<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from __________________ to ___________________
Commission File Number 333-06585
CROSS-CONTINENT AUTO RETAILERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2653095
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1201 S. TAYLOR
AMARILLO, TEXAS 79101
(Address of principal executive offices) (Zip Code)
(806) 374-8653
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of the close of business on March 24, 1997 was $77,433,000.
Number of shares outstanding of each of the issuer's classes of common stock, as
of March 24, 1997.
Class Shares Outstanding
- -------------------------- -------------------------
$.01 Par Value 13,800,000
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's definitive proxy statement to be filed in connection
with the annual meeting of shareholders on May 13, 1997 are incorporated by
reference into Part III.
1
<PAGE>
PART I
ITEM 1. BUSINESS
Cross-Continent Auto Retailers, Inc. was incorporated in the State of
Delaware in May 1996 and in June 1996 acquired all of the capital stock of eight
companies. Unless the context otherwise requires, as used herein the terms
"Company" and "Cross-Continent" mean Cross-Continent Auto Retailers, Inc. and
its subsidiaries.
The Company owns and operates seven franchised automobile dealerships
and several related businesses in the Amarillo, Texas and Oklahoma City,
Oklahoma markets. The Company generates its revenues from sales of new and used
vehicles, fees for repair and maintenance services, the sale of replacement
parts, fees and commissions from arranging financing and credit insurance in
connection with vehicle sales, and the sale of extended warranties on vehicles.
The Company's founder and Chief Executive Officer, Bill 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 dealer and exclusive Nissan dealer in
Amarillo. The Company led the Amarillo market in vehicle unit sales in 1996,
accounting for approximately 35% of new vehicle unit sales and 26% 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. On October 1, 1996, the Company purchased Lynn Hickey
Dodge in Oklahoma City, Oklahoma ("Hickey Dodge"), which is one of the largest
Dodge dealerships in the United States. With these acquisitions, 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 1996.
As a result of the Company's business strategy, including the
acquisition of new dealerships, the Company's sales have increased from $125.2
million in 1992 to $321.6 million in 1996. Pro forma sales for 1996 were $421.8
million, giving a full year effect to Hickey Dodge, which was acquired on
October 1, 1996. Pro forma sales for 1995 were $416.9 million, giving a full
year effect to Hickey Dodge, Performance Nissan, which was acquired on February
2, 1995, and Performance Dodge, which was acquired on December 4, 1995. 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 1996,
the Company's actual gross profit margin was 15.5%, compared to the industry
average of 12.9% according to the National Automobile Dealers Association
("N.A.D.A.").
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.
2
<PAGE>
The Company completed the acquisition of Hickey Dodge on October 1,
1996. According to industry publications, Hickey Dodge ranks as one of the
nation's largest Dodge dealerships. Pro forma Hickey Dodge sales for 1996 were
$123.1 million, giving a full year effect, which was acquired on October 1,
1996.
On January 24, 1997, the Company announced its pending acquisition of
Douglas Toyota, Inc. in Thornton, Colorado ("Douglas Toyota"), a suburb of
Denver, Colorado, and Toyota West Sales and Service, Inc. ("Toyota West"), of
Las Vegas, Nevada. The Company believes that these dealerships are the highest
volume Toyota dealerships in their respective markets. Douglas Toyota sales for
1996 were $98.3 million, and Toyota West sales for 1996 were $106.8 million.
On March 3, 1997, the Company announced its pending acquisition of Sahara
Nissan, Inc. (Sierra Datsun, Inc.), in Las Vegas, Nevada, which operates a
Nissan dealership under the name of Jack Biegger Nissan ("Biegger Nissan").
Biegger Nissan sales for 1996 were approximately $61 million. Each of the
pending acquisitions is subject to completion of due diligence by the Company,
receipt of the necessary approvals from Toyota Motor Sales U.S.A. and Nissan
Motor Corp., U.S.A., as the case may be, and other customary closing conditions.
Although there can be no assurance that these conditions will be satisfied or
the approvals will be obtained, the Company anticipates completing these
acquisitions.
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, but are not limited to,
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.
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 under-
performing 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.
DEALERSHIP OPERATIONS
Four of the Company's seven dealerships are in or within 10 miles of
Amarillo, Texas, two are in suburban areas of Oklahoma City, Oklahoma, and one
is in Oklahoma City. The Company derived approximately 68.3% of its revenue from
its dealerships in the Amarillo area in 1996. The Company
3
<PAGE>
expects that with the completion of the pending acquisitions and through
additional acquisitions in other geographic areas of the nation, the percentage
of total revenue any one market will contribute to total revenue will decrease
and become more balanced.
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, parts and service, and finance and insurance ("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 the Chevrolet
division of General Motors Corporation ("General Motors" or "GM"), the Nissan
division of Nissan Motors Corp. U.S.A. ("Nissan"), and the Dodge division of
Chrysler Corporation ("Chrysler"). Approximately 68.3% of new vehicles sold by
the Company in 1996 were light trucks. 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 10.8% in 1996, as compared to the
industry average for 1996 of 6.4%, according to N.A.D.A.
<TABLE>
<CAPTION>
Company's New Vehicle Sales
------------------------------------------------------
1996(1) 1995(1) 1994 1993 1992
----------- ----------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Unit sales 6,408 5,547 4,468 4,978 4,173
Sales revenue $137,712 $114,494 $90,804 $91,012 $72,659
Gross margin 10.8% 12.1% 12.5% 11.8% 10.6%
- -------------------
</TABLE>
(1) Figures shown reflect actual new vehicle sales activity and do not include
the full year effect of the acquisitions completed in 1996 and 1995.
The Company also arranges traditional retail lease transactions in the
Oklahoma City market and lease-type transactions (such as General Motors
Acceptance Corporation's ("GMAC") "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 had operated a Kia franchise at the Company's
Westgate facility in Amarillo, which had sales of less than 1% of the Company's
total revenue in 1996. 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.
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 3,009 units in 1992 to 8,145 units in
1996. 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. In addition, increases
in new vehicle prices have prompted a growing segment of the
4
<PAGE>
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
sales accounted for less than 1% of the Company's total sales in each of 1995
and 1996.
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. 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
12.3% in 1996, as compared to the industry average for 1996 of 10.9% according
to N.A.D.A. The following table reflects all used vehicle sales transactions of
the Company from 1992 through 1996.
<TABLE>
<CAPTION>
Company's Used Vehicle Sales
-----------------------------------------------------
1996(1) 1995(1) 1994 1993 1992
----------- ---------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Retail unit sales 8,145 6,170 4,816 4,532 3,009
Retail sales revenue $104,842 $75,677 $50,019 $44,655 $28,059
Retail gross margin 12.3% 13.7% 15.7% 16.5% 13.5%
Wholesale unit sales 7,423 5,372 5,201 4,983 3,396
Wholesale sales revenue $ 41,423 $22,813 $22,897 $14,538 $12,354
Wholesale gross margin -1.8% -3.4% -6.0% -8.2% -3.6%
Total unit sales 15,568 11,542 10,017 9,515 6,405
Total sales revenue $146,265 $98,490 $72,916 $59,193 $40,413
Total gross margin 8.3% 9.8% 8.9% 10.4% 8.3%
- -------------
</TABLE>
(1) Figures shown reflect actual used vehicle sales activity and do not include
the full year effect of the acquisitions completed in 1996 and 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.
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 1996, the Company's parts and service
operation generated gross margins of 49.1%, including the sale of parts at
wholesale to independent repair shops, compared to an industry average of 43.1%
according to N.A.D.A. Excluding the sale of parts at wholesale, the Company's
gross margin for parts and service would have been 61.1% in 1996, which the
Company believes compares favorably to the industry
5
<PAGE>
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 and inventory.
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.
FINANCE AND INSURANCE (F&I). 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 75.3% of its new vehicle sales and 76.3% of its used vehicle sales
in 1996, as compared to 42% and 51%, respectively, for the average U.S.
dealership according to the most recent information available
6
<PAGE>
from N.A.D.A. 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 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. At December
31, 1996, the amount of receivables, net of reserve for loan loss, was
$413,000. In 1996, less than 1% of the Company's used vehicle sales were
financed by Working Man's Credit.
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. Until July 1996, the Company sold its own
warranties and is recognizing the associated revenue over the life of these
warranty contracts. The Company sells warranties of third parties and
recognizes the associated commission income immediately. In 1996, the Company
sold warranties on 60.8% and 69.2%, 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 1996, the Company sold such
insurance on 20.8% and 28.8%, respectively, of the new and used vehicle
purchases for which it arranged financing.
SALES AND MARKETING
To promote customer satisfaction 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
7
<PAGE>
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 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.
The Company is analyzing marketing and advertising over the Internet. The
Company's Hickey Dodge store currently has a series of Internet web pages which
have been designed to promote and advertise the dealership's products and
services. The Company believes it will develop Internet web pages for each of
its dealerships, and will eventually market vehicles over the Internet.
VEHICLE AND PARTS SUPPLIERS
The Company depends primarily on General Motors' Chevrolet division, Nissan
and Chrysler's Dodge unit for its supply of new vehicles and replacement parts.
As the Company acquires dealerships representing other automakers, the Company
also will depend on those manufacturers for vehicles and parts. The majority of
the Company's dealerships' used vehicle inventory is derived from trade-ins,
with the remainder being obtained by purchases at auctions and from wholesalers.
Each of the Company's dealerships operates under an agreement (a "Dealer
Agreement") with the relevant automaker. These agreements establish a framework
of reciprocal obligations between the dealerships and each automaker typical of
the industry. The Dealer Agreement with each dealership gives each automaker
the right to approve the dealership's general manager and any material change in
ownership of the dealership. In connection with the Company's initial public
offering, the Company's Dealer Agreements were renegotiated. Under its new
agreements with GM, the Dodge division of Chrysler and Nissan, each automaker
has the right to terminate the Company's dealership franchise if, among other
things, there are certain changes in ownership of Common Stock of the Company
not approved by that automaker. For example, retention by the Company of its GM
dealerships may be at risk if any person or entity acquires 20% or more of the
Company's issued and outstanding Common Stock with the intention of acquiring
additional shares or effecting a material change in the Company's business or
corporate structure.
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
8
<PAGE>
dealers throughout the United States, although such sales frequently are at
prices higher than those charged by the automakers.
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. The Company 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 "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 1996 derived
approximately 56.4% 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. 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.
9
<PAGE>
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 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.
The Company believes that its acquisition strategies will result in broader
geographic diversification and a broader diversification of manufacturer
"nameplates" and will lessen the risks associated with local and regional
economic factors and other competitive pressures.
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 law, the Company must obtain a license in order to establish,
operate or relocate a dealership or operate an automotive repair service. Under
Oklahoma law, the Company must obtain a license in order to establish, operate
or relocate a dealership, and a license may be revoked or denied if, among other
things, the Company does not provide for a suitable repair shop separate from
the dealership display room. 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,
insurance 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.
EMPLOYEES
As of February 28, 1997 the Company employed 746 people, of whom
approximately 113 were employed in managerial positions, 270 were employed in
non-managerial sales positions, 156 were employed in non-managerial parts and
service positions and 207 were employed in administrative support positions.
None of the Company's employees are represented by a labor union.
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 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.
10
<PAGE>
The Company believes that its relationship with its employees is good.
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. 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.
ITEM 2. PROPERTIES
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 has been operated at its Westgate facility in
Amarillo. The Company has two dealerships at adjacent locations in Midwest
City, Oklahoma, and a dealership in Oklahoma City, Oklahoma. The Company's
facilities occupy an aggregate of approximately 312,000 square feet and are
situated on approximately 55 1/2 acres of land.
The Company owns all of the real estate on which its dealerships are
located, except for its Performance Nissan facility in Midwest City, Oklahoma;
its Hickey Dodge facility in Oklahoma City, Oklahoma; a portion of its Quality
Nissan facility in Amarillo; and a small portion of its Performance Dodge
facility in Midwest City, Oklahoma. The Company subleases its Performance
Nissan facility in Midwest City, Oklahoma from Gilliland Group Family
Partnership ("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
leases the Hickey Dodge facility, consisting of a lease of the dealership
facility through September 30, 2006, with two five-year renewal options, and a
lease of Hickey Dodge's Heavy Line Shop facility, which leases on a month-to-
month tenancy. 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 with the various automobile
manufacturers, the Company must maintain an appropriate appearance and design of
its facilities and is restricted in its ability to relocate its dealerships.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable
11
<PAGE>
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company completed an initial public offering of 4,226,250 shares of
Common Stock in September 1996. The Common Stock is listed on the New York
Stock Exchange under the symbol "XC."
The high and low closing sales prices per share for the Common Stock on
the New York Stock Exchange for the period from September 24, 1996 to September
30, 1996 was $23.00 and $19.875, respectively. The high and low closing prices
per share for the Common Stock for the fourth quarter of 1996 was $27.125 and
$18.50, respectively.
At March 26, 1997 there were 44 holders of record of the Common Stock.
The Company has never paid dividends on its Common Stock and does not anticipate
doing so in the foreseeable future.
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>
NUMBER OF
STOCKHOLDER SHARES ISSUED
- ----------- -------------
<S> <C>
Bill 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>
NUMBER OF
STOCKHOLDER 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.
12
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations and balance sheet
data for the 1996, 1995, 1994 and 1993 fiscal years were derived from the
Company's audited consolidated financial statements. The selected statement of
operations and balance sheet data for the year ended December 31, 1992 were
derived from the Company's unaudited financial statements. This selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and related notes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1996(1) 1995(2) 1994 1993 1992
-------------------------- ----------- ------------------- -------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF OPERATIONS
DATA:
Revenues:
Vehicle sales $283,977 $212,984 $163,721 $150,205 $113,072
Other operating revenue 37,606 23,210 18,047 15,159 12,111
-------- -------- -------- -------- --------
Total revenues 321,583 236,194 181,768 165,364 125,183
Cost of sales 271,650 198,702 153,446 139,626 106,681
-------- -------- -------- -------- --------
Gross profit 49,933 37,492 28,322 25,738 18,502
Selling, general and administrative 36,490 25,630 18,522 17,194 12,813
Depreciation and amortization 1,207 951 934 992 731
Management fees (3) - 4,318 3,183 2,536 1,589
Employee stock compensation (4) 1,099 - - - -
-------- -------- -------- -------- --------
Operating income 11,137 6,593 5,683 5,016 3,369
Interest expense, net (3,193) (3,088) (1,950) (1,848) (1,852)
-------- -------- -------- -------- --------
Income before income taxes 7,944 3,505 3,733 3,168 1,517
Income tax expense 3,362 1,310 1,351 1,173 561
-------- -------- -------- -------- --------
Net income (5) $ 4,582 $ 2,195 $ 2,382 $ 1,995 $ 956
======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------------- ----------- ------------------- -------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
COMBINED BALANCE SHEET DATA:
Working capital $ 32,693 $ 536 $ 50 $ 135 $ 8
Total assets 142,446 83,407 47,579 43,513 38,191
Long-term debt 10,568 11,859 7,150 7,887 9,034
Total liabilities 83,928 76,306 42,538 40,774 37,661
Stockholders' equity 58,818 7,101 5,041 2,739 530
- ---------------
</TABLE>
(1) The results for the year ended December 31, 1996 include the results of
operations of Hickey Dodge from the date of acquisition, October 1, 1996.
(2) 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.
(3) As of January 1, 1996, the Company no longer pays management fees to GGFP.
See Note 18 to the Consolidated Financial Statements.
(4) Represents a non-cash expense relating to employee stock compensation that
the Company recognized in the second quarter of 1996 in connection with a
stock purchase by a Company executive. 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 to the executive and the cash consideration
paid of $250,000. See Note 16 to the Consolidated Financial Statements.
(5) Historical earnings per share are not presented, as the historical capital
structure of the Company prior to the Initial public offering is not
comparable with the capital structure that will exist subsequent to the
Initial public offering.
13
<PAGE>
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company owns and operates a group of seven franchised automobile
dealerships and several related businesses in the Amarillo, Texas and Oklahoma
City, Oklahoma markets. The Company generates its vehicle revenue from sales of
new and used vehicles; additionally, the Company generates other operating
revenue from fees for repair and maintenance services, sales of replacement
parts, and fees and commissions from arranging financing, credit insurance and
extended warranties in connection with vehicle sales.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain matters discussed herein are forward-looking statements about
the business, financial condition and prospects of the Company. The actual
results could differ materially from those indicated by such forward-looking
statements because of various risks and uncertainties. Such risks and
uncertainties may include, but are not limited to, regional and national
economic conditions, changes in consumer demand for products offered by the
Company, automaker support of its dealerships, trade relations with other
countries, employee strikes and other matters that may adversely affect the
availability of products and pricing, state and federal regulatory environments,
and other risks indicated in the Company's previous filings with the
Commission. The Company cannot control these risks and uncertainties and, in
many cases, cannot predict the risks and uncertainties that could cause its
actual results to differ materially from those indicated by the forward-looking
statements.
RESULTS OF OPERATIONS
1996 VERSUS 1995
REVENUES
The Company's total revenue increased 36.2% to $321.6 million in 1996
from $236.2 million in 1995. New vehicle sales increased 20.3% to $137.7
million in 1996 from $114.5 million in 1995, primarily because of the
acquisitions in December 1995 and October 1996, of the Company's Performance
Dodge and Lynn Hickey Dodge dealerships in Oklahoma City. The inclusion of the
results of these two dealerships accounted for the overall increase in new
vehicle sales in 1996. The increase in new vehicle revenue from the Company's
Oklahoma City acquisitions was partially offset by a lower demand for new
vehicles in the Company's Amarillo market. The lower demand is partially
attributable to the drought conditions during 1996, which had a negative impact
on the Amarillo market area.
Used vehicle sales increased 48.5% to $146.3 million in 1996 from $98.5
million in 1995. The inclusion of the results of the Company's Oklahoma City
dealerships (purchased in 1995 and 1996) accounted for 62.7% of this increase in
used vehicle sales. The remaining used vehicle revenue increase was caused
primarily by a 23.7% increase in the Amarillo market. The Company attributes
this increase to its market strategy for used vehicle inventory management.
14
<PAGE>
The Company's other operating revenue increased 62.0% to $37.6 million
for 1996, compared to $23.2 million for 1995 largely due to the inclusion of the
Company's Oklahoma City dealerships in the 1996 results of operations. The
addition of the Oklahoma City dealerships accounted for approximately 77% of the
increase in other operating revenue. The remaining increase in other operating
revenue can be largely attributed to the Company, since July 1996, selling third
party vendor warranties, at its dealerships rather than its own warranties.
Historically, the Company principally sold its own in-house extended warranty at
its dealerships and recognized the resulting revenue over the term of the
warranties, although it received payment in full at the time of the sale. In
contrast, when the Company sells warranties of third party vendors, the Company
receives and immediately recognizes commission income at the time of sale as the
Company has no further obligation pursuant to the extended warranty contracts.
GROSS PROFIT
Gross profit increased 33.2% in 1996 to $49.9 million from $37.5
million in 1995 primarily due to the recently acquired Oklahoma City
dealerships. Gross profit as a percentage of sales decreased to 15.5% in 1996
from 15.9% in 1995. The decrease in gross profit as a percentage of sales was
primarily caused by reduced margins on new and used vehicles. Gross margin on
other operating revenue was up slightly to 61.0% in 1996 as compared to 60.8% in
1995.
The reduction in gross margin on new vehicles (10.8% in 1996 versus
12.1% in 1995) was partially 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. The reduction was also attributable to lower gross margins
at the Company's Oklahoma City dealerships, which the Company believes was
attributable to favorable vehicle allocations from the manufacturers related to
the 1995 acquisitions.
The reduction in gross margin on used vehicles (8.3% in 1996 versus
9.8% in 1995) 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). In 1996, approximately 28% of the Company's used vehicle sales were to
other dealers and wholesalers as compared to approximately 23% in 1995. The
increase in wholesales is primarily due to the Company maintaining its policy to
limit the days' supply and age of its used vehicle inventory. Management
believes this policy keeps its inventory in line with the market and minimizes
carrying costs. The Company anticipates a continued increase in wholesale used
vehicle sales due to its used vehicle inventory management system.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company's selling, general and administrative expenses increased to
$36.5 million, or 11.4% of the Company's revenues, in 1996 from $25.6 million,
or 10.9% of total revenues, in 1995.
The increase is primarily attributable to incremental start-up expenses
associated with the acquisition of the Company's Oklahoma City dealerships.
These expenses relate to integrating the Company's systems into their operations
and implementing the Company's strategies. The remaining portion of the
increase is attributable to an increase in the Company's corporate expense
resulting from the conversion from a private company to a public company.
15
<PAGE>
Furthermore, in conjunction with the Company's reorganization, the
Company recorded an executive bonus of $600,000, which was expensed in 1996.
The Company recorded a non-cash expense relating to employee stock
compensation of approximately $1.1 million in 1996, representing the difference
between the Company's estimate of the fair value, as of the grant date of April
1, 1996, of the 303,750 shares of Common Stock issued to a certain Company
executive and the cash consideration paid of $250,000. See Note 16 to the
Consolidated Financial Statements.
INTEREST EXPENSE
The Company's interest expense, net of interest income, increased
approximately 3.4% to $3.2 million for 1996 compared to $3.1 million for 1995.
The increase is primarily attributable to increased debt levels associated with
the Company's recently acquired Performance Dodge and Hickey Dodge dealerships,
which were partially offset by a reduction in interest expense at the Company's
Amarillo dealerships. Additionally, the Company recorded interest income
approximating $631,000 from the investment of initial public offering proceeds
for the period of September 27, 1996 through December 31, 1996.
Net interest expense is expected to increase in 1997 as the Company
uses the proceeds from the initial public offering to acquire additional
dealerships and due to increased floor plan financing associated with the newly
acquired dealerships.
INCOME TAXES
The Company's effective income tax rate increased to 42% in 1996 as
compared to 37.4% in 1995 primarily due to the fact that the Company provided a
valuation allowance for certain separate company losses incurred by the parent
company in 1996. Management expects the effective tax rate in 1997 to
approximate that of 1995.
NET INCOME
The Company's net income increased approximately 108.8% to $4.6 million
in 1996 compared to $2.2 million in 1995. The increase was primarily
attributable to the elimination of the management fees paid to GGFP, and the
commencement of selling third party extended warranty contracts on an exclusive
basis, which was partially offset by an increase in selling, general and
administrative expenses and employee stock compensation. Excluding the non-
recurring stock compensation charge and the $600,000 executive bonus, the 1996
net income would have been approximately $6.1 million representing a 24%
increase over 1995 income of $4.9 million, excluding the 1995 management fee
paid to GGFP.
