-----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, T/cyloO7uPPMcLVzl77LiU8AMlAkU8M8pCYk5BOLvAawSx3/Vwk0jkZLjpI0iv/m aDlWA38NwtEaI/mHR38Osw== 0000950168-99-002268.txt : 19990817 0000950168-99-002268.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950168-99-002268 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SONIC AUTOMOTIVE INC CENTRAL INDEX KEY: 0001043509 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-AUTO DEALERS & GASOLINE STATIONS [5500] IRS NUMBER: 562010790 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13395 FILM NUMBER: 99692924 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 10-Q 1 SONIC AUTOMOTIVE, INC. 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - -------------------------------------------------------------------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-13395 SONIC AUTOMOTIVE, INC. (Exact name of registrant as specified in its charter) DELAWARE 56-201079 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5401 E. Independence Blvd., Charlotte, North Carolina 28212 (Address of principal executive offices) (Zip Code) (704) 532-3320 (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of August 13, 1999, there were 23,446,847 shares of Class A Common Stock and 12,300,000 shares of Class B Common Stock outstanding. INDEX TO FORM 10-Q
PAGE ---- PART I - FINANCIAL INFORMATION ITEM 1. Consolidated Financial Statements (Unaudited) 3 Consolidated Statements of Income - Three-month periods ended June 30, 1998 and June 30, 1999 Consolidated Statements of Income - Six-month periods ended June 30, 1998 and June 30, 1999 Consolidated Balance Sheets - December 31, 1998 and June 30, 1999 Consolidated Statement of Stockholders' Equity - Six-month period ended June 30, 1999 Consolidated Statements of Cash Flows - Six-month periods ended June 30, 1998 and June 30, 1999 Notes to Unaudited Consolidated Financial Statements ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 22 PART II - OTHER INFORMATION ITEM 2. Changes in Securities and Use of Proceeds 22 ITEM 4. Submission of Matters to a Vote of Security Holders 23 ITEM 6. Exhibits and Reports on Form 10-Q 24 SIGNATURES 25
PART I - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS. SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars and shares in thousands except per share amounts) (Unaudited)
THREE MONTHS ENDED JUNE 30, 1998 1999 -------------- --------------- REVENUES: Vehicle sales $ 339,531 $ 632,154 Parts, service and collision repair 39,175 74,401 Finance and insurance (Note 1) 7,426 16,975 -------------- --------------- Total revenues 386,132 723,530 COST OF SALES (Note 1) 337,868 629,269 -------------- --------------- GROSS PROFIT 48,264 94,261 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 34,475 67,429 DEPRECIATION AND AMORTIZATION 1,010 2,244 -------------- --------------- OPERATING INCOME 12,779 24,588 OTHER INCOME AND EXPENSE: Interest expense, floor plan 3,679 4,926 Interest expense, other 1,677 3,748 Other income 7 316 -------------- --------------- Total other expense 5,349 8,358 -------------- --------------- INCOME BEFORE INCOME TAXES 7,430 16,230 PROVISION FOR INCOME TAXES 2,762 6,129 -------------- --------------- NET INCOME $ 4,668 $ 10,101 ============== =============== BASIC EARNINGS PER SHARE (Note 6) $ 0.21 $ 0.34 ============== =============== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 22,555 30,095 ============== =============== DILUTED EARNINGS PER SHARE (Note 6) $ 0.20 $ 0.30 ============== =============== WEIGHTED AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING 23,717 34,088 ============== ===============
See notes to unaudited consolidated financial statements. 3 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars and shares in thousands except per share amounts) (Unaudited)
SIX MONTHS ENDED JUNE 30, 1998 1999 -------------- --------------- REVENUES: Vehicle sales $ 569,110 $ 1,153,421 Parts, service and collision repair 68,311 134,026 Finance and insurance (Note 1) 12,690 29,535 -------------- --------------- Total revenues 650,111 1,316,982 COST OF SALES (Note 1) 567,689 1,144,646 -------------- --------------- GROSS PROFIT 82,422 172,336 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 60,392 124,643 DEPRECIATION AND AMORTIZATION 1,825 4,151 -------------- --------------- OPERATING INCOME 20,205 43,542 OTHER INCOME AND EXPENSE: Interest expense, floor plan 6,555 9,397 Interest expense, other 2,761 7,391 Other income 15 324 -------------- --------------- Total other expense 9,301 16,464 -------------- --------------- INCOME BEFORE INCOME TAXES 10,904 27,078 PROVISION FOR INCOME TAXES 4,100 10,290 -------------- --------------- NET INCOME $ 6,804 $ 16,788 ============== =============== BASIC EARNINGS PER SHARE (Note 6) $ 0.30 $ 0.62 ============== =============== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 22,527 27,259 ============== =============== DILUTED EARNINGS PER SHARE (Note 6) $ 0.29 $ 0.54 ============== =============== WEIGHTED AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING 23,274 31,044 ============== ===============
See notes to unaudited consolidated financial statements. 4 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, 1999 1998 (UNAUDITED) --------------- --------------- (IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 51,834 $ 60,526 Receivables (net of allowance for doubtful accounts of $700,000 and $1,104,000 at December 31, 1998 and June 30, 1999, respectively) 39,902 48,232 Inventories (Note 3) 264,971 368,197 Deferred income taxes 1,702 1,702 Due from affiliates (Note 5) 1,471 5,119 Other current assets 4,961 4,948 --------------- --------------- Total current assets 364,841 488,724 PROPERTY AND EQUIPMENT, NET 26,250 36,019 GOODWILL, NET (Notes 1 and 2) 180,081 258,509 OTHER ASSETS 4,931 5,950 --------------- --------------- TOTAL ASSETS $ 576,103 $ 789,202 =============== ===============
See notes to unaudited consolidated financial statements. 5 CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, 1999 1998 (UNAUDITED) -------------- --------------- (IN THOUSANDS) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable - floor plan $ 228,158 $ 303,965 Trade accounts payable 14,994 17,922 Accrued interest 7,058 7,702 Other accrued liabilities 27,763 30,048 Payable to affiliates (Note 5) 628 572 Payable for acquisitions 2,385 275 Current maturities of long-term debt 4,700 604 -------------- --------------- Total current liabilities 285,686 361,088 LONG-TERM DEBT (Note 4) 131,337 123,437 PAYABLE FOR ACQUISITIONS 275 275 PAYABLE TO THE COMPANY'S CHAIRMAN (Note 5) 5,500 5,500 PAYABLE TO AFFILIATES (Note 5) 3,625 3,400 DEFERRED INCOME TAXES 4,066 5,660 INCOME TAX PAYABLE 3,185 3,104 COMMITMENTS AND CONTINGENCIES (Note 7) STOCKHOLDERS' EQUITY (Note 6): Preferred Stock, $.10 par, 3.0 million shares authorized; 300,000 shares designated as Class A Convertible Preferred Stock, liquidation preference $1,000 per share, of which 22,179 shares are issued and outstanding at December 31, 1998 and 22,830 shares are issued and outstanding at June 30, 1999 20,431 20,991 Class A Common Stock, $.01 par, 100.0 million shares authorized; 11,959,274 shares issued and outstanding at December 31, 1998 and 21,565,585 shares issued and outstanding at June 30, 1999 120 216 Class B Common Stock, $.01 par (convertible into Class A Common Stock), 30.0 million shares authorized; 12,400,000 shares issued and outstanding at December 31, 1998 and 12,300,000 shares issued and outstanding at June 30, 1999 124 123 Paid-in capital 87,011 213,877 Retained earnings 34,743 51,531 -------------- --------------- Total stockholders' equity 142,429 286,738 -------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 576,103 $ 789,202 ============== ===============
See notes to unaudited consolidated financial statements. 6 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Dollars and shares in thousands) (Unaudited)
PREFERRED CLASS A CLASS B STOCK COMMON STOCK COMMON STOCK PAID-IN SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL ---------- --------------- ----------- ---------- ----------- ---------- ------------- BALANCE AT DECEMBER 31, 1998 22 $ 20,431 11,959 $ 120 12,400 $ 124 $ 87,011 Issuance of Preferred Stock (Note 2) 44 38,849 - - - - - Issuance of Common Stock (Note 2) - - 6,243 62 - - 87,474 Shares awarded under stock compensation plans - - 161 2 - - 1,134 Conversion of Preferred Stock (44) (38,289) 3,103 31 - - 38,258 Conversion of Class B Common Stock - - 100 1 (100) (1) - Net income - - - - - - - BALANCE AT ---------- --------------- ----------- ---------- ----------- ---------- ------------- JUNE 30,1999 22 $ 20,991 21,566 $ 216 12,300 $ 123 $213,877 ========== =============== =========== ========== =========== ========== ============= TOTAL RETAINED STOCKHOLDERS' EARNINGS EQUITY ------------- ---------------- BALANCE AT DECEMBER 31, 1998 $ 34,743 $ 142,429 Issuance of Preferred Stock (Note 2) - 38,849 Issuance of Common Stock (Note 2) - 87,536 Shares awarded under stock compensation plans - 1,136 Conversion of Preferred Stock - - Conversion of Class B Common Stock - - Net income 16,788 16,788 BALANCE AT ------------- ---------------- JUNE 30,1999 $ 51,531 $ 286,738 ============= ================
See notes to unaudited consolidated financial statements. 7 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
SIX MONTHS ENDED JUNE 30, 1998 1999 ---------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 6,804 $ 16,788 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 1,851 4,151 Amortization of discount on senior notes - 127 Loss on disposal of property and equipment 104 52 Changes in assets and liabilities that relate to operations: Receivables (8,493) (5,860) Inventories 29,384 (13,588) Other assets (1,245) (1,686) Accounts payable and other current liabilities 458 (614) ---------------- --------------- Total adjustments 22,059 (17,418) ---------------- --------------- Net cash provided by (used in) operating activities 28,863 (630) ---------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of businesses, net of cash acquired (7,808) (77,199) Purchases of property and equipment (1,261) (8,813) Proceeds from sales of property and equipment (Note 5) - 10,596 ---------------- --------------- Net cash used in investing activities (9,069) (75,416) ---------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (payments) proceeds of notes payable - floor plan (25,867) 16,451 Proceeds from long-term debt 23,688 71,138 Payments on long-term debt (8,645) (85,344) Public offering of common stock - 85,286 Issuance of shares under stock compensation plans 224 1,136 Advances to affiliated companies (270) (3,929) ---------------- --------------- Net cash (used in) provided by financing activities (10,870) 84,738 ---------------- --------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 8,924 8,692 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 18,304 51,834 ---------------- --------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 27,228 $ 60,526 ================ =============== SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: Preferred Stock issued for acquisitions (Note 2) $ 11,763 $ 34,961 Common Stock issued for acquisitions (Note 2) $ - $ 2,250
See notes to unaudited consolidated financial statements. 8 The following Notes to Unaudited Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations contain estimates and forward-looking statements as indicated herein by the use of such terms as "estimated", "expects", "approximate", "projected" or similar terms. Such statements reflect management's current views, are based on certain assumptions and are subject to risks and uncertainties. No assurance can be given that actual results or events will not differ materially from those projected, estimated, assumed, or anticipated in any such forward-looking statements. Important factors that could cause actual results to differ from those projected or estimated are discussed herein and in other filings with the Securities and Exchange Commission. SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (ALL TABLES IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION - The accompanying unaudited financial information for the three and six months ended June 30, 1998 and 1999 has been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. All significant intercompany accounts and transactions have been eliminated. These unaudited consolidated financial statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to fairly state the financial position and the results of operations for the periods presented. The results for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year. These interim financial statements should be read in conjunction with the audited consolidated financial statements of Sonic Automotive, Inc. and its subsidiaries (collectively, "Sonic") for the year ended December 31, 1998. REVENUE RECOGNITION - Sonic records revenue when vehicles are delivered to customers, and when vehicle service work is performed. Sonic arranges financing for customers through various financial institutions and receives a commission from the lender equal to the difference between the interest rates charged to customers over the predetermined interest rates set by the financing institution. Sonic also receives commissions from the sale of credit life, accident, health and disability insurance and extended service contracts to customers. Sonic 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 and $2.9 million for the three months ended June 30, 1998 and June 30, 1999, respectively, and approximately $2.2 million and $5.2 million for the six months ended June 30, 1998 and June 30, 1999, respectively. RECLASSIFICATION - Certain balances reported in 1998 have been reclassified to conform with current period presentation. GOODWILL - Goodwill represents the excess purchase price over the estimated fair value of the tangible and separately measurable intangible net assets acquired. The cumulative gross goodwill balance at December 31, 1998 was $182.5 million and at June 30, 1999 was $265.3 million. As a percentage of total assets and stockholders' equity, goodwill, net of accumulated amortization, represented 31.3% and 126.4%, respectively, at December 31, 1998, and 32.8% and 90.2%, respectively, at June 30, 1999. Generally accepted accounting principles require that goodwill and all other intangible assets be amortized over the period benefited. We have determined that the period benefited by the goodwill will be no less than 40 years. Accordingly we are amortizing goodwill over a 40 year period. Earnings reported in periods immediately following an acquisition would be overstated if we attributed a 40 year benefit to an intangible asset that should have had a shorter benefit period. In later years, we 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. We periodically compare the carrying value of goodwill with the anticipated undiscounted future cash flows from operations of the business we have acquired in order to evaluate the recoverability of goodwill. We have concluded that the anticipated future cash flows associated with intangible assets recognized in our acquisitions will continue indefinitely, and there is no pervasive evidence that any material portion will dissipate over a period shorter than 40 years. We will incur additional goodwill in future acquisitions. 9 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (ALL TABLES IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2. BUSINESS ACQUISITIONS PENDING ACQUISITIONS Sonic has signed definitive agreements to acquire 13 dealerships for an estimated $55.2 million in cash and approximately $11.2 million of Class A common stock. The aggregate purchase price is subject to adjustment based on the actual net book value of the assets acquired. The cash portion of the purchase price will be paid with a combination of borrowings under Sonic's $150 million acquisition line of credit with Ford Motor Credit Company (the "Revolving Facility") and with cash generated from Sonic's existing operations. ACQUISITIONS COMPLETED SUBSEQUENT TO JUNE 30, 1999 (THROUGH AUGUST 13, 1999): Subsequent to June 30, 1999, Sonic acquired 9 dealerships for approximately $65.8 million in cash, 11,683 shares of Sonic's Class A Convertible preferred stock, Series III, having a liquidation value of $1,000 per share, and 1,398,902 shares of Sonic's Class A common stock having an estimated fair value at the time of issuance of approximately $20.0 million. The cash portion of the purchase price was financed with a combination of cash borrowed under the Revolving Facility and cash generated from Sonic's existing operations. The acquisitions were accounted for using the purchase method of accounting. ACQUISITIONS COMPLETED DURING THE SIX MONTHS ENDED JUNE 30, 1999: During the first six months of 1999, Sonic acquired 17 dealerships for approximately $84.5 million in cash, 6,282 shares of Sonic's Class A Convertible preferred stock, Series II, having an estimated fair value at the time of issuance of approximately $6.1 million, 34,100 shares of Sonic's Class A Convertible preferred stock, Series III, having an estimated fair value at the time of issuance of approximately $28.9 million, and 176,030 shares of Sonic's Class A common stock having an estimated fair value at the time of issuance of approximately $2.2 million. The cash portion of the purchase price was financed with a combination of a portion of the net proceeds from Sonic's recent public offering of Class A common stock, cash borrowed under the Revolving Facility and cash generated from Sonic's existing operations. The acquisitions were 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 their respective acquisition dates. The aggregate purchase price of these acquisitions has been allocated to the assets and liabilities acquired based on their estimated fair market value at the acquisition date as shown in the table below. The purchase price and corresponding goodwill may ultimately be different than amounts recorded depending on the actual fair value of tangible net assets acquired. Working capital $ 33,678 Property and equipment 9,308 Goodwill 81,309 Non-current liabilites assumed (2,603) --------------- Total purchase price $ 121,692 =============== In connection with the subsequent acquisition of a Honda dealership in Chattanooga, Tennessee, Sonic sold substantially all of the assets of its existing Honda dealership in Cleveland, Tennessee in March 1999 for approximately $1.7 million, net of repayment of floor plan liabilities. There was no material gain or loss as a result of the sale. The following unaudited pro forma financial information presents a summary of consolidated results of operations as if the above acquisition transactions had occurred as of 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 Sonic or whose salaries have been reduced pursuant to employment agreements with Sonic. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results of operations that would have occurred had the acquisitions been completed at the beginning of the period presented. These results are also not necessarily indicative of the results of future operations. 10 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (ALL TABLES IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2. BUSINESS ACQUISITIONS - CONTINUED
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------ ------------------------------------ 1998 1999 1998 1999 --------- --------- ----------- ----------- Total revenues $ 719,847 $ 753,933 $ 1,346,289 $ 1,436,399 Gross profit $ 89,654 $ 98,013 $ 166,369 $ 187,755 Net Income $ 6,679 $ 11,500 $ 9,351 $ 20,898 Diluted income per share $ 0.18 $ 0.31 $ 0.26 $ 0.55
3. INVENTORIES Inventories consist of the following: DECEMBER 31, JUNE 30, 1998 1999 -------------------- ------------------- New vehicles $ 190,139 $ 264,336 Used vehicles 47,033 65,346 Parts and accessories 16,012 27,026 Other 11,787 11,489 -------------------- ------------------- Total $ 264,971 $ 368,197 ==================== =================== 4. LONG-TERM DEBT MORTGAGES: In January 1999, in connection with the sale of real estate at two of its dealership subsidiaries to MMR Holdings, LLC, a limited liability company owned by Bruton Smith, Sonic's Chairman and Chief Executive Officer, and Sonic Financial Corporation ("SFC"), Sonic repaid all amounts outstanding under mortgages encumbering such property. REVOLVING FACILITY: Sonic's Revolving Facility currently has a borrowing limit of $150 million. Amounts outstanding under the Revolving Facility bear interest at a fluctuating per annum rate equal to 2.75% above the 1 month commercial finance paper rate as reported by the Federal Reserve Board (7.56% at June 30, 1999). The Revolving Facility will mature in March 2001, unless Sonic 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. On May 5, 1999, in connection with the public offering by Sonic of 6,067,230 shares of Class A common stock, all amounts outstanding under the Revolving Facility were repaid. As of June 30, 1999, there was no outstanding balance under the Revolving Facility. Future 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 Sonic not to exceed $10 million. 5. RELATED PARTIES THE SMITH GUARANTIES, PLEDGES AND SUBORDINATED LOAN: In December 1997, Mr. Smith was required by Ford Motor Credit Company ("Ford Motor Credit") to lend $5.5 million (the "Subordinated Smith Loan") to Sonic to increase Sonic's capitalization. Ford Motor Credit required the Subordinated Smith Loan as a condition to increasing the Revolving Facility borrowing limit because the net offering proceeds from Sonic's November 1997 initial public offering were significantly less than expected by Sonic and Ford Motor Credit. The Subordinated Smith Loan bears interest at Bank of America's announced prime rate plus 0.5% and matures on November 30, 2000. All amounts owed by Sonic to Mr. Smith under the Subordinated Smith Loan are to be paid after all amounts owed by Sonic under the Revolving Facility, Sonic's floor plan financing facility with Ford Motor Credit and Sonic's senior subordinated notes are paid. 11 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (ALL TABLES IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 5. RELATED PARTIES - CONTINUED REGISTRATION RIGHTS AGREEMENT: When Sonic acquired Town & Country Ford, Lone Star Ford, Fort Mill Ford, Town & Country Toyota and Frontier Oldsmobile-Cadillac in 1997, Sonic signed a Registration Rights Agreement dated as of June 30, 1997 (the "Registration Rights Agreements") with Sonic Financial Corporation ("SFC"), Bruton Smith, Scott Smith and William S. Egan (collectively, the "Class B Registration Rights Holders"). SFC currently owns 8,881,250 shares of Class B common stock; Bruton Smith, 2,071,250 shares; Scott Smith, 956,250 shares; and Egan Group, LLC, an assignee of Mr. Egan (the "Egan Group"), 391,250 shares, all of which are covered by the Registration Rights Agreement. The Egan Group also owns 32,000 shares of Class A common stock to which the Registration Rights Agreement applies. If, among other things provided in Sonic's charter, offers and sales of shares of Class B common stock are registered with the Securities and Exchange Commission, then such shares will automatically convert into a like number of shares of Class A common stock. The Class B Registration Rights Holders have certain limited piggyback registration rights under the Registration Rights Agreement. These rights permit them to have their shares of Sonic's common stock included in any Sonic registration statement registering Class A common stock, except for registrations on Form S-4, relating to exchange offers and certain other transactions, and Form S-8, relating to employee stock compensation plans. The Registration Rights Agreement expires on November 17, 2007. SFC is controlled by Bruton Smith. THE BOWERS VOLVO NOTE: In connection with Volvo's approval of Sonic's acquisition of a Volvo franchise from Nelson Bowers in 1997, Volvo, among other things, conditioned its approval upon Nelson Bowers acquiring and maintaining a 20% interest in Sonic's Chattanooga Volvo subsidiary operating 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., the wholly-owned subsidiary of Sonic 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. Volvo has removed its requirement that Mr. Bowers maintain his interest in Chattanooga Volvo. Sonic and Mr. Bowers are in the process of redeeming his interest in Chattanooga Volvo and satisfying the Bowers Volvo Note. This transaction is not expected to have a material impact on Sonic's future results of operations or cash flows. DEALERSHIP LEASES: In January 1999, Sonic sold to MMR Holdings, L.L.C., a limited liability company currently owned by Bruton Smith and SFC, the real estate at two of its dealership subsidiaries for an aggregate purchase price of approximately $10.6 million and entered into an agreement with MMR Holdings, L.L.C. to lease back the real estate over a term of ten years. Sonic realized a gain on the sale of approximately $3.8 million which was deferred and is currently being amortized against the rent expense over the term of the lease. On August 13, 1999, CAR MMR L.L.C., an affiliate of Capital Automotive REIT which is not affiliated with Sonic, acquired all of the ownership interests of MMR Holdings, L.L.C., and two of its affiliates, MMR Viking Investment Associates, L.P. and MMR Tennessee, L.L.C (collectively, the "MMR Group). As of that date, Sonic leased 48 properties for 38 of its dealerships from the MMR Group under "triple net leases" which required Sonic to pay all costs of operating the properties, as well as all taxes, utilities, insurance, repairs, maintenance and other property related expenses. Sonic has entered into new leases with CAR MMR L.L.C. with terms similar to those under Sonic's former leases with the MMR Group. These leases generally provide Sonic with options to renew the lease for two additional five year terms after the expiration of the initial lease term. Sonic has agreed to renew approximately 75% of its lease rental stream for an additional five year period after the expiration of the initial lease terms. In connection with the acquisition, Sonic, MMR Holdings and Mar Mar Realty Trust, an affiliate of the MMR Group, terminated the strategic alliance agreement whereby Mar Mar Realty Trust had provided Sonic with real estate financing, acquisition referral and related services. In connection with the above transaction, CAR MMR L.L.C. has agreed to provide Sonic with up to $75 million in real estate financing through December 31, 1999. 12 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (ALL TABLES IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 5. RELATED PARTIES - CONTINUED OTHER RELATED PARTY TRANSACTIONS: o Sonic had amounts receivable from affiliates of $1.5 million and $5.1 million at December 31, 1998 and June 30, 1999, respectively. Of the $5.1 million balance at June 30, 1999, approximately $3.5 million represents cash paid for real estate purchased in connection with one of its dealership acquisitions. The real estate was subsequently sold for the same amount to MMR Holdings prior to the acquisition of MMR Holdings by CAR MMR L.L.C. and is currently being leased from CAR MMR L.L.C. The remaining balances at December 31, 1998 and June 30, 1999 primarily represent advances made by Sonic to SFC and Mar Mar Realty Trust. The amounts receivable from affiliates are non-interest bearing and are classified as current based on the expected repayment dates. o As part of the purchase price in connection with Sonic's acquisition of the Bowers Automotive Group in November 1997, Sonic issued its promissory note in the 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 balance outstanding under this note at June 30, 1999 was $3.1 million, the current portion of which was $572,000. o Town and Country Toyota has an amount payable to Bruton Smith in the amount of $0.7 million at December 31, 1998 and June 30, 1999. This loan bears interest at 8.75% per annum and is classified as non-current based on the expected repayment date. 6. CAPITAL STRUCTURE AND PER SHARE DATA PUBLIC OFFERING OF COMMON STOCK - Sonic completed a public offering of 8,500,000 shares of its Class A common stock on May 5, 1999 at a price of $14.9375 per share. Of the 8,500,000 shares sold in the offering, 6,067,230 shares were sold by Sonic and 2,432,770 shares were sold by certain stockholders of Sonic. Of the $86.1 million in net proceeds to Sonic from the public offering, approximately $75.5 million was used to repay the outstanding balance under the Revolving Facility. The remaining net proceeds were used to finance acquisitions which closed in the second quarter of 1999. INCREASE TO AUTHORIZED SHARES OF COMMON STOCK - At the annual meeting of stockholders held on June 8, 1999, Sonic's stockholders approved an amendment to Sonic's Amended and Restated Certificate of Incorporation to increase the number of shares of Class A common stock authorized to be issued thereunder from 50 million to 100 million, and to increase the number of shares of Class B common stock authorized to be issued thereunder from 15 million to 30 million. PER SHARE DATA - The calculation of diluted net income per share considers the potential dilutive effect of options and shares under Sonic's stock compensation plans, Class A common stock purchase warrants, and Class A convertible preferred stock. The following table illustrates the dilutive effect of such items on EPS.
