performance of the Employee's duties require. Employee agrees to observe and comply with all the rules and regulations of Employer as adopted and furnished to Employee by Employer's Board of Directors from time to time. Employee specifically understands that Employer shall have final authority over the terms and conditions of all acquisitions. Employee shall not be required to relocate his base of employment from the Daytona Beach area. 3. Compensation. For all services rendered by Employee under this Agreement, he shall be entitled to compensation in accordance with the following: (a) Base Salary. During the Employment Period, the Employee shall receive an annual base salary ("Annual Base Salary") of FOUR HUNDRED THOUSAND AND NO/100 DOLLARS ($400,000.00) which shall be paid in equal monthly installments in the amount of THIRTY-THREE THOUSAND THREE HUNDRED THIRTY-THREE AND THIRTY-THREE/100 DOLLARS ($33,333.33). (b) Additional Salary and Bonus. In addition to the Annual Base Salary as hereinabove provided, Employer shall pay to the Employee such additional amounts as may be determined and ratified from time to time by the Compensation Committee of Employer's Board of Directors. 4. Fringe Benefits. During the Employment Period, Employee shall receive with other similarly situated employees of the Employer, all the fringe benefits of Employer, together with the following additional fringe benefits: (a) The use of four demonstrator vehicles annually of Employee's choice, including all reasonably related expenses such as insurance, maintenance and gasoline. (b) Medical insurance coverage for Employee and his dependents and reimbursement of the Employee for the reasonable costs of disability insurance with a reasonable monthly benefit for life and with a waiting period of no more than ninety (90) days. (c) Prompt reimbursement for all reasonable employment, travel, entertainment and other business related expenses incurred by the Employee in accordance with the policies, practices and procedures of the Employer. (d) An office, located in New Smyrna Beach, Florida and selected by Employee, of a size and with furnishings and other appointments, and with secretarial assistance, comparable to that provided with respect to other peer executives of the Employer. (e) An annual paid vacation in accordance with the policies, practices and procedures of the Employer as in effect generally at any time with respect to other peer executives of the Employer. (f) Reimbursement for use of personal aircraft for specified business purposes which have been previously approved by Employer, at $1,500 per hour, and reimbursement of pilot's reasonable out-of-pocket overnight expenditures when required. 5. Termination of Employment. This Agreement shall terminate as follows: (a) Death or Disability. The Employee's employment shall terminate automatically upon the Employee's death during the Employment Period. If the Employer determines in good faith that the Employee becomes unable to perform the essential functions of his position, with or without reasonable accommodation, and that such inability is likely to 2 continue for a period of more than six (6) months, then Employer shall give to the Employee written notice of its intention to terminate the Employee's employment. In such event, the Employee's employment with the Employer shall terminate effective on the thirtieth (30th) day after receipt of such notice by the Employee provided that, within the thirty (30) days after such receipt, the Employee shall not have returned to full time performance of the Employee's duties. (b) Cause. The Employer may terminate the Employee's employment at any time, without notice and with immediate effect for Cause. For purposes of this Agreement "Cause" shall mean (i) a material breach by the Employee of the Employee's obligations as set forth herein (other than due to disability) which material breach is not remedied within five (5) business days after receipt of written notice from the Employer specifying such a breach; (ii) the conviction of the Employee of a felony; (iii) actions by Employee involving moral turpitude; (iv) willful failure of Employee to comply with reasonable directives of Employer's Board of Directors; (v) chronic absenteeism of Employee; (vi) willful misconduct of Employee resulting in damage to Employer; or (vii) Employee's illegal use of controlled substances. (c) Without Cause. Either Employee or Employer may terminate this Agreement at any time, for any reason or without any reason. Such a termination shall be deemed a termination "without cause". 