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 used 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
16
<PAGE>
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.
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 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. For the year ended December 31, 1995, gross profit from F&I
activities accounted for 38.4% of the gross profit from other operating revenue
as compared to 32.8% for the year ended December 31, 1994. 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 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.
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
17
<PAGE>
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
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.
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.
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 manufacturer captive
finance companies, such as GMAC and Chrysler Credit Corporation, and commercial
banks. Floor plan financing from manufacturer captive finance companies
represents the primary source of financing for vehicle inventories.
The Company finances its purchases of new vehicle inventory with
manufacturer captive finance companies. The Company also maintains a line of
credit with manufacturer captive finance companies for the financing of used
vehicle inventories. The manufacturer captive finance company receives a
security interest in all inventory it finances. The Company makes monthly
interest payments on the amount financed and must repay the principal amount of
the 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, including the interest rate. At December 31, 1996, the Company had
outstanding floor plan debt of $46.3 million and incurred on an average annual
interest rate of approximately 8.25% during 1996.
18
<PAGE>
During 1996, the Company generated net cash of $7.7 million from
operating activities, compared to a use of $6.4 million in 1995. The increase
is primarily attributable to the decreased inventory levels and increase in net
income, partially offset by increased accounts receivable.
Cash used in investing activities of $21.7 million during 1996 related
primarily to the acquisition of Hickey Dodge in October 1996 which was funded
with proceeds from the Company's initial public offering. Additional capital
expenditures of $1.6 million related primarily to capital improvements to the
service department at one of the Company's dealerships, and was funded with cash
from operations. The Company currently anticipates that any future acquisitions
will be financed with the remaining proceeds from its initial public offering in
1996, the issuance of stock or debt or a combination of cash, stock and debt.
Cash provided by financing activities amounted to $42.5 million for
1996 and was primarily attributable to proceeds of the Company's initial public
offering in the amount of $45.7 million. The cash provided by the initial
public offering proceeds was partially offset by a reduction in floor plan debt,
amounts due to affiliates, and the payment of long-term debt.
The Company believes that its existing capital resources, including the
remaining proceeds of its initial public offering, after considering the
acquisition of Hickey Dodge, will be sufficient to run the Company's operations
in the ordinary course and fund its debt service requirements.
On January 24, 1997 the Company announced the proposed acquisition of
Douglas Toyota and Toyota West. The combined purchase price approximates $40
million, and will be funded with approximately $28.0 million in cash largely
from the Company's initial public offering, and $12.0 million in common stock of
the Company. On March 3, 1997 the Company announced the proposed acquisition of
Biegger Nissan. The purchase approximates $11.6 million, and will be funded
with $9.0 million in cash, $0.6 million in promissory notes and $2.0 million in
common stock of the Company. While management believes that it will complete
these acquisitions in the near future, there can be no assurances to that effect
until closing occurs.
The Company is currently negotiating a revolving line of credit in the
amount of approximately $30.0 million with a certain bank. The Company
anticipates that it will use proceeds from such line of credit to fund the $9.0
million cash portion of the Biegger Nissan acquisition. While management
believes that it will obtain the line of credit, there can be no assurances to
that effect until closing occurs.
The Company has incurred a tax 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 is required to pay this liability in
six 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.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY INDEX TO FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS Page
----
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants 25
Consolidated Statements of Operations for the
Years Ended December 31, 1996, 1995 and 1994 26
Consolidated Balance Sheets, as of
December 31, 1996 and 1995 27
Consolidated Statements of Changes in Stockholders'
Equity for the Three Years Ended December 31, 1996 28
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996, 1995 and 1994 29
Notes to Consolidated Financial Statements 30
</TABLE>
Financial Statements listed above are included under Item 14 of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Inapplicable.
20
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is hereby incorporated by reference
from the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders
(the "1997 Proxy Statement") under the caption "Election of Directors."
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference
from the 1997 Proxy Statement under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is hereby incorporated by reference
from the 1997 Proxy Statement under the caption "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is hereby incorporated by reference
from the 1997 Proxy Statement under the caption "Certain Transactions."
21
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. and 2. See "Index to Financial Statements" at Item 8 of this report. All
schedules are omitted because they were not required or the required
information is included in the Financial Statements and Notes
thereto.
3. The following exhibits are filed as part of this report or hereby
incorporated by reference to exhibits previously filed with the
Commission:
2.1 Asset Purchase Agreement, dated as of June 17, 1996, among Lynn
Hickey Dodge, Inc., Lynn Hickey, and Cross Country Dodge, Inc. (1)
2.2 Stock Purchase Agreement, dated as of January 23, 1997, by and
between Cross-Continent Auto Retailers, Inc. and R. Douglas Spedding
2.3 Stock Purchase Agreement, dated as of February 28, 1997, among
Cross-Continent Auto Retailers, Inc., Jack Biegger, Dale Edwards,
and Sahara Datsun, Inc., d/b/a Jack Biegger Nissan, as amended by
the Amendment to Stock Purchase Agreement dated as of March 17,
1997, among Cross-Continent Auto Retailers, Inc., Jack Biegger, Dale
Edwards, and Sahara Nissan, Inc., d/b/a Jack Biegger Nissan
3.1 Amended and Restated Certificate of Incorporation of Cross-Continent
Auto Retailers, Inc. (2)
3.3 Amended and Restated Bylaws of Cross-Continent Auto Retailers, Inc.
(2)
4.1 Specimen Common Stock Certificate (2)
4.2 Rights Agreement between Cross-Continent Auto Retailers, Inc. and
The Bank of New York, as rights agent (2)
4.3 Amended and Restated 1996 Stock Option Plan of Cross-Continent Auto
Retailers, Inc. (3)
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 (1)(4)
10.2 Sales and Service Agreement between Performance Dodge, Inc. and
Chrysler Corporation, dated as of October 1, 1996 (1)
10.3 Dealer Sales and Service Agreement, dated September 23, 1996,
between the Nissan Division of Nissan Motor corporation in U.S.A.,
Quality Nissan, Inc. and Cross-Continent Auto Retailers, Inc. (5)
10.4 Dealer Sales and Service Agreement, dated September 23, 1996,
between the Nissan Division of Nissan Motor Corporation in U.S.A.,
Performance Nissan and Cross-Continent Auto Retailers, Inc. (2)
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 (1)
10.5 Sublease Agreement, dated June 1, 1995, between Gilliland Group
Family Partnership and performance Nissan, Inc. (1)
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. (1)
10.7 Office Lease, dated June 1, 1996, between Gilliland Group
22
<PAGE>
Family Partnership and Cross-Country Auto Retailers, Inc. (now named
Cross-Continent Auto Retailers, Inc. (1)
10.8 Wholesale Security Agreement, as amended, dated December 4, 1995,
between General Motors Acceptance Corporation and Performance Dodge,
Inc. (1) (6)
10.9 Corporation and Shareholders' Agreement of Xaris Management Co. (1)
10.10 Documents dated December 4, 1995, relating to $5,550,000 loan by
General Motors Acceptance Corporation to Performance Dodge, Inc. (1)
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. (1)
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.
(1)
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 (1)
10.13.1 Used Vehicle Wholesale Borrowing Base Credit Line Loan Agreement,
dated June 7, 1996, between General Motors Acceptance Corporation
and Performance Dodge, Inc. (6)
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
(7)
10.13.3 Cross-Default and Cross-Collateralization Agreements 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.
10.14 Employment Contract dated February 21, 1997, by and between Cross-
Continent Auto Retailers, Inc. and James F. Purser
21.1 Subsidiaries
23.1 Consent of independent accountants
27.1 Financial Data Schedule
- ---------------
23
<PAGE>
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (Registration No. 333-0685), incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the Quarterly Period Ended September 30, 1996, incorporated herein
by reference.
(3) Previously filed as an exhibit to the Company's Registration Statement on
Form S-8, filed with the Securities and Exchange Commission on March 7,
1997, incorporated herein by reference.
(4) Substantially identical agreements exist between the Chevrolet Division and
each of Midway Chevrolet, Inc. and Westgate Chevrolet, Inc.
(5) Substantially identical Agreement exists between the Nissan Division and
Performance Nissan, Inc.
(6) 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.
(7) 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)
(b) Reports on Form 8-K
None
24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Cross-Continent Auto Retailers, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated 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, 1996
and 1995, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. 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
February 13, 1997,
except as to Note 20,
which is as of March 27, 1997
25
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Vehicle sales $283,977 $212,984 $163,721
Other operating revenue 37,606 23,210 18,047
-------- -------- --------
Total Revenues 321,583 236,194 181,768
Cost of sales 271,650 198,702 153,446
-------- -------- --------
Gross Profit 49,933 37,492 28,322
-------- -------- --------
Expenses:
Selling, general and administrative 36,490 25,630 18,522
Depreciation and amortization 1,207 951 934
Management fees paid to related party - 4,318 3,183
Employee stock compensation 1,099 - -
-------- -------- --------
38,796 30,899 22,639
-------- -------- --------
Income before interest and taxes 11,137 6,593 5,683
Other income (expense):
Interest income 1,585 830 576
Interest expense (4,778) (3,918) (2,526)
-------- -------- --------
Income before income taxes 7,944 3,505 3,733
Income tax provision 3,362 1,310 1,351
-------- -------- --------
Net Income $ 4,582 $ 2,195 $ 2,382
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
December 31,
-----------------
1996 1995
-------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 36,946 $ 8,362
Accounts receivable 18,629 9,383
Inventories 48,168 43,731
-------- -------
Total current assets 103,743 61,476
Property and equipment, net 13,391 12,107
Goodwill and other intangible assets, net 22,094 7,385
Other assets 3,218 2,439
-------- -------
Total assets $142,446 $83,407
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Floor plan notes payable $ 46,282 $39,088
Current maturities of long-term debt 1,345 1,525
Accounts payable 8,623 4,846
Due to affiliates 5,478 5,954
Accrued expenses and other liabilities 7,408 7,495
Deferred income taxes 1,914 2,032
-------- -------
Total current liabilities 71,050 60,940
-------- -------
Long-term debt 10,568 11,859
Deferred warranty revenue - long-term portion 2,310 3,507
-------- -------
Total long-term liabilities 12,878 15,366
-------- -------
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000
shares authorized, none issued - -
Common stock, $.01 par value, 100,000,000
shares authorized, 13,800,000 issued
and outstanding at December 31, 1996 138 -
Paid-in capital 47,761 1,064
Retained earnings 10,619 6,037
-------- -------
Total stockholders' equity 58,518 7,101
-------- -------
Commitments and contingencies (Notes 4, 16, 19 and 20)
Total liabilities and stockholders' equity $142,446 $83,407
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 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 - - - - $ 1,064 $1,675 $ 2,739
Net income - - - - - 2,382 2,382
Dividends paid - - - - - (80) (80)
----- ----- ------ ------ -------- -------- -------
Balance at December 31, 1994 - - - - 1,064 3,977 5,041
Net income - - - - - 2,195 2,195
Dividends paid - - - - - (135) (135)
----- ----- ------ ------ -------- -------- -------
Balance at December 31, 1995 - - - - 1,064 6,037 7,101
Issuance of common stock
pursuant to
reorganization - - 9,821 98 (98) - -
Issuance of common stock
pursuant to
employment agreement - - 304 3 1,346 - 1,349
Issuance of common stock
pursuant to the initial
public offering - - 3,675 37 45,449 - 45,486
Net income - - - - - 4,582 4,582
----- ----- ------ ------ -------- -------- -------
Balance at December 31, 1996 - - 13,800 $ 138 $ 47,761 $ 10,619 $58,518
===== ===== ====== ====== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,582 $ 2,195 $ 2,382
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 1,207 951 934
Proceeds from in-house extended warranty sales 1,586 3,345 2,614
Amortization of deferred warranty revenue (2,676) (2,136) (1,648)
Employee stock compensation 1,099 - -
Deferred taxes and other (136) (836) (1,121)
(Increase)decrease in:
Accounts receivable (9,246) (4,860) (74)
Inventory 9,156 (8,285) 1,052
Other assets (989) - -
Increase (decrease) in:
Accounts payable - trade 3,768 3,275 (604)
Accrued expenses and other liabilities (604) (68) 1,452
-------- ------- -------
Net cash provided (used) by operating activities 7,747 (6,419) 4,987
-------- ------- -------
Cash flows from investing activities:
Acquisition of property and equipment (1,636) (1,485) (1,813)
Acquisition of dealerships (20,052) (302) -
------- ------- -------
Net cash used by investing activities (21,688) (1,787) (1,813)
-------- ------- -------
Cash flows from financing activities:
Change in floor plan notes payable (1,220) 9,381 (937)
Due to affiliates (476) 3,729 1,640
Long-term debt repayments (1,515) (1,408) (1,277)
Proceeds from common stock issuance 45,736 - -
Dividends paid - (135) (80)
-------- ------- -------
Net cash provided (used) by financing activities 42,525 11,567 (654)
-------- ------- -------
Increase in cash and cash equivalents 28,584 3,361 2,520
Cash and cash equivalents at beginning of period 8,362 5,001 2,481
-------- ------- -------
Cash and cash equivalents at end of period $ 36,946 $ 8,362 $ 5,001
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL INFORMATION AND BASIS OF PRESENTATION
Cross-Continent Auto Retailers, Inc. ("C-CAR") operates in one business
segment - the retail sales and service of new and used automobiles. C-CAR
conducts its operations in the Amarillo, Texas and Oklahoma City, Oklahoma areas
through three Chevrolet, two Dodge and two Nissan dealerships.
C-CAR was incorporated in Delaware in May, 1996. In June, 1996,
shareholders of the six then-existing dealerships exchanged their shares of
stock in such companies for 9,821,250 shares of C-CAR's stock (the
"Reorganization"). The Shareholders' ownership interest in C-CAR immediately
after the exchange was as follows:
Gilliland Group Family Partnership ("GGFP") 88.2%
Emmett M. Rice, Jr. 10.3%
Other 1.5%
All of the interests in GGFP are owned and controlled by Bill 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 Reorganization, C-CAR did not conduct business or have any
assets and liabilities and, thus, did not operate as a stand-alone company. The
term "Company," when used hereinafter, includes C-CAR, its subsidiaries and its
predecessors.
In September 1996, the Company sold 3,675,000 shares of its common stock in
an initial public offering for $14.00 per share. Net proceeds from the initial
public offering, after considering underwriting commissions, printing costs,
professional fees, and other direct expenses, were $45.5 million. Following the
initial public offering, the Control Group remains the principal stockholder of
the Company and at December 31, 1996 owned approximately 59.2% of the Company's
issued and outstanding shares.
The accompanying consolidated financial statements consist of the accounts of C-
CAR, its subsidiaries and its predecessors. The accounts prior to the
Reorganization 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. Prior to the Reorganization, certain expenses reflected in the
consolidated financial statements include allocations of 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.
30
<PAGE>
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 the Company on a
stand-alone basis. Also, the financial information included in the consolidated
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. Since
the Initial public offering, the Company has incurred additional corporate
expenses as a result of being a public company and no longer remits management
fees to the Control Group (see Note 18).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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
consolidated statement of operations. See Note 8 for an analysis of the
allowance for estimated chargebacks.
EXTENDED WARRANTY CONTRACTS - The Company sells extended service contracts
on new and used vehicles on behalf of unrelated third parties. Commission
revenue for the unrelated third-party extended service contracts is recognized
at the time of sale. Until July 1996, the Company also offered its own in-house
warranty contract; 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 in-house 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 in-house extended warranty
contracts be recognized ratably over the lives of the contracts. Costs directly
related to sales of in-house 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.
31
<PAGE>
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 consolidated statement of operations.
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. The ranges of estimated useful lives are as follows:
Buildings 30 years
Furniture and equipment 3 to 7 years
Leasehold improvements 7 to 15 years
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 INTANGIBLE ASSETS - Goodwill, $20,623,000 at December 31,
1996 and $7,385,000 at December 31, 1995 (net of accumulated amortization of
$707,000 and $447,000 in 1996 and 1995, respectively), represents the excess of
the purchase price over the estimated fair value of net assets of acquired
businesses and is being amortized over a 40-year period. Other intangible
assets of $1,471,000 as of December 31, 1996 (net of accumulated amortization of
$29,000) principally includes customer base and customer lists received in
business acquisitions. Costs of such assets are assigned at the time of the
acquisition based on the estimated fair value and are generally being amortized
on a straight line basis over a period of 10 to 15 years.
IMPAIRMENT OF LONG-LIVED ASSETS - Effective December 31, 1995, the Company
adopted Statement of Accounting Standard ("FAS") No. 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 is 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 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 consolidated statement of operations. Total
advertising and promotional expenses approximated $3,863,000, $2,638,000, and
$1,636,000 in 1996, 1995 and 1994, respectively.
32
<PAGE>
ACCOUNTING FOR STOCK-BASED COMPENSATION - Effective January 1, 1996, the
Company adopted 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 accounts for stock-based employee compensation plans under the intrinsic
method pursuant to APB 25 and has made the disclosures in its footnotes as
required by FAS 123 (See Note 14).
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 the rates on the date of
enactment.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair value of financial
instruments 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 related interest rate or their maturities.
EARNINGS PER SHARE - Earnings per share data is not presented, as the
historical capital structure prior to the Reorganization and initial public
offering is not comparable to the capital structure after the Reorganization and
initial public offering. See pro forma earnings per share in Note 3.
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 in-house and third party 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.
33
<PAGE>
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 operating
results of Performance Nissan have been included in the accompanying
consolidated 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>
<CAPTION>
<S> <C>
Net working capital $ 76
Equipment 61
Goodwill 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
operating results of Performance Dodge have been included in the accompanying
consolidated 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>
<CAPTION>
<S> <C>
Net working capital $1,160
Property and equipment 1,992
Goodwill 2,700
------
Total $5,852
======
</TABLE>
Effective October 1, 1996, the Company acquired Hickey Dodge. Hickey 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 $20 million was financed with proceeds from the Company's
initial public offering. The acquisition has been accounted for as a purchase,
and the operating results of Lynn Hickey Dodge have been included in the
accompanying consolidated 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.
34
<PAGE>
A summary of the purchase price allocation for Lynn Hickey Dodge is
presented below (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Net working capital $ 4,760
Property and equipment 430
Goodwill and other intangible assets 14,862
-------
Total $20,052
=======
</TABLE>
The unaudited consolidated statement of operations data is presented below
on a pro forma basis as though the acquisition of Performance Dodge and Lynn
Hickey Dodge, and the Reorganization and Offering had all occurred as of the
beginning of 1996 and 1995 (in thousands, except per share data).
<TABLE>
<CAPTION>
UNAUDITED
1996 1995
-------- ---------
<S> <C> <C>
Pro forma revenue $421,830 $416,943
Pro forma net income $ 7,320 $ 5,871
Pro forma net income per share $ 0.54 $ 0.44
</TABLE>
The adjustments to arrive at pro forma revenue include additional revenue
based on the historic revenue of Performance Dodge and Lynn Hickey Dodge prior
to the acquisition of each. Adjustments to net income to arrive at pro forma
net income include estimated additional administrative expenses as a publicly
owned company, additional amortization expense related to purchased goodwill,
increased interest expense associated with the debt incurred to purchase
Performance Dodge, and the tax effects of these adjustments. The pro forma net
income per share assumes that 13,800,000 shares were outstanding at the
beginning of each period.
The pro forma results of operations information is not necessarily
indicative of the operating results that would have occurred had the
reorganization, acquisitions and the initial public offering been consummated as
of the beginning of each period, nor is it necessarily indicative of future
operating results.
NOTE 4 - MAJOR SUPPLIERS AND FRANCHISE AGREEMENTS
The Company owns and operates three GM, two Nissan and two 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' inability 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 three 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.
Each automaker also is entitled to terminate the Dealer Agreement if the
dealership is in material breach of the terms. The Dealer Agreements with the
Dodge division of Chrysler Corporation stipulate that the Company could lose
its Dodge dealerships upon any change in ownership of a controlling number of
shares in the Company. Under the June 1996 agreements with GM, GM has the right,
under certain circumstances, to terminate the Company's Chevrolet franchises
upon the acquisition by any person or entity of 20% or more of the Common Stock
outstanding. In addition, the Company
35
<PAGE>
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 inter-dealership
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. Under the Company's Dealer Agreements with Nissan, 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.
The accounts receivable balances at December 31, 1996 and 1995 are comprised
of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Contracts in transit and
vehicle receivables $12,615 $4,837
Trade 2,801 2,596
Due from automakers 2,552 1,923
Other 796 162
------- ------
18,764 9,518
Less: allowance for doubtful
accounts (135) (135)
------- ------
Total accounts receivable $18,629 $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, Chrysler Credit Corporation, and, to a lesser extent,
with financial institutions with strong credit ratings. Cash invested with GMAC
and Chrysler Credit Corporation can be withdrawn at any time. At December 31,
1996, amounts invested with GMAC approximated $32,344,000, with
36
<PAGE>
the interest rate of 8%; amounts invested with Chrysler Credit Corporation
approximated $4,075,000, with an interest rate of 9%. At times, amounts invested
with financial institutions may be in excess of FDIC insurance limits. As of
December 31, 1996, 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, those customers are concentrated in the Company's two
market areas in the Texas Panhandle and central Oklahoma.