For the six months ended June 30, 1998 ------------------------------------------------ Per-Share Income Shares Amount -------------- --------------- --------------- (DOLLARS AND SHARES IN THOUSANDS EXCEPT PER SHARE AMOUNTS) BASIC EPS $ 6,804 22,527 $ 0.30 =============== EFFECT OF DILUTIVE SECURITIES Stock compensation plans - 404 Warrants - 19 Convertible Preferred Stock - 324 -------------- --------------- DILUTED EPS $ 6,804 23,274 $ 0.29 ============== =============== =============== For the six months ended June 30, 1999 ----------------------------------------------- Per-Share Income Shares Amount --------------- --------------- ------------ (DOLLARS AND SHARES IN THOUSANDS EXCEPT PER SHARE AMOUNTS) BASIC EPS $ 16,788 27,259 $ 0.62 ============ EFFECT OF DILUTIVE SECURITIES Stock compensation plans - 1,289 Warrants - 100 Convertible Preferred Stock - 2,396 --------------- --------------- DILUTED EPS $ 16,788 31,044 $ 0.54 =============== =============== ============
13 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (ALL TABLES IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 6. CAPITAL STRUCTURE AND PER SHARE DATA - CONTINUED
For the three months ended June 30, 1998 ------------------------------------------------ Per-Share Income Shares Amount -------------- --------------- --------------- (DOLLARS AND SHARES IN THOUSANDS EXCEPT PER SHARE AMOUNTS) BASIC EPS $ 4,668 22,555 $ 0.21 =============== EFFECT OF DILUTIVE SECURITIES Stock compensation plans - 546 Warrants - 26 Convertible Preferred Stock - 590 -------------- --------------- DILUTED EPS $ 4,668 23,717 $ 0.20 ============== =============== =============== For the three months ended June 30, 1999 ----------------------------------------------- Per-Share Income Shares Amount --------------- --------------- ------------ (DOLLARS AND SHARES IN THOUSANDS EXCEPT PER SHARE AMOUNTS) BASIC EPS $ 10,101 30,095 $ 0.34 ============ EFFECT OF DILUTIVE SECURITIES Stock compensation plans - 1,120 Warrants - 90 Convertible Preferred Stock - 2,783 --------------- --------------- DILUTED EPS $ 10,101 34,088 $ 0.30 =============== =============== ============
7. COMMITMENTS AND CONTINGENCIES Sonic is involved in various legal proceedings. Management believes that the outcome of such proceedings will not have a materially adverse effect on Sonic's financial position or future results of operations and cash flows. 14 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the results of operations and financial condition should be read in conjunction with the Unaudited Consolidated Financial Statements and the related notes thereto. RESULTS OF OPERATIONS The following table summarizes, for the periods presented, the percentages of total revenues represented by certain items reflected in Sonic's statements of income.
Percentage of Total Revenues for Percentage of Total Revenues for Three Months Ended Six Months Ended June 30, June 30, 1998 1999 1998 1999 ------ ------ ------ ------ Revenues: New vehicle sales .................. 60.4% 58.2% 59.4% 58.3% Used vehicle sales ................. 27.6% 29.2% 28.1% 29.3% Parts, service, and collision repair 10.1% 10.3% 10.5% 10.2% Finance and insurance .............. 1.9% 2.3% 2.0% 2.2% ------ ------ ------ ------ Total revenues ..................... 100.0% 100.0% 100.0% 100.0% Cost of sales ...................... 87.5% 87.0% 87.3% 86.9% ------ ------ ------ ------ Gross profit ....................... 12.5% 13.0% 12.7% 13.1% Selling, general, and administrative 9.2% 9.6% 9.6% 9.8% ------ ------ ------ ------ Operating income ................... 3.3% 3.4% 3.1% 3.3% Interest expense ................... 1.4% 1.2% 1.4% 1.3% ------ ------ ------ ------ Income before income taxes ......... 1.9% 2.2% 1.7% 2.0% ====== ====== ====== ======
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998 REVENUES. Revenues grew in each of our primary revenue areas for the first six months of 1999 as compared with the first six months of 1998, causing total revenues to increase 103% to $1.3 billion. New vehicle sales revenue increased 99% to $767.8 million in the first six months of 1999, compared with $386.2 million in the first six months of 1998. The increase was due primarily to an increase in new vehicle unit sales of 91% to 31,731, as compared with 16,601 in the first six months of 1998 resulting from 13,753 additional units contributed by acquisitions. The remainder of the increase was due to a 4.0% increase in the average selling price of new vehicles as well as an increase in new vehicle revenues from stores owned for longer than one year of 16.5% in the first six months of 1999 over the first six months of 1998. Used vehicle revenues from retail sales increased 112% to $285.2 million in the first six months of 1999 from $134.7 million in the first six months of 1998. The increase was primarily due to an increase in used vehicle unit sales of 109% to 20,294, as compared with 9,719 in the first six months of 1998, resulting from additional unit sales contributed by acquisitions. The remainder of the increase was due to a 1.4% increase in the average selling price of used vehicles as well as an increase in used vehicle revenues from stores owned for longer than one year of 16.4% in the first six months of 1999 over the first six months of 1998. Parts, service and collision repair revenue increased 96% to $134.0 million in the first six months of 1999 compared to $68.3 million in the first six months of 1998, principally due to our acquisitions. Finance and insurance revenue increased $16.8 million, or 133%, principally due to vehicle sales and related financing contributed by our acquisitions, as well as a 17.7% improvement in finance and insurance revenues per vehicle resulting from newly implemented programs designed to improve training and development of finance and insurance sales people. GROSS PROFIT. Gross profit increased 109% to $172.3 million in the first six months of 1999 from $82.4 million in the first six months of 1998 principally due to increases in revenues contributed by dealerships acquired. Gross profit as a percentage of sales increased to 13.1% from 12.7% due primarily to an increase in revenues of higher margin used vehicles and finance and insurance products. Used vehicle revenues as a percentage of total revenues increased from 28.1% in the first six months of 1998 to 29.3% in the first six months of 1999. Finance and insurance revenues as a percentage of total revenues increased from 2.0% in the first six months of 1998 to 2.2% in the first six months of 1999. In addition, gross margins of used vehicles improved from 10.3% to 11.1% resulting from efforts made to improve management and marketing of used vehicle inventories. 15 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses, excluding depreciation and amortization, increased 106% to $124.6 million in the first six months of 1999 from $60.4 million in the first six months of 1998 resulting principally from acquisitions. Such expenses as a percentage of revenues increased to 9.5% from 9.3% resulting from two primary factors. First, because compensation programs, which represent over 50% of a dealership's selling, general and administrative expenses, are primarily based on gross profits, the improvement in gross profit margins resulted in an increase in compensation expense as a percentage of total revenues from 5.7% in the first six months of 1998 to 5.9% in the first six months of 1999. Second, an adjustment in monthly lease rates to fair market rates at certain dealerships acquired during the period resulted in an increase in rent expense as a percentage of total revenues from 0.6% in the first six months of 1998 to 0.8% in the first six months of 1999. DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense increased 127% to $4.2 million in the first six months of 1999 from $1.8 million in the first six months of 1998, resulting principally from additional goodwill amortization expense associated with our acquisitions. INTEREST EXPENSE, FLOOR PLAN. Interest expense, floor plan increased 43% to $9.4 million in the first six months of 1999 from $6.6 million in the first six months of 1998, due primarily to floor plan interest expense incurred by dealerships acquired. As a percentage of total revenues, floor plan interest decreased from 1.0% in the first six months of 1998 to 0.7% in the first six months of 1999 due to decreased interest rates under our floor plan financing arrangement, as well as improvement in inventory turnover rates. INTEREST EXPENSE, OTHER. Interest expense, other increased to $7.4 million in the first six months of 1999 from $2.8 million in the first six months of 1998 due primarily to interest incurred on our senior subordinated notes issued on July 31, 1998. NET INCOME. As a result of the factors noted above, our net income increased by $10.0 million in the first six months of 1999 compared to the first six months of 1998. THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998 REVENUES. Revenues grew in each of our primary revenue areas for the second quarter of 1999 as compared with the second quarter of 1998, causing total revenues to increase 87% to $723.5 million. New vehicle sales revenue increased 80% to $420.8 million in the second quarter of 1999, compared with $233.1 million in the second quarter of 1998. The increase was due primarily to an increase in new vehicle unit sales of 75% to 17,449, as compared with 9,984 in the second quarter of 1998 resulting from 7,536 additional units contributed by acquisitions. The remainder of the increase was due to a 3.3% increase in the average selling price of new vehicles as well as an increase in new vehicle revenues from stores owned for longer than one year of 8.2% in the second quarter of 1999 over the second quarter of 1998. Used vehicle revenues from retail sales increased 102% to $155.3 million in the second quarter of 1999 from $76.9 million in the second quarter of 1998. The increase was primarily due to an increase in used vehicle unit sales of 102% to 10,886, as compared with 5,386 in the second quarter of 1998, resulting from additional unit sales contributed by acquisitions. The remainder of the increase was due to an increase in used vehicle revenues from stores owned for longer than one year of 17.9% in the second quarter of 1999 over the second quarter of 1998. Parts, service and collision repair revenue increased 90% to $74.4 million in the second quarter of 1999 compared to $39.2 million in the second quarter of 1998, principally due to our acquisitions. Finance and insurance revenue increased $9.5 million, or 129%, principally due to vehicle sales and related financing contributed by our acquisitions, as well as a 24.0% improvement in finance and insurance revenues per vehicle resulting from newly implemented programs designed to improve training and development of finance and insurance sales people. GROSS PROFIT. Gross profit increased 95% to $94.3 million in the second quarter of 1999 from $48.3 million in the second quarter of 1998 principally due to increases in revenues contributed by dealerships acquired. Gross profit as a percentage of sales increased to 13.0% from 12.5% due primarily to an increase in revenues of higher margin used vehicles and finance and insurance products. Used vehicle revenues as a percentage of total revenues increased from 27.6% in the second quarter of 1998 to 29.2% in the second quarter of 1999. Finance and insurance revenues increased from 1.9% in the second quarter of 1998 to 2.3% in the second quarter of 1999. In addition, gross margins of used vehicles improved from 10.5% to 11.3% resulting from efforts made to improve management and marketing of used vehicle inventories. 16 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses, excluding depreciation and amortization, increased 96% to $67.4 million in the second quarter of 1999 from $34.5 million in the second quarter of 1998 resulting principally from the expenses of dealerships acquired. Such expenses as a percentage of revenues increased to 9.3% from 8.9% resulting from two primary factors. First, because compensation programs, which represent over 50% of a dealership's selling, general and administrative expenses, are primarily based on gross profits, the improvement in gross profit margins resulted in an increase in compensation expense as a percentage of total revenues from 5.6% in the second quarter of 1998 to 5.8% in the second quarter of 1999. Second, an adjustment in monthly lease rates to fair market rates at certain dealerships acquired during the period resulted in an increase in rent expense as a percentage of total revenues from 0.6% in the second quarter of 1998 to 0.8% in the second quarter of 1999. DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense increased 122% to $2.2 million in the second quarter of 1999 from $1.0 million in the second quarter of 1998, resulting principally from additional goodwill amortization expense associated with our acquisitions. INTEREST EXPENSE, FLOOR PLAN. Interest expense, floor plan increased 34% to $4.9 million in the second quarter of 1999 from $3.7 million in the second quarter of 1998, due primarily to floor plan interest expense incurred by dealerships acquired. As a percentage of total revenues, floor plan interest decreased from 1.0% in the second quarter of 1998 to 0.7% in the second quarter of 1999 due to decreased interest rates under our floor plan financing arrangement, as well as improvement in inventory turnover rates. INTEREST EXPENSE, OTHER. Interest expense, other increased to $3.7 million in the second quarter of 1999 from $1.7 million in the second quarter of 1998 due primarily to interest incurred on our senior subordinated notes. NET INCOME. As a result of the factors noted above, our net income increased by $5.4 million in the second quarter of 1999 compared to the second quarter of 1998. LIQUIDITY AND CAPITAL RESOURCES: Our principal needs for capital resources are to finance acquisitions and fund debt service and working capital requirements. Historically, we have relied on internally generated cash flows from operations, borrowings under our various credit facilities, and borrowings and capital contributions from our stockholders to finance our operations and expansion. On May 5, 1999, we completed a public offering of Class A common stock which provided approximately $86.1 million of additional capital resources for the consummation of acquisitions and repayment of borrowings under our $150 million acquisition line of credit with Ford Motor Credit Company (the "Revolving Facility"). During the first six months of 1999, net cash used in operating activities was approximately $0.6 million. During the first six months of 1998, net cash provided by operating activities was approximately $28.9 million. The decrease was attributable principally to an increase in inventory levels. Cash used for investing activities in the first six months of 1999 was approximately $75.4 million, including $77.2 million paid for acquisitions, net of cash received, and $8.8 million in capital expenditures. Cash used for investing activities in the first six months of 1999 was offset by proceeds received from the sale of real estate at Town and Country Toyota and Fort Mill Ford of approximately $10.6 million. Cash used for investing activities in the first six months of 1998 was approximately $9.1 million, including $7.8 million paid for acquisitions, net of cash received, and $1.3 million in capital expenditures. Our principal capital expenditures typically include building improvements and equipment for use in our dealerships. Of the capital expenditures in the first six months of 1999, approximately $3.0 million related to the construction of new dealerships and a body shop, which were subsequently sold to MMR Holdings, LLC, a limited liability company owned by Bruton Smith and Sonic Financial Corporation ("SFC"), prior to the acquisition of MMR Holdings by CAR MMR L.L.C., an affiliate of Capital Automotive REIT which is not affiliated with Sonic. There was no gain or loss on the sale. On August 13, 1999, CAR MMR L.L.C. acquired all of the ownership interests of MMR Holdings, L.L.C., and two of its affiliates, MMR Viking Investment Associates, L.P. and MMR Tennessee, L.L.C (collectively, the "MMR Group). As of that date, Sonic leased 48 properties for 38 of its dealerships from the MMR Group under "triple net leases" which required Sonic to pay all costs of operating the properties, as well as all taxes, utilities, insurance, repairs, maintenance and other property related expenses. Sonic has entered into new leases with CAR MMR L.L.C. with terms similar to those under Sonic's former leases with the MMR Group. These leases generally provide Sonic with options to renew the lease for two additional five year terms after the expiration of the initial lease term. Sonic has agreed to renew approximately 75% of its lease rental stream for an additional five year period after the expiration of the initial lease terms. In connection with the acquisition, Sonic, MMR Holdings and Mar Mar Realty Trust, an affiliate of the MMR Group, terminated the strategic alliance agreement whereby Mar Mar Realty Trust had provided Sonic with real estate financing, acquisition referral and related services. In connection with the above transaction, CAR MMR L.L.C. has agreed to provide Sonic with up to $75 million in real estate financing through December 31, 1999. 17 During the first six months of 1999, we acquired 17 dealerships for approximately $84.5 million in cash, 6,282 shares of Sonic's Class A Convertible preferred stock, Series II, having an estimated fair value at the time of issuance of approximately $6.1 million, 34,100 shares of Sonic's Class A Convertible preferred stock, Series III, having an estimated fair value at the time of issuance of approximately $28.9 million, and 176,030 shares of Sonic's Class A common stock having an estimated fair value at the time of issuance of approximately $2.2 million. The cash portion of the purchase price was financed with a combination of a portion of the proceeds from our recent public offering of Class A common stock, cash borrowed under our Revolving Facility and cash generated from our existing operations. The acquisitions were 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 their respective acquisition dates. Subsequent to June 30, 1999, we acquired 9 dealerships for approximately $65.8 million in cash, 11,683 shares of Sonic's Class A Convertible preferred stock, Series III, having a liquidation value of $1,000 per share, and 1,398,902 shares of Sonic's Class A common stock having an estimated fair value at the time of issuance of approximately $20.0 million. The cash portion of the purchase price was financed with a combination of cash borrowed under the Revolving Facility and cash generated from Sonic's existing operations. The acquisitions were accounted for using the purchase method of accounting. We have signed definitive agreements to acquire 13 dealerships for an estimated $55.2 million in cash and approximately $11.2 million of Class A common stock. The aggregate purchase price is subject to adjustment based on the actual net book value of the assets acquired. The cash portion of the purchase price will be paid with a combination of borrowings under Sonic's $150 million acquisition line of credit with Ford Motor Credit Company (the "Revolving Facility") and with cash generated from Sonic's existing operations. These acquisitions are expected to be consummated in the third and fourth quarters of 1999. Cash provided by financing activities of approximately $84.7 million in the first six months of 1999 primarily reflects net proceeds received from our public offering of common stock completed on May 5, 1999. The Revolving Facility currently has a borrowing limit of $150 million. Amounts outstanding under the Revolving Facility bear interest at a fluctuating per annum rate equal to 2.75% above the 1 month commercial finance paper rate as reported by the Federal Reserve Board (7.56% at June 30, 1999). The Revolving Facility will mature in March 2001, unless we request that such term be extended, at the option of Ford Motor Credit Company ("Ford Motor Credit"), for a number of additional one year terms to be negotiated by us and Ford Motor Credit. On May 5, 1999, in connection with the public offering by Sonic of 6,067,230 shares of Class A common stock, all amounts outstanding under the Revolving Facility were repaid. As of June 30, 1999 there was no outstanding balance under the Revolving Facility. Future 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 not to exceed $10 million. We agreed under the Revolving Facility not to pledge any of our assets to any third party (with the exception of currently encumbered real estate and assets of our dealership subsidiaries that are subject to previous pledges or liens). In addition, the Revolving Facility contains certain negative covenants, including covenants restricting or prohibiting the payment of dividends, capital expenditures and material dispositions of assets as well as other customary covenants. Additional negative covenants include specified ratios of o total debt to tangible base capital (as defined in the Revolving Facility), o current assets to current liabilities, o earnings before interest, taxes, depreciation and amortization (EBITDA) and rent less capital expenditures to fixed charges, o EBITDA to interest expense, o EBITDA to total debt and o the current lending commitment under the Revolving Facility to scaled assets (as defined in the Revolving Facility). In addition, the loss of voting control over Sonic by Bruton Smith, Scott Smith and their spouses or immediate family members or the failure by Sonic, 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. Sonic is in compliance with all restrictive covenants as of June 30, 1999. 18 We currently have an aggregate principal balance of $125 million in our senior subordinated notes which mature on August 1, 2008 and bear interest at a stated rate of 11.0%. The notes are unsecured and are redeemable at our option after August 1, 2003. Interest payments are due semi-annually on August 1 and February 1 and commenced February 1, 1999. The notes are subordinated to all of our present and future senior indebtedness, including the Revolving Facility. Redemption prices during 12 month periods beginning August 1 are 105.500% in 2003, 103.667% in 2004, 101.833% in 2005 and 100% thereafter. The indenture governing the senior subordinated notes contains certain specified restrictive and required financial covenants. We have agreed not to pledge our assets to any third party except under certain limited circumstances (for example, floor plan indebtedness). We have also agreed to certain other limitations or prohibitions concerning the incurrence of other indebtedness, capital stock, guaranties, asset sales, investments, cash dividends to shareholders, distributions and redemptions. Sonic is in compliance with all restrictive covenants as of June 30, 1999. We currently have a standardized floor plan credit facility with Ford Motor Credit for all our dealership subsidiaries (the "Floor Plan Facility"). As of June 30, 1999, there was an aggregate of $304.0 million outstanding under the Floor Plan Facility. The Floor Plan Facility at June 30, 1999 had an effective interest rate of prime less 1.1% (6.65% at June 30, 1999), subject to certain incentives and other adjustments. Typically new vehicle floor plan indebtedness exceeds the related inventory balances. The inventory balances are generally reduced by the manufacturer's purchase discounts, which are not reflected in the related floor plan liability. These manufacturer purchase discounts are standard in the industry, typically occur on all new vehicle purchases, and are not used to offset the related floor plan liability. These discounts are aggregated and generally paid to us by the manufacturers on a quarterly basis. The Floor Plan Facility includes an available credit line for the purchase of used vehicle inventory. Our general policy is to utilize used vehicle floor plan indebtedness only when purchasing large quantities of used vehicles in bulk. As of June 30, 1999, there was approximately $29.1 million available under our used vehicle credit line, of which approximately $26.3 million was unused. We make monthly interest payments on the amount financed under the Floor Plan Facility but are 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 us with respect to the creation of liens and changes in ownership, officers and key management personnel. As a result of the change in our tax basis of accounting for inventory from the "last-in, first-out" method of inventory accounting (LIFO) to the "first-in, first-out" method of inventory accounting (FIFO) at certain of our dealerships, we incurred additional income tax liabilities. As of June 30, 1999 the aggregate balance of such income tax liabilities was approximately $5.1 million, which is payable in quarterly installments through the year 2002, as follows: Year ending December 31, 1999................................................... $ 901 2000................................................... 1,843 2001................................................... 1,597 2002................................................... 711 ------- Total.................................................. $ 5,052 ======= We expect to pay such obligations with cash provided by operations. We believe that funds generated from our recent offering of Class A common stock, together with funds generated through future operations and availability of borrowings under our floor plan financing (or any replacements thereof) and other credit arrangements will be sufficient to fund our debt service and working capital requirements and any seasonal operating requirements, including our currently anticipated internal growth for our existing businesses, for the foreseeable future. We expect to fund any future acquisitions from future cash flow from operations, additional debt financing (including the Revolving Facility) or the issuance of Class A common stock, preferred stock or other convertible instruments. SEASONALITY Our 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. 19 YEAR 2000 COMPLIANCE GENERAL Due to the limited memory capacity of older computers, many computer systems and software applications in early years were programmed to store dates using six digit formats (e.g. mm/dd/yy) versus eight digit formats (e.g. mm/dd/yyyy). Under the six digit format, most computer systems and software applications are limited to recognizing dates within the 20th century only, causing computers to interpret the year "00" as the year "1900" rather than the year "2000." As we approach the beginning of year 2000, there is widespread concern that the inability of computer systems to recognize dates beyond the year 1999 will result in software errors and system failures that could be disruptive to ordinary business operations. We recognize the need to ensure that our operations will not be disrupted by Year 2000 system failures either within our own computer systems or within the computer systems of our primary lenders and suppliers. Each of our dealerships has appointed a team comprised primarily of department managers that, using guides developed by the National Automobile Dealers Association (NADA), is responsible for assessing and resolving potential Year 2000 problems, and developing contingency plans to mitigate the impact of future problems on operations. STATE OF READINESS INTERNAL DEALERSHIP SYSTEMS: Internal systems supporting the dealership's daily operations are comprised of four primary systems: (i) the Dealer Management System ("DMS") which supports the critical operations of the dealership including all vehicle sales, vehicle inventory, financing and insurance operations, service and parts operations, and accounting functions; (ii) the Dealer Communication System ("DCS") which provides on-line communication with manufacturers necessary for ordering vehicles and parts inventory, submitting warranty claims, submitting dealership financial statements, receiving delivery reports, and receiving technical information used in service department operations; (iii) personal computer systems ("PC systems") used in providing information to and communicating with the parent company; and (iv) "embedded systems" which use an electric processor or computer chip to control, monitor, or assist with the operation of equipment, machinery, and building management (e.g. building access, security and fire alarms, automotive diagnostic equipment). DEALER MANAGEMENT SYSTEM: The DMS systems used by our dealerships are obtained from one of four primary vendors, Reynolds & Reynolds, Infiniti Net, ADP, and UCS. Each of these vendors has developed upgrades to correct Year 2000 problems within the DMS systems, and we have completed the process of installing such upgrades to our systems. In addition, we have received written verification from each of these vendors that the DMS systems operating within dealerships currently owned by Sonic are Year 2000 certified. With respect to dealerships being acquired, dealerships using DMS systems which are not Year 2000 certified are being transferred to existing systems which are Year 2000 certified. DEALER COMMUNICATION SYSTEM: The DCS systems used in our dealerships are provided by the respective manufacturers with whom the dealerships communicate. As a result, the manufacturers have assumed responsibility for upgrading DCS systems to Year 2000 compliant systems. To date, approximately half of our dealerships have received written verification from their respective manufacturer that their DCS system is Year 2000 compliant. In addition, we have requested from each manufacturer that status reports be provided to both the dealership and parent company to inform us of remediation efforts at those dealerships that are not yet Year 2000 compliant, and when such remediation efforts are expected to be completed. PERSONAL COMPUTER SYSTEMS: Most PC systems currently operating in our dealerships were installed within the past year and were determined to be Year 2000 compliant at the time of installation. PC systems and local and wide area networks used to communicate with our dealerships were also recently installed and were Year 2000 certified upon purchase. As a precautionary measure, we have provided all dealerships with diskettes containing programs designed to test PC systems for Year 2000 capability. All PC systems not currently Year 2000 compliant will either be upgraded or replaced with systems that are Year 2000 compliant. EMBEDDED SYSTEMS: Embedded systems refer to systems that use some sort of electronic process or computer chip to track time and date information used in the operation of that system. For example, security systems, or heating, ventilation, and air-conditioning systems (HVAC) may be programmed to automatically be activated or deactivated at a certain time. If a security system is programmed to lock up a dealership on weekends, then some dealerships may be locked out on Thursday, January 6, 2000 because the computer interprets the date as Saturday, January 6, 1900. The dealerships are conducting an inventory of such systems, and are contacting the manufacturers or suppliers to test such systems and obtain verification of Year 2000 certification. This process has not yet been completed, though these systems are not considered critical and a disruption in these systems is not expected to significantly affect dealerships' daily operations. 