6. Obligations of the Employer Upon Termination. The parties agree as follows: (a) Generally. Except as provided in paragraph 6(b) below, upon termination of Employee's employment for any reason, Employee shall be entitled only to payment of his Annual Base Salary, together with those fringe benefits described in paragraphs 4(a) and 4(b) hereof, through the effective date of such termination. (b) Without Cause. If Employee's employment is terminated by Employer without cause, then Employer shall continue to pay Employee his Annual Base Salary, together with those fringe benefits described in paragraphs 4(a) and 4(b) hereof, for a period of one year from the date of such termination. Any payments under this Section 6 will be offset against (and 3 will thereby reduce) any other severance to which Employee might be entitled from Employer pursuant to any agreement or policy 7. Stock Option. Employee shall be eligible to participate in the Sonic Automotive, Inc. 1998 Stock Option Plan (the "Stock Option Plan"). Employee's initial grant of options under the Stock Option Plan shall be in an amount which is consistent with the grants of stock options for similar employees of the Employer. The exercise price of such initial options shall be the fair market value of the shares of the common stock of Employer on the date of such initial grant. Any grants of options under the Stock Option Plan shall be subject to ratification at the discretion of Employer's Board of Directors. The terms and conditions of any options granted to Employee pursuant to the Stock Option Plan shall otherwise be governed by the provisions of the Stock Option Plan. 8. Restrictive Covenants. For purposes of this Agreement, "Restrictive Covenants" mean the provisions of this paragraph 8. It is stipulated and agreed that Employer is engaged in the business of owning and operating automobile and/or truck dealerships, which business includes, without limitation, the marketing and selling of new and used vehicles and the servicing of automobiles and trucks (the "Business"). It is further stipulated and agreed that as a result of Employee's employment by Employer, and as a result of Employee's continued employment hereunder, Employee has and will have access to valuable, highly confidential, privileged and proprietary information relating to Employer's Business, including, without limitation, existing and future inventory information, customer lists, sales methods and techniques, costs and costing methods, pricing techniques and strategies, sales agreements with customers, profits and product line profitability information, unpublished present and future marketing strategies and promotional programs, and other information regarded by Employer as proprietary and confidential (the "Confidential Information"). It is further acknowledged that the unauthorized use or disclosure by Employee of any of the Confidential Information would seriously damage Employer in its Business. In consideration of the provisions of this paragraph 8, the compensation and benefits referred to in paragraphs 3 and 4 hereof, which Employee acknowledges are legally sufficient to support enforceability by the Employer of the Restrictive Covenants against Employee, Employee agrees as follows: (a) During the term of this Agreement and after its termination or expiration for any reason, Employee will not, without Employer's prior written consent, use, divulge, disclose, furnish or make accessible to any third person, company or other entity, any aspect of the Confidential Information (other than as required in the ordinary discharge of Employee's duties hereunder). (b) During the term of this Agreement and for a period of two years after the date of the expiration or termination of this Agreement for any reason (the "Restrictive Period"), Employee shall not, directly or indirectly: 4 (i) Employ or solicit the employment of any person who at any time during the twelve (12) calendar months immediately preceding the termination or expiration of this Agreement for any reason was employed by Employer; (ii) Provide or solicit the provision of products or services, similar to those provided by Employer to any person or entity within the "Restricted Territory," as hereinafter defined, who purchased or leased automobiles, trucks or services from Employer at any time during the twelve (12) calendar months immediately preceding the termination or expiration of this Agreement for any reason; (iii) Interfere or attempt to interfere with the terms or other aspects of the relationship between Employer and any person or entity from whom Employer has purchased automobiles, trucks, parts, supplies, inventory or services at any time during the twelve (12) calendar months immediately preceding the termination or expiration of this Agreement for any reason; (iv) Engage in competition with Employer or its respective successors and assigns by engaging, directly or indirectly, in a business involving the sale or leasing of automobiles or trucks or which is otherwise substantially similar to the Business, within the "Restricted