<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 30, 1996
REGISTRATION NO. 333-06585
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
CROSS-CONTINENT AUTO RETAILERS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5511 75-2653095
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
1201 SOUTH TAYLOR STREET
AMARILLO, TEXAS 79101
(806) 374-8653
(Address, including zip code, and telephone number,
including area code, of registrants principal executive offices)
ROBERT W. HALL
SENIOR VICE CHAIRMAN
1201 SOUTH TAYLOR STREET
AMARILLO, TEXAS 79101
(806) 374-8653
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
COPIES TO:
Philip K. Howard, Esq. Jerry V. Elliott, Esq.
Howard, Darby & Levin Shearman & Sterling
1330 Avenue of the Americas 599 Lexington Avenue
New York, New York 10019 New York, New York 10022
(212) 841-1000 (212) 848-4000
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE (2) OFFERING PRICE (2)
<S> <C> <C> <C>
4,226,250
Common Stock (par value $.01 per share).............. shares (1) $14.00 $59,167,500
Rights to Purchase Junior Preferred Stock and Common 4,226,250
Stock of the Company................................ rights (4)
<CAPTION>
AMOUNT OF
TITLE OF EACH CLASS OF REGISTRATION
SECURITIES TO BE REGISTERED FEE (3)
<S> <C>
Common Stock (par value $.01 per share).............. $3,053
Rights to Purchase Junior Preferred Stock and Common
Stock of the Company................................
</TABLE>
(1) Includes 551,250 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457 under the Securities Act of
1933, as amended.
(3) The registrant previously paid a filing fee of $21,067 with respect to the
registration of 3,593,750 shares of Common Stock. The registrant is paying
an additional filing fee of $3,053 to register an additional 632,500 shares
of Common Stock.
(4) Rights to purchase Junior Preferred Stock and Common Stock of the Company
will be issued in a number equal to the number of shares of Common Stock to
be issued for no additional consideration and, therefore, no registration
fee is required therefor. Prior to the occurrence of certain events, such
rights will not be exercisable or evidenced separately from the Common
Stock. When exercisable, each such right shall entitle the owner to purchase
from the Company one-one hundredth of a share of Junior Preferred Stock or
shares of Common Stock of the Company with a market value equal to two times
the exercise price of such right, in each case subject to certain
adjustments.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED AUGUST 30, 1996
[LOGO]
3,675,000 SHARES
CROSS-CONTINENT AUTO RETAILERS, INC.
COMMON STOCK
---------------------
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY
CROSS-CONTINENT AUTO RETAILERS, INC. PRIOR TO THIS OFFERING, THERE HAS
BEEN NO PUBLIC MARKET FOR THE COMMON STOCK. IT IS CURRENTLY
ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE PER SHARE WILL
BE BETWEEN $12.00 AND $14.00. SEE "UNDERWRITERS" FOR A
DISCUSSION OF THE FACTORS CONSIDERED IN
DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
------------------------------
THE COMMON STOCK HAS BEEN APPROVED FOR LISTING ON THE NEW YORK STOCK
EXCHANGE UNDER THE SYMBOL "XC", SUBJECT TO OFFICIAL NOTICE OF ISSUANCE.
------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
-------------- --------------- ------------
<S> <C> <C> <C>
PER SHARE......................................................... $ $ $
TOTAL (3)......................................................... $ $ $
</TABLE>
- ------------
(1)THE COMPANY AND THE SELLING STOCKHOLDERS HAVE AGREED TO INDEMNIFY THE
UNDERWRITERS AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. SEE "UNDERWRITERS."
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $1,650,000.
(3)CERTAIN STOCKHOLDERS OF THE COMPANY (THE "SELLING STOCKHOLDERS") HAVE
GRANTED TO THE UNDERWRITERS AN OPTION, EXERCISABLE WITHIN 30 DAYS OF THE
DATE HEREOF, TO PURCHASE UP TO AN AGGREGATE OF 551,250 ADDITIONAL SHARES OF
COMMON STOCK AT THE PRICE TO PUBLIC SHOWN ABOVE LESS UNDERWRITING DISCOUNTS
AND COMMISSIONS FOR THE PURPOSE OF COVERING OVER-ALLOTMENTS, IF ANY. IF THE
UNDERWRITERS EXERCISE SUCH OPTION IN FULL, THE TOTAL PRICE TO PUBLIC,
UNDERWRITING DISCOUNTS AND PROCEEDS TO THE SELLING STOCKHOLDERS (BEFORE
DEDUCTING EXPENSES PAYABLE BY THE SELLING STOCKHOLDERS ESTIMATED AT
$29,000) WILL BE $ , $ AND $ , RESPECTIVELY. SEE "PRINCIPAL
STOCKHOLDERS" AND "UNDERWRITERS."
------------------------------
THE SHARES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY
THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS
BY SHEARMAN & STERLING, COUNSEL FOR THE UNDERWRITERS. IT IS EXPECTED THAT THE
DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT , 1996, AT THE
OFFICE OF MORGAN STANLEY & CO. INCORPORATED, NEW YORK, N.Y., AGAINST PAYMENT
THEREFOR IN IMMEDIATELY AVAILABLE FUNDS.
------------------------
MORGAN STANLEY & CO.
INCORPORATED
FURMAN SELZ
RAUSCHER PIERCE REFSNES, INC.
, 1996
<PAGE>
[Photographs]
[LOGO] Insert Photo of Westgate Chevtolet
Insert Photo of Chevrolet Insert Photo of Performance Dodge Service
Department
Insert Photo of Nissan Insert Photo of Plains Chevrolet
Insert Photo of Dodge Insert Photo of Performance Nissan
Insert Photo of Plains Chevrolet Used Car &
Truck Dept.
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE SHARES OF COMMON
STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO
SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary......................................................................................... 4
Risk Factors............................................................................................... 8
Recent Developments........................................................................................ 13
Use of Proceeds............................................................................................ 14
Dividend Policy............................................................................................ 14
Capitalization............................................................................................. 15
Dilution................................................................................................... 16
Selected Combined Financial Data........................................................................... 17
Pro Forma Combined Financial Data.......................................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 22
Business................................................................................................... 33
Management................................................................................................. 47
Principal Stockholders..................................................................................... 51
Certain Transactions....................................................................................... 52
Description of Capital Stock............................................................................... 53
Shares Eligible for Future Sale............................................................................ 57
Underwriters............................................................................................... 59
Legal Matters.............................................................................................. 60
Experts.................................................................................................... 60
Available Information...................................................................................... 61
Index to Financial Information............................................................................. F-1
</TABLE>
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
------------------------
This Prospectus includes statistical data regarding the retail automobile
industry. Unless otherwise indicated herein, such data is taken or derived from
information published by the Industry Analysis Division of the National
Automobile Dealers Association ("NADA") in its INDUSTRY ANALYSIS AND OUTLOOK AND
AUTOMOTIVE EXECUTIVE MAGAZINE publication.
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER THE FACTORS SET FORTH HEREIN UNDER THE CAPTION "RISK FACTORS"
AND ARE URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. REFERENCES TO
"CROSS-CONTINENT" OR THE "COMPANY" ARE TO CROSS-CONTINENT AUTO RETAILERS, INC.
AND, UNLESS THE CONTEXT INDICATES OTHERWISE, ITS CONSOLIDATED SUBSIDIARIES AND
THEIR RESPECTIVE PREDECESSORS. REFERENCES IN THIS PROSPECTUS TO THE "COMMON
STOCK" MEAN THE COMMON STOCK, PAR VALUE $.01 PER SHARE, OF THE COMPANY;
REFERENCES TO THE "OFFERING" MEAN THE OFFERING OF COMMON STOCK MADE HEREBY; AND
REFERENCES TO "SHARES" MEAN THE SHARES OF COMMON STOCK OFFERED HEREBY. UNLESS
OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THE
UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED.
THE COMPANY
The Company owns and operates six franchised automobile dealerships in the
Amarillo, Texas and Oklahoma City, Oklahoma markets. Through these dealerships,
the Company sells new and used cars and light trucks, arranges related financing
and insurance, sells replacement parts and provides vehicle maintenance and
repair services.
The Company's founder and Chief Executive Officer, Bill A. Gilliland, has
managed automobile dealerships since 1966 and acquired the Company's first
dealership, Quality Nissan, Inc. in Amarillo, in 1982. The Company continued its
growth in the Amarillo area by acquiring three Chevrolet dealerships, two of
which have been in continuous operation (under various owners) since the 1920s.
The Company is the exclusive Chevrolet and Nissan dealer in Amarillo. The
Company led the Amarillo market in vehicle unit sales in 1995, accounting for
approximately 36% of new vehicle unit sales and 25% of used vehicle unit sales.
In 1995, the Company entered the Oklahoma City market through the acquisition of
a Nissan dealership in February and a Dodge dealership in December. In June
1996, the Company entered into an agreement to purchase Lynn Hickey Dodge, Inc.
("Hickey Dodge"), which is located in the Oklahoma City market and is one of the
largest Dodge dealerships in the United States. With this acquisition, the
Company believes that, based on pro forma revenue, it would have been one of the
50 largest dealer groups out of more than 15,000 dealer groups nationwide in
1995.
The Company has demonstrated historical success in acquiring and integrating
dealerships, and acquisitions remain an important element of the Company's
growth strategy. According to AUTOMOTIVE NEWS the number of franchised
dealerships has declined from 36,336 in 1960 to 22,288 in 1996. Further
consolidation of automobile dealers is anticipated due to a number of factors,
including increased capital requirements for dealerships, the fact that many
dealerships are owned by individuals nearing retirement age and the desire of
certain automakers to strengthen their brand identity by consolidating their
franchised dealerships. The Company believes that an opportunity exists for
dealership groups with significant equity capital to purchase additional
franchises and that being able to offer prospective sellers tax-advantaged
transactions through the use of publicly traded stock will, in certain
instances, make the Company a more attractive acquiror.
As a result of the Company's business strategy and growth through
acquisitions, including the full year effect of the dealership acquired in
December 1995, the Company's sales increased from $74.9 million in 1991 to
$294.7 million in 1995. Giving effect to the pending acquisition of Hickey Dodge
and including the full year effect of the dealership acquired in December 1995,
the Company's pro forma 1995 sales would have been $416.9 million. The Company
believes that its business strategy and operations have also enabled it to
achieve a level of profitability superior to the industry average. In 1995, the
Company's actual gross profit margin was 15.9%, compared to the industry average
of 12.9%.
OPERATING STRATEGY
The Company's strategy includes:
EFFECTIVELY SERVING ITS TARGET CUSTOMERS. The Company's existing
dealerships, which together offer the complete lines of Chevrolet, Nissan and
Dodge vehicles, focus primarily on middle-income buyers seeking
4
<PAGE>
moderately priced vehicles that can be financed with relatively affordable
monthly payments. The Company believes that working closely with its customers
to identify appropriate vehicles and offering suitable financing and credit
insurance products enhances the Company's overall profitability by increasing
the percentage of vehicle purchases financed through its dealerships and by
reducing the subsequent default rate on such financing contracts. In 1995, the
Company arranged financing for approximately 76% of its new vehicle sales and
83% of its used vehicle sales, as compared to 42% and 51%, respectively, for the
average automobile dealership in the United States.
OPERATING MULTIPLE DEALERSHIPS IN SELECTED MARKETS. By operating multiple
dealerships within individual markets, the Company seeks to become a leading
automotive dealer in each market that it serves. This strategy enables the
Company to achieve economies of scale in advertising, inventory management,
management information systems and corporate overhead. In 1995, the Company was
the market share leader in the Amarillo vicinity, accounting for approximately
28% of the new car market and 46% of the new truck market. In Oklahoma City, the
combined market shares in 1995 for the Company's two existing Oklahoma City
dealerships were approximately 2% and 7% of new car and truck sales,
respectively. The Company estimates that, including Hickey Dodge, the Company's
combined market shares in Oklahoma City would have been 4% of the new car market
and 15% of the new truck market in 1995.
MAINTAINING DISCIPLINED INVENTORY MANAGEMENT. The Company believes that
maintaining a vehicle mix that matches market demand is critical to dealership
profitability. The Company's policy is to maintain a 60-day supply of new
vehicles and a 39-day supply of used vehicles. If a new vehicle remains in
inventory for 120 days, or a used vehicle for 60 days, the Company typically
disposes of the vehicle by selling it to another dealer or wholesaler. The
Company believes that this policy enhances profitability by increasing inventory
turnover and reducing carrying costs. If the Company cannot obtain a sufficient
supply of popular models from the manufacturers, it purchases the needed
vehicles from other franchised dealers throughout the United States. For
example, because Chevrolet trucks are popular in Amarillo, the Company purchases
trucks from Chevrolet dealers in other cities to supplement its allocation of
trucks from Chevrolet. In managing its used vehicle inventory, the Company
attempts to "mirror the market" by tracking new and used vehicle sales within
its region and maintaining an inventory mix that matches consumer demand.
EMPLOYING PROFIT-BASED MANAGEMENT COMPENSATION. The Company uses a
management compensation system that differentiates it from most other automobile
dealerships. The Company believes that at many other auto dealerships the heads
of each sales department (new vehicles, used vehicles and finance and insurance
("F&I")) are compensated based on the profitability or sales volumes of their
own departments. This method of compensation does not encourage cooperation
among departments and can affect overall profitability of the dealership. At
Cross-Continent, each dealership's general manager and sales managers are
trained in F&I analysis and receive bonuses based on the profitability of
overall vehicle sales and related F&I income. The Company believes that this
compensation system promotes teamwork and encourages each management team to
maximize overall profitability.
UTILIZING TECHNOLOGY THROUGHOUT OPERATIONS. The Company believes that it
has achieved a competitive advantage in its markets by integrating
computer-based systems into all aspects of its operations. The Company uses
computer-based technology to monitor each dealership's gross profit, permitting
senior management to gauge each dealership's daily and monthly gross margin
"pace" and to quickly identify areas requiring additional focus. Sales managers
also utilize a computer system to design for each customer an affordable
financing and insurance package that maximizes the Company's total profit on
each transaction. Computer technology is also an integral part of the inventory
management system for new and used vehicles and vehicle parts.
ACHIEVING HIGH LEVELS OF CUSTOMER SATISFACTION. Customer satisfaction and a
dealer's reputation for fairness are key competitive factors and are crucial for
establishing long-term customer loyalty. The Company's sales process is intended
to satisfy customers by providing high-quality vehicles that customers can
afford. A customer's experience with the parts and service departments at the
Company's dealerships
5
<PAGE>
can also positively influence overall satisfaction. The Company strives to train
its service managers as professionals, employs state-of-the-art service
equipment, maintains a computer-managed inventory of replacement parts, and
provides clean service and waiting areas to enhance customers' post-sale
experience.
GROWTH STRATEGY
The Company intends to expand its business by acquiring additional
dealerships and seeks to improve their profitability through implementation of
the Company's business strategies. The Company believes that its management team
has considerable experience in evaluating potential acquisition candidates and
determining whether a particular dealership can be successfully integrated into
the Company's existing operations. Based on trends affecting automobile
dealerships, the Company also believes that an increasing number of acquisition
opportunities will become available to the Company.
Although it plans to evaluate acquisition candidates on a case-by-case
basis, the Company intends to make acquisitions primarily in selected cities in
the Western and Southern regions of the United States where there are fewer
dealerships relative to the size of the population than the national average.
Although it may pursue other acquisition opportunities, as part of its strategy
to acquire a leading market share in a given area, the Company intends to focus
its efforts on dealer groups that own multiple franchises in a single city, as
well as on large, single-dealer franchises possessing significant market share.
Other criteria for evaluating potential acquisitions will include a dealership
or dealer group's current profitability, the quality of its management team, its
local reputation with customers and its location along an interstate highway or
principal thoroughfare.
Upon completion of each acquisition, the Company plans to implement its
sales methods and philosophy, computer-supported management system and
profit-based compensation plan in an effort to enhance the acquired dealership's
overall profitability. Cross-Continent intends to focus initially on any
underperforming departments within the acquired entity that the Company believes
may yield the most rapid marginal improvements in operating results. The Company
anticipates that it will take two to three years to integrate an acquired
dealership into the Company's operations and realize the full benefit of the
Company's strategies and systems. There can be no assurance, however, that the
profitability of any acquired dealership will equal that achieved to date by the
Company's existing dealerships. See "Risk Factors -- Risks Associated with
Expansion."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered.............. 3,675,000 shares (1)
Common Stock to be outstanding
after the Offering.............. 13,800,000 shares (2)
Use of proceeds................... The net proceeds of the Offering will be used to finance
the pending acquisition of Hickey Dodge and future
acquisitions, repay debt and provide cash for working
capital and general corporate purposes.
New York Stock Exchange symbol.... XC
</TABLE>
- ---------
(1) Does not include up to an aggregate of 551,250 Shares that may be sold by
the Selling Stockholders pursuant to the Underwriters' over-allotment
option. See "Principal Stockholders" and "Underwriters."
(2) Excludes (i) 1,380,000 shares of Common Stock reserved for future issuance
under the Company's stock option plan, including an option to purchase
7,692 shares of Common Stock that will be granted immediately before the
completion of the Offering with an exercise price equal to the initial
public offering price, and (ii) 130,308 shares of Common Stock issuable
upon the exercise of other options that will have an exercise price equal
to the initial public offering price. See "Management -- Stock Option Plan"
and "Certain Transactions."
6
<PAGE>
SUMMARY COMBINED FINANCIAL DATA
The following summary historical and pro forma combined financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Combined Financial
Statements of the Company and the related notes and "Pro Forma Combined
Financial Data" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------------ --------------------
PRO
ACTUAL FORMA (1) ACTUAL
----------------------------------------------------- ----------- --------------------
1991 1992 1993 1994 1995 1995 1995 1996
--------- --------- --------- --------- --------- ----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.................. $74,925 $ 125,183 $ 165,364 $ 181,768 $ 236,194 $416,943 $112,344 $141,241
Gross profit.................... 10,839 18,502 25,738 28,322 37,492 60,758 17,874 21,320
Operating income (2)(3)......... 2,355 3,369 5,016 5,683 6,593 12,634 3,290 3,977(4)
Net income (3).................. 849 956 1,995 2,382 2,195 5,871 1,105 1,029
Net income per share (5)........ $0.43
Weighted average shares
outstanding (5)................ 13,800
<CAPTION>
PRO
FORMA (1)
-----------
1996
-----------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.................. $211,919
Gross profit.................... 32,160
Operating income (2)(3)......... 6,989 (4)
Net income (3).................. 3,193
Net income per share (5)........ $0.23
Weighted average shares
outstanding (5)................ 13,800
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1996
AS OF ----------------------
DECEMBER 31, PRO
1995 ACTUAL FORMA(1)
------------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................................................ $ 536 $ 2,044 $ 31,557
Total assets................................................................... 83,407 80,888 109,993
Long-term debt................................................................. 11,859 11,131 11,131
Stockholders' equity........................................................... 7,101 9,479 52,260
</TABLE>
- ------------
(1) For information regarding the pro forma adjustments made to the Company's
historical financial data, see "Pro Forma Combined Financial Data."
(2) Operating income is defined as income before income taxes, interest income
and interest expense.
(3) During the six months ended June 30, 1996, the Company recognized a
non-cash expense of approximately $1.1 million relating to employee stock
compensation in connection with the issuance of 303,750 shares of Common
Stock issued for $250,000 to Ezra P. Mager, the Company's Vice Chairman,
pursuant to an agreement dated April 1, 1996 (the "Executive Purchase").
During the six months ended June 30, 1996, the Company also recognized a
compensation expense of $600,000 relating to a bonus paid to Emmett M.
Rice, Jr., the Company's Senior Vice President and Chief Operating Officer
(the "Executive Bonus") in connection with the Reorganization (as defined
below). Excluding the non-cash expense and compensation expense, actual
operating income and net income for the six months ended June 30, 1996
would have approximated $5.7 million and $2.5 million, respectively.
(4) Prior to 1996 the Company paid the Gilliland Group Family Partnership
("GGFP") an annual management fee for executive management services. This
fee was generally based upon profits earned by the Company and the level of
management services rendered by GGFP. As of January 1, 1996 the Company no
longer pays management fees to GGFP. Management fees for the year ended
December 31, 1995, and for the six months ended June 30, 1995 approximated
$4.3 million and $2.2 million, respectively. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Certain
Transactions" and Note 17 to the Notes to the Combined Financial
Statements.
(5) Historical earnings per share are not presented, as the historical capital
structure of the Company prior to the Reorganization (as defined below) and
the Offering is not comparable with the capital structure that will exist
subsequent to these events. Pro forma earnings per share are based upon the
assumption that 13,800,000 shares of Common Stock are outstanding for each
period. This amount represents the total number of Shares to be issued in
the Offering (3,675,000), the number of shares of Common Stock owned by the
Company's stockholders immediately following the Reorganization (9,821,250)
and the number of shares of Common Stock (303,750) issued in connection
with the Executive Purchase. See "Certain Transactions," "Principal
Stockholders" and Note 15 to the Notes to Combined Financial Statements.
THE COMPANY WAS FORMED IN MAY 1996 AND IN JUNE 1996 ACQUIRED (THE
"REORGANIZATION") ALL OF THE CAPITAL STOCK OF MIDWAY CHEVROLET, INC., PLAINS
CHEVROLET, INC., WESTGATE CHEVROLET, INC., QUALITY NISSAN, INC., PERFORMANCE
NISSAN, INC., PERFORMANCE DODGE, INC., WORKING MAN'S CREDIT PLAN, INC. AND
ALLIED 2000 COLLISION CENTER, INC. ALL OF THESE SUBSIDIARIES WERE CONTROLLED BY
MR. GILLILAND PRIOR TO THE REORGANIZATION. MR. GILLILAND WILL REMAIN THE
PRINCIPAL STOCKHOLDER OF THE COMPANY IMMEDIATELY FOLLOWING THE OFFERING. SEE
"CERTAIN TRANSACTIONS" AND "PRINCIPAL STOCKHOLDERS."
7
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER AND EVALUATE ALL OF THE
INFORMATION SET FORTH IN THIS PROSPECTUS, INCLUDING THE RISK FACTORS SET FORTH
BELOW.
COMPETITION
Automobile retailing is a highly competitive business with over 22,000
franchised automobile dealerships in the United States at the beginning of 1996.
The Company's competitors include automobile dealers (which may be larger, and
have greater financial and marketing resources, than the Company), private
market buyers and sellers of used vehicles, used vehicle dealers, other
franchised dealers, service center chains and independent service and repair
shops. Gross profit margins on sales of new vehicles have been declining since
1980, and the new and used car market faces increasing competition from non-
traditional sources such as independent leasing companies, used-car
"superstores," which use sales techniques such as one price shopping, and the
Internet. Several groups have recently announced plans to establish nationwide
networks of used vehicle superstores. "No negotiation" sales methods are also
being tried for new cars by at least one of these superstores and by dealers for
the Saturn Division of General Motors Corporation ("General Motors" or "GM").
Some of the recent market entrants may be capable of operating on smaller gross
margins compared to the Company. The increased popularity of short-term leases
also has resulted, as the leases have expired, in a large increase in the number
of late model vehicles available in the market from sources other than
franchised dealers. As the Company seeks to acquire dealerships in new markets,
it may face significant competition (including from other large dealer groups)
as it strives to gain market share.
The Company is the exclusive Chevrolet dealer in Amarillo and has the
leading position in the Amarillo market. In 1995, the Company derived
approximately 71% of its gross profit from its three Chevrolet dealerships in
Amarillo. The Company could be materially adversely affected if Chevrolet
awarded additional dealership franchises to others in the Amarillo market,
although the Company does not anticipate such awards will be made, or if other
automobile dealerships increased their market share in the area. The Company's
gross margins may decline over time as it expands into markets where it does not
have a leading position. These and other competitive pressures could adversely
affect the Company's results of operations.
DEPENDENCE ON AUTOMAKERS
As a franchised dealer, the Company's success depends upon the popularity
and availability of vehicles it is authorized to sell. For example, light
trucks, in general, and the Chevrolet Suburban and Tahoe models, in particular,
are currently popular with consumers in the Amarillo market, and the Company
typically earns a higher gross profit margin on new trucks than on many new cars
sold by the Company. If consumer preferences for these models change or the
Company is unable to obtain a sufficient supply of these vehicles, the Company's
sales could decline and its results could be adversely affected. Because
approximately 71% of the Company's 1995 gross profit was attributable to the
Company's Chevrolet dealerships, the Company currently is particularly dependent
upon the continued popularity of models offered by Chevrolet and on Chevrolet's
ability to provide it with the appropriate inventory.
Domestic automakers are also vulnerable to strikes and other labor actions
by unions which could reduce or eliminate the supply of new vehicles for a
period. For example, workers at two of GM's parts plants went on strike for 17
days during March 1996, causing a material drop in GM's first quarter vehicle
production. The current collective bargaining agreements between the United
Automobile Workers Union and each of General Motors and Chrysler Corporation
("Chrysler") are scheduled to expire on September 14, 1996, and GM or Chrysler
may be the target of a strike. These automakers may not be able to negotiate new
collective bargaining agreements without experiencing significant labor
stoppages that could limit or interrupt the production or distribution of these
automakers' new vehicles. The Company believes that it has been materially
affected in the past by labor actions such as the strike against GM in March
1996. Due to the automakers' inability to provide the Company with a sufficient
supply of new vehicles and parts during such periods, the Company has purchased,
and in the event of another such strike may need to purchase, inventory from
other automobile dealers, often at prices higher than it would be required to
pay to
8
<PAGE>
the automakers, in order to carry an adequate level and mix of inventory. Such
events could materially adversely affect the financial results of the Company.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- First Six Months 1996 versus First Six Months 1995."
MATURE INDUSTRY; CYCLICAL AND LOCAL NATURE OF AUTOMOBILE SALES
The American automobile dealership industry generally is considered a mature
industry in which minimal growth is expected in unit sales of new vehicles. In
many mature local and regional retail markets, sales of new vehicles have
fluctuated in recent years. As a consequence, growth in the Company's revenues
and earnings and the market value of the Common Stock are likely to be
significantly affected by the Company's success in acquiring and integrating
dealerships and the pace and size of such acquisitions. The Company believes
that the automobile dealership business in the Amarillo area also is mature and
that, although the Oklahoma City automobile dealership market may experience
some growth, it is not likely to expand significantly. The automobile industry
historically has experienced periodic downturns, characterized by oversupply and
weak demand. Many factors affect the industry, including general economic
conditions, consumer confidence, the level of personal discretionary income,
interest rates and credit availability. Future recessions may have a material
adverse effect on the Company's business and the price of the Common Stock.
Local economic, competitive and other conditions also affect the performance
of dealerships. The Texas Panhandle and Oklahoma experienced a severe drought
from October 1995 through June 1996. Although the Company's sales during this
period were not significantly affected by the drought, such a weather condition
could have a material adverse effect on the business of the Company in the
future.
RISKS ASSOCIATED WITH EXPANSION
The Company's future growth will depend in large part on its ability to
acquire additional dealerships. In pursuing a strategy of acquiring other
dealerships, the Company will face risks commonly encountered with growth
through acquisitions. These risks include incurring significantly higher capital
expenditures and operating expenses, failing to assimilate the operations and
personnel of the acquired dealerships, disrupting the Company's ongoing
business, dissipating the Company's limited management resources, failing to
maintain uniform standards, controls and policies, and impairing relationships
with employees and customers as a result of changes in management. The Company
expects that it will take two to three years to integrate an acquired dealership
into the Company's operations and realize the full benefit of the Company's
strategies and systems. During the early part of this integration period the
operating results of an acquired dealership may decrease from results attained
prior to the acquisition as the Company implements its strategies and systems.
For the first six months of 1996, the financial performance of the two Oklahoma
City dealerships acquired in 1995 has been below the Company's financial results
in the Amarillo market and below the Oklahoma City dealerships' performance for
the first six months of 1995. There can be no assurance that the Company will be
successful in overcoming these risks or any other problems encountered with such
acquisitions, including in connection with its two dealerships acquired in 1995
or its pending acquisition of Hickey Dodge. See "Recent Developments,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Growth Strategy -- Acquisitions."
Acquiring additional dealerships, as the Company intends, will have a
significant impact on the Company's financial position, and could cause
substantial fluctuations in the Company's quarterly and yearly operating
results. Acquisitions could result in significant goodwill and intangible
assets, which are likely to result in substantial amortization charges to the
Company that would reduce stated earnings.
AVAILABILITY OF ACQUISITION CANDIDATES; NEED FOR FINANCING AND POSSIBLE DILUTION
THROUGH ISSUANCE OF STOCK
The Company's ability to continue to grow through the acquisition of
additional dealerships will be dependent upon (i) the availability of suitable
candidates, (ii) receiving automaker approval of acquisitions, (iii) the
Company's ability to compete effectively for available dealerships and (iv) the
availability of capital to complete the acquisitions. See "Business -- Growth
Strategy -- Acquisitions." The Company's future growth through acquisitions will
depend in part upon its ability to obtain the requisite automaker approvals. The
Company believes that, currently, at least one major automaker would not approve
acquisitions of its
9
<PAGE>
dealerships by the Company because it has expressed opposition to public
ownership of its dealerships. Alternatively, one or more automakers may attempt
to impose further restrictions on the Company in connection with their approval
of an acquisition. See " -- Automaker Control Over Dealerships." In connection
with the Offering, the Company anticipates entering into a new "Dealer
Agreement" with Chrysler's Dodge division, under which the Company will agree
not to acquire any additional Chrysler dealership in the Oklahoma City market
without Chrysler's approval and acknowledge that Chrysler will have "good cause"
to withhold its consent to any such acquisition (other than the acquisition of
Hickey Dodge).
The Company intends to finance acquisitions with cash on hand (including the
proceeds of the Offering) and through issuances of stock or debt securities. The
Company may require substantial additional capital in order to continue to
acquire dealerships in the future. Using cash to complete acquisitions could
substantially limit the Company's financial flexibility. Using stock to
consummate acquisitions may result in significant dilution of shareholders'
interest in the Company. Under Dealer Agreements with the Nissan division of
Nissan Motors Corp. U.S.A. ("Nissan") that the Company anticipates will be in
effect upon completion of the Offering, the Company's Nissan franchises may be
terminated if, without Nissan's prior approval, Mr. Gilliland's ownership of
Common Stock falls below 20% of the total number of shares of Common Stock
issued and outstanding. See "Business -- Vehicle and Parts Suppliers --
Relationships with Automakers." Although after the Offering Mr. Gilliland will
beneficially own approximately 50% of the Common Stock outstanding
(approximately 47% if the Underwriters' over-allotment option is exercised in
full), this provision of the Nissan Dealer Agreement could limit the Company's
ability to issue additional shares of Common Stock to complete acquisitions.
Using debt to complete acquisitions could result in financial covenants that
limit the Company's operating and financial flexibility. In addition,
substantially all of the assets of the Company's dealerships are pledged to
secure the Company's floor plan debt with General Motors Acceptance Corporation
("GMAC"), amounting to $36.2 million as of June 30, 1996, which may impede the
Company's ability to borrow from other sources. The Company does not have any
commitments from prospective lenders with respect to acquisition financing, and
there can be no assurance that sufficient financing will be available on
acceptable terms in the future. If the Company is unable to obtain additional
capital on acceptable terms, the Company may be required to reduce the scope of
its presently anticipated expansion, which could materially adversely affect the
Company's business and the value of the Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation --
Liquidity and Capital Resources" and "Business -- Growth Strategy --
Acquisitions."
CONCENTRATION OF VOTING POWER AND ANTI-TAKEOVER PROVISIONS
Following the Offering, through their ownership of approximately 73% of the
outstanding Common Stock (approximately 69% if the Underwriters' over-allotment
option is exercised in full), the current owners of the Company will continue to
control the election of all directors and all other actions submitted to a vote
of the Company's stockholders, including significant corporate actions. Other
stockholders (including purchasers of the Shares) will not have the voting power
to elect directors or make corporate decisions. This concentration of voting
power in current owners may, among other things, have the effect of delaying or
preventing a change in control of the Company or preventing stockholders from
realizing a premium on the sale of their shares upon an acquisition of the
Company.
Certain agreements and corporate documents and Delaware law also make it
difficult for a third party to try to unilaterally acquire a significant
ownership position in the Company, including:
(i) The Company's Dealer Agreements with General Motors' Chevrolet
division and with Nissan put the Company at risk of losing its
Chevrolet or Nissan franchises if any person or entity acquires 20% or more
of the Common Stock without Chevrolet's or Nissan's approval, as the case
may be. In addition, under its Dealer Agreement with the Dodge division of
Chrysler, the Company could lose its Dodge dealership upon any change in the
ownership of a controlling number of shares in the Company. See "Business --
Vehicle and Parts Suppliers -- Relationships with Automakers."
(ii)Under Dealer Agreements with Nissan that the Company anticipates will
be in effect upon completion of the Offering, the Company's Nissan
franchises may be terminated if, without Nissan's
10
<PAGE>
prior approval, Mr. Gilliland's ownership of Common Stock falls below 20% of
the total number of shares of Common Stock issued and outstanding or Mr.
Gilliland ceases to be the Chief Executive Officer of the Company. See
"Business -- Vehicle and Parts Suppliers -- Relationships with Automakers."
(iii)
Certain provisions of the Company's Certificate of Incorporation and
Bylaws (a) allow the Company to issue preferred stock with rights
senior to those of the Common Stock without any further vote or action by
the stockholders, (b) provide for a classified board of directors with
staggered three-year terms and (c) impose procedural requirements that could
make it more difficult for stockholders of the Company to effect certain
corporate actions. In addition, Section 203 of the Delaware General
Corporation Law restricts certain business combinations with any "interested
stockholder" as defined by such statute. See "Description of Capital Stock
-- Anti-Takeover Effects of Provisions of the Certificate of Incorporation,
Bylaws and Delaware Law."
(iv)Under the Company's Rights Agreement, shareholders (other than
certain prospective acquirors) are entitled to purchase Common Stock
at a discount or shares in the prospective acquiror at a discount upon
certain acquisitions of 19.9% or more of the Common Stock or a merger of the
Company or similar transaction. The Company may, at the discretion of the
Board of Directors, lower this threshold to as low as 10%. See "Description
of Capital Stock -- Stockholders' Rights Plan."
(v) Under the Company's Stock Option Plan, options outstanding thereunder
become immediately exercisable upon a "change in control" or certain
mergers or reorganizations of Cross-Continent Auto. See "Management -- Stock
Option Plan."
The blank check preferred stock authorized under the Company's Certificate
of Incorporation gives the Board of Directors of the Company broad discretion
with respect to the creation and issuance of preferred stock without stockholder
approval. The issuance of such preferred stock may delay, defer or prevent a
change of control of the Company and may adversely affect the rights of the
holders of Common Stock. The issuance of preferred stock with voting or
conversion rights may adversely affect the voting power of the holders of Common
Stock.
LIMITED MANAGEMENT AND PERSONNEL RESOURCES
The Company's success depends to a significant degree upon the continued
contributions of its management team (particularly its senior management) and
service and sales personnel. In addition, as the Company expands it may need to
hire additional managers. The Company's employees may voluntarily terminate
their employment with the Company at any time. The market for qualified
employees in the industry and in the regions in which the Company operates,
particularly for general managers, is highly competitive. The loss of the
services of key employees or the inability to attract additional qualified
managers could have a material adverse effect on the Company. The Company does
not currently maintain key-man life insurance for any of its officers or other
employees.
LACK OF INDEPENDENT DIRECTORS
At the time it completes the Offering, the Company will not have any outside
membership on its Board of Directors. Although it anticipates naming at least
two outside directors following completion of the Offering, such directors will
not constitute a majority of the Board, and the Company's Board of Directors may
not consist of such a majority in the future. In the absence of a majority of
independent directors, the Company's executive officers, who also are principal
stockholders and directors, could establish policies and enter into transactions
without independent approval of the terms and purposes of such policies and
transactions. In addition, although the Company will establish an audit
committee, which will consist entirely of outside directors, and a compensation
committee, which will consist of at least two outside directors, until those
committees are established, transactions and compensation policies could be
established without an independent review. These and other transactions could
present the potential for a conflict of interest between the Company and its
stockholders generally and the controlling officers, stockholders or directors.
11
<PAGE>
AUTOMAKER CONTROL OVER DEALERSHIPS
Historically, automakers have exercised significant control over dealerships
and have restricted them to specified locations and retained approval rights
over changes in management and ownership. The Company's ability to expand will
depend, in part, on obtaining the consent of automakers to the Company's
acquisitions of new dealerships, including the acquisition of Hickey Dodge,
which the Company currently anticipates acquiring with a portion of the net
proceeds from the Offering. While the Company's acquisitions to date have been
approved and the Company has not been materially adversely affected by the other
limitations imposed by automakers, there can be no assurance that the Company
will be able to obtain future necessary approvals on acceptable terms or not be
materially adversely affected by other limitations in the future.
The Company is dependent to a significant extent on its ability to finance
the purchase of new and used vehicles, which involves significant floor plan
financing principally from GMAC, an affiliate of General Motors. Many automakers
also attempt to measure customers' satisfaction with their sales and service
experience and may limit vehicle inventory allocations or deny approval of
future acquisitions if dealerships fail to meet certain standards. To date, the
Company has not been adversely affected by these standards and has not been
denied approval of any acquisition. However, there can be no assurance that the
Company will be able to comply with such standards in the future, which may
materially adversely affect the Company.
The Company operates its dealerships under "Dealer Agreements" with
automakers that, like the dealer agreements of other automobile dealers, provide
for termination for a variety of causes. The Company believes that it has been
and is in material compliance with all of its Dealer Agreements. Certain of the
Company's Dealer Agreements provide that the Company may lose its franchise if
any one person acquires 20% or more of the outstanding Common Stock of the
Company. See " -- Concentration of Voting Power and Anti-Takeover Provisions."
Any such acquisition of shares of the Company's Common Stock may be outside the
control of the Company and could result in the termination or non-renewal of one
or more of its franchises. In connection with the Offering, the Company has been
informed that its current Dealer Agreements with Nissan will be replaced with
agreements imposing several additional terms. One of these terms will be that
the continuation of each of these Dealer Agreements by Nissan may be contingent
upon, among other things, the Company's achievement of stated goals for market
share penetration in the market served by the applicable dealership. Failure to
meet the market share goals set forth in any Nissan Dealer Agreement could
result in the imposition of additional conditions in subsequent Dealer
Agreements or termination of such Dealer Agreement by Nissan. The Company's
Dealer Agreements with General Motors expire in or about the year 2000, and its
Dealer Agreements with its other automakers currently have no stated expiration
date. The Company currently believes that, as it has done in prior years, it
will be able to renew all of the Dealer Agreements upon expiration, but no such
assurance can be given. See "Business -- Vehicle and Parts Suppliers."
GOVERNMENTAL REGULATIONS
The Company is subject to a wide range of federal, state and local
regulations, such as local licensing requirements, consumer protection laws and
rules relating to gasoline storage, waste treatment and other environmental
matters. Future acquisitions by the Company may also be subject to regulation,
including antitrust reviews. The Company believes that it substantially complies
with all applicable laws relating to its business, but future regulations may be
more stringent and require the Company to incur significant additional costs.
NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that an active public market for the Common Stock
will develop or continue after the Offering. The initial public offering price
of the Common Stock will be determined by negotiations among the Company and
representatives of the Underwriters. Because the Company will be one of the
first public companies dedicated to the retail auto dealership business, these
representatives will not be able to use the market prices of other companies in
the same industry as a benchmark in setting the initial public offering price.
See "Underwriters" for a discussion of the factors considered in determining the
initial public offering
12
<PAGE>
price. Quarterly and annual operating results of the Company, variations between
such results and the results expected by investors and analysts, changes in
local or general economic conditions or developments affecting the automobile
industry, the Company or its competitors could cause the market price of the
Common Stock to fluctuate substantially. Sales of substantial amounts of the
Common Stock by the Company's principal stockholders or others in the public
market following the Offering, or the perception that such sales may occur,
could adversely affect the market price of the Common Stock and could impair the
ability of the Company to raise capital through sales of its equity securities.
As a result of all of these factors, as well as other factors common to initial
public offerings, the market price could fluctuate substantially from the
offering price.
RECENT DEVELOPMENTS
In June 1996, as part of its acquisition growth strategy, the Company
entered into an agreement to purchase substantially all of the operating assets
and the dealership franchise of Hickey Dodge, which is located in the Oklahoma
City market and, according to WARD'S DEALER BUSINESS, is one of the largest
Dodge dealerships in the United States. For its acquisition of Hickey Dodge, the
Company has agreed to pay $13.85 million in cash. In addition, the Company has
agreed to purchase the new vehicle inventory of Hickey Dodge at the seller's
cost and may purchase some or all of the used vehicle inventory at a price to be
agreed. The purchase of the new vehicle inventory will be financed through floor
plan financing. The acquisition is subject to customary closing conditions,
including the receipt of approval from the Dodge division of Chrysler. Although
there can be no assurance that such approval will be obtained or that the
closing will occur, the Company anticipates completing the acquisition on or
about October 1, 1996.
In 1994 and 1995, Hickey Dodge experienced profit margins significantly
below the Company's historical margins. Based on its discussions with management
of Hickey Dodge, the Company believes that, in 1994, Hickey Dodge aggressively
pursued a strategy to maximize sales, which included promotional activities and
guarantees of consumer vehicle loans. In particular, Hickey Dodge heavily
promoted an attempt to set the record for monthly unit sales volume by any U.S.
automobile dealership and sold 2,815 units in June 1994, compared to an average
of approximately 1,000 units per month for the remainder of 1994. The default
rates on loans guaranteed by Hickey Dodge and F&I charges relating to 1994 sales
significantly exceeded management expectations and, together with $938,000 in
bonuses paid to the owner and general manager of Hickey Dodge, negatively
affected profitability, resulting in pre-tax income of $593,000 on revenues of
$167.5 million in 1994. In 1995, revenues declined by 27.0% to $122.2 million.
The Company believes that this reduction in sales was largely due to reduced
promotional activities, difficulty by Hickey Dodge in obtaining an appropriate
mix of new vehicles and a general downturn in the Oklahoma City market due to
the bombing of the Federal Building in April. Although loan guarantees were
curtailed in early 1995, the earnings of Hickey Dodge continued to be adversely
affected as repossessed vehicles relating to loans originated in 1994 were sold
in 1995. As a result of these and other factors, pre-tax income for 1995 was
only $565,000. The Company is not assuming any liability regarding credit
guarantees provided by Hickey Dodge prior to the acquisition and does not intend
to provide such loan guarantees once the acquisition is completed. In the first
six months of 1996, Hickey Dodge's pre-tax margins improved from the
corresponding period in 1995. Revenues at Hickey Dodge for the first six months
of 1996 were $70.7 million, a 12.4% increase from the prior year period, and
pre-tax income increased to $3.3 million from $167,000 for the first six months
of 1995. Based on its discussions with Hickey Dodge, the Company believes that
revenues of Hickey Dodge increased because of a better mix of vehicles sold and
that pre-tax income increased largely because of the absence of the negative
factors that affected 1995 results.
The Company estimates that, including the sales of Hickey Dodge, its
combined market share of total new vehicle unit sales in Oklahoma City would
have increased from approximately 4.5% to approximately 8.8% overall for 1995.
In addition to increasing its market share, the Company believes that the
acquisition of Hickey Dodge will provide the Company with the opportunity to
benefit from the economies of scale that it seeks in expanding its local
presence in targeted markets.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be approximately $42.8 million, assuming an
initial public offering price of $13.00 per share. The Company intends to apply
$13.85 million of the net proceeds to purchase Hickey Dodge. The Company also
may apply a portion of the net proceeds to the purchase of some or all of the
used vehicle inventory of Hickey Dodge at a price to be agreed. Although the
purchase of Hickey Dodge is contingent on receiving approval from the Dodge
division of Chrysler, the Company expects to complete the acquisition on or
about October 1, 1996. See "Recent Developments." Prior to the acquisition of
Hickey Dodge, the Company intends to invest the proceeds to be used for that
acquisition in a short-term, interest-bearing account.
The Company also intends to apply approximately $25 million of the net
proceeds to repay a majority of its vehicle financing indebtedness owed to GMAC.
Such indebtedness accrues interest as of August 1, 1996 at an annual rate equal
to 8.0%. At June 30, 1996, this debt totaled $36.2 million. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
The Company intends to use the remaining expected net proceeds of $3.9
million for working capital and other general corporate purposes, including
future acquisitions.
The Company will not receive any of the proceeds from any sale of Shares
pursuant to any exercise of the Underwriters' over-allotment option.
DIVIDEND POLICY
The Company does not intend to pay cash dividends to holders of Common Stock
for the foreseeable future. Instead, the Company intends to apply earnings, if
any, to finance the growth of Cross-Continent. Any future determination to pay
cash dividends on Common Stock will be at the discretion of the Board of
Directors, will be subject to certain limitations under the General Corporation
Law of the State of Delaware and will be dependent upon the Company's financial
condition, results of operations, capital requirements and such other factors as
the Board of Directors deems relevant, including any restrictions contained in
any future debt facilities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
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CAPITALIZATION
The following table sets forth the cash and cash equivalents, short-term
debt and total capitalization of the Company at June 30, 1996, (i) including the
effect of the Reorganization and excluding the effect of the Offering and (ii)
on a pro forma basis, as adjusted to reflect the sale by the Company of
3,675,000 shares of Common Stock pursuant to the Offering (at an assumed initial
public offering price of $13.00 per share) and the application of the estimated
net proceeds to be received by the Company. This table should be read in
conjunction with the Combined Financial Statements and related notes and "Pro
Forma Combined Financial Data" appearing elsewhere in this Prospectus. See also
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Certain Transactions."
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
ACTUAL PRO FORMA(1)
--------- -------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................................................... $ 8,892 $ 8,892(1)
--------- -------------
--------- -------------
Short-term debt:
Floor plan debt....................................................................... $ 36,177 $ 26,432(1)
Due to affiliates..................................................................... 4,620 689(1)
Current maturities of long-term debt.................................................. 1,543 1,543
--------- -------------
Total short-term debt............................................................. $ 42,340 $ 28,664
--------- -------------
--------- -------------
Long-term debt, excluding current maturities............................................ $ 11,131 $ 11,131
--------- -------------
Stockholders' equity:
Preferred Stock, $.01 par value, 10,000,000 shares authorized;
no shares issued and outstanding..................................................... -- --
Common Stock, $.01 par value, 100,000,000 shares authorized;
10,125,000 shares issued and outstanding, actual;
13,800,000 shares issued and outstanding, as adjusted (2)............................ 101 138
Paid-in capital....................................................................... 2,312 45,056
Retained earnings..................................................................... 7,066 7,066
--------- -------------
Total stockholders' equity........................................................ 9,479 52,260
--------- -------------
Total capitalization............................................................ $ 20,610 $ 63,391
--------- -------------
--------- -------------
</TABLE>
- ------------
(1) Approximately $13.85 million of the net proceeds of the Offering will be
used to acquire the assets (excluding vehicle inventory) of Hickey Dodge.