20 EXTERNAL SYSTEMS: A dealership's operations may be adversely affected if the lenders, suppliers, or other third parties with whom it regularly conducts business are affected by Year 2000 problems within their systems. Other than automobile manufacturers, we are primarily concerned about Year 2000 failures with banks and other financial service providers, companies providing financing and insurance to our customers, and utilities providing electricity and water. We have received verification from our primary banks and lenders that their systems are Year 2000 compliant and that service is not expected to be interrupted by Year 2000 problems. We have contacted other key vendors and suppliers and are awaiting their responses concerning their Year 2000 remediation efforts. COSTS The costs associated with converting our internal systems to Year 2000 compliant systems have not been, and are not expected to be, material to our financial position or results of operations. Costs associated with upgrading and converting the DMS and DCS systems to Year 2000 compliant systems were covered by monthly maintenance contracts with the respective suppliers and were expensed as incurred. Costs associated with upgrading or replacing PC and embedded systems have not been material and were expensed or capitalized in accordance with our capitalization policy. CONTINGENCY PLANS We cannot state with certainty whether Year 2000 system failures either within our own internal systems or within the systems of third-parties with whom we are involved will have a material adverse impact on our results of operations. In order to mitigate the potential impact of any future Year 2000 problems, each of our dealerships is in the process of developing contingency plans which include the following: 1. Use of pre-printed and pre-numbered forms and checks (including repair orders and parts counter tickets) and manual journals and ledger books to assist in bookkeeping and accounting functions; 2. Use of hand held, battery operated finance computers in order to continue providing finance services to our customers; 3. Establishing emergency reserves of supplies in the event that service from third party lenders and suppliers is disrupted due to Year 2000 problems within their systems; and 4. Training of employees to manually perform functions that are currently performed on computers. While we believe that we are taking appropriate steps to ensure we are adequately prepared to deal with Year 2000 problems as they arise, we cannot make assurances that Year 2000 problems will not have a material adverse affect on our results of operations or financial condition. In a most reasonably likely worst case scenario, Year 2000 problems may delay our ability to sell vehicles, provide financing and insurance to our customers, provide parts and repair service to our customers, complete acquisitions, or meet third-party obligations until Year 2000 problems can be resolved in the affected systems. 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 gross goodwill balance at December 31, 1998 was $182.5 million and at June 30, 1999 was $265.3 million. As a percentage of total assets and stockholders' equity, goodwill, net of accumulated amortization, represented 31.3% and 126.4%, respectively, at December 31, 1998, and 32.8% and 90.2%, respectively, at June 30, 1999. Generally accepted accounting principles require that goodwill and all other intangible assets be amortized over the period benefited. We have determined that the period benefited by the goodwill will be no less than 40 years. Accordingly we are amortizing goodwill over a 40 year period. Earnings reported in periods immediately following an acquisition would be overstated if we attributed a 40 year benefit to an intangible asset that should have had a shorter benefit period. In later years, we 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. We periodically compare the carrying value of goodwill with the anticipated undiscounted future cash flows from operations of the business we have acquired in order to evaluate the recoverability of goodwill. We have concluded that the anticipated future cash flows associated with intangible assets recognized in our acquisitions will continue indefinitely, and there is no pervasive evidence that any material portion will dissipate over a period shorter than 40 years. We will incur additional goodwill in future acquisitions. 21 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK. Sonic's only financial instruments with market risk exposure are variable rate floor plan notes payable, Revolving Facility borrowings and other variable rate notes. As of June 30, 1999, the total outstanding balance of such instruments was approximately $316.6 million. A change of one percent in the interest rate would have caused a change in interest expense for the six months ended June 30, 1999 of approximately $1.6 million. In addition, a decrease or increase in interest rates would cause a respective increase or decrease in the present value of Sonic's fixed rate senior subordinated notes, which have a carrying value of $120.9 million at June 30, 1999. PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. The following sets forth certain information as to all equity securities sold by Sonic during the periods discussed that were not registered under the Securities Act of 1933, as amended (the "Securities Act"). As to all such transactions, an exemption was claimed under Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder ("Regulation D") as transactions not involving a public offering in view of sophistication of the purchasers, their access to material information about Sonic, the disclosures actually made to them by Sonic, the absence of any general solicitation or advertising, the status of the purchasers as "accredited investors" as that term is defined in Rule 501(a) of Regulation D and the filing by Sonic of the appropriate forms in connection therewith. All such private sales of Sonic's equity securities were made to the owners of assets associated with, or the capital stock of, automobile dealerships acquired by Sonic as a part of Sonic's dealership acquisition strategy. Sonic has privately issued its Class A common stock in the following dealership acquisition transactions: On May 17, 1999, Sonic issued 176,030 shares of its Class A common stock to John H. Newsome, Jr. to acquire via merger with a subsidiary of Sonic the outstanding capital stock of Newsome Chevrolet, Inc. with a value of approximately $2.2 million. Sonic has also privately issued its Class A convertible preferred stock (the "Preferred Stock") in dealership acquisition transactions. The Preferred Stock is divided into three series: the Series I Preferred Stock, the Series II Preferred Stock and the Series III Preferred Stock. Each share of Preferred Stock is convertible into shares of Class A common stock at the holder's option at specified conversion rates. After the second anniversary of the date of issuance, any shares of Preferred Stock which have not yet been converted are subject to mandatory conversion to Class A common stock at the option of Sonic. No fractional shares of Class A common stock will be issued upon conversion of any shares of Preferred Stock. Instead, Sonic will pay cash equal to the value of such fractional shares. Generally each share of Preferred Stock is convertible into that number of shares of Class A common stock that has an aggregate Market Price at the time of conversion equal to $1,000 (with certain adjustments for Series II and Series III Preferred Stock). "Market Price" is defined generally as the average closing price per share of the Class A common stock on the New York Stock Exchange for twenty trading days immediately preceding the date of determination. Before the first anniversary of the date of issuance of Preferred Stock, each holder of Preferred Stock is unable to convert without first giving Sonic ten business days' notice and an opportunity to redeem such Preferred Stock at the then applicable redemption price. Sonic has privately issued Preferred Stock in the following dealership acquisition transactions: On April 2, 1999, Sonic issued 1,532 shares of its Series II Preferred Stock to Fred Bondesen Chevrolet, Oldsmobile, Cadillac, Inc. to acquire the assets of this corporation with a value of approximately $1.4 million. On May 4, 1999, Sonic issued 500 shares of its Series II Preferred Stock each to Lloyd Pontiac-Cadillac, Inc. and Lloyd Nissan, Inc. to acquire the assets of these corporations with a value of approximately $1.0 million. In two separate issuances occurring on April 1, 1999 and May 4, 1999, Sonic issued 4,055.1825 shares of its Series III Preferred Stock with a value of approximately $3.9 million to Aldo B. Paret as additional consideration for the acquisition of the outstanding capital stock of Casa Ford of Houston, Inc. which closed in May of 1998. On May 17, 1999, Sonic issued 3,750 shares of its Series II Preferred Stock to John H. Newsome, Jr. to acquire via merger with a subsidiary of Sonic the outstanding capital stock of Newsome Chevrolet, Inc. with a value of approximately $3.6 million. 22 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the annual meeting of stockholders held on June 8, 1999, Theodore M. Wright and Dennis D. Higginbotham were elected directors by Sonic's stockholders. Directors whose terms of office continued after the meeting were O. Bruton Smith, Bryan Scott Smith, William R. Brooks, William P. Benton, and William I. Belk. In addition to the election of two directors, the stockholders approved the following: 1. An amendment to Sonic's Amended and Restated Certificate of Incorporation to increase the number of shares of Class A common stock issuable thereunder from 50,000,000 to 100,000,000, and to increase the number of shares of Class B common stock issuable thereunder from 15,000,000 to 30,000,000. 2. An amendment to increase the number of options to purchase shares of Class A common stock that may be granted under Sonic's Restated 1997 Stock Option Plan from 2,250,000 to 4,500,000. 3. An amendment to increase the number of options to purchase shares of Class A common stock that may be granted under Sonic's Employee Stock Purchase Plan from 600,000 to 1,200,000. 4. The appointment of Deloitte & Touche LLP as the Sonic's independent public accountant for the fiscal year ending December 31, 1999.
VOTES VOTES FOR VOTES AGAINST ABSTAINED -------------- -------------- -------------- Election of Theodore M. Wright 128,999,478 4,033,000 Election of Dennis D. Higginbotham 128,999,478 4,033,000 Approval of amendment to Sonic's Amended and Restated Certificate of Incorporation 128,536,365 4,496,113 Approval of amendment to Sonic's Restated 1997 Stock Option Plan 129,354,270 2,130,498 5,122 Approval of amendment to Sonic's Employee Stock Purchase Plan 130,653,174 832,114 4,602 Appointment of Deloitte & Touche LLP 133,032,478
23 ITEM 6. EXHIBITS (a) Exhibits: 3.1* Amended and Restated Certificate of Incorporation of Sonic (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (Registration No. 333-33295) of Sonic (the "Form S-1")). 3.2* Certificate of Designation, Preferences and Rights of Class A Convertible Preferred Stock (incorporated by reference to Exhibit 4.1 to Sonic's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 3.3* Bylaws of Sonic (incorporated by reference to Exhibit 3.2 to the Form S-1). 4.1* Form of 11% Senior Subordinated Note due 2008, Series B (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-4 (Registration Nos. 333-64397 and 333-64397-001 through 333-64397-044) of Sonic (the "Form S-4")). 4.2* Indenture dated as of July 1, 1998 between Sonic, as issuer, the subsidiaries of Sonic named therein, as guarantors, and U.S. Bank Trust National Association, as trustee, relating to the 11% Senior Subordinated Notes due 2008 (incorporated by reference to Exhibit 4.2 to the Form S-4). 4.3* Registration Rights Agreement dated as of June 30, 1998 among Sonic, O. Bruton Smith, Bryan Scott Smith, William S. Egan and Sonic Financial Corporation (incorporated by reference to Exhibit 4.2 to the Form S-1). 10.1* Agreement and Plan of Merger dated as of April 6, 1999 by and among Sonic, Manhattan Auto, Inc., Joseph Herson, Mollye Mills, John Jaffe and Richard Mills (the "Manhattan Merger Agreement") (incorporated by reference to Exhibit 4.10 to Sonic's Registration Statement on Form S-3 (Registration No. 333-82615) (the "August 1999 Form S-3")). 10.2* Letter Agreement dated as of August 3, 1999 regarding amendment to the Manhattan Merger Agreement (incorporated by reference to Exhibit 4.11 to the August 1999 Form S-3). 10.3 Asset Purchase Agreement dated April 6, 1999 by and among Sonic, L.O.R., Inc., Waldorf Automotive, Inc., Manhattan Imported Cars, Inc. and the stockholders of L.O.R., Waldorf Automotive and Manhattan Imported Cars. 10.4 Sonic Agreement dated as of June 30, 1999 by and among Sonic, the subsidiaries of Sonic listed on Schedule A thereto and CAR MMR L.L.C (the "Sonic Agreement") (confidential portions omitted and filed separately with the SEC). 10.5 Agreement dated as of August 5, 1999 by and among Sonic, O. Bruton Smith and Sonic Financial Corporation relating to transactions contemplated by the Sonic Agreement. 27 Financial data schedule for the six month period ended June 30, 1999 (filed electronically). (b) Reports on Form 8-K. We have not filed any reports on Form 8-K during the quarter for which this report is filed. * Filed Previously 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SONIC AUTOMOTIVE, INC. Date: August 15, 1999 By: /s/ O. Bruton Smith --------------- -------------------------------------------------- O. Bruton Smith CHAIRMAN AND CHIEF EXECUTIVE OFFICER Date: August 15, 1999 By: /s/ Theodore M. Wright --------------- -------------------------------------------------- Theodore M. Wright VICE PRESIDENT-FINANCE, CHIEF FINANCIAL OFFICER, TREASURER AND SECRETARY (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) 25 INDEX TO EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q FOR SONIC AUTOMOTIVE, INC. FOR THE QUARTER ENDED June 30, 1999
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------ ----------------------- 3.1* Amended and Restated Certificate of Incorporation of Sonic (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (Registration No. 333-33295) of Sonic (the "Form S-1")). 3.2* Certificate of Designation, Preferences and Rights of Class A Convertible Preferred Stock (incorporated by reference to Exhibit 4.1 to Sonic's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 3.3* Bylaws of Sonic (incorporated by reference to Exhibit 3.2 to the Form S-1). 4.1* Form of 11% Senior Subordinated Note due 2008, Series B (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-4 (Registration Nos. 333-64397 and 333-64397-001 through 333-64397-044) of Sonic (the "Form S-4")). 4.2* Indenture dated as of July 1, 1998 between Sonic, as issuer, the subsidiaries of Sonic named therein, as guarantors, and U.S. Bank Trust National Association, as trustee, relating to the 11% Senior Subordinated Notes due 2008 (incorporated by reference to Exhibit 4.2 to the Form S-4). 4.3* Registration Rights Agreement dated as of June 30, 1998 among Sonic, O. Bruton Smith, Bryan Scott Smith, William S. Egan and Sonic Financial Corporation (incorporated by reference to Exhibit 4.2 to the Form S-1). 10.1* Agreement and Plan of Merger dated as of April 6, 1999 by and among Sonic, Manhattan Auto, Inc., Joseph Herson, Mollye Mills, John Jaffe and Richard Mills (the "Manhattan Merger Agreement") (incorporated by reference to Exhibit 4.10 to Sonic's Registration Statement on Form S-3 (Registration No. 333-82615) (the "August 1999 Form S-3")). 10.2* Letter Agreement dated as of August 3, 1999 regarding amendment to the Manhattan Merger Agreement (incorporated by reference to Exhibit 4.11 to the August 1999 Form S-3). 10.3 Asset Purchase Agreement dated April 6, 1999 by and among Sonic, L.O.R., Inc., Waldorf Automotive, Inc., Manhattan Imported Cars, Inc. and the stockholders of L.O.R., Waldorf Automotive and Manhattan Imported Cars. 10.4 Sonic Agreement dated as of June 30, 1999 by and among Sonic, the subsidiaries of Sonic listed on Schedule A thereto and CAR MMR L.L.C (the "Sonic Agreement") (confidential portions omitted and filed separately with the SEC). 10.5 Agreement dated as of August 5, 1999 by and among Sonic, O. Bruton Smith and Sonic Financial Corporation relating to transactions contemplated by the Sonic Agreement. 27 Financial data schedule for the six month period ended June 30, 1999 (filed electronically).
* Filed Previously 26 EX-10 2 EXHIBIT 10.3 EXHIBIT 10.3 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (this "AGREEMENT") is made this 6th day of April, 1999 by and among SONIC AUTOMOTIVE, INC., a Delaware corporation ("BUYER"), L.O.R., INC., a Maryland corporation ("L.O.R."), WALDORF AUTOMOTIVE, INC., a Maryland corporation ("WALDORF"), MANHATTAN IMPORTED CARS, INC., a Maryland corporation ("MIC"), and the shareholders of L.O.R., MIC and Waldorf (individually, a "STOCKHOLDER" and collectively, the "STOCKHOLDERS"). L.O.R., MIC and Waldorf may be referred to herein individually as a "SELLER" and collectively as the "SELLERS." W I T N E S S E T H: WHEREAS, L.O.R. is engaged in a Lexus automobile dealership business (the "LOR BUSINESS") located at 15501 Frederick Road, Rockville, Maryland 20855, Waldorf is engaged in a Nissan Jeep automobile dealership business (the "WALDORF BUSINESS") located at 2950 Crane Highway, Waldorf, Maryland 20601, and MIC is engaged in, among other businesses, a Porsche and Audi automobile dealership business (collectively, the "MIC BUSINESS") located at 15515 Frederick Road, Rockville, Maryland 20855 (such businesses to be referred to individually as a "BUSINESS" and collectively as the "BUSINESSES"); and WHEREAS, Sellers desire to sell and Buyer desires to buy, or to cause one or more subsidiaries or affiliates of Buyer to buy, certain assets pertaining to the Businesses, subject to the terms and conditions of this Agreement; and WHEREAS, contemporaneously with the execution of this Agreement, Buyer has entered into an Agreement and Plan of Merger (the "MERGER AGREEMENT") with Manhattan Auto, Inc., and the shareholders of Manhattan Auto, Inc., with respect to the acquisition by Buyer of certain automobile dealership properties; and WHEREAS, contemporaneously with the execution of this Agreement, Buyer has entered into a Contract to Purchase and Sell Property (the "REAL PROPERTY PURCHASE AGREEMENT") with WAI Limited Partnership and its general partners (the "WALDORF OWNER"), whereby Buyer has agreed to buy and the Waldorf Owner has agreed to sell the real property at which Waldorf conducts the Nissan Jeep automobile dealership business (the "WALDORF PROPERTY"); and WHEREAS, although the consummation of the transactions contemplated hereby are not subject to the consummation of the transactions contemplated by the Merger Agreement, the parties hereto nonetheless fully intend to and, to the extent practicable, will coordinate the consummation of the transactions contemplated hereby with the consummation of the transactions contemplated by the Merger Agreement in such a manner as to close both transactions on the same date. WHEREAS, at the closing of the transactions contemplated by this Agreement, MIC will assign to Buyer the Existing Lease (as defined below) of the real property at which L.O.R. conducts the LOR Business and MIC conducts the MIC Business (the "ROCKVILLE PROPERTY"; and WHEREAS, at the closing of the transactions contemplated by this Agreement, Buyer and Air Beach LP will enter into the Air Beach Lease (as defined in Section 10.19) whereby Buyer will lease from Air Beach certain condominium units at which MIC operates (and sublets to certain of its Affiliates from time to time) a paint and body shop (the "AIR BEACH PROPERTY"); and WHEREAS, the consummation of the transactions contemplated by this Agreement is, to the extent described in Sections 8.16 and 9.7, subject to the consummation of the transactions contemplated by the Real Property Purchase Agreement; 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 hereby agree as follows: ARTICLE I CERTAIN DEFINITIONS 1.1 "AGGREGATE CONSIDERATION" shall mean Twenty-Four Million Dollars ($24,000,000) plus the Purchase Price paid at Closing. 1.2 "ASSETS" shall mean: the New Vehicles (as defined in Section 3.1); the Demonstrators (as defined in Section 3.2); the Used Vehicles (as defined in Section 3.5), if any; the Parts (as defined in Section 4.3); the Miscellaneous Inventories (as defined in Section 5.1); the Work in Progress (as defined in Section 5.3); the Fixtures and Equipment (as defined in Section 5.4); the Miscellaneous Assets (as defined in Section 5.5); the goodwill of each of the Businesses; and any other assets of the Sellers which are expressly transferred to Buyer hereunder. Assets shall not include any cash, notes receivable, accounts receivable, deposits made by Sellers and items in categories defined in Sections 3.1 through 3.5 and 4.1 through 4.3 and 5.1 through 5.5 which are not purchased by Buyer. 1.3 "CLOSING DATE" shall mean the date of the closing of the purchase and sale of the Assets (the "CLOSING") which shall be a date designated by the Buyer, which date shall be as soon as reasonably practicable after: (a) the receipt by Buyer of the approvals of the Manufacturers contemplated in Section 8.13; (b) the satisfaction of the conditions set forth in 2 Sections 8.8 and 8.18; and (c) the completion of the audited financial statements contemplated in Section 8.21. The Closing Date shall not be later than the Closing Date Deadline. The Closing shall be held at the offices of Seller's counsel in Washington, D.C. at 9:30 a.m. on the Closing Date. 1.4 "CLOSING DATE DEADLINE" shall mean the date that is the sixtieth (60th) day after the date hereof; provided, however, if, as of the Closing Date Deadline: (a) the Buyer shall not have obtained such approvals under Section 8.13, (b) the conditions set forth in Sections 8.8 and 8.18 shall not have been satisfied; and/or (c) such audited financial statements shall not have been completed, either Sellers or Buyer may elect to extend the Closing Date Deadline for up to an additional sixty (60) days. 1.5 "EXISTING LEASE" shall mean the lease between Manhattan Porsche Audi, Inc. (predecessor in interest to MIC) and Royco, Inc. dated June 26, 1985 as modified by the Lease Modification Agreement dated August 2, 1985 and as further modified by the Second Amendment to Lease dated as of July 31, 1996. 1.6 "INVENTORY DATE" shall mean the close of business on the date of completion of the Inventory (as defined in Section 4.1), which date shall not be more than three (3) days prior to the Closing Date, or such later date prior to the Closing as is mutually agreed by Sellers and Buyer. 1.7 "LIABILITIES" of a Seller shall mean: (a) all obligations of such Seller arising in the ordinary course of business after the Closing Date, and not as a result of any breach or default, under (i) each contract and lease of such Seller that is set forth on Annex A of Schedule 2.4 attached hereto but only if Buyer has agreed to assume such contract or lease pursuant to an Assumption Agreement, (ii) the Existing Lease, and (iii) all other contracts and leases of such Seller that are entered into in connection with the Business of such Seller in the ordinary course of business at any time after the date hereof and on or prior to the Closing Date, but only if Buyer has agreed to assume such other contracts or leases pursuant to an Assumption Agreement (as defined in Section 2.4 below); and (b) the Inducement Fee as provided in Section 2.7 below. "LIABILITIES" may also describe the aggregate Liabilities of any or all of the Sellers, if the context so admits or provides. 1.8 "MANUFACTURER" shall mean any, and "MANUFACTURERS" shall mean all, of: the Lexus Division of Toyota Motor Sales U.S.A., Inc. ("LEXUS"); Nissan North America, Inc. ("NISSAN"); Chrysler Corp. ("CHRYSLER"); Porsche Cars North America, Inc. ("PORSCHE"); and Audi of America, Inc. ("AUDI"). 1.9 "REAL PROPERTY" shall mean the Waldorf Property, the Rockville Property and the Air Beach Property. 3 ARTICLE II ---------- SALE AND PURCHASE OF THE ASSETS ------------------------------- 2.1 SALE AND PURCHASE. Upon the terms and subject to the conditions hereinafter set forth, at the Closing, Sellers will sell, transfer and convey the Assets to Buyer and Buyer will purchase the Assets from Sellers for the consideration set forth in this Agreement. The sale, transfer and conveyance of the Assets will be made by execution and delivery at the Closing of a bill of sale from each Seller in a form reasonably satisfactory to Buyer's counsel (the "BILLS OF SALE") and Articles of Transfer and such other instruments of assignment, transfer and conveyance as Buyer shall reasonably request. Except to the extent specifically included within the Assets, Sellers will not sell, and Buyer will not purchase, any other tangible or intangible assets of Sellers. 2.2 PURCHASE PRICE. The aggregate purchase price (the "PURCHASE PRICE") to be paid for the Assets shall consist of Twenty-three Million Six Hundred Sixty-six Thousand Dollars ($23,666,000), as the purchase price for the Businesses and intangible assets included in the Assets (the "BUSINESS AND INTANGIBLE ASSETS PURCHASE PRICE"), which shall be allocated among the Sellers in accordance with Part I of Schedule 2.2 hereto, plus the amounts paid by Buyer pursuant to Section 2.3(c), plus the sum of: (a) the New Vehicle Purchase Price (as defined in Section 3.1); (b) the Demonstrator Purchase Price (as defined in Section 3.2); (c) the Used Vehicle Purchase Price (as defined in Section 3.5), if applicable; (d) the Parts Purchase Price (as defined in Section 4.4); (e) the Miscellaneous Inventories Purchase Price (as defined in Section 5.1); (f) the Work in Progress Purchase Price (as defined in Section 5.3); and (g) the Fixtures and Equipment Purchase Price (as defined in Section 5.4). Each of the components of the Purchase Price, other than the Business and Intangible Assets Purchase Price, shall be allocated among the Sellers in accordance with their respective Assets upon which such components are based, as reflected in a revised Part I of Schedule 2.2, to be completed by Buyer and Sellers at least three (3) days prior to the Closing Date. The parties acknowledge that the New Vehicle Purchase Price, the Parts Purchase Price and the Miscellaneous Inventories Purchase Price will be based upon information contained in Schedule 3.1 and the Inventory (as defined in Section 4.1), both of which are to be delivered prior to the Closing Date. The parties also acknowledge that adjustments to those categories of Assets will have to be made to reflect ordinary course increases or decreases in those assets between the time of delivery of such Schedule 3.1 and the Inventory and the Closing Date, and that the related components of the Purchase Price will have to be adjusted to reflect any such adjustments to those Assets. All of the foregoing adjustments (with appropriate payments in cash or wire transfer by the parties) will be made as promptly as possible after the Closing. Each party will use the Purchase Price and Liabilities allocation described in Part II of Schedule 2.2 hereto, as finally adjusted, in all reporting to, and tax returns filed with, the Internal Revenue Service and other state and local taxing authorities. 