NOTE 7 - PROVISION FOR FINANCE FEES AND INSURANCE AND WARRANTY COMMISSION
CHARGEBACKS
Presented below is the change in the allowance for estimated future
chargebacks for finance fees and insurance and warranty commission for the years
ended December 31, 1996, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance at January 1 $ 2,056 $ 1,595 $ 1,523
Provision 2,016 1,917 1,252
Actual chargebacks (1,863) (1,456) (1,180)
------- ------- -------
Ending allowance balance at
December 31 $ 2,209 $ 2,056 $ 1,595
======= ======= =======
</TABLE>
NOTE 8 - INCOME TAX MATTERS
Components of income tax expense consist of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
-------- ------- ------
<S> <C> <C> <C>
Current:
Federal $3,041 $1,910 $1,160
State 457 265 178
Deferred: (136) (865) 13
------ ------ ------
Total income tax expense $3,362 $1,310 $1,351
====== ====== ======
</TABLE>
Income tax expense for the year ended December 31, 1996, 1995 and 1994 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>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Income before income taxes $7,944 $3,505 $3,733
Statutory tax rate 34% 34% 34%
------ ------ ------
Federal income tax at
statutory rate 2,701 1,192 1,269
State income tax, net of
federal benefit 229 97 103
Increase in valuation allowance 405 - -
Other 27 21 (21)
------ ------ ------
Total income tax expense $3,362 $1,310 $1,351
====== ====== ======
Effective tax rate 42.3% 37.4% 36.2%
====== ====== ======
</TABLE>
37
<PAGE>
The net deferred tax liability consists of the following components as of
December 31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Goodwill amortization $ (619) $ (500)
Inventory (3,260) (3,990)
Other (279) (37)
------- -------
(4,158) (4,527)
------- -------
Deferred tax assets:
Accrued compensation - 401
Deferred warranty revenue 1,669 2,069
Chargeback allowance 817 761
Net operating loss carryforward 1,207 244
Other 50 96
------- -------
3,743 3,571
Valuation Allowance (405) -
------- -------
3,338 3,571
------- -------
Net deferred tax liability $ (820) $ (956)
======= =======
The net deferred tax liability is
classified as follows:
Other assets - non-current 1,094 1,076
Deferred tax liability - current (1,914) (2,032)
------- -------
Net deferred tax liability $ (820) $ (956)
======= =======
</TABLE>
As of December 31, 1996, the Company has net operating loss
carryforwards of approximately $3.2 million, which expire in 2004 through 2011.
Future utilization of certain of these loss carryforwards may be limited, and as
a result, management has provided a valuation allowance of $405,000.
The Company changed 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 is being amortized into
taxable income over a 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,
----------------
1996 1995
------- -------
<S> <C> <C>
Inventories at cost:
New vehicles and demonstrators $30,341 $32,502
Used vehicles 15,366 9,316
Parts and accessories 2,461 1,913
------- -------
Total inventory $48,168 $43,731
======= =======
</TABLE>
38
<PAGE>
NOTE 10 - DEBT
Notes payable and long-term debt (in thousands):
DECEMBER 31
--------------------
1996 1995
--------- ---------
Floor plan notes payable to
GMAC with interest at prime
less .25%, collateralized
by vehicle inventory. The
prime interest rate at
December 31, 1996 was 8.25%. $ 32,110 $ 39,088
Floor plan notes payable to
Chrysler Credit Corporation
with interest at prime plus .75%
to 1.50%, collateralized by vehicle
inventory. The prime interest
rate at December 31, 1996 was 8.25%. 14,172 -
Mortgage loans at prime rate, less .25%
maturing in 2000 through 2002,
monthly principal payments
aggregating $45,500 plus
interest, collateralized by
related property. 7,618 8,154
Notes payable to GMAC with interest at
prime, less .25%, collateralized
by property and inventory,
quarterly principal
payments aggregating $255,000
plus interest, maturing
from 1996 through 2002. 4,295 5,230
Due to affiliates on demand, with
an average rate of 8.0% at
December 31, 1996. 5,478 5,954
-------- --------
63,673 58,426
Debt payable within one year:
Floor plan notes payable (46,282) (39,088)
Due to affiliates (5,478) (5,954)
Current maturities and
notes payable (1,345) (1,525)
-------- --------
Total long-term debt $ 10,568 $ 11,859
======== ========
Substantially all the Company's debt is unconditionally guaranteed by the
Control Group.
Maturities of long-term debt subsequent to December 31, 1996 are as follows (in
thousands):
1997 $ 1,345
1998 1,367
1999 1,368
2000 2,835
2001 2,501
2002 and thereafter 2,497
--------
Total $ 11,913
========
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.
39
<PAGE>
NOTE 11 - ACCRUED EXPENSES AND OTHER LIABILITIES (IN THOUSANDS)
DECEMBER 31,
-------------------------
1996 1995
----------- ----------
Payroll and bonuses $ 1,625 $ 1,787
Deferred warranty revenue -
current portion 2,216 2,109
Chargeback allowance 2,209 2,056
Other 1,358 1,543
------- -------
$ 7,408 $ 7,495
======= =======
NOTE 12 - PROPERTY AND EQUIPMENT (IN THOUSANDS)
DECEMBER 31,
-------------------------
1996 1995
----------- ----------
Land $ 1,858 $ 1,858
Buildings 10,533 10,041
Furniture, fixtures and equipment 6,407 4,830
------- -------
18,798 16,729
Less: accumulated depreciation (5,407) (4,622)
------- -------
$13,391 $12,107
======= =======
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, 1996.
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 - STOCK OPTIONS
During 1996, the Company adopted a Stock Option Plan for the purpose of
attracting and retaining employees, officers, directors and independent
contractors of the Company, or any Subsidiary or Affiliate of the Company, and
to furnish additional incentives to such person by encouraging them to acquire a
proprietary interest in the Company. The Company has reserved 1,380,000 shares
of stock for option grants under the Plan. The term (not to exceed ten years),
vesting period and exercise price of options granted under the Plan are at the
discretion of the Board of Directors with the exception of Incentive options the
exercise price of which shall not be less than the fair market value at the date
of grant. It is the Company's intention to generally grant options with an
exercise price equal to the fair value at the date of grant. During 1996, the
Company granted options under the Plan for the purchase of 130,086 shares at an
exercise price ranging from $14.00 to $19.25 per share representing the fair
market value of the Company's common stock on the date of grant. Of the options
granted under the Plan, 70,086 vested in 1996 and the remaining 60,000 vests
over four years. No compensation expense has been recognized for the options
granted under the Plan. As of December 31, 1996, 1,249,914 shares were available
for option grants under the Plan.
40
<PAGE>
Additionally, in connection with the Company's initial public initial
public offering in September 1996, the Company granted options to purchase
130,308 shares of common stock at an exercise price of $14.00 per share
(representing the price at which shares were sold in the initial public initial
public offering) to a certain officer of the Company. These options have a term
of 10 years and can be exercised at any time; no compensation expense has been
recognized for these options.
The following table summarizes information about stock options granted
during 1996. There were no options granted prior to 1996 and no options were
exercised or canceled during 1996.
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Exercise Remaining
Shares Price Life
-------- --------- ---------
<S> <C> <C> <C>
Options granted and outstanding
as of December 31, 1996 260,394 $16.44 9.8 years
Options Exercisable at December 31, 1996 180,394 $15.19 9.7 years
</TABLE>
As discussed in Note 2, the Company has adopted the disclosure-only
provision of the Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation." The following table presents pro
forma net income assuming the Company recognized compensation expense for stock
options granted using estimated fair market value method instead of the
intrinsic value method.
1996
-------
Net income - as reported $ 4,582
Net income - pro forma $ 3,794
The weighted average fair market value of the options granted during
1996 was $8.63 per option. Such estimates were derived from the Black Scholes
option-pricing model as of the grant date of each grant using the following
weighted average assumptions for the 1996 grants; dividend yield of 0.0%;
expected volatility of 28%; risk free interest rate of 6.4%; and expected lives
of seven years.
NOTE 15 - STOCKHOLDERS' RIGHTS AGREEMENT
Immediately prior to the completion of the Initial public offering, the
Company adopted a stockholder rights agreement (the "Rights Agreement").
Pursuant to the Rights Agreement, each shareholder of the Company has been
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
41
<PAGE>
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 16 - COMMITMENTS AND CONTINGENCIES
The Company is a party to various legal actions arising in the ordinary
course of its business. While it is not feasible to determine the outcome of
these actions, the Company's information available at this time, including
discussions with legal counsel, does not indicate that these matters will have a
material adverse effect upon financial condition, results of operations or cash
flows.
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, 1996
approximated $7.5 million. No material loss is anticipated as a result of such
guarantees.
Pursuant to an agreement dated April 1, 1996 between Ezra P. Mager, a
Company executive, and GGFP, Mr. Mager agreed to purchase 3% (equal to 303,750
shares) of the common stock of the Company on a fully diluted basis for
$250,000. In the second quarter of 1996, the Company recorded a non-cash charge
of $1,099,000 for compensation, 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 17 - SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Interest paid $4,772 $3,697 $2,398
Income taxes paid $3,177 $1,707 $2,034
</TABLE>
The Company acquired two dealerships during 1995, both of which were
financed primarily with debt. During 1996, the Company purchased another
dealership which was partially financed with debt (See Note 3). The Company
also recognized stock compensation expense aggregating $1,099,000 for stock
purchased by an employee (See Note 16).
42
<PAGE>
NOTE 18 - RELATED PARTY TRANSACTIONS
Until October 1, 1996, the Company received services provided by GGFP
which included treasury, risk management, tax compliance, employee benefits
administration and other miscellaneous services. The costs associated with
these services were allocated to the Company as described in Note 1. During
fiscal 1996, 1995 and 1994, allocated expenses from GGFP to the Company
approximated $1,302,000, $1,090,000 and $508,000, respectively. These
allocations are classified as selling, general and administrative expense in the
accompanying consolidated 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 Gilliland and Robert W. Hall, Chairman and Senior Vice
Chairman, respectively. Currently, the Company pays Plains Air, Inc. $13,050
per month plus a fee of approximately $488 per hour for use of the airplane.
During 1996, 1995 and 1994 the Company paid Plains Air, Inc. an aggregate of
$175,000, $199,000, and $154,000.
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 ceased to
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, received 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.
Annual base salaries of the Company's executives will be re-evaluated on an
annual basis by the Company's board of directors. In conjunction with the
Reorganization, the Company paid one of its executive officers a bonus of
$600,000. This bonus was 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 certain 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
the automakers, the Company may deposit funds with such automakers in an amount
up to a certain percentage of the outstanding floor plan balance. Such funds
earn interest at approximately the same rate charged by the automakers on
outstanding floor plan balances. From time to time the Control Group and other
affiliates will advance funds to the Company primarily for the purpose of
investing excess cash with GMAC. The Company acts only as an intermediary in
this process. At December 31, 1996 and 1995, funds advanced and outstanding
from affiliates approximated $5,260,000 and $2,895,000, respectively. Aggregate
amounts outstanding pursuant to these arrangements at December 31, 1996 and 1995
are included in Due to Affiliates in the accompanying balance sheet. The amount
of interest accrued pursuant to these arrangements during 1996, 1995 and 1994
approximated $464,000, $226,000, and $122,000, respectively.
During 1994, GGFP advanced the Company $1,050,000 to fund the relocation
of one of its dealerships. During 1995, GGFP advanced funds aggregating
approximately $2,600,000 to the Company for working capital purposes at the
dealerships acquired in 1995. At December 31, 1996 and 1995, the amount
outstanding pursuant to these advances approximated $218,000 and $3,100,000,
respectively.
43
<PAGE>
GGFP was the contracting agent for the construction of certain
facilities for the Company during 1996 and 1995. The total cost of the
facilities approximated $1,013,300 and $570,000 for 1996 and 1995, respectively.
Such amounts include approximately $40,753 and $52,000 for 1996 and 1995,
respectively, 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.
NOTE 19 - LEASES
The Company leases, under operating leases, land and buildings relating
to certain of its dealerships and certain computer equipment. The property
leases expire in 1998 through 2006 and have renewal options ranging from 5 to 7
years (See Note 18 regarding leases with related parties). 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 $667,000 and $301,000
in 1996 and 1995, respectively.
The aggregate minimum rental commitments for all noncancellable
operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year:
<S> <C>
1997 $1,340
1998 1,283
1999 1,239
2000 1,235
2001 1,094
Thereafter 3,599
------
$9,790
======
</TABLE>
NOTE 20 - SUBSEQUENT EVENTS
On January 24, 1997, the Company announced the proposed acquisition of
Douglas Toyota, Inc. near Denver, Colorado, and Toyota West Sales and Service,
Inc. in Las Vegas, Nevada. The proposed combined purchase price is
approximately $40 million consisting of $28 million in cash and $12 million in
the Company's stock. The Company intends to fund the cash portion of the
acquisition with the remaining proceeds from the Company's initial public
offering. On March 3, 1997, the Company announced the proposed acquisition of
Sahara Nissan, Inc., in Las Vegas, Nevada, which operates as Jack Biegger Nissan
("Biegger Nissan"). The proposed purchase price is approximately $11.6 million
consisting of $9 million in cash, $2 million in the Company's stock, and $0.6
million in a note payable to the seller. The Company intends to fund the cash
portion of this acquisition with bank debt which is currently being
negotiated. These acquisitions will be accounted for under the purchase method
of accounting. While management believes these acquisitions and the related
bank financing will be completed in the near future, there can be no assurances
to that effect until the transactions actually close.
44
<PAGE>
NOTE 21 - QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------
(In thousands) March 31 June 30 Sept. 30 Dec. 31
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Net sales and operating revenue $ 71,229 $70,012 $76,582 $103,759(1)
Gross profit $ 11,333 $ 9,987 $12,054 $ 16,558
Net income (loss) $ 1,599 $ (570)(5) $ 1,635 $ 1,917
Net income per share (4) (4) (4) $ 0.14
YEAR ENDED DECEMBER 31, 1995:
Net sales and operating revenue $ 50,067(2) $62,278 $63,818 $ 60,032(3)
Gross profit $ 7,618 $10,256 $10,444 $ 9,175
Net income $ 322 $ 782 $ 862 $ 229
Net income per share (4) (4) (4) (4)
</TABLE>
(1) Includes results of operations for Lynn Hickey Dodge from October 31, 1996.
(2) Includes results of operations for Performance Nissan, Inc. from
February 2, 1995.
(3) Includes results of operations for Performance Dodge, Inc. from
December 4, 1995.
(4) Earnings per share is not presented for periods prior to September, 1996, as
the historical capital structure prior to the Reorganization and Initial
public offering is not comparable to the capital structure after such
transactions.
(5) Includes non-cash compensation charge of $1,099,000 relating to an executive
stock purchase agreement and a charge of $600,000 relating to an executive
bonus (See Note 16).
45
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized this 31st day of March,
1997.
CROSS-CONTINENT AUTO RETAILERS, INC.
By: /s/BILL GILLILAND
---------------------------------------
Bill Gilliland, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
Date: March 31, 1997 /s/BILL GILLILAND
-----------------------------------------
Bill Gilliland, Chairman, Chief
Executive Officer & Director
(principal executive officer)
Date: March 31, 1997 /s/ROBERT W. HALL
-----------------------------------------
Robert W. Hall, Senior Vice Chairman
& Director
Date: March 31, 1997 /s/JAMES F. PURSER
-----------------------------------------
James F. Purser, Chief Financial
Officer & Director
(principal financial officer)
Date: March 31, 1997 /s/EMMETT M. RICE, JR.
-----------------------------------------
Emmett M. Rice, Jr., Senior Vice
President, Chief Operating Officer
& Director
Date: March 31, 1997 /s/JOHN W. GAINES
-----------------------------------------
John W. Gaines, Vice President-Finance
& Director
Date: March 31, 1997 /s/CHARLES D. WINTON
-----------------------------------------
Vice President, Chief Accounting
Officer & Secretary
(principal accounting officer)
Date: March 31, 1997 /s/JOHN H. MARMADUKE
-----------------------------------------
John H. Marmaduke, Director
Date: March 31, 1997 /s/ROBERT F. GREEN
-----------------------------------------
Robert F. Green, Director
46
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
2.1 Asset Purchase Agreement, dated as of June 17, 1996, among Lynn
Hickey Dodge, Inc., Lynn Hickey, and Cross Country Dodge, Inc. (1)
2.2 Stock Purchase Agreement, dated as of January 23, 1997, by and
between Cross-Continent Auto Retailers, Inc. and R. Douglas Spedding
2.3 Stock Purchase Agreement, dated as of February 28, 1997, among Cross-
Continent Auto Retailers, Inc., Jack Biegger, Dale Edwards, and Sahara
Datsun, Inc., d/b/a Jack Biegger Nissan, as amended by the Amendment
to Stock Purchase Agreement dated as of March 17, 1997, among Cross-
Continent Auto Retailers, Inc., Jack Biegger, Dale Edwards, and Sahara
Nissan, Inc., d/b/a Jack Biegger Nissan
3.1 Amended and Restated Certificate of Incorporation of Cross-Continent
Auto Retailers, Inc. (2)
3.3 Amended and Restated Bylaws of Cross-Continent Auto Retailers, Inc.
(2)
4.1 Specimen Common Stock Certificate (2)
4.2 Rights Agreement between Cross-Continent Auto Retailers, Inc. and
The Bank of New York, as rights agent (2)
4.3 Amended and Restated 1996 Stock Option Plan of Cross-Continent Auto
Retailers, Inc. (3)
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 (1)(4)
10.2 Sales and Service Agreement between Performance Dodge, Inc. and
Chrysler Corporation, dated as of October 1, 1996 (1)
10.3 Dealer Sales and Service Agreement, dated September 23, 1996, between
the Nissan Division of Nissan Motor corporation in U.S.A., Quality
Nissan, Inc. and Cross-Continent Auto Retailers, Inc. (5)
10.4 Dealer Sales and Service Agreement, dated September 23, 1996, between
the Nissan Division of Nissan Motor Corporation in U.S.A., Performance
Nissan and Cross-Continent Auto Retailers, Inc. (2)
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 (1)
10.5 Sublease Agreement, dated June 1, 1995, between Gilliland Group Family
Partnership and performance Nissan, Inc. (1)
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. (1)
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. (1)
10.8 Wholesale Security Agreement, as amended, dated December 4, 1995,
between General Motors Acceptance Corporation and Performance Dodge,
Inc. (1)(6)
10.9 Corporation and Shareholders' Agreement of Xaris Management Co. (1)
10.10 Documents dated December 4, 1995, relating to $5,550,000 loan by
General Motors Acceptance Corporation to Performance Dodge, Inc. (1)
47
<PAGE>
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. (1)
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.
(1)
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 Corporation and Performance
Nissan, L.L.C. Agreement between General Motors Acceptance
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 (1)
10.13.1 Used Vehicle Wholesale Borrowing Base Credit Line Loan Agreement,
dated June 7, 1996, between General Motors Acceptance Corporation and
Performance Dodge, Inc. (6)
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 (7)
10.13.3 Cross-Default and Cross-Collateralization Agreements 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.
10.14 Employment Contract dated February 21, 1997, by and between Cross-
Continent Auto Retailers, Inc. and James F. Purser
21.1 Subsidiaries
23.1 Consent of independent accountants
27.1 Financial Data Schedule
- --------------
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (Registration No. 333-0685), incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the Quarterly Period Ended September 30, 1996, incorporated herein
by reference.
(3) Previously filed as an exhibit to the Company's Registration Statement on
Form S-8, filed with the Securities and Exchange Commission on March 7,
1997, incorporated herein by reference.
(4) Substantially identical agreements exist between the Chevrolet Division and
each of Midway Chevrolet, Inc. and Westgate Chevrolet, Inc.
48
<PAGE>
(5) Substantially identical Agreement exists between the Nissan Division and
Performance Nissan, Inc.
(6) 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.
(7) 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)
49
<PAGE>
EXHIBIT 2.2
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made and entered
into this 23rd day of January, 1997, by and between CROSS-CONTINENT AUTO
RETAILERS, INC., a Delaware corporation ("Purchaser"), and R. DOUGLAS SPEDDING
("Seller").
RECITALS
A. The Seller is or will be the owner of all of the issued and
outstanding shares of capital stock of (1) Toyota West Sales and Service, Inc.,
a Nevada corporation, and (2) Douglas Toyota, Inc., a Colorado corporation.
B. Toyota West Sales and Service, Inc. and Douglas Toyota, Inc. shall
hereinafter be referred to individually as a "Corporation" and collectively as
the "Corporations."
C. Purchaser desires to purchase all of the issued and outstanding
capital stock of each Corporation, and Seller desires to sell such stock to
Purchaser, for the consideration and upon the terms and conditions set forth in
this Agreement.
AGREEMENT
For and in consideration of the premises and the mutual covenants
contained herein, Purchaser and Seller agree as follows:
1. TRANSFER OF SHARES. Subject to the terms and conditions set forth in
this Agreement, on the Closing Date (hereinafter defined) Seller shall sell,
transfer, convey, assign, and deliver (a) 49,000 shares of common stock of
Toyota West Sales and Service, Inc. (the "Toyota West Shares"), and (b) 2,800
shares of common stock of Douglas Toyota, Inc. (the "Douglas Toyota Shares"), to
Purchaser by endorsing and delivering stock certificates representing the Shares
(hereinafter defined) in duly transferable form, and by executing and delivering
such other documents and instruments and taking such other actions as Purchaser
may reasonably request in order to vest in Purchaser good, absolute, and
marketable title to the Shares and to any and all other right, title, interest,
claim, or demand of any kind that Seller may have in the properties, assets, or
business of each Corporation. As used in this Agreement, "Shares" shall mean
the Toyota West Shares and the Douglas Toyota Shares.
2. PURCHASE PRICE. The total price to be paid by Purchaser to Seller
for the Shares shall be $40,000,000 (the "Purchase Price"), subject to the
adjustments set forth in Paragraph 3 of this Agreement. The Purchase Price
shall be allocated between the Toyota West Shares and the Douglas Toyota Shares
as follows:
(a) Toyota West Shares $28,000,000
1
<PAGE>
(b) Douglas Toyota Shares $12,000,000
3. ADJUSTMENTS TO THE PURCHASE PRICE. The Purchase Price shall be
adjusted as follows:
(a) In the event the Aggregate Adjusted Net Worth (hereinafter defined) is
less than $6,000,000, the Purchase Price shall be reduced by an amount
equal to the difference between $6,000,000 and the Aggregate Adjusted
Net Worth. As used in this Agreement, the term "Aggregate Adjusted
Net Worth" shall mean the aggregate net worth of the Corporations as
shown as total shareholder's equity on the consolidated balance sheet
of the Corporations in the Audited Financial Statements (hereinafter
defined), as (i) adjusted by the inventory adjustments set forth in
subparagraph 15(i), (ii) adjusted by the Post 1996 Adjustments
(hereinafter defined), and (iii) reduced by the net book value of any
intangible assets.
(b) In the event the Aggregate 1996 Earnings (hereinafter defined) are
less than $10,000,000, Purchaser and Seller shall mutually agree on
what adjustments, if any, shall be made to the Purchase Price. As
used in this Agreement, the term "Aggregate 1996 Earnings" shall mean
the aggregate amount of the Corporations' 1996 net profit before
income taxes as shown on the Corporations' consolidated income
statement for 1996 in the Audited Financial Statements.
4. PAYMENT OF PURCHASE PRICE. At Closing (hereinafter defined)
Purchaser shall pay the Purchase Price, as adjusted, as follows:
(a) $27,000,000, less the adjustments set forth in Paragraph 3 of this
Agreement, to Seller in immediately available funds.