Approximately $25.0 million of the net proceeds of the Offering will be
used to reduce floor plan debt, partially offset by approximately $15.3
million in additional floor plan debt that will be used to acquire the
Hickey Dodge new vehicle inventory. The remainder of the estimated net
proceeds, approximately $3.9 million, will be invested in an account with
GMAC (the "GMAC Deposit Account") and in other cash equivalents. The
reduction in "due to affiliates" represents the remittance of funds that
have been advanced to the Company by affiliates to invest in the GMAC
Deposit Account. See "Certain Transactions" and "Use of Proceeds."
(2) If the over-allotment option is exercised, the number of issued and
outstanding shares of Common Stock will not increase because only shares of
Common Stock owned by the Selling Stockholders are subject to such option.
See "Principal Stockholders." Excludes (i) 1,380,000 shares of Common Stock
reserved for future issuance under the Company's stock option plan,
including an option to purchase 7,692 shares of Common Stock that will be
granted immediately before the completion of the Offering with an exercise
price equal to the initial public offering price, and (ii) 130,308 shares
of Common Stock issuable upon the exercise of other options which have an
exercise price equal to the initial public offering price. See "Management
-- Stock Option Plan" and "Certain Transactions."
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<PAGE>
DILUTION
The net tangible book value of the Company at June 30, 1996 was $2,138,000,
or $.21 per share of Common Stock. Net tangible book value per share represents
the amount of the Company's net tangible assets less total liabilities divided
by the number of shares of Common Stock outstanding at that date. After giving
effect to the sale by the Company of 3,675,000 shares of Common Stock pursuant
to the Offering (based upon an assumed initial public offering price of $13.00
per share and after deducting estimated offering expenses payable by the
Company) and the acquisition of Hickey Dodge, the Company's pro forma net
tangible book value at June 30, 1996 would have been $32,651,000 or $2.37 per
share. This represents an immediate increase in the net tangible book value of
$2.16 per share to existing stockholders and an immediate dilution of $10.63 per
share to new investors purchasing Shares in the Offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $ 13.00
Net tangible book value per share before the Offering........... $ 0.21
Increase per share attributable to new investors................ 2.16
Pro forma net tangible book value per share after the Offering.... 2.37(1)
-----------
Dilution per share to new investors(2)............................ $ 10.63
-----------
-----------
</TABLE>
- ------------
(1) Includes the pro forma effect on net tangible book value of the Hickey
Dodge acquisition.
(2) Dilution is determined by subtracting the net tangible book value per share
of Common Stock after the Offering from the public offering price per
share.
The following table summarizes, on a pro forma basis as of June 30, 1996
(assuming the Offering had been completed at that date), the differences between
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
stockholders and by the investors purchasing 3,675,000 shares of Common Stock
from the Company in this Offering at an assumed initial public offering price of
$13.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------------- ----------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------------- ----------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders..................... 10,125,000(1) 73.4% $ 9,479,000(2) 16.6% $ 0.94
New Investors............................. 3,675,000 26.6 47,775,000 83.4 13.00
--------------- ----- ---------------- -----
Total................................... 13,800,000 100.0% $ 57,254,000 100.0%
--------------- ----- ---------------- -----
--------------- ----- ---------------- -----
</TABLE>
- ------------
(1) Excludes 138,000 shares of Common Stock that may be issued upon the
exercise at the initial public offering price of options to be granted
immediately prior to completion of the Offering.
(2) Net book value at June 30, 1996.
16
<PAGE>
SELECTED COMBINED FINANCIAL DATA
The selected combined statement of operations and balance sheet data for the
three years in the period ended December 31, 1995 are derived from the Company's
audited financial statements. The selected combined statement of operations and
balance sheet data for the two years in the period ended December 31, 1992 are
based on the Company's unaudited financial statements. The selected combined
results of operations data for the six months ended June 30, 1995 and 1996 and
the balance sheet data at June 30, 1996 are derived from the unaudited financial
statements of the Company and, in the opinion of management, reflect all
adjustments necessary for a fair presentation of its results of operations and
financial condition. All such adjustments are of a normal recurring nature. The
results of operations for an interim period are not necessarily indicative of
results that may be expected for a full year or any other interim period. This
selected combined financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Combined Financial Statements and related notes included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- ----------------------
1991 1992 1993 1994 1995(1) 1995(2) 1996
--------- --------- --------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF OPERATIONS
DATA:
Revenues:
Vehicle sales..................... $ 66,289 $ 113,072 $ 150,205 $ 163,721 $ 212,984 $ 101,464 $ 125,900
Other operating revenue........... 8,636 12,111 15,159 18,047 23,210 10,880 15,341
--------- --------- --------- --------- --------- --------- -----------
Total revenues.............. 74,925 125,183 165,364 181,768 236,194 112,344 141,241
Cost of sales....................... 64,086 106,681 139,626 153,446 198,702 94,470 119,921
--------- --------- --------- --------- --------- --------- -----------
Gross profit........................ 10,839 18,502 25,738 28,322 37,492 17,874 21,320
Selling, general and
administrative..................... 7,278 12,813 17,194 18,522 25,630 11,958 15,695
Depreciation and amortization....... 408 731 992 934 951 471 549
Management fees (3)................. 798 1,589 2,536 3,183 4,318 2,155 --
Employee stock compensation (4)..... -- -- -- -- -- -- 1,099
--------- --------- --------- --------- --------- --------- -----------
Operating income.................... 2,355 3,369 5,016 5,683 6,593 3,290 3,977(5)
Interest expense, net............... (1,008) (1,852) (1,848) (1,950) (3,088) (1,526) (1,724)
--------- --------- --------- --------- --------- --------- -----------
Income before income taxes.......... 1,347 1,517 3,168 3,733 3,505 1,764 2,253
Income tax expense.................. 498 561 1,173 1,351 1,310 659 1,224
--------- --------- --------- --------- --------- --------- -----------
Net income (6)...................... $ 849 $ 956 $ 1,995 $ 2,382 $ 2,195 $ 1,105 $ 1,029
--------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- -----------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------- AS OF
1991 1992 1993 1994 1995 JUNE 30, 1996
--------- --------- --------- --------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
COMBINED BALANCE SHEET DATA:
Working capital.......................... $ 1,274 $ 8 $ 135 $ 50 $ 536 $ 2,044
Total assets............................. 33,693 38,191 43,513 47,579 83,407 80,888
Long-term debt........................... 7,391 9,034 7,887 7,150 11,859 11,131
Total liabilities........................ 34,119 37,661 40,774 42,538 76,306 71,409
Stockholders' equity..................... (426) 530 2,739 5,041 7,101 9,479
</TABLE>
- ------------
(1) The results for the year ended December 31, 1995 include the results of
Performance Nissan, Inc. from the date of acquisition, February 2, 1995,
and the results of Performance Dodge, Inc. from the date of acquisition,
December 4, 1995.
(2) The results for the six months ended June 30, 1995 include the results of
Performance Nissan, Inc. from the date of acquisition, February 2, 1995.
(3) As of January 1, 1996, the Company no longer pays management fees to GGFP.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview" and "Pro Forma Combined Financial Data."
(4) Represents a non-cash expense relating to employee stock compensation that
the Company recognized in the second quarter of 1996 in connection with the
Executive Purchase. This non-cash expense represents the difference, as of
April 1, 1996, between the Company's estimate of the fair value of the
Common Stock issued in the Executive Purchase and the cash consideration
paid of $250,000. The Company based its estimate on the assumed initial
public offering price of the Shares less certain discounts to reflect, as
of April 1, 1996, the lack of a public market for the securities, the
uncertainty regarding an initial public offering and the fact that the
pending acquisition of Hickey Dodge had not been contemplated.
(5) In addition to the non-cash expense in connection with the Executive
Purchase (see footnote (4) above), during the six months ended June 30,
1996, the Company recognized a compensation expense of $600,000 relating to
the Executive Bonus. Excluding the non-cash expense and compensation
expense, actual operating income and net income for the six months ended
June 30, 1996 would have approximated $5.7 million and $2.5 million,
respectively.
(6) Historical earnings per share are not presented, as the historical capital
structure of the Company prior to the Offering is not comparable with the
capital structure that will exist subsequent to the Offering.
17
<PAGE>
PRO FORMA COMBINED FINANCIAL DATA
The following unaudited pro forma combined statements of operations for the
year ended December 31, 1995 and for the six months ended June 30, 1996 reflect
the historical accounts of the Company for those periods, adjusted to give pro
forma effect to the December 1995 acquisition of Performance Dodge, Inc.
(formerly Jim Glover Dodge, Inc.), the pending acquisition of Hickey Dodge
(which is contingent upon, among other things, the successful completion of the
Offering), the Reorganization and the Offering, as if these transactions had
occurred at the beginning of each period presented.
The following unaudited pro forma combined balance sheet as of June 30, 1996
reflects the historical accounts of the Company as of that date adjusted to give
pro forma effect to the pending acquisition of Hickey Dodge and the Offering as
if they had occurred as of June 30, 1996.
The pro forma combined financial data and accompanying notes should be read
in conjunction with the Combined Financial Statements and the related notes of
the Company as well as the financial statements and related notes of Jim Glover
Dodge, Inc. and Hickey Dodge, all of which are included elsewhere in this
Prospectus. The Company believes that the assumptions used in the following
statements provide a reasonable basis on which to present the pro forma
financial data. The pro forma combined financial data is provided for
informational purposes only and should not be construed to be indicative of the
Company's financial condition or results of operations had the transactions and
events described above been consummated on the dates assumed and are not
intended to project the Company's financial condition on any future date or
results of operations for any future period.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------------------------------------------
ACTUAL PRO FORMA
ACTUAL PERFORMANCE ACTUAL PRO FORMA FOR PRO FORMA
COMPANY (1) DODGE (1) HICKEY DODGE ADJUSTMENTS ACQUISITIONS ADJUSTMENTS (2)
----------- ----------- ------------ ----------- ------------ ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Vehicle sales..................... $212,984 $55,498 $111,113 $(4,856)(3) $374,739 --
Other operating revenue........... 23,210 8,419 11,108 (533)(3) 42,204 --
----------- ----------- ------------ ----------- ------------ -------
Total revenues.................. 236,194 63,917 122,221 (5,389) 416,943 --
Cost of sales....................... 198,702 55,370 106,826 (4,713)(3) 356,185 --
----------- ----------- ------------ ----------- ------------ -------
Gross profit........................ 37,492 8,547 15,395 (676) 60,758 --
Selling, general and
administrative..................... 25,630 7,244 13,149 (510)(3) 45,513 889(4)
Depreciation and amortization....... 951 24 346 401 (3)(6 1,722 --
Management fees..................... 4,318 -- -- -- 4,318 (4,318)(7)
----------- ----------- ------------ ----------- ------------ -------
Operating income.................... 6,593 1,279 1,900 (567) 9,205 3,429
Interest expense, net............... (3,088) (367) (1,335) (479)( )(6) (5,269) 2,000(4)
----------- ----------- ------------ ----------- ------------ -------
Income before income taxes.......... 3,505 912 565 (1,046) 3,936 5,429
Income tax expense.................. 1,310 -- -- 159(8) 1,469 2,025(9)
----------- ----------- ------------ ----------- ------------ -------
Net income.......................... $ 2,195 $ 912 $ 565 $(1,205) $ 2,467 $ 3,404
----------- ----------- ------------ ----------- ------------ -------
----------- ----------- ------------ ----------- ------------ -------
Net income per share................
Weighted average shares
outstanding........................
<CAPTION>
PRO FORMA
---------
<S> <C>
Revenues:
Vehicle sales..................... $374,739
Other operating revenue........... 42,204
---------
Total revenues.................. 416,943
Cost of sales....................... 356,185
---------
Gross profit........................ 60,758
Selling, general and
administrative..................... 46,402(5)
Depreciation and amortization....... 1,722
Management fees..................... --
---------
Operating income.................... 12,634
Interest expense, net............... (3,269)
---------
Income before income taxes.......... 9,365
Income tax expense.................. 3,494
---------
Net income.......................... $ 5,871
---------
---------
Net income per share................ $ 0.43(10)
Weighted average shares
outstanding........................ 13,800(10)
</TABLE>
18
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
---------------------------------------------------------------
ACTUAL PRO FORMA
ACTUAL(1) HICKEY DODGE(1) ADJUSTMENTS(2) PRO FORMA
----------- ----------------- ----------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Vehicle sales.................................... $125,900 $63,539 -- $189,439
Other operating revenue.......................... 15,341 7,139 -- 22,480
----------- ------- ------- ---------
Total revenues............................... 141,241 70,678 -- 211,919
Cost of sales...................................... 119,921 59,838 -- 179,759
----------- ------- ------- ---------
Gross profit....................................... 21,320 10,840 -- 32,160
Selling, general and administrative................ 15,695 6,863 672(4) 23,230
Depreciation and amortization...................... 549 133 160(6) 842
Management fees.................................... -- -- -- --
Employee stock compensation(5)..................... 1,099 -- -- 1,099
----------- ------- ------- ---------
Operating income (11).............................. 3,977 3,844 (832) 6,989
Interest expense, net.............................. (1,724) (558) 1,000(4) (1,282 )
----------- ------- ------- ---------
Income before income taxes......................... 2,253 3,286 168 5,707
Income tax expense................................. 1,224 -- 1,290(9) 2,514
----------- ------- ------- ---------
Net income (11).................................... $ 1,029 $ 3,286 $(1,122) $ 3,193
----------- ------- ------- ---------
----------- ------- ------- ---------
Net income per share............................... $ 0.23 (10)
Weighted average shares outstanding................ 13,800 (10)
</TABLE>
- ------------
(1) Actual results of operations reflect the results of operations of the
Company for the year ended December 31, 1995 and the six months ended June
30, 1996, of Performance Dodge, Inc. (formerly Jim Glover Dodge, Inc.) for
the fiscal year ended November 30, 1995 and of Hickey Dodge for the year
ended December 31, 1995 and the six months ended June 30, 1996, as
applicable.
(2) The Company will use the proceeds from the Offering primarily to acquire
dealerships in the future. The pro forma statements of operations shown
above assumes that approximately $13.85 million will be used to acquire
Hickey Dodge. Until the remaining proceeds are used to acquire other
dealerships, the Company intends to reduce floor plan debt by approximately
$25.0 million and to invest the remaining proceeds of approximately $3.9
million in the GMAC Deposit Account, which currently pays interest at an
annual rate of 8.0%, and in other cash equivalents. See "Use of Proceeds."
The pro forma financial information above does not reflect any interest
income related to the investment of proceeds in the GMAC Deposit Account or
other cash equivalents. Partially offsetting the decrease in floor plan
financing will be an increase in floor plan debt to finance the purchase of
vehicle inventory related to the Hickey Dodge acquisition. See Notes 2 and
3 to the notes to the Pro Forma Combined Balance Sheet below. Interest
expense associated with such debt is reflected in Hickey Dodge's actual
results of operations for each period.
(3) Entry reverses the one month of sales and expenses (December 1994) of
Performance Dodge, Inc. recorded in its statement of operations for the
year ended November 30, 1995.
(4) Reflects the Company's estimate of the net additions to selling, general
and administrative expenses and reductions in interest expense which would
have occurred if the Offering had been effected as of the beginning of each
period and consists of (a) a net increase in management compensation
pursuant to new compensation arrangements to be in place subsequent to the
Offering, (b) an increase in administrative expenses associated with public
ownership of the Company's Common Stock and (c) a net reduction in interest
expense reflecting estimated proceeds used to pay down floor plan debt. See
"Use of Proceeds." The additional expenses include:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 JUNE 30, 1996
------------------- ---------------
<S> <C> <C>
Management compensation.............................................................. $ 189 $ 322
Legal and professional............................................................... 300 150
Shareholder relations................................................................ 250 125
Other................................................................................ 150 75
----- -----
$ 889 $ 672
----- -----
----- -----
</TABLE>
The net reduction in interest expense was calculated based on an average
reduction in floor plan debt of $25.0 million at the actual interest rate
in effect during each respective period.
(5) The pro forma combined statement of operations for the year ended December
31, 1995 excludes a non-cash expense relating to employee stock
compensation that the Company recognized in the second quarter of 1996 in
connection with the Executive Purchase. This non-cash expense represents
the difference, as of April 1, 1996, between the Company's estimate of the
fair value of the Common Stock issued in the Executive Purchase and the
cash consideration paid of $250,000. The Company based its estimate on the
assumed initial public offering price of the Shares less certain discounts
to reflect, as of April 1, 1996, the lack of a public market for the
securities, the uncertainty regarding an initial public offering and the
fact that the pending acquisition of Hickey Dodge had not been
contemplated.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
19
<PAGE>
(6) Reflects additional interest expense, depreciation and amortization as if
Performance Dodge, Inc. and Hickey Dodge had been acquired as of January 1,
1995. Additional interest expense of $540,000 for the year ended December
31, 1995 includes interest on debt used to acquire Performance Dodge at a
rate of 9.75%. Interest expense associated with floor plan debt has already
been reflected in the actual results of operations, thus no additional
interest for such debt has been included in the pro forma adjustment. The
pro forma depreciation and amortization for the year ended December 31,
1995 primarily reflects additional amortization of approximately $527,000
associated with intangible assets, which assets consist largely of
goodwill, resulting from the acquisition of Performance Dodge ($2,700,000)
and Hickey Dodge ($12,268,000). Amortization periods range from five to 40
years with the majority of such costs being amortized over a 40-year
period. Partially offsetting the increased amortization is a decrease in
depreciation expense of approximately $126,000 for certain property and
equipment that will not be included in the purchase of Hickey Dodge by the
Company. The pro forma adjustment for the six months ended June 30, 1996
reflects increased amortization relating solely to the Hickey Dodge
acquisition, of approximately $200,000, partially offset by $40,000 of
decreased depreciation.
(7) Reflects elimination of the management fees as discussed under "Certain
Transactions" and Note 17 to the Notes to Combined Financial Statements.
See footnote (4) above for increase in selling, general and administrative
expenses for executive compensation paid to these individuals.
(8) Reflects the estimated income tax effect of the adjustments described in
footnotes (3) and (6) above and Performance Dodge, Inc. and Hickey Dodge,
as if they were taxable entities for the year ended December 31, 1995,
using the Company's incremental tax rate of approximately 37%.
(9) Reflects the estimated income tax effect of the adjustments (i) described
in footnotes (4) and (7) above for the year ended December 31, 1995, (ii)
described in footnotes (4) and (6) above and (iii) for Hickey Dodge, as if
it were a taxable entity, for the six months ended June 30, 1996, in each
case using the Company's incremental tax rate of approximately 37%.
(10) Pro forma earnings per share are based upon the assumption that 13,800,000
shares of Common Stock are outstanding for each period. This amount
represents the Shares to be issued in the Offering (3,675,000), the number
of shares of Common Stock owned by the Company's stockholders immediately
following the Reorganization (9,821,250) and the 303,750 shares of Common
Stock issued in connection with the Executive Purchase. See "Certain
Transactions" and Note 15 to the Notes to Combined Financial Statements.
(11) In addition to the non-cash expense in connection with the Executive
Purchase (see footnote (5) above), during the six months ended June 30,
1996, the Company recognized a compensation expense of $600,000 relating to
the Executive Bonus. Excluding the non-cash expense and compensation
expense, pro forma operating income and pro forma net income for the six
months ended June 30, 1996 would have approximated $8.7 million and $4.7
million, respectively.
20
<PAGE>
PRO FORMA COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-------------------------------------
PRO FORMA PRO
ACTUAL ADJUSTMENTS FORMA (1)
-------- --------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................................................... $ 8,892 $ -- 8,892
Accounts receivable................................................................ 10,664 -- 10,664
Inventories........................................................................ 38,416 15,837(2) 54,253
-------- --------------- ---------
Total current assets........................................................... 57,972 15,837 73,809
Net property, plant and equipment.................................................... 12,213 1,000(2) 13,213
Goodwill, net, and other assets...................................................... 10,703 12,268(2) 22,971
-------- --------------- ---------
Total assets..................................................................... $ 80,888 $ 29,105 $109,993
-------- --------------- ---------
-------- --------------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Floor plan debt.................................................................... $ 36,177 $ (9,745)(2)(3) $ 26,432
Current maturities of long-term debt............................................... 1,543 -- 1,543
Accounts payable................................................................... 4,796 -- 4,796
Due to affiliates.................................................................. 4,620 (3,931)(3) 689
Accrued expenses and other liabilities............................................. 6,760 -- 6,760
Deferred income taxes.............................................................. 2,032 -- 2,032
-------- --------------- ---------
Total current liabilities...................................................... 55,928 (13,676) 42,252
-------- --------------- ---------
Long-term Liabilities:
Long-term debt, excluding current maturities....................................... 11,131 -- 11,131
Deferred warranty revenue -- long-term portion..................................... 4,350 -- 4,350
-------- --------------- ---------
Total long-term liabilities.................................................... 15,481 -- 15,481
-------- --------------- ---------
Stockholders' Equity:
Preferred Stock, $.01 par value, 10,000,000 shares authorized, no shares issued and
outstanding....................................................................... -- -- --
Common Stock, $.01 par value; 100,000,000 shares authorized, no shares issued and
outstanding, actual; 13,800,000 shares issued and outstanding, as adjusted(1)..... 101 37(4) 138
Paid-in capital.................................................................... 2,312 42,744(4) 45,056
Retained earnings.................................................................. 7,066 -- 7,066
-------- --------------- ---------
Total stockholders' equity..................................................... 9,479 42,781 52,260
-------- --------------- ---------
Total liabilities and stockholders' equity................................... $ 80,888 $ 29,105 $109,993
-------- --------------- ---------
-------- --------------- ---------
</TABLE>
- ----------
(1) A sale by the Selling Stockholders of the shares of Common Stock included in
the Underwriters' over-allotment option would not increase stockholders'
equity, the number of shares issued and outstanding or cash and cash
equivalents.
(2) Reflects the allocation of the Hickey Dodge purchase price based on the
estimated fair value of assets acquired. The purchase price consists of the
following:
<TABLE>
<S> <C>
Estimated cash consideration................................................ $13,850,000
Less estimated fair value of assets acquired................................ 1,582,000
----------
Excess of purchase price over fair value of tangible assets acquired........ $12,268,000
----------
----------
</TABLE>
The Company is purchasing new vehicle and parts inventory, certain property
and equipment and the dealer agreement with Chrysler-Dodge and may purchase
some or all of the used vehicle inventory. The excess of the purchase price
over the fair value of tangible assets acquired will be allocated to
intangible assets, primarily the dealer agreement and goodwill. Fair value
of assets acquired primarily represents the estimated fair value of the
parts inventory and certain property and equipment. Vehicle inventory, which
at June 30, 1996 approximated $15,255,000, will be financed with floor plan
debt.
(3) Reflects the application of the estimated net proceeds of the Offering.
Approximately $25.0 million will be used to reduce floor plan debt,
approximately $13.85 million will be utilized to acquire Hickey Dodge and
the remainder of the estimated net proceeds of approximately $3.9 million
will be invested in the GMAC Deposit Account and cash equivalents. The
reduction in due to affiliates represents the remittance of funds that have
been advanced to the Company to invest in the GMAC Deposit Account. See
"Certain Transactions" and "Use of Proceeds."
(4) Reflects the issuance of 3,675,000 shares of Common Stock at an assumed
initial public offering price of $13.00 per share, net of estimated offering
expenses of $5.0 million.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE RESULTS OF OPERATIONS AND FINANCIAL
CONDITION OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
COMBINED FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE
IN THIS PROSPECTUS.
OVERVIEW
The Company owns and operates six franchised automobile dealerships in the
Amarillo and Oklahoma City markets and has grown primarily through dealership
acquisitions since the founders of the Company acquired their first dealership
in 1982. Given the relatively stable demand for new and used vehicles in the
United States generally, and in the markets served by its dealerships in
particular, the Company expects that future growth will be primarily derived
from acquisitions of additional dealerships. Based on management's experience in
acquiring and integrating dealerships, the Company believes that it takes two to
three years to integrate an acquired dealership into the Company's operations
and realize the full benefit of the Company's strategies and systems.
Significant management attention, capital investment and an increase in
operating expenses are typically required for acquisitions, particularly in the
first year after the acquisition. During the early part of the integration
period the operating results of an acquired dealership may decrease from results
attained prior to the acquisition as the Company implements its strategies and
systems. For the first six months of 1996, the financial performance of the two
Oklahoma City dealerships acquired in 1995 has been below their performance for
the first six months of 1995. The Company anticipates that general and
administrative expenses may increase in the future as the Company continues its
expansion by acquiring other dealerships.
The Company generates its revenues from sales of new and used vehicles, fees
for repair and maintenance services, sales of replacement parts, sales of
extended warranties on vehicles, and fees and commissions from arranging
financing and credit insurance in connection with vehicle sales. While sales of
new vehicles are sensitive to general economic conditions, the Company believes
that its used car sales and parts and service operations are less affected and
help to mitigate, in part, the effects of general economic downturns. The
Company also believes that its strong market share in the Amarillo market has
contributed to its revenues and profitability. The Company is the exclusive
Chevrolet dealer in Amarillo and in 1995 derived approximately 71% of its gross
profit from its three Chevrolet dealerships in Amarillo. The Company could be
materially adversely affected if Chevrolet awarded additional dealership
franchises to others in the Amarillo market, although the Company does not
anticipate such awards will be made, or if other automobile dealerships
increased their market share in the area. The Company does not have as large a
market share in Oklahoma City and there can be no assurance that it will be able
to obtain such a position in any other market that it may enter.
New vehicle revenues include sales of new vehicles and revenue attributable
to vehicle leases arranged by the Company ($114.5 million in the aggregate in
1995). Sales or trades of new vehicles to other franchised dealers are not
included in Company revenues but result in an adjustment to inventory and
flooring debt. Used vehicle revenues include amounts received for used vehicles
sold to retail customers, other dealers and wholesalers ($98.5 million in the
aggregate in 1995). Other operating revenues include parts and service revenues,
fees and commissions for F&I transactions and sales of the Company's extended
warranties for vehicles. The Company recognizes revenue attributable to sales of
its warranties over the term of the warranties for accounting purposes, although
it receives payment in full at the time of sale. In contrast, when the Company
sells warranties of third party vendors, as it does in the Oklahoma City market
and may do in new markets that it enters and with respect to all of its
dealerships in the future, the Company receives and, for accounting purposes,
immediately recognizes a commission at the time of sale. In connection with
vehicle financing contracts, the Company receives a fee (a "finance fee") from
the lender for originating the loan but is assessed a charge (a "chargeback") by
the lender if the contract terminates before its scheduled maturity,
22
<PAGE>
which can result from early repayment because of refinancing the loan, selling
or trading in the vehicle or default on the loan. The amount of the chargeback
depends on how long the related loan was outstanding. As a result, the Company
establishes a reserve based on its historical chargeback experience.
At each of its dealerships, the Company's management focuses on maximizing
profitability in each area of operations rather than on volumes of vehicle
sales. The key factors affecting the Company's profitability are costs of sales
and selling, general and administrative expenses. The average gross margins
obtained by franchised vehicle dealers in the United States on sales of new
vehicles have declined from over 7.0% in 1991 to 6.5% in 1995. Although the
Company's gross margins on new vehicle sales declined from 12.5% in 1994 to
12.1% in 1995, the Company's gross margins on new vehicle sales have
consistently been higher than the industry average. The Company's gross margins
on used vehicle sales fluctuate based on many factors, including the volume of
used vehicles sold to other dealers and wholesalers and the turnover rate of
used vehicle inventory, and were 8.9% in 1994 and 9.8% in 1995. See "Business --
Dealership Operations -- Used Vehicle Sales." Excluding sales to other dealers
and wholesalers (which are frequently at or below cost), the Company's gross
margin in 1995 of 13.7% on retail sales of used vehicles is currently higher
than its margin on new vehicles.
The Company's cost of sales and profitability are also affected by the
allocations of new vehicles which its dealerships receive from automakers. When
the Company does not receive allocations of new vehicle models adequate to meet
customer demand, it purchases additional vehicles from other dealers at a
premium to the manufacturer's invoice, reducing the gross margin realized on the
sales of such vehicles. In addition, the Company follows a disciplined approach
in selling vehicles to other dealers and wholesalers when the vehicles have been
in the Company's inventory longer than the guidelines set by the Company. Such
sales are frequently at or below cost and, therefore, affect the Company's
overall gross margin on vehicle sales. The Company's salary expense, employee
benefits costs and advertising expenses comprise the majority of its selling,
general and administrative expenses. The Company's interest expense fluctuates
based primarily on the level of the inventory of vehicles held at its
dealerships, substantially all of which is financed (such financing being called
"floor plan financing" or "flooring").
As a privately held company, Cross-Continent historically reimbursed the
Gilliland Group Family Partnership ("GGFP") for costs incurred by GGFP on behalf
of the Company, including the Company's proportionate share of GGFP's
administrative, clerical and other corporate overhead costs. In addition, the
Company paid GGFP a fee for management services generally based on the Company's
profits and the level of management services rendered. The Company's financial
statements included in this Prospectus reflect allocated costs and expenses
attributable to administrative, clerical and corporate assistance provided by
GGFP as selling, general and administrative expenses. That portion of the fee
paid to GGFP that represented a share of the overall profitability of the
Company has been reflected in the financial statements as management fees. As of
January 1, 1996, the Company began providing the administrative and corporate
oversight previously provided by GGFP and discontinued its practice of paying
management fees to GGFP. See "Management."
The Company has accounted for the purchase of each of its dealerships on a
purchase basis and, as a result, does not include in its financial statements
the results of operations of these dealerships prior to the date they were
acquired by the Company. The combined financial statements of the Company
reflect the results of operations, financial position and cash flows of each of
the Company's dealerships. The financial information included in this Prospectus
may not necessarily reflect the results of operations, financial position and
cash flows of the Company in the future or what the results of operations,
financial position and cash flows would have been had the Reorganization and
Offering occurred during the periods presented in the financial statements.
23
<PAGE>
RESULTS OF OPERATIONS
The following table summarizes, for the periods presented, the percentages
of total revenues represented by certain items reflected in the Company's
statement of operations.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
---------------------------------------------------------------
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
------------------------------------- ------------------------
1993 1994 1995(1) 1995(2) 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
New vehicle sales......................................... 55.0% 50.0% 48.5% 47.7% 46.8%
Used vehicle sales........................................ 35.8 40.1 41.7 42.6 42.3
Other operating revenue (3)............................... 9.2 9.9 9.8 9.7 10.9
----- ----- ----- ----- -----
Total revenues........................................ 100.0 100.0 100.0 100.0 100.0
Cost of sales............................................... 84.5 84.4 84.1 84.1 84.9
----- ----- ----- ----- -----
Gross profit................................................ 15.5 15.6 15.9 15.9 15.1
Selling, general and administrative......................... 10.4 10.2 10.9 10.6 11.1
Depreciation and amortization............................... 0.6 0.5 0.4 0.4 0.4
Management fees (4)......................................... 1.5 1.8 1.8 1.9 --
Employee stock compensation (5)............................. -- -- -- -- 0.8
----- ----- ----- ----- -----
Operating income............................................ 3.0 3.1 2.8 3.0 2.8(6)
Interest expense, net....................................... (1.1) (1.1) (1.3) (1.4) (1.2)
----- ----- ----- ----- -----
Income before income taxes.................................. 1.9 2.0 1.5 1.6 1.6
Income tax expense.......................................... 0.7 0.7 0.6 0.6 0.9
----- ----- ----- ----- -----
Net income.................................................. 1.2% 1.3% 0.9% 1.0% 0.7%(6)
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
- ----------
(1) The results for the year ended December 31, 1995 include the results of
Performance Nissan, Inc. from the date of acquisition, February 2, 1995 and
the results of Performance Dodge, Inc. from the date of acquisition,
December 4, 1995.
(2) The results for the six months ended June 30, 1995 include the results of
Performance Nissan, Inc. from the date of acquisition, February 2, 1995.
(3) Reflects primarily parts and service sales and F&I-related revenue.
(4) Management fees reflect certain payments made to GGFP prior to 1996, which
payments have been discontinued as of January 1, 1996.
(5) Represents a non-cash expense of approximately $1.1 million relating to
employee stock compensation that the Company recognized in the second
quarter of 1996 in connection with the Executive Purchase. This non-cash
expense represents the difference, as of April 1, 1996, between the
Company's estimate of the fair value of the Common Stock issued in the
Executive Purchase and the cash consideration paid of $250,000. The Company
based its estimate on the assumed initial public offering price of the
Shares less certain discounts to reflect, as of April 1, 1996, the lack of
a public market for the securities, the uncertainty regarding an initial
public offering and the fact that the pending acquisition of Hickey Dodge
had not been contemplated.
(6) In addition to the non-cash expense of approximately $1.1 million in
connection with the Executive Purchase (see footnote (5) above), during the
six months ended June 30, 1996, the Company recognized a compensation
expense of $600,000 relating to the Executive Bonus. Excluding the non-cash
expense and compensation expense, actual operating income and net income
for the six months ended June 30, 1996, as a percentage of total revenues,
would have approximated 4.0% and 1.8%, respectively.
FIRST SIX MONTHS 1996 VERSUS FIRST SIX MONTHS 1995
REVENUES
Revenues grew in each of the Company's primary revenue areas for the first
six months of 1996 as compared with the first six months of 1995, causing total
sales to increase 25.7% to $141.2 million. New vehicle sales revenue increased
23.3% in the first six months of 1996 to $66.1 million, compared with $53.6
million in the first six months of 1995. Substantially all of this increase was
attributable to the Company's dealerships in Oklahoma City, sales of which were
included for the full six months in 1996 while only one of the Company's
Oklahoma City dealerships was included for a portion of the first six months of
1995.
Used vehicle sales increased by 25.1% in the first six months of 1996 to
$59.8 million, compared with $47.8 million in the first six months of 1995. The
inclusion of the Company's Oklahoma City dealerships in the Company's results
for the first six months of 1996 accounted for 45.3% of this increase. The
remainder of the increase was largely attributable to an increase in sales of
used vehicles to wholesalers and other dealers
24
<PAGE>
in accordance with the Company's inventory management guidelines. An improvement
in the mix of used vehicles purchased by retail customers also resulted in
higher unit prices and contributed to the overall increase in used vehicle
sales.
The Company's other operating revenue increased 40.4% to $15.3 million in
the first six months of 1996 from $10.9 million in the first six months of 1995
largely because of inclusion of the parts and service sales and F&I sales by the
Company's Oklahoma City dealerships, which accounted for 79.3% of the increase.
The remaining increase was primarily attributable to increased F&I revenue per
vehicle sold by the Company's Amarillo dealerships.
GROSS PROFIT
Gross profit increased 19.0% in the first six months of 1996 to $21.3
million, compared with $17.9 million for the first six months of 1995, primarily
because of the addition of sales from the Company's Oklahoma City dealerships in
the 1996 period. Gross profit as a percentage of sales decreased to 15.1% in the
first six months of 1996 from 15.9% in the same period in 1995. The decrease in
gross profit as a percentage of sales was caused principally by reduced margins
for new and used vehicle sales at the Company's Amarillo dealerships, partially
offset by an increase in gross profit as a percentage of sales on new and used
vehicle sales at the Company's Oklahoma City dealerships.
The reduction in gross margin on new vehicles at the Amarillo dealerships
was primarily attributable to increased vehicle costs resulting from the
Company's efforts to minimize the effect of inventory shortfalls caused by GM's
parts plant strike in March 1996 by purchasing supplemental inventory from other
dealers. Gross margins on the sale of new vehicles at the Oklahoma City
dealerships increased in the first six months of 1996 from the same period of
1995. The Company believes that this increase was due, in part, to a one-time
favorable vehicle allocation from the manufacturers relating to the Company's
acquisition of these dealerships and, in part, to the Company's implementation
of its business strategy.
The reduction in gross margin on used vehicles at the Amarillo dealerships
was primarily attributable to increased vehicle purchase and reconditioning
costs as well as greater volume of sales of used vehicles to other dealers and
wholesalers (which sales are frequently at or slightly below cost) to avoid
carrying charges associated with used vehicle inventory. If such sales to other
dealers and wholesalers continue to increase as a percentage of total used
vehicle sales, gross margins on total used vehicle sales may continue to
decline. Used vehicle gross margins at the Oklahoma City dealerships increased
slightly due to the Company's implementation of its "mirror the market" program.
In the first six months of 1996, approximately 29.6% of the Company's used
vehicles sales were to other dealers and wholesalers as compared to
approximately 22.8% in the first six months of 1995.
Gross profit from other operating revenue, which includes parts and service,
F&I activities and other incidental revenue, increased 31.8% in the first six
months of 1996 to $8.7 million, compared with $6.6 million for the first six
months of 1995, largely because of the inclusion of the Company's Oklahoma City
dealerships, which accounted for 79.0% of the increase. Gross profit as a
percentage of other operating revenue declined to 56.7% in the first six months
of 1996 as compared to 60.5% for the same period of 1995 due primarily to an
increase in the Company's warranty repair costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES; MANAGEMENT FEES
The Company's selling, general and administrative expenses increased to
$15.7 million in the first six months of 1996 compared to $12.0 million in the
first six months of 1995, and increased as a percentage of revenue to 11.1% from
10.6%. The Oklahoma City dealerships' selling, general and administrative
expenses were higher as a percentage of their total revenues compared with the
Company's Amarillo dealerships. This was due to certain expenses incurred by the
Oklahoma City dealerships in integrating the Company's systems into their
operations and implementing the Company's strategies.
As of January 1, 1996, the Company ceased paying management fees to GGFP.
See Notes 4 and 7 to the "Pro Forma Combined Financial Data," "-- Overview" and
Note 17 to the Combined Financial Statements.
25
<PAGE>
The Company recorded a non-cash expense relating to employee stock
compensation of approximately $1.1 million in the six months ended June 30,
1996, representing the difference between the Company's estimate of the fair
value, as of April 1, 1996, of the 303,750 shares of Common Stock issued in the
Executive Purchase and the cash consideration paid of $250,000. See "Certain
Transactions" and Note 15 to the Notes to Combined Financial Statements.
In July 1996, the Company implemented a revised compensation plan for
Messrs. Gilliland, Hall, Rice and Mager (the "Senior Management Group"). Under
this revised plan, the Company's Senior Management Group is to receive base
salaries approximating an aggregate of $1,020,000 per year, subject to cost of
living adjustments in future years. During the first six months of 1996, the
base salaries paid to the Senior Management Group totalled $180,000. Because of
the newly implemented plan, compensation to this group will increase in the
second half of 1996. In conjunction with the Reorganization, the Company has
agreed to pay one of its executive officers a bonus of $600,000. The Executive
Bonus has been expensed in its entirety in the three months ended June 30, 1996.
Other than the Executive Bonus, the Senior Management Group will not receive any
bonus payments in 1996.
INTEREST EXPENSE
The Company's interest expense increased 16.5% to $2.3 million for the first
six months of 1996 compared to $1.9 million for the corresponding period of
1995. The increase was due to interest expense associated with the acquisitions
of the Oklahoma City dealerships and related inventories, which were financed
primarily with debt. This increase was partially offset by a reduction in the
Company's interest expense at its Amarillo dealerships caused by lower levels of
floor plan financing due to fewer vehicles held in inventory during the first
six months of 1996 compared with the first six months of 1995.
NET INCOME
The Company's net income decreased by 6.9% to $1.0 million in the first six
months of 1996 compared to $1.1 million in the first six months of 1995. This
decrease was primarily attributable to the non-cash expense relating to employee
stock compensation of approximately $1.1 million in connection with the
Executive Purchase and the compensation expense of $600,000 relating to the
Executive Bonus. Excluding the non-cash expense and compensation expense, net
income for the six months ended June 30, 1996 would have been $2.5 million. The
Company's effective tax rate for the six months ended June 30, 1996 approximated
54.3% as compared to 37.4% for the comparable period of 1995. The increase in
the effective rate relates to certain non-deductible expenses incurred during
the first six months of 1996.
1995 VERSUS 1994
REVENUES
The Company's total revenue increased 29.9% to $236.2 million in 1995 from
$181.8 million in 1994. New vehicle sales increased 26.1% to $114.5 million in
1995 from $90.8 million in 1994, primarily because of the acquisitions in
February and December 1995, respectively, of the Company's Performance Nissan
and Performance Dodge dealerships in Oklahoma City. The inclusion of the results
of these two dealerships accounted for 64.7% of the Company's overall increase
in new vehicle sales in 1995. The remainder of the increase in new vehicle sales
in 1995 was largely attributable to a net increase in sales volume of 9.2% at
the Company's dealerships in Amarillo, which the Company believes was primarily
due to changes in inventory mix, population growth and, to a lesser extent,
increases in new vehicle sales prices.
Used vehicle sales increased 35.1% to $98.5 million in 1995 from $72.9
million in 1994. The inclusion of the results of the Company's Oklahoma City
dealerships accounted for 68.8% of this increase in used vehicle sales. In
addition, the Company's Quality Nissan dealership in Amarillo, which began
selling used vehicles in May 1994, accounted for 16.4% of the Company's overall
increase in used vehicle sales in 1995. The Company attributes the remainder of
the increase in its used vehicle sales in 1995 to increases in volume resulting
from improvements in stocking and selling used vehicles in demand in the
Amarillo market and an increase of approximately 18% in the average retail
selling price per vehicle sold related in part to increases in retail prices and
in part to changes in the vehicle mix.
26
<PAGE>
The Company's other operating revenue increased 28.9% to $23.2 million for
1995, compared to $18.0 million for 1994 largely due to the inclusion of the
Company's Oklahoma City dealerships in the 1995 results of operations. The
addition of the Oklahoma City dealerships accounted for approximately 77% of the
increase in other operating revenue. The Company attributes the remainder of the
increase mainly to an increase in parts and service sales by its dealerships in
Amarillo, which the Company believes was caused by population growth in the
Amarillo market, and to an increase in the Amarillo dealerships' F&I sales
caused by the growth in vehicle sales and an increase in the volume of F&I
products sold by the Company, such as extended warranties and credit insurance
policies.
GROSS PROFIT
Gross profit increased 32.5% in 1995 to $37.5 million from $28.3 million in
1994 primarily due to the Oklahoma City dealerships. Gross profit as a
percentage of sales increased to 15.9% in 1995 from 15.6% in 1994. The increase
in gross margin was principally caused by higher gross margins on used vehicle
sales and parts and service sales, which were partially offset by a reduction in
the gross margin on new vehicles. The increase in gross margin on used vehicles
was primarily due to the success of the Company's strategy to mirror the market
in Amarillo. The new vehicle margin declined because the Company purchased more
new vehicles from other dealers in 1995, at prices above what the automakers
would have charged, due to General Motors' inability to supply the Company with
its desired mix of the more popular-selling models.
The Company's gross margin on used vehicle sales increased due to
improvements by the Company in stocking and selling used vehicles in demand in
its local markets and fewer used vehicle sales to other dealers and wholesalers
(which sales are frequently at or below cost). In 1995, 23.0% of the Company's
used vehicle sales were to other dealers and wholesalers as compared to 31.2% in
1994.
The Company's overall gross margin also improved in 1995 due to higher parts
and service margins resulting from increased labor efficiencies in its parts and
service work, including the use of a variable pricing system that reflected the
difficulty and sophistication of different types of repairs, and
productivity-based compensation for its parts and service teams.
The Company's gross profit on other operating revenue increased 34.0% in
1995 to $14.1 million from $10.5 million in 1994 largely because of the
inclusion of the Company's Oklahoma City dealerships, which accounted for 69.0%
of the increase. Gross profit as a percentage of other operating revenue
increased to 60.7% in 1995 from 58.0% in 1994. This increase was attributable
primarily to the implementation of variable rate pricing strategies in the
Company's parts and service department.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES; MANAGEMENT FEES
The Company's selling, general and administrative expenses increased to
$25.6 million, or 10.9% of the Company's revenues, in 1995 from $18.5 million,
or 10.2% of total revenues, in 1994. Expenses associated with the Oklahoma City
dealerships acquired by the Company in 1995 accounted for approximately 79% of
this increase. The Company attributes the remainder of the increase in selling,
general and administrative expenses primarily to higher compensation levels in
1995 and to an increase in advertising expenses. Due primarily to transition
costs, selling, general and administrative expenses of the Oklahoma City
dealerships represented 15.2% of the total revenue in 1995, compared with 10.0%
for the Company's Amarillo dealerships.
The Company's management fees increased 34.4% to $4.3 million in 1995 from
$3.2 million in 1994. This increase was attributable to increased levels of
services provided related to the Oklahoma City dealerships and increased levels
of overall profitability of the Company.
INTEREST EXPENSE
The Company's interest expense in 1995 increased 56.0% to $3.9 million from
$2.5 million in 1994. The Company attributes 38.4% of this increase to floor
plan financing at the Company's Oklahoma City dealership acquired in February
1995. The remainder of the increase primarily reflects higher levels of flooring
due to higher vehicle inventories in 1995 as compared to 1994, interest expense
on the debt incurred to acquire Performance Nissan and an increase in the
financing rate charged by GMAC during 1995.
27
<PAGE>
NET INCOME
The Company's net income in 1995 decreased 8.3% to $2.2 million from $2.4
million in 1994. This decrease was principally caused by an increase of $1.1
million in management fees in 1995. Excluding management fees, which were
eliminated beginning in 1996, the Company's net income would have increased by
12.0% to $4.9 million in 1995.
1994 VERSUS 1993
REVENUES
Total revenues increased 9.9% to $181.8 million in 1994 as compared with
$165.4 million in 1993. New vehicle sales were relatively unchanged at $90.8
million in 1994 compared with $91.0 million in 1993. The slight decline in new
vehicle sales was attributable to the Company's inability to obtain an
appropriate mix of new Chevrolet vehicles to meet customer demand and a
disruption in sales because of the relocation of one of the Company's
dealerships during the year. These factors were mitigated by increases in new
vehicle sales at two of the Company's dealerships because of a higher level of
truck sales and an increase in the average new vehicle retail sales price.
Used vehicle sales increased 23.1% to $72.9 million in 1994 compared with
$59.2 million in 1993. This increase was primarily attributable to the
introduction of used vehicles at one of the Company's dealerships and to an
increase in the volume of used vehicle inventory sold to other dealers and
wholesalers.
The Company's other operating revenue increased 18.4% to $18.0 million in
1994 from $15.2 million in 1993. An increase of 19.0% in parts and service
revenue was largely due to sales originating from newly renovated parts and
service facilities at one of the Company's dealerships. The increase in parts
and service revenue also was the result of inventory management systems that
were implemented in 1993. The Company's other operating revenue also increased
in 1994 due to a net increase of 8.1% in the level of F&I activity at the
Company's dealerships, which was directly related to a greater volume of sales
of used vehicles at the Company's dealerships.