Territory," as hereinafter defined; or (v) Provide information to, solicit or sell for, organize or own any interest in (either directly or through any parent, affiliate or subsidiary corporation, partnership, or other entity), or become employed or engaged by, or act as agent for, any person, corporation or other entity that is directly or indirectly engaged in a business in the "Restricted Territory," as hereinafter defined, which is substantially similar to the Business or competitive with Employer's business; provided, however, that nothing herein shall preclude the Employee from holding not more than three percent (3%) of the outstanding shares of any publicly held company which may be so engaged in a trade or business identical or similar to the Business of the Employer. As used herein, "Restricted Territory" means the Standard Metropolitan Statistical Areas, as determined by the United States Office of Management and Budget, for: Houston, Texas; Charlotte, North Carolina; Chattanooga, Tennessee; Nashville, Tennessee; TampaSt. Petersburg - Clearwater, Florida; Daytona Beach, Florida; Columbus, Ohio; Atlanta, Georgia; and Montgomery, Alabama. 9. Remedies. It is stipulated that a breach by Employee of the Restrictive Covenants would cause irreparable damage to Employer. Employer, in addition to any other rights or remedies which Employer may have, shall be entitled to an injunction restraining 5 Employee from violating or continuing any violation of such Restrictive Covenants. Such right to obtain injunctive relief may be exercised at the option of Employer, concurrently with, prior to, after or in lieu of, the exercise of any other rights or remedies which Employer may have as a result of any such breach or threatened breach. Employee agrees that upon breach of any of the Restrictive Covenants, Employer shall be entitled to an accounting and repayment of all profits, royalties, compensation, and/or other benefits that Employee directly or indirectly has realized or may realize as a result of, or in connection with, any such breach. Employee further agrees that the Restrictive Period shall be extended by a period of time equal to any period of time in which any Employee is in violation of the Restrictive Covenants. 10. Acknowledgment of Reasonableness. Employee has carefully read and considered the provisions of this Agreement and has had the opportunity for consultation with an attorney of Employee's choice and agrees that the restrictions set forth herein are fair and reasonably required for the protection of Employer. In the event that any provision relating to the Restrictive Period, the Restricted Territory or the scope of the restrictions shall be declared by a court of competent jurisdiction to exceed the maximum period of time, geographical area or scope that such court deems reasonable and enforceable under applicable law, such time period, geographical area or scope of restriction held reasonable and enforceable by the court shall thereafter be the Restricted Period, Restricted Territory and/or scope under this Agreement. 11. Surrender of Books and Records. Employee acknowledges that all files, records, lists, designs, specifications, books, products, plans and other materials owned or used by Employer in connection with conduct of its business shall at all times remain the property of Employer, and that upon termination or expiration of this Agreement for any reason, Employee will immediately surrender to Employer all such materials. 12. Entire Agreement. This Agreement contains the entire agreement of the parties hereto, and shall not be modified or changed in any respect except by a writing executed by the parties hereto. 13. Successors and Assigns. The rights and obligations of Employee under this Agreement shall inure to the benefit of Employer, its successors and assigns, and shall be binding upon Employee and his respective successors, heirs and assigns. Employer shall have the right to assign, transfer, or convey this Agreement to its affiliated companies, successor entities, or assignees or transferees of substantially all of Employer's business activities. This Agreement, being personal in nature to the Employee, may not be assigned by Employee without Employer's prior written consent. 