(b) Purchaser shall issue to Seller the number of shares of restricted
common stock of Purchaser that, when multiplied by the closing price
for the stock of Purchaser quoted in the Wall Street Journal for the
first business day prior to the date that the transactions
contemplated by this Agreement are announced to the public by
Purchaser (the "Pricing Date"), will equal $12,000,000; provided,
however, that if the closing price for the stock of Purchaser quoted
in the Wall Street Journal for the Pricing Date is (i) less than
$18.00 per share, the price to be used in making the calculation shall
be $18.00, and (ii) greater than $24.00 per share, the price to be
used in making the calculation shall be $24.00. Purchaser shall not
issue any fractional shares and shall pay Seller cash in lieu of any
fractional shares based on the closing price for the stock of
Purchaser quoted in the Wall Street Journal for the Pricing Date.
2
<PAGE>
(c) $1,000,000 shall be paid into a joint interest-bearing account for
twelve (12) months under an escrow agreement (the "Escrow Agreement")
between Seller and Purchaser.
5. INDEPENDENT CONSIDERATION. Contemporaneously with the execution of
this Agreement, Purchaser shall pay Seller $50,000, (a) as independent
consideration for the execution of this Agreement by Seller, but shall be
applied as part of, and not in addition to, the Purchase Price for the Shares,
and (b) for Seller's standstill agreement set forth in subparagraph 9(f). Any
other provision of this Agreement to the contrary notwithstanding, in the event
of the termination of this Agreement prior to Closing for any reason other than
the default of Seller, such independent consideration shall be paid to, and
shall be retained by, Seller. Absent a default hereunder by Seller, such
independent consideration is deemed earned by Seller as of the date of this
Agreement and is non-refundable. In the event of the termination of this
Agreement prior to Closing as a result of a default by Seller, Seller shall
return such independent consideration to Purchaser.
6. CLOSING. Subject to the terms and conditions set forth in this
Agreement, the closing ("Closing") of the purchase and sale of the Shares shall
take place at the offices of Burg & Eldredge, P.C., or at such other place as
may be mutually agreed upon by Purchaser and Seller, as soon as practicable
following the date on which all conditions to the obligations of the parties
hereunder (other than those requiring the taking of action at the Closing) have
been satisfied or waived but no later than March 1, 1997. The date on which the
Closing is to occur is hereinafter referred to as the "Closing Date." Any other
provision of this Agreement to the contrary notwithstanding, if Seller and
Purchaser have not obtained the consents required by this Agreement, prior to
March 1, 1997, either Seller or Purchaser shall have the right to extend the
Closing Date 60 days by giving written notice to the other party.
7. REPRESENTATIONS AND WARRANTIES OF SELLER. The Seller represents and
warrants to Purchaser as follows:
(A) AUTHORIZATION. Seller has the authority to execute and deliver this
Agreement and to perform Seller's obligations hereunder. This
Agreement is a valid and legally binding obligation of Seller,
enforceable against Seller in accordance with its terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to the
enforcement of creditors' rights generally and by general principles
of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law). Douglas J. Spedding owns 280
shares of Douglas Toyota, Inc. The shares of Douglas Toyota, Inc.
owned by Douglas J. Spedding are subject to that certain Stock
Purchase and Re-Purchase Agreement (the "Buy-Sell Agreement") dated
December 31, 1992, by and between Seller and Douglas J. Spedding, a
copy of which is attached hereto as Exhibit "A." Prior to Closing the
Seller will purchase the shares of Douglas Toyota, Inc.
3
<PAGE>
owned by Douglas J. Spedding. The Seller will have at Closing (i)
good, absolute, and marketable title to the Shares, free and clear of
any liens, claims, encumbrances, or restrictions of any kind, and (ii)
the complete and unrestricted right, power, and authority to sell,
transfer, and assign the Shares in accordance with this Agreement.
(B) INCORPORATION AND GOOD STANDING. Each Corporation is duly organized,
validly existing and in good standing under the applicable laws of the
state of its incorporation and has all necessary power and authority
to own, lease, and operate its properties and assets and to conduct
its business as its business is now being conducted. Seller has
delivered to Purchaser complete and accurate copies of each
Corporation's articles of incorporation and bylaws, including all
amendments thereto. Each Corporation is qualified to do business and
is in good standing in each state in which it transacts business.
Neither Corporation has any subsidiaries nor any direct or indirect
equity interest in any corporation, partnership, or other entity.
Each Corporation has elected to be taxed as an "S" corporation under
Section 1362 of the Internal Revenue Code of 1986, as amended, and
Seller agrees to cause each Corporation to maintain it's "S"
corporation status.
(C) CAPITALIZATION. (i) Toyota West Sales and Service, Inc.. The
authorized capital stock of Toyota West Sales and Service, Inc.
consists of 49,000 shares of common stock, par value $0.01 per share.
The Toyota West Shares constitute all of the issued and outstanding
shares of capital stock of Toyota West Sales and Service, Inc., have
been validly authorized and issued, are fully paid and nonassessable,
have not been issued in violation of any preemptive rights or of any
federal or state securities law. On the date hereof, the Toyota West
Shares are owned beneficially and of record by the Seller. There are
and will be on the Closing Date no outstanding subscriptions, options,
rights, warrants, convertible securities, or other agreements or
commitments obligating Toyota West Sales and Service, Inc. to issue
any additional shares of its capital stock of any class or any other
securities of any kind. There are no agreements that relate to the
voting or control of the Toyota West Shares.
(ii) Douglas Toyota, Inc.. The authorized capital stock of Douglas
Toyota, Inc. consists of 49,000 shares of common stock, having no par
value. The Douglas Toyota Shares constitute all of the issued and
outstanding shares of capital stock of Douglas Toyota, Inc., have been
validly authorized and issued, are fully paid and nonassessable, have
not been issued in violation of any preemptive rights or of any
federal or state securities law. On the date hereof, Seller owns
2,520 shares of Douglas Toyota, Inc. and Douglas J. Spedding owns 280
shares of Douglas Toyota, Inc. The shares of Douglas Toyota, Inc.
owned by Douglas J. Spedding are subject to the Buy-Sell Agreement.
All of the Douglas Toyota Shares are fully paid and non-assessable.
There are and will be on the Closing Date no outstanding
subscriptions, options, rights,
4
<PAGE>
warrants, convertible securities, or other agreements or commitments
obligating Douglas Toyota, Inc. to issue any additional shares of its
capital stock of any class or any other securities of any kind. Except
for the Buy-Sell Agreement, there are no agreements that relate to the
voting or control of the Douglas Toyota Shares.
(D) NO CONFLICTS. To the best of Seller's knowledge, neither the
execution and delivery of this Agreement nor the fulfillment of or
compliance with the terms and provisions hereof will violate, conflict
with, or result in a breach of the terms, conditions or provisions of,
or constitute a default or an event which, with notice or lapse of
time or both, would constitute a default under, the articles of
incorporation or bylaws of either of the Corporations, any contract,
agreement, mortgage, deed of trust, or other instrument or obligation
to which either of the Corporations or the Seller are parties or by
which any of them is bound, or violate any provision of any applicable
law or regulation or of any order, decree, writ or injunction of any
court or governmental body, or result in the creation or imposition of
any lien, charge, restriction, security interest or encumbrance of any
nature whatsoever on any property or asset of either of the
Corporations or on the Shares.
(E) CONSENTS. No consent from, or other approval of, any governmental
entity or agency or any other person or entity is necessary in
connection with the execution, delivery or performance of this
Agreement by Seller, other than consent from (i) the Colorado
Department of Transportation, (ii) Toyota Motor Corporation of
America, and (iii) the Department of Motor Vehicles of the State of
Nevada.
(F) REAL PROPERTY. Exhibit "B" will set forth a complete and accurate
(i) legal description of all real property owned by each Corporation,
(ii) legal description of all real property in which each Corporation
has a leasehold interest, (iii) description of each lease under which
each Corporation holds such leasehold interests, and (iv) legal
description of the real property owned by Seller that will be covered
by the Purchase Agreements (hereinafter defined). Each of the leases
is in full force and effect and constitutes a legal, valid and binding
obligation of the parties thereto. Each Corporation has performed the
covenants required to be performed by it under each of the leases to
which it is a party and is not in default under any of the leases to
which it is a party. To the best of Seller's knowledge, the zoning of
each tract of real property which will be described in Exhibit "B"
permits the presently existing improvements and the continuation of
the business presently being conducted on such real property. To the
best of Seller's knowledge, Seller is not aware of any pending or
proposed changes to such zoning. Exhibit "B" will also set forth (i)
a complete and accurate description of the real property to which each
Corporation intends to relocate its dealership, and (ii) the owner of
such real property.
5
<PAGE>
(G) TANGIBLE PERSONAL PROPERTY. Exhibit "C" will set forth a complete
and accurate description of all equipment, furniture, fixtures, and
other tangible personal property owned by, in possession of, or used
by each Corporation in connection with its business and a complete and
accurate description of all tangible personal property in which each
Corporation has a leasehold interest, together with a complete and
accurate description of each lease under which each Corporation holds
such leasehold interests. Each of the leases is in full force and
effect and constitutes a legal, valid, and binding obligation of the
parties thereto. Each Corporation has performed the covenants
required to be performed by it under each of the leases to which it is
a party and is not in default under any of the leases to which it is a
party.
(H) INVENTORIES. Exhibit "D" will set forth a complete and accurate
description of the inventory (new vehicles, used vehicles, and parts
and accessories) of each Corporation. To the best of Seller's
knowledge, the inventory of each Corporation consists of goods of a
quality and in quantities that are saleable in the ordinary course of
its business with normal mark-up at prevailing market prices. To the
best of Seller's knowledge, all parts and accessories in the inventory
of each Corporation are returnable and undamaged parts and accessories
that (i) are still in the original, resaleable merchandising package,
and in unbroken lots, (ii) were listed for sale in the then-current
dealer parts and accessories price schedule for the represented
manufacturers, (iii) were purchased directly from the represented
manufacturers, and (iv) are returnable under the terms of the
represented manufacturers' sales and service agreement for credit to
the account of the Corporation.
(I) LICENSES AND PERMITS. Exhibit "E" will set forth a complete and
accurate description of all permits, licenses, franchises,
certificates, and similar items and rights, owned or held by each
Corporation (hereinafter collectively referred to as the "Licenses and
Permits"). The Licenses and Permits are adequate for the operation of
each Corporation's business; are valid and in full force and effect,
except as set forth on Exhibit "E;" and will be transferred to the
Purchaser at the Closing, unless such transfer is prohibited by law or
by the terms of the item or right to be transferred. No additional
permit, license, franchise, certificate, or similar item or right is
required by either of the Corporations for the operation of its
business.
(J) INTELLECTUAL PROPERTY. Exhibit "F" will set forth a complete and
accurate description of all intellectual property presently in use by
each Corporation, which intellectual property includes (without
limitation) patents, trademarks, tradenames, service marks,
copyrights, trade secrets, customer lists, inventions, formulas,
methods, processes, advertising materials, Internet sites, and any
other proprietary information or property. There are no outstanding
licenses or consents to third parties granting the right to use any
intellectual property owned by either of the Corporations. To the
best
6
<PAGE>
of Seller's knowledge, each Corporation owns and has the exclusive
right to use its intellectual property free and clear of any claims
and without any conflict with the rights of others. No royalties or
fees are payable by either of the Corporations to any third party by
reason of the use of any intellectual property by the Corporation. No
additional intellectual property is required by either of the
Corporations for the operation of its business.
(K) TITLE TO PROPERTIES; ENCUMBRANCES. To the best of Seller's
knowledge, each Corporation has good, absolute, and marketable title
to (or, in the case of leased property, valid and subsisting leasehold
interests in) all of its properties and assets, including (without
limitation) the properties and assets that will be listed on Exhibits
"B", "C", "D", "E" and "F," except for properties and assets sold,
consumed, or otherwise disposed of by the Corporation in the ordinary
course of its business. To the best of Seller's knowledge, the
properties and assets of each Corporation are subject to no liens,
mortgages, encumbrances, conditional sales agreements, security
interests, claims, or restrictions of any kind or character, except
for (i) the encumbrances that will be listed on Exhibit "G," and (ii)
liens for current taxes not yet due and payable.
(L) FINANCIAL STATEMENTS. The Seller has delivered to the Purchaser
copies of a balance sheet for each Corporation dated December 31, 1996
(the "Balance Sheet Date"), and the related statement of income and
retained earnings for the period ending December 31, 1996
(hereinafter collectively referred to as the "Financial Statements").
The Financial Statements were prepared by John Kelly, CPA and are
unaudited. The Financial Statements fairly present the financial
condition of each Corporation at the dates mentioned and the results
of its operations for the periods specified, were prepared in
accordance with generally accepted accounting principles, and reflect
adequate reserves for all reasonably anticipated losses, claims, and
costs. Each balance sheet in the Financial Statements discloses all
of the debts, liabilities, and obligations of any nature (whether
absolute, accrued, contingent, or otherwise, and whether due or to
become due) of the Corporation as of the Balance Sheet Date and
includes appropriate reserves for all taxes and other liabilities
accrued or due at such dates but not yet paid.
(M) INDEBTEDNESS FOR BORROWED MONEY; GUARANTIES. Seller has delivered to
the Purchaser complete and accurate copies of all instruments
evidencing or relating to each Corporation's indebtedness for borrowed
money. To the best of Seller's knowledge, neither of the Corporations
is in default or violation of any provision of any agreement
evidencing or relating to its indebtedness for borrowed money.
Exhibit "H" will set forth a complete and accurate description of all
guaranties by each Corporation of any obligation or liability of any
person or entity, including (without limitation) any guaranties of
installment sales contracts or leases.
7
<PAGE>
(N) TAX MATTERS. To the best of Seller's knowledge, each Corporation has
duly filed all federal, state, and local tax returns required to be
filed by it. All federal, state, local, and foreign income, ad
valorem, excise, sales, use, payroll, unemployment, and other taxes
and assessments that are due and payable by Seller, each Corporation,
or by Seller on behalf of either of the Corporations have been
properly computed, duly reported, fully paid, and discharged to the
best of Seller's knowledge. Seller is not aware of any unpaid taxes
that require payment by either of the Corporations, except for current
taxes not yet due and payable. To the best of Seller's knowledge, all
current taxes not yet due and payable by each Corporation have been
properly accrued and are accurately reflected in the Corporation's
balance sheet in the Financial Statements. To the best of Seller's
knowledge, neither of the Corporations has been delinquent in the
payment of any tax, assessment, or governmental charge. To the best
of Seller's knowledge, neither of the Corporations has had any tax
deficiencies proposed or assessed against it nor has executed any
waiver of the statute of limitations on the assessment or collection
of any tax. The Seller agrees to indemnify and hold harmless the
Purchaser with respect to any income or other tax liabilities,
penalties and interest which arise from the operation of either of the
Corporations prior to Closing or arise as a result of the transactions
contemplated by this Agreement.
(O) TRANSACTIONS SINCE BALANCE SHEET DATE. Since the Balance Sheet Date,
(i) neither of the Corporations has incurred any debts, liabilities,
or obligations except current liabilities in the ordinary course of
business; discharged or satisfied any liens or encumbrances, or paid
any debts, liabilities, or obligations, except in the ordinary course
of business; mortgaged, pledged, or otherwise subjected to any lien
or other encumbrance any of its properties or assets; canceled any
debt or claim; sold or transferred any properties or assets except
sales from inventory in the ordinary course of business; nor entered
into any transaction other than in the ordinary course of business;
(ii) there has not been any change in the financial condition, net
income, assets, liabilities, operations, or business of either of the
Corporations other than changes in the ordinary course of business,
none of which, individually or in the aggregate, has been material;
(iii) there has not been any declaration, setting aside or payment of
any dividend or other distribution in respect of, or any repurchase or
acquisition of, the capital stock of either of the Corporations; (iv)
none of the Corporations has issued any securities or options to
purchase any securities of any nature whatsoever; (v) neither of the
Corporations has increased the compensation, commissions, bonuses, or
other remuneration payable to any officer, director, employee, or to
any other person or entity, whether now or hereafter payable; (vi)
there has not been any damage, destruction or loss (whether or not
covered by insurance) materially and adversely affecting the assets,
properties or business of either of the Corporations; (vii) neither of
the Corporations has made any capital expenditure or commitment in
excess of $50,000.00 for additions to property, plant, or equipment;
8
<PAGE>
(viii) neither of the Corporations has made any loan or advance to any
person or entity; guaranteed any obligation or liability of any person
or entity, including (without limitation) any guaranties of any
installment sales contracts or leases, other than as will be set forth
on Exhibit "H;" or given any indemnification to any person or entity;
(ix) neither of the Corporations has made any sale, assignment or
transfer of, additions to or transactions involving any of its
tangible assets other than in the ordinary course of business; (x)
neither of the Corporations has made any change in its method of
accounting or accounting practices, including (without limitation) any
change in depreciation or amortization policies or rates; (xi) neither
of the Corporations has granted any waiver or release of any claim or
right, or canceled any debt or claim held by it; (xii) neither of the
Corporations has amended or terminated any material contract,
agreement, or license to which it is a party; or (xiii) neither of the
Corporations has agreed, in writing or otherwise, to do or permit any
of the foregoing.
(P) LITIGATION. Exhibit "I" will set forth a complete and accurate
description of all legal actions, suits, arbitrations, condemnation
actions, or other proceedings pending or threatened against either of
the Corporations, or any of their properties, assets, or business, and
all orders, decrees, writs or injunctions of any court or governmental
body applicable to Seller or to either of the Corporations. Neither
the Seller nor either of the Corporations is aware of any facts that
might result in any other action, suit, arbitration, or proceeding.
(Q) COMPLIANCE WITH LAWS. To the best of Seller's knowledge, there are
no existing violations of federal, state, or local laws, ordinances,
rules, codes, regulations, or orders by either of the Corporations
which might materially affect the properties, assets, or business of
the Corporation, except for the closure order issued by the State of
Colorado, which has been appealed to the Colorado Court of Appeals,
which is described on Exhibit "E." To the best of Seller's knowledge,
neither of the Corporations is subject to any restriction, judgment,
order, writ, injunction, decree, or award, which materially or
adversely affects or is likely to materially or adversely affect the
business, operations, properties, assets, or condition (financial or
otherwise) of the Corporation.
(R) CONTRACTS AND AGREEMENTS. Exhibit "J" will set forth a complete and
accurate description of all material contracts and agreements to which
each Corporation is a party or by which it or any of its property is
bound. All such contracts and agreements are in full force and effect
and are binding upon the parties thereto, and none of the parties
thereto is in breach of any of the provisions thereof. Except as set
forth on Exhibit "J," neither of the Corporations is a party to any
contract or agreement which materially or adversely affects or is
likely to materially or adversely affect the
9
<PAGE>
business, operations, properties, assets, or condition (financial or
otherwise) of the Corporation.
(S) EMPLOYEE BENEFIT PLANS. Exhibit "K" will set forth a complete and
accurate description of all pension, profit-sharing, bonus, deferred
compensation, percentage compensation, severance pay, retirement,
health, stock option, insurance and other employee benefit plans and
arrangements binding upon each Corporation. Each Corporation has
complied with the provisions of and has performed the obligations
required of it under such plans and arrangements, and neither of the
Corporations is in default under any provision thereof in any manner.
To the best of Seller's knowledge, there have been no material
defaults, breaches, or omissions by either of the Corporations or any
fiduciary under any of these plans or arrangements. Neither of the
Corporations has incurred any liability of any nature whatsoever under
any employee benefit plan or arrangement.
(T) INSURANCE. Exhibit "L" will set forth a complete and accurate
description of all insurance, including (without limitation) worker's
compensation, maintained by each Corporation and summarizes the
substantive terms of each of the insurance policies, including
(without limitation) whether the insurance policies are "claims made"
or "occurrence" policies. Each Corporation is carrying insurance that
is reasonable in light of the risks attendant to the business and
activities in which the Corporation is engaged. All of the insurance
is in full force and effect, and Seller will cause each Corporation to
keep such insurance in full force and effect until the Closing Date.
(U) PERSONNEL. Exhibit "M" will set forth a complete and accurate list
of all current employees of each Corporation and all independent
contractors regularly performing services on behalf of each
Corporation and their respective rates of compensation, including any
salary, bonus or other payment arrangement made with any of them.
Neither of the Corporations has any employment agreements or contracts
between the Corporation and any person or entity. Neither of the
Corporations is a party to or bound by any collective bargaining
agreement, nor has either of the Corporations experienced any strikes,
grievances, claims of unfair labor practices, or other collective
bargaining disputes. Neither of the Corporations has, to the Seller's
knowledge, committed any unfair labor practice. There are no unions
representing any employees of either of the Corporations. The Seller
has no knowledge of any organizational effort presently being made or
threatened by or on behalf of any labor union with respect to
employees of either of the Corporations. To the best of Seller's
knowledge, each Corporation has paid or has made provision for the
payment of all compensation due any person or entity and has complied
in all material respects with all applicable laws, rules, and
regulations relating to the employment of labor, including those
related to wages, hours, collective bargaining and the payment and
withholding
10
<PAGE>
of taxes, and has withheld and paid to the appropriate governmental
authority, or is holding for payment not yet due to such authority,
all amounts required by law or agreement to be withheld from the
compensation of its employees.
(V) ACCOUNTS RECEIVABLE. Exhibit "N" will set forth a complete and
accurate list of all accounts receivable and notes receivable of each
Corporation and an aging analysis of the accounts receivable. To the
best of Seller's knowledge, all receivables of each Corporation are
valid and enforceable claims, arose in the ordinary course of
business, require no further performance by the Corporation, and are
collectable without resort to litigation. To the best of Seller's
knowledge, no material objection, claim, or offset has been made
regarding the receivables. Except as will be set forth on Exhibit
"N," all of the receivables are current. There are and at Closing
there will be no intercompany payables or intercompany receivables due
or owing between (i) Seller and either of the Corporations, or (ii)
the Corporations.
(W) BROKERS AND FINDERS. The Seller has not employed, directly or
indirectly, any broker or finder, or incurred any liability for any
brokerage fees or commissions or finders' fees, and no broker or
finder has acted directly or indirectly for the Seller in connection
with this Agreement or the transactions contemplated by this
Agreement.
(X) DELIVERY OF DOCUMENTS. Complete and accurate copies of all written
instruments listed or described on the exhibits attached hereto have
been or will be furnished to Purchaser. Each Corporation will make
available to Purchaser, to the extent requested by Purchaser, all
books, records, and facilities of the Corporation.