2.3 PAYMENT. Upon the terms and subject to the conditions hereinafter set forth, at the Closing: 4 (a) The Buyer shall issue and deliver to the Sellers at Closing, pro rata in accordance with the Sellers' respective allocation of the Purchase Price in accordance with Schedule 2.2, (i) such whole number of Registered Common Shares (as defined below) OR (ii) such whole number (but not less than zero) of Restricted Common Shares (as defined below), in either case with an aggregate Market Price, determined as of the Closing Date, equal to (A) forty percent (40%) of the Aggregate Consideration less (B) $22,000,000 (such Market Price amount being referred to herein as the "ASSET AGREEMENT STOCK CONSIDERATION"). (b) Buyer shall deliver to Sellers, by bank or cashier's check or a wire transfer to an account designated by Sellers, an amount equal to the Purchase Price less (i) the aggregate Market Price, as of the Closing Date, of such shares as are issued and delivered in accordance with Section 2.3(a) and (ii) the amount paid pursuant to Section 2.3(c) below; (c) Buyer shall pay by wire transfer to the respective holders thereof, pursuant to payoff letters to be provided by such holders as of the Closing Date, the principal of and accrued interest as of the Closing Date, not to exceed an aggregate total of $2,800,000, of the obligations of all the Sellers that are owed to one or more of the Sellers, shareholders of Sellers, Marco LP or any entity controlled by any shareholder of Sellers as described on Schedule 2.3(c); and (d) Buyer shall assume the Liabilities in accordance with Section 2.4. 2.4 ASSIGNMENT AND ASSUMPTION. At the Closing, each Seller will assign to Buyer its Liabilities, and Buyer will assume and agree to perform and discharge the Liabilities of each Seller, pursuant to an assignment and assumption agreement with each Seller in the form attached hereto as Exhibit 2.4 (collectively, the "ASSUMPTION AGREEMENTS"). Notwithstanding anything herein to the contrary, except as expressly provided in this Section 2.4 and in the Assumption Agreements, Buyer does not and will not assume or become liable for any obligations or liabilities of any Seller, of any kind whatsoever, fixed or contingent, known or unknown (collectively, the "RETAINED LIABILITIES"), as a result of the transactions contemplated in this Agreement. Each Seller shall retain and agrees to satisfy and discharge all of its Retained Liabilities, including the Retained Liabilities set forth with respect to such Seller on Part II of Schedule 2.4. 2.5 NON-COMPETITION AGREEMENT. At the Closing: (a) L.O.R. and Bernard Mills shall enter into a non-competition agreement with Buyer substantially in the form of Exhibit 2.5(a) attached hereto and (b) Waldorf and John Birch shall enter into a non-competition agreement with Buyer substantially in the form of Exhibit 2.5(b) attached hereto (collectively, the "NON-COMPETITION AGREEMENTS"). 2.6 EMPLOYMENT AGREEMENT. At the Closing, Buyer and John Jaffe shall enter into an employment agreement substantially in the form of Exhibit 2.6 attached hereto (the "EMPLOYMENT AGREEMENT"). 2.7 INDUCEMENT FEE. As an inducement to the Buyer to negotiate and enter into this Agreement and to undertake the further cost and expense of conducting its due diligence 5 investigation and preparing to satisfy its obligations at the Closing, Sellers hereby agree, jointly and severally, to pay to Buyer not later than nine (9) months after the date hereof, the sum of $1,500,000 (the "INDUCEMENT FEE"). The Inducement Fee will be included in the Liabilities and will become an obligation of Buyer. In addition, the Inducement Fee will become an obligation of any other person or entity (including any holder of a right of first refusal, preemptive right or other similar right, with respect to any of the Assets) who purchases the Assets, or any portion thereof, as a result of the execution and delivery by Sellers of this Agreement. This Section 2.7 shall survive the termination hereof except that the Inducement Fee will be canceled if this Agreement is terminated for any reason other than the exercise by all Manufacturers of their respective rights of first refusal, preemptive rights or other similar rights as provided under Section 10.13(a). 2.8 EXISTING LEASE. At Closing, MIC shall assign the Existing Lease to Buyer through the execution and delivery of an Assumption Agreement to Buyer. L.O.R. and MIC shall have executed and delivered to Buyer a termination agreement (the "SUBLEASE TERMINATION AGREEMENT"), in recordable form, of the Agreement of Sublease dated June 26, 1989 between MIC and L.O.R. The Sellers will record, at their expense, the Sublease Termination Agreement where appropriate promptly after Closing. 2.9 ISSUANCE OF STOCK. The Buyer will use its best reasonable efforts to deliver to the Sellers prior to the Closing a prospectus (a "PROSPECTUS") with respect to the Buyer's offer and sale to the Sellers of the Registered Common Stock to the Sellers no later than the thirtieth (30th) Business Day prior to the Closing Date. The Sellers shall provide Buyer with a notice (the "SELLERS' NOTICE") not sooner than twenty (20) Business Days after the receipt by the Sellers from the Buyer of the Prospectus, and not later than five (5) Business Days before the Closing Date. The Sellers' Notice shall indicate whether the Sellers desire to receive Registered Common Stock (as defined below) or Restricted Common Stock (as defined below). In the event that the Sellers' Notice provides for the issuance of Registered Common Stock, the Buyer shall issue and deliver to the Sellers at the Closing, in the respective percentages set forth below their names on Schedule 2.2, that number of whole shares (the "REGISTERED COMMON STOCK") of Buyer's Class A Common Stock, par value $.01 per share (the "COMMON STOCK"), with an aggregate Market Price (as of the Closing Date) equal to the Asset Agreement Stock Consideration. As used herein, the term "MARKET PRICE" shall mean the average of the daily closing prices on the New York Stock Exchange for one share of Common Stock for the twenty (20) consecutive trading days ending on the last trading day immediately prior to the date of determination. In lieu of the issuance of any fractional share of Common Stock under this Section, the Buyer shall pay to the Sellers in cash or by bank or cashier's check an amount equal to the Market Price of such share as of the date payment is due multiplied by the fraction of such share. 2.10 ALTERNATIVE ISSUANCE OF STOCK. In the event that: (i) Buyer shall fail, for any reason, to satisfy its "best reasonable efforts" obligation to deliver timely to the Sellers the Prospectus in accordance with Section 2.9, (ii) if the Seller's Notice indicates the Sellers' preference for the issuance and delivery of Registered Common Stock and Buyer shall for any reason fail to deliver the Registered Common Stock to the Sellers at the Closing, or (iii) if the Seller's Notice indicates the Seller's preference for the issuance and delivery of Restricted Common Stock then, in any such 6 case, notwithstanding anything contained in Section 2.9 to the contrary, the Buyer shall issue and deliver to the Sellers at the Closing, in the respective percentages set forth below their names on Schedule 2.2, that number of whole shares (the "RESTRICTED COMMON STOCK") of Common Stock with an aggregate Market Price (as of the Closing Date) equal to the Asset Agreement Stock Consideration. Subject to the terms and conditions hereof, the issuance and delivery of such shares shall satisfy in full all of Buyer's obligations under Section 2.9. In lieu of the issuance of any fractional share of Common Stock under this Section, the Buyer shall pay to the Sellers in cash or by bank or cashier's check an amount equal to the Market Price of such share as of the date payment is due multiplied by the fraction of such share. 2.11 MARKET PROTECTION FOR SONIC COMMON SHARES. (a) As used herein, the term "CLOSING DATE MARKET PRICE" shall mean the Market Price as of the Closing Date. As used herein, the term "RESTRICTIVE PERIOD MARKET PRICE" shall mean the Market Price, as determined as of the later of (i) the first trading day after the date of the expiration of the Restrictive Period and (ii) the first trading day after the date on which Sellers are first able to utilize a prospectus supplement to the Acquisition Shelf Registration Statement or the S-3 Registration Statement for resales. (b) In the event that the Restrictive Period Market Price is less than the Closing Date Market Price, then Buyer shall pay to the Sellers, in the respective percentages set forth below their names on Schedule 2.2, no later than the third Business Day after the date the Restrictive Period Market Price may be determined, an amount equal to the number of Sonic Common Shares issued hereunder and then held by them multiplied by the difference between the Restrictive Period Market Price and Closing Date Market Price. If Registered Common Shares were issued to the Sellers at the Closing and if the Acquisition Shelf Registration Statement is then current and effective in accordance with Section 2.12 (including Section 2.12(a)(ii)), such payment shall be made through the issuance and delivery of additional whole shares of Common Stock with an aggregate Restrictive Period Market Price equal to the amount due under this Section 2.11(b), and the offer and resale of such shares of Common Stock shall be registered under the Acquisition Shelf Registration Statement in accordance with Section 2.12. Such shares shall be considered Registered Common Stock under the terms hereof. If the Acquisition Shelf Registration Statement is not then current and effective in accordance with Section 2.12 (including Section 2.12(a)(ii)), such payment shall be made in immediately available funds by bank or cashier's check or wire transfer. Any fractional share amount shall be paid by bank or cashier's check or wire transfer. Notwithstanding anything contained in this Section 2.11(b) to the contrary, in the event that Sonic Common Shares are redeemed pursuant to Section 2.11(d), no payment shall be made under this Section 2.11(b). (c) In the event that the Restrictive Period Market Price exceeds the Closing Date Market Price, then the Sellers shall return to Buyer, no later than the third Business Day after the date the Restrictive Period Market Price may be determined, pro rata according to their respective amounts set forth below their names on Schedule 2.2 hereto, an aggregate amount of whole Sonic Common Shares with an aggregate Restrictive Period Market Price equal to the number of Sonic Common Shares issued hereunder and then held by the Sellers, multiplied by the difference between 7 the Closing Date Market Price and the Restrictive Period Market Price. Any fractional share amount shall be paid by bank or cashier's check or wire transfer. Notwithstanding anything contained in this Section 2.11(c) to the contrary, in the event that Sonic Common Shares are redeemed pursuant to Section 1.2(d), no payment shall be made under this Section 2.11(c). (d) Notwithstanding any other provision of this Agreement, if on or prior to the ninetieth (90th) day after the Restrictive Period Expiration Date all steps on the part of Buyer necessary to register the resale of all Sonic Common Shares held by Sellers shall not have been taken (including, without limitation the filing of the Acquisition Shelf Registration Statement and/or the S-3 Registration Statement together with the appropriate S-3 Resale Prospectus and/or the Resale Prospectus (as hereinafter defined)), the Buyer shall, as and to the extent permitted by the Delaware General Corporation Law, immediately redeem all of the Sonic Common Shares issued hereunder and then held by the Sellers and deliver to the Sellers therefor, in immediately available funds by bank or cashier's check or wire transfer, an amount equal to the aggregate Market Price, as of the Closing Date, of all such Sonic Common Shares, together with any accrued and unpaid interest thereon required under Section 2.12(b)(i). Any such payment shall be made to the Sellers in the respective percentages set forth below their names on Schedule 2.2. In such an event, Sellers shall deliver to Buyer certificates representing such Sonic Common Shares, duly endorsed for transfer to Buyer or accompanied by appropriate stock power and vesting unto Buyer good and marketable title to all of such shares, free and clear of any and all Encumbrances. 2.12 ADDITIONAL TERMS RELATING TO THE ISSUANCE OF COMMON STOCK. (a) ISSUANCE OF REGISTERED COMMON STOCK. In the event that Buyer issues and delivers Registered Common Stock to the Sellers hereunder, the parties agree as follows: (i) ACQUISITION SHELF REGISTRATION STATEMENT. The offer and sale of the Registered Common Stock by the Buyer shall be registered under an effective registration statement on Form S-4 (the "ACQUISITION SHELF REGISTRATION STATEMENT") filed by the Buyer with the Securities and Exchange Commission (the "SEC"). (ii) PROSPECTUS SUPPLEMENT. To the extent required by law, the Buyer shall prepare as soon as reasonably practicable after the issuance of such shares a prospectus supplement or post-effective amendment to the Acquisition Shelf Registration Statement that would permit the offer and resale of the Registered Common Stock from time to time by the Sellers after the Restrictive Period. Promptly after Buyer has prepared such supplement or amendment, Buyer will provide the Sellers with notice thereof. (iii) LISTING. The Buyer shall cause the Registered Common Stock to be listed for trading on the New York Stock Exchange prior to the termination of the Restrictive Period. (iv) CURRENCY OF SHELF. The Buyer shall maintain the effectiveness of the Acquisition Shelf Registration Statement for the resale of the Registered Common Stock and maintain a current resale prospectus to permit the resale of the Registered Common Stock until all 8 of the shares of Registered Common Stock that remain unsold may be sold by the Sellers without restriction pursuant to clause (k) of Rule 144 ("RULE 144"), or any successor regulation thereto, promulgated by the SEC under the Securities Act of 1933, as amended (the "SECURITIES ACT"), or pursuant to clause (d) of Rule 145, or any successor regulation thereto ("RULE 145"), promulgated by the SEC under the Securities Act . So long as the Acquisition Shelf Registration Statement is effective, the Sellers agree that they shall effect each resale of Registered Common Stock only as permitted by Rules 144 and 145, as applicable, or pursuant to a current prospectus or supplements thereto that is a part of the Acquisition Shelf Registration Statement (the "RESALE PROSPECTUS") with respect to which the Buyer, for each such resale, has granted its prior consent to the use thereof. (b) ISSUANCE OF RESTRICTED COMMON STOCK. In the event that Buyer issues and delivers Restricted Common Stock to the Sellers hereunder, the parties agree as follows: (i) S-3 REGISTRATION STATEMENT. The Buyer shall use its best reasonable efforts to register the resale of the Restricted Common Stock pursuant to a registration statement on Form S-3 (the "S-3 REGISTRATION STATEMENT") effective as of the first Business Day after the expiration of the Restrictive Period (the "RESTRICTIVE PERIOD EXPIRATION DATE") or as soon thereafter as reasonably practicable. Promptly after the S-3 Registration Statement becomes effective, Buyer shall notify the Sellers thereof. In the event that the S-3 Registration Statement shall not be effective as of the Restrictive Period Expiration Date, the Buyer shall be obligated to pay to the Sellers, during the period commencing upon the Restrictive Period Expiration Date and ending upon the date the S-3 Registration Statement becomes effective and an S-3 Resale Prospectus (as hereinafter defined) is current and effective, interest in the amount of the Interest Rate upon the aggregate Market Price, determined as of the Closing Date, of the Sonic Common Shares issued hereunder and then held by the Sellers. Any such interest payments shall be made to the Sellers in the respective percentages set forth below their names on Schedule 2.2. Any such interest payments shall be made monthly in arrears and shall be paid, with respect to any calendar month, no later than the fifth Business Day of the following calendar month. (ii) LISTING. The Buyer shall cause the Restricted Common Stock to be listed for trading on the New York Stock Exchange prior to the termination of the Restrictive Period. (iii) CURRENCY OF S-3 REGISTRATION STATEMENT. The Buyer shall maintain the effectiveness of the S-3 Registration Statement for the resale of the Restricted Common Stock and maintain a current resale prospectus to permit the resale of the Restricted Common Stock until all of the Restricted Common Stock that remains unsold may be sold by the Sellers without restriction pursuant to clause (d) of Rule 145 or clause (k) of Rule 144, as applicable, or any successor regulation thereto. So long as the S-3 Registration Statement is effective, the Sellers agree that they shall effect each resale of Restricted Common Stock only as permitted by Rule 144 or pursuant to a current prospectus or supplements thereto that is a part of the S-3 Registration Statement (the "S-3 RESALE PROSPECTUS") with respect to which the Buyer, for each such resale, has granted its prior consent to the use thereof. 9 (c) ADDITIONAL SELLERS' OBLIGATIONS. The Sellers agree and acknowledge, with regard to the offer or resale by any of them of any shares of Common Stock issued to them hereunder (as used herein the term "SONIC COMMON SHARES" shall refer to such shares), that: (i) any offering of any of the Sonic Common Shares under the Resale Prospectus or under the S-3 Resale Prospectus by a Seller will be effected in an orderly manner through one or more of three (3) reputable securities dealers (including, unless otherwise indicated by Buyer, Merrill Lynch & Co., BancBoston Robertson Stephens, and Stephens, Inc.), acting as broker or dealer, selected by the Buyer in its sole discretion (each a "DESIGNATED BROKER"); (ii) if requested by the Buyer, in connection with a resale of Sonic Common Shares under the Acquisition Shelf Registration Statement or the S-3 Registration Statement, the Sellers will enter into one or more custody agreements with one or more banks with respect to such Sonic Common Shares so that all such Sonic Common Shares are held in the custody of such bank or banks provided however that any Sonic Common Shares not sold pursuant to the Acquisition Shelf Registration Statement or the S-3 Registration Statement shall be released from custody on request of the Sellers; (iii) each Seller will make resales of Registered Common Stock only by one or more methods described in the Resale Prospectus (including resales pursuant to Rule 144, or any successor regulation thereto), as appropriately supplemented or amended when required; and each Seller will make resales of Restricted Common Stock only by one or more methods described in the S-3 Resale Prospectus (including resales pursuant to Rule 144, or any successor regulations thereto), as appropriately supplemented or amended when required; (iv) since the Sonic Common Shares may be subject to restrictions on resale under Rules 144 or 145, as applicable, the certificates representing the Sonic Common Shares will be issued by the Buyer to the Sellers with such legends as the Buyer may reasonably require until such Sonic Common Shares are offered pursuant to the foregoing terms under the Resale Prospectus, the S-3 Resale Prospectus or pursuant to Rules 144 or 145, as applicable, at which time such certificates shall be tendered to the Buyer by the Sellers and a new certificate or certificates without legends shall be issued by the Buyer to the Designated Broker in order to settle any resales by the Sellers; (v) the Sellers shall provide the Buyer, in writing, with all information concerning the Sellers and their resale of the Sonic Common Shares as may be reasonably requested by the Buyer in order to comply with the Securities Act, and the Sellers shall indemnify the Buyer for any liabilities (the "SELLERS' LIABILITIES") arising under the Securities Act, the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), or any state securities or blue sky laws resulting from any material misstatements in, or omissions of material information from, such information provided by the Sellers to the Buyer pursuant to this clause (v); and (vi) the Sellers shall pay the commissions or fees of the Designated Brokers in connection with the resale of the Sonic Common Shares, and Buyer shall pay all fees 10 related to the registration, listing and maintaining the registered status of the Sonic Common Shares and the fees and expenses of the custodial bank or banks holding such Sonic Common Shares, if applicable. (d) ADDITIONAL BUYER OBLIGATIONS. The Buyer agrees that: (i) the Buyer shall pay all expenses, including legal and accounting fees, in connection with the preparation, filing and maintenance of, as applicable, the Acquisition Shelf Registration Statement, the S-3 Registration Statement (including any amendments to either Registration Statement), the Resale Prospectus, the S-3 Resale Prospectus (including any supplements to either Prospectus), the issuance of certificates representing the Sonic Common Shares and other expenses incurred by the Buyer in meeting its obligations set forth in Sections 2.9 through 2.12, inclusive; and (ii) the Buyer shall indemnify the Sellers for any liabilities arising under the Securities Act, the Exchange Act, or any state securities or blue sky laws resulting from any material misstatements in, or omissions of material information from, the Resale Prospectus, the S-3 Resale Prospectus, the Acquisition Shelf Registration Statement and the S-3 Registration Statement, including the information incorporated by reference therein, except for the Sellers' Liabilities. (e) NO INJUNCTION. Notwithstanding any provision of this Agreement to the contrary, the Sellers and the Stockholders shall not have any right to take any action (and the Sellers and the Stockholders hereby agree that none of them shall take any action) to restrain, enjoin or otherwise delay any registration as a result of any controversy that might arise with respect to the interpretation or implementation of this Agreement. Nothing contained in this Section 2.12(e) shall prevent the Sellers from making a claim for monetary relief. (f) RESTRICTIVE PERIOD. The Sellers shall not offer, sell or otherwise dispose of, or contract to sell or dispose of, any of the Sonic Common Shares for a period of one hundred eighty (180) days after the Closing Date (the "RESTRICTIVE PERIOD"); provided, however, that each Seller may transfer his or her Sonic Common Shares during the Restrictive Period: (A) to his or her spouse or issue or to a trust for the benefit of his or her spouse or issue or (B) in connection with his or her death; provided, further, that in the event of any such transfer contemplated by clause (A) or (B) above, such Sonic Common Shares shall remain subject to the restrictions on transfer in this Section 2.12(f). ARTICLE III NEW VEHICLES; DEMONSTRATORS AND USED VEHICLES 3.1 NEW VEHICLES. At the Closing, Buyer shall purchase all of each Seller's untitled new 1999 and 1998 motor vehicles in the respective Seller's stock and unsold by the respective Sellers as of the Closing Date and which are listed on Schedule 3.1 hereto, which schedule Sellers shall 11 deliver to Buyer not more than three (3) days prior to the Closing (all such vehicles are collectively referred to hereinafter as the "NEW VEHICLES" of such Seller, or of the Sellers collectively if the context so admits or provides). The purchase price to be paid by Buyer for each New Vehicle shall be the price at which the New Vehicle was invoiced to the respective Seller by the applicable Manufacturer, as adjusted pursuant to this Article III (the sum of all such amounts to be paid for New Vehicles as determined by this Article III is herein referred to as the "NEW VEHICLE PURCHASE PRICE"). Schedule 3.1 shall set forth the model, invoice cost, and all other information necessary to calculate the New Vehicle Purchase Price with respect to each New Vehicle listed in such Schedule 3.1. At the Closing, each Seller shall assign to Buyer, without any additional consideration therefor, by appropriate documents reasonably satisfactory to Buyer, all unfilled retail orders and deposits made thereon. Any profits or proceeds derived from such unfilled retail orders shall belong to Buyer. 3.2 DEMONSTRATORS. At the Closing, Buyer shall purchase all of each Seller's untitled 1999 and 1998 motor vehicles in such Seller's stock and unsold by such Seller as of the Closing Date which are used in the ordinary course of business for the purpose of demonstration and that are listed on Schedule 3.2, which schedule Sellers shall deliver to Buyer no more than three (3) days prior to the Closing (all such vehicles are collectively referred to herein as the "DEMONSTRATORS"of such Seller, or of the Sellers collectively if the context so admits or provides). For purposes of this Agreement, any motor vehicle with more than 6,000 miles on its odometer shall be deemed to be "used" rather than a "Demonstrator." The purchase price to be paid by Buyer for each Demonstrator shall be the price at which the Demonstrator was invoiced to the Seller by the applicable Manufacturer, as adjusted pursuant to this Article III, and as reduced by an amount equal to ten cents ($.10) multiplied by the total mileage on such odometer (the sum of all such amounts to be paid for Demonstrators hereunder is herein referred to as the "DEMONSTRATOR PURCHASE PRICE"). Schedule 3.2 shall set forth each Demonstrator's model, invoice cost, odometer reading and all other information necessary to calculate the Demonstrator Purchase Price with respect to such Demonstrator. 3.3 ADJUSTMENT OF NEW VEHICLE AND DEMONSTRATOR PURCHASE PRICE. The purchase price paid for each New Vehicle and each Demonstrator purchased under this Article III shall be: (a) increased by the dealer cost of any equipment and accessories which have been installed in such vehicles; and (b) decreased by (i) the dealer cost of any equipment and accessories which have been removed from such vehicles, (ii) all paid or unpaid rebates, discounts, holdback for dealer account and other factory incentives to the extent not already deducted from dealer cost (including without limitation rebates applied for and paid but not earned, incentive monies claimed on pre-reported units and carryover allowances on 1998 models), and (iii) refundable advertising allowances, if any. 3.4 DAMAGED OR REPAIRED NEW VEHICLES AND DEMONSTRATORS. If any New Vehicles or Demonstrators shall have suffered any damage prior to the Closing Date which is not reflected on Schedule 3.1 or Schedule 3.2, the applicable Seller shall notify Buyer in writing on or prior to the Closing Date. In such case, the applicable Seller and Buyer will attempt to agree on the cost to cover reasonably required repairs prior to sale, which amount shall be deducted from the price to be paid for such New Vehicle or Demonstrator to the extent not repaired prior to Closing. In the 12 event Buyer and the applicable Seller cannot agree on the cost of repairs or the amount of reduction, Buyer shall have no obligation to purchase any such damaged New Vehicle or Demonstrator and such Seller shall have no obligation to sell such damaged New Vehicle or Demonstrator. With respect to any New Vehicle or Demonstrator which shall have been damaged and repaired prior to the Closing Date, the applicable Seller and Buyer will attempt to agree on an adjustment to the price to reflect the decrease, if any, in the wholesale value of such New Vehicle or Demonstrator resulting from such damage and repair, which amount shall be deducted from the price to be paid for such New Vehicle or Demonstrator. In the event Buyer and such Seller cannot agree on such adjustment, Buyer shall have no obligation to purchase such New Vehicle or Demonstrator and such Seller shall have no obligation to sell such New Vehicle or Demonstrator. 3.5 USED VEHICLES. Buyer shall have no obligation to purchase any vehicle from any Seller other than its obligation hereunder to purchase the New Vehicles and the Demonstrators. Sellers and Buyer shall perform an inventory of each Seller's motor vehicles that are not New Vehicles or Demonstrators as of the Inventory Date and, in connection with such inventory, the applicable Seller and Buyer shall attempt to assign a mutually agreed price to each such vehicle owned by such Seller as of the Closing Date. Any such vehicles as to which such Seller and Buyer are unable to agree upon a price shall not be purchased by Buyer in connection herewith. Any such vehicles as to which such Seller and Buyer shall agree upon a price are collectively referred to herein as the "USED VEHICLES" of such Seller, or of the Sellers collectively if the context so admits or provides, and shall be purchased by the Buyer at the Closing. The aggregate sum of all prices assigned to such Used Vehicles to be purchased by Buyer pursuant to the terms of this Section 3.5 shall be referred to herein as the "USED VEHICLE PURCHASE PRICE." ARTICLE IV PARTS/ACCESSORIES 4.1 THE INVENTORY. Buyer and Sellers shall engage a mutually acceptable third party engaged in the business of appraising, valuing and preparing inventories for automobile dealerships (hereinafter referred to as the "INVENTORY SERVICE") to prepare an inventory list (the "INVENTORY") of the parts and accessories, as well as of the Miscellaneous Inventory, owned by and either used or held for use by the respective Sellers in the Businesses. The Inventory (insofar as it relates to parts and accessories) shall be posted to each Manufacturer's approved system of inventory control. The cost of the Inventory shall be borne 50% by Buyer and 50% by Sellers. Buyer shall have the right to deduct Sellers' portion of such expense from the consideration to be paid to Sellers under the terms of this Agreement and to remit such sums directly to the Inventory Service. The Inventory shall be completed by the Inventory Date. The Inventory shall identify each part and accessory and its purchase price. 