GROSS PROFIT
Gross profit increased 10.1% to $28.3 million in 1994 from $25.7 million in
1993 primarily because of increased profits in parts and service sales and
higher profits on new vehicle sales primarily due to an increase in truck sales,
which typically carry a higher margin than new car sales. Gross profit from
other operating revenue increased 19.3% in 1994 to $10.5 million from $8.8
million in 1993. This increase was largely due to an increase in parts and
service activity and a greater volume of sales of used vehicles at the Company's
dealerships, which resulted in a greater amount of F&I activity. Gross profit as
a percentage of other operating revenue remained relatively constant at 58%.
Overall gross profit as a percentage of sales remained unchanged at 15.6% in
1994 and 1993.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES; MANAGEMENT FEES
The Company's selling, general and administrative expenses increased to
$18.5 million in 1994, which represented a slight decline in selling, general
and administrative expenses as a percentage of sales to 10.2% in 1994 compared
to 10.4% in 1993. This percentage decrease was primarily attributable to the
higher volume of sales in 1994.
Management fees increased 25.5% to $3.2 million in 1994 compared to $2.5
million in 1993. This increase was primarily due to increased profitability.
INTEREST EXPENSE
The Company's interest expense increased 19.0% to $2.5 million in 1994 from
$2.1 million in 1993. This increase was attributable to higher levels of floor
plan financing caused by increased levels of inventory, interest on debt
incurred in connection with the relocation of one of the Company's dealerships
and a general increase in interest rates.
NET INCOME
As a result of the factors noted above, the Company's net income increased
20.0% to $2.4 million in 1994 from $2.0 million in 1993.
28
<PAGE>
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following tables set forth the Company's results of operations data for
the quarterly periods presented. This presentation should be read in conjunction
with the audited and unaudited financial statements of the Company appearing
elsewhere in this Prospectus. Because of the seasonal nature of its business and
based on past experience, the Company expects its operating income for the
fourth quarter to be lower than that of the second and third quarters.
Historically, the Company's first quarter results of operations are also lower
than those of the second and third quarters. The Company's results of operations
for the first and second quarters of 1996 did not reflect this historical
seasonality. This was largely attributable to the particularly high volume of
sales in the first quarter of 1996, the effects of the drought in the Texas
Panhandle and in Oklahoma that adversely affected the second quarter results, a
less favorable allocation of new vehicles from General Motors that was directly
related to strikes at two GM parts plants in March 1996 and a greater volume of
sales of used vehicles to other dealers and wholesalers (which sales are
frequently at or below cost) in the first six months of 1996. See "--First Six
Months 1996 versus First Six Months 1995."
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 (1) 1995 1995 1995 (2) 1996 1996
------------- ------------- ------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
New vehicle sales..... $ 23,840 $ 29,789 $ 31,521 $ 29,344 $ 34,649 $ 31,493
Used vehicle sales.... 21,237 26,598 26,016 24,639 29,360 30,398
Other operating
revenue.............. 4,990 5,891 6,281 6,049 7,220 8,121
------------- ------------- ------------- ------------- ------------- -------------
Total revenues...... 50,067 62,278 63,818 60,032 71,229 70,012
Cost of sales........... 42,449 52,022 53,374 50,857 59,896 60,025
------------- ------------- ------------- ------------- ------------- -------------
Gross profit............ 7,618 10,256 10,444 9,175 11,333 9,987
Selling, general and
administrative......... 5,377 6,580 6,685 6,987 7,537 8,158
Depreciation and
amortization........... 224 248 240 240 270 279
Management fees (3)..... 798 1,357 1,393 770 -- --
Employee stock
compensation (4)....... -- -- -- -- -- 1,099
------------- ------------- ------------- ------------- ------------- -------------
Operating income........ 1,219 2,071 2,126 1,178 3,526 451(5)
Interest expense, net... (704) (823) (749) (813) (975) (749)
------------- ------------- ------------- ------------- ------------- -------------
Income (loss) before
income taxes........... 515 1,248 1,377 365 2,551 (298)
Income tax expense...... 193 466 515 136 952 272
------------- ------------- ------------- ------------- ------------- -------------
Net income (loss)....... $ 322 $ 782 $ 862 $ 229 $ 1,599 $ (570)(5)
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
- ------------
(1) Includes results of operations for Performance Nissan, Inc. from February
2, 1995.
(2) Includes results of operations for Performance Dodge, Inc. from December 4,
1995.
(3) Discontinued as of January 1, 1996.
(4) Represents a non-cash expense relating to employee stock compensation that
the Company recognized in the second quarter of 1996 in connection with the
Executive Purchase. This non-cash expense represents the difference, as of
April 1, 1996, between the Company's estimate of the fair value of the
Common Stock issued in the Executive Purchase and the cash consideration
paid of $250,000. The Company based its estimate on the assumed initial
public offering price of the Shares less certain discounts to reflect, as
of April 1, 1996, the lack of a public market for the securities, the
uncertainty regarding an initial public offering and the fact that the
pending acquisition of Hickey Dodge had not been contemplated.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
29
<PAGE>
(5) In addition to the non-cash expense in connection with the Executive
Purchase (see footnote (4) above), during the three months ended June 30,
1996, the Company recognized a compensation expense of $600,000 relating to
the Executive Bonus. Excluding the non-cash expense and compensation
expense, actual operating income and net income for the three months ended
June 30, 1996 would have approximated $2.15 million and $0.9 million,
respectively.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 (1) 1995 1995 1995 (2) 1996 1996
--------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
New vehicle sales..... 47.6% 47.8% 49.4% 48.9% 48.6% 45.0%
Used vehicle sales.... 42.4 42.7 40.8 41.0 41.2 43.4
Other operating
revenue.............. 10.0 9.5 9.8 10.1 10.2 11.6
----- ----- ----- ----- ----- -----
Total revenues...... 100.0 100.0 100.0 100.0 100.0 100.0
Cost of sales........... 84.8 83.5 83.6 84.7 84.1 85.7
----- ----- ----- ----- ----- -----
Gross profit............ 15.2 16.5 16.4 15.3 15.9 14.3
Selling, general and
administrative......... 10.7 10.6 10.5 11.6 10.6 11.7
Depreciation and
amortization........... 0.5 0.4 0.4 0.4 0.4 0.4
Management fees (3)..... 1.6 2.2 2.2 1.3 -- --
Employee stock
compensation (4)....... -- -- -- -- -- 1.6
----- ----- ----- ----- ----- -----
Operating income (5).... 2.4 3.3 3.3 2.0 4.9 0.6
Interest expense, net... (1.4) (1.3) (1.2) (1.4) (1.3) (1.0)
----- ----- ----- ----- ----- -----
Income (loss) before
income taxes........... 1.0 2.0 2.1 0.6 3.6 (0.4)
Income tax expense...... 0.4 0.7 0.8 0.2 1.3 0.4
----- ----- ----- ----- ----- -----
Net income (loss) (5)... 0.6% 1.3% 1.3% 0.4% 2.3% (0.8)%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
- ------------
(1) Includes results of operations for Performance Nissan, Inc. from February
2, 1995.
(2)
Includes results of operations for Performance Dodge, Inc. from December 4,
1995.
(3) Discontinued as of January 1, 1996.
(4) Represents a non-cash expense of approximately $1.1 million relating to
employee stock compensation that the Company recognized in the second
quarter of 1996 in connection with the Executive Purchase. This non-cash
expense represents the difference, as of April 1, 1996, between the
Company's estimate of the fair value of the Common Stock issued in the
Executive Purchase and the cash consideration paid of $250,000. The Company
based its estimate on the assumed initial public offering price of the
Shares less certain discounts to reflect, as of April 1, 1996, the lack of
a public market for the securities, the uncertainty regarding an initial
public offering and the fact that the pending acquisition of Hickey Dodge
had not been contemplated.
(5) In addition to the non-cash expense of approximately $1.1 million in
connection with the Executive Purchase (see footnote (4) above), during the
three months ended June 30, 1996, the Company recognized a compensation
expense of $600,000 relating to the Executive Bonus. Excluding the non-cash
expense and compensation expense, actual operating income and net income
for the three months ended June 30, 1996, as a percentage of total
revenues, would have approximated 3.1% and 1.3%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires cash primarily for financing its inventory of new and
used vehicles and replacement parts, acquisitions of additional dealerships,
capital expenditures and transition expenses in connection with its
acquisitions. Historically, the Company has met these liquidity requirements
primarily through cash flow generated from operating activities, floor plan
financing and borrowings under credit agreements with GMAC and commercial banks.
Floor plan financing from GMAC represents the primary source of financing for
vehicle inventories.
The Company finances its purchases of new vehicle inventory (including its
Dodge and Nissan vehicles) with GMAC. The Company also maintains a line of
credit with GMAC for the financing of used vehicles, pursuant to which GMAC
provides financing for up to 80% of the cost of used vehicles that are less than
five
30
<PAGE>
years old and that have been driven fewer than 70,000 miles. GMAC receives a
security interest in all inventory it finances. The Company makes monthly
interest payments on the amount financed by GMAC. The Company must repay the
principal amount of indebtedness with respect to any vehicle within two days of
the sale of such vehicle by the Company. The Company periodically renegotiates
the terms of its financing with GMAC, including the interest rate. In 1995, the
average annual interest rate paid by the Company under the GMAC floor plan was
8.6%. As of June 30, 1996, the Company had outstanding floor plan debt of $36.2
million and paid an average annual interest rate of 8.0%. The Company
anticipates that its floor plan debt will decrease following the Offering as a
result of the Company's repayment of approximately $25 million in GMAC floor
plan debt. This $25 million decrease will be partially offset by the Company's
assumption of approximately $15 million of floor plan debt of Hickey Dodge.
From time to time the Company also finances its purchases of new and used
vehicles, replacement parts and short-term receivables through borrowings from
commercial banks at various rates. At June 30, 1996, there was no such
indebtedness outstanding.
During the first six months of 1996, the Company generated net cash of $5.8
million from operating activities. Net cash used for operating activities was
$6.4 million in 1995 and was primarily attributable to increased inventory
levels and accounts receivable, partially offset by increased sales of Company
warranties and increased accounts payable. The increase in inventory levels in
1995 reflects an increase in the volume of sales and the timing of shipments
from the manufacturer. Increased receivables reflect increased sales near year
end primarily attributable to the Oklahoma City dealerships acquired in 1995.
The Company generated net cash from operations of $5.0 million and $2.4 million
in 1994 and 1993, respectively.
Cash used for investing activities was approximately $565,000 for the first
six months of 1996 and related primarily to acquisitions of property and
equipment. Cash used for investing activities was $1.8 million, $1.8 million and
$1.7 million in 1995, 1994 and 1993, respectively, including $1.5 million, $1.8
million and $0.7 million of capital expenditures during such periods. Capital
expenditures in 1995 were primarily attributable to expenditures for renovations
at the Amarillo dealerships and expenditures related to the Company's Oklahoma
City dealerships. Capital expenditures in 1994 consisted of $1.8 million of cash
expended for capital improvements at the Company's Amarillo dealerships,
including expenditures in connection with the relocation of Quality Nissan, Inc.
The Company's capital expenditures for the second half of 1996 are expected
to approximate $800,000 relating primarily to capital improvements to the
service department at one of the Company's dealerships. The Company anticipates
that cash from operations will be sufficient to fund its planned capital
expenditures for the remainder of 1996. The Company has entered into an
agreement to purchase Hickey Dodge for approximately $13.85 million in cash. In
addition, the Company has agreed to purchase the new vehicle inventory of Hickey
Dodge at the seller's cost and may purchase some or all of the used vehicle
inventory at a price to be agreed. See "Recent Developments." The Company
currently anticipates that it will finance this acquisition with a portion of
the proceeds of the Offering. The Company anticipates that any future
acquisitions will be financed with proceeds from the Offering, issuance of stock
or debt or a combination of cash, stock and debt. There can be no assurance that
such financial resources will be available or be available on favorable terms.
Cash used by financing activities amounted to $4.7 million for the first six
months of 1996 and was primarily attributable to the Company's reduced levels of
inventory in the first six months of 1996. In 1995, cash provided by financing
activities reflected the increase in inventories, resulting in a $9.4 million
increase in floor plan debt. At June 30, 1996, the Company's long term
indebtedness totaled $11.1 million, primarily attributable to the Company's real
estate holdings, with the remainder consisting primarily of indebtedness
incurred in connection with prior acquisitions. Cash provided by financing
activities totaled approximately $11.6 million in 1995 compared with a use of
cash of $0.7 million in 1994. This fluctuation is primarily attributable to
increases in inventory levels financed with floor plan debt.
The Company believes that its existing capital resources, including the net
proceeds of the Offering, will generate sufficient funds to finance the pending
acquisition of Hickey Dodge, run the Company's operations in the ordinary course
and fund its debt service requirements. The Company estimates that it will incur
a tax
31
<PAGE>
liability of approximately $4 million in connection with the change in its tax
basis of accounting for inventory from LIFO to FIFO. The Company believes that
it will be required to pay this liability in three to six equal annual
installments, beginning in March 1997, and believes that it will be able to pay
such obligation with cash provided by operations.
SEASONALITY
The Company generally experiences a higher volume of new and used vehicle
sales in the second and third quarters of each year. If the Company acquires
dealerships in other markets, it may be affected by other seasonal or consumer
buying trends. See "-- Selected Quarterly Results of Operations."
32
<PAGE>
BUSINESS
OVERVIEW
The Company owns and operates six franchised automobile dealerships in the
Amarillo, Texas and Oklahoma City, Oklahoma markets. Through these dealerships,
the Company sells new and used cars and light trucks, arranges related financing
and insurance, sells replacement parts and provides vehicle maintenance and
repair services.
The Company's founder and Chief Executive Officer, Bill A. Gilliland, has
managed automobile dealerships since 1966 and acquired the Company's first
dealership, Quality Nissan, Inc. in Amarillo, in 1982. The Company continued its
growth in the Amarillo area by acquiring three Chevrolet dealerships, two of
which have been in continuous operation (under various owners) since the 1920s.
The Company is the exclusive Chevrolet and Nissan dealer in Amarillo. The
Company led the Amarillo market in vehicle unit sales in 1995, accounting for
approximately 36% of new vehicle unit sales and 25% of used vehicle unit sales.
In 1995, the Company entered the Oklahoma City market through the acquisition of
a Nissan dealership in February and a Dodge dealership in December. In June
1996, the Company entered into an agreement to acquire Hickey Dodge, which is
one of the largest Dodge dealerships in the United States. With this
acquisition, the Company believes that, based on pro forma revenue, it would
have been one of the 50 largest dealer groups out of more than 15,000 dealer
groups nationwide in 1995.
As a result of the Company's business strategy, including the acquisition of
new dealerships, the Company's sales have increased from $74.9 million in 1991
to $236.2 million in 1995. Including the full year effect of the dealership
acquired in December 1995, the Company's 1995 sales were $294.7 million. Giving
effect to the pending acquisition of Hickey Dodge and including the full year
effect of the dealership acquired in December 1995, the Company's pro forma 1995
sales would have been $416.9 million. The Company believes that its business
strategy and operations have also enabled it to achieve a level of profitability
superior to the industry average. In 1995, the Company's actual gross profit
margin was 15.9%, compared to the industry average of 12.9%. The Company's
operating strategy includes:
EFFECTIVELY SERVING ITS TARGET CUSTOMERS. The Company's existing
dealerships, which together offer the complete lines of Chevrolet, Nissan and
Dodge vehicles, focus primarily on middle-income buyers seeking moderately
priced vehicles that can be financed with relatively affordable monthly
payments. The Company believes that working closely with its customers to
identify appropriate vehicles and offering suitable financing and credit
insurance products enhances the Company's overall profitability by increasing
the percentage of vehicle purchases financed through its dealerships and by
reducing the subsequent default rate on such financing contracts. In 1995, the
Company arranged financing for approximately 76% of its sales of new vehicles
and 83% of its sales of used vehicles, as compared to 42% and 51%, respectively,
for the average automobile dealership in the U.S.
OPERATING MULTIPLE DEALERSHIPS IN SELECTED MARKETS. By operating multiple
dealerships within individual markets, the Company seeks to become a leading
automotive dealer in each market that it serves. This strategy enables the
Company to achieve economies of scale in advertising, inventory management,
management information systems and corporate overhead. In 1995, the Company was
the market share leader in the Amarillo vicinity, accounting for approximately
28% of the new car market and 46% of the new truck market. In Oklahoma City, the
combined market shares in 1995 for the Company's existing Oklahoma City
dealerships were 2% and 7% of new car and truck sales, respectively. The Company
estimates that, including Hickey Dodge, the Company's combined market shares in
Oklahoma City would have been 4% of the new car market and 15% of the new truck
market in 1995, or 8% of total new vehicle sales.
MAINTAINING DISCIPLINED INVENTORY MANAGEMENT. The Company believes that
maintaining a vehicle mix that matches market demand is critical to dealership
profitability. The Company's policy is to maintain a 60-day supply of new
vehicles and a 39-day supply of used vehicles. If a new vehicle remains in
inventory for 120 days, or a used vehicle for 60 days, the Company typically
disposes of the vehicle by selling it to another dealer or wholesaler. The
Company believes that this policy enhances profitability by increasing inventory
turnover and reducing carrying costs. If the Company cannot obtain a sufficient
supply of popular models
33
<PAGE>
from the manufacturers, it purchases the needed vehicles from other franchised
dealers throughout the United States. For example, because Chevrolet trucks are
popular in Amarillo, the Company purchases trucks from Chevrolet dealers in
other cities to supplement its allocation of trucks from Chevrolet. In managing
its used vehicle inventory, the Company attempts to mirror the market by
tracking new and used vehicle sales within its region and maintaining an
inventory mix that matches consumer demand.
EMPLOYING PROFIT-BASED MANAGEMENT COMPENSATION. The Company uses a
management compensation system that differentiates it from most other automobile
dealerships. The Company believes that at many other auto dealerships the heads
of each sales department (new vehicles, used vehicles and F&I) are compensated
based on the profitability or sales volumes of their own departments. This
method of compensation does not encourage cooperation among departments and can
affect overall profitability of the dealership. At Cross-Continent, each
dealership's general manager and sales managers are trained in F&I analysis and
receive bonuses based on the profitability of overall vehicle sales and related
F&I income. The Company believes that this compensation system promotes teamwork
and encourages each management team to maximize overall profitability.
UTILIZING TECHNOLOGY THROUGHOUT OPERATIONS. The Company believes that it
has achieved a competitive advantage in its markets by integrating
computer-based systems into all aspects of its operations. The Company uses
computer-based technology to monitor each dealership's gross profit, permitting
senior management to gauge each dealership's daily and monthly gross margin
"pace" and to quickly identify areas requiring additional focus. Sales managers
also utilize a computer system to design for each customer an affordable
financing and insurance package that maximizes the Company's total profit on
each transaction. Computer technology is also an integral part of the inventory
management system for new and used vehicles and vehicle parts.
ACHIEVING HIGH LEVELS OF CUSTOMER SATISFACTION. Customer satisfaction and a
dealer's reputation for fairness are key competitive factors and are crucial for
establishing long-term customer loyalty. The Company's sales process is intended
to satisfy customers by providing high-quality vehicles that customers can
afford. A customer's experience with the parts and service departments at the
Company's dealerships can also positively influence overall satisfaction. The
Company strives to train its service managers as professionals, employs
state-of-the-art service equipment, maintains a computer-managed inventory of
replacement parts, and provides clean service and waiting areas to enhance
customers' post-sale experience.
GROWTH STRATEGY -- ACQUISITIONS
The Company intends to expand its business by acquiring additional
dealerships and seeks to improve their profitability through implementation of
the Company's business strategies. The Company believes that its management team
has considerable experience in evaluating potential acquisition candidates and
determining whether a particular dealership can be successfully integrated into
the Company's existing operations. Based on trends affecting automobile
dealerships, the Company also believes that an increasing number of acquisition
opportunities will become available to the Company. See "Industry Overview."
In June 1996, the Company entered into an agreement to purchase
substantially all of the operating assets and the dealership franchise of Hickey
Dodge, one of the largest Dodge dealerships in the United States. The Company
estimates that, including the sales of Hickey Dodge, its combined market share
of total new vehicle unit sales in Oklahoma City would have increased from
approximately 4.5% to approximately 8.8% overall for 1995. In addition to
providing a means of increasing its local market share, the Company believes
that the acquisition of Hickey Dodge will provide the Company with the
opportunity to benefit from the economies of scale that it seeks in expanding
its local presence in targeted markets. Although there can be no assurance that
the closing will occur, the Company anticipates completing the acquisition on or
about October 1, 1996. Under its Dealer Agreements with Chrysler's Dodge
division that the Company anticipates will be in effect upon completion of the
Offering, the Company will acknowledge that Chrysler will have "good cause" to
withhold its consent to any proposed acquisition by the Company of an additional
Chrysler dealership (other than Hickey Dodge) in the Oklahoma City market. The
Company does not believe that it will be materially adversely affected by any
failure by Chrysler to approve its acquisition of other Chrysler dealerships in
the Oklahoma City market or that this provision will affect its acquisition
strategy.
34
<PAGE>
The Company intends to continue to focus its acquisition search primarily on
markets that have fewer dealerships relative to the size of the population than
the national average. The Company believes that the most attractive markets for
acquisitions currently exist in selected cities in the Western and Southern
regions of the United States. As part of its strategy to acquire a leading
market share in any targeted market, the Company intends to focus its efforts on
dealer groups that own multiple franchises in a single city, as well as on
large, single-dealer franchises possessing significant market share. Other
criteria for evaluating potential acquisitions will include the dealership or
dealer group's current profitability, the quality of its management team, its
local reputation with customers, and its location along an interstate highway or
principal thoroughfare. The Company plans to evaluate acquisition candidates on
a case-by-case basis, and there can be no assurance that future acquisitions by
the Company will have all or any of these characteristics. See "Risk
Factors -- Availability of Acquisition Candidates; Need for Financing and
Possible Dilution through Issuance of Stock."
Upon completion of each acquisition, the Company plans to implement its
sales methods and philosophy, computer-supported management system and
profit-based compensation plan in an effort to enhance the acquired dealership's
overall profitability. Cross-Continent intends to focus initially on any
underperforming departments within the acquired entity that the Company believes
may yield the most rapid marginal improvements in operating results. The Company
anticipates that it will take two to three years to integrate an acquired
dealership into the Company's operations and realize the full benefit of the
Company's strategies and systems. There can be no assurance, however, that the
profitability of any acquired dealership will equal that achieved to date by the
Company's existing dealerships. During the early part of the integration period
the operating results of an acquired dealership may decrease from results prior
to the acquisition as the Company implements its strategies and systems. See
"Risk Factors -- Risks Associated with Expansion."
INDUSTRY OVERVIEW
In 1995, franchised automobile dealers in the United States sold over $290
billion in new cars and light trucks and $180 billion in used vehicles. After
growing at an average rate of 7.1% each year from 1991 through 1994, new vehicle
unit sales declined 2.0% in 1995. However, total franchised dealership dollar
sales increased 7.0% during 1995, primarily due to increased used vehicle unit
sales, increased parts and service revenues and inflation. Automobile sales are
affected by many factors, including rates of employment, income growth, interest
rates, weather patterns and other national and local economic conditions,
automotive innovations and general consumer sentiment. See "Risk Factors --
Mature Industry; Cyclical and Local Nature of Automobile Sales."
<TABLE>
<CAPTION>
UNITED STATES FRANCHISED DEALERS' VEHICLE SALES
-----------------------------------------------------
1991 1992 1993 1994 1995
--------- --------- --------- --------- ---------
(UNITS IN MILLIONS; DOLLARS IN BILLIONS)
<S> <C> <C> <C> <C> <C>
New vehicle unit sales........................................... 12.3 12.9 13.9 15.1 14.8
New vehicle sales................................................ $ 182.9 $ 191.7 $ 225.1 $ 261.8 $ 293.3
Used vehicle unit sales*......................................... 14.6 14.6 14.8 15.1 15.7
Used vehicle sales*.............................................. $ 114.1 $ 130.0 $ 146.0 $ 167.8 $ 181.7
</TABLE>
- ------------
*Reflects franchised dealerships sales at retail and wholesale. In addition,
sales by independent retail used car and truck dealers were $77.2, $81.0,
$100.3, $134.1 and $129.7 billion, respectively, for each of the five years
ended December 31, 1995.
Sources: NADA; CNW Market Research.
In the early years of the automobile industry, automakers established
franchised dealership networks for the distribution of their vehicles. Under
these franchise arrangements, automakers agreed to distribute their vehicles
exclusively through their dealer network. In return, under these early
arrangements automakers sought to prevent dealers from selling other automakers'
vehicles, limited the transferability of ownership interests in dealerships,
forced dealerships to accept vehicle inventory, defined the territory in which
dealers could market their vehicles and retained the right to franchise other
dealerships in those geographic areas. Most dealer agreements currently in
effect continue to require manufacturer approval for
35
<PAGE>
the transfer of ownership of a dealership. Typically, however, these agreements
require automakers to reasonably consider any acquisition request, taking into
account the acquiring dealer's capital resources, industry experience and
general reputation.
Pressure from dealers and state legislative developments have caused
automakers to ease a number of these restrictions during the last 50 years. For
example, dealers may not have their franchises terminated without good cause,
may designate family members as successors to their business and may not be
forced to accept unordered inventory. In addition, although a dealership's
agreement with the automaker does not provide for exclusivity with respect to
the brand of cars and trucks sold by the dealership within a particular
geographic area, many states now have licensing and procedural requirements that
may impede the ability of another dealership selling the same brand to enter a
geographic market already served by a dealership.
Until the 1960s, dealerships typically were owned and operated by one
individual who controlled one franchise. Competitive and economic pressures
during the 1970s and 1980s, particularly the oil embargo of 1973 and the
subsequent loss of market share experienced by U.S. auto manufacturers to
imported vehicles, forced many dealerships to close or sell out to
better-capitalized dealer groups. Continued economic pressure on dealers,
combined with the easing of restrictions against multiple dealer ownership, have
led to further consolidation in the industry.
According to AUTOMOTIVE NEWS, the number of franchised dealerships has
declined from 36,336 dealerships in 1960 to 22,288 in 1996. This consolidation
has resulted in fewer and larger dealer groups. AUTOMOTIVE NEWS' data also
reflect that each of the largest 100 dealer groups (ranked by unit sales) had
more than approximately $150 million in revenues in 1995. Although significant
consolidation has taken place among dealerships since 1960, the industry remains
highly fragmented. The Company estimates that the largest 100 dealer groups
generated less than 10% of total revenues, and controlled approximately 5% of
all franchise dealerships, in the retail vehicle market in 1995.
The Company believes that further consolidation of automobile dealers is
likely due to the increased capital requirements of dealerships, the fact that
many dealerships are owned by individuals nearing retirement age and the desire
of certain automakers to strengthen their brand identity by consolidating their
franchised dealerships. The Company believes that an opportunity exists for
dealership groups with significant equity capital and experience in running
dealerships to purchase additional franchises either for cash, stock, debt or a
combination and that being able to offer prospective sellers tax-advantaged
transactions through the use of publicly traded stock will, in certain
circumstances, make the Company a more attractive acquiror to prospective
sellers. Although the Company's ability to issue additional shares of Common
Stock to complete acquisitions could be limited under Dealer Agreements with
Nissan that the Company anticipates will be in effect upon completion of the
Offering, the Company does not anticipate that these agreements will materially
adversely affect its ability to acquire other dealerships. See "Risk Factors--
Availability of Acquisition Candidates; Need for Financing and Possible Dilution
through Issuance of Stock."
As with retailers generally, auto dealership profitability varies widely and
depends in part on the effective management of inventory, marketing, quality
control and responsiveness to customers. Since 1991, retail automobile
dealerships in the United States have earned on average between 12.9% and 14.1%
total gross margin on sales. New vehicle sales were the smallest proportionate
contributors to dealers' gross profits during this period, most recently earning
an average gross margin of 6.5% in 1995. Used vehicles provided higher gross
margins than new vehicles during this period, with an average used vehicle gross
margin of 11.5% in 1995. Dealerships also offer a range of other services and
products, including repair and warranty work, replacement parts, extended
warranty coverage, financing and credit insurance. In 1995, the average
dealership's revenue from parts and service was about 12.4% of its total sales.
DEALERSHIP OPERATIONS
Four of the Company's six dealerships are in or within 10 miles of Amarillo,
Texas and two are in suburban areas of Oklahoma City, Oklahoma. The Company
derived approximately 71% of its gross profit from its three Chevrolet
dealerships in the Amarillo area in 1995. The Company's retail unit sales of new
and
36
<PAGE>
used vehicles in 1995 totalled more than 11,500, compared with the Company's
estimate of under 1,000 for the average franchised dealer in the United States.
The Company's revenues by market area on a pro forma basis for 1995 and on an
actual basis for the first six months of 1996 are as follows:
<TABLE>
<CAPTION>
COMPANY DEALERSHIPS
----------------------------------------------
AMARILLO OKLAHOMA CITY
MARKET MARKET (1) TOTAL
-------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
1995 REVENUES
New vehicle sales................................................. $ 99,164 $ 42,612 $ 141,776
Used vehicle sales................................................ 80,901 40,949 121,850
Other operating revenue (2)....................................... 19,224 11,872 31,096
FIRST SIX MONTHS 1996 REVENUES
New vehicle sales................................................. 48,109 18,033 66,142
Used vehicle sales................................................ 45,900 13,858 59,758
Other operating revenue (2)....................................... 10,036 5,305 15,341
</TABLE>
- ------------
(1) Figures shown for 1995 are 11-month sales figures for Performance Nissan,
which the Company acquired February 2, 1995, and full-year sales figures
for Performance Dodge, which the Company acquired December 4, 1995. The
sales figures do not include sales figures for Hickey Dodge, which the
Company anticipates acquiring by the end of September 1996.
(2) Primarily includes sales of parts and service (including at wholesale) and
F&I income.
Each of the Company's dealerships has a general manager who oversees all of
the operations of that dealership. In addition, each dealership's new vehicle,
used vehicle, parts and service, and F&I departments have managers who supervise
the employees in their departments and report to that dealership's general
manager. All general managers report to the Company's senior management on a
daily basis. The Company's senior management tracks the daily sales and
inventory turnover of each dealership. In addition to reporting directly to the
general manager, the department managers of each dealership also work with the
Company's central management staff, which includes specialists in new and used
vehicle inventory management and control, parts and service operations and
finance and insurance.
NEW VEHICLE SALES. The Company's dealerships sell the complete product
lines of new cars and light trucks manufactured by General Motors' Chevrolet
division, the Nissan division of Nissan Motors Corp. U.S.A. and Chrysler's Dodge
division. Approximately 67% of new vehicles sold by the Company in 1995 were
light trucks, as compared to 41.5% of all U.S. new vehicles sold, as reported by
AUTOMOTIVE NEWS. The Company believes that its new vehicle sales mix is
influenced by regional preferences as well as the Company's inventory management
policies. The Company believes that its mix of light trucks, as well as its
personalized sales approach, permit it to achieve higher gross margins on new
vehicle sales than the industry average. The Company earned gross margins for
new vehicle sales of 12.1% in 1995, as compared to the industry average for 1995
of 6.5%.
<TABLE>
<CAPTION>
COMPANY'S NEW VEHICLE SALES
----------------------------------------------------------------
1991 1992 1993 1994 1995(1)
----------- ----------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Unit sales.................................... 2,674 4,173 4,978 4,468 5,547
Sales revenue................................. $ 41,812 $ 72,659 $ 91,012 $ 90,804 $ 114,494
Gross margin.................................. 9.0% 10.6% 11.8% 12.5% 12.1%
</TABLE>
- ------------
(1) Figures shown reflect actual 1995 new vehicle sales activity and do not
include the full year effect of the acquisitions completed in 1995.
The Company also arranges traditional retail lease transactions in the
Oklahoma City market and lease-type transactions (such as GMAC's "smart-buy"
program) in the Amarillo market. The Company does not believe that such
leasing-related activities have significantly affected its business or will
affect its business to a substantially greater degree in the future. In addition
to its Chevrolet, Nissan and Dodge dealerships, the Company has operated a Kia
franchise at the Company's Westgate facility in Amarillo, which had sales of
37
<PAGE>
less than 1.0% of the Company's total revenue in 1995. The Company is in the
process of transferring this franchise back to Kia at no material cost to the
Company. The sales data shown above reflect all of the Company's new vehicle
sales and leasing-type transactions. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
USED VEHICLE SALES. Used vehicle sales have become an increasingly
important part of the Company's overall profitability. The Company's retail used
car and truck sales have grown from 2,029 units in 1991 to 6,170 units in 1995.
The Company attributes this growth, in part, to attractive product availability.
The quality and selection of used vehicles available in the industry have
improved in the last several years primarily due to an increase in the number of
popular cars coming off short term leases. See "Risk Factors -- Competition." In
addition, increases in new vehicle prices have prompted a growing segment of the
vehicle-buying population to purchase used cars and trucks. The Company also
sells used vehicles through its wholly owned subsidiary Working Man's Credit
Plan, Inc. ("Working Man's Credit"). Working Man's Credit sells primarily older
used vehicles and finances those purchases for customers who, due to their low
income levels or past credit problems, may not be able to obtain credit for the
vehicles more typically sold by the Company's dealerships. Working Man's
Credit's sales accounted for less than 1.0% of the Company's total sales in each
of 1994 and 1995.
The Company believes that it has enhanced its used car and truck sales by
monitoring its used vehicle inventory on a daily basis and distributing
inventory to the dealership most likely to sell a particular vehicle. For
example, a Nissan vehicle traded in at any one of the Company's dealerships
typically will be placed in one of the Company's Nissan dealerships. The Company
sells used vehicles to retail customers and, particularly in the case of used
vehicles held in inventory more than 60 days, to other dealers and to
wholesalers. See "-- Inventory Management." As the table below reflects, sales
to other dealers and wholesalers are frequently at or below cost and therefore
affect the Company's overall gross margin on used vehicle sales. Excluding
inter-dealer and wholesale transactions, the Company's gross margin on used
vehicle sales was 13.7% in 1995, as compared to the industry average for 1995 of
11.5%. The following table reflects all used vehicle sale transactions of the
Company from 1991 through 1995. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
COMPANY'S USED VEHICLE SALES
---------------------------------------------------------------
1991 1992 1993 1994 1995(1)
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Retail unit sales.............................. 2,029 3,009 4,532 4,816 6,170
Retail sales revenue........................... $ 17,130 $ 28,059 $ 44,655 $ 50,019 $ 75,677
Retail gross margin............................ 11.9% 13.5% 16.5% 15.7% 13.7%
Wholesale unit sales........................... 2,163 3,396 4,983 5,201 5,372
Wholesale sales revenue........................ $ 7,347 $ 12,354 $ 14,538 $ 22,897 $ 22,813
Wholesale gross margin......................... -2.9% -3.6% -8.2% -6.0% -3.4%
Total unit sales............................... 4,192 6,405 9,515 10,017 11,542
Total sales revenue............................ $ 24,477 $ 40,413 $ 59,193 $ 72,916 $ 98,490
Total gross margin............................. 7.4% 8.3% 10.4% 8.9% 9.8%
</TABLE>
- ------------
(1) Figures shown reflect actual 1995 used vehicle sales activity and do not
include the full year effect of the acquisitions completed in 1995.
PARTS AND SERVICE. Historically, the automotive repair industry has been
highly fragmented. However, the Company believes that the increased use of
electronics and computers in vehicles has made it difficult for independent
repair shops to retain the expertise to perform major or technical repairs.
Given the increasing technological complexity of motor vehicles and extended
warranty periods for new vehicles, the Company believes that an increasing
percentage of repair work will take place at dealerships that have the
sophisticated equipment and skilled personnel necessary to perform such repairs.
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The Company's parts and service business has grown along with the Company's
growth in sales of new and used vehicles. The Company provides parts and service
primarily for the vehicle makes sold by its dealerships but also services other
makes of vehicles. In 1995, the Company's parts and service operation generated
gross margins of 52.4%, including the sale of parts at wholesale to independent
repair shops. Excluding the sale of parts at wholesale, the Company's gross
margin for parts and service would have been 63.3% in 1995, which the Company
believes compares favorably to the industry average.
The Company attributes its profitability in parts and service to its
comprehensive management system, including the use of a variable rate pricing
structure, the adoption of a team concept in servicing vehicles and the
cultivation of strong customer relationships through an emphasis on preventive
maintenance. Also critical to the profitability of the Company's parts and
service business is the efficient management of parts inventory. See "--
Inventory Management -- Parts."
In charging for its mechanics' labor, the Company uses a variable rate
structure designed to reflect the difficulty and sophistication of different
types of repairs. The percentage mark-ups on parts are similarly varied based on
market conditions for different parts. The Company believes that variable rate
pricing helps the Company to achieve overall profit margins in parts and service
superior to those of certain competitors who rely on fixed labor rates and
percentage markups.
The Company also believes that the profitability of its parts and service
business is significantly enhanced by its use of teams in servicing vehicles.
Each vehicle that is brought into one of the Company's dealerships for service
typically is assigned to a team of service professionals, ranging from master
technicians with multiple skills to less experienced apprentices. The
experienced technicians perform more complicated repairs, while apprentices
assist technicians, track down needed parts and perform simple functions, such
as oil changes. Each team is responsible for servicing multiple vehicles each
day, depending upon the complexity of the services required. When possible, the
team performs multiple service functions simultaneously and, as a result,
enhances productivity and completes repairs more quickly. Team members receive
supplemental compensation based on the overall productivity of their team. The
Company believes this team system increases the productivity of its service
personnel and results in reduced training costs and higher quality repairs.
The Company also makes extensive efforts to notify owners of vehicles
purchased at the dealerships when their vehicles are due for periodic service,
thereby encouraging preventive maintenance rather than repairing cars only after
breakdowns. The Company regards its parts and service activities as an integral
part of its overall approach to customer service, providing an opportunity to
strengthen relationships with the Company's customers and deepen customer
loyalty.
Since March 1996, the Company has operated a body shop, Allied 2000
Collision Center, Inc., adjacent to its Plains Chevrolet dealership in Amarillo,
Texas. The Company intends to perform all body work for the vehicles it services
in Amarillo at this location. Previously, the Company contracted with third
parties for body repair work. The Company believes that by operating its own
body shop it can enhance its profitability on vehicle repairs and maintain
quality control. Currently, the Company contracts with third parties for body
repair work in the Oklahoma City market. However, upon completion of the pending
acquisition of Hickey Dodge, it will acquire a body shop and intends to perform
all body work for vehicles it services in the Oklahoma City market at Hickey
Dodge.
FINANCE AND INSURANCE. The Company also arranges financing for its
customers' vehicle purchases, sells vehicle warranties and arranges selected
types of credit insurance in connection with the financing of vehicle sales. The
Company places heavy emphasis on F&I and trains its general and sales managers
in F&I. This emphasis resulted in the Company's arranging of financing for 76.3%
of its new vehicle sales and 82.8% of its used vehicle sales in 1995, as
compared to 42% and 51%, respectively, for the average U.S. dealership in 1995.
Typically, the Company's dealerships review the credit history of their
customers and forward proposed financing contracts to automakers' captive
finance companies, selected commercial banks or other financing parties. The
Company receives a finance fee from the lender for arranging the financing and
is typically assessed a chargeback against a portion of the finance fee if the
contract is terminated prior to its scheduled maturity for any reason, such as
early repayment or default. As a result, it is important that the
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Company arrange financing for a customer that is competitive (I.E., the customer
is more likely to accept the financing terms and the loan is less likely to be
refinanced) and affordable (I.E., the loan is more likely to be repaid).
The Company's subsidiary, Working Man's Credit, sells used vehicles and
provides financing to customers with low income levels or past credit problems.
Typically, the Company requires these customers to make weekly payments. If
these payments are not made, the Company may repossess the vehicle. In 1995,
less than 1% of the Company's used vehicle sales were financed by Working Man's
Credit.
As the number of dealerships operated by the Company increases, the Company
may decide to create a finance subsidiary to offer financing to the Company's
customers and further enhance its F&I activities. The Company believes that such
a subsidiary could provide a source of additional profits. There is no assurance
that the Company will create such a subsidiary or that it will enhance
profitability.
At the time of a new vehicle sale, the Company offers extended warranties to
supplement warranties offered by automakers. Additionally, the Company sells
primary warranties for used vehicles. Currently, the Company primarily sells its
own warranties and recognizes the associated revenue over the life of the
warranty. The Company also sells warranties of third-party vendors, for which it
recognizes a commission upon the sale of the warranty, in the Oklahoma City
market and is likely to sell such third-party warranties in other markets that
the Company may enter. In 1995, the Company sold warranties on 59.1% and 74.7%,
respectively, of its new and used vehicle sales, which penetration rates the
Company believes exceed industry averages.
The Company also offers certain types of credit insurance to customers who
finance their vehicle purchases through the Company. The Company sells credit
life insurance policies to these customers, which policies provide for repayment
of the vehicle loan if the obligor dies while the loan is outstanding. The
Company also sells accident and health insurance policies, which provide payment
of the monthly loan obligations during any period in which the obligor is
disabled. These policies are underwritten by Enterprise Life Insurance Company,
which pays the Company a commission upon the sale of a policy and a bonus based
on whether payments are made under the policy. In 1995, the Company sold such
insurance on 22.3% and 32.2%, respectively, of the new and used vehicle
purchases for which it arranged financing.
SALES AND MARKETING
To promote customer satisfaction, minimize problem loans on vehicles sold
and enhance profitability, the Company seeks to "match" its customers' economic
situation to appropriate vehicles. The Company assesses (i) the customer's
equity position in the vehicle being traded in (I.E., the value of the vehicle
relative to the amount still owed on the vehicle), (ii) the ability and
willingness of the customer to make a down payment, (iii) the customer's credit
profile and (iv) the cost of the desired vehicle and the likely automobile
insurance premium the customer will be required to pay. After reviewing these
facts using a computer-based system, if it appears that a customer will not be
able to finance the vehicle purchase or prudently service the vehicle loan, the
Company may suggest a lower priced vehicle, a vehicle with fewer options or a
larger down payment to reduce the monthly payments. The Company believes that
most dealerships generally perform this financial analysis only after the
customer has agreed to purchase the vehicle at a particular price, which can
lead to customer dissatisfaction. The Company believes that its "counseling"
approach during the sales process increases the likelihood that a customer will
be satisfied with the vehicle purchase over a longer time period. Additionally,
the Company believes this approach enables it to sell more vehicles at higher
gross margins.
The salespeople employed by the Company's dealerships are compensated with a
salary plus bonus. The bonus is based on the profit to the dealership of each
vehicle sold by that salesperson, excluding F&I income. Salespeople also may
receive additional bonuses based on the total number of vehicles they sell.
The Company's marketing and advertising activities vary among its
dealerships and among its markets. Generally, the Company advertises primarily
through newspapers and does not conduct special promotions. The Company intends
to continue tailoring its marketing efforts, such as using radio or television,
to the relevant marketplace in order to reach the Company's targeted customer
base. Under arrangements with the
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automakers, the Company receives a subsidy for its advertising expenses incurred
in connection with that automaker's vehicles. The Company expects to realize
cost savings on its advertising expenses as it acquires multiple dealerships in
particular markets, due to volume discounts and other concessions from media.
VEHICLE AND PARTS SUPPLIERS
NEW VEHICLES AND PARTS. The Company depends primarily on General Motors'
Chevrolet division, Nissan and Chrysler's Dodge unit for its supply of new
vehicles and replacement parts. Currently, the Company's total sales of new
vehicles may be adversely affected by an automaker's inability or unwillingness
to furnish one or more dealerships with an adequate supply of models popular in
the Company's markets. A dealership that lacks sufficient inventory to satisfy
demand for a particular model may purchase additional vehicles from other
franchised dealers throughout the United States. Although the Company's gross
profit margin on sales of new vehicles purchased from other dealers is typically
lower than on vehicles supplied by the manufacturers, such sales generate gross
profit and additional income from financing, insurance, warranties and parts and
service transactions.
USED VEHICLES. The majority of the Company's dealerships' used car
inventory is derived from trade-ins. Substantially all of the remainder of the
Company's used car inventory is obtained by purchases at auctions and from
wholesalers. The Company monitors the sales of used vehicles by all franchised
and independent dealers within its geographic regions and attempts to maintain
used vehicle inventories at each dealership which mirror the market. The Company
strives to maintain a broad selection of used vehicles that generally are less
than five years old and that automakers' captive finance companies and other
commercial lenders are likely to finance for customers.
RELATIONSHIPS WITH AUTOMAKERS. Each of the Company's dealerships operates
under a separate Dealer Agreement with the relevant automaker. These agreements
establish a framework of reciprocal obligations between the dealerships and each
automaker. In general, each Dealer Agreement specifies the location of the
dealership for the sale of vehicles and for the performance of certain approved
services in a specified market area. The designation of such areas and the
allocation of new vehicles among dealerships are determined at the discretion of
each automaker, which generally does not guarantee exclusivity within a
specified territory. A Dealer Agreement generally imposes requirements on a
dealer concerning such matters as showrooms, the facilities and equipment for
servicing vehicles, the maintenance of inventories, the maintenance of minimum
net working capital and the training of personnel. The Dealer Agreement with
each dealership also gives each automaker the right to approve the dealership's
general manager and any material change in ownership of the dealership. Each
automaker also may terminate a Dealer Agreement under certain circumstances,
such as a change in control of the dealership without automaker approval, the
impairment of the reputation or financial standing of the dealership, the death,
removal or withdrawal of the dealership's general manager, the conviction of the
dealership or the dealership's owner or general manager of certain crimes, a
failure to adequately operate the dealership or maintain wholesale financing
arrangements, insolvency or bankruptcy of the dealership or a material breach of
other provisions of the Dealer Agreement. In anticipation of the Offering, the
Company renegotiated these agreements to remove restrictions that would have
prevented the Company from selling its Common Stock to the public. See
"Description of Capital Stock -- Anti-Takeover Effect of Provisions in Dealer
Agreements."
Under the terms of its Dealer Agreements with GM, as renegotiated in
anticipation of the Offering, the Company is subject to several additional
obligations. Following the Offering, if any person or entity acquires 20% or
more of the Company's issued and outstanding shares with the intention of
acquiring additional shares or effecting a material change in the Company's
business or corporate structure, retention of the Company's Chevrolet
dealerships could be at risk. If GM reasonably determines that such person or
entity has interests incompatible with GM's or is not qualified to own a GM
dealership, the Company must either (i) transfer the assets of the Company's GM
dealerships to a third party reasonably acceptable to GM, (ii) voluntarily
terminate its Dealer Agreements with GM divisions, or (iii) demonstrate that
such person or entity in fact owns less than 20% of the Company.