(Y) POWERS OF ATTORNEY; AUTHORIZED SIGNATORIES. EACH CORPORATION HAS
provided to Purchaser (i) the names and addresses of all persons
holding a power of attorney on behalf of the Corporation, and (ii) the
account numbers and names of all banks or other financial institutions
in which the Corporation currently has an account, deposit, or safe
deposit box, with the names of all persons authorized to draw on the
accounts or deposits or to have access to the boxes.
(Z) FULL DISCLOSURE. No representation or warranty by Seller in this
Agreement or in any of the exhibits attached hereto, or other
statement in writing or certificate furnished or to be furnished to
Purchaser by or on behalf of Seller or either of the Corporations in
connection with the transactions contemplated by this Agreement,
contains or will contain any untrue statement of a material fact, or
omits or will omit to state a material fact necessary to make the
statements contained herein not misleading.
11
<PAGE>
(AA) ENVIRONMENTAL.
(i) To the best of Seller's knowledge, there are no past or present
events, conditions, circumstances, activities, practices, incidents,
plans or actions, based on or resulting from the conduct of the
business of either of the Corporations, including the manufacture,
processing, distribution, use, treatment, storage, disposal,
transport, or handling, or the emission, discharge, release, or
threatened release into the environment, of any pollutant,
contaminant, chemical, or industrial toxic or hazardous material,
substance or waste, which will violate any laws currently in effect
relating to pollution or protection of the environment (the
"Environmental Laws") or any plan, order, decree, judgment,
injunction, notice or demand letter from a governmental entity
applicable to the Corporation, or which will give rise to any common
law or other legal liability, including, without limitation, liability
under the Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA") or similar state or local laws in effect as
of the date hereof. To the best of Seller's knowledge, the real
property currently owned, leased or otherwise utilized by each
Corporation contains no spill, deposit, or discharge of any hazardous
substance (as that term is currently defined under CERCLA or any
applicable state law), as a result of which there would be a
materially adverse effect on the Corporation.
(ii) Exhibit "O" will set forth a complete and accurate description
of each underground storage tank of any kind or nature located on any
real property currently owned, leased or otherwise utilized by each
Corporation.
(iii) Each Corporation has delivered to Purchaser copies of all
existing environmental site audits on any real property currently
owned, leased, or otherwise utilized by the Corporation.
(BB) CONTINUATION OF BUSINESS. Seller knows of no reason why each
Corporation cannot continue its business in the same manner following
the execution of this Agreement and the Closing as it has been
operated prior thereto, except to the extent that Purchaser causes the
business of the Corporation to change following the Closing. Seller
has no reason to believe that at any time in the foreseeable future
the business of either of the Corporations shall be materially or
adversely affected by any event, except to the extent that the
Purchaser causes the business of the Corporation to change following
the Closing.
(CC) CONTRACTS IN TRANSIT. Exhibit "P" will set forth a complete and
accurate description of all contracts in transit for each Corporation.
12
<PAGE>
(DD) WARRANTIES. Exhibit "Q" will set forth a complete and accurate list
of all of the warranties that have been sold on all vehicles sold by
either of the Corporations for the last three (3) years.
8. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents
and warrants to Seller as follows:
(A) INCORPORATION. Purchaser has been duly incorporated, is validly
existing, and is in good standing under the laws of the State of
Delaware. At Closing Purchaser will be qualified to do business and
will be in good standing in the States of Colorado and Nevada.
(B) AUTHORIZATION. Purchaser has the authority to execute and deliver
this Agreement and to perform its obligations hereunder. This
Agreement is a valid and legally binding obligation of Purchaser,
enforceable against Purchaser in accordance with its terms, except as
the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to the
enforcement of creditors' rights generally and by general principles
of equity (regardless of whether such enforceability is considered in
a proceeding at law or in equity).
(C) NO CONFLICTS. The execution and delivery of this Agreement and the
consummation of the transactions contemplated by this Agreement will
not result in any breach or violation of or default under any
agreement or other instrument to which Purchaser is a party or by
which it is bound.
(D) BROKERS AND FINDERS. The Purchaser has not employed, directly or
indirectly, any broker or finder, or incurred any liability for any
brokerage fees or commissions or finders' fees, and no broker or
finder has acted directly or indirectly for the Purchaser in
connection with this Agreement or the transactions contemplated
hereby.
9. PRE-CLOSING COVENANTS. The Seller agrees that prior to the Closing
Date:
(A) NOTICES AND CONSENTS. The Seller shall use Seller's best efforts to
obtain any required approvals or consents to this Agreement and the
transactions contemplated by this Agreement from all (i) lenders, (ii)
lessors, (iii) manufacturers represented by each Corporation, and (iv)
the FTC (hereinafter defined) and the Justice Department (hereinafter
defined) under the Hart-Scott-Rodino Act ("HSR Act") and all
regulations promulgated thereunder.
13
<PAGE>
(B) CONDUCT OF BUSINESS BY THE CORPORATIONS PRIOR TO THE CLOSING DATE.
The Seller shall cause each Corporation to conduct its operations
according to the ordinary and usual course of business reasonably
consistent with past and current practices, to maintain and preserve
its assets, properties, insurance policies, business organization, and
advantageous business relationships, and to retain the services of its
officers, employees, agents, and independent contractors, and shall
not allow either of the Corporations to engage in any practice, take
any action, or enter into any transaction outside of the ordinary
course of business. From the date of the execution of this Agreement
to the date of Closing of the transaction contemplated hereby, Seller
will not commit to or make any obligation which binds either
Corporation to an expense in excess of $50,000.00 without Purchaser's
prior consent.
(C) PURCHASER'S EXAMINATION. The Seller shall cause each Corporation to
permit representatives of the Purchaser to have full access to and to
examine, at all reasonable times, and in a manner so as not to
interfere with the normal business operations of the Corporation, the
books, records, properties, and assets of the Corporation.
(D) AUDIT. Seller shall cause each Corporation to permit an audit to be
conducted under generally accepted auditing standards, of the books,
records, and financial statements of the Corporation for 1995, 1996,
and any additional years if required by applicable law, and shall
cause Audited Financial Statements (hereinafter defined) to be
prepared in accordance with generally accepted accounting principles,
which shall include reserves for any deferred warranties, charge-
backs, inventory write downs, repossessions, contracts in transit, and
any other appropriate reserves. The audits shall hereinafter be
referred to individually as an "Audit" and collectively as the
"Audits." As used in this Agreement, "Audited Financial Statements"
shall mean an audited (i) consolidated balance sheet dated December
31, 1996, for the Corporations, and (ii) consolidated income statement
for the year ending December 31, 1996 for the Corporations. The
Audits will be conducted by Purchaser's accountants, Price Waterhouse,
assisted by Seller's accountant, John Kelly, CPA. Seller agrees to
cause the full cooperation of the officers, directors and employees of
each Corporation in the Corporation's Audit as requested by Purchaser.
The start date of the Audits will be January 23, 1997. Each
Corporation's accounting staff will assist in gathering information
and providing schedules and analyses in order to have the
Corporation's Audit completed by February 23, 1997. In addition, as
near as possible to the Closing Date, Price Waterhouse shall review
the activities of each Corporation for the period after December 31,
1996, and shall prepare a letter setting forth the unaudited
adjustments that should be made to the Aggregate Adjusted Net Worth
(the "Post 1996 Adjustments").
14
<PAGE>
(E) NOTICE OF CHANGES. The Seller shall give prompt written notice to
Purchaser of any material adverse change in the financial condition,
net income, assets, liabilities, operations, or business of either of
the Corporations.
(F) STANDSTILL. Except for the transactions contemplated by this
Agreement, from the date hereof to the Closing Date, the Seller shall
not, directly or indirectly, through any officer, director, employee,
or otherwise, solicit or initiate the submission of any proposal or
offer from any person or entity (including any officers or employees
of either of the Corporations) relating to any liquidation,
dissolution, recapitalization, merger, consolidation, acquisition, or
purchase of all or a material portion of the assets and properties of
either of the Corporations, or the acquisition or purchase of any
equity interest in either of the Corporations, or participate in any
negotiations regarding, or furnish to any other person or entity any
information with respect to, or otherwise cooperate in any manner
with, or assist or participate in, facilitate or encourage, any effort
or attempt by any other person or entity to do or seek any of the
foregoing. Seller has agreed to this standstill provision in
consideration for a portion of the independent consideration set forth
in Paragraph 5.
(G) FURTHER ASSURANCES. Seller shall from time to time, upon the request
of Purchaser, execute and deliver to Purchaser such further
instruments and take such other action as Purchaser may reasonably
request, in order to more effectively transfer, convey, assign, and
deliver, or place Purchaser in possession and control of, the Shares
and the assets and properties of each Corporation, or to enable
Purchaser to exercise and enjoy all rights and benefits with respect
thereto.
(H) INVESTMENT LETTER. Seller agrees to execute and deliver to Purchase
an investment letter (the "Investment Letter") in form and substance
reasonably satisfactory to Purchaser and Purchaser's counsel.
(I) STOCK OF DOUGLAS J. SPEDDING Seller shall exercise Seller's rights
under the Buy-Sell Agreement and purchase the stock owned by Douglas
J. Spedding in Douglas Toyota, Inc.
(J) ENVIRONMENTAL SITE AUDITS. Seller shall obtain an environmental site
audit on all real property owned, leased, or otherwise utilized by
each Corporation in order to determine whether there exists any
environmental condition which could reasonably be expected to result
in any liability, cost, or expense to the owner, occupier, or operator
of such real property arising under any Environmental Laws.
(K) AMENDMENTS TO REAL PROPERTY LEASES. Seller shall cause each
Corporation to amend each real property lease held by the Corporation
(the "Amendments") to
15
<PAGE>
provide (i) that the lease shall have a term of no less than one (1)
year from the Closing Date, and (ii) for rental in the amount set
forth on Exhibit "R." The amendments of the real property leases held
by the Corporations shall be referred to collectively in this
Agreement as the "Amendments."
10. CONDITIONS PRECEDENT TO OBLIGATION OF PURCHASER. The obligation of
Purchaser to effect the transactions contemplated by this Agreement is subject
to the satisfaction on or prior to the Closing Date of the following conditions,
each of which may be waived by the Purchaser:
(A) REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF SELLER. All
representations and warranties of Seller contained in this Agreement
shall be true and correct in all material respects as of the Closing
Date with the same effect as though such representations and
warranties were made on the Closing Date, except to the extent that
such representations and warranties expressly relate to any earlier
date, and Seller shall have performed and complied with all the
covenants and agreements and satisfied all the conditions required by
this Agreement to be performed, complied with or satisfied by Seller
on or prior to the Closing Date. The Seller must have delivered to
the Purchaser a certificate dated as of the Closing Date certifying
that this condition has been fulfilled.
(B) NO ADVERSE CHANGE. Purchaser shall have determined, to its
satisfaction, that as of the Closing Date, there has been no material
adverse change in the financial condition, net income, assets,
liabilities, operations, or business of either of the Corporations.
(C) STOCK OF DOUGLAS J. SPEDDING Seller shall have acquired all of the
stock of Douglas Toyota, Inc. owned by Douglas J. Spedding
(D) TRANSFER OF SHARES. The certificates representing the Shares shall
have been transferred and conveyed by Seller to Purchaser in a manner
and by instruments acceptable to Purchaser and its counsel, free and
clear of all liens, claims, encumbrances, or restrictions of any kind.
Contemporaneously with the consummation of the transfer, Seller shall
put Purchaser in full possession and enjoyment of all properties and
assets of each Corporation.
(E) ENVIRONMENTAL SITE AUDITS. Purchaser shall have received
environmental site audits on each tract of real property owned,
leased, or otherwise utilized by each Corporation. If any of the
environmental site audits discloses an environmental condition which
could reasonably be expected to result in any liability, cost, or
expense to the owner, occupier, or operator of the property arising
under any Environmental Laws, then Seller shall have cured such
environmental condition and received a "no
16
<PAGE>
further action" letter from the Environmental Protection Agency and
any comparable state agency.
(F) EMPLOYMENT CONTRACTS. (i) Seller shall have executed and delivered an
employment contract with Purchaser that has a term of three (3) years
commencing on the Closing Date and is otherwise in form and substance
reasonably satisfactory to Purchaser and Purchaser's counsel.
(ii) Douglas J. Spedding shall have executed and delivered an
employment contract with Douglas Toyota, Inc. that has a term of three
(3) years commencing on the Closing Date and is otherwise in form and
substance reasonably satisfactory to Purchaser and Purchaser's
counsel.
(iii) Ron Carpenter shall have executed and delivered an employment
contract with Toyota West Sales and Service, Inc. that has a term of
three (3) years commencing on the Closing Date and is otherwise in
form and substance reasonably satisfactory to Purchaser and
Purchaser's counsel.
(iv) Frank Urbano shall have executed and delivered an employment
contract with Toyota West Sales and Service, Inc. that has a term of
three (3) years commencing on the Closing Date and is otherwise in
form and substance reasonably satisfactory to Purchaser and
Purchaser's counsel.
(G) THIRD PARTY APPROVALS. This Agreement and the transactions
contemplated by this Agreement shall have received all required
approvals and consents from all (i) lenders, (ii) lessors, (iii)
manufacturers represented by each Corporation, (iv) the FTC and the
Justice Department under the HSR Act and the regulations promulgated
thereunder, (v) the New York Stock Exchange, and (vi) Morgan Stanley &
Co. Incorporated.
(H) COMPLIANCE WITH SECURITIES LAWS. Purchaser shall have (i) received
the Investment Letter, and (ii) determined that all state and federal
securities laws have been fully satisfied relating to the purchase of
the Shares by Purchaser and the issuance of restricted stock of
Purchaser to Seller. In addition, Seller shall have executed and
delivered to Purchaser the Registration Rights Agreement (hereinafter
defined).
(I) AMENDMENTS. The Amendments shall have been executed and delivered to
Purchaser.
(J) PHYSICAL INVENTORIES. Purchaser shall have conducted the Physical
Inventories.
17
<PAGE>
(K) PURCHASER'S REVIEW. Based on such examinations and inquiries as
Purchaser shall have made or shall have caused to be made, the
financial condition, net income, assets, liabilities, operations, and
business of each Corporation shall be satisfactory to Purchaser, in
Purchaser's sole judgment and discretion.
(L) APPROVAL OF DOCUMENTATION. The form and substance of all opinions,
certificates, instruments and other documents delivered to Purchaser
in connection with this Agreement shall be satisfactory in all
reasonable respects to Purchaser and Purchaser's counsel.
(M) RESIGNATION OF DIRECTORS AND OFFICERS. Seller shall have delivered to
Purchaser the written resignations of the directors and officers of
each Corporation, except (i) Douglas J. Spedding as General Manager of
Douglas Toyota, Inc., and (ii) Ron Carpenter as General Manager of
Toyota West Sales and Service, Inc.
(N) OPINIONS OF COUNSEL. Seller shall have delivered to Purchaser (i) an
opinion of Seller's counsel, Burg & Eldredge, P.C., dated as of the
Closing Date, that contains such opinions that are reasonably
requested by Purchaser, including (without limitation) an opinion that
the issued and outstanding capital stock of Douglas Toyota, Inc. was
issued in compliance with all state and federal securities laws, and
(ii) an opinion of counsel reasonably satisfactory to Purchaser, dated
as of the Closing Date, that contains such opinions that are
reasonably requested by Purchaser, including (without limitation) an
opinion that the issued and outstanding capital stock of Toyota West
Sales and Service, Inc. was issued in compliance with all state and
federal securities laws.
(O) HART-SCOTT-RODINO WAITING PERIOD. The applicable waiting period
under the HSR Act, and the regulations promulgated thereunder, shall
have expired.
(P) AGGREGATE ADJUSTED NET WORTH AND AGGREGATE 1996 EARNINGS. The
Aggregate Adjusted Net Worth, as adjusted by the Post 1996
Adjustments, shall not be less than $6,500,000, and the Aggregate 1996
Earnings shall not be less than $10,000,000.
(Q) ADDITIONAL INFORMATION. Seller shall have furnished to Purchaser and
Purchaser's counsel such additional information, certificates, and
other documents as Purchaser shall have reasonably requested.
(R) ESCROW AGREEMENT. Seller shall have executed and delivered to
Purchaser the Escrow Agreement.
18
<PAGE>
(S) AUDITS. Price Waterhouse shall have performed the Audit, prepared the
Audited Financial Statements, and delivered a copy of the Audited
Financial Statements to Purchaser.
(T) PURCHASE AGREEMENTS. Purchaser shall have purchased the property
covered by the Purchase Agreements (hereinafter defined).
CONDITIONS PRECEDENT TO OBLIGATION OF SELLER. The obligation of
Seller to effect the transactions contemplated by this Agreement is subject to
the satisfaction on or prior to the Closing Date of the following conditions,
each of which may be waived by Seller:
(A) REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF PURCHASER. All
representations and warranties of Purchaser contained in this
Agreement shall be true and correct in all material respects as of the
Closing Date with the same effect as though such representations and
warranties were made on the Closing Date, except to the extent that
such representations and warranties expressly relate to an earlier
date, and Purchaser shall have performed and complied with all of the
covenants and agreements and satisfied all the conditions required by
this Agreement to be performed, complied with or satisfied by
Purchaser on or prior to the Closing Date. The Purchaser must have
delivered to the Seller a certificate dated as of the Closing Date
certifying that this condition has been fulfilled.
(B) DELIVERY OF PURCHASE PRICE. The Purchaser shall have delivered (i)
the cash provided for in subparagraph 4(a) of this Agreement, and (ii)
the shares of restricted common stock of Purchaser provided for in
subparagraph 4(b) of this Agreement.
(C) APPROVAL OF DOCUMENTATION. The form and substance of all
certificates and other documents required to be delivered to Seller in
connection with this Agreement shall be satisfactory in all reasonable
respects to Seller and Seller's counsel.
(D) ADDITIONAL INFORMATION. Purchaser shall have furnished to Seller and
Seller's counsel such additional information, certificates, and other
documents as Seller shall have reasonably requested.
(E) ELECTION TO PURCHASER'S BOARD OF DIRECTORS. Seller shall have been
elected as a member of the Board of Directors of Purchaser.
(F) PURCHASE AGREEMENTS. Purchaser shall have purchased the property
covered by the Purchase Agreements.
19
<PAGE>
(G) BOARD APPROVAL. The Board of Directors of Purchaser shall have
approved the consummation of the transactions contemplated by this
Agreement.
(H) AGGREGATE ADJUSTED NET WORTH. The Aggregate Adjusted Net Worth, as
adjusted by the Post 1996 Adjustments, shall not be less than
$6,000,000.
(I) REGISTRATION RIGHTS AGREEMENT. Purchaser shall have executed and
delivered to Seller the Registration Rights Agreement.
(J) EMPLOYMENT CONTRACTS. (i) Purchaser shall have executed and
delivered an employment contract with Seller that has a term of three
(3) years commencing on the Closing Date and is otherwise in form and
substance reasonably satisfactory to Seller and Seller's counsel.
(ii) Douglas Toyota, Inc. shall have executed and delivered an
employment contract with Douglas J. Spedding that has a term of
three (3) years commencing on the Closing Date and is otherwise
in form and substance reasonably satisfactory to Douglas J.
Spedding and his counsel.
(iii) Toyota West Sales and Service, Inc. shall have executed and
delivered an employment contract with Ron Carpenter that has a
term of three (3) years commencing on the Closing Date and is
otherwise in form and substance reasonably satisfactory to Ron
Carpenter and his counsel.
(iv) Toyota West Sales and Service, Inc. shall have executed and
delivered an employment contract with Frank Urbano that has a
term of three (3) years commencing on the Closing Date and is
otherwise in form and substance reasonably satisfactory to
Frank Urbano and his counsel.
(K) APPROVAL OF PURCHASER AS THE DEALER. Purchaser shall have been
approved as the dealer by the manufacturers represented by each
Corporation.
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties made in this Agreement or in any certificate, schedule, document, or
instrument furnished in connection with this Agreement shall survive the
Closing; provided, however, that no claim or cause of action for indemnification
under paragraph 13 of this Agreement for breaches of the representations and
warranties made in this Agreement or in any certificate, schedule, document, or
instrument furnished in connection with this Agreement shall be made twelve (12)
months after the Closing Date. Notwithstanding any investigation or examination
conducted before or after the Closing or the decision of any party to complete
the Closing, each party shall be entitled to rely upon the representations and
warranties set forth in this Agreement.
20
<PAGE>
13. INDEMNIFICATION.
(A) GENERAL INDEMNITY. Seller agrees that Seller shall indemnify, defend
and hold harmless the Purchaser and its respective successors and
assigns (the "Purchaser Indemnified Parties") from and against any
Claims (hereinafter defined). Claims, as used in this Agreement,
include any claims, damages, liabilities, penalties, actions, suits,
proceedings, demands, assessments, costs and expenses, including
reasonable attorneys' fees and expenses of investigation, incurred by
any Purchaser Indemnified Party arising from or related to (i) any
breach of any representation, warranty, covenant or agreement made by
the Seller in this Agreement, (ii) any debts, liabilities, or
obligations of any nature (whether absolute, accrued, contingent, or
otherwise and whether due or to become due) of either of the
Corporations at the Balance Sheet Date that are not reflected in the
Financial Statements, (iii) any condition, activity, or event, caused
in whole or in part by, or engaged in, by either of the Corporations
and that existed or occurred prior to the Closing Date, (iv) the
infringement or claimed infringement by either of the Corporations on
the rights or claimed rights of any person or entity under or in
respect to any intellectual property, and (v) any tax audit of the
Seller or either of the Corporations by any federal, state, or local
taxing authority for any time period prior to the Closing Date.
(B) ENVIRONMENTAL INDEMNIFICATION. With respect to any existing or
potential liability arising out of any condition, activity, or event
existing or occurring prior to the Closing Date with respect to any
property comprising part of the properties or assets of either of the
Corporations for which there is any material risk of liability to any
governmental entity or agency or any other person or entity for the
violation of any Environmental Laws or for which there may be
liability in tort, or otherwise, and which is related to or arises out
of an environmental condition, the Seller agrees that Seller shall
indemnify, defend, and hold harmless the Purchaser Indemnified Parties
from and against all claims, damages, liabilities, penalties, actions,
suits, proceedings, demands, assessments, costs and expenses,
including reasonable attorneys' fees and expenses of investigation,
incurred by any Purchaser Indemnified Party as a result of such
environmental condition and further including, if necessary, the costs
and expenses of any remediation, transportation, incineration,
treatment, or other necessary and appropriate disposition or
mitigation of such environmental condition. In the event that any
claim relating to a violation of Environmental Laws shall arise,
Seller, upon notice from Purchaser, shall have the first right to
address and implement remediation of the environmental condition.