4.2 RETURNABLE AND NON-RETURNABLE PARTS AND ACCESSORIES. The Inventory shall classify parts and accessories as "returnable" or "nonreturnable." For purposes of this Agreement, the terms "returnable parts" and "returnable accessories" shall describe and include only those new 13 parts and new accessories for vehicles which are listed (coded) in the latest current Master Parts Price List Suggested List Prices and Dealer Prices, or other applicable similar price lists, of the applicable Manufacturer, with supplements or the equivalent in effect as of the Inventory Date (the "MASTER PRICE LIST"), as returnable to the applicable Manufacturer at not less than the purchase price reflected in the Master Price List or in the most recent applicable price list. The purchase price for each "returnable part" and "returnable accessory" will be the price listed in the Master Price List. All parts and accessories listed (coded) in the Master Price List as non-returnable to the applicable Manufacturer shall be classified as "nonreturnable." The purchase price for each "nonreturnable" part and accessory, of which type the applicable Seller has made no sales during the ninety (90) day period prior to the Inventory Date, shall be sixty percent (60%) of the price listed therefor in the Master Price List. The purchase price for each "nonreturnable" part and accessory, of which type the applicable Seller has made retail sales to one or more customers during the ninety (90) day period prior to the Inventory Date, shall be one hundred percent (100%) of the price therefor listed in the Master Price List. The purchase price for all "Jobber" and/or "NPN" parts shall be equal to the applicable Seller's original cost of such parts. The purchase price for all nuts, bolts and any other parts not addressed in this Section 4.2 shall equal the value thereof as determined by the Inventory Service. 4.3 PARTS. At the Closing, Buyer shall purchase all parts and accessories owned by each Seller at the Closing Date and listed on the Inventory (the "PARTS"of such Seller, or of the Sellers collectively if the context so admits or provides) provided, however, that Buyer shall not be obligated to purchase any damaged parts or accessories, parts and accessories with component parts missing, superseded or obsolete parts or accessories, or used parts or accessories. Sellers agree that if parts and accessories that Buyer is not obligated to purchase hereunder are not removed from the Real Property within thirty (30) days after the Closing Date, they shall become the property of Buyer without the payment of any consideration in addition to the consideration otherwise provided herein. Buyer agrees to provide access to Sellers for the purpose of removing such property during such thirty (30) day period. 4.4 PARTS PURCHASE PRICE. The purchase price for the Parts will equal the value of such items shown on the Inventory, subject to the provisions of Section 4.2 above (the "PARTS PURCHASE PRICE"). 4.5 PARTS RETURN PRIVILEGES. Each Seller shall assign to Buyer at Closing any net parts return privileges under the respective Manufacturer's Parts Return Plans that may have accrued to such Seller prior to the Closing (and any other special parts return authorizations which may have been granted to such Seller by a Manufacturer). ARTICLE V MISCELLANEOUS INVENTORIES; WORK IN PROGRESS; FIXTURES AND EQUIPMENT 14 5.1 MISCELLANEOUS INVENTORIES. At the Closing, Buyer shall purchase all useable gas, oil and grease, all undercoat material and body materials in unopened cans and such other miscellaneous useable and saleable articles in unbroken lots (including office supplies) which (i) are on any Seller's dealership premises and used in its Business, (ii) are owned by such Seller on the Closing Date, (iii) do not represent more than a sixty (60) day supply of any particular item(s), and (iv) are identified in the Inventory taken by the Inventory Service on the Inventory Date (collectively referred to herein as the "MISCELLANEOUS INVENTORIES"of such Seller, or of the Sellers collectively if the context so admits or provides). The purchase price for the Miscellaneous Inventories shall be equal to the replacement cost of the Miscellaneous Inventories as determined by the Inventory Service and set forth on the Inventory (the sum of all prices of the Miscellaneous Inventories pursuant to the terms of this Section 5.1 shall be referred to herein as the "MISCELLANEOUS INVENTORIES PURCHASE PRICE"). 5.2 MISCELLANEOUS ITEMS NOT INCLUDED IN THE INVENTORY. Buyer shall have no obligation to purchase any such miscellaneous items that are not included in the Miscellaneous Inventories. Sellers agree that any miscellaneous items that are not included in the Miscellaneous Inventories and are not removed from the Real Property within thirty (30) days after the Closing Date shall become the property of Buyer without the payment of any consideration in addition to the consideration otherwise provided herein. Buyer agrees to provide access to Sellers for the purpose of removing such property during such thirty (30) day period. 5.3 WORK IN PROGRESS. At the Closing, Buyer shall buy at the applicable Seller's actual cost for parts and labor such shop labor and sublet repairs as such Seller shall have caused to be performed on any repair orders in connection with their respective Businesses which are in process at the close of business on the Closing Date for which there are adequate credit arrangements (the "WORK IN PROGRESS"of such Seller, or of the Sellers collectively if the context so admits or provides) (the aggregate sum of all costs of Sellers for the Work in Progress pursuant to the terms of this Section 5.3 shall be referred to herein as the "WORK IN PROGRESS PURCHASE PRICE"). Buyer shall complete such repair work and shall be entitled to the entire proceeds to be collected for such services. 5.4 FIXTURES AND EQUIPMENT. At the Closing, Buyer shall purchase all fixtures, machinery, equipment (including special tools and shop equipment), furniture, leasehold improvements and all signs and office equipment owned by each Seller and used or held for use in connection with the respective Businesses, including the items listed on Schedule 5.4 hereto, which schedule Sellers shall deliver to Buyer not later than five (5) days prior to the Closing (collectively referred to herein as the "FIXTURES AND EQUIPMENT"of a Seller, or of the Sellers collectively if the context so admits or provides). The purchase price for the Fixtures and Equipment shall be the depreciated book value thereof as reflected in said Schedule 5.4 hereto (the "FIXTURES AND EQUIPMENT PURCHASE PRICE"). 5.5 MISCELLANEOUS ASSETS. At the Closing, and without payment of any additional consideration, Buyer shall purchase all of the following assets that are used or held for use in connection with or relate to the Sellers' respective Businesses (i) unused shop repair orders, parts 15 sales tickets, accounting forms, binders, office and shop supplies and such shop reference manuals, parts reference catalogs, non-accounting file copies for all sales of such Seller for the three (3) years preceding the Closing Date, (ii) copies of new and used car sales records and specifically wholesale parts sales records, new and used parts sales records, and service sales records for the three (3) years preceding the Closing Date, (iii) product sales training material and reference books on hand as of the Closing Date, (iv) customer and registration lists pertaining to the sale of motor vehicles, service files, repair orders, owner follow-up lists and similar records, (v) telephone numbers and listings used by such Seller, (vi) names and addresses of each Seller's service customers and prospective purchasers, (vii) all lawfully transferrable licenses and permits, (viii) all rights and claims under or arising out of the contracts and leases included in the Liabilities, and (ix) Sellers' respective rights to the tradenames "Lexus of Rockville," "Nissan Jeep of Waldorf," "Rockville Porsche Audi" and any other tradename used by any Seller, as listed on Schedule 5.5 hereto, and any similar variations thereof (all the foregoing items collectively referred to herein as the "MISCELLANEOUS ASSETS"of a Seller, or of the Sellers collectively if the context so admits or provides). 5.6 CERTAIN RECORDS OF SELLER; ACCESS BY SELLER. Each Seller may retain all corporate records, financial records and correspondence which are not necessary for the continued operation of such Seller's Business by Buyer. For a period of two (2) years following the Closing Date, Buyer and Sellers will allow the Sellers and Buyer, respectively, and their respective authorized agents and representatives access, upon reasonable notice during business hours, to the books and records regarding post-Closing adjustments arising during the three day period prior to Closing. 5.7 WARRANTY OBLIGATIONS OF SELLER. To the extent that a Seller may have issued warranties on the vehicles sold by such Seller on or prior to the Closing Date and to the extent such warranties are not included in the Work in Progress, Buyer shall have no responsibility to perform any services required under such warranties, unless authorized in writing by the applicable Seller accompanied by arrangements in writing satisfactory to Buyer to assure Buyer of payment for all work performed by Buyer, and, if so authorized by a Seller, such Seller shall reimburse Buyer for all of Buyer's costs for parts and labor in connection therewith at established internal rates for parts and labor. At the Closing Date, each Seller shall supply Buyer with a list to which such warranties and guaranties, if any, are applicable, which list shall include the names of the purchasers, the make and year model of the vehicles purchased and the date of purchase. Each Seller shall also supply to Buyer at or prior to the Closing Date an address for and a designation of the person who will be responsible for authorizing Buyer to perform any services under such warranties, if any, issued by such Seller on vehicles sold by it on or prior to the Closing Date. The applicable Seller shall reimburse Buyer promptly upon demand for all sums due or payable by such Seller to Buyer hereunder. 5.8 ACCOUNTS RECEIVABLE. Each Seller shall retain all accounts receivable arising out of the operation of its Business on or prior to the Closing Date and Buyer shall retain all accounts receivable arising out of sales and/or services of the respective Businesses after the Closing Date. After the Closing Date, Buyer shall cooperate with Sellers and shall use reasonable and ordinary efforts, including providing Sellers access to the Buyer's books, records and employees (at Sellers' expense) to assist Sellers in their efforts to collect their respective accounts receivable for a period 16 of six (6) months after the Closing. Buyer shall accept payment of each Seller's accounts receivable at no charge to Sellers for a period of six (6) months after the Closing, and shall forward to Sellers, promptly upon receipt, all the money so received on said accounts. Notwithstanding anything to the contrary, Buyer shall have no responsibility to actually collect any Sellers' accounts receivable. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Sellers and the Stockholders as follows: 6.1 ORGANIZATION; POWER AND AUTHORITY; AUTHORIZATION. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, is duly qualified to do business and is in good standing in every jurisdiction in which the nature of its business makes such qualification necessary and has full corporate power and authority to own or use the properties it purports to own and use and to carry on its business as now being conducted. The Board of Directors of Buyer has, or prior to the Closing will have, duly approved this Agreement, all other agreements, certificates and documents executed or to be executed by Buyer in connection herewith, and the transactions contemplated hereby and thereby. Buyer has full corporate power and authority to execute and deliver this Agreement and all other agreements, certificates and documents executed or to be executed by Buyer in connection herewith, to consummate the transactions contemplated hereby and thereby and to perform its obligations hereunder and thereunder. This Agreement, and all other agreements, certificates and documents executed or to be executed by Buyer in connection herewith, constitute or, when executed and delivered, will constitute legal, valid and binding agreements of Buyer enforceable against Buyer in accordance with their respective terms. 6.2 NON-VIOLATION; CONSENTS. Except as set forth on Schedule 6.2 attached hereto, the execution and delivery of this Agreement, the consummation of the transactions contemplated by this Agreement and compliance with the provisions hereof do not and will not: (a) conflict with or violate any of the provisions of Buyer's restated Certificate of Incorporation or By-laws, each as amended, or any resolution of the Board of Directors or the stockholders of Buyer, (b) violate any law, ordinance, rule or regulation or any judgment, order, writ, injunction or decree or similar command of any court, administrative or governmental agency or other body applicable to Buyer, (c) violate or conflict with or result in a breach of, or constitute a default under, any material instrument, agreement or indenture or any mortgage, deed of trust or similar contract to which Buyer is a party or by which Buyer is bound or affected, or (d) require the consent, authorization or approval of, or notice to, or filing or registration with, any governmental body or authority, or any other third party. 6.3 LITIGATION. There are no actions, suits or proceedings pending, or, to the knowledge of Buyer, threatened against or affecting Buyer which might adversely affect the power or authority of Buyer to carry out the transactions to be performed by it hereunder. 17 6.4 BROKERS' OR FINDERS' FEES, ETC. No agent, broker, investment banker, person or firm acting on behalf of the Buyer or any person, firm or corporation affiliated with the Buyer or under its authority is or will be entitled to any brokers' or finders' fee or any other commission or similar fee directly or indirectly from any of the parties hereto in connection with the consummation of the transactions contemplated hereby. 6.5 DISCLOSURE MATERIAL. Sellers acknowledge that Buyer has delivered to them copies of (i) the Prospectus dated November 10, 1997 (the "1997 PROSPECTUS"), (ii) the Buyer's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, (iii) the Buyer's Quarterly Reports on Form 10-Q for the three-month periods ended March 31, 1998, June 30, 1998 and September 30, 1998 and (iv) all Current Reports on Form 8-K, filed in 1998 or 1999, each in the form (excluding exhibits) filed with the SEC (collectively, such Form 10-K, 10-Q and 8-K being hereinafter referred to as its "REPORTS"). Neither the 1997 Prospectus nor any of the Reports contained, at the time of filing thereof with the SEC, any untrue statement of any material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances in which they were made, not misleading. 6.6 NO MISSTATEMENTS OR OMISSIONS. No representation or warranty made by Buyer in this Agreement, and no statement contained in any agreement, instrument, certificate or schedule furnished or to be furnished by Buyer pursuant hereto, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make such representation or warranty or such statement not misleading. ARTICLE VII REPRESENTATIONS AND WARRANTIES OF SELLERS AND THE STOCKHOLDERS Sellers and the Stockholders, jointly and severally, represent and warrant to Buyer, as follows: 7.1 ORGANIZATION; POWER AND AUTHORITY; AUTHORIZATION. Each Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Maryland, is duly qualified to do business and is in good standing in every jurisdiction in which the nature of its business makes such qualification necessary and has full corporate power and authority to own or use the properties it purports to own and use and to carry on its business as now being conducted. Schedule 7.1 sets forth each person or entity which has an ownership interest in any Seller and the extent and nature of such ownership interest held by each such owner. Each Seller has full corporate power and authority to execute and deliver this Agreement and all other agreements, certificates and documents executed or to be executed by such Seller in connection herewith, to consummate the transactions contemplated hereby and thereby and to perform its obligations hereunder and thereunder. Each of the Stockholders has full capacity, power and authority to execute and deliver this Agreement and all other agreements, certificates and documents executed or to be executed by such Stockholder in connection herewith, to consummate the transactions contemplated hereby and thereby and to perform his or her obligations hereunder and thereunder. This Agreement, and all 18 other agreements, certificates and documents executed or to be executed by any Seller in connection herewith, have been duly authorized by all necessary corporate action and constitute or, when executed and delivered, will constitute legal, valid and binding agreements of such Seller enforceable against such Seller in accordance with their respective terms. This Agreement, and all other agreements, certificates and documents executed or to be executed by a Stockholder in connection herewith, constitute or, when executed and delivered, will constitute legal, valid and binding agreements of such Stockholder enforceable against him or her in accordance with their respective terms. No Seller has ever operated its Business under any tradenames other than the tradenames listed or referred to in Section 5.5, except that MIC's corporate name is "Manhattan Imported Cars" (although it has not operated under the tradename "Manhattan Imported Cars" during the last fifteen (15) years) and Waldorf has operated under the tradename of Nissan Jeep Eagle of Waldorf. 7.2 NO VIOLATION; CONSENTS. Except as set forth in Schedule 7.2 attached hereto, the execution and delivery of this Agreement, the consummation of the transactions contemplated by this Agreement and compliance with the provisions hereof do not and will not: (a) conflict with or violate any of the provisions of any Seller's Articles of Incorporation, as amended, or any resolution of the Board of Directors of any Seller, (b) violate any law, ordinance, rule or regulation or any judgment, order, writ, injunction or decree or similar command of any court, administrative or governmental agency or other body applicable to any Seller, any Assets, any Business or any Liabilities, (c) provided that the transactions contemplated hereby and (to the extent described in Sections 8.16 and 9.7) the Real Property Purchase Agreement are consummated, violate or conflict with or result in a breach of, or constitute a default under, or an event giving rise to a right of termination of, any Contract (as defined in Section 7.10), any material instrument, agreement or indenture or any mortgage, deed of trust or similar contract to which any of the Sellers or any of the Stockholders is a party or by which any of the Sellers, any of the Stockholders or any of the Assets are bound or affected, (d) result in the creation or imposition of any Encumbrance upon any of the Assets, or (e) except for the Articles of Transfer or as otherwise specifically contemplated by this Agreement, require the consent, authorization or approval of, or notice to, or filing or registration with, any governmental body or authority, or any other third party. 7.3 LITIGATION. There are no actions, suits or proceedings pending (excluding any actions, suits or proceedings for which process has not been served) or, to the knowledge of Sellers and the Stockholders, threatened against any Seller or any of the Stockholders which might adversely affect the power or authority of any of them to carry out the transactions to be performed by any such party hereunder. There are no actions, suits or proceedings pending (excluding any actions, suits or proceedings for which process has not been served) or, to the knowledge of Sellers and the Stockholders, threatened against or affecting any Seller, other than those adequately covered by insurance, and those disclosed on Schedule 7.3 attached hereto, and none of the actions, suits or proceedings described on Schedule 7.3, if determined adversely to such Seller, will have, or could reasonably be expected to have, a material adverse effect upon the Assets or the Liabilities of any Seller or the business, prospects, properties, earnings, results of operations or condition (financial or otherwise) of any Business. 19 7.4 TITLE TO ASSETS; ENCUMBRANCES. Except as disclosed on Schedule 7.4 attached hereto, each Seller has good title to its Assets, free and clear of all liens (including tax liens), security interests, encumbrances, actions, claims, payments or demands of any kind and character (collectively, "ENCUMBRANCES"), except Encumbrances disclosed on Schedule 7.4 hereto and Encumbrances for ad valorem personal property taxes not yet due and payable. All of the Assets to be transferred hereunder conform, as to condition and character, to the descriptions of such Assets contained herein and will be transferred at the Closing free and clear of all Encumbrances, except Encumbrances for ad valorem personal property taxes not yet due and payable. To the knowledge of Sellers and the Stockholder, the ownership and use of the Assets, and the operation of the respective Businesses, do not infringe upon the intellectual property rights of any other person or entity. 7.5 PERMITS AND APPROVALS. Except as disclosed on Schedule 7.5 attached hereto, there are no permits or approvals used or obtained for use by any Seller which are required under applicable law in connection with the ownership or operation of the respective Businesses. 7.6 FINANCIAL STATEMENTS. (a) Each Seller has delivered to Buyer the financial statements of such Seller listed in Schedule 7.6 attached hereto (the "FINANCIAL STATEMENTS"). Except as set forth on Schedule 7.6, the Financial Statements have been prepared in accordance with generally accepted accounting principles consistently applied. Each balance sheet included in the Financial Statements fairly presents the financial condition of such Seller as of the date thereof and all debts and liabilities of such Seller, fixed or contingent, as of the date thereof, and each related statement of income included in the Financial Statements fairly presents the results of the operations of such Seller and the changes in its financial position for the period indicated, all in accordance with generally accepted accounting principles consistently applied. The Financial Statements are in accord with the books and records of such Seller, which books and records are true, correct and complete. (b) No Seller has any outstanding material claims, liabilities, obligations or indebtedness of any nature, fixed or contingent, except as set forth in its Financial Statements, or in the Schedules to this Agreement, and except for liabilities incurred in the ordinary course of business and of the kind and type reflected in the Financial Statements. 7.7 BROKERS AND FINDERS. None of the Sellers, and none of the Stockholders, has engaged any broker or any other person or entity who would be entitled to any brokerage commission or finder's fee in respect of the execution of this Agreement and/or the consummation of the transactions contemplated hereby, other than such fee or commission the entire cost of which will be borne by Sellers. 7.8 COMPLIANCE WITH LAWS. (a) Except as set forth on Schedule 7.8(a) attached hereto, the Assets comply in all material respects with, and the Businesses have been conducted in all material respects in 20 compliance with, all laws, rules and regulations (including all worker safety and all Environmental Laws (as hereinafter defined)) applicable zoning and other laws, ordinances, regulations and building codes, and none of the Sellers, and none of the Stockholders, has received any notice of any violation thereof which has not been remedied. (b) Except as set forth on Schedule 7.8(b) attached hereto, (i) no Seller has at any time generated, used, treated or stored Hazardous Materials (as hereinafter defined) on, or transported Hazardous Materials to or from, the Real Property or any property adjoining or adjacent to the Real Property and, to the knowledge of Sellers and the Stockholders, no party has taken such actions on or with respect to the Real Property, provided, however, certain petroleum products are stored and handled by Sellers in the ordinary course of business in compliance in all material respects with all Environmental Laws, (ii) no Seller has at any time released or disposed of Hazardous Materials on the Real Property or any property adjoining or adjacent to the Real Property, and, to the knowledge of Sellers and the Stockholders, no party has taken any such actions on the Real Property, (iii) each Seller has at all times been in compliance with all Environmental Laws and the requirements of any permits issued under such Environmental Laws with respect to the Real Property, the Assets and the operation of its Business, except where failure to comply has not had, and could not reasonably be expected to have, a material adverse effect on such Seller's Assets or Liabilities or the prospects, properties, earnings, results of operations or condition (financial or otherwise) of its Business, (iv) there are no past, pending or, to the knowledge of Sellers and the Stockholders, threatened environmental claims against any Seller, any Real Property, any of the Assets or any Business, (v) to the knowledge of Sellers and the Stockholders, there are no facts or circumstances, conditions or occurrences regarding any Seller, any Real Property, any of the Assets or any Business that could reasonably be anticipated to form the basis of an environmental claim against any Seller, any Real Property, any of the Assets or any Business or to cause such Real Property, Assets or Business to be subject to any restrictions on its ownership, occupancy, use or transferability under any environmental law, (vi) there are not now and, to the knowledge of Sellers and the Stockholders, never have been any underground storage tanks located on any Real Property, (vii) no Seller has transported or arranged for the transportation of any Hazardous Materials to any site other than the Real Property and (viii) except as set forth on Schedule 7.8(b), none of the Sellers, and none of the Stockholders, has operated any Business at any location other than the applicable Real Property. As used herein, the term "ENVIRONMENTAL LAWS" shall mean all present and future federal, state and local laws, statutes, regulations, rules, ordinances and common law, and all judgments, decrees, orders, agreements or permits, issued, promulgated, approved or entered thereunder by any governmental authority relating to pollution or Hazardous Materials or protection of human health or the environment, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), as amended. As used herein, the term "HAZARDOUS MATERIALS" means any waste, pollutant, chemical, hazardous substance, toxic substance, hazardous waste, special waste, solid waste petroleum or petroleum-derived substance or waste, or any constituent or decomposition product of any such pollutant, material, substance or waste, regulated under or as defined by any Environmental Law. (c) None of the Sellers, nor any Stockholder, director, officer, agent or employee of such Seller or, to the knowledge of Sellers and the Stockholders, any other person or entity 21 associated with or acting for or on behalf of such Seller, has, directly or indirectly, made any unlawful contribution, gift, bribe, rebate, payoff, influence payment, kickback, or other payment to any person or entity, regardless of form, whether in money, property or services: (i) to obtain favorable treatment in securing business, (ii) to pay for favorable treatment for business secured, or (iii) to obtain special concessions or for special concessions already obtained, for or in respect of such Seller. 7.9 FIXTURES AND EQUIPMENT. The Fixtures and Equipment constitute in the aggregate all of the fixtures, machinery, equipment, furniture, leasehold improvements, signs and office equipment used by Sellers in the Businesses and, to the extent such are currently actively used in the operation of the Businesses, are in good operating condition, normal wear and tear excepted. All Demonstrators have been operated in the ordinary course of business, are operated with dealer tags and have not had certificates of title issued with respect to them. The structures and building systems included in the Real Property are in good condition, maintenance and repair, normal wear and tear excepted. 7.10 CONTRACTS. All contracts and leases to which a Seller is a party or to which a Seller or any of the Assets are bound that relate to the Businesses are set forth on Part I of Schedule 2.4 (collectively, the "CONTRACTS"). Each Seller has in all material respects performed all of its obligations required to be performed by it to the date hereof, and is not in default or alleged to be in default in any material respect, under any of the material Contracts. There exists no event, condition or occurrence which, after notice or lapse of time or both, would constitute such a default. To the knowledge of Sellers and the Stockholders, no other party to any Contract is in default in any respect of any of its obligations thereunder. Each of the Contracts is valid and in full force and effect and enforceable against the applicable Seller in accordance with its terms, and, to the knowledge of Sellers and the Stockholders, enforceable against the other parties thereto in accordance with its respective terms. Except as set forth in Schedule 7.2 hereto, each Contract is assignable to Buyer without the consent of the other party(ies) thereto. 