Under its agreements with GM, the Company also agreed to comply with GM's
Network 2000 Channel Strategy ("Project 2000"). Project 2000 includes a plan to
eliminate 1,500 GM dealerships by the year 2000,
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primarily through dealership buybacks and approval by GM of inter-dealership
acquisitions, and encourages dealers to align GM divisions' brands as may be
requested by General Motors. The agreements require that the Company must bring
any GM dealership acquired after the Offering into compliance with the Project
2000 plan within one year of the acquisition. Failure to achieve such compliance
will result in termination of the Dealer Agreement and a buyback of the related
dealership assets at net book value by GM. The Company believes that this aspect
of the agreements does not present a significant risk to its business or future
operating results. The Company believes that all of its Chevrolet dealerships
currently comply with GM's guidelines.
The Company has also agreed that its dealerships offering new vehicles
manufactured by GM will not attempt to sell new vehicles of other automakers.
The Company believes that this requirement of exclusive representation at its GM
dealerships will not adversely affect the Company's overall profitability.
In connection with the Offering, the Company has been informed that its
current Dealer Agreements with Nissan will be replaced with agreements imposing
several additional terms. The continuation of each of these Dealer Agreements by
Nissan may be contingent upon, among other things, the Company's achievement of
stated goals for market share penetration in the market served by the applicable
dealership. Failure to meet the market share goals set forth in any Nissan
Dealer Agreement could result in the imposition of additional conditions in
subsequent Dealer Agreements or termination of such Dealer Agreement by Nissan.
In addition, the Company anticipates that these Dealer Agreements will give
Nissan the right to terminate the Company's Nissan franchises if, without
Nissan's prior approval, Mr. Gilliland's ownership of Common Stock falls below
20% of the total number of shares of Common Stock issued and outstanding.
Although the Company does not anticipate that this provision in the Nissan
Dealer Agreements will materially adversely affect its ability to acquire other
dealerships, it could limit the Company's ability to issue additional shares of
Common Stock to complete acquisitions. If the Company were unable to issue
shares of Common Stock to acquire other dealerships, it would be required to use
cash or incur debt or issue preferred stock to complete future acquisitions.
Nissan also will have the right to terminate the Company's Dealer Agreements if,
without Nissan's prior approval, Mr. Gilliland ceases to be the Chief Executive
Officer of the Company or if any person or entity acquires 20% or more of the
Company's issued and outstanding shares and Nissan determines that such
ownership is adverse to the automaker.
Under its Dealer Agreement with the Dodge division of Chrysler, as
renegotiated in anticipation of the Offering, the Company will be subject to
several additional obligations. Chrysler will be entitled to terminate the
Company's Dodge franchise if there is any change in the ownership of a
controlling number of shares in the Company not approved by Chrysler. In
addition, the Company will agree not to acquire any additional Chrysler
dealership in the Oklahoma City market without Chrysler's approval and
acknowledge that Chrysler will have "good cause" to withhold its consent to any
such acquisition (other than the acquisition of Hickey Dodge). The Company does
not believe that its acquisition strategy will be materially adversely affected
by any failure by Chrysler to approve its acquisition of other Chrysler
dealerships in the Oklahoma City market.
Texas and Oklahoma laws, and the laws of many other states, attempt to limit
automakers' control over dealerships. See "-- Industry Overview." For example,
under Texas law, despite the terms of contracts between automakers and dealers,
automakers may not prevent the sale of a dealership unless it would harm the
public or the reputation of the automaker. In addition, under Texas law and the
laws of other states, franchised dealerships may challenge automakers' attempts
to establish new franchises in the franchised dealers' markets, and state
regulators may deny applications to establish new dealerships for a number of
reasons, including a determination that the automaker is adequately represented
in the region. Other laws in Texas and elsewhere limit the ability of automakers
to terminate or fail to renew franchises, withhold their approval for the
relocation of a franchise or require that disputes be arbitrated. Similarly,
under Oklahoma law, automakers must have "good cause" for any termination or
failure to renew their franchises, and an automaker's license to distribute
vehicles in Oklahoma may be revoked if, among other things, the automaker has
forced or attempted to force an automobile dealer to accept delivery of motor
vehicles not ordered by that dealer.
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The state statutes generally provide that it is a violation of law for an
automaker to terminate or fail to renew a franchise without good cause. These
statutes also provide that the automaker is prohibited from unreasonably
withholding approval for a proposed change in ownership of the dealership.
Acceptable grounds for disapproval include material reasons relating to the
character, financial ability or business experience of the proposed transferee.
Accordingly, certain provisions of dealer agreements relating to an automaker's
right to terminate or fail to renew a franchise have been held invalid by
certain state courts and administrative agencies.
INVENTORY MANAGEMENT
VEHICLES. The Company makes extensive efforts to tailor its vehicle
inventory to meet changes in local consumer demand for different vehicle models
and types and may acquire vehicles from other dealers if it cannot obtain a
sufficient supply from the automakers. The Company is not required by the terms
of its Dealer Agreements to take particular vehicle inventory from the
automakers. New and used vehicle inventory at the Company's dealerships is
continually monitored using an integrated computer inventory system that allows
the Company to track the age and size of its entire inventory and to coordinate
vehicle transfers between its dealerships in response to specific customer
demand. This computerized system also links the Company's dealerships with
secondary-market wholesalers, auctions and other dealers. In addition, the
Company assembles data from on-site surveys of customers at its dealerships and
draws upon automakers' online reports analyzing local, regional and national
vehicle purchasing trends.
The Company generally maintains a 60-day supply of new vehicles. If
Cross-Continent has not sold a new vehicle to a customer within 120 days after
receiving the vehicle into inventory, it attempts to transfer the vehicle to
other franchised dealers. Such a transfer does not impact new vehicle sales, as
compared with sales of used vehicles to other dealers and wholesalers, which are
reflected in total used vehicle sales. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The Company's policy on its
used vehicle inventory is to maintain a 39-day supply and to offer to other
dealers and wholesalers used vehicles remaining unsold for more than 60 days.
The Company estimates that sales of used vehicles to other dealers and
wholesalers constituted approximately 23% of its total used vehicle dollar sales
in 1995.
The Company's vice president in charge of dealer operations establishes
guidelines for, and coordinates the purchases of, vehicles to ensure an
efficient allocation of inventory among the dealerships generally. In addition,
each of the Company's dealerships employs new and used vehicle inventory
managers who supervise the size and composition of inventories at their
individual dealerships. Inventory managers are encouraged to act as "brokers" on
behalf of their dealerships, using computerized systems, surveys and market
information to anticipate customer preferences and buy and sell to other Company
dealerships and in secondary markets. The Company believes that its coordinated
system of inventory management is unusual in the industry and enhances its
overall profitability.
Although there can be no assurance either that the Company's acquisition
strategy will be successful or that it will produce the anticipated benefits,
the Company believes that the acquisition of additional dealerships would expand
its internal market for transfers of vehicles among its dealerships and,
therefore, reduce the need to acquire vehicles from other dealers or wholesalers
or sell vehicles in the wholesale market, which frequently results in lower
gross margins. The acquisition of additional dealerships may reduce the total
amount of transportation and other fees paid to other franchised dealers. The
Company believes that its acquisition of additional dealerships also may reduce
its reliance on any particular automaker so that it may be less affected by
changes in buying trends or the automaker's inability to supply requested
inventory. The Company also believes that its acquisition of additional
dealerships may produce economies of scale in its purchasing of used vehicle
inventory.
PARTS. Each of the Company's dealerships sells factory-approved parts for
vehicle makes and models sold by that dealership. These parts are either used in
repairs made by the dealership or sold at wholesale to independent repair shops.
While a majority of the Company's dealerships sell parts primarily through their
own service departments, two of the dealerships sell predominantly at wholesale
to other dealers, body shops and repair businesses.
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Currently, each of the Company's dealerships employs its own parts manager
and independently controls its parts inventory and sales. Dealerships that sell
the same new vehicle makes have access to each other's computerized inventories
and frequently obtain unstocked parts from the Company's other dealerships. The
Company uses a computerized tracking system to manage the inventory of vehicle
parts at its dealerships. This system allows each dealership to monitor customer
requests for parts not in stock and the length of time each part has remained in
inventory.
The Company intends to further centralize its inventory system by
establishing uniform standards for inventory control and increasing the
efficiency of cross-dealership exchanges. In addition, the Company intends to
expand the volume of its wholesale parts business.
COMPETITION
The retail automotive industry is highly competitive. Depending on the
geographic market, the Company competes with both dealers offering the same
product line as the Company and dealers offering other automakers' vehicles. The
Company also competes for vehicle sales with auto brokers and leasing companies.
Cross-Continent competes with small, local dealerships and with large
multi-franchise auto dealerships. Some of the Company's larger competitors have
greater financial resources and are more widely known than the Company. In
addition, the used vehicle market is facing additional competition from non-
traditional outlets such as used-car "superstores," which have inventories
significantly larger and more varied than the Company and other more traditional
dealerships. While these superstores have not yet entered the markets in which
the Company currently does business, the Company may face this competition in
new markets it may enter. Some of the Company's competitors also may utilize
marketing techniques, such as Internet visibility or "no negotiation" sales
methods, not currently used by the Company.
In the Amarillo market, the Company competes with over 10 franchised
dealerships and numerous other independent dealers of used vehicles, most of
which sell vehicles suited to the same customer group that the Company targets.
The Company is the exclusive Chevrolet dealer in Amarillo and in 1995 derived
approximately 71% of its gross profit from its three Chevrolet dealerships in
Amarillo. The Company could be materially adversely affected if Chevrolet
awarded additional dealerships franchises to others in the Amarillo market,
although the Company does not anticipate such awards will be made, or if other
automobile dealerships increased their market share in the area. In the Oklahoma
City market, the Company estimates that there are at least 13 multi-franchise
dealer groups, many of which have significantly greater market share and
experience than the Company has in the Oklahoma City area.
The Company believes that the principal competitive factors in vehicle sales
are the marketing campaigns conducted by automakers, the ability of dealerships
to offer a wide selection of the most popular vehicles, the location of
dealerships and the quality of customer service. Other competitive factors
include customer preference for makes of automobiles, pricing (including
manufacturer rebates and other special offers) and warranties. The Company
believes that its dealerships are competitive in all of these areas.
In addition to competition for vehicle sales, the Company also competes with
other auto dealers, service stores, auto parts retailers and independent
mechanics in providing parts and service. The Company believes that the
principal competitive factors in parts and service sales are price, the use of
factory-approved replacement parts, the familiarity with a dealer's makes and
models and the quality of customer service. A number of regional or national
chains offer selected parts and service at prices that may be lower than the
Company's prices.
In arranging or providing financing for its customers' vehicle purchases,
the Company competes with a broad range of financial institutions. The Company
believes that the principal competitive factors in offering financing are
convenience, interest rates and contract terms.
In addition to being affected by national competitive trends, the Company's
success depends, in part, on regional auto-buying trends, local and regional
economic factors and other regional competitive pressures. Currently, the
Company sells its vehicles in the Amarillo and Oklahoma City markets. Conditions
and
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competitive pressures affecting these markets, such as price-cutting by dealers
in these areas, or in any new markets the Company enters, could adversely affect
the Company, although the retail automobile industry as a whole might not be
affected.
GOVERNMENTAL REGULATIONS
A number of regulations affect the Company's business of marketing, selling,
financing and servicing automobiles. The Company also is subject to laws and
regulations relating to business corporations generally.
Under Texas and Oklahoma law, the Company must obtain a license in order to
establish, operate or relocate a dealership or operate an automotive repair
service. See "-- Vehicle and Parts Suppliers -- Relationships with Automakers."
These laws also regulate the Company's conduct of business, including its
advertising and sales practices. Other states may have similar requirements.
The Company's financing activities with its customers are subject to federal
truth in lending, consumer leasing and equal credit opportunity regulations as
well as state and local motor vehicle finance laws, installment finance laws,
usury laws and other installment sales laws. Some states regulate finance fees
that may be paid as a result of vehicle sales. State and federal environmental
regulations, including regulations governing air and water quality and the
storage and disposal of gasoline, oil and other materials, also apply to the
Company.
The Company believes that it complies substantially with all laws affecting
its business. Possible penalties for violation of any of these laws include
revocation of the Company's licenses and fines. In addition, many laws may give
customers a private cause of action.
PROPERTY
The Company's principal executive offices are located at 1201 South Taylor
Street, Amarillo, Texas 79101, and its telephone number is (806) 374-8653. The
Company has four dealerships at other locations in the Amarillo vicinity. In
addition, the Company is in the process of transferring back to the automaker
its Kia dealership, which it has operated at its Westgate facility in Amarillo.
The Company also has two dealerships at adjacent locations in the Oklahoma City,
Oklahoma market. The Company's facilities occupy an aggregate of approximately
270,000 square feet and are situated on approximately 45 acres of land.
All of the Company's dealerships are located along interstate highways. One
of the principal factors considered by the Company in evaluating an acquisition
candidate is its location. The Company prefers to acquire dealerships located
along major thoroughfares, primarily interstate highways with ease of access,
which can be easily visited by prospective customers.
The Company owns all of the real estate on which its dealerships are
located, except for its Performance Nissan facility, a portion of its Quality
Nissan facility in Amarillo and a small portion of its Performance Dodge
facility near Oklahoma City. The Company subleases its Performance Nissan
facility from GGFP, which sublease extends until February 2002 and provides the
Company with an option to extend the sublease for an additional seven years and
an option to purchase the property in 2002 for $2.2 million. The Company's lease
for a portion of its Quality Nissan facility runs through 1998, with an option
to purchase the property for $400,000 or extend the lease for five years. The
Company also leases its principal corporate offices from GGFP for a lease term
ending 2001. The Company believes that its facilities are adequate for its
current needs. In connection with its acquisition strategy, the Company intends
to evaluate, on a case-by-case basis, the relative benefit of owning or leasing
the real estate associated with a particular dealership.
Under the terms of its Dealer Agreements, the Company must maintain an
appropriate appearance and design of its facilities and is restricted in its
ability to relocate its dealerships. See "-- Vehicle and Parts Suppliers --
Relationship with Automakers."
EMPLOYEES
As of August 1, 1996 the Company employed 536 people, of whom approximately
88 were employed in managerial positions, 229 were employed in non-managerial
sales positions, 93 were employed in non-managerial parts and service positions
and 126 were employed in administrative support positions.
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The Company believes that many dealerships in the retail automobile industry
have difficulty attracting and retaining qualified personnel for several
reasons, including the historical inability of dealerships to provide employees
with a marketable equity interest in the profitability of the dealerships. The
Company intends, upon completion of the Offering, to provide certain executive
officers, managers and other employees with options to purchase Common Stock and
believes this equity incentive will be attractive to existing and prospective
employees of the Company. See "Management -- Stock Option Plan."
The Company believes that its relationship with its employees is good. None
of the Company's employees is represented by a labor union. Because of its
dependence on the automakers, however, the Company may be affected by labor
strikes, work slowdowns and walkouts at the automakers' manufacturing
facilities. See "Risk Factors -- Dependence on Automakers." The Company has a
policy of requiring prospective employees to undergo tests for illegal
substances prior to being hired and of requiring employees to consent to drug
tests at the Company's discretion during their employment with the Company.
LEGAL PROCEEDINGS AND INSURANCE
From time to time, the Company is named in claims involving the manufacture
of automobiles, contractual disputes and other matters arising in the ordinary
course of the Company's business. Currently, no legal proceedings are pending
against or involve the Company that, in the opinion of management, could be
expected to have a material adverse effect on the business, financial condition
or results of operations of the Company.
Because of their vehicle inventory and nature of business, automobile retail
dealerships generally require significant levels of insurance covering a broad
variety of risks. The Company's insurance includes an umbrella policy as well as
insurance on its real property, comprehensive coverage for its vehicle
inventory, general liability insurance, employee dishonesty coverage and errors
and omissions insurance in connection with its vehicle sales and financing
activities.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company, and their ages as of
August 1, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Bill A. Gilliland.......................... 58 Chairman, Chief Executive Officer and Director
Robert W. Hall............................. 39 Senior Vice Chairman, Treasurer and Director
Ezra P. Mager.............................. 54 Vice Chairman and Director
Emmett M. Rice, Jr......................... 38 Senior Vice President, Chief Operating Officer and
Director
Charles D. Winton.......................... 34 Vice President, Chief Financial Officer and Secretary
Thomas A. Corchado......................... 38 Vice President -- Fixed Operations
John W. Gaines............................. 36 Vice President -- Systems
Jerry L. Pullen............................ 50 Vice President -- City Manager
Benjamin J. Quattrone...................... 32 Vice President -- Dealer Operations
</TABLE>
Bill A. Gilliland has been the Chairman and Chief Executive Officer and a
Director of the Company since its formation. Since 1987, Mr. Gilliland has been
the Managing Partner of GGFP, which prior to the Reorganization owned a majority
interest in the Company's dealerships. Mr. Gilliland currently is, and since
their acquisition by GGFP has been, a director and the president of each of the
Company's dealerships. Mr. Gilliland has worked in the retail automobile
industry for over 30 years. He is a member of the National Auto Dealers
Association and a former board member of the Texas Auto Dealers Association. Mr.
Gilliland's initial term as a director of the Company will expire at the annual
meeting of stockholders of the Company to be held in 1999.
Robert W. Hall has been the Senior Vice Chairman, Treasurer and a Director
of the Company since its formation. Mr. Hall currently is, and since the
acquisition of the Company's dealerships by GGFP has been, a director and the
treasurer of each of the dealerships. Since 1988, Mr. Hall has been a partner of
GGFP. Mr. Hall is the son-in-law of Mr. Gilliland. Mr. Hall's initial term as a
director of the Company will expire at the annual meeting of stockholders of the
Company to be held in 1997.
Ezra P. Mager has been the Vice Chairman and a Director of the Company since
its formation. From 1990 to January 1996, Mr. Mager was in charge of acquisition
activity for United Auto Group, Inc. and its predecessors, one of the largest
automobile dealership groups in the United States, and served as its Executive
Vice Chairman from 1995 to January 1996. Prior to that time, Mr. Mager was an
executive vice president and director of Furman Selz, Mager, Dietz & Birney,
Incorporated. Mr. Mager's initial term as a director of the Company will expire
at the annual meeting of stockholders of the Company to be held in 1998.
Emmett M. Rice, Jr. has been the Senior Vice President, Chief Operating
Officer and a Director of the Company since its formation. Mr. Rice currently
is, and since their acquisition by GGFP has been, a director and the vice
president of each of the Company's dealerships. Mr. Rice has worked in and
managed certain of the Company's dealerships for over 13 years. He is a member
of the National Auto Dealers Association and the Texas Auto Dealers Association.
Mr. Rice's initial term as a director of the Company will expire at the annual
meeting of stockholders of the Company to be held in 1999.
Charles D. Winton has been a Vice President, the Chief Financial Officer and
the Secretary of the Company since its formation. Mr. Winton currently is, and
since June 1995 has been, the secretary of the Company's Texas-based
dealerships. Prior to that time, Mr. Winton was Vice President of Accounting and
Taxes for Sims-Plummer Financial Services. From 1990 to 1993, Mr. Winton was a
supervisor with George B. Jones & Company, an accounting firm serving franchised
auto dealers.
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<PAGE>
Thomas A. Corchado has been Vice President -- Fixed Operations of the
Company since the Reorganization. From June 1993 to that time, Mr. Corchado was
employed by GGFP, where he supervised the parts and service operations of the
Company's dealerships. From June 1990 to May 1993, Mr. Corchado was a senior
consultant at Automotive Service Consultants.
John W. Gaines has been the Vice President -- Systems of the Company since
the Reorganization. From February 1992 to that time, Mr. Gaines was employed by
GGFP as the coordinator of projects and systems for the Company's dealerships.
Mr. Gaines was the Controller for the Amarillo National Bank in Amarillo, Texas,
from 1983 to 1992.
Jerry L. Pullen has been the Vice President--City Manager of the Company
since July 1996, with responsibility for the Amarillo area dealerships. From
January 1988 to July 1996, Mr. Pullen served as the General Manager of the
Company's Midway Chevrolet, Inc. dealership. Mr. Pullen has over 28 years of
related experience in the automotive industry. He is currently the President of
High Country Chevrolet Dealers.
Benjamin J. Quattrone has been the Vice President -- Dealer Operations of
the Company since the Reorganization. In addition, since July 15, 1996, Mr.
Quattrone has served as the General Manager of Westgate Chevrolet, Inc. Prior to
the Reorganization, Mr. Quattrone was employed as the Management/ Dealer Trainee
of the Quality Nissan Dealership from June 1995. Mr. Quattrone was the District
Sales Manager with the Chevrolet Motor Division of General Motors from August
1989 to February 1995.
The Company intends to select a manager to oversee its Oklahoma City
dealerships. This manager may be selected from among the Company's existing
employees or hired specifically for that role. Until such a manager is selected,
certain officers of the Company, including the Company's Chief Operating
Officer, are assisting in overseeing and coordinating the operation of the
Company's Oklahoma City dealerships.
As soon as practicable after the Offering, the Company intends to name two
individuals not employed by or affiliated with the Company to Cross-Continent's
Board of Directors. Upon completion of the Offering, the Company's Board of
Directors will not consist of a majority of independent directors and may not
consist of such a majority in the future. See "Risk Factors -- Lack of
Independent Directors."
The Board of Directors of the Company is divided into three classes, each of
which, after a transitional period, will serve for three years, with one class
being elected each year. Under the Company's Certificate of Incorporation and
Bylaws, individuals who are employed by the Company at the time they become
directors of Cross-Continent are entitled to serve as directors only if they
remain so employed. The executive officers are elected annually by, and serve at
the discretion of, the Company's Board of Directors. Following the appointment
of at least two outside directors, the Company intends to establish and maintain
an Audit Committee, the members of which will consist solely of outside
directors, and a Compensation Committee and a Nominating Committee of its Board
of Directors. The Company has not previously had any of these committees.
The Company may compensate the members of the Board of Directors who are not
full-time employees of the Company on an annual and per meeting basis, in an
amount and on a basis as may be determined in the future. The Company also may
decide to compensate members of committees of the Board of Directors for each
meeting attended. Directors of the Company receive reimbursement of their
reasonable out-of-pocket expenses incurred in connection with their board
activities. The Company intends to purchase directors' and officers' insurance
for its executive officers and directors, assuming that such insurance is
available on commercially reasonable terms.
EXECUTIVE COMPENSATION
The Company anticipates that during 1996 its most highly compensated
executive officers with annualized salaries exceeding $100,000, and their
annualized base salaries for 1996, will be: Mr. Gilliland -- $300,000; Mr. Hall
- -- $240,000; Mr. Mager -- $240,000; Mr. Rice -- $240,000; and Messrs. Pullen and
Winton -- each at $120,000 (collectively, the "Named Executives"). See Note 5 to
the "Pro Forma Combined Financial Data." In conjunction with the Reorganization,
the Company has agreed to pay Mr.
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Rice the Executive Bonus. This $600,000 bonus has been expensed in its entirety
in the three months ended June 30, 1996. See Note 17 to the Notes to Combined
Financial Statements. In his current position as a City Manager, Mr. Pullen is
entitled to receive an annual bonus equal to 5.0% of the pre-tax profits over
$5.0 million (if any) of the Company's Amarillo area dealerships, payable in
cash, incentive stock or stock options, as may be determined in the future. The
Company anticipates entering into written agreements with Messrs. Rice and
Pullen to evidence these compensation arrangements. The Company also
historically has paid, and in the future may pay, discretionary bonuses to its
other executive officers, based on the performance of the Company or the nature
of services provided by the executives during the year. The amounts of such
future bonuses, the conditions for any such awards and the forms of any such
bonuses (such as cash, incentive stock or stock options) have not been
determined. The Company does not intend to grant any such discretionary bonuses
to any of the Senior Management Group for 1996.
The table below sets forth the compensation paid to the Company's Chief
Executive Officer and each of its most highly compensated executive officers
with annual compensation exceeding $100,000 for the year ending December 31,
1995.
<TABLE>
<CAPTION>
1995 ANNUAL COMPENSATION
-------------------------------------
NAME AND TOTAL ANNUAL
PRINCIPAL POSITION SALARY BONUS COMPENSATION
- -------------------------------------------------------------------------- ---------- ---------- -------------
<S> <C> <C> <C>
Bill A. Gilliland
Chairman and Chief Executive Officer.................................... $ 114,000 -- $ 114,000
Emmett M. Rice, Jr.
Senior Vice President and Chief
Operating Officer....................................................... 120,000 $ 524,836 644,836
Jerry L. Pullen
Vice President -- City Manager.......................................... 72,000 568,091 640,091
Thomas A. Corchado
Vice President -- Fixed Operations...................................... 64,538 78,865 143,403
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Because the Company was formed in 1996, it did not have a Compensation
Committee for a prior fiscal year. Following the appointment of at least two
outside directors to the Company's Board, the Company intends to form a
Compensation Committee and anticipates naming its two outside directors to serve
on the committee.
STOCK OPTION PLAN
The Company expects to have in place its 1996 Stock Option Plan (the "Stock
Option Plan") immediately prior to completion of the Offering. The Company
anticipates granting, under the Stock Option Plan, options to purchase 7,692
shares of Common Stock to Mr. Mager immediately before completion of the
Offering. Such options will have an exercise price equal to the per share
initial public offering price of the Common Stock and be exercisable starting 90
days from the date of grant. The per share exercise price of incentive stock
options ("ISOs") granted under the Stock Option Plan must equal at least 100% of
the Fair Market Value (as defined in the Stock Option Plan) of a share of the
Common Stock on the date of grant (or 110% in the case of ISOs granted to
employees owning more than 10% of the Common Stock).
The purpose of the Stock Option Plan is to provide key employees (including
officers) and directors of the Company with additional incentives by increasing
their equity ownership in the Company. The Company intends to reserve a total of
1,380,000 authorized but unissued shares of Common Stock for issuance under the
Stock Option Plan. These reserved shares will represent 10% of the shares of
Common Stock outstanding after the Offering.
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<PAGE>
Options granted under the Stock Option Plan are intended to qualify as ISOs
under Section 422 of the Internal Revenue Code of 1986, as amended, or be
non-qualified. Holders of ISOs are not taxed until they sell the stock received
upon the exercise of an ISO. The entire spread between the sale proceeds and the
ISO exercise price is a long-term capital gain. Holders of non-qualified options
receive ordinary income upon exercise of the option in an amount equal to the
spread between the value of the purchased stock on exercise and the exercise
price.
The Stock Option Plan is intended to satisfy the conditions of Section 16 of
the Securities Exchange Act of 1934, as amended, pursuant to Rule 16b-3
promulgated thereunder, which rule exempts certain short-swing gains from
recapture by the Company. The Stock Option Plan will be administered by the
Company's Board of Directors, or a committee of the Board comprised exclusively
of two or more "non-employee directors" within the meaning of Rule 16b-3.
Subject to the terms of the Stock Option Plan, the administrator of the Stock
Option Plan will have the sole authority and discretion to grant options,
construe the terms of the plan and make all other determinations and take all
other action with respect to the Stock Option Plan.
Options will be exercisable during the period specified by the administrator
of the Stock Option Plan, except that options will become immediately
exercisable upon a Change in Control (as defined in the Stock Option Plan) of
the Company. See "Risk Factors -- Concentration of Voting Power and
Anti-Takeover Provisions." Option holders may not exercise their options more
than 10 years from the date of grant (or five years in the case of ISOs granted
to holders of more than 10% of the Common Stock) or, unless otherwise determined
by the administrator of the Stock Option Plan, after their employment with the
Company terminates (other than by reason of death). Unless otherwise permitted
by the administrator of the Stock Option Plan, options are nontransferable,
except by will or the laws of intestate succession or pursuant to a qualified
domestic relations order. Shares underlying options that terminate unexercised
are available for reissuance under the Stock Option Plan.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table describes the beneficial ownership of the Common Stock
as of August 1, 1996 (and after giving effect to the Offering) by (i) each
person who has granted the Underwriters an option to purchase shares of Common
Stock held by such person if the Underwriters' over-allotment option is
exercised (a "Selling Stockholder"), (ii) each person (or group of affiliated
persons) who is known by the Company to own beneficially more than 5% of the
Common Stock, (iii) each of the Company's directors and executive officers and
(iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES PERCENT PERCENT NUMBER OF SHARES PERCENT IF OVER-
BENEFICIALLY BEFORE AFTER SUBJECT TO OVER- ALLOTMENT OPTION
BENEFICIAL OWNER (1) OWNED (2) OFFERING OFFERING (3) ALLOTMENT OPTION EXERCISED (4)
- --------------------------------------- ------------ ----------- -------------- ---------------- -------------------
<S> <C> <C> <C> <C> <C>
Bill A. Gilliland (5).................. 6,925,500 68.4% 50.2% 388,631 47.4
Robert W. Hall (6)..................... 1,731,375 17.1 12.5 97,020 11.8
Emmett M. Rice, Jr. (7)................ 1,012,500 10.0 7.3 56,779 6.9
Ezra P. Mager (8)...................... 303,750 3.0 2.2 -- 2.2
Jerry L. Pullen (9).................... 151,875 1.5 1.1 8,820 1.0
Charles D. Winton...................... -- -- -- -- --
Thomas A. Corchado..................... -- -- -- -- --
John W. Gaines......................... -- -- -- -- --
Benjamin J. Quattrone.................. -- -- -- -- --
All executive officers and directors as
a group (9 persons) (8)............... 10,125,000 100.0 73.3 551,250 69.3
</TABLE>
- ---------
(1) The address for each beneficial owner is in care of Cross-Continent Auto
Retailers, Inc., 1201 South Taylor Street, Amarillo, Texas 79101. Each of
the individuals listed is an officer of the Company.
(2) Except as indicated in the footnotes to this table, to the knowledge of the
Company, the persons named in the table have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned
by them, except to the extent authority is shared by spouses under
applicable state law.
(3) Assumes no exercise of the Underwriters' over-allotment option.
(4) Assumes that the Underwriters' over-allotment option is exercised in full.
(5) Of these shares, 1,731,375 are owned of record by Xaris, Ltd., a Texas
limited partnership. Pursuant to the terms of an agreement among Mr.
Gilliland, Lori D'Atri (Mr. Gilliland's daughter) and Mr. Hall and his wife,
Robin W. Hall, Mr. Gilliland controls Xaris Management Co., the general
partner of Xaris, Ltd. Mr. Gilliland disclaims beneficial ownership of these
shares.
(6) Mr. and Mrs. Hall hold a controlling interest in the general partner of
Twenty-Two Ten, Ltd., a Texas limited partnership, which is the record owner
of these shares.
(7) Mr. Rice and his wife, Nancy J. Rice, hold a controlling interest in the
general partner of Benji Investments, Ltd., a Texas limited partnership,
which is the record owner of these shares.
(8) Does not include 138,000 shares of Common Stock issuable upon the exercise
of options to be granted immediately prior to the Offering with an exercise
price equal to the initial public offering price.
(9) Jerry L. Pullen and his wife, Kaye J. Pullen, hold a controlling interest in
the general partner of KAPL, Ltd., a Texas limited partnership, which is the
record owner of these shares.
Pursuant to the Underwriting Agreement, the Underwriters have agreed to
purchase shares of Common Stock from the Selling Stockholders, if and to the
extent the Underwriters' over-allotment option is exercised, in proportion to
the Selling Stockholders' respective ownership interests in the Company.
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<PAGE>
CERTAIN TRANSACTIONS
Prior to the Reorganization, Bill A. Gilliland and his wife, Sandra
Gilliland, Robert W. Hall and his wife, Robin W. Hall, and Lori D'Atri
(collectively, the "GGFP Partners") held a controlling equity interest in Midway
Chevrolet, Inc., Plains Chevrolet, Inc., Westgate Chevrolet, Inc., Quality
Nissan, Inc. and Working Man's Credit Plan, Inc. The GGFP Partners held their
interests in these dealerships through GGFP, of which Mr. Gilliland is the
managing general partner. Midway, Plains and Westgate acquired the common stock
of Performance Nissan, Inc. and Performance Dodge, Inc. in 1995 at a cost of
$1.4 million and $5.9 million, respectively, and Midway, Plains, Westgate and
Quality Nissan acquired Allied 2000 Collision Center, Inc. in 1996 at a cost of
$26,000. The Company was formed in May 1996 and, in June 1996, acquired all of
the common stock of the dealerships owned directly by GGFP in exchange for
Common Stock of the Company. The shares of common stock of Performance Nissan,
Performance Dodge and Allied 2000 were then distributed to the Company.
GGFP and other stockholders of Midway, Plains, Westgate, Quality Nissan and
Working Man's Credit exchanged their shares of stock in those dealerships for an
aggregate of 1,012,500, 6,744,600, 1,240,000, 822,055 and 2,000 shares of Common
Stock, respectively, in the Reorganization. The exchange ratios of Common Stock
for the stock in the dealerships acquired by the Company in the Reorganization
were established through negotiation among the parties to the Reorganization,
and were based largely on the value of the dealerships and the capital
contributions by the owners of the dealerships. Although Mr. Gilliland and Mr.
Hall took an active role in these negotiations, all of the owners of the
dealerships, including Mr. Rice, the Company's Chief Operating Officer (who
beneficially owned shares in Plains Chevrolet, Inc. and Working Man's Credit
Plan, Inc. prior to the Reorganization), and Mr. Pullen, the Company's Vice
President-City Manager (who beneficially owned shares in Midway Chevrolet, Inc.
prior to the Reorganization), approved the allocation of shares of Common Stock.
In connection with its business travel, the Company from time to time uses
an airplane that is owned by Plains Air, Inc. Messrs. Gilliland and Hall, the
Chairman and Senior Vice Chairman, respectively, of the Company, own Plains Air,
Inc. Currently, the Company pays Plains Air, Inc. $13,050 per month plus a fee
of approximately $488 per hour for use of the airplane. In 1995, the Company
paid an aggregate of $199,000 for the use of the airplane. The Company believes
that these fees are no less favorable to the Company than could be obtained in
an arm's-length transaction between unrelated parties. The Company anticipates
that as it pursues its acquisition strategy, its use of this airplane will
increase and its costs associated with the plane will correspondingly increase.
As a privately held company, Cross-Continent historically reimbursed GGFP,
which is a Texas partnership controlled by Mr. Gilliland, the Company's Chairman
and Chief Executive Officer, for costs incurred by GGFP on behalf of the
Company, including the Company's proportionate share of GGFP's administrative,
clerical and other corporate overhead costs. In addition, the Company paid GGFP
a fee for management services generally based on the Company's profits and the
level of management services rendered. Messrs. Gilliland and Hall hold 60% and
20%, respectively, of the partnership interests of GGFP. Payments to GGFP for
1993, 1994 and 1995 were $3.0 million, $3.7 million and $5.4 million,
respectively. A portion of these fees have been classified as selling, general
and administrative expenses in the Company's financial statements included in
this Prospectus. The management fees shown separately on the accompanying
financial statements have been discontinued as of January 1, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In 1994, GGFP loaned $1.05 million to the Company in connection with the
relocation of the Company's Quality Nissan dealership. Interest on the loan
accrues at 8.0% per annum and is payable monthly. Principal is payable in
quarterly installments, and the Company expects to repay the loan in full out of
funds from operations by the end of 1996. At June 30, 1996, the amount
outstanding under the loan was $467,000.
As with other franchised dealerships, the Company is entitled to deposit
funds in the GMAC Deposit Account in an amount up to 75% of the amount of
inventory financed by GMAC. These funds so deposited earn interest at a rate
equal to the rate charged under the GMAC floor plan. Historically, the Company
has
52
<PAGE>
permitted its employees (including its principal stockholders and Named
Executives) to advance funds to the Company for the purpose of investing in the
GMAC Deposit Account. The Company has acted only as an intermediary in this
process. At December 31, 1995 and June 30, 1996, funds advanced and outstanding
from the Company's principal stockholders and Named Executives aggregated $2.9
million and $4.2 million, respectively. Following completion of the Offering,
the Company intends to deposit its funds in the GMAC Deposit Account before
permitting its employees, including its principal stockholders and Named
Executives, to make deposits into the account.
During 1995, GGFP advanced funds aggregating $2.6 million to the Company for
working capital purposes relating primarily to acquisitions. These advances
accrued interest at an annual rate of 8.0% and were repaid in full in February
1996.
GGFP was the contracting agent for the construction of certain facilities
for the Company during 1995. The total cost of the facilities approximated
$570,000, which included approximately $52,000 as payment to GGFP for
architectural and construction management fees.
GGFP leases the Company its corporate offices for an annual rent of $64,800
under a five-year lease extending through June 2001. GGFP also subleases to the
Company the real estate on which the Company's Performance Nissan dealership is
located. Annual rent under the sublease is $228,000, which is the same amount
payable by GGFP under the principal lease for the property.
In June 1996, the Company issued 303,750 shares of Common Stock to Mr. Mager
in connection with the Executive Purchase. The Company recorded a non-cash
expense relating to employee stock compensation of approximately $1.1 million in
the six months ended June 30, 1996, representing the difference between the
Company's estimate of the fair value, as of April 1, 1996, of the 303,750 shares
of Common Stock issued in the Executive Purchase and the cash consideration paid
of $250,000. The Company based its estimate on the assumed initial public
offering price of the Shares less certain discounts to reflect, as of April 1,
1996, the lack of a public market for the securities, the uncertainty regarding
an initial public offering and the fact that the pending acquisition of Hickey
Dodge had not been contemplated.
It is anticipated that, in addition to options to purchase 7,692 shares of
Common Stock that will be granted to him under the Stock Option Plan immediately
before completion of the Offering, Mr. Mager will receive from the Company upon
completion of the Offering an option to purchase an aggregate of 130,308 shares
of Common Stock at the initial public offering price. All of these options will
be exercisable at any time or from time to time after the 90th day after, and
before the tenth anniversary of, the completion of the Offering, so long as Mr.
Mager is an employee or serves as a consultant or in another advisory capacity
to the Company at the time the option is exercised. Mr. Mager has agreed with
Morgan Stanley & Co. Incorporated, on behalf of the Underwriters, not to sell or
otherwise transfer or dispose of any shares of Common Stock issued upon the
exercise of these options for a period of 180 days after the date of this
Prospectus. See "Underwriters."
Mr. Gilliland has unconditionally guaranteed substantially all, and Mr. Rice
has unconditionally guaranteed a portion, of the Company's debt to
non-affiliates. At June 30, 1996, the aggregate amount of such debt was $48.9
million. To the extent proceeds of the Offering are applied to reduce any of
this debt, these guarantee obligations will be reduced. Following the Offering,
the Company intends to seek the release of Messrs. Gilliland and Rice from these
guarantees.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock, par value $.01 per share, and 10,000,000 shares of Preferred
Stock, $.01 par value per share.
COMMON STOCK
As of August 1, 1996, there were 10,125,000 shares of Common Stock
outstanding that were held of record by six stockholders. Immediately following
the Offering, 13,800,000 shares of Common Stock will be outstanding.
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<PAGE>
Holders of Common Stock have one vote per share on matters to be voted upon
by the stockholders of the Company. They do not have cumulative voting rights.
As a result, the holders of more than 50% of the shares of the Common Stock will
have the ability to elect all of the Company's directors. See "Risk Factors --
Concentration of Voting Power and Anti-Takeover Provisions." Holders of Common
Stock may receive dividends when, as and if declared by the Board of Directors
from any assets legally available therefor and may share ratably in the assets
of the Company legally available for distribution to its stockholders in the
event of the liquidation, dissolution or winding up of the Company, in each case
subject to the rights of the holders of Preferred Stock. The Company does not
intend to pay cash dividends on the Common Stock for the foreseeable future. See
"Dividend Policy." Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights and are subject to the rights of the holders of
any Preferred Stock that the Company may issue. Holders of Common Stock are not
subject to calls or assessments by the Company. All outstanding shares of Common
Stock are, and the shares of Common Stock being issued and sold hereby will be,
when issued, fully paid and non-assessable. The rights, privileges, preferences
and priorities of holders of the Common Stock are subject to, and may be
adversely affected by, the rights of the holders of shares of any series of
Preferred Stock that the Company may designate and issue in the future.
Prior to the Offering, there has been no public market for the Common Stock.
The Common Stock has been approved for listing on the New York Stock Exchange
under the symbol "XC", subject to official notice of issuance.
PREFERRED STOCK
The Board of Directors of the Company may, subject to applicable law, from
time to time issue up to an aggregate of 10,000,000 shares of Preferred Stock.
The Preferred Stock may be issued in one or more series with such designations,
rights, preferences, privileges and restrictions as the Board of Directors may
determine, in each case without further vote or action by the stockholders. Such
rights may include dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences, sinking
fund provisions and the number of shares constituting any series or the
designation of such series. Because of the broad discretion of the Board of
Directors with respect to the creation and issuance of Preferred Stock without
stockholder approval, the issuance of Preferred Stock may delay, defer or
prevent a change in control of the Company and may adversely affect the rights
of the holders of Common Stock. The issuance of Preferred Stock with voting or
conversion rights may adversely affect the voting power of the holders of Common
Stock. In addition, because the terms of such Preferred Stock may be fixed by
the Board of Directors without stockholder approval, the Preferred Stock could
be designated and issued quickly in the event that the Company requires
additional equity capital. Under certain circumstances, this could have the
effect of decreasing the market price of the Common Stock. In connection with
its Rights Agreement, the Company has designated 250,000 shares of Preferred
Stock as its Series A Junior Participating Preferred Stock. See
"-- Stockholders' Rights Plan." As of the date hereof, the Board of Directors
has not provided for the issuance of any other series of Preferred Stock, and
except as described below under "-- Stockholders' Rights Plan," there are no
agreements or understandings providing for the issuance of Preferred Stock.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
CERTIFICATE OF INCORPORATION AND BYLAWS
The Company has included provisions in its Certificate of Incorporation and
Bylaws to help assure fair and equitable treatment of the Company's stockholders
if a person or group should seek to gain control of Cross-Continent in the
future. Such provisions, which are discussed below, may make a takeover attempt
more difficult, whether by tender offer, proxy contest or otherwise. These
provisions may diminish the likelihood that a potential acquiror will make an
offer for the Company's Common Stock, impede a transaction favorable to the
interests of the stockholders, or increase the difficulty of removing the
incumbent Board of Directors and management, even if such removal would benefit
the stockholders.
The Company's Board of Directors is divided into three classes, each of
which, after a transitional period, will serve for three years, with one class
being elected each year. Under the Delaware General Corporation Law,
stockholders of a corporation with a classified board may remove a director only
for cause.
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<PAGE>
Under the Company's Certificate of Incorporation, an affirmative vote of the
holders of at least two-thirds of the shares is required to amend or repeal the
provisions related to the classified board. In addition, all stockholder action
must be taken at a duly called meeting and not by a consent in writing. The
Company's Bylaws do not permit stockholders of Cross-Continent to call a special
meeting of stockholders. See "Risk Factors -- Concentration of Voting Power and
Anti-Takeover Provisions."
DELAWARE TAKEOVER STATUTE
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless, prior
to the date the stockholder became an interested stockholder, the board approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder or unless one of the two
exceptions to the prohibitions is satisfied: (i) upon consummation of the
transaction that resulted in such person becoming an interested stockholder, the
interested stockholder owned at least 85% of the corporation's voting stock
outstanding at the time the transaction commenced (excluding, for purposes of
determining the number of shares outstanding, shares owned by certain directors
or certain employee stock plans) or (ii) on or after the date the stockholder
became an interested stockholder, the business combination is approved by the
board of directors and authorized by the affirmative vote (and not by written
consent) of at least two-thirds of the outstanding voting stock excluding that
stock owned by the interested stockholder. A "business combination" includes a
merger, asset sale or other transaction resulting in a financial benefit to the
interested stockholder. An "interested stockholder" is a person who (other than
the corporation and any direct or indirect majority-owned subsidiary of the
corporation), together with affiliates and associates, owns (or, as an affiliate
or associate, within three years prior, did own) 15% or more of the
corporation's outstanding voting stock. It is possible that these provisions may
have the effect of delaying, deterring or preventing a change in control of the
Company.
ANTI-TAKEOVER EFFECT OF PROVISIONS IN DEALER AGREEMENTS
Under the Company's Dealer Agreements with the Chevrolet division of General
Motors, if any person or entity acquires more than 20% of the Common Stock
issued and outstanding at any time and the Chevrolet division determines that
such person or entity does not have interests compatible with those of the
Chevrolet division, or is otherwise not qualified to have an ownership interest
in a Chevrolet dealership (an "Adverse Person"), the Company must transfer its
Chevrolet dealerships to a third party acceptable to the Chevrolet division or
terminate its Dealer Agreements with Chevrolet unless, within 90 days after
Chevrolet's determination, the Adverse Person's ownership interest in the
Company is reduced to less than 20%. See "Risk Factors -- Concentration of
Voting Power and Anti-Takeover Provisions" and "Business -- Vehicle and Parts
Suppliers -- Relationships with Automakers."
Under the Dealer Agreements with Nissan that the Company anticipates will be
in effect upon completion of the Offering, as renegotiated in anticipation of
the Offering, Nissan will have the right to terminate the Company's Nissan
franchises if, without Nissan's prior approval, Mr. Gilliland's ownership of
Common Stock falls below 20% of the total number of shares of Common Stock
issued and outstanding or Mr. Gilliland ceases to be the Chief Executive Officer
of the Company. Nissan also will have the right to terminate the Company's
Dealer Agreements if any person or entity acquires 20% or more of the Company's
issued and outstanding shares and Nissan determines that such ownership is
adverse to Nissan.
Under the Company's Dealer Agreement with the Dodge division of Chrysler,
following the Offering, Chrysler will be entitled to terminate the Company's
Dodge franchise if there is any change in the ownership of a controlling number
of shares in the Company not approved by Chrysler. The change of control
provisions in the Company's Dealer Agreements with GM, Nissan and Chrysler could
discourage a third party from acquiring a significant equity position in the
Company or from seeking control of the Company.
55
<PAGE>
STOCKHOLDERS' RIGHTS PLAN
Immediately prior to completion of the Offering, the Company's Rights
Agreement (the "Rights Plan") will take effect. The purpose of the Rights Plan
is to promote negotiations between a prospective acquiror and the Company's
Board of Directors in order to ensure that the stockholders' interests will be
best served.
Under the Rights Plan, each stockholder of the Company (including the
Company's existing stockholders) will be issued one right (a "Right") with each
share of Common Stock issued prior to the Distribution Date (as defined below).
The Rights are not exercisable, will not be represented by separate certificates
and are transferable only with a transfer of the Common Stock until the tenth
day after (i) such time as a person or entity, together with affiliates and
associates, acquires beneficial ownership of 19.9% of the Common Stock or (ii) a
person or entity announces its intention to make such an acquisition (such
person or entity being the "Acquiring Person" and such date being the
"Distribution Date"). Until a Right is exercised, the holder thereof, as such,
will have no rights as a stockholder of the Company, including, without
limitation, the right to vote or receive dividends.