(C) OTHER INDEMNIFICATION PROVISIONS. The foregoing indemnification
provisions are in addition to, and not in derogation of, any other
indemnification
21
<PAGE>
provisions in this Agreement, or any contractual, statutory, equitable
or common law remedy any party may have for the breach of any
representation, warranty or covenant.
14. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION.
(A) SELLER'S NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. Seller
acknowledges that Seller has in the past, currently has, and in the
future may possibly have access to certain confidential information of
each Corporation, including, but not limited to, list of accounts,
operational policies, and pricing and cost policies that are valuable,
special and unique assets of the Corporation (the "Confidential
Information"). Seller agrees that Seller will not disclose such
Confidential Information to any person or entity for any purpose or
reason whatsoever except to authorized representatives of the
Purchaser, or as required by law, unless the Confidential Information
becomes known to the public generally through no fault of the Seller.
In the event of a breach or threatened breach by the Seller of this
subparagraph, the Purchaser shall be entitled to an injunction
restraining the Seller from disclosing, in whole or in part, such
Confidential Information. Nothing herein shall be construed as
prohibiting the Purchaser from pursuing any other available remedy for
such breach or threatened breach, including the recovery of damages.
(B) PURCHASER'S NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. Purchaser
acknowledges that it has in the past, currently has, and in the future
may possibly have access to Confidential Information. The Purchaser
agrees that it will not disclose such Confidential Information to any
person or entity for any purpose or reason whatsoever, except to
authorized representatives of the Purchaser, or as required by law,
unless such Confidential Information becomes known to the public
generally through no fault of the Purchaser. In the event of a breach
or threatened breach by Purchaser of the provisions of this
subparagraph, the Seller shall be entitled to an injunction
restraining the Purchaser from disclosing, in whole or in part, such
Confidential Information. Nothing herein shall be construed as
prohibiting the Seller from pursuing any other available remedy for
such breach or threatened breach, including the recovery of damages.
Any other provision of this Agreement to the contrary notwithstanding,
Purchaser's obligations not to disclose the Confidential Information
shall terminate at Closing.
(C) INSIDER LIABILITY. The Seller acknowledges that trading in the
Purchaser's securities by persons possessing material non-public
information may result in private lawsuits for damages or to civil or
criminal proceedings by the Securities and Exchange Commission.
Seller also acknowledges that liability may be imposed on insiders who
privately disclose otherwise non-public material information where
such disclosure
22
<PAGE>
coincide with trading Purchaser's securities by such insiders or by
the recipients of such information.
15. ADDITIONAL AGREEMENTS OF PURCHASER AND SELLER.
(A) INSURANCE. In the event the transactions contemplated by this
Agreement cause any of the insurance policies of either of the
Corporations to lapse and the insurance policy is a "claims made"
policy, Seller agrees to purchase a "tail" policy that will cover any
condition, activity, or event that would have been covered under the
"claims made" policy had the claim been made prior to the Closing
Date. All such "tail" policies shall be purchased at the Seller's
cost and expense.
(B) ESCROW AGREEMENT. The Escrow Agreement shall provide (among other
terms) that Purchaser shall be reimbursed out of the amount held in
escrow for (i) any accounts receivable listed on Exhibit "N" that are
not collected within 120 days of invoice date, and (ii) any contracts
in transit listed on Exhibit "P" that are not collected within 30 days
of the contract date. In the event any account receivable is not
collected within 120 days of invoice date, upon receiving credit for
such receivable from the Escrow Account, Purchaser will assign the
account receivable to Seller.
(C) PURCHASE AGREEMENTS. Seller has acquired certain real property in Las
Vegas, Nevada, and RDS, Inc., a Colorado corporation, has acquired
certain real property in Denver, Colorado; which will be described on
Exhibit "B," for the relocation of each Corporation's dealership.
Seller agrees to cause RDS, Inc. to execute and deliver to Purchaser a
purchase and sale agreement covering the Denver real property, which
will contain a purchase price of $2,000,000 and such other terms and
conditions as RDS, Inc. and Purchaser shall mutually agree. Seller
agrees to execute and deliver to Purchaser a purchase and sale
agreement covering the Las Vegas real property, which will contain a
purchase price of $5,500,000 and such other terms as Seller and
Purchaser shall mutually agree. The above described purchase and sale
agreements shall be referred to in this Agreement as the "Purchase
Agreements." Purchaser and Seller agree that the purchase of the real
property in Denver, Colorado and in Las Vegas, Nevada will occur
simultaneous with the Closing of the transaction contemplated by this
Agreement, or as soon thereafter as practicable.
(D) STOCK OF THE PURCHASER. The certificates representing the restricted
common stock of Purchaser that is issued to the Seller shall bear a
restrictive legend that the stock has not been registered under
applicable federal and state securities laws. It is understood and
agreed that Purchaser has not agreed to register the restricted common
stock of Purchaser that is to be issued to Seller.
23
<PAGE>
(E) TERMINATION.
(i) Mutual Consent. This Agreement may be terminated by the written
consent of the parties.
(ii) By the Purchaser. This Agreement may be terminated by written
notice of termination given by the Purchaser to the Seller if a
material default should be made by the Seller in the observance
of or in the due and timely performance by Seller of any of the
agreements and covenants herein contained, or if there shall
have been a material breach by the Seller of any of the
warranties and representations herein contained, or if the
conditions of this Agreement to be complied with or performed by
Seller at or before Closing shall not have been complied with or
performed at the time required for such compliance or
performance and such noncompliance or nonperformance shall not
have been waived by the Purchaser.
(iii) By the Seller. This Agreement may be terminated by written
notice of termination given by the Seller to the Purchaser if a
material default should be made by the Purchaser in the
observance of or in the due and timely performance by the
Purchaser of any agreements and covenants of the Purchaser
herein contained, or if there shall have been a material breach
by the Purchaser of any of the warranties and representations of
the Purchaser, of if the conditions of this Agreement to be
complied with or performed by the Purchaser at or before Closing
shall not have been complied with or performed at the time
required for such compliance or performance and such
noncompliance or nonperformance shall not have been waived by
the Seller.
(F) REGISTRATION RIGHTS AGREEMENT. Seller and Purchaser agree to execute
and deliver a Registration Rights Agreement (the "Registration Rights
Agreement") covering the restricted common stock of the Purchaser that
will be acquired by Seller at Closing.
(G) ASSIGNMENT OF CAUSE OF ACTION. Douglas Toyota, Inc. and Seller are
currently plaintiffs in Civil Action 96-B-2543, R. Douglas Spedding
and Douglas Toyota, Inc. v. Colorado Motor Vehicle Dealer Board, et
al., in the United States District Court for the District of
Colorado. Purchaser and Seller agree that as soon as possible after
the Closing, Douglas Toyota, Inc. will withdraw from the lawsuit and
that Douglas Toyota, Inc. will assign its cause of action to Seller.
In the event that Douglas Toyota, Inc. commences, prior to closing,
any State Court actions arising out
24
<PAGE>
of the same or similar causes of action, upon closing , Douglas
Toyota, Inc. will assign all right, title and interest to Seller in
such State Court action.
(H) HART-SCOTT-RODINO NOTIFICATION. Prior to the Closing Date, the
parties shall, if and to the extent required by law, file all reports
or other documents required or requested by the Federal Trade
Commission ("FTC") or the United States Department of Justice
("Justice Department") under the HSR Act, and all regulations
promulgated thereunder, concerning the transactions contemplated by
this Agreement, and comply promptly with any request by the FTC or the
Justice Department for additional information concerning such
transactions, so that the waiting period specified in the HSR Act will
expire as soon as reasonably possible after the execution and delivery
of this Agreement. The parties agree to furnish to one another such
information concerning the Purchaser, the Seller, and the Corporations
as the parties need to perform their obligations hereunder. The
Purchaser agrees to pay all filing fees and costs due governmental
agencies with regard to the HSR Act notification and compliance.
(I) PHYSICAL INVENTORY. Prior to the Closing Date, Purchaser or
Purchaser's representatives shall conduct a physical inventory of all
parts, accessories, new vehicles, and used vehicles owned by each
Corporation. The Seller shall have the right to have an agent present
during each physical inventory. The physical inventories shall be
collectively referred to in this Agreement as the "Physical
Inventories." The following adjustments shall be made to the
Aggregate Adjusted Net Worth after the Physical Inventories:
(i) Seller and Purchaser shall agree to the value of the used vehicle
inventory. The net book value of the used vehicle inventory in the
Audited Financial Statements shall be adjusted to the agreed value in
determining the Aggregate Adjusted Net Worth. If Seller and Purchaser
fail to agree on the value of any used vehicles, the Seller shall
retain ownership of such used vehicles and the net book value of such
used vehicles shall be deducted from the net book value of the used
vehicle inventory in the Audited Financial Statements in determining
the Aggregate Adjusted Net Worth.
(ii) Seller and Purchaser shall calculate the value of the new vehicle
inventory for each Corporation. The value of each new vehicle shall
be the cash sum equal to the factory invoice price to the Corporation,
less any factory hold-back rebate, any other factory rebates which the
Corporation may have received, or to which the Corporation is or may
become entitled to receive, advertising, interest credits, and PDI,
plus options added at dealer cost and any freight and handling
charges. All 1995 and 1996 demonstrators shall be valued for a cash
sum equal to an amount as calculated above, less $0.30 per mile over
1,000 miles on the odometer as depreciation for demo service.
25
<PAGE>
The value of any new vehicle shall be decreased by an amount equal to
the Corporation's actually incurred internal cost of repair for any
physically damaged vehicle. The net book value of the new vehicle
inventory in the Audited Financial Statements shall be adjusted to the
value as calculated above in determining the Aggregate Adjusted Net
Worth.
(iii) Seller and Purchaser shall agree to the value of the parts and
accessories inventory. The net book value of the parts and
accessories inventory in the Audited Financial Statements shall be
adjusted to the agreed value in determining the Aggregate Adjusted Net
Worth. If Seller and Purchaser fail to agree on the value of any
parts or accessories, the Seller shall retain ownership of such parts
or accessories and the net book value of such parts or accessories
shall be deducted from the net book value of the parts and accessories
inventory in the Audited Financial Statements in determining the
Aggregate Adjusted Net Worth.
(j) EXCESS NET WORTH DISTRIBUTION. In the event that the Aggregate
Adjusted Net Worth should exceed $6,000,000, Seller, prior to Closing,
may receive a distribution equaling the excess of Aggregate Adjusted
Net Worth.
(k) LIMITATIONS ON SELLER'S LIABILITY. Notwithstanding anything herein to
the contrary, the liability of Seller hereunder relating to any and
all representations, warranties, indemnifications and matters set
forth in Section 15(b) hereof, shall not exceed the sum of $1,000,000.
(l) SECTION 338(H)(10) ELECTIONS.
i) Seller agrees to make elections under Section 338(h)(10) of the
Internal Revenue Code and all comparable elections under state and
local tax law with respect to the Corporations.
ii) Purchaser and Seller shall jointly file Form 8023-A with the
Internal Revenue Service in accordance with Section 338 of the
Internal Revenue Code and the regulations thereunder no later than the
15th day of the ninth month beginning after the month that includes
the Closing Date in accordance with Internal Revenue Code Section
338(g) and Treasury Regulation Section 1.338(h)(10) - 1(d)(2).
iii) Purchaser and Seller shall allocate the Purchase Price to the
assets conveyed pursuant to this Agreement using a reasonable asset
valuation which will be agreed to by Purchaser and Seller no later
than ninety (90) days after the Closing Date. In all events, however,
Purchaser and Seller agree to conformity of treatment of all asset
allocations with respect to the Section 338(h)(10) elections.
26
<PAGE>
16. GENERAL PROVISIONS.
(A) ENTIRE AGREEMENT. This Agreement contains and constitutes the entire
agreement between the parties regarding the subject matter hereof and
supersedes all prior agreements and understandings between the parties
relating to the subject matter of this Agreement. There are no
agreements, understandings, restrictions, warranties or
representations between the parties relating to the subject matter
hereof other than those set forth in this Agreement. This Agreement
is not intended to have any legal effect whatsoever, or to be a
legally binding agreement, or any evidence thereof, until it has been
signed by the Seller and the Purchaser.
(B) EXHIBITS. The following exhibits shall be initialed by the parties and
attached to this Agreement prior to or at Closing. When attached to
this Agreement, the exhibits shall be made a part of this Agreement by
reference.
Exhibit "A" - The Buy-Sell Agreement
Exhibit "B" - Real Property and Leases
Exhibit "C" - Tangible Personal Property
Exhibit "D" - Inventories
Exhibit "E" - Permits and Licenses
Exhibit "F" - Intellectual Property
Exhibit "G" - Encumbrances
Exhibit "H" - Guaranties
Exhibit "I" - Legal Actions
Exhibit "J" - Contracts and Agreements
Exhibit "K" - Employee Benefit Plans
Exhibit "L" - Insurance
Exhibit "M" - Personnel
Exhibit "N" - Accounts and Notes Receivable
Exhibit "O" - Underground Storage Tanks
Exhibit "P" - Contracts in Transit
Exhibit "Q" - Warranties
Exhibit "R" - Rentals on Real Property Leases
(C) THIRD PARTY CONSENTS. The Seller and the Purchaser mutually agree to
cooperate and use reasonable, good faith efforts to prepare all
documentation, to effect all filings and to obtain all permits,
consents, approvals, and authorizations of all third parties and
governmental bodies as may be necessary to consummate the transactions
contemplated by this Agreement.
27
<PAGE>
(D) FURTHER ACTIONS. From time to time, as and when requested by any
party hereto, the other party shall execute and deliver, or cause to
be executed and delivered, all such documents and instruments and
shall take, or cause to be taken, all such further or other actions as
such other party may reasonably deem necessary or desirable to
consummate the transactions contemplated by this Agreement.
(E) PUBLICITY. The parties hereto agree that no public release or
announcement concerning the terms of the transactions contemplated by
this Agreement shall be issued by any party without the prior written
consent of the other party (which consent shall not be unreasonably
withheld), except as such release or announcement may be required by
law, in which case the party required to make the release or
announcement shall allow the other party reasonable time to comment on
such release or announcement in advance of such issuance.
(F) AMENDMENT. This Agreement may not be amended, modified, or
terminated except by an instrument in writing signed by all parties to
this Agreement.
(G) CONSTRUCTION. All pronouns and any variations thereof shall be
deemed to refer to the masculine, feminine or neuter gender thereof or
to the plurals of each, as the identity of the person or persons or
the context may require. The descriptive headings contained in this
Agreement are for reference purposes only and are not intended to
describe, interpret, define or limit the scope, extent or intent of
this Agreement or any provision contained in this Agreement.
(H) INVALIDITY. If any provision contained in this Agreement shall for
any reason be held to be invalid, illegal, void or unenforceable in
any respect, such provision shall be deemed modified so as to
constitute a provision conforming as nearly as possible to such
invalid, illegal, void or unenforceable provision while still
remaining valid and enforceable; and the remaining terms or provisions
contained herein shall not be affected thereby.
(I) PAYMENT OF EXPENSES. Whether or not the transactions contemplated by
this Agreement are consummated, each of the parties to this Agreement
shall be responsible for its own costs and expenses incurred in
connection with the preparation and negotiation of this Agreement and
the transactions contemplated hereby.
(J) BINDING EFFECT AND ASSIGNMENT. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their
respective legal representatives, successors and permitted assigns.
Only with the prior written consent of the Seller, which consent shall
not be unreasonably withheld, the Purchaser may assign its rights
28
<PAGE>
under this Agreement to a related entity, and the Purchaser and its
assignee shall be fully obligated, responsible and liable for the
performance of the Purchaser's obligations hereunder regardless of any
such assignment. The Seller may not assign any of the Seller's rights
or delegate any of the Seller's obligations hereunder. Any assignment
in violation hereof shall be void.
(K) ATTORNEYS' FEES. In the event any party instigates litigation to
enforce or protect its rights under this Agreement, the party
substantially prevailing in any such litigation shall be entitled, in
addition to all other relief, to reasonable attorneys' fees, out-of-
pocket costs and disbursements relating to such litigation.
(L) NOTICES. All notices and other communications hereunder shall be (i)
in writing, dated with the current date of such notice, and signed by
the party giving such notice, and (ii) mailed, postpaid, registered or
certified, return receipt requested, addressed to the party to be
notified, or delivered by personal delivery or by overnight courier.
Notice shall be deemed given when received by the party to be notified
or when the party to be notified refuses to accept delivery of the
notice. The initial addresses of the parties shall be as follows:
If to Purchaser:
Cross-Continent Auto Retailers, Inc.
1201 S. Taylor
P.O. Box 750
Amarillo, Texas 79105-0750
ATTENTION: ROBERT W. HALL
With a copy to:
Sprouse, Mozola, Smith & Rowley, P.C.
P.O. Box 15008
Amarillo, Texas 79105-5008
ATTENTION: R. WAYNE MOORE
If to Seller:
R. Douglas Spedding
4380 E. Alameda Avenue
Glendale, Colorado 80222
29
<PAGE>
With a copy to:
Burg & Eldredge, P.C.
40 Inverness East
Englewood, Colorado 80112
ATTENTION: MICHAEL S. BURG
The parties hereto shall have the right from time to time to change
their respective addresses by not less than ten (10) days prior
written notice to the other parties.
(M) DEFINITION OF KNOWLEDGE. As used in this Agreement, Seller's
"knowledge" shall include the knowledge of Seller and the employees
and agents of the applicable Corporation. Each representation and
warranty that is limited to Seller's "knowledge" is made with the
understanding that Seller has examined whatever sources of information
as are in the actual possession or control of Seller or the applicable
Corporation in order to verify the truth and accuracy of such
representation and warranty.
(N) TIME IS OF THE ESSENCE. Time shall be of the essence with respect to
this Agreement and the consummation of the transactions contemplated
hereby.
(O) REMEDIES. None of the remedies provided for in this Agreement shall
be the exclusive remedy of either party for a breach of this
Agreement. The parties hereto shall have the right to seek any other
remedy at law or in equity in lieu of or in addition to any remedies
provided for in this Agreement.
(P) SURVIVAL OF OBLIGATIONS. To the extent necessary to carry out the
terms and provisions of this Agreement, the obligations and rights
arising from or related to this Agreement shall survive the Closing
and shall not be merged into the various documents executed and
delivered at the time of the Closing.
(Q) WAIVER. No waiver of any breach or default hereunder shall be
considered valid unless in writing and signed by the party giving such
waiver, and no such waiver shall be deemed a waiver of any subsequent
breach or default of the same or similar nature.
(R) GOVERNING LAW. This Agreement shall be construed, enforced, and
governed in accordance with the laws of the State of Texas, except for
matters related to any real property owned or leased by either of the
Corporations, which shall be construed, enforced, and governed in
accordance with the laws of the state in which such real property is
located.
30
<PAGE>
(S) VENUE. The obligations of the parties to this Agreement are
performable, and venue for any legal action arising out of this
Agreement shall lie in Potter County, Texas.
(T) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one and the
same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
PURCHASER: CROSS-CONTINENT AUTO RETAILERS, INC.,
a Delaware corporation
By: ______________________________
Bill Gilliland,
Chairman and Chief Executive Officer
SELLER: _________________________________________
R. Douglas Spedding
31
<PAGE>
EXHIBIT 2.3
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made and entered into
this 28th day of February, 1997, by and among CROSS-CONTINENT AUTO RETAILERS,
INC., a Delaware corporation ("Purchaser"), JACK BIEGGER, DALE EDWARDS, and
SAHARA DATSUN, INC., a Nevada corporation, dba JACK BIEGGER NISSAN (the
"Company").
RECITALS
A. Jack Biegger and Dale Edwards are the owners of all of the issued and
outstanding shares of capital stock of the Company (the "Shares").
B. Jack Biegger and Dale Edwards shall hereinafter be collectively referred
to as the "Sellers" and individually as a "Seller".
C. Purchaser desires to purchase all of the Shares, and Sellers desire to
sell the Shares to Purchaser, for the consideration, upon the terms and subject
to the conditions set forth in this Agreement.
AGREEMENT
For and in consideration of the mutual covenants, agreements,
representations, and warranties set forth in this Agreement, Purchaser, Sellers,
and the Company agree as follows:
1. PURCHASE AND SALE OF THE SHARES. Upon the terms and subject to the
conditions set forth in this Agreement, at the Closing (hereinafter defined)
each Seller shall sell, transfer, convey, assign, and deliver to the Purchaser,
and Purchaser shall purchase, acquire and accept from each Seller, all of the
Shares owned by such Seller, free and clear of all security interests, liens,
pledges, options, rights of first refusal, or other claims, encumbrances,
agreements, arrangements or commitments of any kind or character, whether
written or oral.
2. PURCHASE PRICE. The purchase price to be paid by Purchaser to Sellers
for the Shares shall be $11,600,000 (the "Purchase Price"), subject to the
adjustment set forth in Paragraph 3 of this Agreement.
3. ADJUSTMENTS TO THE PURCHASE PRICE. The Purchase Price shall be
adjusted as follows:
In the event the 1996 Earnings (hereinafter defined) are less than
$3,100,000, the Purchase Price shall be reduced by an amount equal to 3.74
times the difference between $3,100,000 and the 1996 Earnings. As used in
this Agreement, the term "1996 Earnings" shall mean the amount of the
Company's 1996 net profit before income taxes as shown on the Company's
income statement for 1996 in the Audited Financial Statements (hereinafter
defined), plus (a) salaries in the aggregate amount of $368,752.00 paid to
Jack Biegger and Dale Edwards during 1996, and (b) a LIFO adjustment in the
amount of $111,000.00.
<PAGE>
4. PAYMENT OF PURCHASE PRICE. At Closing Purchaser shall pay the Purchase
Price, as adjusted, as follows:
a. Cash in the amount of $9,000,000, less the adjustments set forth in
Paragraph 3 of this Agreement, to Sellers.
b. Purchaser shall issue to Sellers the number of shares of restricted
common stock of Purchaser that, when multiplied by the closing price
for the stock of Purchaser quoted in the Wall Street Journal for the
last business day immediately preceding the date that the
transactions contemplated by this Agreement is announced to the
public by Purchaser (the "Pricing Date"), will equal $2,000,000.