7.11 ADEQUACY OF ASSETS. With respect to each Seller, except for such Seller's cash and accounts receivable and rights under its dealership agreements with the applicable Manufacturer, the Assets of such Seller, together with the Real Property and the Contracts (including all equipment leased pursuant to the equipment leases included in the Contracts) of such Seller, comprise all of the assets, properties, contracts, leases and rights necessary for Buyer to operate the Business of such Seller substantially in the manner operated by such Seller prior to the Closing. The failure by any Seller to satisfy and discharge in full any of its Retained Liabilities will not have, and could not reasonably be expected to have, a material adverse effect upon any of the Assets or Liabilities of such Seller or the prospects, properties, earnings, results of operations or condition (financial or otherwise) of its Business. 7.12 TAXES. Each Seller has filed all federal, state and local governmental tax returns required to be filed by it in accordance with the provisions of law pertaining thereto and has paid all taxes and assessments (including, without limitation of the foregoing, income, excise, unemployment, social security, occupation, franchise, property and import taxes, duties or charges 22 and all penalties and interest in respect thereof) required by such tax returns or otherwise to have been paid to date. 7.13 EMPLOYEES. Schedule 7.13 attached hereto discloses, as of the date hereof, all of each Seller's employees, as well as each employee's compensation (including, separately, base pay and any incentive or commission pay), title, length of employment, employment contract, if any, and accrued vacation time. Except as disclosed on Schedule 7.13, none of the Sellers have any "employee benefit plan" ("EMPLOYEE BENEFIT PLAN") (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), including without limitation, any bonus, deferred compensation, pension, profit-sharing, stock option, employee stock purchase, secrecy agreement or covenant not to compete with any employee. None of the Sellers are currently, nor has any ever been, a party to any collective bargaining agreement or other labor contract, and there has not been nor is there pending or, to the knowledge of Sellers and the Stockholders, threatened any union organizational drive or application for certification of a collective bargaining agent with respect to such Seller's employees. Each Seller has been and is now in material compliance with the "COBRA" health care continuation coverage requirements of Section 4980B of the Internal Revenue Code of 1986, as amended, and Sections 601-608 of ERISA and any applicable state health care continuation coverage requirements. No Seller has made any promises nor incurred any liability, pursuant to an Employee Benefit Plan or otherwise, to provide medical or other welfare benefits to retired or former employees of such Seller (other than COBRA or state mandated continuation coverage, where applicable). Except as disclosed on Schedule 7.13, none of any Seller's employees or former employees has elected COBRA continuation coverage or has incurred a COBRA qualifying event since January 1, 1997. 7.14 YEAR 2000. Sellers have (i) initiated a review and assessment of all areas within the Businesses and operations (including those affected by the Manufacturers, suppliers, vendors and customers) that could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications used by a Seller may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) developed a plan and time line as described on Schedule 7.14 for addressing the Year 2000 Problem on a timely basis, and (iii) to date, implemented that plan and timetable, except as set forth in said Schedule 7.14. 7.15 RESTRICTED COMMON STOCK MATTERS. (a) Each of the Sellers and the Stockholders understand that the Restricted Common Stock, if any, will not be registered, except for resales as expressly contemplated hereby, under the Securities Act or applicable state securities laws on the basis that the sale provided for in this Agreement and the issuance of such Restricted Common Stock hereunder is exempt from registration under the Securities Act pursuant to Section 4(2) thereof, and that the Buyer's reliance on such exemption is predicated on the representations and warranties of such Seller and such Stockholder. 23 (b) The Restricted Common Stock, if any, is being acquired for the account of each Seller and each Stockholder for the purposes of investment and not with a view to the distribution thereof, as those terms are used in the Securities Act and the rules and regulations promulgated thereunder. (c) Each of the Sellers and the Stockholders is an "accredited investor" within the meaning of Rule 501(a) of Regulation D promulgated under the Securities Act; and each of the Sellers and the Stockholders has sufficient knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of acquiring the Restricted Common Stock; each of the Sellers and Stockholders has delivered to the Buyer an Investor Qualification Questionnaire with respect to such Seller's and/or Stockholder's status as an "accredited investor". (d) Each of the Sellers and the Stockholders has received copies of: (i) the Prospectus dated November 10, 1997; (ii) the Form 10-K filing of Buyer for the year ended December 31, 1997 (without exhibits); (iii) the Form 10-Q filings of Buyer for the first, second and third quarters of 1998 (without exhibits); and (iv) the Form 8-K filings of Buyer filed March 24, 1998 and July 9, 1998 (without exhibits); and has been furnished such other information, and has had an opportunity to ask such questions and have them answered by the Buyer, as it, he or she has deemed necessary in order to make an informed investment decision with respect to the acquisition of the Restricted Common Stock. (e) Each of the Sellers and the Stockholders understands, and has the financial capability of assuming, the economic risk of an investment in the Restricted Common Stock for an indefinite period of time. (f) Each of the Sellers and the Stockholders has been advised that such Seller and/or Stockholder will not be able to sell, pledge or otherwise dispose of the Restricted Common Stock, or any interest therein, without first complying with the relevant provisions of the Securities Act and any applicable state securities laws, and that the provisions of Rule 144 permitting routine sales of securities of certain issuers subject to the terms and conditions thereof, may not currently be available to such Seller and/or Stockholder with respect to the Restricted Common Stock. (g) Each of the Sellers and the Stockholders has, to the extent such Seller and/or Stockholder has deemed necessary, consulted with its, his or her own investment advisors, legal counsel and tax advisors regarding an investment in the Restricted Common Stock. (h) Each of the Sellers and the Stockholders acknowledges that, except as set forth in this Agreement, the Buyer is not under any obligation (i) to register the Restricted Common Stock, or (ii) to furnish any information or to take any other action to assist the Sellers or the Stockholders in complying with the terms and conditions of any exemption which might be available under the Securities Act or any state securities laws with respect to sales of the Restricted Common Stock by the undersigned in the future. 24 7.16 NO MISSTATEMENTS OR OMISSIONS. No representation or warranty made by any Seller or any Stockholder in this Agreement, and no statement contained in any agreement, instrument, certificate or schedule furnished or to be furnished by any Seller or any Stockholder pursuant hereto, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make such representation or warranty or such statement not misleading. ARTICLE VIII CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS The obligations of Buyer to perform this Agreement at Closing are subject to the following conditions precedent which shall be fully satisfied at or before the Closing, unless waived in writing by Buyer. 8.1 REPRESENTATIONS AND WARRANTIES. All of the representations and warranties of Sellers and the Stockholders herein contained shall be true and correct in all material respects on and as of the Closing Date as if made on and as of the Closing Date, and Buyer shall have received a certificate from the Stockholders and a duly authorized officer of each Seller, dated the Closing Date, to such effect. 8.2 COMPLIANCE WITH AGREEMENTS. Each of the agreements or obligations required by this Agreement to be performed or complied with by any Seller or any Stockholder at or before the Closing shall have been duly performed or complied with in all material respects, and Buyer shall have received a certificate from the Stockholders and a duly authorized officer of each Seller, dated the Closing Date, to such effect. 8.3 NO LITIGATION. No action, suit or proceeding shall have been instituted by a governmental agency or any other third party to prohibit or restrain the sale contemplated by this Agreement or otherwise challenge the power and authority of the parties to enter into this Agreement or to carry out their obligations hereunder or the legality or validity of the sale contemplated by this Agreement. 8.4 INVENTORY. The Inventory shall have been completed to the reasonable satisfaction of Buyer. 8.5 CORPORATE ORGANIZATION; ENCUMBRANCES. Each Seller shall have furnished to Buyer: (a) a certificate of good standing of such Seller issued by the Secretary of State of the State of Maryland dated as of a recent date prior to the Closing Date; (b) a copy of the Articles of Incorporation of such Seller certified by the Secretary of State of the State of Maryland dated as of a recent date prior to the Closing Date; (c) a certificate of such Seller, dated the Closing Date, in form and substance reasonably satisfactory to Buyer, certifying as to (i) no amendments to the Articles of Incorporation of such Seller since the date of the certificate delivered in accordance with 25 Section 8.5(b); (ii) the Bylaws of such Seller; and (iii) the incumbency and signatures of the officers of such Seller executing this Agreement and any other agreements, instruments or documents to be executed by such Seller in connection herewith; and (d) UCC-11 search reports or other evidence reasonably satisfactory to Buyer and its counsel that the Assets are free and clear of all Encumbrances. 8.6 BOARD RESOLUTIONS. Each Seller shall have furnished to Buyer a copy of the resolutions duly adopted by the directors and the Stockholders of such Seller authorizing the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, certified by an authorized officer of such Seller as of the Closing Date. 8.7 NO DAMAGE. There shall have been no material adverse change or development in any of the Assets or the Liabilities of any Seller or in the prospects, properties, earnings, results of operations or condition (financial or otherwise) of either of the Businesses, and no event shall have occurred or circumstance exist that may, or could reasonably be expected to, result in such a material adverse change. Excepted from this provision are the general business and economic conditions generally effecting the industry and markets in which the Sellers participate. 8.8 MOTOR VEHICLE LICENSES. Buyer shall have been licensed as a Motor Vehicle Dealer under applicable Maryland motor vehicle dealer registration laws and shall have obtained all other authorizations, consents, licenses and permits from applicable governmental agencies having or asserting jurisdiction, which Buyer deems necessary or appropriate to conduct business as an automobile dealer at each dealership location included in the Real Property. 8.9 CONSENTS AND APPROVALS. Each Seller shall have obtained all other authorizations, consents and approvals from third persons and entities as are (a) required to assign those material contracts and leases that Buyer is to assume at Closing or (b) otherwise required of any Seller to consummate the transactions contemplated hereby. 8.10 CERTIFICATES OF ORIGIN; ETC. Each Seller shall have transferred to Buyer certificates of title or origin for all New Vehicles, Demonstrators and, if applicable, Used Vehicles and all of its registration lists, owner follow-up lists and service files on hand as of the Closing Date with respect to its Business. 8.11 TERMINATION OF SELLERS' AGREEMENTS WITH MANUFACTURERS. Each Seller shall have terminated in writing contingent upon Closing hereunder such Seller's dealer agreement and any other applicable sales and service agreements with the applicable Manufacturer. 8.12 BILLS OF SALE; ETC. Each of the Sellers and the Stockholders shall have executed, as appropriate, and delivered to Buyer a Bill of Sale, Articles of Transfer, other documents of transfer of title contemplated hereby and any and all other documents necessary or desirable in connection with the transfer of the Assets, which documents shall warrant title to Buyer consistent with this Agreement and shall in all respects be in such form as may be reasonably required by Buyer and its counsel. 26 8.13 MANUFACTURER APPROVAL. Excluding each Manufacturer as to which this Agreement has been partially terminated with respect to the Assets and Liabilities relating to such Manufacturer's dealership franchise, each of the Manufacturers shall have approved Buyer or Buyer's affiliate as an authorized dealer and O. Bruton Smith or O. Bruton Smith's designee, as the authorized dealer operator, and each such Manufacturer shall have executed a dealer agreement, and any other applicable sales and service agreements, on terms reasonably satisfactory to Buyer. 8.14 CONSENTS, ETC. All consents, approvals, notices, filings and/or registrations set forth on Schedule 7.2 hereto shall have been obtained or made and Sellers shall have delivered to Buyer evidence thereof reasonably satisfactory to Buyer. 8.15 EXISTING LEASE. The owner of the Rockville Property shall have approved the assignment of the Existing Lease from MIC to Buyer and executed and delivered to Buyer an estoppel, in form and substance reasonably acceptable to Buyer. MIC shall have assigned the Existing Lease to Buyer. L.O.R. and MIC shall have executed and delivered to Buyer the Sublease Termination Agreement. 8.16 OTHER BASIC AGREEMENTS. With respect only to the consummation of the transactions contemplated hereby in respect of the acquisition of the Assets and Liabilities relating to the Nissan and Jeep dealership franchise, (a) all conditions to the obligations of Buyer or its affiliates under the Real Property Purchase Agreement shall have been satisfied or fulfilled unless waived in writing by such party and (b) the closing under the Real Property Purchase Agreement shall have occurred or shall be occurring contemporaneously with the Closing of the transactions contemplated by this Agreement. 8.17 CHANGE OF NAME. Each Seller, except MIC, shall have delivered to Buyer all documents, including, without limitation, Articles of Amendment, resolutions of the directors and the Stockholders of such Seller, necessary to effect a change of name of such Seller after the Closing to names other than the corporate name and trade names referred to in Section 5.5 or any variation thereof. 8.18 HSR. All applicable waiting periods under the HSR Act (as defined in Section 10.15) shall have expired without any indication by the Antitrust Division (as defined in Section 10.15) or the FTC (as defined in Section 10.15) that either of them intends to challenge the transactions contemplated hereby or, if any such challenge or investigation is made or commenced, the conclusion of such challenge or investigation permits the transactions contemplated hereby in all material respects. 8.19 NON-COMPETITION AGREEMENTS. L.O.R., Waldorf, Bernard Mills and John Birch shall have executed and delivered to Buyer the Non-Competition Agreements in accordance with Section 2.5. 8.20 EMPLOYMENT AGREEMENT. John Jaffe shall have executed and delivered to Buyer the Employment Agreement. 27 8.21 AUDITED FINANCIAL STATEMENTS OF BUYER. Buyer shall have completed preparation of such audited financial statements of each Seller as may be required by applicable regulations of the Securities and Exchange Commission or by Buyer's lenders. 8.22 OPINION OF COUNSEL. Buyer shall have received an opinion of Whiteford, Taylor & Preston, L.L.P., counsel to Sellers and the Stockholders, dated the Closing Date, in substantially the form of Exhibit 8.22 attached hereto. 8.23 AIR BEACH LEASE. Air Beach shall have executed and delivered to Buyer the Air Beach Lease. ARTICLE IX CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLERS AND THE STOCKHOLDERS The obligations of Sellers and the Stockholders to perform this Agreement at Closing are subject to the following conditions precedent which shall be fully satisfied at or before the Closing, unless waived in writing by Sellers: 9.1 REPRESENTATIONS AND WARRANTIES. All of the representations and warranties of Buyer herein contained shall be true and correct in all material respects on and as of the Closing Date as if made on and as of the Closing Date, and Sellers shall have received a certificate from a duly authorized officer of Buyer, dated the Closing Date, to such effect. 9.2 COMPLIANCE WITH AGREEMENTS. Each of the agreements or obligations required by this Agreement to be performed or complied with by Buyer at or before the Closing shall have been duly performed or complied with in all material respects, and Sellers shall have received a certificate from a duly authorized officer of Buyer, dated the Closing Date, to such effect. 9.3 NO LITIGATION. No action, suit or proceeding shall have been instituted by a governmental agency or any third party to prohibit or restrain the sale contemplated by this Agreement or otherwise challenge the power and authority of the parties to enter into this Agreement or to carry out their obligations hereunder or the legality or validity of the sale contemplated by this Agreement. 9.4 INVENTORY. The Inventory shall have been completed to the reasonable satisfaction of Sellers. 9.5 CORPORATE ORGANIZATION; BOARD RESOLUTIONS. Buyer shall have furnished to Sellers: (a) a certificate of good standing of Buyer issued by the Secretary of State of the State of Delaware dated as of a recent date prior to the Closing Date; and (b) a certificate of Buyer, dated the Closing Date, in form and substance reasonably satisfactory to Seller, certifying as to (i) the Certificate of Incorporation of Buyer; (ii) the By-laws of Buyer; (iii) the resolutions of the Board 28 of Directors of Buyer authorizing the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby; and (iv) the incumbency and signatures of the officers of Buyer executing this Agreement and any other agreements, instruments or documents to be executed by Buyer in connection herewith. 9.6 PAYMENT OF PURCHASE PRICE; ASSUMPTION AGREEMENTS; ARTICLES OF TRANSFER. Buyer shall have tendered to Sellers the Purchase Price and shall have executed and delivered the Assumption Agreement and the Articles of Transfer. 9.7 OTHER BASIC AGREEMENTS. With respect only to the consummation of the transactions contemplated hereby in respect of the acquisition of the Assets and Liabilities relating to the Nissan and Jeep dealership franchises, (a) all conditions to the Seller's (as defined in the Real Property Purchase Agreement) obligations under the Real Property Purchase Agreement shall have been satisfied or fulfilled, unless waived in writing by such party (b) and the closing under the Real Property Purchase Agreement shall have occurred or shall be occurring contemporaneously with the Closing of the transactions contemplated hereby. 9.8 HSR. All applicable waiting periods under the HSR Act shall have expired without any indication of the Antitrust Division or the FTC that either of them intends to challenge the transactions contemplated hereby, or, if any such challenge or investigation is made or commenced, the conclusion of such challenge or investigation permits the transactions contemplated hereby in all material respects. 9.9 EMPLOYMENT AGREEMENT. Buyer shall have executed and delivered to John Jaffe the Employment Agreement. 9.10 OPINION OF COUNSEL. Sellers shall have received an opinion of Parker, Poe, Adams & Bernstein L.L.P., counsel to Buyer, dated the Closing Date, in substantially the form attached hereto as Exhibit 9.10. 9.11 GUARANTY. Buyer shall have entered into an agreement with the Existing Lease landlord to guarantee the payments under the Existing Lease. 9.12 AIR BEACH LEASE. Buyer shall have executed and delivered to the Sellers the Air Beach Lease. ARTICLE X COVENANTS AND AGREEMENTS 10.1 BULK SALES. Each Seller shall comply with the notification requirements of the Maryland Uniform Commercial Code--Bulk Transfer Law with respect to the transactions contemplated hereby. 29 10.2 FURTHER ASSURANCES. Sellers and the Stockholders agree that they will, at any time and from time to time, after the Closing, upon request of Buyer, do, execute, acknowledge and deliver all such further acts, deeds, assignments, transfers, conveyances, powers of attorney and assurances, in a form reasonably satisfactory to Buyer's counsel, as may be reasonably required to convey and transfer to and vest in Buyer, and protect its rights, title and interest in and enjoyment of, all the Assets. 10.3 SATISFACTION OF CLOSING CONDITIONS. The parties hereto shall use their reasonable best efforts to satisfy the conditions contemplated by Articles VIII and IX, and to obtain, and to cooperate with each other in obtaining, all authorizations, approvals, licenses, permits and other consents contemplated by Articles VIII and IX. 10.4 NO MATERIAL ADVERSE CHANGES. During the period from the date of this Agreement through the Closing Date, each Seller will operate its Business only in the ordinary course of business and in accordance with past practices. Sellers shall promptly notify Buyer of any material adverse change or development in any of the Assets or the Liabilities of any Seller or in the prospects, properties, earnings, results of operations or condition (financial or otherwise) of either Business, and of the occurrence of any event or circumstance that will, or could reasonably be expected to, result in such a material adverse change. Excepted from this provision are general economic or business conditions generally effecting the industry and markets in which the respective Sellers participate. 10.5 ACCESS. Until Closing, Sellers shall afford to Buyer, its attorneys, accountants and such other representatives of Buyer as Buyer shall designate to Sellers, free and full access at all reasonable times, and upon reasonable prior notice, to the Assets and the properties, books and records of each Seller, and to interview personnel, suppliers and customers of each Seller, in order that Buyer may have full opportunity to make such further investigation as it shall reasonably desire of the Assets, the Liabilities and the Businesses. Sellers and the Stockholders have furnished to Buyer the due diligence materials set forth in Schedule 10.5 hereto, and shall provide to Buyer such additional information as Buyer may reasonably request. Buyer's representatives shall coordinate all visits to the Real Property or the Sellers' business locations and conversations with employees of each Seller with the Stockholders or their designee and shall use reasonable efforts to minimize any disruption of Sellers' businesses in performing such visits or investigations. Buyer shall bear the costs, fees and expenses in connection with any financial audit. 10.6 INDEMNIFICATION BY SELLERS AND THE STOCKHOLDERS. (a) All representations and warranties of Sellers and the Stockholders contained herein, or in any agreement, certificate or document executed by any Seller or any of the Stockholders in connection herewith, shall survive the Closing for a period of two (2) years with the exception of (i) the representations and warranties of Sellers and the Stockholders contained in Section 7.12, which shall survive the Closing for seven years except that, in the case of fraud, such representations and warranties shall survive indefinitely; (ii) the representations and warranties of Sellers and the Stockholders contained in Section 7.8, which shall survive the Closing for a period 30 of three (3) years; and (iii) the representations and warranties of Sellers and the Stockholders contained in Section 7.4, which shall survive the Closing indefinitely. As to each representation and warranty of the parties to this Agreement, the date to which such representation and warranty shall survive is hereinafter referred to as the "SURVIVAL DATE." All information contained in any Schedule furnished hereunder by any Seller shall be deemed a representation and warranty by Sellers and the Stockholders of such Seller made in this Agreement as to the accuracy of such information. (b) Subject to Section 10.18, Sellers and the Stockholders, jointly and severally, agree to indemnify and hold harmless Buyer and its stockholders, officers, directors, employees and agents, and their respective successors and assignees (collectively, the "BUYER INDEMNITEES"), from and against any and all losses, damages, liabilities, obligations, assessments, suits, actions, proceedings, claims or demands, including costs, expenses and fees (including reasonable attorneys' fees and expert witness fees incurred in connection therewith) ("LOSSES"), suffered by any of them or asserted against any of them or any of the Assets, arising out of or based upon (i) the breach or failure of any representation or warranty of any Seller or any Stockholder contained herein, or in any agreement, certificate or document executed by any Seller or any Stockholder in connection herewith, to be true and correct; provided, however, that the Sellers and the Stockholders shall not have any indemnification obligation under this Section 10.6(b)(i) until (and only to the extent that) the Losses in respect of all claims for indemnity pursuant to this Section 10.6(b)(i) shall exceed a cumulative aggregate total of $150,000, (ii) the breach of any covenant or agreement of any Seller or any Stockholder contained in this Agreement, (iii) the Retained Liabilities or any liability or obligation of any Stockholder, (iv) any arrangements or agreements made or alleged to have been made by any Seller or any Stockholder with any broker, finder or other agent in connection with the transactions contemplated hereby, or (v) any matter, item, circumstance or condition listed, contained or otherwise referred to on Schedules 7.8(a), and 7.8(b). (c) No claim for indemnification with respect to a breach of a representation and warranty shall be made by a Buyer Indemnitee after the applicable Survival Date unless prior to such Survival Date the Buyer Indemnitee shall have given an indemnifying party written notice of such claim for indemnification based upon actual loss sustained, or potential loss anticipated, as a result of the existence of any claim, demand, suit, or cause of action against such Buyer Indemnitee. 10.7 INDEMNIFICATION BY BUYER. (a) All representations and warranties of Buyer contained herein, or in any agreement, certificate or document executed by Buyer in connection herewith, shall survive the Closing for a period of two (2) years. All information contained in any Schedule furnished hereunder by Buyer shall be deemed a representation and warranty by Buyer made in this Agreement as to the accuracy of such information. (b) Subject to Section 10.18, Buyer agrees to indemnify and hold harmless Sellers and their respective stockholders, officers, employees, agents, successors and assigns (the "SELLER INDEMNITEES"), from and against any and all Losses incurred in connection with, suffered by any of them, or asserted against any of them, arising out of or based upon (i) the breach or failure of any 31 representation or warranty of Buyer contained herein, or in any agreement, certificate or document executed by Buyer in connection herewith, to be true and correct, (ii) the breach of any covenant or agreement of Buyer contained in this Agreement, (iii) Buyer's failure to discharge the Liabilities, (iv) any arrangements or agreements made or alleged to have been made by Buyer with any broker, finder or other agent in connection with the transactions contemplated hereby, or (v) any event or action by Buyer or failure to act by Buyer, occurring with respect to the Assets or the Businesses subsequent to the Closing Date but only to the extent that Buyer is not entitled to indemnification from any of the persons or entities referred to in Section 7.8 of the Merger Agreement with respect to such event, action or failure to act. (c) No claim for indemnification with respect to a breach of a representation and warranty shall be made by any Seller Indemnitee under this Agreement after the applicable Survival Date unless prior to such Survival Date the Seller Indemnitee shall have given Buyer written notice of such claim for indemnification based upon actual loss sustained, or potential loss anticipated, as a result of the existence of any claim, demand, suit, or cause of action against such Seller Indemnitee. 10.8 CERTAIN TAXES. Personal property, use and intangible taxes and assessments and utility charges with respect to the Assets shall be prorated on a per diem basis and apportioned between Sellers, on the one hand, and Buyer, on the other hand, as of the date of the Closing. Sellers shall be liable for that portion of such taxes and assessments relating to, or arising in respect of, periods on or prior to the Closing Date, and Buyer shall be liable for that portion of such taxes and assessments relating to, or arising in respect of, any period after the Closing Date. Any taxes attributable to the sale or transfer of the Assets to Buyer hereunder shall be paid by Sellers. 