Each Right is exercisable after the Distribution Date for one one-hundredth
of a share of Junior Preferred Stock at a purchase price of $100 per share,
subject to adjustment. However, once the Rights are triggered, holders of Common
Stock (other than the Acquiring Person) have the right, in lieu of acquiring
Junior Preferred Stock, to purchase Common Stock having a market value, as of
the time that the Acquiring Person crossed the 19.9% threshold, equal to twice
the Right's exercise price. The factors considered in determining the exercise
price of the Rights include pricing and dilution characteristics of other rights
plans with respect to similar securities registered under the Securities Act and
the estimated initial public offering price of the Common Stock.
The Company may, at the discretion of the Board of Directors, lower this
threshold to as low as 10% of the Common Stock then outstanding. The Company
also has the right, after the Acquiring Person has crossed the 19.9% or 10%
threshold, as the case may be, but before the Acquiring Person has acquired 50%
of the Common Stock, to exchange one new share of Common Stock for each Right
(other than Rights held by the Acquiring Person).
Under the Rights Plan, once the Rights become exercisable, if the Company is
merged or combined with any person or if the Company sells 50% or more of its
assets to any person, each holder of a Right (other than an Acquiring Person)
has the right, in lieu of acquiring Junior Preferred Shares, to purchase shares
of common stock of such person having a market value at that time of two times
the exercise price of the Rights.
If the Company is unable to issue a sufficient number of shares of Common
Stock to permit the exercise in full of the Rights for Common Stock, it will
issue shares of Junior Preferred Stock upon exercise of the Rights. The Junior
Preferred Stock is non-redeemable and junior to any other preferred stock of the
Company. The provisions of the Junior Preferred Stock are designed to provide
that each one one-hundredth of a share of Junior Preferred Stock issuable upon
exercise of a Right approximates the value of one share of Common Stock. Each
whole share of Junior Preferred Stock will accrue a quarterly dividend of $1 and
a dividend equal to 100 times any dividend paid on the Common Stock. Upon
liquidation of the Company, each whole share of Junior Preferred Stock will have
a liquidation preference of $100 plus an amount equal to 100 times the amount
paid on any share of Common Stock. Each share of Junior Preferred Stock will
entitle its holder to 100 votes on matters submitted to the Company's
stockholders, which votes will be cast with the votes of the holders of Common
Stock. If the Company were merged, consolidated or involved in a similar
transaction, each share of Junior Preferred Stock would entitle its holder to
receive 100 times the amount received by holders of Common Stock in the merger
or similar transaction.
Any exercise of the Rights would have a dilutive effect on an Acquiring
Person both economically and in terms of its percentage ownership of the
Company's Common Stock. Therefore, the existence of the Rights may discourage a
third party from attempting to acquire control of the Company. In order to
ensure that the Rights will not interfere with negotiated transactions between
the Company and a potential acquiror, which
56
<PAGE>
are approved by the Company's Board of Directors, the Company may redeem the
Rights at a price of $.01 per Right at any time prior to the acquisition by any
person or entity of beneficial ownership of 19.9% or more of the Common Stock.
Reference is hereby made to the Rights Agreement to be entered into between
the Company and The Bank of New York, as rights agent, specifying the terms of
the Rights, which agreement includes as an exhibit the form of Rights
Certificate, and this description is qualified in its entirety by reference to
the terms and conditions thereof. The Rights Agreement is an exhibit to the
Registration Statement of which this Prospectus is a part.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation and Bylaws contain certain
provisions permitted under the Delaware General Corporation Law that limit the
liability of directors. These provisions eliminate a director's personal
liability for monetary damages resulting from a breach of fiduciary duty, except
in certain circumstances involving certain wrongful acts, such as the breach of
a director's duty of loyalty, acts or omissions that involve intentional
misconduct or a knowing violation of law, or any transaction from which a
director derived an improper personal benefit. These provisions do not limit or
eliminate the rights of the Company or any stockholder to seek non-monetary
relief, such as an injunction or rescission, in the event of a breach of a
director's fiduciary duty. These provisions will not alter a director's
liability under federal securities laws. The Company's Certificate of
Incorporation and Bylaws also contain provisions indemnifying the directors and
officers of the Company to the fullest extent permitted by the Delaware General
Corporation Law. The Company believes that these provisions will assist it in
attracting and retaining qualified individuals to serve as directors.
TRANSFER AGENT AND REGISTRAR
The Company has appointed The Bank of New York as the transfer agent and
registrar for the Common Stock, as well as rights agent under the Rights Plan.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have approximately
13,800,000 shares of Common Stock issued and outstanding, assuming no exercise
of options outstanding. Of the Common Stock outstanding upon completion of this
Offering, the 3,675,000 shares of Common Stock sold in this Offering will be
freely transferable by the holders thereof without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"), except for any shares held by "affiliates" of the Company, as that term
is defined under the Securities Act and the regulations promulgated thereunder
(an "affiliate"), or persons who have been affiliates within the preceding three
months. Holders of the remaining 10,125,000 shares of Common Stock will not be
able to sell their shares in reliance on Rule 144 under the Securities Act prior
to June 1998.
In general, under Rule 144 as currently in effect, a holder (or holders
whose shares are aggregated) of "restricted securities," including persons who
may be deemed affiliated with the Company, whose shares meet a two-year holding
period requirement are entitled to sell, within any three-month period, a number
of these shares that does not exceed the greater of 1% of the then outstanding
shares of Common Stock or the average weekly reported trading volume in the
Common Stock during the four calendar weeks preceding the date on which notice
of the sale is given, provided certain manner of sale and notice requirements
and requirements as to the availability of current public information about the
Company are satisfied. Under Rule 144(k), a holder of "restricted securities"
who is deemed not to have been an affiliate of the Company during the three
months preceding a sale by him, and whose shares meet a three-year holding
period requirement, is entitled to sell those shares, without regard to these
restrictions and requirements. In addition, affiliates of the Company must
comply with the restrictions and requirements of Rule 144, other than the
two-year holding period requirement, in order to sell shares of Common Stock
which are not "restricted securities" (such as shares acquired by affiliates in
the Offering).
57
<PAGE>
The Securities and Exchange Commission (the "Commission") has recently
proposed amendments to Rule 144 and Rule 144(k) that would permit resales of
restricted securities under Rule 144 after a one-year, rather than a two-year,
holding period, subject to compliance with the other provisions of Rule 144, and
would permit resale of restricted securities by non-affiliates under Rule 144(k)
after a two-year, rather than a three-year, holding period. Adoption of such
amendments could result in resales of restricted securities sooner than would be
the case under Rule 144 and Rule 144(k) as currently in effect.
The Company has reserved 1,380,000 shares of Common Stock for issuance under
the Stock Option Plan. See "Management -- Stock Option Plan." After the
Offering, the Company may file registration statements under the Securities Act
to register the Common Stock to be issued under this plan. After the effective
date of such registration statement, shares issued under the Stock Option Plan
will be freely tradeable without restriction or further registration under the
Securities Act, unless acquired by affiliates of the Company. In addition, as
part of any acquisition it may complete in the future, the Company may issue
additional shares of Common Stock subject to concentration of ownership
provisions in the Company's Dealer Agreements. See "Business -- Growth Strategy
- -- Acquisitions."
Prior to the Offering, there has been no market for the Common Stock. No
prediction can be made regarding the effect, if any, that public sales of shares
of the Common Stock or the availability of shares for sale will have on the
market price of the Common Stock after the Offering. Sales of substantial
amounts of the Common Stock in the public market following the Offering, or the
perception that such sales may occur, could adversely affect the market price of
the Common Stock and could impair the ability of the Company to raise capital
through sales of its equity securities.
58
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions in the Underwriting Agreement
dated the date hereof (the "Underwriting Agreement"), the Underwriters named
below (the "Underwriters") have severally agreed to purchase, and the Company
has agreed to sell to them, severally, the respective number of shares of Common
Stock set forth opposite their respective names below:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- ------------------------------------------------------------------------------------- -----------------
<S> <C>
Morgan Stanley & Co. Incorporated....................................................
Furman Selz LLC......................................................................
Rauscher Pierce Refsnes, Inc.........................................................
-----------------
Total............................................................................ 3,675,000
-----------------
-----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are committed to take
and pay for all of the shares of Common Stock offered hereby (other than those
covered by the Underwriters' over-allotment option described below) if any such
shares are taken.
The Underwriters propose to offer part of the shares of Common Stock
directly to the public at the Price to Public set forth on the cover page hereof
and part to certain dealers at a price that represents a concession not in
excess of $ per share under the public offering price. Any Underwriter may
allow, and such dealers may reallow, a concession not in excess of $ per share
to other Underwriters or to certain dealers. After the initial offering of the
shares of Common Stock, the offering price and other selling terms may from time
to time be varied by Morgan Stanley & Co. Incorporated, Furman Selz LLC and
Rauscher Pierce Refsnes, Inc. (the "Representatives").
The Common Stock has been approved for listing on the New York Stock
Exchange under the symbol "XC", subject to official notice of issuance.
The Company and, if the Underwriters' over-allotment option is exercised,
the Selling Stockholders have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act.
Pursuant to the Underwriting Agreement, the Selling Stockholders have
granted to the Underwriters an option, exercisable for 30 days from the date of
this Prospectus, to purchase up to 551,250 additional shares of Common Stock at
the Price to Public set forth on the cover page hereof, less underwriting
discounts and commissions. The Selling Stockholders will participate in the
Offering only if and to the extent the Underwriters exercise the over-allotment
option. The Company will pay the expenses related to the exercise of the
over-allotment option (other than stock transfer taxes and counsel fees of the
Selling Stockholders, if any). The Underwriters may exercise such option solely
for the purpose of covering over-allotments, if any, made in connection with the
Offering. To the extent such option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares of Common Stock as the number set forth
next to such Underwriter's name in the preceding table bears to the total number
of shares of Common Stock offered by the Underwriters hereby. See "Principal
Stockholders."
The Company, its directors and executive officers and all existing
stockholders have agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated on behalf of the Underwriters, they will not for a
period of 180 days after the date of this Prospectus (i) offer, pledge, sell,
contract to sell, grant any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of, directly or indirectly, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock
or (ii) enter into any swap or
59
<PAGE>
other agreement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by the
delivery of Common Stock or such other securities, in cash or otherwise, other
than (a) the shares of Common Stock offered hereby, (b) any options or similar
securities issued pursuant to the Stock Option Plan, as such plan is in effect
on the date hereof, and (c) any shares of Common Stock issued by the Company
upon the exercise of any option outstanding on the date hereof as disclosed in
this Prospectus.
The Underwriters have informed the Company that they do not expect sales to
discretionary accounts to exceed 5% of the total number of shares of Common
Stock offered by them.
At the request of the Company, the Underwriters have reserved approximately
183,750 shares of Common Stock, representing 5.0% of the shares of Common Stock
to be sold in the Offering, for sale to certain of its employees and certain
other persons at the public offering price set forth on the cover page hereof.
If such shares are not so sold to employees of the Company, they will be sold to
the public.
PRICING OF THE OFFERING
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price of the Common Stock will be determined by
negotiations between the Company and the Representatives. Among the factors that
will be considered in determining the initial public offering price of the
Common Stock are the sales, earnings and certain other pro forma financial and
operating information of the Company in recent periods, the future prospects of
the Company and its industry in general, and certain ratios, the market price of
securities and certain financial and operating information of companies engaged
in activities similar to those of the Company. Since the Company will be one of
the first public companies in the auto dealership business, the Company and the
Representatives will not be able to use the market prices of other companies in
the same industry as a benchmark in setting the initial public offering price.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Howard, Darby & Levin, New York, New York. Certain legal
matters will be passed upon for the Underwriters by Shearman & Sterling, New
York, New York.
EXPERTS
The combined financial statements of the Company as of December 31, 1994 and
1995 and for each of the three years in the period ended December 31, 1995, the
financial statements of Jim Glover Dodge, Inc. as of November 30, 1994 and 1995
and for each of the two years in the period ended November 30, 1995 and the
financial statements of Lynn Hickey Dodge, Inc. as of December 31, 1994 and 1995
and for each of the two years in the period ended December 31, 1995 included in
this Prospectus have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in accounting and auditing.
60
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act for the Shares. This Prospectus, filed as part of
the Registration Statement, omits certain information contained in the
Registration Statement and the exhibits and schedules thereto, to which
reference is hereby made. Statements contained herein concerning the provisions
of any documents filed as exhibits to the Registration Statement are not
necessarily complete, and in each instance reference is made to the copy of such
document. Each such statement is qualified in its entirety by such reference.
The Registration Statement, including exhibits and schedules filed therewith,
may be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at 7 World
Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street,
Room 1400, Chicago, Illinois 60661. Copies of such materials may be obtained at
prescribed rates from the Public Reference Section of the Commission, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and its public
reference facilities in New York, New York and Chicago, Illinois. The Commission
also maintains a Website (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and quarterly reports for the first
three quarters of each fiscal year containing unaudited summary financial
information.
61
<PAGE>
INDEX TO COMBINED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
HISTORICAL FINANCIAL STATEMENTS
CROSS-CONTINENT AUTO RETAILERS, INC. AND SUBSIDIARIES
Report of Independent Accountants...................................................................... F-2
Combined Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and for the six
months ended June 30, 1995 and 1996 (unaudited)....................................................... F-3
Combined Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996 (unaudited)................. F-4
Combined Statement of Changes in Stockholders' Equity for the three years ended December 31, 1995 and
for the six months ended June 30, 1996 (unaudited).................................................... F-5
Combined Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and for the six
months ended June 30, 1995 and 1996 (unaudited)....................................................... F-6
Notes to Combined Financial Statements................................................................. F-7
HISTORICAL FINANCIAL STATEMENTS
JIM GLOVER DODGE, INC.
Report of Independent Accountants...................................................................... F-21
Statements of Operations for the years ended November 30, 1994 and 1995................................ F-22
Balance Sheets as of November 30, 1994 and 1995 ....................................................... F-23
Statement of Changes in Stockholders' Equity for the two years ended November 30, 1995................. F-24
Statements of Cash Flows for the years ended November 30, 1994 and 1995................................ F-25
Notes to Financial Statements.......................................................................... F-26
HISTORICAL FINANCIAL STATEMENTS
LYNN HICKEY DODGE, INC.
Report of Independent Accountants...................................................................... F-30
Statements of Operations for the years ended December 31, 1994 and 1995 and for the six months ended
June 30, 1995 and 1996 (unaudited).................................................................... F-31
Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996 (unaudited).......................... F-32
Statements of Changes in Stockholder's Equity for the two years ended December 31, 1995 and for the six
months ended June 30, 1996 (unaudited)................................................................ F-33
Statements of Cash Flows for the years ended December 31, 1994 and 1995 and for the six months ended
June 30, 1995 and 1996 (unaudited).................................................................... F-34
Notes to Financial Statements.......................................................................... F-35
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Cross-Continent Auto Retailers, Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Cross-Continent Auto Retailers, Inc. and its subsidiaries at December 31, 1994
and 1995 and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Fort Worth, Texas
June 21, 1996
F-2
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Vehicle sales $ 150,205 $ 163,721 $ 212,984 $ 101,464 $ 125,900
Other operating revenue 15,159 18,047 23,210 10,880 15,341
--------- --------- --------- --------- ---------
Total revenues 165,364 181,768 236,194 112,344 141,241
--------- --------- --------- --------- ---------
Cost and expenses:
Cost of sales 139,626 153,446 198,702 94,470 119,921
Selling, general and administrative 17,194 18,522 25,630 11,958 15,695
Depreciation and amortization 992 934 951 471 549
Management fees paid to related party 2,536 3,183 4,318 2,155 -
Employee stock compensation - - - - 1,099
--------- --------- --------- --------- ---------
160,348 176,085 229,601 109,054 137,264
--------- --------- --------- --------- ---------
5,016 5,683 6,593 3,290 3,977
Other income (expense):
Interest income 265 576 830 406 527
Interest expense (2,113) (2,526) (3,918) (1,932) (2,251)
--------- --------- --------- --------- ---------
Income before income taxes 3,168 3,733 3,505 1,764 2,253
Income tax provision 1,173 1,351 1,310 659 1,224
--------- --------- --------- --------- ---------
Net income $ 1,995 $ 2,382 $ 2,195 $ 1,105 $ 1,029
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-3
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- JUNE 30, 1996
-------------
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 5,001 $ 8,362 $ 8,892
Accounts receivable 4,523 9,383 10,664
Inventories 23,243 43,731 38,416
--------- --------- -------------
Total current assets 32,767 61,476 57,972
Property and equipment, at cost, less accumulated
depreciation 9,283 12,107 12,213
Goodwill, net 3,523 7,385 7,296
Other assets 2,006 2,439 3,407
--------- --------- -------------
Total assets $ 47,579 $ 83,407 $ 80,888
--------- --------- -------------
--------- --------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Floor plan notes payable $ 18,964 $ 39,088 $ 36,177
Current maturities of long-term debt 655 1,525 1,543
Accounts payable 1,571 4,846 4,796
Due to affiliates 2,225 5,954 4,620
Accrued expenses and other liabilities 6,966 7,495 6,760
Deferred income taxes 2,336 2,032 2,032
--------- --------- -------------
Total current liabilities 32,717 60,940 55,928
--------- --------- -------------
Long-term debt 7,150 11,859 11,131
Deferred warranty revenue - long-term portion 2,671 3,507 4,350
--------- --------- -------------
Total long-term liabilities 9,821 15,366 15,481
--------- --------- -------------
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none issued - - -
Common stock, $.01 par value, 100,000,000 shares
authorized, 10,125,000 issued and outstanding at June
30, 1996 - - 101
Paid-in capital 1,064 1,064 2,312
Retained earnings 3,977 6,037 7,066
--------- --------- -------------
Total stockholders' equity 5,041 7,101 9,479
--------- --------- -------------
Commitments and contingencies (Notes 4, 15, 18 and 19)
--------- --------- -------------
Total liabilities and stockholders' equity $ 47,579 $ 83,407 $ 80,888
--------- --------- -------------
--------- --------- -------------
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-4
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1995 AND
SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------------- ---------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
----------- ---------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 - $ - - $ - $ 764 $ (234)
Contributions by Control Group 300
Dividends paid (86)
Net income 1,995
----- ---------- --------- ----- ----------- -----------
Balance at December 31, 1993 - - - - 1,064 1,675
Net income 2,382
Dividends paid (80)
----- ---------- --------- ----- ----------- -----------
Balance at December 31, 1994 - - - - 1,064 3,977
Net income 2,195
Dividends paid (135)
----- ---------- --------- ----- ----------- -----------
Balance at December 31, 1995 - - - - 1,064 6,037
Issuance of common stock pursuant to reorganization
(unaudited) 9,821 98 (98)
Issuance of common stock pursuant to employment
agreement (unaudited) 304 3 1,346
Net income (unaudited) 1,029
----- ---------- --------- ----- ----------- -----------
Balance at June 30, 1996 (unaudited) - $ - 10,125 $ 101 $ 2,312 $ 7,066
----- ---------- --------- ----- ----------- -----------
----- ---------- --------- ----- ----------- -----------
<CAPTION>
TOTAL
---------
<S> <C>
Balance at December 31, 1992 $ 530
Contributions by Control Group 300
Dividends paid (86)
Net income 1,995
---------
Balance at December 31, 1993 2,739
Net income 2,382
Dividends paid (80)
---------
Balance at December 31, 1994 5,041
Net income 2,195
Dividends paid (135)
---------
Balance at December 31, 1995 7,101
Issuance of common stock pursuant to reorganization
(unaudited) -
Issuance of common stock pursuant to employment
agreement (unaudited) 1,349
Net income (unaudited) 1,029
---------
Balance at June 30, 1996 (unaudited) $ 9,479
---------
---------
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-5
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,995 $ 2,382 $ 2,195 $ 1,105 $ 1,029
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 992 934 951 471 549
Proceeds from extended warranty sales 2,667 2,614 3,345 1,497 2,447
Amortization of deferred warranty revenue (1,089) (1,648) (2,136) (956) (1,396)
Employee stock compensation - - - - 1,099
Deferred taxes and other 367 (1,121) (836) 282 (968)
(Increase) decrease in:
Accounts receivable (2,383) (74) (4,860) (2,369) (1,281)
Inventory (1,697) 1,052 (8,285) (4,211) 5,315
Increase (decrease) in:
Accounts payable - trade 458 (604) 3,275 2,558 (50)
Accrued expenses and other liabilities 1,041 1,452 (68) 63 (944)
--------- --------- --------- --------- ---------
Net cash provided (used) by operating
activities 2,351 4,987 (6,419) (1,560) 5,800
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Acquisition of property and equipment (739) (1,813) (1,485) (37) (565)
Acquisition of minority interest (1,000) - - - -
Acquisition of dealerships - - (302) - -
--------- --------- --------- --------- ---------
Net cash used by investing activities (1,739) (1,813) (1,787) (37) (565)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Change in floor plan notes payable 800 (937) 9,381 3,467 (2,911)
Due to affiliates 473 1,640 3,729 1,647 (1,334)
Long-term debt repayments (584) (1,277) (1,408) (404) (710)
Paid-in capital 300 - - - -
Proceeds from common stock issuance - - - - 250
Dividends paid (86) (80) (135) - -
--------- --------- --------- --------- ---------
Net cash provided (used) by financing
activities 903 (654) 11,567 4,710 (4,705)
--------- --------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents 1,515 2,520 3,361 3,113 530
Cash and cash equivalents at beginning of period 966 2,481 5,001 5,001 8,362
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period $ 2,481 $ 5,001 $ 8,362 $ 8,114 $ 8,892
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-6
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 - GENERAL INFORMATION AND BASIS OF PRESENTATION
The accompanying financial statements reflect the combined operations of Plains
Chevrolet, Inc., Midway Chevrolet, Inc., Westgate Chevrolet, Inc., Quality
Nissan, Inc., Performance Nissan, Inc., Performance Dodge, Inc. and Working
Man's Credit Plan, Inc. During June 1996, the shareholders of these entities
exchanged their shares of stock in these companies for 9,821,155 shares of
common stock in a newly created Delaware corporation, Cross-Continent Auto
Retailers, Inc., representing all of such corporation's outstanding common stock
prior to the Offering. The shareholders' ownership interests in the newly
created company subsequent to the reorganization and prior to the Offering are
as follows:
<TABLE>
<S> <C>
Gilliland Group Family Partnership ("GGFP") 88.2%
Emmett M. Rice, Jr. 10.3%
Other 1.5%
</TABLE>
All of the GGFP partnership interests are owned and controlled by Bill A.
Gilliland, Chairman and CEO, Robert W. Hall, Senior Vice Chairman and son-in-law
to Bill Gilliland, and Lori D'Atri, daughter of Bill Gilliland. The ownership
group described above is hereinafter referred to as the Control Group.
Prior to the exchange of stock, Cross-Continent Auto Retailers, Inc. did not
conduct business or have any assets and liabilities and, thus, has not operated
as a stand-alone company. The term "Company," when used hereinafter, includes
Cross-Continent Auto Retailers, Inc., its subsidiaries and its predecessors.
The Company plans to sell 3,675,000 shares of common stock in an initial public
offering (the "Offering"). The Control Group will remain the principal
stockholders of the Company immediately following the Offering.
The Company operates in one business segment - the retail sales of new and used
automobiles and the service thereof. The Company has three Chevrolet
dealerships, two Nissan dealerships and a Dodge dealership. The three Chevrolet
dealerships and one Nissan dealership are located in the Amarillo, Texas
vicinity and the Dodge and other Nissan dealership are located in the Oklahoma
City, Oklahoma vicinity.
The accompanying combined financial statements are presented as if the Company
had existed as a corporation separate from the Control Group during the periods
presented and include the historical assets, liabilities, revenues and expenses
that are directly related to the Company's operations. All material intercompany
transactions have been eliminated. For the periods presented, certain expenses
reflected in the financial statements include allocations of certain expenses
from GGFP. These allocations include expenses for general management, use of an
airplane, treasury, legal and benefits administration, insurance, tax compliance
and other miscellaneous services. The allocation of expenses was generally based
upon actual costs incurred and such costs were apportioned to the Company on
various methods such as volume of sales, number of employees, profit and actual
expense or time incurred as it related to the Company's business.
Financing associated with working capital needs and mortgage financing used to
purchase property for the dealership operations and their related interest
expense have been historically recorded on the Company's financial statements.
No other interest expense or income has been allocated to the Company in these
financial statements.
Management believes that the foregoing allocations were made on a reasonable
basis; however, the allocations of costs and expenses do not necessarily
indicate the costs that would have been or will be incurred by
F-7
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
the Company on a stand-alone basis. Also, the financial information included in
the financial statements may not necessarily reflect the financial position,
results of operations and cash flows of the Company in the future or what the
financial position, results of operations and cash flows would have been if the
Company had been a separate, stand-alone company during the periods presented.
It is expected that after the Offering, the Company will incur additional
corporate expenses as a result of being a public company and will no longer
remit management fees to the Control Group (see Note 17). The pro forma
adjustments described in the unaudited Notes to Combined Pro Forma Financial
Data reflect the elimination of the management fee to GGFP as well as
management's estimate of the additional costs the Company would have incurred
for the year ended December 31, 1995 and the six-month period ended June 30,
1996 as if the Offering and reorganization had occurred at the beginning of
those periods.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM PERIODS - The following notes, insofar as they are applicable
to June 30, 1996 and the six-month periods ended June 30, 1995 and 1996, are
unaudited. These interim combined financial statements have been prepared on the
same basis as the annual financial statements included herewith. In the opinion
of management, all adjustments, consisting only of ordinary recurring accruals
considered necessary to fairly state the unaudited financial position at June
30, 1996 and the unaudited results of operations and cash flows for the six
months ended June 30, 1995 and 1996 have been included. Results for the six
months ended June 30, 1995 and 1996 are not necessarily indicative of results
which may be expected for any other interim period or for any year as a whole.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand and
all highly liquid investments with maturities of three months or less when
purchased.
REVENUES - Revenues from vehicle and parts sales and from service operations are
recognized at the time the vehicle is delivered to the customer or service is
completed.
FINANCE FEES AND INSURANCE COMMISSIONS - Finance fees represent revenue earned
by the Company for notes placed with financial institutions in connection with
customer vehicle financing. Finance fees are recognized in income upon
acceptance of the credit by the financial institution. Insurance income
represents commissions earned on credit life, accident and disability insurance
sold in connection with the vehicle on behalf of third-party insurance
companies. Insurance commissions are recognized in income upon customer
acceptance of the insurance terms as evidenced by contract execution.
The Company is charged back for a portion of these fees and commissions should
the customer terminate the finance contract prior to its scheduled maturity. The
estimated allowance for these chargebacks ("chargeback allowance") is based upon
the Company's historical experience for prepayments or defaults on the finance
contracts. Finance fees and insurance commissions, net of chargebacks, are
classified as other operating revenue in the accompanying combined statement of
operations. See Note 7 for an analysis of the allowance for estimated
chargebacks.
INVENTORIES - Vehicles are stated at the lower of cost or market, cost being
determined on a specific identification basis. Parts are stated at the lower of
cost or market, cost being determined on the first-in, first-out (FIFO) basis.
F-8
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
POSTRETIREMENT BENEFITS - The Company has no material postretirement or
postemployment benefits as defined in SFAS No. 106, EMPLOYERS' ACCOUNTING FOR
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, or SFAS No. 112, EMPLOYERS'
ACCOUNTING FOR POSTEMPLOYMENT BENEFITS.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation
is computed using the straight-line method over the respective lives of the
assets. The ranges of estimated useful lives are as follows:
<TABLE>
<S> <C>
Buildings 30 years
Furniture and equipment 3 to 7 years
7 to 15
Leasehold improvements years
</TABLE>
When depreciable assets are sold or retired, the related cost and accumulated
depreciation are removed from the accounts. Any gains or losses are included in
selling, general and administrative expenses. Major additions and betterments
are capitalized. Maintenance and repairs which do not materially improve or
extend the lives of the respective assets are charged to operating expenses as
incurred.
GOODWILL AND OTHER ASSETS - The values assigned to noncompete agreements are
being amortized on a straight-line basis over their contractual lives of five
years. Values assigned to noncompete agreements arising from business
combinations are included as other assets in the accompanying combined balance
sheet. At December 31, 1994 and 1995, the unamortized portion of such noncompete
agreements approximated $192,000 and $92,000, respectively, net of accumulated
amortization of $608,000 and $708,000, respectively. Goodwill represents the
excess of the purchase price over the estimated fair value of the net assets of
acquired businesses and is being amortized over a 40-year period. The cumulative
amount of goodwill amortization at December 31, 1994 and 1995 approximated
$309,000 and $447,000, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS - In March 1995, the FASB issued FAS No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF ("FAS 121"), which is effective for fiscal years beginning after
December 15, 1995. Effective December 31, 1995, the Company adopted FAS 121
which requires that long-lived assets (i.e., property, plant and equipment and
goodwill) held and used by an entity be reviewed for impairment whenever events
or changes in circumstances indicate that the net book value of the asset may
not be recoverable. An impairment loss will be recognized if the sum of the
expected future cash flows (undiscounted and before interest) from the use of
the asset is less than the net book value of the asset. Generally, the amount of
the impairment loss is measured as the difference between the net book value of
the assets and the estimated fair value of the related assets. The adoption of
this statement at December 31, 1995 had no impact on the Company's results of
operations or its financial position.
ADVERTISING AND PROMOTIONAL COSTS - Advertising and promotional costs are
expensed as incurred and are included in selling, general and administrative
expense in the accompanying combined statement of operations. Total advertising
and promotional expenses approximated $1,433,000, $1,636,000 and $2,638,000 in
1993, 1994 and 1995, respectively.
EXTENDED WARRANTY CONTRACTS - The Company's dealerships offer extended warranty
contracts on new and used vehicles sold. These contracts generally provide
extended coverage for periods of one year or 12,000 miles up to six years or
100,000 miles, whichever comes first. The Company accounts for the sale of its
extended warranty contracts in accordance with FASB Technical Bulletin No. 90-1,
ACCOUNTING FOR SEPARATELY PRICED EXTENDED WARRANTY AND PRODUCT MAINTENANCE
CONTRACTS, which requires that revenues from sales of extended warranty
contracts be recognized ratably over the lives of the contracts. Costs directly
related to
F-9
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
sales of extended warranty contracts are deferred and charged to expense
proportionately as the revenues are recognized. A loss is recognized on extended
warranty contracts if the sum of the expected costs of providing services under
the contracts exceeds related unearned revenue. The Company also sells extended
service contracts on behalf of unrelated third parties. Commission revenue for
the unrelated third-party extended service contracts is recognized at the time
of sale. Revenue and commissions recognized from the sale of extended warranty
contracts are classified as other operating revenue and the related costs of
parts and service associated therewith are classified as cost of sales in the
accompanying combined statement of operations.
ACCOUNTING FOR STOCK-BASED COMPENSATION - In October 1995, the FASB issued FAS
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("FAS 123"), which is effective
for fiscal years beginning after December 15, 1995. Effective January 1, 1996,
the Company will adopt FAS 123 which establishes financial accounting and
reporting standards for stock-based employee compensation plans. The
pronouncement defines a fair value based method of accounting for an employee
stock option or similar equity instrument and encourages all entities to adopt
that method of accounting for all of their employee stock option compensation
plans. However, it also allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting as
prescribed by Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES ("APB 25"). Entities electing to remain with the accounting
in APB 25 must make pro forma disclosures of net income and earnings per share
as if the fair value based method of accounting defined in FAS 123 had been
applied. The Company will account for stock-based employee compensation plans
under the intrinsic method pursuant to APB 25 and will make the disclosures in
its footnotes as required by FAS 123.
INCOME TAXES - Deferred taxes are provided on the liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment. The
operations of each of the dealerships have historically filed separate tax
returns from the Control Group.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair value of financial statements is
determined by reference to various market data and other valuation techniques,
as appropriate. Unless otherwise disclosed, the fair value of financial
instruments approximates their recorded values due primarily to the short-term
nature of their maturities.
EARNINGS PER SHARE - Earnings per share data is not presented, as the historical
capital structure prior to the Offering is not comparable to the capital
structure that will exist after the Offering.
OTHER OPERATING REVENUE - Other operating revenue primarily consists of finance
fees, insurance commissions, sales for parts and service and revenue recognized
from the sale of extended warranty contracts.
PERVASIVENESS OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, and related revenues and expenses, and disclosure of gain and loss
contingencies at the date of the financial statements. Actual results could
differ from those estimates.
F-10
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - ACQUISITIONS
Effective February 2, 1995, the Company acquired Performance Nissan, Inc.
(formerly Jim Glover Nissan, Inc.). Performance Nissan is engaged in the retail
sales of new and used vehicles and in the retail and wholesale of replacement
parts and vehicle servicing. The total purchase price of approximately $1.4
million was funded originally by bank debt and was subsequently refinanced with
GMAC. The acquisition has been accounted for as a purchase, and the results of
Performance Nissan have been included in the accompanying combined statements of
operations since the date of acquisition. The cost of the acquisition has been
allocated on the basis of the estimated fair market value of the assets acquired
and the liabilities assumed.
A summary of the purchase price allocation for Performance Nissan is presented
below (in thousands):
<TABLE>
<S> <C>
Net working capital $ 76
Equipment 61
Excess of cost over fair value of net assets acquired 1,300
---------
Total $ 1,437
---------
---------
</TABLE>
Effective December 4, 1995, the Company acquired Performance Dodge, Inc.
(formerly Jim Glover Dodge, Inc.). Performance Dodge is engaged in the retail
sales of new and used automobiles and in the retail and wholesale of replacement
parts and vehicle servicing. The total purchase price of approximately $5.9
million was financed with debt proceeds of $3.7 million and a mortgage of $1.85
million, both of which were provided by GMAC. The remaining purchase price
approximating $302,000 was provided with available cash from existing
dealerships. The acquisition has been accounted for as a purchase, and the
results of Performance Dodge have been included in the accompanying combined
statements of operations since the date of the acquisition. The cost of the
acquisition has been allocated on the basis of the estimated fair market value
of the assets acquired and the liabilities assumed.
A summary of the purchase price allocation for Performance Dodge is presented
below (in thousands):
<TABLE>
<S> <C>
Net working capital $ 1,160
Property and equipment 1,992
Excess of cost over fair value of net assets acquired 2,700
---------
Total $ 5,852
---------
---------
</TABLE>
The unaudited combined statement of operations data is presented below on a pro
forma basis as though Performance Nissan and Performance Dodge had been acquired
as of the beginning of 1994 and 1995 (in thousands):
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Sales and operating revenues $ 287,849 $ 298,312
---------- ----------
---------- ----------
Net income $ 2,884 $ 2,600
---------- ----------
---------- ----------
</TABLE>
The pro forma results of operations information is not necessarily indicative of
the operating results that would have occurred had the acquisitions been
consummated as of the beginning of each period, nor is it necessarily indicative
of future operations.
F-11
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
In March 1993, the Company acquired the remaining 40% minority interest in
Westgate Chevrolet, Inc. for $1.0 million, resulting in additional goodwill of
$773,000 which is being amortized over 40 years. Minority interest for the two
months ended February 28, 1993 approximated $30,000.
NOTE 4 - MAJOR SUPPLIERS AND FRANCHISE AGREEMENTS
The Company owns and operates three GM, two Nissan and one Dodge automobile
dealerships. The Company enters into agreements ("Dealer Agreements") with the
automakers that supply new vehicles and parts to its dealerships. The Company's
overall sales could be impacted by the automakers' ability or unwillingness to
supply the dealerships with an adequate supply of popular models. The Company's
existing GM Dealer Agreements have remaining terms of approximately five years,
expiring in 2000. The Nissan and Dodge Dealership Agreements have no stated
expiration date. Management currently believes that it will be able to renew all
the GM Dealer Agreements upon expiration; however, there can be no assurance
that the GM Dealer Agreements will be renewed.
The Dealer Agreements generally limit locations of dealerships and retain
automaker approval rights over changes in dealership management and ownership
greater than 20%. The Dealer Agreement with Dodge stipulates that the Company
could lose its Dodge dealership upon any change in ownership of a controlling
number of shares in the Company. Each automaker also is entitled to terminate
the dealership agreement if the dealership is in material breach of the terms.
In addition, under the June 1996 agreements with GM, the Company has agreed to
comply with GM's Network 2000 Channel Strategy ("Project 2000"). Project 2000
includes a plan to eliminate 1,500 GM dealerships by the year 2000, primarily
through dealership buybacks and approval by GM of interdealership acquisitions,
and encourages dealers to align GM divisions' brands as may be requested by GM.
The June 1996 agreements require that the Company bring any GM dealership
acquired after the Offering into compliance with the Project 2000 plan within
one year of the acquisition. Failure to achieve such compliance will result in
termination of the Dealer Agreement and a buyback of the related dealership
assets by GM. The Company believes that this aspect of the June 1996 agreements
does not present a significant risk to its business or future operating results.
Additionally, Nissan has the right to terminate the Company's Nissan franchises
if, without Nissan's prior approval, Mr. Gilliland's ownership of common stock
decreases below 20% of the total number of shares of common stock issued and
outstanding or Mr. Gilliland ceases to be the Chief Executive Officer of the
Company.
The Company's ability to expand operations depends, in part, on obtaining the
consent of the automakers to the acquisition or establishment of additional
dealerships.
NOTE 5 - ACCOUNTS RECEIVABLE
Contracts in transit and vehicle receivables primarily represent receivables
from financial institutions such as GMAC, Chrysler Credit Corporation, and
regional banks which provide funding for customer vehicle financing. These
receivables are normally collected in less than 30 days of the sale of the
vehicle. Trade receivables primarily relate to the sale of parts to commercial
customers and finance fees representing amounts due from financial institutions
earned from arranging financing with the Company's customers. Amounts due from
automakers represent receivables for parts and service work performed on
vehicles pursuant to the automakers' warranty coverage. Receivables from
automakers also include amounts due from automakers in connection with the
purchase of vehicles ("holdback") pursuant to the dealership agreement; such
amounts are generally remitted to the Company on a quarterly basis.
F-12
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The accounts receivable balances at December 31, 1994 and 1995 are comprised of
the following (in thousands):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Contracts in transit and vehicle receivables $ 2,099 $ 4,837
Trade 1,345 2,596
Due from automakers 1,085 1,923
Other 129 162
--------- ---------
4,658 9,518
Less: allowance for doubtful accounts (135) (135)
--------- ---------
Total accounts receivable $ 4,523 $ 9,383
--------- ---------
--------- ---------
</TABLE>
NOTE 6 - CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentration of
credit risk, consist principally of cash and cash equivalents and accounts
receivable. The Company invests a substantial portion of its excess cash with
GMAC and, to a lesser extent, with financial institutions with strong credit
ratings. Cash invested with GMAC can be withdrawn at any time. At December 31,
1995, amounts invested approximated $7,705,000, with the interest rate
approximating 8.5%. At times, amounts invested with financial institutions may
be in excess of FDIC insurance limits. As of December 31, 1995, the Company has
not experienced any losses on its cash equivalents.
Concentrations of credit risk with respect to customer receivables are limited
primarily to automakers and financial institutions such as GMAC and regional
banks. Credit risk arising from receivables from commercial customers is minimal
due to the large number of customers comprising the Company's customer base.
However, they are concentrated in the Company's two market areas in the Texas
Panhandle and central Oklahoma.
NOTE 7 - PROVISION FOR FINANCE FEES AND INSURANCE COMMISSION CHARGEBACKS
Presented below is the change in the allowance for estimated finance fees and
insurance commission chargebacks for the years ended December 31, 1993, 1994 and
1995 (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Balance at January 1 $ 1,131 $ 1,523 $ 1,595
Provision 1,292 1,252 1,917
Actual chargebacks (900) (1,180) (1,456)
--------- --------- ---------
Ending allowance balance at December 31 $ 1,523 $ 1,595 $ 2,056
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-13
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - INCOME TAX MATTERS
Components of income tax expense consist of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Paid or payable on currently taxable income:
Federal $ 941 $ 1,160 $ 1,910
State 135 178 265
Net increase (decrease) due to deferred income taxes 97 13 (865)
--------- --------- ---------
Total income tax expense $ 1,173 $ 1,351 $ 1,310
--------- --------- ---------
--------- --------- ---------
</TABLE>
Income tax expense for the years ended December 31, 1993, 1994 and 1995 is
different than the amount computed by applying the U.S. federal income tax rate
to income before income taxes. The reasons for these differences are as follows
(in thousands except percentages):
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Income before income taxes $ 3,168 $ 3,733 $ 3,505
Statutory tax rate 34% 34% 34%
--------- --------- ---------
Federal income tax at statutory rate 1,077 1,269 1,192
State income tax, net of federal benefit 91 103 97
Other 5 (21) 21
--------- --------- ---------
Total income tax expense $ 1,173 $ 1,351 $ 1,310
--------- --------- ---------
--------- --------- ---------
Effective tax rate 37.0% 36.2% 37.4%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Net deferred tax liabilities consist of the following components as of December
31, 1994 and 1995 (in thousands):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Goodwill amortization $ (514) $ (500)
Inventory (3,723) (3,990)
Other -- (37)
--------- ---------
(4,237) (4,527)
--------- ---------
Deferred tax assets:
Accrued compensation -- 401
Deferred warranty revenue 1,624 2,069
Chargeback allowance 588 761
Net operating loss carryforward 141 244
Other 63 96
--------- ---------
2,416 3,571
--------- ---------
Net deferred tax liability $ (1,821) $ (956)
--------- ---------
--------- ---------
</TABLE>
F-14
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1995, the Company has net operating loss carryforwards
totaling $677,000, which expire in 2004 through 2010. Management believes that
it is more likely than not that the Company will utilize all of these loss
carryforwards; accordingly, no valuation allowance has been provided.
The Company is changing its tax basis method of valuing inventories from the
LIFO method to the FIFO and specific identification methods in 1996. The balance
of the LIFO reserve as of December 31, 1995 will be amortized into taxable
income over a three to six year period, thereby increasing current taxes
payable. This amortization will create a corresponding reduction in the deferred
tax liability related to inventory and will not impact the Company's effective
tax rate.
NOTE 9 - INVENTORIES
The inventory balances are comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- JUNE 30, 1996
-------------
(unaudited)
<S> <C> <C> <C>
Inventories at cost:
New vehicles and demonstrators $ 15,887 $ 32,502 $ 27,112
Used vehicles 6,067 9,316 9,390
Parts and accessories 1,289 1,913 1,914
--------- --------- -------------
Total inventory $ 23,243 $ 43,731 $ 38,416
--------- --------- -------------
--------- --------- -------------
</TABLE>
NOTE 10 - DEBT
Notes payable and long-term debt (in thousands):
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Floor plan notes payable to GMAC with interest at prime, collateralized by
vehicle inventory. The prime interest rate at December 31, 1994 and 1995
was 8.50%. $ 18,964 $ 39,088
Mortgage loans at prime rate, maturing in 2000 and 2002, monthly principal
payments aggregating $45,500 plus interest inclusive of principal and
interest, collateralized by related property. 6,727 8,154
Notes payable to GMAC with interest at prime, collateralized by property and
inventory, quarterly principal payments aggregating $255,000 with interest
and maturing from 1996 through 2002. 1,078 5,230
Due to affiliates on demand, with an average rate of 8.50% at December 31,
1994 and 1995. 2,225 5,954
---------- ----------
28,994 58,426
Debt payable within one year:
Floor plan notes payable (18,964) (39,088)
Due to affiliates (2,225) (5,954)
Current maturities and notes payable (655) (1,525)
---------- ----------
Total long-term debt $ 7,150 $ 11,859
---------- ----------
---------- ----------
</TABLE>
Substantially all the Company's debt is unconditionally guaranteed by the
Control Group.
F-15
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Maturities of long-term debt for the five years subsequent to December 31, 1995
are as follows (in thousands):
<TABLE>
<S> <C>
1996........................................................ $ 1,525
1997........................................................ 1,345
1998........................................................ 1,345
1999........................................................ 1,345
2000........................................................ 1,592
2001 and thereafter......................................... 6,232
</TABLE>
Management believes that the fair value of the Company's long-term debt
approximates its recorded value based on the floating nature of the related
interest rates.
NOTE 11 - ACCRUED EXPENSES AND OTHER LIABILITIES (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Payroll and bonuses $ 2,150 $ 1,787
Deferred warranty revenue - current portion 1,736 2,109
Chargeback allowance 1,595 2,056
Other 1,485 1,543
--------- ---------
$ 6,966 $ 7,495
--------- ---------
--------- ---------
</TABLE>
NOTE 12 - PROPERTY AND EQUIPMENT (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Land $ 1,673 $ 1,858
Buildings 7,390 10,041
Furniture, fixtures and equipment 4,288 4,830
--------- ---------
13,351 16,729
Less: accumulated depreciation (4,068) (4,622)
--------- ---------
$ 9,283 $ 12,107
--------- ---------
--------- ---------
</TABLE>
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Company's defined contribution plan, available to substantially all
employees, permits eligible participants to contribute from 1% to 15% of their
annual compensation. The Company may make voluntary contributions to the plan as
well. The Company has not made any contributions to the plan for the three years
ended December 31, 1995.
F-16
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The Company currently anticipates implementing the following employee benefit
plans upon completion of the Offering:
The Company expects to implement its 1996 Stock Option Plan (the "Plan")
immediately prior to completion of the Offering. The Company anticipates
granting options to purchase 7,692 shares of common stock to a certain executive
officer immediately prior to the Offering exercisable at the initial public
offering price. The Plan requires that the per share exercise price of incentive
stock options granted must equal at least 100% of the fair market value at date
of grant or 110% in the case of incentive stock options granted to employees
owning more than 10% of the outstanding common stock. The Company intends to
reserve 1,380,000 authorized but unissued shares of common stock for issuance
under the Plan.
The Company may grant shares of restricted stock, which are subject to
forfeiture to the Company, under such conditions and for such period of time
(not less than one year) as the Company may determine. The conditions or
restrictions of any restricted stock awards may include restrictions on
transferability, requirements of continued employment, individual performance or
the Company's financial performance.
NOTE 14 - STOCKHOLDERS' RIGHTS AGREEMENT
Immediately prior to the completion of the Offering, the Company's Rights
Agreement (the "Rights Agreement") will take effect. Pursuant to the Rights
Agreement, each shareholder of the Company will be issued one right for each
share of common stock owned. Until a right is exercised, the holder thereof, as
such, will have no rights as a stockholder of the Company. Each right becomes
exercisable upon certain events involving the acquisition of or stated intention
by an entity to acquire 19.9% of the Company's common stock. Upon the occurrence
of such an event, each right entitles its holder to purchase common stock of the
Company or, in certain circumstances, of the acquiror, worth twice as much as
the exercise price. The Company may, at the discretion of the Board of Directors
lower this threshold of 19.9% to 10% of the common stock then outstanding. If
the Company is unable to issue a sufficient number of shares of common stock to
permit the exercise in full of the rights for common stock, it will issue shares
of junior preferred stock upon exercise of the rights. The junior preferred
stock is non-redeemable and junior to any other preferred stock of the Company.