14. Notice. All notices required and permitted to be give hereunder shall be in writing and shall be deemed to have been given when mailed by certified or registered mail, return receipt requested, addressed to the intended recipient as follows or at such other address as is provided by either party to the other: 6 If to Employer: With a copy to: Sonic Automotive, Inc. Parker, Poe, Adams & Bernstein L.L.P. 5401 East Independence Boulevard 2500 Charlotte Plaza P. O. Box 18747 Charlotte, North Carolina 28244 Charlotte, North Carolina 28218 Telecopier No.: (704) 334-4706 Telecopier No.: (704) 532-3323 Attention: Edward W. Wellman, Jr. Attention: Chief Financial Officer If to Employee: With a copy to: Dennis D. Higginbotham Cobb, Cole & Bell Higginbotham Management, Inc. P. O. Box 2491 P.O. Box 770 150 Magnolia Avenue 104 Riverside Drive Daytona Beach, Florida 32114 New Smyrna Beach, Florida 32170 Telecopier No.: (904) 238-7003 Telecopier No.: (904) 426-8111 Attention: Larry Marsh 15. Governing Law; Forum. This Agreement shall, in all respects, be governed by and construed according to the laws of the State of Florida. Any dispute or controversy arising out of or relating to this Agreement shall also be governed by the laws of the State of Florida. IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be effective as of the date first above written. EMPLOYEE: /s/ Dennis D. Higginbotham --------------------------------------(SEAL) Dennis D. Higginbotham EMPLOYER: SONIC AUTOMOTIVE, INC. By: /s/ O. Bruton Smith ----------------------------------- Title: Chief Executive Officer 7 EX-21 9 EXHIBIT 21.1 EXHIBIT 21.1 SONIC AUTOMOTIVE, INC. LIST OF SUBSIDIARIES Capitol Chevrolet and Imports, Inc. Casa Ford of Houston, Inc. Fort Mill Chrysler-Plymouth-Dodge Inc. Fort Mill Ford, Inc. Freedom Ford, Inc. Frontier Oldsmobile-Cadillac, Inc. Lone Star Ford, Inc. Marcus David Corporation Sonic Automotive of Chattanooga, LLC Sonic Automotive - Clearwater, Inc. Sonic Automotive Collision Center of Clearwater, Inc. Sonic Automotive of Georgia, Inc. Sonic Automotive - Hwy. 153 at Shallowford Road, Chattanooga, Inc. Sonic Automotive of Nashville, LLC Sonic Automotive of Nevada, Inc. Sonic Automotive of Tennessee, Inc. Sonic Automotive - 1307 N. Dixie Hwy., NSB, Inc. Sonic Automotive - 1400 Automall Drive, Columbus, Inc. Sonic Automotive - 1455 Automall Drive, Columbus, Inc. Sonic Automotive - 1495 Automall Drive, Columbus, Inc. Sonic Automotive - 1500 Automall Drive, Columbus, Inc. Sonic Automotive - 1720 Mason Ave., DB, Inc. Sonic Automotive - 1720 Mason Ave., DB, LLC Sonic Automotive - 1919 N. Dixie Hwy., NSB, Inc. Sonic Automotive - 21699 U.S. Hwy 19 N., Inc. Sonic Automotive - 241 Ridgewood Ave., HH, Inc. Sonic Automotive - 2424 Laurens Rd., Greenville, Inc. Sonic Automotive - 2490 South Lee Highway, LLC Sonic Automotive - 2752 Laurens Rd., Greenville, Inc. Sonic Automotive - 3700 West Broad Street, Columbus, Inc. Sonic Automotive - 3741 S. Nova Rd., PO, Inc. Sonic Automotive - 4000 West Broad Street, Columbus, Inc. Sonic Automotive - 5260 Peachtree Industrial Blvd., LLC Sonic Automotive - 5585 Peachtree Industrial Blvd., LLC Sonic Automotive - 6025 International Drive, LLC Sonic Chrysler-Plymouth-Jeep-Eagle, LLC Sonic Dodge, LLC Sonic Peachtree Industrial Blvd., L.P. Town and Country Chrysler-Plymouth-Jeep, LLC Town and Country Chrysler-Plymouth-Jeep of Rock Hill, Inc. Town and Country Dodge of Chattanooga, LLC Town and Country Ford, Incorporated Town and Country Ford of Cleveland, LLC Town and Country Jaguar, LLC EX-23 10 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 Registration Statement of Sonic Automotive, Inc. on Form S-4 of (i) our report dated March 2, 1998 (March 24, 1998 as to Notes 2, 8 and 9) on the consolidated financial statements of Sonic Automotive, Inc. and Subsidiaries as of December 31, 1996 and 1997 and for each of the three years in the period ended December 31, 1997; (ii) our report dated February 20, 1998 on the financial statements of Clearwater Dealerships and Affiliated Companies as of and for the year ended December 31, 1997; (iii) our report dated May 22, 1998 on the combined financial statements of Hatfield Automotive Group as of December 31, 1996 and 1997 and for each of the three years in the period ended December 31, 1997; (iv) our report dated May 11, 1998 on the financial statements of Economy Cars, Inc. as of and for the year ended December 31, 1997; (v) our report dated June 4, 1998 on the financial statements of Casa Ford of Houston, Inc. as of and for the year ended December 31, 1997; (vi) our report dated August 21, 1998 on the combined financial statements of Higginbotham Automotive Group as of and for the year ended December 31, 1997; (vii) 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; (viii) 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 each of the two years in the period ended December 31, 1996; (ix) 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; (x) 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 part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ DELOITTE & TOUCHE LLP September 25, 1998 EX-25 11 EXHIBIT 25.1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM T-1 Statement of Eligibility Under the Trust Indenture Act of 1939 of a Corporation Designated to Act as Trustee U.S. BANK TRUST NATIONAL ASSOCIATION (Exact name of Trustee as specified in its charter) United States 41-0257700 (State