10.9 NO PUBLICITY. Except as may be required by law or the rules of the New York Stock Exchange or as necessary in connection with the transactions contemplated hereby, no party hereto shall (a) make any press release or other public announcement relating to this Agreement or the transactions contemplated hereby, without the prior approval of the other parties hereto or (b) otherwise disclose the existence and nature of the transactions contemplated hereby to any person or entity other than such party's accountants, attorneys, agents, representatives and employees of Sellers, as appropriate, all of whom shall be subject to this nondisclosure obligation as agents of such party. The parties shall cooperate with each other in the preparation and dissemination of any public announcements of the transactions contemplated by this Agreement. Buyer approves of Sellers making their employees aware of this Agreement upon the execution thereof. Buyer recognizes that the presence of its representatives at the Sellers' dealership location will cause speculation by the Sellers' respective employees concerning the transactions contemplated hereby and that Sellers have no control over such speculation. 10.10 NO NEGOTIATIONS OR DISCUSSIONS. None of the Sellers, and none of the Stockholders, shall, directly or indirectly, at any time on or prior to the Closing Date, pursue, initiate, encourage or engage in, any negotiations or discussions with, or provide any information to, any person or entity (other than Buyer and its representatives and affiliates) regarding the sale or possible sale to 32 any such person or entity of any of the Assets of any Seller or capital stock of any Seller or any merger or consolidation or similar transaction involving any Seller. 10.11 REGARDING THE MANUFACTURERS. Each Seller shall promptly notify the applicable Manufacturers regarding the transactions contemplated by this Agreement. Buyer shall promptly apply to the respective Manufacturers for, or cause an affiliate of Buyer to apply to the respective Manufacturers for, the issuance of franchises to operate automobile dealerships upon the Real Property. Effective as of the Closing, each Seller shall terminate its Dealer Sales and Service Agreements with the applicable Manufacturer. Each Seller shall fully cooperate with Buyer, and take all reasonable steps to assist Buyer, in Buyer's efforts to obtain its own similar Dealer Sales and Service Agreements with the applicable Manufacturer. The parties acknowledge that Buyer's Dealer Agreements are subject to the approval of the respective Manufacturers and that Buyer would be unable to obtain its own, similar Dealer Sales and Service Agreements absent Sellers' termination of their respective agreements. 10.12 SELLERS' EMPLOYEES. Buyer shall have the right, but not the obligation, to employ any or all of Sellers' respective employees. If permitted by law and applicable regulations, each Seller shall, in consideration for the sale of substantially all of such Seller's assets in bulk, assign and transfer to Buyer, without additional charge therefor, the amount of reserve in such Seller's State Unemployment Compensation Fund with respect to its Business and the corresponding experience rate. 10.13 TERMINATION. (a) Notwithstanding any other provision herein contained to the contrary, this Agreement shall automatically terminate, without any action taken by the parties hereto, in the event that all Manufacturers exercise their rights of first refusal, preemptive rights or other similar rights under their respective dealer agreements with the Sellers. Notwithstanding any other provision herein contained to the contrary, this Agreement may be terminated at any time prior to the Closing: (i) by the written mutual consent of the parties hereto prior to the Closing Date Deadline; (ii) by Buyer prior to the Closing Date Deadline in the event of any material breach by any Seller or any of the Stockholders of any of their respective representations, warranties, covenants or agreements contained herein; (iii) by Sellers, jointly, prior to the Closing Date Deadline in the event of any material breach by Buyer of any of Buyer's representations, warranties, covenants or agreements contained herein; (iv) at any time after the Closing Date Deadline, by written notice by Buyer or Sellers (subject to the other party's option to elect to extend the Closing Date Deadline in accordance with Section 1.4) to the other parties hereto if the Closing shall not have occurred on or 33 before the Closing Date Deadline (as the same may have been extended in accordance with Section 1.4); (v) by Buyer (by written notice to the Sellers) or by the Sellers (by written notice to Buyer) if either or both of the following occur: (A) two or more of the following occur (other than in connection with any exercise of any rights of first refusal, preemptive rights or other similar rights) (I) Lexus shall fail to grant such approvals and execute such documents as contemplated by Section 8.13 on or before the Closing Date Deadline, (II) Nissan shall fail to grant such approvals and execute such documents as contemplated by Section 8.13 on or before the Closing Date Deadline, (III) Chrysler shall fail to grant such approvals and execute such documents as contemplated by Section 8.13 on or before the Closing Date Deadline, (IV) either (1) BMW of North America, Inc. shall fail to grant such approvals and execute such documents as contemplated by Section 7.10 of the Merger Agreement on or before the Closing Date Deadline or (2) the Merger Agreement is terminated prior to the Closing; or (V) a Partial Termination shall occur with respect to the Waldorf Business as a result of the termination of the Real Property Purchase Agreement pursuant to Section 10.13(f); (B) (I) Porsche and/or Audi shall fail to grant such approvals and execute such documents as contemplated by Section 8.13 on or before the Closing Date Deadline (other than in connection with any exercise of any rights of first refusal, preemptive rights or other similar rights) AND (II) either (a) one or more of Lexus, Nissan, Chrysler and BMW of North America, Inc. shall fail to grant such approvals and execute such documents as contemplated by, as appropriate, Section 8.13 and Section 7.10 of the Merger Agreement on or before the Closing Date Deadline (other than in connection with any exercise of any rights of first refusal, preemptive rights or other similar rights), (b) the Merger Agreement is terminated prior to the Closing or (c) a Partial Termination shall occur with respect to the Waldorf Business as a result of the termination of the Real Property Purchase Agreement pursuant to Section 10.13(f); or (vi) by Buyer, by written notice to Sellers if, after any initial HSR Act filing, the FTC makes a "second request" for information, or if the FTC or the Antitrust Division challenges the transactions contemplated hereby; provided, however, no party may terminate this Agreement pursuant to clauses (ii), (iii) or (iv) above if such party is in material breach of any of its representations, warranties, covenants or agreements contained herein. (b) In the event of termination of this Agreement pursuant to Section 10.13(a), this Agreement shall, subject to Section 2.7, be of no further force or effect; provided, however, that any termination pursuant to Section 10.13(a) shall not relieve: (i) Buyer of any liability under Section 10.13(c) below; (ii) Sellers and the Stockholders of any liability under Section 10.13(d) below; or (iii) subject to Section 10.13(e) below, any party hereto of any liability for breach of any representation, warranty, covenant or agreement hereunder occurring prior to such termination. 34 (c) If this Agreement is terminated by Sellers pursuant to Section 10.13(a)(iv) and the failure to complete the Closing on or before the Closing Date Deadline (as the same may have been extended pursuant to Section 1.4) shall have been due to Buyer's material breach of its representations, warranties, covenants or agreements under this Agreement, then Buyer shall, upon demand of Sellers, promptly pay to Sellers in immediately available funds, as liquidated damages for the loss of the transaction, an aggregate termination fee of $1,000,000 (the "BUYER TERMINATION FEE"); PROVIDED, HOWEVER, that if the Sellers are paid the Buyer's Termination Fee (as defined in the Merger Agreement) pursuant to the Merger Agreement, then the Sellers shall not be entitled to payment of the Buyer Termination Fee hereunder. (d) If this Agreement is terminated by Buyer pursuant to Section 10.13(a)(iv) and the failure to complete the Closing on or before the Closing Date Deadline (as the same may have been extended pursuant to Section 1.4) shall have been due to a material breach by any of the Stockholders or any Seller of a representation, warranty, covenant or agreement of such party under this Agreement, then Sellers and the Stockholders, jointly and severally, shall, upon demand of Buyer, promptly pay to Buyer in immediately available funds, as liquidated damages for the loss of the transaction, a termination fee of $1,000,000 (the "SELLER TERMINATION FEE"); PROVIDED, HOWEVER, that if the Buyer is paid the Sellers' Termination Fee (as defined in the Merger Agreement) pursuant to the Merger Agreement, then the Buyer shall not be entitled to payment of the Seller Termination Fee hereunder. (e) In the case of termination of this Agreement pursuant to Section 10.13(a)(iv), the rights of the terminating party to be paid the Seller Termination Fee or the Buyer Termination Fee, as the case may be, shall be such party's sole and exclusive remedy for damages; in the event of such termination by either party, such party shall have no right to equitable relief for any breach or alleged breach of this Agreement, other than for specific performance for the payment of the Seller Termination Fee or the Buyer Termination Fee, as the case may be. Nothing contained in this Agreement shall prevent any party from electing not to exercise any right it may have to terminate this Agreement and, instead, seeking any equitable relief (including specific performance) to which it would otherwise be entitled in the event of breach of any other party hereto. (f) In the event that (a) a Manufacturer shall fail to grant such approvals and execute such documents as contemplated by Section 8.13 on or before the Closing Date Deadline and (b) no party exercises its right, if any, to terminate this Agreement under Section 10.13(a)(v), then Buyer may terminate this Agreement as it relates to the Assets and Liabilities relating to such Manufacturer's dealership franchise. In addition, in the event that a Manufacturer shall exercise a right of first refusal, preemptive right or similar right with respect to any of the Assets, then Buyer or the Sellers may terminate this Agreement as it relates to the Assets and Liabilities relating to such Manufacturer's dealership franchise. In the event that (a) Porsche or Audi shall fail to grant such approvals and execute such documents as contemplated by Section 8.13 on or before the Closing Date Deadline and (b) no party exercises its right, if any, to terminate this Agreement under Section 10.13(a)(v), then Buyer or the Sellers may terminate this Agreement as it relates to the Assets and Liabilities relating to the Porsche and Audi dealership franchises. In addition, in the event that Porsche or Audi shall exercise a right of first refusal, preemptive right or similar right with respect 35 to any of the Assets, then Buyer or the Sellers may terminate this Agreement as it relates to the Assets and Liabilities relating to the Porsche and Audi dealership franchises. In the event that the Real Property Purchase Agreement terminates prior to the Closing, then either Buyer or the Sellers may terminate this Agreement as it relates to the Assets and Liabilities relating to the Waldorf Business. Notwithstanding the foregoing, the parties expressly agree and understand that a termination of this Agreement as it relates to certain Assets and Liabilities as contemplated in this Section (a "PARTIAL TERMINATION") shall not effect a termination of this Agreement as it relates to the remainder of the Assets and Liabilities, and, despite any Partial Termination, this Agreement shall remain, subject to the exclusion of such Assets and Liabilities, in full force and effect. (g) In the event that there is a Partial Termination as contemplated by Section 10.13(f), the Business and Intangible Assets Purchase Price shall be reduced by the applicable amount below the name of the applicable Seller on Schedule 2.2 and the other components of the Purchase Price shall be appropriately reduced. 10.14 CONTEMPORANEOUS CLOSINGS. The parties hereto acknowledge and agree that the consummation of the transactions contemplated by this Agreement is, to the extent described in Sections 8.16 and 9.7, subject to the consummation of the transactions contemplated by the Real Property Purchase Agreement, and the parties agree that, to the extent so required, the closings of all such transactions shall occur contemporaneously. In addition, although the consummation of the transactions contemplated hereby are not subject to the consummation of the transactions contemplated by the Merger Agreement, the parties hereto nonetheless fully intend to and, to the extent practicable, will coordinate the consummation of the transactions contemplated hereby with the consummation of the transactions contemplated by the Merger Agreement in such a manner as to close such transactions on the same day. 10.15 HSR. Subject to the determination by Buyer that compliance by Sellers and Buyer with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR ACT"), is not required, Sellers and Buyer shall each prepare and file with the Federal Trade Commission (the "FTC") and the Antitrust Division of the Department of Justice (the "ANTITRUST DIVISION"), and respond as promptly as practicable to all inquiries received from the FTC or the Antitrust Division for additional information or documentation. Buyer shall pay any HSR Act filing fee. 10.16 MIC GUARANTY. Buyer shall use its best efforts to have MIC and the Stockholders released from their respective guaranty obligations under the Existing Lease. 10.17 BUYER'S FINANCIAL STATEMENTS. Sellers shall allow, cooperate with and assist Buyer's accountants, and shall instruct Sellers' accountants to cooperate, in the preparation of audited financial statements of each Seller as necessary for any required filings by the Buyer with the Securities and Exchange Commission or as required by Buyer's lenders; provided, however, that the expense of such audit shall be borne by Buyer. 10.18 LIMITATIONS ON INDEMNITY. Notwithstanding any provision herein to the contrary: 36 (a) Provided the transactions contemplated hereby are consummated, the parties' rights under Sections 10.6 and 10.7 (as specifically limited hereby) shall be the exclusive means (other than with respect to fraud) by which such party shall seek money damages against another party in connection with the transactions contemplated hereby. (b) Indemnity obligations of the Stockholders hereunder may, at their election, be satisfied through the payment of cash or the delivery of common stock or preferred stock of the Buyer, or a combination thereof. For purposes of calculating the value of Common Stock paid as contemplated under this Section 10.18(b), the value of a share of Common Stock shall be the Market Price as of the date of Closing for indemnity obligations of the Sellers which are satisfied during the period of "market protection" for Common Stock as provided pursuant to Section 2.11, after which time the value shall be the Market Price as of the date of such payment. Indemnity obligations of the Buyer shall be satisfied through the payment of cash. (c) Except as specifically set forth in this Agreement, no party shall be entitled to indemnity for claims or conditions which have been waived by such party. (d) Upon making a claim for indemnification, the indemnifying party shall be subrogated, to the extent of such payment, to any rights that the indemnified party may have against any third parties with respect to the subject matter underlying such indemnified claim. (e) Notwithstanding the provisions of Section 10.6(b), the aggregate amount of each Stockholder's liability for indemnification obligations under Section 10.6(b) shall not exceed the aggregate amount equal to (i) such Stockholder's percentage ownership, as shown on Schedule 7.1, of L.O.R. multiplied by the amount of the Purchase Price which is allocated to L.O.R., (ii) such Stockholder's percentage ownership, as shown on Schedule 7.1, of Waldorf multiplied by the amount of the Purchase Price which is allocated to Waldorf and (iii) such Stockholder's percentage ownership, as shown on Schedule 7.1, of MIC multiplied by the amount of the Purchase Price which is allocated to MIC. For illustrative purposes only, assume that the Purchase Price is equal to $30,000,000 and is allocated as follows: (i) $20,000,000 to L.O.R., (ii) $7,000,000 to Waldorf and (iii) $3,000,000 to MIC. As shown on Schedule 7.1, Joseph Herson owns 33% of L.O.R., 33% of Waldorf and 41% of MIC. Joseph Herson's liability for indemnification obligations under Section 10.6(b) would not exceed the sum of (i) $20,000,000 x 33.33%, (ii) $7,000,000 x 33.33% and (iii) $3,000,000 x 41% for a total of $10,229,999. (f) Notwithstanding the provisions of Section 10.6(b), but subject to Section 10.18(g), (i) Mollye Mills shall have no indemnification liability under Section 10.6(b) with respect to any matter which arises solely with respect to the Waldorf Business; (ii) Bernard Mills shall have no indemnification liability under Section 10.6(b) with respect to any matter which arises solely with respect to the Waldorf Business; (iii) Richard Mills shall have no indemnification liability under Section 10.6(b) with respect to any matter which arises solely with respect to the Waldorf Business or the LOR Business; and (iv) John Birch shall have no indemnification liability under Section 10.6(b) with respect to any matter which arises solely with respect to the MIC Business or the LOR 37 Business. This Section 10.18(f) shall in no event limit the indemnification liability hereunder of Joseph Herson or John Jaffe. (g) The provisions of Section 10.18(f) shall have no force or effect with respect to a Stockholder in the case of any breach of a representation, warranty, covenant or agreement with respect to which such Stockholder has actual knowledge. The Stockholders acknowledge and agree that the $150,000 limitation set forth in Section 10.6(b)(i) applies on an aggregate basis with respect to all of the Sellers and the Stockholders and shall not be applied to each Seller or Stockholder on an individual basis. (h) Notwithstanding the provisions of Section 10.6(b), the aggregate amount of MIC's liability for indemnification obligations under Section 10.6(b) shall not exceed One Million Five Hundred Thousand Dollars ($1,500,000). 10.19 AIR BEACH LEASE. At the Closing, Buyer shall, and the Sellers shall cause Air Beach to, enter into a lease agreement whereby Buyer shall lease the Air Beach Property from Air Beach (the "AIR BEACH LEASE"). The Air Beach Lease: (a) shall have an initial term of ten (10) years with two (2) renewal terms of five (5) years each, (b) shall be a triple net lease with an annual rental of $115,000 plus the payment of any condominium association fees or charges and (c) shall otherwise be on substantially the terms of Exhibit 10.19 attached hereto. Buyer and the Sellers acknowledge that such Exhibit is a form lease for a stand-alone facility and does not contemplate the lease of condominium units as will occur under the Air Beach Lease. The parties agree that, in preparation of the Air Beach Lease, such Exhibit will be modified as appropriate in order to reflect the lease of condominium units rather than a stand-alone facility. ARTICLE XI MISCELLANEOUS 11.1 ASSIGNMENT. Except as provided in this Section, this Agreement shall not be assignable by any party hereto without the prior written consent of the other parties. Buyer may assign this Agreement, without the consent of the other parties hereto, to a corporation, partnership, limited liability company or other entity controlled by Buyer, including a corporation, partnership, limited liability company or other entity to be formed at any time prior to the Closing Date, and to any person or entity who shall acquire all or substantially all of the assets of Buyer or of such corporation, partnership, limited liability company or other entity controlled by Buyer (including any such acquisition by merger or consolidation); provided said assignment shall be in writing and the assignee shall assume all obligations of Buyer hereunder, whereupon the assignee shall be substituted in lieu of Buyer named herein for all purposes, and provided further, that Buyer originally named herein shall continue to be liable with respect to its obligations hereunder. Buyer may assign this Agreement, without the consent of the other parties hereto, as collateral security, and the other parties hereto agree to execute and deliver any acknowledgment of such assignment by 38 Buyer as may be required by any lender to Buyer. Notwithstanding the foregoing, Buyer may not assign its obligation to guarantee the Existing Lease contemplated by Section 9.11. 11.2 GOVERNING LAW. The interpretation and construction of this Agreement, and all matters relating hereto, shall be governed by the laws of the State of Maryland. 11.3 ACCOUNTING MATTERS. All accounting matters required or contemplated by this Agreement shall be in accordance with generally accepted accounting principles. 11.4 FEES AND EXPENSES. Except as otherwise specifically provided in this Agreement, each of the parties hereto shall be responsible for the payment of such party's fees, costs and expenses incurred in connection with the negotiation and consummation of the transactions contemplated hereby. 11.5 AMENDMENTS; MERGER CLAUSE. This Agreement, including the schedules and exhibits hereto (which schedules and exhibits are hereby incorporated herein by this reference), contains the entire understanding of the parties hereto with respect to the subject matter contained herein and therein. This Agreement may not be amended except by a writing executed by all of the parties hereto. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. Unless expressly stated herein to the contrary, any reference herein to (a) a Section or Article shall refer to a Section or Article hereof, respectively, and (b) a Schedule or Exhibit shall refer to a Schedule or Exhibit, respectively, attached hereto. 11.6 WAIVER. To the extent permitted by applicable law, no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by a party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by all the parties hereto. Any waiver by a party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach of such provision or any other provision of this Agreement. Neither the failure nor any delay by any party hereto in exercising any right or power under this Agreement or the documents referred to in this Agreement will operate as a waiver of such right or power, and no single or partial exercise of any such right or power will preclude any other or further exercise of such right or power or the exercise of any other right or power. 11.7 NOTICES. All notices, claims, certificates, requests, demands and other communications hereunder shall be given in writing and shall be delivered personally or sent by facsimile or by a nationally recognized overnight courier, postage prepaid, and shall be deemed to have been duly given when so delivered personally or by confirmed facsimile or one (1) business day after the date of deposit with such nationally recognized overnight courier. All such notices, claims, certificates, requests, demands and other communications shall be addressed to the respective parties at the addresses set forth below or to such other address as the person to whom notice is to be given may have furnished to the others in writing in accordance herewith. 39 If to Buyer, to: Sonic Automotive, Inc. 5401 E. Independence Boulevard Charlotte, North Carolina 28212 Telecopy No.: (704) 536-5116 Attention: Chief Financial Officer With a copy to: Parker, Poe, Adams & Bernstein L.L.P. 2500 Charlotte Plaza Charlotte, North Carolina 28244 Telecopy No.: (704) 334-4706 Attention: John R. Hairr III If to any Seller or any Stockholder, to: Personal and Confidential Mr. Joseph Herson 11617 Old Georgetown Road Rockville, MD 20852 Telecopy No.: (301) 881-3038 With a copy to: Whiteford, Taylor & Preston, L.L.P. 1025 Connecticut Avenue, N.W. #400 Washington, D.C. 20036-5405 Telecopy No.: (202)331-0573 Attention: Glenn R. Bonard 11.8 COUNTERPARTS. This Agreement may be executed in any number of counterparts. Each such counterpart hereof shall be deemed to be an original instrument, and all such counterparts together shall constitute but one agreement. 11.9 KNOWLEDGE. Whenever any representation or warranty of Sellers or the Stockholders contained herein or in any other document executed and delivered in connection herewith is based upon the knowledge of Sellers or the Stockholders, (a) such knowledge shall be deemed to include (i) the best actual knowledge, information and belief of each Seller's directors and officers and of each Stockholder and (ii) any information which any Stockholder would reasonably be expected to be aware of in the prudent discharge of his duties in the ordinary course of business (including consultation with legal counsel) on behalf of any Seller, (b) the knowledge of any Seller shall be deemed to be the knowledge of all its Stockholders, and (c) the knowledge of a Stockholder shall be deemed to be the knowledge of each Seller in which such Stockholder owns, of record or 40 beneficially, shares of capital stock and of every other Stockholder who owns, of record or beneficially, shares of such Seller. 11.10 ARBITRATION. (a) Except as otherwise provided herein, any dispute, claim or controversy arising out of or relating to this Agreement or the interpretation or breach hereof shall be resolved by binding arbitration under the commercial arbitration rules of the American Arbitration Association (the "AAA RULES") to the extent such AAA Rules are not inconsistent with this Agreement. Judgment upon the award of the arbitrators may be entered in any court having jurisdiction thereof or such court may be asked to judicially confirm the award and order its enforcement, as the case may be. The demand for arbitration shall be made by any party hereto within a reasonable time after the claim, dispute or other matter in question has arisen, and in any event shall not be made after the date when institution of legal proceedings, based on such claim, dispute or other matter in question, would be barred by the applicable statute of limitations. The arbitration panel shall consist of three (3) arbitrators, one of whom shall be appointed by Buyer and one of whom shall be appointed by Sellers within thirty (30) days after any request for arbitration hereunder. The two arbitrators thus appointed shall choose the third arbitrator (who shall not be currently nor have been during the last ten years living in, or practicing his or her profession from a base in, North Carolina) within thirty (30) days after their appointment; provided, however, that if the two arbitrators are unable to agree on the appointment of the third arbitrator within thirty (30) days after their appointment, either arbitrator may petition the American Arbitration Association to make the appointment. The place of arbitration shall be Charlotte, North Carolina. The arbitrators shall be instructed to render their decision within sixty (60) days after their selection and to allocate all costs and expenses of such arbitration (including legal and accounting fees and expenses of the respective parties) to the parties in the proportions that reflect their relative success on the merits (including the successful assertion of any defenses). (b) Notwithstanding the provisions of Section 11.10(a), any dispute relating to accounting matters shall be resolved as provided in this Section 11.10(b). The parties first shall use reasonable efforts to resolve any such accounting dispute. In the event the dispute has not been resolved within a reasonable amount of time, either Buyer, on the one hand, or Sellers, on the other hand, may provide written notice to the other party that the matter will be submitted to an accounting firm for resolution. The parties shall mutually agree in writing on a "big five" accounting firm not in the employ of any party hereto to be retained to resolve the matter, and after joint retention of such firm the determination of such firm shall be final and binding on the parties with respect to such disputed accounting matter. The costs of the accounting firm shall be borne 50% by Buyer and 50% by Sellers. (c) Nothing contained in this Section 11.10 shall prevent any party hereto from seeking any equitable relief to which it would otherwise be entitled from a court of competent jurisdiction. 41 11.11 PERMITTED SUCCESSORS; ASSIGNS; NO THIRD PARTY BENEFICIARIES. Subject to Section 11.1, this Agreement shall be binding upon, inure to the benefit of and be enforceable by the respective successors, heirs and assigns of the parties hereto. Nothing in this Agreement, expressed or implied, is intended or shall be construed to confer upon or give to any employee of any Seller, or any other person, firm, corporation or legal entity, other than the parties hereto and their successors and permitted assigns, any rights, remedies or other benefits under or by reason of this Agreement. 