The provisions of the junior preferred stock are designed to provide that each
one one-hundredth of a share of junior preferred stock issuable upon exercise of
a right approximates the value of one share of common stock. Each whole share of
junior preferred stock will accrue a quarterly dividend of $1 and a dividend
equal to 100 times any dividend paid on the common stock. Upon liquidation of
the Company, each whole share of junior preferred stock will have a liquidation
preference of $100 plus an amount equal to 100 times the amount paid on any
shares of common stock. Each share of junior preferred stock will entitle its
holder to 100 votes on matters submitted to the Company's stockholders, which
votes will be cast with the votes of the holders of common stock. If the Company
were merged, consolidated or involved in a similar transaction, each share of
junior preferred stock would entitle its holder to receive 100 times the amount
received by holders of common stock in the merger or similar transaction.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
The Company is a party to various legal actions arising in the ordinary course
of its business. The liability, if any, associated with these matters was not
determinable at December 31, 1995. While it is not feasible to determine the
outcome of these actions, the Company's information, including discussions with
legal counsel, at this time does not indicate that these matters will have a
material adverse effect upon financial condition, results of operations or cash
flows.
F-17
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The Company is also subject to federal and state environmental regulations,
including rules relating to air and water pollution and the storage and disposal
of gasoline, oil, other chemicals and waste. Local, state and federal
regulations also affect automobile dealerships' advertising, sales, service and
financing activities. The Company believes that it complies with all applicable
laws relating to its business.
The Company has certain financial guarantees outstanding representing
conditional commitments issued by the Company to guarantee the payment of
certain customers' loans. These financial guarantees have historically
represented an immaterial portion of its sales. The Company's exposure for
financial guarantees is less than the customer's full contractual obligations
outstanding under such financial guarantees which at December 31, 1995
approximated $14.4 million. No material loss is anticipated as a result of such
guarantees.
Pursuant to an agreement dated April 1, 1996 between Mr. Ezra P. Mager, Vice
Chairman and Director, and GGFP, Mr. Mager has agreed to purchase 3% (equal to
303,750 shares) of the common stock of the Company on a fully diluted basis for
$250,000. Additionally, pursuant to such agreement, upon the closing of the
Offering the Company is obligated to grant to Mr. Mager options to purchase 1%
(approximately 138,000 shares inclusive of the 7,692 shares issuable under
grants as described in Note 13) of the shares of common stock that will then be
outstanding, on a fully diluted basis, with an exercise price equal to the
initial public offering price. The option becomes exercisable 90 days from the
date of grant. In the second quarter of 1996, the Company recorded compensation
expense of $1,099,000, which represents the difference between the estimated
fair value, as of April 1, 1996, of the common stock purchased ($1,349,000) and
the cash consideration paid.
NOTE 16 - SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest paid $ 2,104 $ 2,398 $ 3,697
Income taxes paid $ 658 $ 2,034 $ 1,707
</TABLE>
Additionally, the Company acquired two dealerships during 1995, both of which
were financed primarily with debt (see Note 3).
NOTE 17 - RELATED PARTY TRANSACTIONS
The Company receives services provided by GGFP which include treasury, risk
management, tax compliance, employee benefits administration and other
miscellaneous services. The costs associated with these services have been
allocated to the Company as described in Note 1. During fiscal 1993, 1994 and
1995, allocated expenses from GGFP to the Company approximated $419,000,
$508,000 and $1,090,000, respectively. During the unaudited six months ended
June 30, 1995 and 1996, allocated expenses to the Company approximated $422,000
and $615,000, respectively. These allocations are classified as selling, general
and administrative expense in the accompanying combined statement of operations.
In connection with its business travel, the Company from time to time uses an
airplane that is owned and operated by Plains Air, Inc. Plains Air, Inc. is
owned by Bill A. Gilliland and Robert W. Hall, Chairman and Senior Vice
Chairman, respectively. Currently, the Company pays Plains Air, Inc. $13,050 per
month plus a
F-18
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
fee of approximately $488 per hour for use of the airplane. During 1993, 1994
and 1995 the Company paid Plains Air, Inc. an aggregate of $131,000, $154,000
and $199,000, and $98,000 and $120,000 for the unaudited six months ended June
30, 1995 and 1996, respectively, for the use of the airplane.
In addition to the above corporate allocations, the Company has paid the Control
Group a management fee for executive management services. This fee was generally
based upon the profits earned and the level of executive management services
rendered. These fees are shown separately on the face of the accompanying
statement of operations. Commencing in 1996, the Company will no longer pay
management fees to the Control Group. Effective July 1, 1996, the senior
management group consisting of the Chairman, Senior Vice Chairman, Vice
Chairman, and Senior Vice President and Chief Operating Officer, will receive
annual base salaries approximating $1,020,000, may receive restricted stock if
certain performance objectives are met and may also receive grants of stock
options. In conjunction with the Reorganization, the Company has agreed to pay
one of its executive officers a bonus of $600,000. This bonus has been expensed
in the first six months ended June 30, 1996.
In general, the Company is required to pay for all vehicles purchased from the
automakers upon delivery of the vehicles to the Company. GMAC provides financing
for all new vehicles and used vehicles that are less than five years old and
have been driven less than 70,000 miles. This type of financing is known as
"floor plan financing" or "flooring." Under this arrangement with GMAC, the
Company may deposit funds with GMAC in an amount up to 75% of the amount of the
floor plan financing. Such funds earn interest at the same rate charged by GMAC
to the Company for its flooring. From time to time, the Control Group and other
affiliates will advance funds to the Company primarily for the purpose of
investing their excess cash with GMAC. The Company acts only as an intermediary
in this process. At December 31, 1994 and 1995 and at June 30, 1996, funds
advanced and outstanding from affiliates approximated $1,323,000, $2,895,000 and
$4,153,000 (unaudited), respectively. Aggregate amounts outstanding pursuant to
these arrangements at December 31, 1994 and 1995 and at June 30, 1996 are
included in Due to Affiliates in the accompanying balance sheet. The amount of
interest accrued pursuant to these arrangements during 1993, 1994, 1995 and for
the unaudited six months ended June 30, 1995 and 1996 approximated $10,000,
$122,000, $226,000, $129,000 and $191,000, respectively.
During 1994, GGFP advanced the Company $1.05 million to fund the relocation of
one of its dealerships. During 1995, GGFP advanced funds aggregating $2.6
million to the Company for working capital purposes at the dealerships acquired
in 1995. At December 31, 1994 and 1995 and at June 30, 1996, the amount
outstanding pursuant to these advances approximated $.9 million, $3.1 million
and $.5 million (unaudited), respectively.
GGFP was the contracting agent for the construction of certain facilities for
the Company during 1995. The total cost of the facilities approximated $570,000
which included approximately $52,000 as payment to GGFP for architectural and
construction management fees.
The Company leases its corporate offices from GGFP under a five-year lease
extending through June 2001 for an annual rent of approximately $64,800.
GGFP also subleases to the Company the real estate on which the Company's
Performance Nissan dealership is located. Annual rent under the sublease is
$228,000, which is the same amount payable by GGFP under the principal lease for
the property.
F-19
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18 - LEASES
The Company leases, under operating leases, certain of the land and buildings
relating to certain of its dealerships and certain computer equipment. The
property leases expire in 1998 through 2002 and have renewal options ranging
from 5 to 7 years. The Company has an option to purchase the property on which
Performance Nissan, Inc. operates for $2.2 million upon the expiration of the
lease in 2002. Additionally, the Company has an option to purchase a portion of
the property on which Quality Nissan, Inc. operates for $400,000 upon expiration
of that lease in 1998. The total rent expense under all operating leases
approximated $301,000 in 1995.
The aggregate minimum rental commitments for all noncancellable operating leases
are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal year:
1996...................................................... $ 385
1997...................................................... 385
1998...................................................... 385
1999...................................................... 385
2000...................................................... 279
Thereafter................................................ 209
---------
$ 2,028
---------
---------
</TABLE>
NOTE 19 - SUBSEQUENT EVENT
Effective June 17, 1996, the Company executed a purchase and sale agreement in
which it has agreed to purchase Lynn Hickey Dodge, Inc. in Oklahoma City for
cash consideration of approximately $13.1 million for fixed assets and
intangible assets, plus an estimated $750,000 for parts inventory. The Company
currently intends to use proceeds from the Offering to fund the purchase price.
In addition, the Company will acquire the new vehicle inventory at cost and may
acquire the used vehicle inventory at a negotiated value, which will be funded
by floor plan financing. The purchase is subject to customary closing conditions
as well as the Company's successful completion of the Offering and upon approval
of the change in ownership by Dodge. The dealership's revenue for 1995
approximated $122.2 million. The Company will account for this acquisition as a
purchase and consolidate its results of operations from the date of consummation
of the purchase.
F-20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Cross-Continent Auto Retailers, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of changes in stockholders' equity and of cash flows present fairly,
in all material respects, the financial position of Jim Glover Dodge, Inc. at
November 30, 1994 and 1995 and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of management of
Jim Glover Dodge, Inc.; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Fort Worth, Texas
June 4, 1996
F-21
<PAGE>
JIM GLOVER DODGE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
30,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Revenues:
Vehicle sales $ 56,719 $ 55,498
Other operating revenue 8,178 8,419
--------- ---------
Total revenues 64,897 63,917
--------- ---------
Cost of sales and expenses:
Cost of sales 56,867 55,370
Selling, general and administrative 6,272 7,268
Interest expense 270 367
--------- ---------
63,409 63,005
--------- ---------
Net income $ 1,488 $ 912
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-22
<PAGE>
JIM GLOVER DODGE, INC.
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Current assets:
Cash $ 4 $ 632
Accounts receivable 2,653 2,267
Inventories 9,348 7,475
--------- ---------
Total current assets 12,005 10,374
Property and equipment, net of accumulated depreciation of $121,000 and $164,000,
respectively 91 130
--------- ---------
$ 12,096 $ 10,504
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Floor plan notes payable $ 8,240 $ 6,688
Accounts payable and accrued expenses 696 292
Due to affiliates - 552
--------- ---------
Total current liabilities 8,936 7,532
--------- ---------
Stockholders' equity:
Common stock, $1 par value - 250,000 shares authorized and outstanding 250 250
Retained earnings 2,910 2,722
--------- ---------
3,160 2,972
--------- ---------
Commitments and contingencies (Notes 6, 7 and 8)
Total liabilities and stockholders' equity $ 12,096 $ 10,504
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-23
<PAGE>
JIM GLOVER DODGE, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE TWO YEARS ENDED NOVEMBER 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON RETAINED
STOCK EARNINGS TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
Balance at November 30, 1993 $ 250 $ 1,902 $ 2,152
Net income - 1,488 1,488
Distributions to stockholders - (480) (480)
----- ----------- ---------
Balance at November 30, 1994 250 2,910 3,160
Net income - 912 912
Distributions to stockholders - (1,100) (1,100)
----- ----------- ---------
Balance at November 30, 1995 $ 250 $ 2,722 $ 2,972
----- ----------- ---------
----- ----------- ---------
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-24
<PAGE>
JIM GLOVER DODGE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
30,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,488 $ 912
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 22 24
(Increase) decrease in:
Accounts receivable (300) 385
Inventory (149) 1,872
Increase (decrease) in:
Accounts payable and accrued expenses (617) (404)
--------- ---------
Net cash provided by operating activities 444 2,789
--------- ---------
Cash flows from investing activities:
Investment of property and equipment (34) (62)
--------- ---------
Cash flows from financing activities:
Change in floor plan notes payable 113 (1,551)
Advance from affiliates (44) 552
Distributions to stockholders (480) (1,100)
--------- ---------
Net cash used by financing activities (411) (2,099)
--------- ---------
Increase (decrease) in cash (1) 628
Cash at beginning of period 5 4
--------- ---------
Cash at end of period $ 4 $ 632
--------- ---------
--------- ---------
Cash paid for interest $ 274 $ 305
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-25
<PAGE>
JIM GLOVER DODGE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS - Jim Glover Dodge, Inc.'s ("Jim Glover") principal business
is the retail sales of new Dodge automobiles obtained through an exclusive
dealer agreement with the manufacturer/distributor and the sale of used cars.
Jim Glover operates in the Oklahoma City area. In addition, Jim Glover retails
and wholesales replacement parts and provides vehicle servicing.
MAJOR SUPPLIER AND DEALER AGREEMENT - Jim Glover purchases substantially all of
its new vehicles and parts inventory from Chrysler Motor Company, Inc. at the
prevailing prices charged by the automobile manufacturer/distributor to all
franchised dealers.
Jim Glover's overall sales could be impacted by the automaker's ability or
unwillingness to supply the dealership with an adequate supply of popular
models. Management currently believes that it will be able to renew the Dealer
Agreement upon expiration. However, there can be no assurance that the Dealer
Agreement will be renewed.
The Dealer Agreement generally limits the location of the dealership and retains
automaker approval rights over changes in dealership management and ownership.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject
Jim Glover to concentrations of credit risk consist principally of cash
deposits. Jim Glover generally limits its exposure to credit risks from balances
on deposit in financial institutions in excess of the FDIC-insured limit.
However, at November 30, 1995, cash in excess of the FDIC-insured limit
approximated $532,000.
REVENUE RECOGNITION - Revenues from vehicle and parts sales and from service
operations are recognized at the time the vehicle is delivered to the customer
or service is completed.
ACCOUNTS RECEIVABLE - An allowance for doubtful accounts is provided for
accounts that are deemed to be uncollectible.
INVENTORIES - Vehicles are stated at the lower of cost or market, cost being
determined on a specific identification basis. Parts are stated at the lower of
cost or market, cost being determined on the first-in, first-out (FIFO) basis.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation
is computed using the straight-line method over the respective lives of the
assets.
RECOGNITION OF FINANCE FEES AND INSURANCE COMMISSIONS - Jim Glover arranges
financing for its customers' vehicle purchases and insurance in connection
therewith. Financing contracts are reviewed by the dealership and are forwarded
to Chrysler Financial Corp. and other financial institutions. Jim Glover
receives a fee from the financial institution for arranging the financing and
receives a commission for the sale of an insurance policy. Jim Glover is charged
back for a portion of this fee should the customer terminate the finance
contract before its scheduled term. Finance fees and insurance commissions, net
of chargebacks, are classified as other operating revenue in the accompanying
statement of operations. See Note 2 for an analysis of the reserve for estimated
future chargebacks.
F-26
<PAGE>
JIM GLOVER DODGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL INCOME TAXES - Jim Glover is organized as a sub-chapter S-Corporation
under the Internal Revenue Code; therefore, the income earned by Jim Glover is
reported on the personal tax returns of the stockholders. Consequently, no
provision for income taxes has been recorded in the accompanying financial
statements.
ADVERTISING AND PROMOTIONAL COSTS - Advertising and promotional costs are
expensed as incurred and are included in selling, general and administrative
expense in the accompanying combined statement of operations. Total advertising
and promotional expenses approximated $1,260,000 and $1,436,000 in 1994 and
1995, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair value of financial instruments
approximates their recorded values due primarily to the short-term nature of
their maturities.
PERVASIVENESS OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and disclosure of gain and loss contingencies
at the date of the financial statements. The actual outcome of the estimates
could differ from the estimates made in the preparation of the financial
statements.
NOTE 2 - PROVISION FOR FINANCE FEE AND INSURANCE COMMISSION CHARGEBACKS
Presented below is the change in the reserve for estimated finance and insurance
chargebacks for the fiscal years 1994 and 1995 (in thousands):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Beginning reserve balance at December 1 $ 152 $ 93
Provision 453 525
Actual chargebacks (512) (510)
--------- ---------
Ending reserve balance at November 30 $ 93 $ 108
--------- ---------
--------- ---------
</TABLE>
NOTE 3 - CONTRACTS IN TRANSIT AND ACCOUNTS RECEIVABLE
Contracts in transit and vehicle receivables primarily represent receivables
from financial institutions such as Chrysler Financial Corp. and regional banks
which provide funding for customer vehicle financing. These receivables are
normally collected in less than 30 days of the sale of the vehicle. Trade
receivables primarily relate to the sale of parts to commercial customers and
finance fees representing amounts due from financial institutions earned from
arranging financing with Jim Glover's customers. Amounts due from auto
manufacturers primarily represent receivables for parts and service work
performed on vehicles pursuant to the auto manufacturer's warranty coverage.
F-27
<PAGE>
JIM GLOVER DODGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The accounts receivable balance at November 30 is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Trade $ 487 $ 437
Contracts in transit 1,823 1,370
Due from manufacturer 249 322
Due from finance companies 94 138
--------- ---------
Total accounts receivable $ 2,653 $ 2,267
--------- ---------
--------- ---------
</TABLE>
NOTE 4 - INVENTORIES
The November 30 inventory balance is comprised of the following (in thousands):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
New vehicles and demonstrators $ 5,988 $ 5,386
Used vehicles 2,602 1,343
Parts and accessories 758 746
--------- ---------
$ 9,348 $ 7,475
--------- ---------
--------- ---------
</TABLE>
NOTE 5 - FLOOR PLAN NOTES PAYABLE
The manufacturer/distributor finances new and used vehicle purchases by Jim
Glover. Floor plan notes payable bear interest at the finance company's prime
rate (approximately 9.5% at November 30, 1995). The notes are collateralized by
all of Jim Glover's tangible and intangible personal property, including, but
not limited to, substantially all new, used and demonstrator vehicles, parts and
accessories inventory, accounts receivable, and all machinery and equipment. The
notes are generally due within ten days of the sale of the vehicles or within
three days after receiving the sales proceeds, whichever is sooner. Accordingly,
floor plan notes payable have been classified as current in the accompanying
balance sheet.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - Jim Glover leases the facility on which it conducts its
retail automobile business. In connection with the sale of its business and
inventory to Performance Dodge, Inc. (as more fully discussed in Note 9), the
owners of Performance Dodge, Inc. acquired Jim Glover's primary dealership
facility and continued to lease the facility to Jim Glover. This lease expired
upon the sale of the business and inventory to Performance Dodge, Inc. Two other
land and building leases require annual rent payments of $24,000 and $13,200 and
expire in May 1997 and March 2000, respectively.
Rent expense on all operating leases was approximately $235,000 and $236,000 for
the years ended November 30, 1994 and November 30, 1995, respectively.
Additionally, Jim Glover is liable for property taxes and insurance.
F-28
<PAGE>
JIM GLOVER DODGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - LITIGATION
From time to time, Jim Glover is named in claims involving the manufacture and
sale of automobiles, contractual disputes and other matters arising in the
ordinary course of business. Currently, no legal proceedings are pending against
or involve Jim Glover that, in the opinion of management, could be expected to
have a material adverse effect on the financial condition, results of operations
or cash flows of Jim Glover in the year of ultimate settlement.
Jim Glover is also subject to federal and state environmental regulations,
including rules relating to air and water pollution and the storage and disposal
of gasoline, oil and other chemicals and waste. Jim Glover is not aware of any
pending environmental matters or matters of noncompliance with all applicable
environmental laws relating to its business.
In limited circumstances, Jim Glover will either partially or fully guarantee
finance contracts of customers with the financial institutions issuing the
credit. The amount of outstanding finance contracts on which Jim Glover has
either partially or fully guaranteed the financial performance of the customer
approximated $418,000 and $203,000 at November 30, 1994 and November 30, 1995,
respectively.
NOTE 8 - RELATED PARTY TRANSACTIONS
During fiscal 1994 and 1995, Jim Glover leased the primary building and land
from an affiliate of Jim Glover. Jim Glover has accounted for this lease as an
operating lease. During fiscal 1994 and 1995, Jim Glover paid rent of $120,000
and $100,000, respectively, to this affiliate.
Several affiliated corporations advanced Jim Glover funds during fiscal 1995.
These advances bear interest at 9.5% and are due upon demand. Accordingly, these
advances have been classified as a current liability in the accompanying balance
sheet. The balance of these advances at November 30, 1995 approximated $552,000.
There were no outstanding advances from affiliates at November 30, 1994.
NOTE 9 - SUBSEQUENT EVENT
Effective December 4, 1995, Jim Glover sold substantially all its assets to
Performance Dodge, Inc. for the assumption of its floor plan liability and cash
consideration of approximately $5.9 million. Performance Dodge, Inc. is a
wholly-owned subsidiary of Cross-Continent Auto Retailers, Inc.
F-29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Cross-Continent Auto Retailers, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of changes in stockholder's equity and of cash flows present fairly,
in all material respects, the financial position of Lynn Hickey Dodge, Inc. at
December 31, 1994 and 1995 and the results of its operations and its cash flows
for the two years then ended, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of management of
Lynn Hickey Dodge, Inc.; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Fort Worth, Texas
July 3, 1996
F-30
<PAGE>
LYNN HICKEY DODGE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------- --------------------
1994 1995 1995 1996
---------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Vehicle sales $ 155,406 $ 111,113 $ 57,504 $ 63,539
Other operating revenue 12,104 11,108 5,371 7,139
---------- ---------- --------- ---------
Total revenues 167,510 122,221 62,875 70,678
---------- ---------- --------- ---------
Cost and expenses:
Cost of sales 146,551 106,826 55,518 59,838
Selling, general and administrative 18,452 13,149 6,205 6,863
Depreciation and amortization 341 346 164 133
---------- ---------- --------- ---------
165,344 120,321 61,887 66,834
---------- ---------- --------- ---------
2,166 1,900 988 3,844
Other income (expense):
Interest income 177 402 148 273
Interest expense (1,750) (1,737) (969) (831)
---------- ---------- --------- ---------
Net income $ 593 $ 565 $ 167 $ 3,286
---------- ---------- --------- ---------
---------- ---------- --------- ---------
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-31
<PAGE>
LYNN HICKEY DODGE, INC.
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- JUNE 30,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 3,854 $ 6,002 $ 8,323
Accounts receivable 3,129 4,495 4,113
Inventories 21,527 15,234 16,119
Due from affiliates 841 903 360
--------- --------- -------------
Total current assets 29,351 26,634 28,915
Property and equipment, at cost, less accumulated depreciation 2,085 1,943 1,856
--------- --------- -------------
Total assets $ 31,436 $ 28,577 $ 30,771
--------- --------- -------------
--------- --------- -------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Floor plan financing $ 18,737 $ 14,900 $ 15,187
Line of credit - - 5,000
Accounts payable 4,429 2,653 2,289
Accrued expenses and other liabilities 3,434 2,432 1,990
--------- --------- -------------
Total current liabilities 26,600 19,985 24,466
--------- --------- -------------
Line of credit - 5,000 -
Deferred warranty revenue - long-term portion 249 571 932
--------- --------- -------------
Total long-term liabilities 249 5,571 932
--------- --------- -------------
Stockholder's equity:
Preferred stock, $100 par value, 1,500 shares authorized, none issued - - -
Common stock, $100 par value, 1,500 shares authorized, 915 shares issued
and outstanding 92 92 92
Paid-in capital 339 339 339
Retained earnings 4,156 2,590 4,942
--------- --------- -------------
Total stockholder's equity 4,587 3,021 5,373
--------- --------- -------------
Commitments and contingencies (Notes 2 and 8) - - -
--------- --------- -------------
Total liabilities and stockholder's equity $ 31,436 $ 28,577 $ 30,771
--------- --------- -------------
--------- --------- -------------
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-32
<PAGE>
LYNN HICKEY DODGE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE TWO YEARS ENDED DECEMBER 31, 1995 AND
SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------- ------------------------ PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ---------- ----------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 915 $ 92 $ 339 $ 4,835 $ 5,266
Net income 593 593
Distributions to stockholder (1,272) (1,272)
--------- ---------- ----- --- ----- --------- ---------
Balance at December 31, 1994 915 92 339 4,156 4,587
Net income 565 565
Distributions to stockholder (2,131) (2,131)
--------- ---------- ----- --- ----- --------- ---------
Balance at December 31, 1995 915 92 339 2,590 3,021
Net income (unaudited) 3,286 3,286
Distributions to stockholder (unaudited) (934) (934)
--------- ---------- ----- --- ----- --------- ---------
Balance at June 30, 1996 (unaudited) $ 915 $ 92 $ 339 $ 4,942 $ 5,373
--------- ---------- ----- --- ----- --------- ---------
--------- ---------- ----- --- ----- --------- ---------
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-33
<PAGE>
LYNN HICKEY DODGE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- --------------------
1994 1995 1995 1996
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 593 $ 565 $ 167 $ 3,286
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Depreciation and amortization 341 346 164 133
Proceeds from extended warranty sales 526 1,389 818 989
Amortization of deferred warranty revenue (47) (555) (265) (615)
(Increase) decrease in:
Accounts receivable 1,542 (1,367) (7) 382
Inventory 1,268 6,293 4,081 (886)
Due from affiliates 737 (61) 313 543
Increase (decrease) in:
Accounts payable (89) (1,776) (1,878) (364)
Accrued expenses and other liabilities 854 (1,514) (1,093) (455)
--------- --------- --------- ---------
Net cash provided (used) by operating activities 5,725 3,320 2,300 3,013
--------- --------- --------- ---------
Cash flows from investing activities:
Acquisition of property and equipment (206) (204) (114) (46)
--------- --------- --------- ---------
Cash flows from financing activities:
Change in floor plan financing (2,651) (3,837) (3,070) 287
Line of credit proceeds - 5,000 - -
Distributions to stockholder (1,272) (2,131) (1,052) (933)
--------- --------- --------- ---------
Net cash provided (used) by financing activities (3,923) (968) (4,122) (646)
--------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents 1,596 2,148 (1,936) 2,321
Cash and cash equivalents at beginning of period 2,258 3,854 3,854 6,002
--------- --------- --------- ---------
Cash and cash equivalents at end of period $ 3,854 $ 6,002 $ 1,918 $ 8,323
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-34
<PAGE>
LYNN HICKEY DODGE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS - Lynn Hickey Dodge, Inc.'s ("Hickey Dodge") principal
business is the retail sales of new Dodge automobiles obtained through an
exclusive dealer agreement with Dodge and the sale of used cars. In addition,
Hickey Dodge retails and wholesales replacement parts and provides vehicle
servicing. Hickey Dodge operates in the Oklahoma City area.
UNAUDITED INTERIM PERIODS - The following notes, insofar as they are applicable
to June 30, 1996 and the six-month periods ended June 30, 1995 and 1996, are
unaudited. These interim financial statements have been prepared on the same
basis as the annual financial statements included herewith. In the opinion of
management, all adjustments, consisting only of ordinary recurring accruals
considered necessary to fairly state the unaudited financial position at June
30, 1996 and the unaudited results of operations and cash flows for the six
months ended June 30, 1995 and 1996, have been included. Results for the six
months ended June 30, 1995 and 1996 are not necessarily indicative of results
which may be expected for any other interim period or for any year as a whole.
MAJOR SUPPLIER AND DEALER AGREEMENT - Hickey Dodge purchases substantially all
of its new vehicles and parts inventory from Chrysler Motor Company, Inc. at the
prevailing prices charged by the automaker to all franchised dealers. Hickey
Dodge's overall sales could be impacted by the automaker's ability or
unwillingness to supply the dealership with an adequate supply of popular
models. Management believes that 1995 sales were negatively impacted by an
unfavorable allocation of vehicles from the automaker.
The Dealer Agreement generally limits the location of the dealership and retains
automaker approval rights over changes in dealership management and ownership.
The automaker is also entitled to terminate the dealership agreement if the
dealership is in material breach of the terms.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand and
all highly liquid investments with maturities of three months or less when
purchased.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject
Hickey Dodge to concentrations of credit risk consist principally of cash
deposits.
Concentrations of credit risk with respect to customer receivables are limited
primarily to Chrysler Financial Corp. and financial institutions such as
regional banks. Credit risk arising from receivables from commercial customers
is minimal due to the large number of customers comprising Hickey Dodge's
customer base; however, they are concentrated in Hickey Dodge's only market area
located in the central Oklahoma vicinity.
REVENUE RECOGNITION - Revenues from vehicle and parts sales and from service
operations are recognized at the time the vehicle is delivered to the customer
or service is completed.
INVENTORIES - Vehicles are stated at the lower of cost or market, cost being
determined on a specific identification basis. Parts are stated at the lower of
cost or market, cost being determined on the first-in, first-out (FIFO) basis.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation
is computed using the straight-line method over the respective lives of the
assets.
F-35
<PAGE>
LYNN HICKEY DODGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
RECOGNITION OF FINANCE FEES AND INSURANCE COMMISSIONS - Hickey Dodge arranges
financing for its customers' vehicle purchases and arranges insurance in
connection therewith. Financing contracts are reviewed by the dealership and are
forwarded to Chrysler Financial Corp. and other financial institutions. Hickey
Dodge receives a fee from the financial institution for arranging the financing
and receives a commission for the sale of an insurance policy. Hickey Dodge is
charged back ("chargebacks") for a portion of this fee should the customer
terminate the finance or insurance contract before its scheduled term. Finance
fees and insurance commissions, net of chargebacks, are classified as other
operating revenue in the accompanying statement of operations. See Note 2 for an
analysis of the allowance for estimated future chargebacks.
EXTENDED WARRANTY CONTRACTS - Prior to late 1994, Hickey Dodge sold extended
service contracts on behalf of unrelated third parties. Commission revenue for
the unrelated third-party extended service contracts is recognized at the time
of sale. Commencing in late 1994, Hickey Dodge began offering its own extended
warranty contracts on new and used vehicles sold and continued to offer extended
warranty contracts on behalf of unrelated third parties. These contracts
generally provide extended coverage for periods of two years or 24,000 miles up
to seven years or 70,000 miles, whichever comes first. Hickey Dodge accounts for
the sale of its extended warranty contracts in accordance with FASB Technical
Bulletin No. 90-1, Accounting for Separately Priced Extended Warranty and
Product Maintenance Contracts, which requires that revenues from sales of
extended warranty contracts be recognized ratably over the lives of the
contracts. Costs directly related to sales of extended warranty contracts are
deferred and charged to expense proportionately as the revenues are recognized.
A loss is recognized on extended warranty contracts if the sum of the expected
costs of providing services under the contracts exceed related unearned revenue.
Revenue and commissions recognized from the sale of extended warranty contracts
are classified as other operating revenue and the related costs of parts and
service associated therewith are classified as cost of sales in the accompanying
combined statement of operations.
FEDERAL INCOME TAXES - Hickey Dodge is organized as a sub-chapter S-Corporation
under the Internal Revenue Code; therefore, the income earned by Hickey Dodge is
reported on the personal tax returns of the stockholders. Consequently, no
provision for income taxes has been recorded in the accompanying financial
statements.
ADVERTISING AND PROMOTIONAL COSTS - Advertising and promotional costs are
expensed as incurred and are included in selling, general and administrative
expense in the accompanying statement of operations. Total advertising and
promotional expenses approximated $3,063,000 and $2,151,000 in 1994 and 1995,
respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair value of financial instruments
approximates their recorded values due primarily to the short-term nature of
their maturities or the floating nature of the related interest rates.
OTHER OPERATING REVENUE - Other operating revenue primarily consists of finance
fees, insurance commissions, sales for parts and service and revenue recognized
from the sale of extended warranty contracts.
PERVASIVENESS OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and disclosure of gain and loss contingencies
at the date of the financial statements. The actual outcome of the estimates
could differ from the estimates made in the preparation of the financial
statements.
F-36
<PAGE>
LYNN HICKEY DODGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - ALLOWANCE FOR FINANCE FEE AND INSURANCE AND WARRANTY COMMISSION
CHARGEBACKS
Presented below is the change in the allowance for estimated finance and
insurance chargebacks for 1994 and 1995 (in thousands):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Balance January 1 $ 488 $ 635
Provision 856 344
Actual chargebacks (709) (629)
--------- ---------
Balance at December 31 $ 635 350
--------- ---------
--------- ---------
</TABLE>
NOTE 3 - CONTRACTS IN TRANSIT AND ACCOUNTS RECEIVABLE
Contracts in transit and vehicle receivables primarily represent receivables
from financial institutions such as Chrysler Financial Corp., and regional banks
who provide funding for customer vehicle financing. These receivables are
normally collected in less than 30 days of the sale of the vehicle. Trade
receivables primarily relate to the sale of parts to commercial customers and
finance fees representing amounts due from financial institutions earned from
arranging financing with Hickey Dodge's customers. Amounts due from automaker
represent receivables for parts and service work performed on vehicles pursuant
to the automaker's warranty coverage. Receivables from the automaker also
include amounts due from the automaker in connection with the purchase of
vehicles ("holdback") pursuant to the dealership agreement; such amounts are
generally remitted to Hickey Dodge on a quarterly basis.
The accounts receivable balance at December 31 is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Trade $ 658 $ 899
Contracts in transit and vehicle receivables 2,081 3,172
Due from automaker 202 196
Due from finance companies 41 127
Other 147 101
--------- ---------
Total accounts receivable $ 3,129 $ 4,495
--------- ---------
--------- ---------
</TABLE>
NOTE 4 - INVENTORIES
The December 31 inventory balance is comprised of the following (in thousands):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
New vehicles and demonstrators $ 12,231 $ 7,845
Used vehicles 8,595 6,724
Parts and accessories 701 665
--------- ---------
$ 21,527 $ 15,234
--------- ---------
--------- ---------
</TABLE>
F-37
<PAGE>
LYNN HICKEY DODGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - PROPERTY AND EQUIPMENT (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Land $ 76 $ 76
Buildings 2,249 2,315
Furniture, fixtures and equipment 1,416 1,553
--------- ---------
3,741 3,944
Less: accumulated depreciation 1,656 2,001
--------- ---------
$ 2,085 $ 1,943
--------- ---------
--------- ---------
</TABLE>
NOTE 6 - NOTES PAYABLE
The automaker finances new and used vehicle purchases by Hickey Dodge. Floor
plan financing bears interest at prime plus 1% (approximately 9.5% at December
31, 1995). The notes are collateralized by all of Hickey Dodge's tangible and
intangible personal property, including, but not limited to, substantially all
new, used and demonstrator vehicles, parts and accessories inventory, accounts
receivable, and all machinery and equipment. The notes are generally due within
ten days of the sale of the vehicles or within three days after receiving the
sales proceeds, whichever is sooner. Accordingly, floor plan financing is
classified as current in the accompanying balance sheet.
Hickey Dodge also has a $5,000,000 revolving credit note outstanding from
Chrysler Financial Corp. which was scheduled to mature on April 15, 1996; in
April 1996, the maturity date was extended to April 15, 1997. As a result of
this extension, the amount outstanding pursuant to the line of credit has been
classified as long-term in the December 31, 1995 accompanying balance sheet. The
note is secured by a pledge of Hickey Dodge's stock and accrues interest at a
rate equal to LIBOR plus 2.75% (8.47% at December 31, 1995).
NOTE 7 - ACCRUED EXPENSES AND OTHER LIABILITIES (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Deferred warranty revenue - current portion $ 229 $ 742
Chargeback allowance 635 350
Allowance for financial guarantees 1,387 419
Other 1,183 921
--------- ---------
$ 3,434 $ 2,432
--------- ---------
--------- ---------
</TABLE>
NOTE 8 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - Hickey Dodge leases its dealership facility from various
lessors, but principally from Rolynn's Ltd. ("Rolynn's"), an entity controlled
by Lyndel Hickey (see Note 9). These lease agreements are generally renewed
annually. The Company also leases certain equipment for terms ranging from 2 to
5 years.
Rent expense on all operating leases was approximately $833,000 and $846,000 for
the years ended December 31, 1994 and 1995, respectively. Additionally, Hickey
Dodge is liable for property taxes and insurance.
F-38
<PAGE>
LYNN HICKEY DODGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Future aggregate minimum rental commitments for noncancellable operating leases
are immaterial.
From time to time, Hickey Dodge will either partially or fully guarantee the
payment of certain customers' loans relating to the purchase of vehicles from
Hickey Dodge. A portion of these customer loans are purchased by Dakota Finance
(see Note 9). As of December 31, 1994 and 1995, Hickey Dodge had full guarantees
on outstanding loans with a principal balance of $14,421,000 and $7,780,000,
respectively. Additionally, as of December 31, 1994 and 1995, Hickey Dodge had
partial guarantees on outstanding customer loans with total principal balances
of $7,313,000 and $3,896,000, respectively. Partial guarantees are for an
agreed-upon amount less than the face value of the loan. Hickey Dodge records an
allowance for estimated future losses on such guarantees. Below is an analysis
of the allowance for estimated losses on such guarantees (in thousands).
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Balance at January 1 $ 1,120 $ 1,387
Provision 1,626 309
Actual losses relating to guarantees (1,359) (1,277)
--------- ---------
Balance at December 31 $ 1,387 $ 419
--------- ---------
--------- ---------
</TABLE>
Hickey Dodge is a party to various legal actions arising in the ordinary course
of its business. The liability, if any associated with these matters was not
determinable at December 31, 1995. While it is not feasible to determine the
outcome of these actions, Hickey Dodge's information, including discussions with
legal counsel, at this time does not indicate that these matters will have a
material adverse effect upon the financial condition, results of operations or
cash flows.
Hickey Dodge is also subject to federal and state environmental regulations,
including rules relating to air and water pollution and the storage and disposal
of gasoline, oil, and other chemicals and waste. Local, state and federal
regulations also affect automobile dealership's advertising, sales, service and
financing activities. Hickey Dodge believes that it complies with all applicable
laws relating to its business.
NOTE 9 - RELATED PARTY TRANSACTIONS
Dakota Finance ("Dakota") is a finance company owned 50% by Lyndel Hickey, the
sole stockholder of Hickey Dodge, and 50% by Wade Hickey, Vice President of
Hickey Dodge. In assisting its customers with their vehicle purchases, the
Company arranges financing through various lenders, including Dakota. Hickey
Dodge receives no finance commission for customer loans arranged with Dakota and
generally guarantees the customer's loan. During 1994 and 1995 and the unaudited
six months ended June 30, 1995 and 1996, Dakota financed $2,592,000, $2,175,000,
$1,067,000 and $1,244,000, respectively, of Hickey Dodge's sales. As of December
31, 1995 and June 30, 1996, Dakota had $2,164,000 and $1,856,000 (unaudited) in
outstanding loans receivable which were guaranteed by Hickey Dodge. During 1994
and 1995, and the unaudited six months ended June 30, 1995 and 1996, Hickey
Dodge recognized losses of $260,000, $176,000, $102,000 and $119,000,
respectively, relating to nonperformance under such guarantees. An allowance for
estimated future losses relating to these financial guarantees has been included
in the allowance for financial guarantees discussed in Note 8 above.
As of December 31, 1995 and June 30, 1996, Hickey Dodge had committed to advance
Dakota up to $5,000,000 at a rate of LIBOR plus 3%. This commitment was
scheduled to expire in April 1996; however, it has been extended on month to
month basis. Hickey Dodge advanced, primarily under this line of credit,
$3,226,000, $1,660,000 and $287,000 (unaudited) to Dakota in 1994, 1995 and the
six months ended June 30,
F-39
<PAGE>
LYNN HICKEY DODGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1996, respectively, for working capital purposes. Interest charged relating to
the line of credit advances accrued at 8.5% per annum and LIBOR plus 3% per
annum. Interest income of $43,000, $31,000, $26,000 and $7,000 was recognized on
the advances during the years ended December 31, 1994 and 1995 and for the
unaudited six months ended June 30, 1995 and 1996, respectively. As of December
31, 1994, 1995, and June 30, 1996, $800,000, $802,000 and $360,000 (unaudited),
respectively, was outstanding relating to such advances.
Hickey Dodge arranges credit life and accident and disability insurance for its
customers in connection with their purchase of new and used vehicles. These
insurance contracts are arranged on behalf of Mega Life and Health Insurance
Company, which reinsures a portion of the risk with a company owned by Lyndel
Hickey. During 1994 and 1995, insurance premiums received from customers totaled
$1.6 million and $0.8 million of which 60% was paid to Mega Life and 40% was
retained by Hickey Dodge as commission.
As more fully discussed in Note 8, Hickey Dodge leases most of its operating
facilities from Rolynn's, an entity controlled by Lyndel Hickey, who owns 100%
of Hickey Dodge's stock. Rent expense under this lease was $780,000 during 1994
and 1995.
NOTE 10 - SUBSEQUENT EVENTS
Hickey Dodge has executed a purchase and sale agreement whereby it has agreed to
sell substantially all of its assets to Cross-Continent Auto Retailers, Inc. The
purchase price will consist of cash consideration of approximately $13.1 million
for fixed assets and intangible assets, plus an estimated $750,000 for parts
inventory. In addition, the purchaser will acquire the new vehicle inventory at
cost and may acquire the used vehicle inventory at a negotiated value. The sale
is subject to customary closing conditions as well as the purchaser's successful
completion of its initial public offering and approval of the change in
ownership by Dodge.
F-40
<PAGE>
[Photograhs]
Insert Photo of Service Central at Westgate Insert Photo of Quality Nissan
Chevrolet
Insert Photo of Customer Taking Delivery Insert Photo of Performance Dodge
of New Chevrolet
Insert Photo of Midway Chevrolet Insert Photo of Lynn Hickey Dodge
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Company in connection with the sale of
the Common Stock being registered. All the amounts shown are estimates, except
for the registration fee with the Securities and Exchange Commission, the NASD
filing fee and the New York Stock Exchange fees.
<TABLE>
<S> <C>
SEC registration fee.................................................... $ 21,067
NASD filing fee......................................................... 6,610
New York Stock Exchange fees............................................ 119,600
Blue Sky fees and expenses.............................................. 22,500
Printing and engraving expenses......................................... 142,000
Legal fees and expenses................................................. 650,000*
Accounting fees and expenses............................................ 550,000
Transfer agent and registrar fees....................................... 7,200
Miscellaneous........................................................... 131,023
---------
TOTAL............................................................... $1,650,000
---------
---------
</TABLE>
- ---------
* Includes legal fees and expenses payable by the Selling Stockholders
estimated at $29,000.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Company's Certificate of Incorporation and Bylaws set forth the extent
to which officers or directors of Cross-Continent may be indemnified against any
liabilities which they may incur. The general effect of such provisions is that
any person made a party to an action, suit or proceeding by reason of the fact
that he is or was a director or officer of the Company, or of another
corporation or other enterprise for which he served as such at the request of
the Company, shall be indemnified by the Company against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding,
to the full extent permitted under the laws of the State of Delaware. The
Company's Certificate of Incorporation and Bylaws give the Board of Directors
the authority to extend such indemnification to employees of the Company as
well. These provisions of the Company's Certificate of Incorporation and Bylaws
are not exclusive of any other indemnification rights to which an officer or
director may be entitled, whether by contract or otherwise.
The general effect of the indemnification provisions contained in Section
145 of the Delaware General Corporation Law is as follows: A director or officer
who, by reason of such directorship or officership, is involved in any action,
suit or proceeding (other than an action by or in the right of the corporation)
may be indemnified by the corporation against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe that his conduct was unlawful.
A director or officer who, by reason of such directorship or officership, is
involved in any action or suit by or in the right of the corporation may be
indemnified by the corporation against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made in respect of any claim,
issue or matter as to which he shall have been adjudged to be liable to the
corporation unless and only to the extent that a court of appropriate
jurisdiction shall approve such indemnification.
The Company's Certificate of Incorporation provides that, to the maximum
extent permitted under the General Corporation Law of the State of Delaware, a
director of Cross-Continent shall not be personally liable to the Company or to
any of its stockholders for monetary damages for breach of fiduciary duty as a
director of the Company. Section 102(b)(7) of the Delaware General Corporation
Law permits a corporation to include in its charter a provision that eliminates
or limits the personal liability of a director to the
II-1
<PAGE>
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that such provision shall not eliminate or limit
the liability of a director (i) for any breach of the director's duty of loyalty
to the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit.
The Company intends to purchase directors' and officers' insurance for its
executive officers and directors, assuming that such insurance is available on
commerically reasonable terms.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Company was incorporated on May 16, 1996. The Company issued the
following shares of Common Stock as of June 12, 1996 for $10 per share in cash:
<TABLE>
<CAPTION>
STOCKHOLDER NUMBER OF SHARES ISSUED
- --------------------------------------- -----------------------
<S> <C>
Bill A. Gilliland 51
Twenty-Two Ten, Ltd. 17
Xaris, Ltd. 17
Benji Investments, Ltd. 10
</TABLE>
On June 20, 1996, the Company issued the following shares of its Common
Stock in exchange for all of the issued and outstanding shares of common stock
of Plains Chevrolet, Inc., Midway Chevrolet, Inc., Westgate Chevrolet, Inc.,
Quality Nissan, Inc. and Working Man's Credit Plan, Inc.:
<TABLE>
<CAPTION>
STOCKHOLDER NUMBER OF SHARES ISSUED
- --------------------------------------- -----------------------
<S> <C>
Gilliland Group Family Partnership 8,656,790
Benji Investments, Ltd. 1,012,490
KAPL, Ltd. 151,875
</TABLE>
On June 21, 1996, the Company issued 303,750 shares of Common Stock to Ezra
P. Mager for an aggregate of $250,000 in cash.
All of the issuances of securities described above were exempt from
registration pursuant to Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ ---------------------------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement
**2.1 Asset Purchase Agreement, dated as of June 17, 1996, among Lynn Hickey Dodge, Inc., Lynn Hickey and
Cross Country Dodge, Inc.
**3.1 Certificate of Incorporation of Cross-Country Auto Retailers, Inc. (now named Cross-Continent Auto
Retailers, Inc.)
**3.2 Proposed Form of Amended and Restated Certificate of Incorporation of Cross-Continent Auto
Retailers, Inc.
**3.3 Bylaws of Cross-Country Auto Retailers, Inc. (now named Cross-Continent Auto Retailers, Inc.)
**3.4 Proposed Form of Amended and Restated Bylaws of Cross-Continent Auto Retailers, Inc.
*4.1 Specimen Common Stock Certificate
**4.2 Form of Rights Agreement between Cross-Continent Auto Retailers, Inc. and The Bank of New York, as
rights agent
*4.3 Proposed Form of Power of Attorney and Custody Agreement
**4.4 Form of 1996 Stock Option Plan of Cross-Continent Auto Retailers, Inc.
*5.1 Opinion and Consent of Howard, Darby & Levin
**10.1 Dealer Sales and Service Agreement, dated November 1, 1995, between the Chevrolet Division of
General Motors Corporation and Plains Chevrolet, Inc., as amended by Supplemental Agreement, dated
as of July 29, 1996***
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ ---------------------------------------------------------------------------------------------------
<C> <S>
**10.2 Sales and Service Agreement between Performance Dodge, Inc. and Chrysler Corporation
**10.3 Dealer Sales and Service Agreement, dated April 20, 1989, between the Nissan Division of Nissan
Motor Corporation in U.S.A. and Nissan of Amarillo, Inc.****
**10.4 Dollar Volume Contract, dated March 31, 1994, between Plains Chevrolet, Inc., Westgate Chevrolet,
Inc., Midway Chevrolet, Inc., and Quality Nissan, Inc. and Amarillo Globe News
**10.5 Sublease Agreement, dated June 1, 1995, between Gilliland Group Family Partnership and Performance
Nissan, Inc.