of Incorporation) (I.R.S. Employer Identification No.) U.S. Bank Trust Center 180 East Fifth Street St. Paul, Minnesota 55101 (Address of Principal Executive Offices) (Zip Code) SONIC AUTOMOTIVE, INC. (Exact name of Registrant as specified in its charter) Delaware 56-2010790 (State of Incorporation) (I.R.S. Employer Identification No.) 5401 East Independence Boulevard P.O. Box 18747 Charlotte, North Carolina 28212 (Address of Principal Executive Offices) (Zip Code) 11% SENIOR SUBORDINATED NOTES DUE 2008 (Title of the Indenture Securities) GENERAL 1. General Information Furnish the following information as to the Trustee. (a) Name and address of each examining or supervising authority to which it is subject. Comptroller of the Currency Washington, D.C. (b) Whether it is authorized to exercise corporate trust powers. Yes 2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS If the obligor or any underwriter for the obligor is an affiliate of the Trustee, describe each such affiliation. None See Note following Item 16. Items 3-15 are not applicable because to the best of the Trustee's knowledge the obligor is not in default under any Indenture for which the Trustee acts as Trustee. 16. LIST OF EXHIBITS List below all exhibits filed as a part of this statement of eligibility and qualification. 1. Copy of Articles of Association.* 2. Copy of Certificate of Authority to Commence Business.* 3. Authorization of the Trustee to exercise corporate trust powers (included in Exhibits 1 and 2; no separate instrument).* 4. Copy of existing By-Laws.* 5. Copy of each Indenture referred to in Item 4. N/A. 6. The consents of the Trustee required by Section 321(b) of the act. 7. Copy of the latest report of condition of the Trustee published pursuant to law or the requirements of its supervising or examining authority is incorporated by reference to Registration Number 333-53211. * Incorporated by reference to Registration Number 22-27000. NOTE The answers to this statement insofar as such answers relate to what persons have been underwriters for any securities of the obligors within three years prior to the date of filing this statement, or what persons are owners of 10% or more of the voting securities of the obligors, or affiliates, are based upon information furnished to the Trustee by the obligors. While the Trustee has no reason to doubt the accuracy of any such information, it cannot accept any responsibility therefor. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee, U.S. Bank Trust National Association, an Association organized and existing under the laws of the United States, has duly caused this statement of eligibility and qualification to be signed on its behalf by the undersigned, thereunto duly authorized, and its seal to be hereunto affixed and attested, all in the City of Saint Paul and State of Minnesota on the 10th day of August, 1998. U.S. BANK TRUST NATIONAL ASSOCIATION /s/ RICHARD H. PROKOSCH -------------------------------- Richard H. Prokosch Assistant Vice President /s/ JOANN M. SCHALK - ------------------- JoAnn M. Schalk Assistant Secretary EXHIBIT 6 CONSENT In accordance with Section 321(b) of the Trust Indenture Act of 1939, the undersigned, U.S. BANK TRUST NATIONAL ASSOCITION hereby consents that reports of examination of the undersigned by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon its request therefor. Dated: August 10, 1998 U.S. BANK TRUST NATIONAL ASSOCIATION /s/ RICHARD H. PROKOSCH ------------------------------ Richard H. Prokosch Assitant Vice President EX-27 12 EXHIBIT 27.1
5 This schedule contains summary financial information extracted from the Consoli- dated Balance Sheet, Consolidated Statement of Income and Consolidated Statement of Cash Flows included in the Company's Form S-4 Registration Statement for the six months ending June 30, 1998, and is qualified in its entirety by reference to such Financial Statements. 0001043509 SONIC AUTOMOTIVE, INC. 1,000 US 6-MOS DEC-31-1997 JAN-01-1998 JUN-30-1998 1 27,228 0 35,761 2,300 175,515 244,111 22,040 0 369,623 194,134 54,644 0 11,763 113 91,525 369,623 567,279 648,840 566,392 566,392 61,473 0 10,086 10,904 4,100 6,804 0 0 0 6,804 0.60 0.58
EX-27 13 EXHIBIT 27.2
5 This schedule contains summary financial information extracted from the Consoli- dated Balance Sheet, Consolidated Statement of Income and Consolidated Statement of Cash Flows included in the Company's Form S-4 Registration Statement for the year ending December 31, 1997, and is qualified in its entirety by reference to such Financial Statements. 1,000 US 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1 18,304 270 19,784 523 156,514 197,372 19,081 0 291,450 152,696 38,640 0 0 113 84,252 291,450 467,858 536,001 473,003 473,003 48,092 0 9,206 5,998 2,249 3,749 0 0 0 3,702 0.53 0.53
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