11.12 HEADINGS. The article headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 11.13 SEVERABILITY. In the event that any provision, or part thereof, of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions, or parts thereof, shall not in any way be affected or impaired thereby. [SIGNATURE PAGE FOLLOWS] 42 IN WITNESS WHEREOF, the parties have caused this Asset Purchase Agreement to be executed as of the day and year first above written. SONIC AUTOMOTIVE, INC. /s/ O. Bruton Smith --------------------------------------- By: O. Bruton Smith Its: Chief Executive Officer L.O.R., INC. /s/ John Jaffe --------------------------------------- By: John Jaffe Its: Vice President WALDORF AUTOMOTIVE, INC. /s/ John F. Birch --------------------------------------- By: John F. Birch Its: President MANHATTAN IMPORTED CARS, INC. /s/ Joseph Herson --------------------------------------- By: Joseph Herson Its: Chairman STOCKHOLDERS: /s/ Joseph Herson (SEAL) --------------------------------------- JOSEPH HERSON /s/ John Birch (SEAL) --------------------------------------- JOHN BIRCH /s/ John Jaffe (SEAL) --------------------------------------- JOHN JAFFE /s/ Bernard Mills (SEAL) --------------------------------------- BERNARD MILLS /s/ Mollye Mills (SEAL) --------------------------------------- MOLLYE MILLS /s/ Richard Mills (SEAL) --------------------------------------- RICHARD MILLS 43 EX-10 3 EXHIBIT 10.4 EXHIBIT 10.4 SONIC AGREEMENT THIS SONIC AGREEMENT (this "AGREEMENT") is made and entered into as of June 30, 1999, by and among (i) SONIC AUTOMOTIVE, INC., a Delaware corporation (the "GUARANTOR"), (ii) the signatories listed on Schedule A attached hereto (the "TENANTS"), and (iii) CAR MMR L.L.C., a Delaware limited liability company (the "ACQUIRER"), in connection with that certain Acquisition Agreement dated of even date herewith (the "ACQUISITION AGREEMENT") by and among (a) O. Bruton Smith, an individual, Sonic Financial Corporation, a North Carolina corporation (collectively, the "SELLERS"), MMR Holdings, L.L.C., a North Carolina limited liability company ("MMR HOLDINGS"), MMR Viking Investment Associates, L.P., a Texas limited partnership ("MMR VIKING"), and MMR Tennessee, L.L.C., a North Carolina limited liability company ("MMR TENNESSEE"), and (b) the Acquirer. RECITALS Pursuant to the Acquisition Agreement, the Sellers are selling, transferring, conveying and assigning their membership interests and partnership interests, as the case may be, and the Acquirer is acquiring such membership interests and partnership interests, in MMR Holdings, MMR Viking, and MMR Tennessee (collectively, the "LANDLORDS", and each, a "LANDLORD"), in exchange for cash. Upon consummation of the transaction contemplated by the Acquisition Agreement, the Acquirer will own, directly or indirectly, one hundred percent (100%) of the ownership interests in the Landlords. Pursuant to certain leases (the "PRE-ACQUISITION LEASES"), the Landlords have leased to the Tenants the Properties. Pursuant to certain guaranties (the "PRE-ACQUISITION GUARANTIES") in favor of the Landlords, Guarantor has guaranteed the obligations of the Tenants under each of the Pre- Acquisition Leases. In order to induce the Acquirer to consummate the transaction in accordance with the Acquisition Agreement and in connection with the obligations of the parties thereto which include, INTER ALIA, that: (i) the Landlords and the Tenants of the Properties shall terminate the Pre-Acquisition Leases and enter into the Sonic Lease (as defined herein); (ii) the Pre- Acquisition Guaranties shall be terminated and the Guarantor shall execute the Sonic Guaranties (as defined herein); and (iii) the Acquirer shall commit to purchase additional automobile dealership properties from Guarantor, the parties have agreed to set forth certain of their rights and obligations, all as more particularly set forth hereinbelow. Unless otherwise provided herein, all terms used in this Agreement that are defined in the Acquisition Agreement shall have the meanings provided in the Acquisition Agreement. -1- NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby mutually acknowledged, the parties hereto agree as follows: 1. Tenants. (a) Representations and Warranties. The Tenants hereby represent and warrant jointly and severally to the Acquirer that the representations and warranties set forth below are true and correct as of the date first above written and shall be true and correct in all material respects on and as of the Closing: (i) Litigation. Except as shown on Schedule 1(a)(i) attached hereto, there is no action, suit, litigation or proceeding pending or, to the Tenants' knowledge, threatened against any of the Tenants or the Properties that could reasonably be expected to have a material adverse effect on any of the Properties or on the ability of any Tenant to execute or deliver, or perform its obligations under, this Agreement or any of the Sonic Leases (as hereinafter defined). (ii) Environmental. The Tenants have no knowledge of any violation of Environmental Laws related to the Properties or the presence or release of Hazardous Materials on or from such Properties, except as reflected in the environmental reports listed on Schedule 1(a)(ii). Schedule 1(a)(ii) is a list of all written environmental reports and results of environmental inspections and tests in the possession of the Tenants, which list is complete in all material respects. The Tenants have not used the Properties for the generation, treatment, storage, handling or disposal of any Hazardous Materials in violation of any Environmental Laws. (b) Termination Agreements. Each of the Tenants agrees that it will at Closing enter into a Pre-Acquisition Lease Termination Agreement and Estoppel Certificate in the form attached hereto as Exhibit 1(b). (c) Sonic Leases. Each of the Tenants agrees that, with respect to each Property subject to a Pre-Acquisition Lease, it will at Closing (or with respect to a Substitute Property or Contingent Property, Sonic or its Affiliate will, at the closing of the transaction consummating the acquisition of such Substitute Property or Contingent Property), enter into a lease in the form attached hereto as Exhibit 1(c) (each, a "SONIC LEASE"); provided, however, (i) that the term of each Sonic Lease shall be the unexpired term of the Pre-Acquisition Lease it is replacing (and the initial term of each Sonic Lease with respect to the Contingent Property or the Substitute Property shall be for a period of ten (10) years), and (ii) the base rent and escalation thereof under each Sonic Lease shall be as set forth in Section 4 of the lease attached hereto as Exhibit 1(c). -2- 2. Guarantor. (a) Representations and Warranties. Guarantor hereby represents and warrants to the Acquirer that the representations and warranties set forth below are true and correct as of the date first above written and shall be true and correct in all material respects on and as of the Closing: (i) Due Authorization. The execution and delivery of, and performance under, this Agreement and the Sonic Guaranties (as hereinafter defined) has been duly and validly approved by all necessary applicable corporate action and constitutes (or, with respect to the Sonic Guaranties, upon execution will constitute) the valid, legally binding, and enforceable agreement of Guarantor, subject to applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and transfer and other similar laws of general application heretofore or hereafter enacted or in effect, affecting the rights and remedies of creditors generally. (ii) Litigation. Except as shown on Schedule 2(a)(ii) attached hereto, there is no action, suit, litigation or proceeding pending or, to Guarantor's knowledge, threatened against the Tenants, Guarantor, or the Properties that could reasonably be expected to have a material adverse effect on the financial condition of Guarantor or its ability to execute or deliver, or perform its obligations under, this Agreement or any of the Sonic Guaranties. (iii) Financial Statements. The financial statements of Guarantor, and the notes related thereto, included in the Form 10K for the fiscal year ended December 31, 1998, and 10Q for the quarter ended March 31, 1999, present fairly the consolidated financial condition of Guarantor as of the dates indicated and the results of the operations and changes in consolidated cash flows for the periods specified; such financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis; and there has occurred no material adverse change in the financial condition or prospects of Guarantor since the date of such financial statements. (b) Sonic Guaranties. Guarantor agrees that, with respect to each Sonic Lease, it will at Closing execute a guaranty in the form attached hereto as Exhibit 2(b) (each, a "SONIC GUARANTY"). (c) Legal Opinion. Guarantor shall cause its counsel to deliver a legal opinion which may be relied upon by the Acquirer, opining as to the enforceability of this Agreement, the Sonic Leases and the Sonic Guaranties. 3. Repurchase Option. Subject to the terms and conditions provided in -3- this Section 3, Guarantor shall have the right (the "OPTION TO SUBSTITUTE") from time to time to purchase one or more of the Properties and to substitute therefor one or more properties (each, a "REPLACEMENT PROPERTY"). (a) Guarantor may exercise the Option to Substitute only by delivering written notice (each, a "SUBSTITUTION OPTION NOTICE") of the exercise of such right to the Acquirer during the period commencing on the day after the Closing Date and expiring, with respect to each Property, on the date on which the initial term of the Sonic Lease for such Property expires or is sooner terminated (each, a "SUBSTITUTION WINDOW EXPIRATION DATE"). (b) In the event that Guarantor elects to purchase a Property, Guarantor shall simultaneously sell to the Acquirer a Replacement Property that has previously been approved in writing by the financial institution (the "LENDER") that has made to the Acquirer or an Affiliate thereof a loan (the "LOAN") secured by the Property in accordance with the qualifications for a Replacement Property under such Lender's requirements. Each date on which the transactions contemplated by this Section 3 are consummated with respect to a Property and a Replacement Property shall be known as a "SUBSTITUTION DATE", which Substitution Date in all events shall not be later than ninety (90) days after the date of the applicable Substitution Option Notice. The parties shall reasonably cooperate to consummate the substitution contemplated by this Section 3 within the aforesaid ninety (90) day period. The value of the Replacement Property shall be approximately equal to the Purchase Price allocated to the Property being replaced but in no event less than the Purchase Price allocated to such Property, and the aggregate value of all Replacement Properties shall not exceed the aggregate value of such replaced Properties by more than Three Million Dollars ($3,000,000.00). (c) On the Substitution Date: (i) Guarantor shall (A) execute, or cause the Designated Grantee (as hereinafter defined) to execute, a lease in the form attached hereto as Exhibit 1(c) for the Replacement Property (provided, however, (I) that the initial term of such lease shall be the unexpired initial term of the lease of the Property being repurchased, plus two five (5) year renewal periods, and (II) during each year of the term of the lease for the Replacement Property, the base rent and escalation thereunder shall be not less than the base rent and escalation under the lease for the applicable Property being repurchased, (B) execute a guaranty in the form attached hereto as Exhibit 2(b), (C) execute, acknowledge, and deliver to the Acquirer a special warranty deed for the Replacement Property, (D) pay the Allocated Property Cost (as hereinafter defined) for such Property in cash or readily available funds (E) execute, acknowledge and deliver to the Acquirer such other documents as may reasonably be requested by the Acquirer or the Lender, and (F) pay to the Acquirer all out-of-pocket costs -4- incurred by the Acquirer in connection with such purchase of the Replacement Property and sale of the Property (including, without limitation, costs incurred in connection with title insurance policies, surveys, zoning reports, appraisals, building condition surveys, attorneys' fees, deed, mortgage and other recordation, transfer, document and stamp taxes, and any fees imposed by the Lender in connection with such substitution); and (ii) the Acquirer shall (A) execute, acknowledge and deliver to Guarantor or the Designated Grantee a special warranty deed for the Property, (B) execute and deliver the lease for the Replacement Property set forth in Section 3(c)(i)(A) and (C) pay the Replacement Property Purchase Price (as hereinafter defined) in cash or readily available funds. The Property shall be conveyed to Guarantor or the Designated Grantee in its "as is" condition as of the Substitution Date, subject to all restrictions, covenants, declarations, and easements of record as of such date and subject to the tenancy of the applicable entity under the applicable Sonic Lease. The Guarantor shall provide to the Acquirer representations and warranties customary in a sale transaction in connection with the conveyance of the Replacement Property. The Substitution Date shall occur, if at all, prior to the earlier of (X) the Substitution Window Expiration Date, and (Y) the date on which the Loan (as hereinafter defined) is discharged. "ALLOCATED PROPERTY COST" shall mean the Purchase Price allocated to the Property being replaced, plus all allocated costs capitalized by the Acquirer in connection with the Acquirer's acquisition and ownership of such Property. "REPLACEMENT PROPERTY PURCHASE PRICE" shall mean the fair market value of the Replacement Property as determined by an appraisal reasonably acceptable to the Acquirer. (d) Guarantor's rights under this Section 3 may only be exercised with respect to Properties, the Allocated Property Cost of which, when aggregated with the Allocated Property Cost of all Properties that are then being or have previously been repurchased, does not exceed an amount equal to Fifty-One Million Four Hundred Seventy- Six Thousand Nine Hundred Two and 75/100 Dollars ($51,476,902.75). (e) Guarantor's rights under this Section 3 may be exercised by Sonic Automotive, Inc. only, and may not be exercised by any other Person or entity; provided, however, that by written notice to the Acquirer within five (5) Business Days prior to the Substitution Date, Guarantor may elect to have title to the applicable Property conveyed to any Affiliate of Guarantor (a "DESIGNATED GRANTEE"). No such election, and no assignment of this Agreement or Guarantor's rights hereunder, shall discharge Guarantor from its obligations hereunder. (f) If Guarantor is in default under this Agreement or there exists an Event of Default under the applicable Sonic Lease on the date the Substitution Option Notice is given or at any time thereafter prior to the Substitution Date, then, at Landlord's option, the -5- Substitution Option Notice shall be null, void, and of no force or effect. (g) Notwithstanding anything to the contrary contained in this Section 3, Guarantor shall have no option to purchase the Lone Star Nissan Oldsmobile Property located in Stafford, Texas unless Guarantor simultaneously purchases the Lute Riley Property located in Dallas, Texas in connection with an Option to Substitute. 4. Future Acquisition Commitment. The parties hereto acknowledge that Guarantor will be acquiring additional automobile dealership properties (the "ADDITIONAL PROPERTIES") from third parties. During the period (the "FUTURE ACQUISITION PERIOD") commencing one (1) day after the Closing Date, and ending on December 31, 1999 (the "FUTURE ACQUISITION PERIOD EXPIRATION DATE"), the Guarantor may agree to sell and the Acquirer agrees, if requested by the Guarantor, to purchase, from time to time during the Future Acquisition Period, such Additional Properties, the purchase price of which shall not exceed Seventy-Five Million Dollars ($75,000,000) in the aggregate, on the terms and conditions set forth herein. From time to time during the Future Acquisition Period, the Guarantor may provide written notice (the "ACQUISITION NOTICE") to the Acquirer of its desire to sell one or more Additional Properties. Within ten (10) days after the Acquirer's receipt of the Acquisition Notice, the Guarantor and the Acquirer shall enter into a mutually acceptable purchase agreement (or mutually acceptable assignment of an existing purchase agreement between the Guarantor and the seller of the Additional Property) providing, among other things, (a) that the purchase price for such Additional Property shall be based on a capitalization rate (the "CAP RATE") equal to the lesser of (i) *, and (ii) a rate equal to two hundred fifty (250) basis points over the Acquirer's "all-in cost of long-term fixed-rate debt financing" for the acquisition of the Additional Properties; (b) that such acquisition shall be subject to customary due diligence by Acquirer (the results of which due diligence shall be made available to the Guarantor), including, without limitation, review of (i) the environmental and structural condition of such Additional Property, (ii) title and survey, and (iii) appraisals/valuation; (c) that the Guarantor pay, except as otherwise mutually agreed by the parties, all reasonable costs and expenses of such closing, including, without limitation, the cost of recording and transfer fees, title insurance, surveys, environmental studies, structural reports and appraisals and legal and accounting fees, and (d) that the Acquirer shall enter into a lease with or guaranteed by Guarantor, using a lease in the form attached hereto as Exhibit 1(c), provided that the annual rent under such lease shall be equal to the product of (i) the purchase price, multiplied by (ii) the Cap Rate. - ------------------------------- *Text deleted pursuant to application for Confidential Treatment under Rule 24b-2 of the Securities and Exchange Act of 1934 and filed separately with the Securities and Exchange Commission. -6- 5. Postponed Conveyance or Substituting of Properties. Pursuant to the Acquisition Agreement, in certain instances in which Owners do not convey all of the Properties, then until such time as such Property or Substitute Property is conveyed to the Acquirer or its Affiliate as more particularly set forth in the Acquisition Agreement, Guarantor shall use best efforts to convey to the Acquirer or its Affiliate, such Property or such Substitute Property, as applicable, in accordance with and subject to the terms and conditions of transferring a Property or Substitute Property under the Acquisition Agreement. 6. Obligation to Renew. During each calendar year in which the Initial Term of any Sonic Lease expires, Guarantor shall cause the Tenants of Sonic Leases expiring in such calendar year not to, and the Tenants of the Sonic Leases expiring in such calendar year shall not, give notices effecting the termination of any combination of Sonic Leases during such calendar year, the aggregate annual Base Rent of which during the last year of the Initial Term exceeds twenty-five percent (25%) of the aggregate annual Base Rent during the last year of the Initial Term of all Sonic Leases expiring in such calendar year. 7. Miscellaneous. (a) Survival. The representations and warranties contained in this Agreement shall survive the Closing for a period of five (5) years from the Closing Date (except that representations and warranties relating to any of the Properties shall survive Closing for a period of one (1) year from the Closing Date) and shall not be deemed to be merged into or waived by the instruments of the Closing. (b) Additional Actions and Documents. Each of the parties hereto hereby agrees to use its commercially reasonable efforts to take or cause to be taken such further actions, to execute, deliver and file or cause to be executed, delivered and filed such further documents, and to obtain such consents, as may be necessary or as may be reasonably requested in order to fully effectuate the purposes, terms and conditions of this Agreement. The obligations of the parties set forth in this Section 7(b) shall survive the Closing and shall not be deemed to be merged into or waived by any instrument of conveyance delivered at Closing. (c) Entire Agreement; Amendment. This Agreement, including the exhibits, schedules and other documents referred to herein or therein or furnished pursuant hereto or thereto, constitutes the entire agreement among the parties hereto with respect to the transactions contemplated herein, and supersedes all prior oral or written agreements, commitments or understandings with respect to the matters provided for herein. No amendment, modification or discharge of this Agreement shall be valid or binding unless set -7- forth in writing and duly executed and delivered by the party against whom enforcement of the amendment, modification or discharge is sought. (d) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Faxed signatures shall have the same binding effect as original signatures. (e) Governing Law. This Agreement, the rights and obligations of the parties hereto, and any claim or disputes relating thereto, shall be governed by and construed in accordance with the laws of the State of North Carolina (excluding the choice of law rules thereof) except for actions affecting title to real property, in which case the laws of the state in which the real property is located shall apply. (f) No Third Party Beneficiaries. This Agreement is solely for the benefit of the parties hereto and the Acquirer, and no provision of this Agreement shall be deemed to confer any benefit on any third party other than the Acquirer. (g) Severability. If any provision of this Agreement shall be held invalid, illegal or unenforceable, the validity, legality or enforceability of the other provisions hereof shall not be affected thereby, and there shall be deemed substituted for the provision at issue a valid, legal and enforceable provision as similar as possible to the provision at issue. (h) Binding Effect. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. (i) Headings. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. (j) Waiver of Jury Trial. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE PARTIES HEREBY IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE ACQUISITION AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. THE PROVISIONS OF THIS SECTION 7(j) SHALL SURVIVE ANY TERMINATION OF THIS AGREEMENT. (k) Assignment. The Acquirer may assign its rights and/or obligations under this Agreement to any Affiliate. (l) Confidentiality. Guarantor and Tenants agree to keep confidential the Cap Rate as defined in the Acquisition Agreement and in this Agreement, and shall not -8- disclose the Cap Rate to any Person. (m) Wire Transfer. Guarantor agrees that it shall use best efforts to cause the payment of all Rent under the Sonic Leases to be made by one wire transfer on a monthly basis. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. GUARANTOR: SONIC AUTOMOTIVE, INC., a Delaware corporation By: /s/ Theodore M. Wright ---------------------------------------------- Name: Theodore M. Wright Title:Vice President - Finance and Chief Financial Officer ACQUIRER: CAR MMR L.L.C., a Delaware limited liability company By: Capital Automotive L.P., a Delaware limited partnership, its Managing Member By: Capital Automotive REIT, a Maryland real estate investment trust, its General Partner By: /s/ David S. Kay ---------------------------------- Name: David S. Kay Title: Vice President and Chief Financial Officer TENANTS: [See Attached Schedule A] -9- SCHEDULE A SIGNATURE BLOCKS FOR TENANTS Sonic - Williams Buick, Inc. Sonic - Williams Cadillac, Inc. Sonic Automotive - Bondesen, Inc. Sonic Automotive - 1307 N. Dixie Hwy., NSB, Inc. Sonic Automotive - 1720 Mason Ave., NSB, Inc. Sonic Automotive - 1919 N. Dixie Hwy., NSB, Inc. Sonic Automotive - 3741 S. Nova Rd., PO, Inc. Sonic - Shottenkirk, Inc. Sonic Automotive, Inc. Sonic - Global Imports, L.P. Sonic - Rockville Imports, Inc. Sonic - Manhattan Waldorf, Inc. Frontier Oldsmobile-Cadillac, Inc. Sonic Automotive - 9103 E. Independence, NC, LLC Sonic Chrysler-Plymouth-Jeep, LLC Sonic Dodge, LLC Town & Country Ford, Incorporated Marcus David Corporation Sonic Automotive - 1400 Automall Drive, Columbus, Inc. Sonic Automotive - 1495 Automall Drive, Columbus, Inc. Sonic Automotive - 1500 Automall Drive, Columbus, Inc. Sonic Automotive - 1455 Automall Drive, Columbus, Inc. Sonic Automotive - 4000 West Broad Street, Columbus, Inc. Sonic Automotive 2752 Laurens Rd., Greenville, Inc. Sonic - North Charleston, Inc. -10- Fort Mill Ford, Inc. Sonic - Newsome of Florence, Inc. Sonic - Newsome Chevrolet World, Inc. Sonic Automotive of Chattanooga, LLC Sonic Automotive - 2490 South Lee Highway, LLC Town & Country Jaguar, LLC Sonic Automotive - 6025 International Drive, LLC Sonic - Superior Oldsmobile, LLC Town & Country Ford of Cleveland, LLC Sonic Automotive of Nashville, LLC Sonic Automotive of Texas, L.P. Sonic - Sam White Nissan, L.P. Sonic - Lute Riley, L.P. Sonic - Reading, L.P. Sonic Automotive - 5221 I-10 East, TX, L.P. Sonic - Manhattan Fairfax, Inc. By: /s/ Theodore M. Wright ------------------------------------- Name: Theodore M. Wright Authorized Signatory -11- EX-10 4 EXHIBIT 10.5 EXHIBIT 10.5 AGREEMENT THIS AGREEMENT dated as of the 5th day of August, 1999 (this "Agreement"), by and among SONIC AUTOMOTIVE, INC., a Delaware corporation ("Sonic Automotive"), SONIC FINANCIAL CORPORATION, a North Carolina corporation ("SFC"), and O. BRUTON SMITH, an individual residing in the State of North Carolina ("Smith"). RECITALS: This Agreement is entered into based on the following facts, intentions and understandings: a. SFC and Smith own, directly or indirectly, all of the issued and outstanding equity interests of MMR Holdings, L.L.C., MMR Viking Investment Associates, L.P. and MMR Tennessee, L.L.C. (collectively, the "Mar Mar Group"); and b. Sonic Automotive and/or its subsidiaries lease numerous automobile dealership properties from various members of the Mar Mar Group; and c. SFC and Smith have agreed to sell (the "Sale Transaction") all of the issued and outstanding equity interests of the Mar Mar Group to CAR MMR L.L.C. ("CAR") pursuant to an Acquisition Agreement among CAR, SFC, Smith and the Mar Mar Group; and d. CAR is requiring as a condition precedent to its purchase of the equity interests of the Mar Mar Group from SFC and Smith that Sonic Automotive enter into the so-called "Sonic Agreement" with CAR (the "Sonic Agreement"), pursuant to which, among other things, Sonic Automotive would agree to certain changes in the various lease agreements currently in effect between Sonic Automotive and/or its subsidiaries, as tenants, and various members of the Mar Mar Group, as landlords, including but not limited to (i) Sonic Automotive's agreement to amend and restate all of such leases pursuant to a new standardized form of lease to be agreed upon between Sonic Automotive and CAR, and (ii) Sonic Automotive's agreement to renew at least 75% of the current leases between Sonic Automotive and/or its subsidiaries, as tenant, and members of the Mar Mar Group, as landlord, at the end of the terms of such leases. NOW, THEREFORE, in order to induce Sonic Automotive to enter into the Sonic Agreement and to otherwise participate in the Sale Transaction, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows: SECTION 1. PAYMENT BY SFC AND SMITH TO SONIC AUTOMOTIVE. As promptly as possible after the closing of the Sale Transaction, SFC and Smith shall pay over to Sonic Automotive all of the profits received by SFC and Smith from the Sale Transaction, less (i) the direct and indirect expenses of the Sale Transaction paid or incurred by SFC and Smith, and (ii) a return of 14% annually to SFC and Smith on their initial investments in the Mar Mar Group, net of any advances made by Sonic Automotive to any member of the Mar Mar Group. SECTION 2. GENERAL PROVISIONS. (a) This Agreement shall be binding upon, inure to the benefit of, and be enforceable by the parties and their successors and assigns; (b) Nothing in this Agreement shall give any person, other than the parties and their successors and assigns, any rights, remedies or other benefits; (c) This Agreement shall not be assignable by any party without the prior written consent of the other parties hereto; (d) This Agreement constitutes the entire agreement between the parties pertaining to the subject matter contained in it and supersedes all prior agreements, representations and understandings with respect to the subject matter; (e) No amendment or modification of this Agreement shall be binding unless in writing and signed by each of the parties; (f) In the event that any provision of this Agreement, or part thereof, shall be held to be invalid, illegal or unenforceable, the remaining provisions of this Agreement shall not be affected thereby; and (g) This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina. IN WITNESS WHEREOF, the undersigned have executed and delivered this Agreement as of the date first stated above. SONIC AUTOMOTIVE, INC. By: /s/ Theodore M. Wright --------------------------------------- Theodore M. Wright, Vice President - Finance and Chief Financial Officer SONIC FINANCIAL CORPORATION By: /s/ William R. Brooks --------------------------------------- William R. Brooks, Vice President By: /s/ O. Bruton Smith --------------------------------------- O. BRUTON SMITH EX-27 5 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF INCOME AND CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE SIX MONTHS ENDING JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 60,526 0 48,232 1,104 368,197 488,724 36,019 0 789,202 361,088 123,437 0 20,991 339 265,408 789,202 1,153,421 1,316,982 1,144,646 1,144,646 128,794 0 16,788 27,078 10,290 16,788 0 0 0 16,788 0.62 0.54
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