**10.6 Lease Agreement, dated March 1, 1994, among John W. Adams, Eleanore A. Braly as Trustee of the
Eleanore A. Braly Trust, Romie G. Carpenter, Melody Lynn Goff, and Selden Simpson and Quality
Nissan, Inc.
**10.7 Office Lease, dated June 1, 1996, between Gilliland Group Family Partnership and Cross-Country Auto
Retailers, Inc. (now named Cross-Continent Auto Retailers, Inc.)
**10.8 Wholesale Security Agreement, as amended, dated December 4, 1995, between General Motors Acceptance
Corporation and Performance Dodge, Inc. *****
**10.9 Corporation and Shareholders' Agreement of Xaris Management Co.
**10.10 Documents, dated December 4, 1995, relating to $5,550,000 loan by General Motors Acceptance
Corporation to Performance Dodge, Inc.
10.10.1 Promissory Note by Performance Dodge, Inc. to General Motors Acceptance Corporation, in the amount
of $1,850,000
10.10.2 Promissory Note by Performance Dodge, Inc. to General Motors Acceptance Corporation, in the amount
of $3,700,000
10.10.3 Cross-Default and Cross-Collateralization Agreement between General Motors Acceptance Corporation
and Performance Dodge, Inc.
10.10.4 Security Agreement between General Motors Acceptance Corporation and Performance Dodge, Inc.
10.10.5 Mortgage, Assignment and Security Agreement between General Motors Acceptance Corporation and
Performance Dodge, Inc.
**10.11 Documents relating to loan by General Motors Acceptance Corporation to Midway Chevrolet, Inc.
10.11.1 Promissory Note, dated December 15, 1989, by Midway Chevrolet, Inc. to General Motors Acceptance
Corporation, in the amount of $977,249.74
10.11.2 Renewal, Extension and Modification Agreement, dated February 20, 1995, between General Motors
Acceptance Corporation and Midway Chevrolet, Inc.
10.11.3 Security Agreement, dated February 20, 1995, between General Motors Acceptance Corporation and
Midway Chevrolet, Inc.
**10.12 Documents, dated December 4, 1995, relating to $1,350,000 loan by General Motors Acceptance
Corporation to Performance Nissan, L.L.C.
10.12.1 Promissory Note by Performance Nissan, L.L.C. to General Motors Acceptance Corporation, in the
amount of $1,350,000
10.12.2 Cross-Default and Cross-Collateralization Agreement between General Motors Acceptance Corporation
and Performance Nissan, L.L.C.
10.12.3 Security Agreement between General Motors Acceptance Corporation and Performance Nissan, L.L.C.
**10.13 Documents relating to used vehicle inventory financing agreements between General Motors Acceptance
Corporation and Cross-Continent Auto Retailers, Inc. dealership subsidiaries
10.13.1 Used Vehicle Wholesale Borrowing Base Credit Line Loan Agreement, dated June 7, 1996, between
General Motors Acceptance Corporation and Peformance Dodge, Inc.*****
10.13.2 Promissory Note, dated June 7, 1996, by Performance Dodge, Inc. to General Motors Acceptance
Corporation, in the amount of $3,000,000******
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ ---------------------------------------------------------------------------------------------------
<C> <S>
10.13.3 Cross-Default and Cross-Collateralization Agreement between General Motors Acceptance Corporation
and Performance Nissan, Inc., Performance Dodge, Inc., Midway Chevrolet, Inc., Plains Chevrolet,
Inc., Quality Nissan, Inc. and Westgate Chevrolet, Inc.
**21.1 Subsidiaries
*23.1 Consent of Price Waterhouse LLP, independent accountants, relating to the financial statements of
Cross-Continent Auto Retailers, Inc. and subsidiaries and Jim Glover Dodge, Inc. and Lynn Hickey
Dodge, Inc.
*23.2 Consent of Howard, Darby & Levin (included in Exhibit 5.1)
**24.1 Power of Attorney (see page II-5 filed June 21, 1996)
**27.1 Financial Data Schedule
</TABLE>
- ---------
* Filed herewith.
** Previously filed.
*** Substantially identical Agreements exist between the Chevrolet Division
and each of Midway Chevrolet, Inc. and Westgate Chevrolet, Inc.
**** Substantially identical Agreement exists between the Nissan Division and
Performance Nissan, Inc.
***** Substantially identical Agreements exist between General Motors Acceptance
Corporation and each of Midway Chevrolet, Inc., Plains Chevrolet, Inc.,
Westgate Chevrolet, Inc., Quality Nissan, Inc. and Performance Nissan,
Inc.
******Substantially identical Promissory Notes have been executed by Midway
Chevrolet, Inc., Plains Chevrolet, Inc., Westgate Chevrolet, Inc., Quality
Nissan, Inc., and Performance Nissan, Inc., in the amounts indicated for
each dealership subsidiary in the Cross-Default and
Cross-Collateralization Agreement (Exhibit 10.13.3).
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To provide to the underwriter at the closing specified in the
underwriting agreement, certificates in such denominations and
registered in such names as required by the underwriter to permit prompt
delivery to each purchaser.
(2) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement for the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on August 30, 1996.
CROSS-CONTINENT AUTO RETAILERS, INC.
By /s/ ROBERT W. HALL
------------------------------------
Name: Robert W. Hall
Title: Senior Vice Chairman
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 3 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ------------------------------------- ------------------
<C> <S> <C>
* Chairman, Chief Executive Officer and
------------------------------------------- Director August 30, 1996
Bill A. Gilliland (principal executive officer)
------------------------------------------- Senior Vice Chairman and Director August 30, 1996
Robert W. Hall
*
------------------------------------------- Vice Chairman and Director August 30, 1996
Ezra P. Mager
*
------------------------------------------- Senior Vice President, Chief August 30, 1996
Emmett M. Rice, Jr. Operating Officer and Director
* Vice President and Chief Financial
------------------------------------------- Officer (principal accounting and August 30, 1996
Charles D. Winton financial officer)
*By: /s/ROBERT W. HALL
Robert W. Hall
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ------------ ------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
*1.1 Form of Underwriting Agreement
**2.1 Asset Purchase Agreement, dated as of June 17, 1996, among Lynn Hickey Dodge, Inc., Lynn
Hickey and Cross Country Dodge, Inc.
**3.1 Certificate of Incorporation of Cross-Country Auto Retailers, Inc. (now named
Cross-Continent Auto Retailers, Inc.)
**3.2 Proposed Form of Amended and Restated Certificate of Incorporation of Cross-Continent Auto
Retailers, Inc.
**3.3 Bylaws of Cross-Country Auto Retailers, Inc. (now named Cross-Continent Auto Retailers,
Inc.)
**3.4 Proposed Form of Amended and Restated Bylaws of Cross-Continent Auto Retailers, Inc.
*4.1 Specimen Common Stock Certificate
**4.2 Form of Rights Agreement between Cross-Continent Auto Retailers, Inc. and The Bank of New
York, as rights agent
*4.3 Proposed Form of Power of Attorney and Custody Agreement
**4.4 Form of 1996 Stock Option Plan of Cross-Continent Auto Retailers, Inc.
*5.1 Opinion and Consent of Howard, Darby & Levin
**10.1 Dealer Sales and Service Agreement, dated November 1, 1995, between the Chevrolet Division
of General Motors Corporation and Plains Chevrolet, Inc., as amended by Supplemental
Agreement, dated as of July 29, 1996***
**10.2 Sales and Service Agreement between Performance Dodge, Inc. and Chrysler Corporation
**10.3 Dealer Sales and Service Agreement, dated April 20, 1989, between the Nissan Division of
Nissan Motor Corporation in U.S.A. and Nissan of Amarillo, Inc.****
**10.4 Dollar Volume Contract, dated March 31, 1994, between Plains Chevrolet, Inc., Westgate
Chevrolet, Inc., Midway Chevrolet, Inc., and Quality Nissan, Inc. and Amarillo Globe News
**10.5 Sublease Agreement, dated June 1, 1995, between Gilliland Group Family Partnership and
Performance Nissan, Inc.
**10.6 Lease Agreement, dated March 1, 1994, among John W. Adams, Eleanore A. Braly as Trustee of
the Eleanore A. Braly Trust, Romie G. Carpenter, Melody Lynn Goff, and Selden Simpson and
Quality Nissan, Inc.
**10.7 Office Lease, dated June 1, 1996, between Gilliland Group Family Partnership and
Cross-Country Auto Retailers, Inc. (now named Cross-Continent Auto Retailers, Inc.)
**10.8 Wholesale Security Agreement, as amended, dated December 4, 1995, between General Motors
Acceptance Corporation and Performance Dodge, Inc. *****
**10.9 Corporation and Shareholders' Agreement of Xaris Management Co.
**10.10 Documents, dated December 4, 1995, relating to $5,550,000 loan by General Motors Acceptance
Corporation to Performance Dodge, Inc.
10.10.1 Promissory Note by Performance Dodge, Inc. to General Motors Acceptance Corporation, in the
amount of $1,850,000
10.10.2 Promissory Note by Performance Dodge, Inc. to General Motors Acceptance Corporation, in the
amount of $3,700,000
10.10.3 Cross-Default and Cross-Collateralization Agreement between General Motors Acceptance
Corporation and Performance Dodge, Inc.
10.10.4 Security Agreement between General Motors Acceptance Corporation and Performance Dodge,
Inc.
10.10.5 Mortgage, Assignment and Security Agreement between General Motors Acceptance Corporation
and Performance Dodge, Inc.
**10.11 Documents relating to loan by General Motors Acceptance Corporation to Midway Chevrolet,
Inc.
10.11.1 Promissory Note, dated December 15, 1989, by Midway Chevrolet, Inc. to General Motors
Acceptance Corporation, in the amount of $977,249.74
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ------------ ------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
10.11.2 Renewal, Extension and Modification Agreement, dated February 20, 1995, between General
Motors Acceptance Corporation and Midway Chevrolet, Inc.
10.11.3 Security Agreement, dated February 20, 1995, between General Motors Acceptance Corporation
and Midway Chevrolet, Inc.
**10.12 Documents, dated December 4, 1995, relating to $1,350,000 loan by General Motors Acceptance
Corporation to Performance Nissan, L.L.C.
10.12.1 Promissory Note by Performance Nissan, L.L.C. to General Motors Acceptance Corporation, in
the amount of $1,350,000
10.12.2 Cross-Default and Cross-Collateralization Agreement between General Motors Acceptance
Corporation and Performance Nissan, L.L.C.
10.12.3 Security Agreement between General Motors Acceptance Corporation and Performance Nissan,
L.L.C.
**10.13 Documents relating to used vehicle inventory financing agreements between General Motors
Acceptance Corporation and Cross-Continent Auto Retailers, Inc. dealership subsidiaries
10.13.1 Used Vehicle Wholesale Borrowing Base Credit Line Loan Agreement, dated June 7, 1996,
between General Motors Acceptance Corporation and Peformance Dodge, Inc.*****
10.13.2 Promissory Note, dated June 7, 1996, by Performance Dodge, Inc. to General Motors
Acceptance Corporation, in the amount of $3,000,000******
10.13.3 Cross-Default and Cross-Collateralization Agreement between General Motors Acceptance
Corporation and Performance Nissan, Inc., Performance Dodge, Inc., Midway Chevrolet, Inc.,
Plains Chevrolet, Inc., Quality Nissan, Inc. and Westgate Chevrolet, Inc.
**21.1 Subsidiaries
*23.1 Consent of Price Waterhouse LLP, independent accountants, relating to the financial
statements of Cross-Continent Auto Retailers, Inc. and subsidiaries and Jim Glover Dodge,
Inc. and Lynn Hickey Dodge, Inc.
*23.2 Consent of Howard, Darby & Levin (included in Exhibit 5.1)
**24.1 Power of Attorney (see page II-5 filed June 21, 1996)
**27.1 Financial Data Schedule
</TABLE>
- ---------
* Filed herewith.
** Previously filed.
*** Substantially identical Agreements exist between the Chevrolet Division
and each of Midway Chevrolet, Inc. and Westgate Chevrolet, Inc.
**** Substantially identical Agreement exists between the Nissan Division and
Performance Nissan, Inc.
***** Substantially identical Agreements exist between General Motors Acceptance
Corporation and each of Midway Chevrolet, Inc., Plains Chevrolet, Inc.,
Westgate Chevrolet, Inc., Quality Nissan, Inc. and Performance Nissan,
Inc.
******Substantially identical Promissory Notes have been executed by Midway
Chevrolet, Inc., Plains Chevrolet, Inc., Westgate Chevrolet, Inc., Quality
Nissan, Inc., and Performance Nissan, Inc., in the amounts indicated for
each dealership subsidiary in the Cross-Default and
Cross-Collateralization Agreement (Exhibit 10.13.3).
ii
<PAGE>
3,675,000 SHARES
CROSS-CONTINENT AUTO RETAILERS, INC.
COMMON STOCK, PAR VALUE $.01 PER SHARE
UNDERWRITING AGREEMENT
September __, 1996
<PAGE>
September __, 1996
Morgan Stanley & Co. Incorporated
Furman Selz LLC
Rauscher Pierce Refsnes, Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
Cross-Continent Auto Retailers, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell to the several Underwriters named in
Schedule I hereto (the "Underwriters"), an aggregate of 3,675,000 shares of
common stock, par value $.01 per share, of the Company (the "Firm Shares").
Certain stockholders of the Company (the "Selling Stockholders") named
in Schedule II hereto propose to sell not more than an aggregate of 551,250
shares of common stock, par value $.01 per share of the Company (together, the
"Additional Shares"), each Selling Stockholder selling up to the amount set
forth opposite such Selling Stockholder's name in Schedule II hereto, if and to
the extent that you, as Managers of the offering, shall have determined to
exercise, on behalf of the Underwriters, the right to purchase such shares of
common stock granted to the Underwriters in Section 3 hereof. The Firm Shares
and the Additional Shares are hereinafter collectively referred to as the
"Shares." The shares of common stock, par value $.01 per share, of the Company
to be outstanding after giving effect to the sales contemplated hereby are
hereinafter referred to as the "Common Stock." The Company and the Selling
Stockholders are hereinafter sometimes collectively referred to as the
"Sellers."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement, including a prospectus, relating to the
Shares. The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the "Securities Act"), is hereinafter
referred to as the "Registration Statement"; the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "Prospectus."
If the Company files a registration statement to register a portion of the
Shares and relies on Rule 462(b) for such registration statement to become
effective upon filing with the Commission (the "Rule 462(b) Registration
Statement"), then any reference to the "Registration Statement" shall be deemed
to refer to both the registration statement referred to above and the Rule
462(b) Registration Statement, in each case as amended from time to time.
<PAGE>
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending before or threatened by the
Commission.
(b) (i) The Registration Statement, when it became effective, did not
contain and, as amended or supplemented, if applicable, will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, (ii) the Registration Statement and the Prospectus comply
and, as amended or supplemented, if applicable, will comply in all material
respects with the Securities Act and the applicable rules and regulations
of the Commission thereunder and (iii) the Prospectus does not contain and,
as amended or supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and
warranties set forth in this paragraph (b) do not apply to statements or
omissions in the Registration Statement or the Prospectus based upon
information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of Delaware, has the corporate
power and authority to own its property and to conduct its business as
described in the Prospectus and is duly qualified to transact business and
is in good standing in each jurisdiction in which the conduct of its
business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or
be in good standing would not have a material adverse effect on the Company
and its subsidiaries, taken as a whole.
(d) Each of Lynn Hickey Dodge, Inc., Midway Chevrolet, Inc., Plains
Chevrolet, Inc., Westgate Chevrolet, Inc., Quality Nissan, Inc.,
Performance Nissan, Inc., Performance Dodge, Inc., Working Man's Credit
Plan, Inc. and Allied 2000 Collision Center, Inc. has been duly
incorporated, is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, has the corporate power
and authority to own its property and to conduct its business as described
in the Prospectus and is duly qualified to transact business and is in good
standing in each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification, except to the
extent that the failure to be so qualified or be in good standing would not
have a material adverse effect on the Company and its subsidiaries, taken
as a whole.
2
<PAGE>
(e) This Agreement has been duly authorized, executed and delivered
by the Company.
(f) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(g) The shares of Common Stock (including the Shares to be sold by
the Selling Stockholders) outstanding prior to the issuance of the Shares
to be sold by the Company have been duly authorized and are validly issued,
fully paid and non-assessable.
(h) The Shares to be sold by the Company have been duly authorized
and, when issued and delivered in accordance with the terms of this
Agreement, will be validly issued, fully paid and non-assessable, and the
issuance of such Shares will not be subject to any preemptive or similar
rights.
(i) The execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Agreement will not contravene
any provision of applicable law or the certificate of incorporation or by-
laws of the Company or any agreement or other instrument binding upon the
Company or any of its subsidiaries that is material to the Company and its
subsidiaries, taken as a whole, or any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the Company or
any subsidiary, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for the
performance by the Company of its obligations under this Agreement, except
such as may be required by the securities or Blue Sky laws of the various
states in connection with the offer and sale of the Shares.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from that
set forth in the Prospectus (exclusive of any amendments or supplements
thereto subsequent to the date of this Agreement).
(k) There are no legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is a party or to
which any of the properties of the Company or any of its subsidiaries is
subject that are required to be described in the Registration Statement or
the Prospectus and are not so described or any statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required.
(l) Each preliminary prospectus filed as part of the Registration
Statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424
3
<PAGE>
or Rule 462 under the Securities Act, complied when so filed in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder.
(m) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described
in the Prospectus, will not be an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended.
(n) The Company and its subsidiaries (i) are in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and
conditions of such permits, licenses or approvals would not, singly or in
the aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(o) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the
Company to file a registration statement under the Securities Act with
respect to any securities of the Company or to require the Company to
include such securities with the Shares registered pursuant to the
Registration Statement.
(p) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (1) the Company and
its subsidiaries have not incurred any material liability or obligation,
direct or contingent, nor entered into any material transaction not in the
ordinary course of business; (2) the Company has not purchased any of its
outstanding capital stock, nor declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock; and (3) there
has not been any material change in the capital stock, short-term debt or
long-term debt of the Company and its consolidated subsidiaries, except in
each case as described in or contemplated by the Prospectus and except, in
the case of a change in short-term debt relating to a corresponding change
in inventory, as occurs in the ordinary course of the Company's business.
(q) The Company and its subsidiaries have good and marketable title
in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the
Company and its subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or
such as do not materially affect the value of such
4
<PAGE>
property and do not interfere with the use made and proposed to be made of
such property by the Company and its subsidiaries; and any real property
and buildings held under lease by the Company and its subsidiaries are held
by them under valid, subsisting and enforceable leases with such exceptions
as are not material and do not interfere with the use made and proposed to
be made of such property and buildings by the Company and its subsidiaries,
in each case except as described in or contemplated by the Prospectus.
(r) No material labor dispute with the employees of the Company or
any of its subsidiaries exists, or, to the knowledge of the Company, is
imminent; and the Company is not aware of any existing, threatened or
imminent labor disturbance by the employees of any of its principal
suppliers, manufacturers (other than with respect to the upcoming contract
negotiations between General Motors Corporation and Chrysler Corporation
and representatives of the International Union, United Automobile,
Aerospace and Agricultural Implement Workers of America (UAW) as described
in the Prospectus) or contractors that would reasonably be expected to
result in any material adverse change in the condition, financial or
otherwise, or in the earnings, business or operations of the Company and
its subsidiaries, taken as a whole.
(s) The Company and each of its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which they
are engaged; neither the Company nor any such subsidiary has been refused
any insurance coverage sought or applied for; and neither the Company nor
any such subsidiary has any reason to believe that it will not be able to
renew its existing insurance coverage as and when such coverage expires or
to obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not materially and adversely
affect the condition, financial or otherwise, or the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, except as
described in or contemplated by the Prospectus.
(t) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct their respective
businesses, except where the lack of such certificates, authorizations and
permits would not, singly or in the aggregate, have a material adverse
effect on the Company and its subsidiaries, taken as a whole, and neither
the Company nor any such subsidiary has received any notice of proceedings
relating to the revocation or modification of any such certificate,
authorization or permit which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would result in a material
adverse change in the condition, financial or otherwise, or in the
earnings, business or operations of the Company and its subsidiaries, taken
as a whole, except as described in or contemplated by the Prospectus.
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(u) Neither the Company nor any of its subsidiaries is in violation
of any federal or state law or regulation relating to occupational safety
and health and the Company and its subsidiaries have received all permits,
licenses or other approvals required of them under applicable federal and
state occupational safety and health laws and regulations to conduct their
respective businesses, and the Company and each such subsidiary is in
compliance with all terms and conditions of any such permits, licenses or
approvals, except any such violation of law or regulation, failure to
receive required permits, licenses or other approvals or failure to comply
with the terms and conditions of such permits, licenses or approvals which
would not, singly or in the aggregate, result in a material adverse change
in the condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, except as
described in or contemplated by the Prospectus.
(v) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (1) transactions are executed in accordance with management's general
or specific authorizations; (2) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (3)
access to assets is permitted only in accordance with management's general
or specific authorization; and (4) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(w) As of the date the Registration Statement becomes effective, the
Common Stock will be authorized for listing on the New York Stock Exchange
(the "NYSE"), subject to official notice of issuance.
(x) The Company and its subsidiaries are in compliance with any and
all applicable foreign, federal, state and local laws and regulations,
except where such non-compliance would not, singly or in the aggregate,
have a material adverse effect on the Company and its subsidiaries, taken
as a whole; the franchise agreements, in each case between a subsidiary of
the Company and General Motors Corporation, Chrysler Corporation, or Nissan
Motor Corporation U.S.A. (collectively, the "Manufacturers"), have been
duly authorized by the Company and such subsidiaries and are valid and
binding agreements of the Company and such subsidiaries, enforceable in
accordance with their terms; and the Company has obtained all consents,
authorizations and approvals from the Manufacturers required to conduct the
public offering of Common Stock as contemplated hereby.
(y) The Company has complied with all provisions of Section 517.075,
Florida Statutes relating to doing business with the Government of Cuba or
with any person or affiliate located in Cuba.
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2. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS AND
THE EXECUTIVE SELLING STOCKHOLDERS.
(a) Each of the Selling Stockholders represents and warrants to and
agrees with each of the Underwriters that:
(i) Each Selling Stockholder which is a limited partnership has
been duly formed, is validly existing as a limited partnership under
the laws of Texas and has the power and authority to execute, deliver
and perform its respective obligations under this Agreement and the
Irrevocable Power of Attorney and Custody Agreement signed by such
Selling Stockholder and the Company, as Custodian, relating to the
deposit of the Additional Shares to be sold by such Selling
Stockholder, appointing certain individuals as such Selling
Stockholder's attorneys-in-fact to the extent set forth therein, and
relating to the transactions contemplated hereby and by the
Registration Statement (the "Power of Attorney and Custody
Agreement").
(ii) This Agreement has been duly authorized, executed and
delivered by or on behalf of such Selling Stockholder.
(iii) The execution and delivery by such Selling Stockholder
of, and the performance by such Selling Stockholder of its obligations
under, this Agreement and the Power of Attorney and Custody Agreement
will not contravene any provision of applicable law, or the agreement
of limited partnership of such Selling Stockholder (if such Selling
Stockholder is a limited partnership), or any agreement or other
instrument binding upon such Selling Stockholder or any judgment,
order or decree of any governmental body, agency or court having
jurisdiction over such Selling Stockholder, and no consent, approval,
authorization or order of, or qualification with, any governmental
body or agency is required for the performance by such Selling
Stockholder of its obligations under this Agreement or the Power of
Attorney and Custody Agreement of such Selling Stockholder, except
such as may be required by the securities or Blue Sky laws of the
various states in connection with the offer and sale of the Shares.
(iv) Such Selling Stockholder has, and on the Option Closing
Date (as defined below) will have, valid title to the Additional
Shares to be sold by such Selling Stockholder and the legal right and
power, and all authorization and approval required by law, to enter
into this Agreement, the Power of Attorney and Custody Agreement and
to sell, transfer and deliver the Additional Shares to be sold by such
Selling Stockholder.
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(vi) The Power of Attorney and Custody Agreement has been duly
authorized, executed and delivered by such Selling Stockholder and is
a valid and binding agreement of such Selling Stockholder.
(vii) Delivery of the Additional Shares to be sold by such
Selling Stockholder pursuant to this Agreement will pass title to such
Additional Shares free and clear of any security interests, claims,
liens, equities and other encumbrances.
(b) Each of the stockholders of the Company (the "Executive Selling
Stockholders") named in Schedule IV hereto represents and warrants to and
agrees with each of the Underwriters that: (i) The Registration Statement,
when it became effective, did not contain and, as amended or supplemented,
if applicable, will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, (ii) the Registration Statement
and the Prospectus comply and, as amended or supplemented, if applicable,
will comply in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder and (iii) the
Prospectus does not contain and, as amended or supplemented, if applicable,
will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that the
representations and warranties set forth in this paragraph 2(b) do not
apply to statements or omissions in the Registration Statement or the
Prospectus based upon information relating to any Underwriter furnished to
the Company in writing by such Underwriter through you expressly for use
therein.
3. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees to sell to
the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company at $______ a share (the "Purchase Price") the respective numbers of Firm
Shares (subject to such adjustments to eliminate fractional shares as you may
determine) set forth in Schedule I hereto opposite the name of such Underwriter.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, each Selling Stockholder,
severally and not jointly, agrees to sell to the Underwriters the Additional
Shares (PROVIDED that if the Underwriters elect to purchase less than all of the
Additional Shares, the number of Additional Shares to be sold by each Selling
Stockholder shall be reduced PRO RATA (subject to such adjustment to eliminate
fractional shares as you may determine) based upon the maximum number of
Additional Shares that may be sold by the Selling Stockholders), and the
Underwriters shall have a one-time right to purchase, severally and not jointly,
up to 551,250 Additional Shares at the Purchase Price. If you, on behalf of the
Underwriters, elect to exercise such option, you shall so notify the Selling
Stockholders in writing not later than 30 days after the date of
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this Agreement, which notice shall specify the number of Additional Shares to be
purchased by the Underwriters and the date on which such shares are to be
purchased. Such date may be the same as the Closing Date (as defined below) but
not earlier than the Closing Date nor later than ten business days after the
date of such notice. Additional Shares may be purchased as provided in Section
5 hereof solely for the purpose of covering over-allotments made in connection
with the offering of the Firm Shares. If any Additional Shares are to be
purchased, each Underwriter agrees, severally and not jointly, to purchase the
number of Additional Shares (subject to such adjustments to eliminate fractional
shares as you may determine) that bears the same proportion to the total number
of Additional Shares to be purchased as the number of Firm Shares set forth in
Schedule I hereto opposite the name of such Underwriter bears to the total
number of Firm Shares.
Each Seller hereby agrees that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period commencing on the date hereof and ending 180 days after the
date of the Prospectus, (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock (provided that such shares
or securities are either now owned by such Selling Stockholder or are hereafter
acquired prior to or in connection with the public offering of the Shares) or
(ii) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the Common
Stock, whether any such transaction described in clause (i) or (ii) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (A) the Shares to be sold
hereunder (B) any options or similar securities issued pursuant to the Company's
1996 Stock Option Plan, as such plan is in effect on the date hereof, and (C)
any shares of Common Stock issued by the Company upon the exercise of any option
outstanding on the date hereof as disclosed in the Prospectus; PROVIDED,
HOWEVER, that any shares acquired by a Seller upon the exercise of such options
within such 180 day period shall become subject to such agreement. In addition,
each Selling Stockholder agrees that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period commencing on the date hereof and ending 180 days after the
date of the Prospectus, make any demand for, or exercise any right with respect
to, the registration of any shares of Common Stock or any security convertible
into or exercisable or exchangeable for Common Stock.
4. TERMS OF PUBLIC OFFERING. The Sellers are advised by you that
the Underwriters propose to make a public offering of their respective portions
of the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Sellers are further
advised by you that the Shares are to be offered to the public initially at
$__________ a share (the "Public Offering Price") and to certain dealers
selected by you at a price that represents a concession not in excess of $______
a share under the Public Offering Price, and that any Underwriter may allow, and
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such dealers may reallow, a concession, not in excess of $_____ a share, to any
Underwriter or to certain other dealers.
5. PAYMENT AND DELIVERY. Payment for the Firm Shares to be sold by
the Company shall be made to the Company in Federal or other funds immediately
available in New York City against delivery of such Firm Shares for the
respective accounts of the several Underwriters at the office of Shearman &
Sterling, 599 Lexington Avenue, New York, New York, at 10:00 A.M., local time,
on [Pricing Date + 3 business days or 4 business days if pricing occurs after
4:30 P.M.], 1996, or at such other time on the same or such other date, not
later than [Closing Date + 5 business days], 1996, as shall be designated in
writing by you. The time and date of such payment are hereinafter referred to
as the "Closing Date."
The Underwriters agree to reserve a maximum of 183,750 of the Firm
Shares for offering and sale to certain employees of the Company and its
subsidiaries (and to certain other persons designated by the Company) at the
public offering price (the "Directed Share Program"). Any such shares not
purchased by such persons by the end of the first business day after either (a)
the date on which the Registration Statement has become effective, or (b) if the
Company has elected to rely upon Rule 430A, the date of this Agreement, will be
offered to the public by the Underwriters as set forth in the Prospectus.
Payment for any Additional Shares shall be made to the Selling
Stockholders in Federal or other funds immediately available in New York City
against delivery of such Additional Shares for the respective accounts of the
several Underwriters at the office of Shearman & Sterling, 599 Lexington Avenue,
New York, New York, at 10:00 A.M., local time, on the date specified in the
notice described in Section 3 or on such other date, in any event not later than
[Exercise Date + 10 business days], 1996, as shall be designated in writing by
you. The time and date of such payment are hereinafter referred to as the
"Option Closing Date."
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
6. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The obligations of
the Sellers to sell the Shares to the Underwriters and the several obligations
of the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than the date hereof.
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The several obligations of the Underwriters are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall
any notice have been given of any intended or potential downgrading or
of any review for a possible change that does not indicate the
direction of the possible change, in the rating accorded any of the
Company's securities by any "nationally recognized statistical rating
organization," as such term is defined for purposes of Rule 436(g)(2)
under the Securities Act; and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or operations of
the Company and its subsidiaries, taken as a whole, from that set
forth in the Prospectus (exclusive of any amendments or supplements
thereto subsequent to the date of this Agreement) that, in your
judgment, is material and adverse and that makes it, in your judgment,
impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of
the Company, to the effect set forth in clause (a)(i) above and to the
effect that the representations and warranties of the Company contained in
this Agreement are true and correct as of the Closing Date and that the
Company has complied with all of the agreements and satisfied all of the
conditions on its part to be performed or satisfied hereunder on or before
the Closing Date.
The officer signing and delivering such certificate may rely upon the
best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date a
certificate from each Selling Stockholder, dated the Closing Date and
signed by such Selling Stockholder, or by an Attorney-in-Fact thereof on
behalf of such Selling Stockholder, to the effect that the representations
and warranties of such Selling Stockholder contained in this Agreement are
true and correct as of the Closing Date and that such Selling Stockholder
has complied with all of the agreements and satisfied all of the conditions
on its part to be performed or satisfied hereunder on or before the Closing
Date.
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(d) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of
the Company, in the form of Exhibit E hereto.
(e) The Underwriters shall have received on the Closing Date an
opinion of Howard, Darby & Levin, outside counsel for the Company, dated
the Closing Date, in the form of Exhibit B hereto.
(f) The Underwriters shall have received on the Closing Date (i) an
opinion of Sprouse, Mozola, Smith & Rowley, P.C., special Texas and
Oklahoma counsel for the Company, dated the Closing Date, in the form of
Exhibit C hereto.
(g) The Underwriters shall have received on the Closing Date an
opinion of Mullin, Hoard & Brown, LLP, counsel for the Selling
Stockholders, dated the Closing Date, to the effect set forth on Exhibit D
hereto.
(h) The Underwriters shall have received on the Closing Date an
opinion of Shearman & Sterling, counsel for the Underwriters, dated the
Closing Date, with respect to the Registration Statement and the Prospectus
and such other related matters as you may reasonably request, and such
counsel shall have received such documents and information as they may
reasonably request to enable them to pass upon such matters.
With respect to subparagraph (xi) of Exhibit B, Howard, Darby & Levin
and Shearman & Sterling may state that their opinion and belief are based
upon their participation in the preparation of the Registration Statement
and Prospectus and any amendments or supplements thereto and review and
discussion of the contents thereof, but are without independent check or
verification, except as specified. With respect to Exhibit D, Mullin,
Hoard & Brown, LLP may rely, with respect to factual matters and to the
extent such counsel deems appropriate, upon the representations of each
Selling Stockholder contained herein and in the Power of Attorney and
Custody Agreement of such Selling Stockholder and in other documents and
instruments; PROVIDED that copies of such Power of Attorney and Custody
Agreements and of any such other documents and instruments shall be
delivered to you and shall be in form and substance reasonably satisfactory
to your counsel.
(i) The Underwriters shall have received, on each of the date hereof
and the Closing Date, a letter dated the date hereof or the Closing Date,
as the case may be, in form and substance reasonably satisfactory to the
Underwriters, from Price Waterhouse LLP, independent public accountants,
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectus dated the date hereof or the
Closing Date.
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(j) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and the stockholders, officers and directors
of the Company listed on Schedule III hereto relating to sales and certain
other dispositions of shares of Common Stock or certain other securities,
delivered to you on or before the date hereof, shall be in full force and
effect on the Closing Date.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the delivery to you on the Option Closing Date
of such documents and legal opinions as you may reasonably request with respect
to the good standing of the Company, the valid title to the Additional Shares
sold by the Selling Stockholders and other matters related to the sale of the
Additional Shares.
7. COVENANTS OF THE COMPANY. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, four signed copies of the
Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and, during the period mentioned in paragraph
(c) below, as many copies of the Prospectus and any supplements and
amendments thereto or to the Registration Statement as you may reasonably
request. In the case of the Prospectus, to use its reasonable best efforts
to furnish to you copies of the Prospectus in New York City prior to 5:00
p.m., on the business day next succeeding the date of this Agreement, in
such quantities as you reasonably request.
(b) Before amending or supplementing the Registration Statement or
the Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and not to file any such proposed amendment or supplement to
which you reasonably object, and to file with the Commission within the
applicable period specified in Rule 424(b) under the Securities Act any
prospectus required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters
the Prospectus is required by law to be delivered in connection with sales
by an Underwriter or dealer, any event shall occur or condition exist as a
result of which it is necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances
when the Prospectus is delivered to a purchaser, not misleading, or if, in
the opinion of counsel for the Underwriters, it is necessary to amend or
supplement the Prospectus to comply with applicable law, forthwith to
prepare, file with the Commission and furnish, at its own expense, to the
Underwriters and to the dealers (whose names and addresses you will furnish
to the Company) to which Shares may have been sold by you on behalf of the
Underwriters and to any other dealers upon
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request, either amendments or supplements to the Prospectus so that the
statements in the Prospectus as so amended or supplemented will not, in
light of the circumstances when the Prospectus is delivered to a purchaser,
be misleading or so that the Prospectus, as amended or supplemented, will
comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request; PROVIDED, HOWEVER, that the Company shall not be obligated to file
any general consent to service of process or to qualify as a foreign
corporation in any jurisdiction in which it is not so qualified.
(e) To make generally available to the Company's security holders and
to you as soon as practicable an earning statement that satisfies the
provisions of Section 11(a) of the Securities Act and the rules and
regulations of the Commission thereunder covering a twelve-month period
beginning after the effective date of the Registration Statement but not
later than the first day of the Company's fiscal quarter next following
such twelve-month period.
(f) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be paid
all expenses incident to the performance of its obligations and the
obligations of the Selling Stockholders (other than expenses agreed to be
paid by the Selling Stockholders under Section 8) under this Agreement,
including: (i) the fees, disbursements and expenses of the Company's
counsel and the Company's accountants in connection with the registration
and delivery of the Shares under the Securities Act and all other fees or
expenses in connection with the preparation and filing of the Registration
Statements and the Registration Statement on Form 8-A, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated therewith, and the
mailing and delivering of copies thereof to the Underwriters and dealers,
in the quantities hereinabove specified, (ii) all costs and expenses
related to the transfer and delivery of the Shares to the Underwriters,
including any transfer or other taxes payable thereon, (iii) the cost of
printing or producing any Blue Sky or Legal Investment memorandum in
connection with the offer and sale of the Shares under state securities
laws and all expenses in connection with the qualification of the Shares
for offer and sale under state securities laws as provided in Section 7(d)
hereof, including filing fees and the reasonable fees and disbursements of
counsel for the Underwriters in connection with such qualification and in
connection with the Blue Sky or Legal Investment memorandum, (iv) all
filing fees and disbursements of counsel to the Underwriters incurred in
connection with the review and qualification of the offering of the Shares
by the National Association of Securities Dealers, Inc., (v) all costs and
expenses incident to listing the Shares on the NYSE or other securities
exchange or quotation system, (vi) the cost of printing certificates
representing the Shares, (vii) the costs and charges of any transfer agent,
registrar or depositary, (viii) the costs and expenses of the
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Company relating to investor presentations on any "road show" undertaken in
connection with the marketing of the offering of the Shares, including,
without limitation, expenses associated with the production of road show
slides and graphics, fees and expenses of any consultants engaged in
connection with the road show presentations with the prior approval of the
Company, travel and lodging expenses of the representatives and officers of
the Company and any such consultants, and the cost of any aircraft
chartered in connection with the road show, and (ix) all other costs and
expenses incident to the performance of the obligations of the Company
hereunder for which provision is not otherwise made in this Section. It is
understood, however, that except as provided in this Section, Section 9
entitled "Indemnity and Contribution," and the last paragraph of Section 11
below, the Underwriters will pay all of their costs and expenses, including
fees and disbursements of their counsel, stock transfer taxes payable on
resale of any of the Shares by them and any advertising expenses connected
with any offers they may make.
8. EXPENSES OF SELLING STOCKHOLDERS. Each Selling Stockholder,
severally and not jointly, agrees to pay or cause to be paid (i) all taxes, if
any, on the transfer and sale of the Shares being sold by such Selling
Stockholder and (ii) the fees, disbursements and expenses of counsel for the
Selling Stockholders.
9. INDEMNITY AND CONTRIBUTION. (a) Each of the Company and the
Executive Selling Stockholders, jointly and severally, agrees to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably incurred
in connection with defending or investigating any such action or claim) caused
by any untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement or any amendment thereof, any preliminary
prospectus or the Prospectus (as amended or supplemented if the Company shall
have furnished any amendments or supplements thereto), or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such losses, claims, damages or liabilities are caused by any such
untrue statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished to the Company in writing by
such Underwriter through you expressly for use therein; PROVIDED, HOWEVER, that
any indemnification for which the Executive Selling Stockholders are liable
pursuant to this Section 9(a) shall be limited, with respect to each such
Executive Selling Stockholder, to the net proceeds (after deducting the
underwriting commission and before deducting expenses) received by such
Executive Selling Stockholder from any sale of Additional Shares pursuant
hereto.
(b) Each Selling Stockholder agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration
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Statement and each person, if any, who controls the Company within the meaning
of either Section 15 of the Securities Act or Section 20 of the Exchange Act,
from and against any and all losses, claims, damages and liabilities (including,
without limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim) caused by
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement or any amendment thereof, any preliminary prospectus
or the Prospectus (as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto), or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, but only with
reference to information relating to such Selling Stockholder furnished in
writing by or on behalf of such Selling Stockholder expressly for use in the
Registration Statement, any preliminary prospectus, the Prospectus or any
amendments or supplements thereto; PROVIDED, HOWEVER, that any indemnification
for which the Selling Stockholders are liable pursuant to this Section 9(b)
shall be limited, with respect to each such Selling Stockholder, to the net
proceeds (after deducting the underwriting commission and before deducting
expenses) received by such Selling Stockholder from any sale of Additional
Shares pursuant hereto.
(c) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, the Selling Stockholders, the directors of the
Company, the officers of the Company who sign the Registration Statement and
each person, if any, who controls the Company or any Selling Stockholder within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any such
action or claim) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment thereof,
any preliminary prospectus or the Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto), or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
but only with reference to information relating to such Underwriter furnished to
the Company in writing by such Underwriter through you expressly for use in the
Registration Statement, any preliminary prospectus, the Prospectus or any
amendments or supplements thereto.
(d) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to paragraph (a), (b) or (c) of this Section 9, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees
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and expenses of such counsel shall be at the expense of such indemnified party
unless (i) the indemnifying party and the indemnified party shall have mutually
agreed to the retention of such counsel or (ii) the named parties to any such
proceeding (including any impleaded parties) include both the indemnifying party
and the indemnified party and representation of both parties by the same counsel
would be inappropriate due to actual or potential differing interests between
them. It is understood that the indemnifying party shall not, in respect of the
legal expenses of any indemnified party in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the fees and
expenses of more than one separate firm (in addition to any local counsel) for
(i) all Underwriters and all persons, if any, who control any Underwriter within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act, (ii) the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the Company within
the meaning of either such Section and (iii) all Selling Stockholders and all
persons, if any, who control any Selling Stockholder within the meaning of
either such Section, and that all such fees and expenses shall be reimbursed as
they are incurred. In the case of any such separate firm for the Underwriters
and such control persons of the Underwriters, such firm shall be designated in
writing by Morgan Stanley & Co. Incorporated. In the case of any such separate
firm for the Company, and such directors, officers and control persons of the
Company, such firm shall be designated in writing by the Company. In the case
of any such separate firm for the Selling Stockholders and such controlling
persons of the Selling Stockholders, such firm shall be designated in writing by
the persons named as attorneys-in-fact for the Selling Stockholders under the
Power of Attorney and Custody Agreements. The indemnifying party shall not be
liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel as contemplated by the second and third
sentences of this paragraph, the indemnifying party agrees that it shall be
liable for any settlement of any proceeding effected without its written consent
if (i) such settlement is entered into more than 30 days after receipt by such
indemnifying party of the aforesaid request and (ii) such indemnifying party
shall not have reimbursed the indemnified party in accordance with such request
prior to the date of such settlement. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such proceeding.
(e) To the extent the indemnification provided for in paragraph (a),
(b) or (c) of this Section 9 is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or liabilities referred
to therein, then each indemnifying party under such paragraph, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
17
<PAGE>
damages or liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the indemnifying party or parties on the one hand
and the indemnified party or parties on the other hand from the offering of the
Shares or (ii) if the allocation provided by clause (i) above is not permitted
by applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the indemnifying party or parties on the one hand and of the indemnified party
or parties on the other hand in connection with the statements or omissions that
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative benefits received by the
Sellers on the one hand and the Underwriters on the other hand in connection
with the offering of the Shares shall be deemed to be in the same respective
proportions as the net proceeds from the offering of the Shares (before
deducting expenses) received by each Seller and the total underwriting discounts
and commissions received by the Underwriters, in each case as set forth in the
table on the cover of the Prospectus, bear to the aggregate Public Offering
Price of the Shares. The relative fault of the Sellers on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Sellers or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Underwriters' respective obligations to contribute
pursuant to this Section 9 are several in proportion to the respective number of
Shares they have purchased hereunder, and not joint.
(f) The Sellers and the Underwriters agree that it would not be just
or equitable if contribution pursuant to this Section 9 were determined by PRO
RATA allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in paragraph (e) of this Section 9. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 9, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages that such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The remedies provided for in this Section 9 are
not exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
(g) The indemnity and contribution provisions contained in this
Section 9 and the representations, warranties and other statements of the
Company and the Selling
18
<PAGE>
Stockholders contained in this Agreement shall remain operative and in full
force and effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, any Selling Stockholder or any person controlling any Selling
Stockholder, or the Company, its officers or directors or any person controlling
the Company and (iii) acceptance of and payment for any of the Shares.
10. TERMINATION. This Agreement shall be subject to termination by
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses (a) (i) through (iv) such event, singly or
together with any other such event, makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated in the Prospectus.
11. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall
become effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Shares
that it has or they have agreed to purchase hereunder on such date, and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase is not more than one-tenth of the
aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule I bears to the
aggregate number of Firm Shares set forth opposite the names of all such non-
defaulting Underwriters, or in such other proportions as you may specify, to
purchase the Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date; PROVIDED that in no event shall the
number of Shares that any Underwriter has agreed to purchase pursuant to this
Agreement be increased pursuant to this Section 11 by an amount in excess of
one-ninth of such number of Shares without the written consent of such
Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall
fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares
with respect to which such default occurs is more than one-tenth of the
aggregate number of Firm Shares to be purchased, and arrangements satisfactory
to you, the Company and the Selling Stockholders for the purchase of such Firm
Shares are not made within 36 hours after such default, this Agreement shall
terminate without liability on the part of any non-defaulting Underwriter, the
Company or the
19
<PAGE>
Selling Stockholders. In any such case either you or the relevant Sellers shall
have the right to postpone the Closing Date, but in no event for longer than
seven days, in order that the required changes, if any, in the Registration
Statement and in the Prospectus or in any other documents or arrangements may be
effected. If, on the Option Closing Date, any Underwriter or Underwriters shall
fail or refuse to purchase Additional Shares and the aggregate number of
Additional Shares with respect to which such default occurs is more than one-
tenth of the aggregate number of Additional Shares to be purchased, the non-
defaulting Underwriters shall have the option to (i) terminate their obligation
hereunder to purchase Additional Shares or (ii) purchase not less than the
number of Additional Shares that such non-defaulting Underwriters would have
been obligated to purchase in the absence of such default. Any action taken
under this paragraph shall not relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of any Seller to comply with
the terms or to fulfill any of the conditions of this Agreement, or if for any
reason any Seller shall be unable to perform its obligations under this
Agreement, the Sellers will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
12. COUNTERPARTS. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
13. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF
THE STATE OF NEW YORK.
20
<PAGE>
14. HEADINGS. The headings of the sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed a part
of this Agreement.
Very truly yours,
CROSS-CONTINENT AUTO RETAILERS, INC.
By ________________________________________________
Name:
Title:
The Stockholders named in Schedules II and IV hereto,
acting severally
By _________________________________________________
Ezra P. Mager,
individually and as Attorney-in-Fact
Accepted as of the date hereof
MORGAN STANLEY & CO. INCORPORATED
FURMAN SELZ LLC
RAUSCHER PIERCE REFSNES, INC.
Acting severally on behalf
of themselves and the
several Underwriters named
herein.