Purchaser shall not issue any fractional shares and shall pay Sellers
cash in lieu of any fractional shares based on the closing price for
the stock of Purchaser quoted in the Wall Street Journal for the
Pricing Date.
c. Purchaser shall execute and deliver a promissory note (the "Note") to
Sellers in the original principal amount of $600,000, payable in
sixty (60) equal monthly installments, bearing interest at the
allowed lowest rate under the Internal Revenue Code for installment
sales, in substantially the form attached hereto as Exhibit "A". The
Note shall provide that Purchaser may offset (for a period of two (2)
years after the Closing Date), any accounts receivable or notes
receivable listed on Exhibit "O" that are not collected when due, any
contracts in transit listed on Exhibit "R" that are not collected
when due, any parts and accessories listed on Exhibit "E" that are in
the current Nissan Motor Corporation price list and that are returned
by the Company and are not accepted by the manufacturer, and any
Claims (hereinafter defined) that are recovered against the Company;
against any amounts due to Sellers under the Note.
Each component of the Purchase Price shall be allocated between the Sellers as
follows:
Jack Biegger 60%
Dale Edwards 40%
5. CLOSING. Subject to the terms and conditions set forth in this
Agreement, the closing ("Closing") of the purchase and sale of the Shares shall
take place at the offices of Singer, Brown & Barringer, 520 S. Fourth Street,
Las Vegas Nevada 89101, or at such other place as may be mutually agreed upon by
Purchaser and Sellers, as soon as practicable following the date on which all
conditions to the obligations of the parties hereunder (other than those
requiring the taking of action at the Closing) have been satisfied or waived but
no later than May 10, 1997 (effective as of April 30, 1997). The date on which
the Closing is to occur is hereinafter referred to as the "Closing Date." Any
other provision of this Agreement to the contrary notwithstanding, if Sellers
have not obtained the consent of Nissan Motor Corporation, U.S.A. prior to April
30, 1997, either Purchaser or Sellers shall have the right to extend the Closing
Date thirty (30) days by giving written notice to the other parties.
6. CLOSING OBLIGATIONS.
a. At Closing the Purchaser shall deliver to the Sellers (i) the cash
described in subparagraph 4(a), (ii) the restricted common stock of
Purchaser described in subparagraph 4(b), (iii) the Note executed by
the Purchaser, and (iv) the Registration Rights Agreement
(hereinafter defined) executed by the Purchaser. At Closing,
Purchaser shall deliver to Sellers such additional information,
certificates, and other documents as Sellers shall have reasonably
requested.
b. At Closing the Sellers shall deliver to the Purchaser (i) stock
certificates representing the Shares in duly transferable form, (ii)
such other documents and
2
<PAGE>
instruments as Purchaser may reasonably request in order to vest in
Purchaser good, absolute, and marketable title to the Shares and to
any and all other right, title, interest, claim, or demand of any
kind that Sellers may have in the properties, assets, or business of
the Company, (iii) the Amendment executed by the Company, (iv) the
opinions of counsel described in subparagraph 10(n) of this
Agreement, (v) an Investment Letter (hereinafter defined) executed by
each Seller, (vi) the Registration Rights Agreement executed by the
Sellers, (vii) that certain promissory note dated September 16, 1996,
executed by the Company, payable to the order of The Jack Biegger
Revocable Living Trust, marked "Paid," (viii) that certain promissory
note dated September 16, 1996, executed by the Company, payable to
the order of The Dale M. Edward Revocable Family Trust, marked
"Paid," and (ix) the Amendment (hereinafter defined). Sellers shall
use their best efforts to obtain and deliver to the Purchaser at
Closing employment contracts executed by Jeff Pastorini, Mark Evans,
Ed Cox, Barbara Askin, Ron Ragona, Jerry Brown, Carl Vance, Alan
Pope, Arthur Fordonski and Hal Houssein. At Closing each Seller and
the Company shall deliver to Purchaser such additional information,
certificates, and documents as Purchaser shall have reasonably
requested.
7. REPRESENTATIONS AND WARRANTIES OF THE SELLERS AND THE COMPANY. The
Sellers and the Company jointly and severally represent and warrant to Purchaser
as follows:
A. AUTHORITY; BINDING AGREEMENT. Each Seller has the legal power and
capacity to enter into this Agreement and to perform his obligations
hereunder. This Agreement is a valid and binding obligation of each
Seller, enforceable against each Seller in accordance with its terms,
except as the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating
to the enforcement of creditors' rights generally and by general
principles of equity. Each Seller has (i) good, absolute, and
marketable title to the portion of the Shares owned by that Seller,
free and clear of any liens, claims, agreements, encumbrances, or
restrictions of any kind, and (ii) the complete and unrestricted
right, power, and authority to sell, transfer, and assign the Shares
in accordance with this Agreement.
B. INCORPORATION AND GOOD STANDING. The Company is duly incorporated, is
validly existing, and is in good standing under the laws of the State
of Nevada and has all necessary power and authority to own, lease,
and operate its properties and assets and to conduct its business as
its business is now being conducted. Sellers have delivered to
Purchaser complete and accurate copies of the Company's articles of
incorporation and bylaws, including all amendments thereto and have
made available to Purchaser its minute book and stock records.
Exhibit "B" will set forth a complete and accurate list of all
officers and directors of the Company as of the date of this
Agreement. The Company is qualified to do business and is in good
standing in each state in which it transacts business. The Company
does not have any subsidiaries nor any direct or indirect equity
interest in any corporation, partnership, or other entity. The
Company is a "small business corporation" and has maintained a valid
election to be an "S" corporation under Subchapter S of the Internal
Revenue Code of 1986, as amended.
C. CAPITALIZATION. The authorized capital stock of the Company consists
of 2,500 shares of common stock, having no par value. The Shares (i)
constitute all of the issued and outstanding shares of capital stock
of the Company, (ii) have been validly authorized and issued, (iii)
are fully paid and nonassessable, (iv) have not been issued in
violation of any preemptive rights or of any federal or state
3
<PAGE>
securities laws, and (v) are not subject to any agreement that
relates to the voting or control of any of the Shares. On the date
hereof, the Shares are (I) comprised of 700 shares of common stock of
the Company, and (ii) owned beneficially and of record by Jack
Biegger (450 shares) and Dale Edwards (300 shares), the Sellers.
There are and will be on the Closing Date no outstanding
subscriptions, options, rights, warrants, convertible securities, or
any other agreements or commitments obligating the Company to issue,
deliver, or sell any additional shares of its capital stock of any
class or any other securities of any kind. There are no bonds,
debentures, notes, or other indebtedness or securities of the Company
having the right to vote on any matters on which the shareholders of
the Company may vote. There are no outstanding rights, agreements, or
arrangements of any kind obligating the Company to repurchase,
redeem, or otherwise acquire any shares of capital stock or other
voting securities of the Company.
D. NO CONFLICTS. Neither the execution and delivery of this Agreement
nor the fulfillment of or compliance with the terms and provisions
hereof will violate, conflict with, or result in a breach of the
terms, conditions or provisions of, or constitute a default or an
event which, with notice or lapse of time or both, would constitute a
default under, (i) the articles of incorporation or bylaws of the
Company, (ii) any contract, agreement, mortgage, deed of trust, or
other instrument or obligation to which the Sellers or the Company is
a party or by which any of them is bound, except for agreements
between the Company and Nissan Motor Corporation, USA, which require
the consent of Nissan Motor Corporation, USA, (iii) violate any
provision of any applicable law or regulation or of any order,
decree, writ or injunction of any court or governmental body, or (iv)
result in the creation or imposition of any lien, charge,
restriction, security interest or encumbrance of any kind whatsoever
on any property or asset of the Company or on the Shares.
E. CONSENTS. No consent or approval by, or any notification of or filing
with, any governmental entity or agency or any other person or entity
is required in connection with the execution, delivery or performance
of this Agreement by Sellers or the Company, other than consent from
(i) the Department of Motor Vehicles of the State of Nevada, and (ii)
Nissan Motor Corporation, U.S.A.
F. REAL PROPERTY. Exhibit "C" will set forth a complete and accurate (i)
legal description of all real property owned by the Company, and (ii)
description of each lease under which the Company holds a leasehold
interest. Each of the leases is in full force and effect and
constitutes a legal, valid and binding obligation of the parties
thereto. The Company has performed the covenants required to be
performed by it under each of the leases to which it is a party and
is not in default under any of the leases to which it is a party. The
zoning of each tract of real property permits the presently existing
improvements and the continuation of the business presently being
conducted on such real property. To the best of each Seller's and the
Company's knowledge, neither Seller nor the Company is aware of any
pending or proposed changes to such zoning.
G. TANGIBLE PERSONAL PROPERTY. Exhibit "D" will set forth a complete and
accurate description of (i) all equipment, furniture, fixtures, and
other tangible personal property (other than inventory) owned by, in
possession of, or leased or used by the Company in connection with
its business, and (ii) each lease under which the Company holds a
leasehold interest. Each of the leases is in full force and effect
and constitutes a legal, valid, and binding obligation of the parties
thereto. The Company has performed the covenants required to be
performed by it under each
4
<PAGE>
of the leases to which it is a party and is not in default under any
of the leases to which it is a party. To the best of each Seller's
and the Company's knowledge, the tangible personal property of the
Company is in good repair and operating condition, has been regularly
and properly maintained and fully serviced, and is suitable for the
purposes for which it is presently being used.
H. INVENTORIES. Exhibit "E" will set forth a complete and accurate
description of the inventory (new vehicles, used vehicles, and parts
and accessories) of the Company. To the best of each Seller's and the
Company's knowledge, the inventory of the Company consists of goods
of a quality and in quantities that are saleable in the ordinary
course of the Company's business with normal mark-up at prevailing
market prices. To the best of each Seller's and the Company's
knowledge, all parts and accessories in the inventory of the Company
that were purchased from Nissan are returnable and undamaged parts
and accessories that are listed for sale in the current dealer parts
and accessories price schedule for Nissan, except as set forth on
Exhibit "E." Parts and accessories in the inventory of the Company
that were not purchased from Nissan (batteries and anti-freeze) do
not, and at Closing will not, exceed $10,000 in the aggregate. On the
Closing Date, the Company will have the following unencumbered
assets: (i) a used vehicle inventory with a fair market value of at
least $1,700,000, (ii) a new vehicle inventory with a fair market
value of at least $600,000, and (iii) a parts and accessories
inventory with a fair market value of at least $480,000; or
unencumbered cash, accounts receivable, or contracts in transit, in
such amounts. Fair market value shall be determined in accordance
with subparagraph 14(f) of this Agreement.
I. LICENSES AND PERMITS. Exhibit "F" will set forth a complete and
accurate description of all permits, licenses, franchises,
certificates, and similar items and rights, owned or held by the
Company (hereinafter collectively referred to as the "Licenses and
Permits"). The Licenses and Permits (i) are adequate for the
operation of the Company's business, (ii) are valid and in full force
and effect, except as set forth on Exhibit "F," and (iii) will be
transferred to the Purchaser at the Closing, unless such transfer is
prohibited by law or by the terms of the item or right to be
transferred. No additional permit, license, franchise, certificate,
or similar item or right is required by the Company for the operation
of its business.
J. INTELLECTUAL PROPERTY. Exhibit "G" will set forth a complete and
accurate description of all intellectual property presently in use by
the Company, which intellectual property includes (without
limitation) software patents, trademarks, tradenames, service marks,
copyrights, trade secrets, customer lists, inventions, formulas,
methods, processes, advertising materials, Internet sites, and any
other proprietary information or property. There are no outstanding
licenses or consents to third parties granting the right to use any
intellectual property owned by the Company. To the best
5
<PAGE>
of each Seller's and the Company's knowledge, no intellectual
property used by the Company infringes on any rights owned or held by
any other person or entity, and no person is infringing on the rights
of the Company in any intellectual property used by the Company. Any
royalties or fees payable by the Company to any third party by reason
of the use of any intellectual property by the Company is set forth
on Exhibit "G." No additional intellectual property is required by
the Company for the operation of its business.
K. TITLE TO PROPERTIES; ENCUMBRANCES. The Company has good, absolute,
and marketable title to (or, in the case of leased property, valid
and subsisting leasehold interests in) all of its properties and
assets, including (without limitation) the properties and assets that
will be listed on Exhibits "C," "D," "E," "F," and "G." The
properties and assets of the Company are subject to no liens, deeds
of trust, mortgages, encumbrances, conditional sales agreements,
security interests, claims, or restrictions of any kind or character,
except for (i) the encumbrances that will be listed on Exhibit "H,"
and (ii) liens for current taxes not yet due and payable.
L. FINANCIAL STATEMENTS. The Company has delivered to the Purchaser
copies of a balance sheet for the Company dated January 31, 1997 the
"Balance Sheet Date"), and statements of income and retained earnings
for the periods ending December 31, 1996 and January 31, 1997
(hereinafter collectively referred to as the "Financial Statements").
The Financial Statements were prepared by Conway Stuart & Woodberry
and are unaudited. The Financial Statements fairly present the
financial condition of the Company at the dates mentioned and the
results of its operations for the periods specified and were prepared
in accordance with its normal and customary accounting procedures.
The balance sheet in the Financial Statements discloses all of the
debts, liabilities, and obligations of any nature (whether absolute,
accrued, contingent, or otherwise, and whether due or to become due)
of the Company as of the Balance Sheet Date and includes appropriate
reserves for all taxes and other liabilities accrued or due at such
dates but not yet paid.
M. INDEBTEDNESS FOR BORROWED MONEY; GUARANTIES. Exhibit "I" will set
forth a complete and accurate description of the Company's
indebtedness for borrowed money. Sellers will deliver to the
Purchaser complete and accurate copies of all instruments evidencing
or relating to the Company's indebtedness for borrowed money. To the
best of each Seller's and the Company's knowledge, the Company is not
in default or violation of any provision of any agreement evidencing
or relating to its indebtedness for borrowed money. Exhibit "I" will
also set forth a complete and accurate description of all guaranties
by the Company of any obligation or liability of any person or
entity, including (without limitation) any guaranties of installment
sales contracts or leases.
N. TAX MATTERS. To the best of each Seller's knowledge, the Company has
filed or will file all federal, state, local and foreign tax returns
and tax reports required to be filed by it for periods ending on or
prior to the Closing Date. All such returns and reports are and will
be correct and complete in all material respects. All federal, state,
local, and foreign income, profits, franchise, property, excise,
sales, use, occupation, payroll, employment, and other taxes and
assessments that are due and payable by either Seller, the Company,
or by either Seller on behalf of the Company have been properly
computed, duly reported, fully paid, and discharged to the best of
each Seller's knowledge. Neither Seller is aware of any unpaid taxes
that require payment by the Company, except for current taxes not yet
due and
6
<PAGE>
payable. To the best of each Seller's and the Company's knowledge,
(i) all current taxes not yet due and payable by the Company have
been properly accrued and are accurately reflected in the Company's
balance sheet in the Financial Statements, (ii) the Company has not
been delinquent in the payment of any tax, assessment, or
governmental charge, (iii) no issues have been raised in writing with
the Company by the Internal Revenue Service or any other taxing
authority in connection with any tax return or tax report filed by
the Company, and (iv) the Company has not executed any waiver of the
statute of limitations on the assessment or collection of any tax.
Each Seller agrees to indemnify and hold harmless the Purchaser with
respect to any income or other tax liabilities, penalties and
interest which arise from the operation of the Company prior to
Closing or arise as a result of the transactions contemplated by this
Agreement.
O. TRANSACTIONS Since the Balance Sheet Date. Since the Balance Sheet
Date, (i) the Company has not incurred any debts, liabilities, or
obligations, except current liabilities in the ordinary course of
business; discharged or satisfied any liens or encumbrances, or paid
any debts, liabilities, or obligations, except in the ordinary course
of business; mortgaged, pledged, or otherwise subjected to any lien
or other encumbrance any of its properties or assets; canceled any
debt or claim; sold or transferred any properties or assets, except
sales from inventory in the ordinary course of business; nor entered
into any transaction other than in the ordinary course of business;
(ii) there has not been any material adverse change in the business,
operations, properties, assets, revenues, earnings, liabilities, or
condition (financial or otherwise) of the Company; (iii) there has
not been any declaration, setting aside or payment of any dividend or
other distribution in respect of, or any direct or indirect
redemption, purchase or other acquisition of, any of the capital
stock of the Company; (iv) the Company has not issued or sold or
contracted to issue or sell any stock, securities or options, of any
nature whatsoever; (v) the Company has not increased the
compensation, commissions, bonuses, or other remuneration payable to
any officer, director, employee, or to any other person or entity,
whether now or hereafter payable, including any increase pursuant to
any pension, profit-sharing or other plan or commitment, except for
Jerry Brown, Carl Vance, and Elanore Nelson; (vi) there has not been
any damage, destruction or loss (whether or not covered by insurance)
affecting any asset or property of the Company; (vii) the Company has
not made any capital expenditure or commitment, individually or in
the aggregate, in excess of $10,000.00; (viii) the Company has not
made any loan or advance to any person or entity; guaranteed any
obligation or liability of any person or entity, including (without
limitation) any guaranties of any installment sales contracts or
leases, other than as will be set forth on Exhibit "I;" (ix) the
Company has not given any indemnifications to any person or entity;
(x) the Company has not made any sale, assignment or transfer of,
additions to or transactions involving any of its tangible assets
other than in the ordinary course of business; (xi) the Company has
not made any change in its method of accounting or accounting
practices, including (without limitation) any change in depreciation
or amortization policies or rates; (xii) the Company has not granted
any waiver or release of any claim or right held by it; (xiii) the
Company has not amended or terminated any material contract,
agreement, or license to which it is a party; (xiv) the Company has
not made any material write-down of the value of any asset of the
Company or any material write-off as uncollectible of any account
receivable or note receivable; and (xv) the Company has not agreed,
in writing or otherwise, to do or permit any of the foregoing;
P. LITIGATION. Exhibit "J" will set forth a complete and accurate
description of all actions, suits, claims, investigations or legal,
administrative or arbitration proceedings, pending or threatened,
whether at law or in equity, involving the
7
<PAGE>
Company or any of its properties, assets, or business, and all
judgments, orders, decrees, writs or injunctions of any court or
governmental department, commission, agency, instrumentality or
arbitrator applicable to either Seller or to the Company. Neither of
the Sellers nor the Company is aware of any facts that might result
in any other action, suit, claim, investigation, or legal,
administrative or arbitration proceeding.
Q. COMPLIANCE WITH LAWS. To the best of each Seller's and the Company's
knowledge, the Company has complied and is in compliance in all
material respects with all federal, state, local and foreign laws,
ordinances, rules, codes, regulations, and orders (including those
related to environmental protection and occupational safety and
health) applicable to the Company. To the best of each Seller's and
the Company's knowledge, the Company is not subject to any
restriction, judgment, order, writ, injunction, decree, or award,
which has a material adverse affect or is likely to have a material
adverse affect on the business, operations, properties, assets,
revenues, earnings, liabilities, or condition (financial or
otherwise) of the Company.
R. CONTRACTS AND AGREEMENTS. Exhibit "K" will set forth a complete and
accurate description of all material written or oral contracts and
agreements to which the Company is a party or by which it or any of
its property is bound. All such contracts and agreements are in full
force and effect and are binding upon the parties thereto, and none
of the parties thereto is in breach of any of the provisions thereof.
Except as set forth on Exhibit "K," the Company is not a party to any
contract or agreement which has a material adverse affect or is
likely to have a material adverse affect on the business, operations,
properties, assets, revenues, earnings, liabilities, or condition
(financial or otherwise) of the Company.
S. EMPLOYEE BENEFIT PLANS. Exhibit "L" will set forth a complete and
accurate description of all pension, retirement, savings, deferred
compensation, profit sharing, stock option, bonus, incentive,
severance, retirement, health, insurance and other employee benefit
plans that are binding upon the Company. The Company has complied
with the provisions of and has performed the obligations required of
it under such plans, and the Company is not in default under any
provision thereof. To the best of each Seller's and the Company's
knowledge, there have been no material defaults, breaches, or
omissions by the Company or any fiduciary under any of such plans.
The Company has not incurred any liability of any nature whatsoever
under any employee benefit plan.
T. INSURANCE. Exhibit "M" will set forth a complete and accurate
description of all insurance, including (without limitation) worker's
compensation, maintained by the Company and will summarize the
substantive terms of each of the insurance policies, including
(without limitation) whether the insurance policies are "claims made"
or "occurrence" policies. The Company is carrying insurance that is
reasonable in light of the risks attendant to the business and
activities in which the Company is engaged. All of the insurance is
in full force and effect and will not be affected by, or terminated
or lapse by reason of, the transactions contemplated by this
Agreement. The Sellers will cause the Company to keep such insurance
in full force and effect until the Closing Date.
U. PERSONNEL. Exhibit "N" will set forth a complete and accurate list of
all current employees of the Company and all independent contractors
regularly performing services on behalf of the Company and their
respective rates of compensation, including any salary, bonus or
other payment arrangement made with any of them.
8
<PAGE>
The Company does not have any employment agreements or contracts
between the Company and any person or entity. No employee of the
Company is represented by any union or collective bargaining agent.
The Company is not a party to or bound by any collective bargaining
agreement, nor has the Company experienced any strikes, grievances,
claims of unfair labor practices, or other collective bargaining
disputes. The Company has not, to either Seller's knowledge,
committed any unfair labor practice. Neither Seller has any knowledge
of any organizational effort being made or threatened by or on behalf
of any labor union with respect to employees of the Company within
the past five (5) years. To the best of each Seller's and the
Company's knowledge, the Company has (i) paid or has made provision
for the payment of all compensation due any person or entity, (ii)
complied in all material respects with all applicable laws, rules,
and regulations relating to the employment of labor, including those
related to wages, hours, collective bargaining and the payment and
withholding of taxes, and (iii) withheld and paid to the appropriate
governmental authority, or is holding for payment not yet due to such
authority, all amounts required by law or agreement to be withheld
from the compensation of its employees.
V. ACCOUNTS RECEIVABLE. Exhibit "O" will set forth a complete and
accurate list of all accounts receivable and notes receivable of the
Company and an aging analysis of the accounts receivable. To the best
of each Seller's and the Company's knowledge, all accounts receivable
and notes receivable of the Company are valid and enforceable claims,
arose in the ordinary course of business, require no further
performance by the Company, and are collectable without resort to
litigation. To the best of each Seller's and the Company's knowledge,
no material objection, claim, or offset has been made regarding any
of the accounts receivable or notes receivable. Except as will be set
forth on Exhibit "O," all of the accounts receivable and notes
receivable are current. There are and at Closing there will be no
intercompany payables or intercompany receivables due or owing
between either Seller and the Company.