By Morgan Stanley & Co.
Incorporated
By ______________________
21
<PAGE>
SCHEDULE I
Number of
Firm Shares
Underwriter To Be Purchased
----------- ---------------
Morgan Stanley & Co. Incorporated
Furman Selz LLC
Rauscher Pierce Refsnes, Inc.
[NAMES OF OTHER UNDERWRITERS]
-------------
Total ................... 3,675,000
-------------
-------------
<PAGE>
SCHEDULE II
Number of
Additional Shares
Selling Stockholder To Be Sold
------------------ ----------
Bill A. Gilliland. . . . . . . . . . . . . . . . . . . . . . 388,631
Twenty-Two Ten, Ltd., a Texas limited partnership. . . . . . 97,020
Benji Investments, Ltd., a Texas limited partnership . . . . 56,779
KAPL, Ltd., a Texas limited partnership. . . . . . . . . . . 8,820
----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 551,250
<PAGE>
SCHEDULE III
CERTAIN STOCKHOLDERS, OFFICERS AND DIRECTORS
Thomas A. Corchado
John W. Gaines
Robert W. Hall
Ezra P. Mager
Emmett M. Rice, Jr.
Jerry L. Pullen
Benjamin J. Quattrone
Charles D. Winton
Xaris, Ltd.
<PAGE>
SCHEDULE IV
EXECUTIVE SELLING STOCKHOLDERS
Bill A. Gilliland
Twenty-Two Ten, Ltd., a Texas limited partnership
Benji Investments, Ltd., a Texas limited partnership
<PAGE>
EXHIBIT A
FORM OF LOCK-UP CONTRACT
August __ , 1996
Morgan Stanley & Co. Incorporated
Furman Selz LLC
Rauscher Pierce Refsnes, Inc.
1251 Avenue of the Americas
New York, NY 10020
Dear Sirs:
The undersigned understands that Morgan Stanley & Co. Incorporated
("Morgan Stanley"), as Representative of the several Underwriters, proposes to
enter into an Underwriting Agreement (the "Underwriting Agreement") with Cross-
Continent Auto Retailers, Inc., a Delaware corporation (the "Company") providing
for the public offering (the "Public Offering") by the several Underwriters,
including Morgan Stanley (the "Underwriters"), of shares of common stock, par
value $.01 per share, of the Company (the "Common Stock").
To induce the Underwriters that may participate in the Public Offering
to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of Morgan
Stanley on behalf of the Underwriters, it will not, during the period commencing
on the date hereof and ending 180 days after the date of the final prospectus
relating to the Public Offering (the "Prospectus"), (1) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock (provided that such shares or securities are either now owned by
the undersigned or are hereafter acquired prior to or in connection with the
Public Offering), or (2) enter into any swap or similar arrangement that
transfers, in whole or in part, any of the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (1) or (2)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. The foregoing sentence shall not apply to the sale of any
Shares to the Underwriters pursuant to the Underwriting Agreement [or to the
exercise of any options to purchase shares of Common Stock granted to the
undersigned and outstanding as of the date of the Underwriting Agreement;
PROVIDED, HOWEVER, that any shares acquired by the undersigned upon the exercise
of such options within such 180 day period shall become subject to this
agreement]. In addition, the undersigned agrees that, without the prior written
consent of Morgan Stanley on behalf of the Underwriters, it will not, during the
period commencing on the date hereof and ending 180
<PAGE>
days after the date of the Prospectus, make any demand for or extend any right
with respect to, the registration of any shares of Common Stock or any security
convertible into or exercisable or exchangeable for Common Stock.
Whether or not the Public Offering actually occurs depends on a number
of factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
agreement between the Company and the Underwriters.
Very truly yours,
___________________________________
(Name)
___________________________________
(Address)
Accepted as of the date
first set forth above:
MORGAN STANLEY & CO. INCORPORATED
By: ______________________________
<PAGE>
EXHIBIT B
FORM OF OPINION OF HOWARD, DARBY & LEVIN
Pursuant to Section 6(e) of the Underwriting Agreement, Howard, Darby &
Levin, counsel to the Company and, with respect to paragraph (xii), counsel to
the Selling Stockholders, shall furnish an opinion to the effect that:
(i) the Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of Delaware, has the
corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in
which the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent that the
failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries, taken as
a whole;
(ii) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
(iii) the shares of Common Stock (including the Shares to be
sold by the Selling Stockholders) outstanding prior to the issuance of
the Shares to be sold by the Company have been duly authorized and are
validly issued, fully paid and non-assessable;
(iv) the Shares to be sold by the Company have been duly
authorized and, when issued and delivered in accordance with the terms
of this Agreement, will be validly issued, fully paid and non-
assessable, and the issuance of such Shares will not be subject to any
preemptive or similar rights;
(v) this Agreement has been duly authorized, executed and
delivered by the Company;
(vi) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not contravene any provision of applicable law or the certificate
of incorporation or by-laws of the Company or, to such counsel's
knowledge, any agreement or other instrument binding upon the Company
or any of its subsidiaries that is material to the Company and its
subsidiaries, taken as a whole, or, to such counsel's knowledge, any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Company or any subsidiary, and no
consent, approval, authorization or order of, or qualification with,
any
<PAGE>
governmental body or agency is required for the performance by the
Company of its obligations under this Agreement, except such as may be
required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares;
(vii) the statements (A) in the Prospectus under the caption
"Business--Vehicle and Parts Suppliers," "Shares Eligible for Future
Sale," "Management--Stock Option Plan," "Description of Capital Stock"
and "Underwriters" and (B) in the Registration Statement in Items 14
and 15, in each case insofar as such statements constitute summaries
of the legal matters, documents or proceedings referred to therein,
fairly present the information called for with respect to such legal
matters, documents and proceedings and fairly summarize the matters
referred to therein;
(viii) such counsel does not know of any legal or governmental
proceedings pending or threatened to which the Company or any of its
subsidiaries is a party or to which any of the properties of the
Company or any of its subsidiaries is subject that are required to be
described in the Registration Statement or the Prospectus and are not
so described or of any statutes, regulations, contracts or other
documents that are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required;
(ix) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as such term is defined in the Investment Company Act of
1940, as amended;
(x) to such Counsel's knowledge, the Company and its
subsidiaries (A) are in compliance with any and all applicable
Environmental Laws, (B) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to
conduct their respective businesses and (C) are in compliance with all
terms and conditions of any such permit, license or approval, except
where such noncompliance with Environmental Laws, failure to receive
required permits, licenses or other approvals or failure to comply
with the terms and conditions of such permits, licenses or approvals
would not, singly or in the aggregate, have a material adverse effect
on the Company and its subsidiaries, taken as a whole; and
(xi) such counsel (A) is of the opinion that the Registration
Statement and Prospectus (except for financial statements and
schedules and notes thereto and other financial data included therein
as to which such counsel need not express any opinion) comply as to
form in all material respects with
<PAGE>
the Securities Act and the applicable rules and regulations of the
Commission thereunder, (B) has no reason to believe that (except for
the statements in Prospectus under the caption "Principal
Stockholders" provided by the Selling Stockholders in writing to the
Company and except for the financial statements and schedules and
notes thereto and other financial data as to which such counsel need
not express any belief) the Registration Statement and the prospectus
included therein at the time the Registration Statement became
effective contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading and (C) has no reason to
believe that (except for the statements in Prospectus under the
caption "Principal Stockholders" provided by the Selling Stockholders
in writing to the Company and except for financial statements and
other financial data as to which such counsel need not express any
belief) the Prospectus contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading.
With respect to paragraph (xi), Howard, Darby & Levin may state that their
opinion and belief are based upon their participation in the preparation of the
Registration Statement and Prospectus and any amendments or supplements thereto
and review and discussion of the contents thereof, but are without independent
check or verification, except as specified.
<PAGE>
EXHIBIT C
FORM OF OPINION OF SPROUSE, MOZOLA, SMITH & ROWLEY, P.C.
Pursuant to Section 6(f) of the Underwriting Agreement, Sprouse, Mozola,
Smith & Rowley, P.C., special Texas and Oklahoma counsel to the Company, shall
furnish an opinion to the effect that:
(i) Each of Midway Chevrolet, Inc., Plains Chevrolet, Inc.,
Westgate Chevrolet, Inc., Quality Nissan, Inc., Working Man's Credit
Plan, Inc. and Allied 2000 Collision Center, Inc. (each, a "Texas
Subsidiary") has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the State of Texas, has
the corporate power and authority to own its property and to conduct
its business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in
which the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent that the
failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries, taken as
a whole;
(ii) Each of Lynn Hickey Dodge, Inc., Performance Nissan, Inc.
and Performance Dodge, Inc. (each, an "Oklahoma Subsidiary" and
together with the Texas Subsidiaries, the "Subsidiaries") has been
duly incorporated, is validly existing as a corporation in good
standing under the laws of the State of Oklahoma, has the corporate
power and authority to own its property and to conduct its business as
described in the Prospectus and is duly qualified to transact business
and is in good standing in each jurisdiction in which the conduct of
its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole;
(iii) the statements in the Prospectus under the caption
"Business -- Governmental Regulations" and "Business -- Litigation,"
insofar as such statements constitute summaries of the legal matters,
documents or proceedings referred to therein, fairly present the
information called for with respect to such legal matters, documents
and proceedings and fairly summarize the matters referred to therein;
and
(iv) after due inquiry, such counsel does not know of any legal
or governmental proceedings pending or threatened to which any of the
Subsidiaries is a party or to which any of the properties of the
Subsidiaries is
<PAGE>
subject that are required to be described in the Registration
Statement or the Prospectus and are not so described or of any
statutes, regulations or, to such counsel's knowledge, contracts or
other documents that are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required.
<PAGE>
EXHIBIT D
FORM OF OPINION OF MULLIN, HOARD & BROWN, LLP
Pursuant to Section 6(g) of the Underwriting Agreement, Mullin, Hoard &
Brown, LLP, counsel to the Selling Stockholders, shall furnish an opinion to the
effect that:
(i) each Selling Stockholder which is a limited partnership has
been duly formed, is validly existing as a limited partnership under
the laws of Texas and has the power and authority to execute, deliver
and perform its respective obligations under this Agreement and the
Power of Attorney and Custody Agreement;
(ii) this Agreement has been duly authorized, executed and
delivered by or on behalf of each of the Selling Stockholders;
(iii) the execution and delivery by each Selling Stockholder
of, and the performance by such Selling Stockholder of its obligations
under, this Agreement and the Power of Attorney and Custody Agreement
of such Selling Stockholder will not contravene any provision of
applicable law, or the agreement of limited partnership of such
Selling Stockholder (if such Selling Stockholder is a limited
partnership), or, to such counsel's knowledge, any agreement or other
instrument binding upon such Selling Stockholder or, to such counsel's
knowledge, any judgment, order or decree of any governmental body,
agency or court having jurisdiction over such Selling Stockholder, and
no consent, approval, authorization or order of, or qualification
with, any governmental body or agency is required for the performance
by such Selling Stockholder of its obligations under this Agreement or
the Power of Attorney and Custody Agreement of such Selling
Stockholder, except such as may be required by the securities or Blue
Sky laws of the various states in connection with offer and sale of
the Shares;
(iv) each of the Selling Stockholders has valid title to the
Shares to be sold by such Selling Stockholder and the legal right and
power, and all authorization and approval required by law, to enter
into this Agreement and the Power of Attorney and Custody Agreement of
such Selling Stockholder and to sell, transfer and deliver the Shares
to be sold by such Selling Stockholder;
(v) the Power of Attorney and Custody Agreement of each Selling
Stockholder has been duly authorized, executed and delivered by such
Selling Stockholder and is a valid and binding agreement of such
Selling Stockholder;
<PAGE>
(vi) delivery of the Shares to be sold by each Selling
Stockholder pursuant to this Agreement will pass title to such Shares
free and clear of any security interests, claims, liens, equities and
other encumbrances; and
(vii) such counsel (A) has no reason to believe that the
statements in the Prospectus under the caption "Principal
Stockholders" at the time that the Registration Statement became
effective contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to
make such statements not misleading and (B) has no reason to believe
that the statements in the Prospectus under the caption "Principal
Stockholders" contain any untrue statement of a material fact or omit
to state a material fact necessary in order to make such statements,
in the light of the circumstances under which they were made, not
misleading.
Mullin, Hoard & Brown may rely, with respect to factual matters and to the
extent such counsel deems appropriate, upon the representations of each Selling
Stockholder contained herein and in the Power of Attorney and Custody Agreement
of such Selling Stockholder and in other documents and instruments.
<PAGE>
EXHIBIT E
CROSS-CONTINENT AUTO RETAILERS, INC.
CERTIFICATE AS TO DIRECTED SHARES
I, Charles D. Winton, Vice President, Chief Financial Officer and
Secretary of Cross-Continent Auto Retailers, Inc. (the "Company"), do hereby
certify that (a) certain officers and employees of the Company (collectively,
the "Purchasers") purchased an aggregate of ________ shares (the "Shares") of
the 3,675,000 shares of Common Stock, par value $.01 per share, of the Company
offered by the Company as described in the Company's Prospectus, dated September
___, 1996, relating to such 3,675,000 shares, and (b) the list attached hereto
as Exhibit A accurately sets forth the name of each Purchaser and the respective
number of the Shares purchased by such Purchaser.
In connection with the sale of stock by the Company and based upon
information provided to me by each Purchaser and to my knowledge, I hereby
certify that no such Purchaser or any member of the Purchaser's immediate family
is an officer, director, general partner, employee or agent of any securities
broker/dealer, or a person associated with any securities broker/dealer; a
senior officer of a bank, savings and loan institution, insurance company,
registered investment company, registered investment advisory firm or other
institutional type account, domestic or foreign; or a person in the securities
department of, or an employee or other person who may influence or whose
activities directly or indirectly involve or are related to the function of
buying or selling securities for, any bank, savings and loan institution,
insurance company, registered investment company, registered investment advisory
firm, or other institutional type account, domestic or foreign.
IN WITNESS WHEREOF, I have hereunto set my hand this ___th day of
September, 1996.
__________________________________
Charles D. Winton
Vice President,
Chief Financial Officer
and Secretary
<PAGE>
Exhibit A
CROSS-CONTINENT AUTO RETAILERS, INC.
DIRECTED SHARE PROGRAM
Name Number of Shares
- ---- ----------------
[Name of Purchaser]
_______
Total
<PAGE>
PATTY 7-03-96 H 45001-A ETHER 27 JC
7-26-96
COMMON STOCK
PAR VALUE $.01 PER SHARE
- ---------------- ---------------------
NUMBER SHARES
C
- ---------------- ---------------------
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INCORPORATED UNDER THE LAWS CUSIP 227481 10 8
OF THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS
CROSSS-CONTINENT AUTO RETAILERS, INC.
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| This certifies that |
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|is the owner of |
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FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
Cross-Continent Auto Retailers, Inc., transferable on the books of
the Corporation by the holder hereof, in person or by duly authorized
attorney, upon surrender of this Certificate properly endorsed or
accompanied by a proper assignment. This Certificate and the shares
represented hereby are issued and shall be held subject to all of the
provisions of the Certificate of Incorporation and the Bylaws of the
Corporation, and all amendments thereto, copies of which are on file at
the principal office of the Corporation to all of which the holder of
this Certificate by acceptance hereof assents. This Certificate is not
valid until countersigned and registered by the Transfer Agent and
Registrar.
In Witness Whereof, the Corporation has caused this Certificate to
be signed in facsimile by its duly authorized officers and the facsimile
corporate seal to be duly affixed hereto.
DATED:
COUNTERSIGNED AND REGISTERED:
/S/ THE BANK OF NEW YORK
CHAIRMAN AND CHIEF EXECUTIVE OFFICER TRANSFER AGENT
AND REGISTRAR.
BY
/s/ Robert W. Hall
SENIOR VICE CHAIRMAN AND TREASURER AUTHORIZED SIGNATURE.
[SEAL]
AMERICAN BANK
NOTE COMPANY
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
Cross-Continent Auto Retailers, Inc. will furnish without charge to each
stockholder who so requests the powers, designations, preferences and
relative participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations of such
preferences and/or rights.
This certificate also evidences and entitles the holder hereof to certain
rights as set forth in a Rights Agreement between Cross-Continent Auto
Retailers, Inc. and The Bank of New York, dated as of September 20, 1996
(the "Rights Agreement"), the terms of which are hereby incorporated herein
by reference and a copy of which is on file at the principal executive
offices of Cross-Continent Auto Retailers, Inc. Under certain circumstances,
as set forth in the Rights Agreement, such Rights will be evidenced by
separate certificate and will no longer be evidenced by this certificate.
Cross-Continent Auto Retailers, Inc. will mail to the holder of this
certificate a copy of the Rights Agreement without charge after receipt of a
written request therefor. Under certain circumstances, as set forth in the
Rights Agreement, Rights issued to any Person who becomes an Acquiring Person
(as defined in the Rights Agreement) may become null and void.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT--_____Custodian______
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with under Uniform Gifts to Minors Act
right of survivorship and
not as tenants in common ________________________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received,_______________________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
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(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
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of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
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to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated, _____________________
X_________________________________________
NOTICE: (SIGNATURE)
THE SIGNATURE(S) TO
THIS ASSIGNMENT MUST
CORRESPOND WITH THE
NAME(S) AS WRITTEN
UPON THE FACE OF THE X________________________________________
CERTIFICATE IN EVERY (SIGNATURE)
PARTICULAR WITHOUT
ALTERATION OR EN- ----------------------------------------------
LARGEMENT OR ANY | THE SIGNATURES(S) SHOULD BE GUARANTEED BY AN |
CHANGE WHATEVER | ELIGIBLE GUARANTOR INSTITUTION (BANKS, |
| STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS |
| AND CREDIT UNIONS WITH MEMBERSHIP IN AN |
| APPROVED SIGNATURE GUARANTEE MEDALLION |
| PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. |
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| SIGNATURE(S) GUARANTEED BY: |
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| AMERICAN BANKNOTE COMPANY | | PRODUCTION COORDINATOR - |
| 680 BLAIR MILL ROAD | | PAT STOVER-215-830-2155 |
| HORSHAM, PA 19044 | | PROOF OF JULY 29, 1996 |
| 215-657-3480 | | CROSS-CONTINENT |
| | | H 45001PATCH |
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| SALES PERSON- R JOHNS -212-557-9100 | | Opr. eg/JW/hj Rev. 1 |
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|/home/ed/inprogress/home11/Cross45001| | /net/banknote/home11/C |
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<PAGE>
IRREVOCABLE POWER OF ATTORNEY AND CUSTODY AGREEMENT
Robert W. Hall
Ezra P. Mager
As Attorneys-in-Fact
c/o Cross-Continent Auto Retailers, Inc.
1201 S. Taylor Street
Amarillo, TX 79101
Cross-Continent Auto Retailers, Inc.
As Custodian
1201 S. Taylor Street
Amarillo, TX 79101
Dear Sirs:
The undersigned shareholder(s) of Cross-Continent Auto Retailers,
Inc., a Delaware corporation (the "Company"), contemplates that the undersigned
stockholders of the Company (the undersigned stockholders being hereinafter
collectively called the "Selling Stockholders") may sell issued and outstanding
shares of the Company's common stock, par value $.01 per share (the "Common
Stock"), to certain Underwriters (as defined below), pursuant to the over-
allotment option described in Section 3 of the Underwriting Agreement referred
to below, in connection with a registered initial public offering of the Common
Stock (the "Offering"). The undersigned also understands that the Company has
filed with the Securities and Exchange Commission (the "Commission") a
Registration Statement on Form S-1 (the "Registration Statement") (File No. 333-
06585) to register the shares of Common Stock (the "Shares") to be sold by the
Selling Stockholders in the Offering under the Securities Act of 1933, as
amended (the "Securities Act").
The undersigned, by executing and delivering this Irrevocable Power of
Attorney and Custody Agreement (the "Agreement"), confirms the undersigned's
willingness to sell the aggregate number of shares of Common Stock set forth
next to the undersigned's name on Appendix A hereto (or such other lesser number
of shares of Common Stock, as determined by the Attorneys-in Fact (as defined
below) in accordance herewith) (collectively, the "Shares") to the Underwriters
and to deposit such Shares with the Company, acting in its capacity as Custodian
hereunder (the "Custodian"), all as hereinafter provided.
The undersigned hereby acknowledges receipt of (i) a draft of an
underwriting agreement dated August __, 1996 (the "Underwriting Agreement"),
among the Company, the
<PAGE>
2
Selling Stockholders (acting by their attorneys-in-fact) and the Underwriters
listed on Schedule I thereto (the "Underwriters") relating to the Offering of
Common Stock to be purchased by the Underwriters from the Company and the
Selling Stockholders, and (ii) a conformed copy (without exhibits) of the
original Registration Statement and all amendments thereto through the date of
execution hereof. The undersigned understands that the Underwriting Agreement
is subject to revisions before execution, with such changes as the Attorneys-in-
Fact referred to below deem appropriate (including with respect to the number of
Shares of Common Stock to be sold), and that the Registration Statement has not
yet become effective under the Securities Act and is subject to amendment.
To induce the Underwriters to enter into the Underwriting Agreement
with the Company and the Selling Stockholders and to secure their performance,
the undersigned agrees, for the benefit of the other Selling Stockholders, the
Underwriters and the Company, as follows:
(1) APPOINTMENT OF ATTORNEYS-IN-FACT; GRANT OF AUTHORITY. For
purposes of effecting the sale of the Shares pursuant to the Underwriting
Agreement, the undersigned hereby irrevocably makes, constitutes and
appoints Robert W. Hall and Ezra P. Mager, and each of them, the true and
lawful agents and attorneys-in-fact of the undersigned (each, an "Attorney-
in-Fact" and, collectively, the "Attorneys-in-Fact"), each with full power
and authority (except as provided below) to act hereunder, individually,
collectively, or through duly appointed successor attorneys-in-fact, in his
or their sole discretion (it being understood and agreed that the
Attorneys-in-Fact may, unless otherwise specified herein, act individually
and, where collective action is specified, act collectively by and through
the joint action of each of them, and that each of them may duly appoint
successor attorneys-in-fact and delegate to them any and all of their
powers hereunder), all as hereinafter provided, in the name of and for and
on behalf of the undersigned, as fully as could the undersigned if present
and acting in person, with respect to all matters in connection with the
execution and delivery of the Underwriting Agreement and the registration
and sale of the Shares in the Offering including, but not limited to, the
power and authority to:
(a) authorize and direct the Custodian and any other person or
entity to take any and all actions as may be necessary or deemed to be
advisable by the Attorneys-in-Fact or either of them to effect the
sale, transfer and disposition of the undersigned's Shares in, and in
connection with, the Offering (including without limitation to
determine the number of Shares of the undersigned to be sold (which
may differ from the amount set forth in the Registration Statement and
draft Underwriting Agreement reviewed by the undersigned) and the
price at which such Shares will be sold to the Underwriters (which
shall be the same price per Share as is paid by the
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3
Underwriters to the Company pursuant to the Underwriting Agreement)),
on such terms and conditions, except as set forth below, as the
Attorneys-in-Fact or either of them may, in their sole discretion,
determine;
(b) execute and deliver the Underwriting Agreement,
substantially in the form of the draft dated August __, 1996, with
such changes therein as the Attorneys-in-Fact or either of them, in
their sole discretion, except as set forth below, may determine, the
execution and delivery of such Underwriting Agreement by either
Attorney-in-Fact to be conclusive evidence with respect to their
approval thereof, and carry out and comply with each and all of the
provisions of the Underwriting Agreement;
(c) arrange for, prepare or cause to be prepared an amendment or
amendments to the Registration Statement and take all actions as may
be necessary or deemed to be desirable with respect to the
Registration Statement, including, without limitation, the execution,
acknowledgment and delivery of all such certificates, reports,
assurances, documents, letters and consents, as may be necessary or
deemed to be desirable in connection therewith, and execute,
acknowledge and deliver any and all certificates, assurances, reports,
documents, letters and consents to the Commission, appropriate
authorities of states or other jurisdictions, the Underwriters or
legal counsel, which may be required or appropriate in connection with
the registration of the Shares under the Securities Act or the
securities or blue sky laws of the various states and jurisdictions or
to facilitate sales of the Shares including, but not limited to (i) a
request for acceleration of the effective date of the Registration
Statement and (ii) any representations to the Commission necessary to
facilitate effectiveness of the Registration Statement;
(d) retain legal counsel, as appropriate, in connection with any
and all matters referred to herein (which counsel may, but need not,
be counsel for the Company) to represent the Selling Stockholders in
connection with the transactions referred to in the Underwriting
Agreement and this Agreement;
(e) agree with the Company and the other Selling Stockholders
upon the allocation of the expenses of the Offering, and upon the
mutual indemnification of the Company, the Underwriters and the
Selling Stockholders, including the undersigned and the Attorneys-in-
Fact (it being understood and agreed that the Attorneys-in-Fact or
either of them may be Selling Stockholders in the Offering) as set
forth in the Underwriting Agreement, this Agreement or in any other
agreement or instrument;
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4
(f) endorse (in blank or otherwise) on behalf of the undersigned
the certificates for Shares to be sold by the undersigned to the
Underwriters, or a stock power or stock powers attached to such
certificates; and
(g) take or cause to be taken any and all further actions, and
execute and deliver, or cause to be executed and delivered, any and
all such agreements (including, but not limited to, the Underwriting
Agreement and any and all documents, instruments and certificates as
may be necessary or deemed to be advisable in connection therewith),
instruments, documents, certificates and share powers, with such
changes as the Attorneys-in-Fact or either of them may, in their sole
discretion, approve (such approval to be evidenced by their signature
thereof) as may be necessary or deemed to be desirable by the
Attorneys-in-Fact or either of them to effectuate, implement and
otherwise carry out the transactions contemplated by the Underwriting
Agreement and this Agreement, or as may be necessary or deemed to be
desirable in connection with the registration of the Shares pursuant
to the Securities Act or the sale of the Shares to the Underwriters;
PROVIDED, HOWEVER, that the Attorneys-in-Fact shall act collectively
insofar as their actions shall concern (i) the determination of the number
of Shares to be sold by Selling Stockholders in the Offering, (ii) the
determination of or any change in or modification of any material terms and
conditions of the Offering, including, but not limited to, any
determination with respect to the pricing, timing or provision of
indemnification in connection with the Offering, (iii) determinations with
respect to any allocation of Shares to be sold by Selling Stockholders in
the Offering and (iv) allocation of any expenses to Selling Stockholders;
PROVIDED FURTHER, HOWEVER, that actions with respect to (iii) or (iv) may
not be made in any manner other than ratably based on the relative number
of Shares set forth with respect to the Selling Stockholders on Appendix A
without the prior consent of each Selling Shareholder. The Attorneys-in-
Fact shall treat equitably all Selling Stockholders for whom the Attorneys-
in-Fact are acting.
(2) IRREVOCABILITY. The undersigned has conferred and granted the
power of attorney and all other authority contained herein in consideration
of the Company's, the other Selling Stockholders' and the Underwriters'
proceeding with, and for the purpose of completing, the transactions
contemplated by the Underwriting Agreement. Therefore, the undersigned
hereby agrees that all power and authority hereby conferred is coupled with
an interest and is irrevocable; and to the fullest extent not prohibited by
law shall not be terminated by any act of the undersigned or by operation
of law or by the occurrence of any event whatsoever, including, without
limitation, the death, incapacity, dissolution, liquidation, termination,
bankruptcy, dissolution of marital relationship or insolvency of the
undersigned or any similar
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5
event. If, after the execution of this Agreement, any such event shall
occur before the completion of the transactions contemplated by the
Underwriting Agreement and this Agreement, the Attorneys-in-Fact and the
Custodian are nevertheless authorized and directed to complete all of such
transactions, including the delivery of the certificates for the Shares to
be sold to the Underwriters, as if such event had not occurred and
regardless of notice thereof.
(3) DEPOSIT AND DELIVERY OF SHARES. The undersigned hereby appoints
the Company as Custodian to hold the Shares and to dispose of them in
accordance with the instructions of the Attorneys-in-Fact or either of them
and as set forth herein, with full power in the name of, and for and on
behalf of, the undersigned.
(a) If stock certificates with respect to the Shares are in the
undersigned's possession, the undersigned hereby agrees to deliver
herewith and deposit such certificates with the Custodian, together
with an irrevocable stock power duly executed in blank.
(b) If any Shares are to be delivered to the Custodian by
someone other than the undersigned, the undersigned hereby agrees to
deliver to and deposit with the Custodian an irrevocable stock power
duly executed in blank.
(c) The Attorneys-in-Fact and each of them hereby agree to
instruct The Bank of New York to issue certificates for all of the
Shares and to deliver such certificates to the Custodian or, in the
alternative, to make an appropriate book entry transfer of such Shares
to the account of the Custodian.
(d) The undersigned authorizes and directs the Custodian to
deliver to the Underwriters such Shares as may be designated in
written instructions from either Attorney-in-Fact and to deliver, or
cause to be delivered, certificates representing such Shares to the
Underwriters on the Option Closing Date referred to in the
Underwriting Agreement against receipt of payment (payable to the
Custodian) therefor.
(e) The undersigned hereby authorizes and directs the Attorneys-
in-Fact and each of them and the Custodian to issue appropriate
receipts to the Underwriters, for the full amount of net proceeds, in
the name of the undersigned as payee.
(4) THE CUSTODIAN. The Custodian's execution of this Agreement shall
constitute the acceptance by the Custodian of the agency herein conferred,
and shall evidence its agreement to carry out and perform its duties under
this Agreement in accordance with the provisions hereof, subject, however,
to the following terms and
<PAGE>
6
conditions, which all parties hereto agree shall govern and control the
rights, duties and immunities of the Custodian:
(a) The Custodian shall have no duties except those expressly
set forth herein and shall not be liable except for commission of
gross negligence or willful misconduct in the performance of such
duties of the Custodian as are specifically set out herein. The
Custodian shall not be responsible for the performance of the powers
of attorney contained herein by any party hereto, or for the
interpretation of any of the provisions of such powers of attorney, or
for the failure or inability of any other party hereto, or anyone
else, to deliver moneys or certificates for Common Stock or other
property to it or otherwise to honor any provision hereof.
(b) If a controversy arises between two or more of the parties
hereto, or between any of the parties hereto and any person not a
party hereto, as to whether or not or to whom the Custodian shall
deliver the certificates for the Shares or any funds held by it, or as
to any other matter arising out of or relating hereto or to the
property held by it hereunder, the Custodian shall not be required to
determine the same and need not make any delivery of the property or
any portion thereof but may retain it until the rights of the parties
to the dispute shall have finally been determined by agreement or by
final order of a court of competent jurisdiction, PROVIDED, HOWEVER,
that the time for appeal from any such final order shall have expired
without an appeal having been made. The Custodian shall deliver the
property or any portion thereof within 15 days after it has received
written notice of any such agreement or final order (accompanied by an
affidavit that the time for appeal has expired without an appeal
having been made). The Custodian shall be entitled to assume that no
such controversy has arisen unless it has received a written notice
that such a controversy has arisen which refers specifically to this
Agreement and identifies by name and address the adverse claimants to
the controversy.
(c) The Custodian will acknowledge in writing receipt by
physical delivery of any certificates representing any Shares when
such certificates are received.
(5) REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the
undersigned represents, warrants and agrees that:
(a) All authorizations and consents, including, but not limited
to, any releases necessary for the execution, delivery and performance
by the undersigned of this Agreement and for the sale and delivery of
the Shares to
<PAGE>
7
the Underwriters have been obtained and are in full force and effect,
and the undersigned has full right, power and authority to enter into
and perform the Underwriting Agreement and this Agreement and to sell,
transfer and deliver the Shares to the Underwriters. This Agreement,
upon execution and delivery by the undersigned, and the Underwriting
Agreement, upon execution and delivery by the undersigned or on behalf
of the undersigned by one or more of the Attorneys-in-Fact, will
constitute valid and binding agreements of the undersigned in
accordance with their respective terms.
(b) The undersigned has read the draft of the Underwriting
Agreement referred to above and understands the same, and agrees that
the representations and warranties ascribed to the undersigned as set
forth in Section 2 of the Underwriting Agreement are incorporated by
reference herein, are true and correct on the date hereof and will be
true and correct on the Closing Date referred to in the Underwriting
Agreement with respect to the Offering, and authorizes the Attorneys-
in-Fact, acting on behalf of the undersigned, to confirm the truth and
accuracy of such representations and warranties in connection with the
consummation or implementation of the transactions contemplated by the
Underwriting Agreement and this Agreement. The undersigned
acknowledges that the representations, warranties and obligations made
or undertaken by the undersigned herein shall survive the conclusion
of the Offering and are in addition to, and not in limitation of, the
representations, warranties and obligations made or undertaken, or to
be made or undertaken, on the part of the undersigned in the
Underwriting Agreement, as the same may be executed, delivered and
amended.
(c) The undersigned has not taken and will not take, directly or
indirectly, any action intended to constitute or which has
constituted, or which might reasonably be expected to cause or result
in, stabilization or manipulation of the price of the Common Stock,
and, to assure compliance with Rule 10b-6 under the Securities
Exchange Act of 1934, the undersigned will not make bids for or
purchases of, or induce bids for or purchases of, directly or
indirectly, any Shares of Common Stock until the distribution of all
Shares being sold in the Offering has been completed; the undersigned
has not and will not distribute any prospectus or other offering
material in connection with the Offering and sale of the Shares other
than the then current prospectus filed with the Commission or other
material permitted by the Securities Act.
(d) The foregoing representations, warranties and agreements are
for the benefit of and may be relied upon by the Attorneys-in-Fact,
the Company, the other Selling Stockholders, the Underwriters and
their respective legal counsel. The undersigned agrees that the
representations,
<PAGE>
8
warranties and agreements herein contained shall also be true and
correct and in full force and effect on the effective date of the
Registration Statement and the Option Closing Date referred to in the
Underwriting Agreement. The undersigned will immediately notify the
Attorneys-in-Fact and the Company of any default under or breach of
this Agreement (or of any event which, with notice or the lapse of
time or both, would constitute such a default or breach), and in the
event any representation or warranty contained herein shall not be
true or correct; PROVIDED, HOWEVER, that nothing contained herein
shall in any way affect the obligations of the undersigned hereunder
and under the Underwriting Agreement to maintain such representations
and warranties as true and correct and in full force and effect
through the Option Closing Date.
(e) The undersigned acknowledges that the success of the
Offering is largely dependent upon factors not within the Company's
control, such as participation and cooperation by other Selling
Stockholders, market conditions, the Commission and Blue Sky matters,
and other factors within the discretion of the Underwriters. It is
therefore understood that the Company shall not be obligated to
complete the Offering, except under such circumstances as the Company
deems appropriate and desirable, and the Company shall not be liable
to the undersigned for any failure to complete the Offering. This
Agreement will terminate in the event that the Option Closing Date
does not occur on or prior to November 15, 1996, unless this Agreement
is extended by the parties hereto in writing.
(6) PAYMENT. The undersigned hereby authorizes and directs the
Attorneys-in-Fact or either of them to take such action as may be required
to provide for the distribution to the undersigned of the proceeds of the
Offering (net of the reserve for undersigned's share of expenses of the
Offering as described below) owing to the undersigned in connection
therewith, such payment to be made in immediately available funds or such
other manner as the Attorneys-in-Fact or either of them shall determine.
Before remitting any proceeds of the sale of the Shares to the
undersigned, the Attorneys-in-Fact are authorized and empowered to reserve
from the proceeds allocable to the undersigned in respect of Shares sold by
the undersigned an amount determined by the Attorneys-in-Fact to be
sufficient to pay the undersigned's share of all expenses of the Selling
Stockholders. The Selling Stockholders' expenses shall include only those
items of expense set forth in Section 8 of the Underwriting Agreement and
the Attorneys-in-Fact are authorized to pay such expenses from the amount
reserved for such purpose. After payment of any such expenses from the
reserve, the Attorneys-in-Fact will prepare a written itemization of the
expenses and remit to the undersigned his proportionate share of the
balance as well as the
<PAGE>
9
itemization. To the extent expenses exceed the amount reserved, the
Selling Stockholders shall remain liable for their proportionate share of
such expenses.
(7) OWNERSHIP OF STOCK. Subject to the terms hereof, until payment
of the purchase price for the Shares being sold by the undersigned pursuant
to the Underwriting Agreement has been made by or for the account of the
Underwriters, the undersigned shall remain the owner of the Shares and
shall have all rights thereto, including the right to receive any and all
dividends and distributions thereon which are not inconsistent with this
Agreement. However, until such payment in full has been made or until the
Underwriting Agreement has been terminated, the undersigned agrees that the
undersigned will not give, sell, pledge, hypothecate, grant any lien on or
security interest in, transfer, deal with or contract with respect to the
Shares or any interest therein, except to the Underwriters pursuant to the
Underwriting Agreement.
(8) RELEASE. The undersigned hereby agrees to release the Attorneys-
in-Fact and each of them and the Custodian from any and all liabilities,
joint or several, to which they may become subject insofar as such
liabilities (or action in respect thereof) arise out of or are based upon
any action taken or omitted to be taken by the Attorneys-in-Fact or the
Custodian pursuant hereto, except if such liabilities shall result from the
bad faith of the Attorneys-in-Fact or the Custodian. This paragraph shall
survive termination of this Agreement.
(9) TERMINATION. If the Underwriting Agreement shall not be entered
into on behalf of the undersigned, or if it shall not become effective
pursuant to its terms, or if it shall be terminated pursuant to its terms,
or if the Shares agreed to be sold as contemplated by the Underwriting
Agreement are not purchased and paid for by the Underwriters on or before
November 15, 1996, then after such date the undersigned shall have the
power, on written notice to each of the Attorneys-in-Fact and the
Custodian, to terminate this Agreement, subject, however, (i) to Section
(8) hereof, (ii) to the payment of all expenses incurred by or on behalf of
the undersigned, and (iii) to all lawful action of the Attorneys-in-Fact
and the Custodian done or performed pursuant hereto prior to actual receipt
of such notice, and thereafter the Attorneys-in-Fact and the Custodian
shall have no further responsibilities or liabilities to the undersigned
except to redeliver to the undersigned the Shares held in custody by book
entry or otherwise.
(10) NOTICES. Any notice required to be given pursuant to this
Agreement shall be deemed given if in writing and delivered in person, or
if given by telephone, telecopy or facsimile if subsequently confirmed by
letter, (i) to Robert W. Hall and Ezra P. Mager, as Attorneys-in-Fact, c/o
Cross-Continent Auto Retailers, Inc., 1201 South Taylor Street, Amarillo,
Texas 79101, (ii) to Cross-Continent Auto Retailers, Inc., as Custodian,
1201 South Taylor Street, Amarillo, Texas 79101, or to such other
<PAGE>
10
address as the Custodian shall have specified in a written notice duly
given to the undersigned, or (iii) to the undersigned at the address set
forth in the Company's records.
(11) APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF
THE STATE OF NEW YORK, AND THIS AGREEMENT SHALL INURE TO THE BENEFIT OF,
AND SHALL BE BINDING UPON, THE UNDERSIGNED AND THE UNDERSIGNED'S HEIRS,
EXECUTORS, ADMINISTRATORS, SUCCESSORS AND ASSIGNS, AS THE CASE MAY BE.
(12) COUNTERPARTS. This Agreement may be signed in any number of
counterparts, each executed counterpart constituting an original but all
together constituting only one instrument.
<PAGE>
11
This Irrevocable Power of Attorney and Custody Agreement shall be
effective as of September [ ], 1996.
Very truly yours,
Bill A. Gilliland
______________________________
(signature)
WHEN SIGNING AS AN OFFICER OF
A CORPORATION, PARTNER OF A
PARTNERSHIP, TRUSTEE OF A TRUST,
GUARDIAN OF A MINOR CHILD, OR
CUSTODIAN UNDER THE UNIFORM
GIFT TO MINORS ACT, PLEASE
INDICATE TITLE AS SUCH AND
PROVIDE DOCUMENTATION EVIDENCE
OF THE AUTHORITY OF PERSON
SIGNING.
FOR CERTIFICATES HELD BY JOINT
TENANTS OR AS COMMUNITY PROPERTY,
ALL NAMED HOLDERS MUST SIGN.
<PAGE>
11
This Irrevocable Power of Attorney and Custody Agreement shall be
effective as of September [ ], 1996.
Twenty-Two Ten, Ltd., a Texas Partnership
By: Twenty-Two Ten Management Co., Inc.,
Corporate General Partner
By:___________________________
Name: Robert W. Hall
Title:
WHEN SIGNING AS AN OFFICER OF
A CORPORATION, PARTNER OF A
PARTNERSHIP, TRUSTEE OF A TRUST,
GUARDIAN OF A MINOR CHILD, OR
CUSTODIAN UNDER THE UNIFORM
GIFT TO MINORS ACT, PLEASE
INDICATE TITLE AS SUCH AND
PROVIDE DOCUMENTATION EVIDENCE
OF THE AUTHORITY OF PERSON
SIGNING.
FOR CERTIFICATES HELD BY JOINT
TENANTS OR AS COMMUNITY PROPERTY,
ALL NAMED HOLDERS MUST SIGN.
<PAGE>
11
This Irrevocable Power of Attorney and Custody Agreement shall be
effective as of September [ ], 1996.
Benji Investments, Ltd., a Texas Limited
Partnership
By: Benji Management Co., Inc.,
Corporate General Partner
By: __________________________
Name: Emmett M. Rice, Jr.
Title:
WHEN SIGNING AS AN OFFICER OF
A CORPORATION, PARTNER OF A
PARTNERSHIP, TRUSTEE OF A TRUST,
GUARDIAN OF A MINOR CHILD, OR
CUSTODIAN UNDER THE UNIFORM
GIFT TO MINORS ACT, PLEASE
INDICATE TITLE AS SUCH AND
PROVIDE DOCUMENTATION EVIDENCE
OF THE AUTHORITY OF PERSON
SIGNING.
FOR CERTIFICATES HELD BY JOINT
TENANTS OR AS COMMUNITY PROPERTY,
ALL NAMED HOLDERS MUST SIGN.
<PAGE>
11
This Irrevocable Power of Attorney and Custody Agreement shall be
effective as of September [ ], 1996.
KAPL, Ltd., a Texas Limited Partnership
By: KAPL Management Co., Inc.,
Corporate General Partner
By: __________________________
Name: Jerry Pullen
Title:
WHEN SIGNING AS AN OFFICER OF
A CORPORATION, PARTNER OF A
PARTNERSHIP, TRUSTEE OF A TRUST,
GUARDIAN OF A MINOR CHILD, OR
CUSTODIAN UNDER THE UNIFORM
GIFT TO MINORS ACT, PLEASE
INDICATE TITLE AS SUCH AND
PROVIDE DOCUMENTATION EVIDENCE
OF THE AUTHORITY OF PERSON
SIGNING.
FOR CERTIFICATES HELD BY JOINT
TENANTS OR AS COMMUNITY PROPERTY,
ALL NAMED HOLDERS MUST SIGN.
<PAGE>
12
Robert W. Hall hereby accepts the appointment as Attorney-in-Fact
pursuant to the foregoing Irrevocable Power of Attorney and Letter Agreement,
and agrees to abide by and act in accordance with the terms of said agreement.
Dated: September __, 1996
______________________________
Robert W. Hall
Ezra P. Mager hereby accepts the appointment as Attorney-in-Fact
pursuant to the foregoing Irrevocable Power of Attorney and Letter Agreement,
and agrees to abide by and act in accordance with the terms of said agreement.
Dated: September __, 1996
______________________________
Ezra P. Mager
Cross-Continent Auto Retailers, Inc. hereby agrees to act as Custodian
pursuant to the foregoing Irrevocable Power of Attorney and Letter Agreement,
and agrees to abide by and act in accordance with the terms of said agreement.
Dated: September __, 1996
CROSS-CONTINENT AUTO RETAILERS, INC.
By: _______________________________
Name:
Title:
<PAGE>
APPENDIX A
Number of
Firm Shares
Selling Shareholder To Be Sold
------------------- -----------
Bill A. Gilliland . . . . . . . . . . . . . . . . . . . . . . . 388,631
Twenty-Two Ten, Ltd., a Texas limited partnership . . . . . . . 97,020
Benji Investments, Ltd., a Texas limited partnership. . . . . . 56,779
KAPL, Ltd., a Texas limited partnership . . . . . . . . . . . . 8,820
-----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 551,250
<PAGE>
Exhibit 5.1
[LETTERHEAD OF HOWARD, DARBY & LEVIN]
August 30, 1996
Cross-Continent Auto Retailers, Inc.
1201 South Taylor Street
Amarillo, Texas 79101
Dear Sirs:
In connection with the registration under the Securities Act of 1933, as
amended (the "Act"), of 3,675,000 shares of common stock, par value $.01 per
share, of Cross-Continent Auto Retailers, Inc., a Delaware corporation (the
"Company"), to be sold by the Company (the "Company Shares"), and 551,250
shares of common stock, par value $.01 per share, of the Company to be sold
by certain stockholders of the Company upon an exercise (if any) of the
underwriters' over-allotment option (the "Stockholder Shares"), in each case
pursuant to the Registration Statement (No. 333-06585) on Form S-1, as
amended (the "Registration Statement"), filed by you with the Securities and
Exchange Commission, we have reviewed such corporate records, certificates
and other documents, and such questions of law, as we have deemed necessary
or appropriate for the purposes of this opinion.
Based upon the foregoing, we are of the opinion that:
(i) when the Registration Statement has become effective under the Act,
the terms of the Company Shares and the terms of their issuance and sale have
been duly established in conformity with the Company's Certificate of
Incorporation and the proceedings that we contemplate being taken prior to
the issuance of the Company Shares have been duly completed, the Company
Shares, when issued and sold as contemplated in the Registration Statement,
and assuming compliance with the Act, will be duly and validly issued, fully
paid and nonassessable; and
(ii) the Stockholder Shares have been duly and validly issued and are
fully paid and nonassessable.
We hereby consent to the filing of our opinion as Exhibit 5.1 to the
Registration Statement and to the reference to us under the heading "Legal
Matters" in the Prospectus. In giving such consent, we do not thereby admit
that we are in the category of persons whose consent is required under
Section 7 of the Act.
Very truly yours,
/s/ Howard, Darby & Levin
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 3 to Registration Statement on Form S-1 of our report dated June
21, 1996, relating to the financial statements of Cross-Continent Auto
Retailers, Inc., which appears in such Prospectus. We also hereby consent to the
use in the Prospectus constituting part of this Amendment No. 3 to Registration
Statement on Form S-1 of our report dated June 4, 1996, relating to the
financial statements of Jim Glover Dodge, Inc. and our report dated July 3,
1996, relating to the financial statements of Lynn Hickey Dodge, Inc., which
appear in such Prospectus. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Forth Worth, Texas
August 30, 1996