W. BROKERS. Other than Mike Bellon (the "Broker"), neither Seller has
employed, directly or indirectly, any broker or finder, or incurred
any liability for any brokerage fees, commissions, or finders fees,
and other than the Broker, no broker or finder has acted directly or
indirectly for either Seller in connection with this Agreement or the
transactions contemplated by this Agreement.
X. DELIVERY OF DOCUMENTS. Complete and accurate copies of all written
instruments listed or described on the exhibits attached hereto have
been or will be furnished to Purchaser. The Company will make
available to Purchaser, to the extent requested by Purchaser, all
books, records, and facilities of the Company.
Y. BANK ACCOUNTS; POWERS OF ATTORNEY. Exhibit "P" will set forth a
complete and accurate list of (i) the names and addresses of all
persons holding a power of attorney on behalf of the Company, and
(ii) the account numbers and names of all banks or other financial
institutions in which the Company currently has an account, deposit,
or safe deposit box, with the names of all persons authorized to draw
on the accounts or deposits or to have access to the boxes.
Z. DISCLOSURE. To the best of each Seller's and the Company's knowledge,
there have been no events, transactions or information relating to
the Company which, singly or in the aggregate could reasonably be
expected to have a material adverse affect on the business,
operations, properties, assets, revenues, earnings, liabilities, or
condition (financial or otherwise) of the Company. No representation
or
9
<PAGE>
warranty by either Seller or the Company in this Agreement or in any
of the exhibits attached hereto, or other statement in any other
writing furnished or to be furnished to Purchaser by or on behalf of
either Seller or the Company in connection with the transactions
contemplated by this Agreement, contains or will contain any untrue
statement of a material fact, or omits or will omit to state a
material fact necessary to make the statements contained herein not
misleading.
AA. ENVIRONMENTAL.
(i) To the best of each Seller's and the Company's knowledge, there
are no past or present events, conditions, circumstances,
activities, practices, incidents, plans or actions, based on or
resulting from the conduct of the business of the Company,
including the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling, or the
emission, discharge, release, or threatened release into the
environment, of any pollutant, contaminant, chemical, or
industrial toxic or hazardous material, substance or waste,
which violates any laws currently in effect relating to
pollution or protection of the environment (the "Environmental
Laws"), including (without limitation) the Comprehensive
Environmental Response, Compensation, and Liability Act
("CERCLA"), or any plan, order, decree, judgment, injunction,
notice or demand letter from a governmental department,
commission, agency or instrumentality applicable to the
Company, or which could give rise to any common law or other
legal liability. To the best of each Seller's and the Company's
knowledge, all real property currently or formerly owned,
leased or otherwise utilized by the Company contains no spill,
deposit, or discharge of any hazardous substance (as that term
is currently defined under CERCLA or any applicable state law),
for which the Company could be liable.
(ii) Exhibit "Q" will set forth a complete and accurate description
of each underground storage tank of any kind or nature that is
located or that was located on any real property currently or
formerly owned, leased or otherwise utilized by the Company.
Exhibit "Q" will also set forth a complete history of each
underground storage tank, including the dates and types of all
tests.
(iii) The Company will deliver to Purchaser copies of all existing
environmental site audits on any real property currently or
formerly owned, leased, or otherwise utilized by the Company.
BB. CONTINUATION OF BUSINESS. Neither Seller knows of any reason why the
Company cannot continue its business in the same manner following the
execution of this Agreement and the Closing as it has been operated
prior thereto, except to the extent that Purchaser causes the
business of the Company to change following the Closing. Neither
Seller has any reason to believe that at any time in the foreseeable
future the business of the Company shall be materially adversely
affected by any event, except to the extent that the Purchaser causes
the business of the Company to change following the Closing.
CC. CONTRACTS IN TRANSIT. Exhibit "R" will set forth a complete and
accurate list of all of the Company's contracts in transit.
10
<PAGE>
DD. WARRANTIES. Exhibit "S" will set forth a complete and accurate list
of (i) all warranties on vehicles that have been sold by the Company
for the last three (3) years for which there is any contingency of
liability for the Company, and (ii) the companies that sold the
warranties.
8. REPRESENTATIONS AND WARRANTIES OF PURCHASER.
Purchaser represents and warrants to each Seller as follows:
A. INCORPORATION. Purchaser is duly incorporated, is validly existing,
and is in good standing under the laws of the State of Delaware.
Purchaser is qualified to do business and is in good standing in the
State of Nevada.
B. AUTHORITY; BINDING AGREEMENT. Purchaser has the corporate power and
authority to enter into this Agreement and to perform its obligations
hereunder. This Agreement is a valid and binding obligation of
Purchaser, enforceable against Purchaser in accordance with its
terms, except as the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to the enforcement of creditors' rights generally and
by general principles of equity.
C. NO CONFLICTS. Neither the execution and delivery of this Agreement
nor the consummation of the transactions contemplated by this
Agreement will result in any breach or violation of or default under
any agreement or other instrument to which Purchaser is a party or by
which it is bound.
D. BROKERS. Other than the Broker, the Purchaser has not employed,
directly or indirectly, any broker or finder, or incurred any
liability for any brokerage fees, commissions or finders' fees, and
other than the Broker no broker or finder has acted directly or
indirectly for the Purchaser in connection with this Agreement or the
transactions contemplated by this Agreement.
9. PRE-CLOSING COVENANTS. Each Seller and the Company agrees to do the
following prior to the Closing Date:
A. NOTICES AND CONSENTS. Each Seller shall use his best efforts to
obtain any required approvals or consents to this Agreement and to
the transactions contemplated by this Agreement from any person or
entity from which such approval or consent is required, including
(without limitation) consent or approval from (i) the manufacturer
represented by the Company, and (ii) the Federal Trade Commission
(the "FTC") and the Department of Justice of the United States of
America (the "Justice Department") under the Hart-Scott-Rodino Act
("HSR Act") and all regulations promulgated thereunder.
B. CONDUCT OF BUSINESS BY THE COMPANY PRIOR TO THE CLOSING DATE. Each
Seller shall cause the Company to conduct its operations according to
the ordinary and usual course of business reasonably consistent with
past and current practices, to maintain and preserve its assets,
properties, insurance policies, business organization, and
advantageous business relationships, and to retain the services of
its officers, employees, agents, and independent contractors, and
shall not allow the Company to engage in any practice, take any
action, or enter into any transaction outside of the ordinary course
of business. Without limiting the generality of the foregoing, each
Seller shall prohibit the Company, without the prior written consent
of Purchaser, from directly or indirectly taking any of the actions
described in subparagraph 7(o).
11
<PAGE>
C. PURCHASER'S EXAMINATION. Each Seller shall cause the Company to
permit Purchaser and representatives of the Purchaser to have full
access to and to examine, at all reasonable times and places, and in
a manner so as not to interfere with the normal business operations
of the Company; the books, records, properties, assets and operations
of the Company. Such examination shall include access to the
officers, directors, employees, agents and representatives of the
Company. Each Seller shall cause the Company to furnish to Purchaser
and representatives of Purchaser with such financial, operating and
other data and information, and copies of documents with respect to
the Company as Purchaser shall from time to time request. Such access
and information shall not in any way affect or diminish any of the
representations or warranties made in this Agreement.
D. AUDIT. Each Seller shall cause the Company to permit an audit (the
"Audit") to be conducted under generally accepted auditing standards,
of the books, records, and financial statements of the Company for
1994, 1995, 1996, and any additional years if required by applicable
law, and shall cause Audited Financial Statements (hereinafter
defined) to be prepared in accordance with generally accepted
accounting principles, which shall include reserves for any deferred
warranties, charge-backs, inventory write downs, repossessions,
contracts in transit, and any other appropriate reserves. As used in
this Agreement, "Audited Financial Statements" shall mean an audited
(i) balance sheet dated December 31, 1996, for the Company, and (ii)
income statement for the year ending December 31, 1996 for the
Company. The Audit will be conducted by Purchaser's accountants,
Price Waterhouse, assisted by the Company's accountants, Conway,
Stuart & Woodbury. Each Seller agrees to cause the full cooperation
of the officers, directors and employees of the Company in the Audit
as requested by Purchaser. The start date of the Audit will be no
later than March 20, 1997. The Company's accounting staff will assist
in gathering information and providing schedules and analyses in
order to have the Audit completed by April 20, 1997. In addition, as
near as possible prior to the Closing Date, Price Waterhouse shall
review the activities of the Company for the period after December
31, 1996, and shall prepare a letter (the "Post 1996 Adjustment
Letter"0 setting forth the adjustments (the "Post 1996 Adjustments")
that should be made to the unaudited earnings for the period from
January 1, 1997, to the Closing Date.
E. NOTICE OF CHANGES. Each Seller shall give prompt written notice to
Purchaser of any material adverse change in the business, operations,
properties, assets, revenues, earnings, liabilities, or condition
(financial or otherwise) of the Company.
F. STANDSTILL. Except for the transactions contemplated by this
Agreement, from the date hereof to the Closing Date, neither Seller
shall, directly or indirectly, through any officer, director,
employee, or otherwise, (i) solicit or initiate the submission of any
proposal or offer from any person or entity (including any officers
or employees of the Company) relating to any liquidation,
dissolution, recapitalization, merger, consolidation, acquisition, or
purchase of all or a material portion of the assets and properties of
the Company, or the acquisition or purchase of any equity interest in
the Company, or (ii) participate in any negotiations regarding, or
furnish to any other person or entity any information with respect
to, or otherwise cooperate in any manner with, or assist or
participate in, facilitate or encourage, any effort or attempt by any
other person or entity to do or seek any of the foregoing.
12
<PAGE>
G. FURTHER ASSURANCES. Each Seller shall from time to time, upon the
request of Purchaser, execute and deliver to Purchaser such further
instruments and take such other action as Purchaser may reasonably
request, in order to consummate the transactions contemplated by this
Agreement as expeditiously as possible and to place Purchaser in
possession and control of, the Shares and the assets and properties
of the Company, or to enable Purchaser to exercise and enjoy all
rights and benefits with respect thereto.
H. INVESTMENT LETTER. Each Seller agrees to execute and deliver to
Purchaser an investment letter (the "Investment Letters") in form and
substance reasonably satisfactory to Purchaser and Purchaser's
counsel.
I. ENVIRONMENTAL SITE AUDITS. On or before April 10, 1997, the Company
shall obtain an environmental site audit on all real property owned,
leased, or otherwise utilized by the Company in order to determine
whether there exists any environmental condition which could
reasonably be expected to result in any liability, cost, or expense
to the owner, occupier, or operator of such real property arising
under any Environmental Law.
J. AMENDMENT TO REAL PROPERTY LEASE. Each Seller shall cause the Company
to amend the real property lease held by the Company to provide that
the lease shall have a term of ten (10) years from the Closing Date,
rent during the first five (5) years of $42,000.00 per month, and two
(2) options to extend the term of the lease for five (5) years each,
with rent during the extended terms to be mutually agreed upon. The
amendment of the real property lease held by the Company shall be
referred to in this Agreement as the "Amendment."
10. CONDITIONS PRECEDENT TO OBLIGATION OF PURCHASER. The obligation of
Purchaser to consummate the transactions contemplated by this Agreement
is subject to the satisfaction on or prior to the Closing Date of the
following conditions, each of which may be waived by the Purchaser:
A. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. All representations and
warranties of Sellers and the Company contained in this Agreement
shall be true and correct in all material respects as of the Closing
Date with the same effect as though such representations and
warranties were made on the Closing Date, except to the extent that
such representations and warranties expressly relate to any earlier
date, and Sellers and the Company shall have performed and complied
with all the covenants and agreements and satisfied all the
conditions required by this Agreement to be performed, complied with
or satisfied by Sellers and the Company on or prior to the Closing
Date. Each Seller must have delivered to the Purchaser a certificate
dated as of the Closing Date certifying that this condition has been
fulfilled.
B. NO ADVERSE CHANGE. Purchaser shall have determined, to its
satisfaction, that as of the Closing Date, there has been no material
adverse change in the business, operations, properties, assets,
revenues, earnings, liabilities or condition (financial or otherwise)
of the Company.
C. EXHIBITS. Purchaser shall have timely received all exhibits to this
Agreement.
D. TRANSFER OF SHARES. The certificates representing the Shares shall
have been transferred and conveyed by Sellers to Purchaser in a
manner and by instruments acceptable to Purchaser and its counsel,
free and clear of all liens, claims, encumbrances, or restrictions of
any kind. Contemporaneously with the
13
<PAGE>
consummation of the transfer of the Shares, Sellers shall put
Purchaser in full possession and enjoyment of all properties and
assets of the Company. In addition, Purchaser shall have received the
complete stock ledgers, minute books and other corporate records of
the Company.
E. ENVIRONMENTAL SITE AUDITS. Purchaser shall have timely received
environmental site audits on each tract of real property owned,
leased, or otherwise utilized by the Company. If any of the
environmental site audits discloses an environmental condition which
could reasonably be expected to result in any liability, cost, or
expense to the owner, occupier, or operator of the property arising
under any Environmental Law, then the Company shall have cured such
environmental condition and received a "no further action" letter
from the Environmental Protection Agency the applicable state agency.
F. THIRD PARTY APPROVALS. This Agreement and the transactions
contemplated by this Agreement shall have received all required
approvals and consents from all persons and entities from which such
approvals or consents is required, including (without limitation) (i)
the manufacturer represented by the Company, (ii) the FTC and the
Justice Department under the HSR Act and the regulations promulgated
thereunder, (iii) the New York Stock Exchange, and (iv) Morgan
Stanley & Co. Incorporated. Purchaser shall have been approved as the
dealer by the manufacturer represented by the Company.
G. COMPLIANCE WITH SECURITIES LAWS. Purchaser shall have (i) received
the Investment Letters, (ii) received the Registration Rights
Agreement, and (iii) determined that all state and federal securities
laws have been fully satisfied relating to the purchase of the Shares
by Purchaser and the issuance of restricted stock of Purchaser to
Sellers.
H. AMENDMENT. The Amendment shall have been executed and delivered to
Purchaser.
I. PHYSICAL INVENTORIES. Purchaser shall have conducted the Physical
Inventories (hereinafter defined).
J. DUE DILIGENCE. Based on such examinations and inquiries as Purchaser
shall have made or shall have caused to be made, the business,
operations, properties, assets, revenues, earnings, liabilities, and
condition (financial or otherwise) shall be satisfactory to
Purchaser, in Purchaser's sole judgment and discretion.
K. APPROVAL OF DOCUMENTATION. The form and substance of all opinions,
certificates, instruments and other documents delivered to Purchaser
in connection with this Agreement shall be satisfactory in all
reasonable respects to Purchaser and Purchaser's counsel.
L. CORPORATE DIRECTORS AND OFFICERS. The composition of the directors
and officers of the Company shall be as requested by Purchaser,
effective as of the Closing Date.
M. OPINIONS OF COUNSEL. Each Seller shall have delivered to Purchaser an
opinion of counsel reasonably satisfactory to Purchaser, dated as of
the Closing Date, that contains such opinions that are reasonably
requested by Purchaser, including (without limitation) an opinion
that the Shares held by the Seller in the Company were issued in
compliance with all state and federal securities laws. The Company
14
<PAGE>
shall have delivered to Purchaser an opinion of counsel reasonably
satisfactory to Purchaser, dated as of the Closing Date, that
contains such opinions that are reasonably requested by Purchaser.
N. HART-SCOTT-RODINO WAITING PERIOD. The applicable waiting period under
the HSR Act, and the regulations promulgated thereunder, shall have
expired.
O. 1996 EARNINGS. The 1996 Earnings shall not be less than $3,100,000.
P. AUDIT. Price Waterhouse shall have timely performed the Audit and the
review of earnings for the period from January 1, 1997 to the Closing
Date, prepared the Audited Financial Statements, and the Post 1996
Adjustment Letter, and delivered a copy of the Audited Financial
Statement and the Post 1996 Adjustment Letter to Purchaser.
Q. AUTHORIZATION. All actions necessary to authorize the execution,
delivery and performance of this Agreement and the other agreements
and documents to which either Seller is a party as contemplated by
this Agreement and the consummation of the transactions contemplated
hereby and thereby shall have been duly and validly taken by Sellers,
and Sellers shall have full power and authority to enter into and
deliver such agreements and to consummate the transactions
contemplated hereby and thereby.
R. ADDITIONAL INFORMATION. Each Seller and the Company shall have
furnished to Purchaser and Purchaser's counsel such additional
information, certificates, and other documents as Purchaser shall
have reasonably requested.
11. CONDITIONS PRECEDENT TO OBLIGATION OF SELLERS. The obligation of each
Seller to consummate the transactions contemplated by this Agreement is
subject to the satisfaction on or prior to the Closing Date of the
following conditions, each of which may be waived by the Seller:
A. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. All representations and
warranties of Purchaser contained in this Agreement shall be true and
correct in all material respects as of the Closing Date with the same
effect as though such representations and warranties were made on the
Closing Date, except to the extent that such representations and
warranties expressly relate to an earlier date, and Purchaser shall
have performed and complied with all of the covenants and agreements
and satisfied all the conditions required by this Agreement to be
performed, complied with or satisfied by Purchaser on or prior to the
Closing Date. The Purchaser must have delivered to the Sellers a
certificate dated as of the Closing Date certifying that this
condition has been fulfilled.
B. DELIVERY OF PURCHASE PRICE. The Purchaser shall have delivered (i)
the cash provided for in subparagraph 3(a) of this Agreement, (ii)
the shares of restricted common stock of Purchaser provided for in
subparagraph 3(b) of this Agreement, and (iii) the Note.
C. APPROVAL OF DOCUMENTATION. The form and substance of all certificates
and other documents required to be delivered to Sellers in connection
with this Agreement shall be satisfactory in all reasonable respects
to Sellers and Sellers' counsel.
15
<PAGE>
D. REGISTRATION RIGHTS AGREEMENT. Purchaser shall have executed and
delivered to Sellers the Registration Rights Agreement.
E. ADDITIONAL INFORMATION. Purchaser shall have furnished to Sellers and
Sellers' counsel such additional information, certificates, and other
documents as Sellers shall have reasonably requested.
12. INDEMNIFICATION.
A. INDEMNIFICATION. Sellers severally, in proportion to the portion of
the Purchase Price paid or to be paid to him, indemnify and agree to
defend and hold harmless the Purchaser and its successors and assigns
(the "Purchaser Indemnified Parties") from and against any Claims
(hereinafter defined). "Claims", as used in this Agreement, include
any and all liabilities, judgments, claims, settlements, losses,
damages, fees, liens, taxes, penalties, obligations and expenses,
including reasonable attorneys' fees and expenses of investigation,
incurred or suffered by any Purchaser Indemnified Party arising from,
by reason of, or in connection with (i) any breach of any
representation, warranty, covenant or agreement made by either Seller
in this Agreement, or in any certificate or other document delivered
on behalf of either Seller, (ii) any debts, liabilities, or
obligations of any nature (whether absolute, accrued, contingent, or
otherwise and whether due or to become due) of the Company at the
Balance Sheet Date that are not reflected in the Financial
Statements, (iii) the conduct of the business or other operations of
the Company prior to the Closing Date or any condition, activity, or
event relating to product or environmental liability existing or
occurring prior to the Closing Date, (iv) the failure of either
Seller or the Company to comply with any federal, state, or local tax
laws for any matter occurring prior to the Closing Date or applicable
to the transactions contemplated by this Agreement, and (v) any and
all actions, suits, proceedings, demands and judgments, arising from
or related to any of the matters set forth in this subparagraph
12(a). Any provision of this Agreement to the contrary
notwithstanding, Sellers' obligation to indemnify Purchaser under
this subparagraph 12(a) shall be limited to any Claims that are made
or occur prior to the second anniversary date of the Closing.
B. PROCEDURE FOR INDEMNIFICATION CLAIMS. In the event that any Purchaser
Indemnified Party desires to make a claim against either Seller under
subparagraph 12(a). in connection with any Claim at any time
instituted against, or made upon, the Purchaser Indemnified Party by
any third party for which the Purchaser Indemnified Party may seek
indemnification hereunder (a "Third Party Claim"), the Purchaser
Indemnified Party shall promptly notify each Seller of such Third
Party Claim and of the Purchaser Indemnified Party's claim of
indemnification with respect thereto; provided, however, that no
reasonable delay on the part of the Purchaser Indemnified Party in
notifying either Seller shall relieve the Seller from any obligation
hereunder. Each Seller shall have thirty (30) days after receipt of
such notice to notify the Purchaser Indemnified Party if it has
elected to assume the defense of such Third Party Claim. If either
Seller timely elects to assume the defense of such Third Party Claim,
the Seller shall be entitled at its own expense to conduct and
control the defense and settlement of such Third Party Claim through
counsel of its own choosing, provided that the Purchaser Indemnified
Party may participate in the defense of such Third Party Claim with
its or their own counsel at its or their own expense, and provided
further that the Seller must conduct the defense of
16
<PAGE>
the Third Party Claim actively and diligently in order to preserve
its rights in this regard. If both Sellers timely elect to assume the
defense of such Third Party Claim, the Sellers shall be entitled at
their own expense to jointly conduct and control the defense and
settlement of such Third Party Claim through counsel of their own
choosing, provided that the Purchaser Indemnified Party may
participate in the defense of such Third Party Claim with its or
their own counsel at its or their own expense, and provided further
that the Sellers must conduct the defense of the Third Party Claim
actively and diligently in order to preserve their rights in this
regard. If neither Seller notifies the Purchaser Indemnified Party
within thirty (30) days after receipt of notice of a Third Party
Claim, the Purchaser Indemnified Party shall be entitled to assume
the defense of such Third Party Claim (and the Purchaser Indemnified
Party need not consult with, or obtain the consent of the Sellers)
and in the Purchaser Indemnified Party's sole discretion prosecute,
litigate, settle and perform such other actions as the Purchaser
Indemnified Party may deem necessary in order to fully protect the
Purchaser Indemnified Party's interests, and each Seller shall remain
responsible for indemnification of the Purchaser Indemnified Party.
C. OTHER INDEMNIFICATION PROVISIONS. The foregoing indemnification
provision is in addition to, and not in derogation of, any other
indemnification provisions in this Agreement, or any contractual,
statutory, equitable or common law remedy Purchaser may have for the
breach of any representation, warranty or covenant by either Seller
or the Company.
13. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION; NON-COMPETITION.
A. SELLERS' NON-DISCLOSURE OF CONFIDENTIAL INFORMATION REGARDING THE
COMPANY. Each Seller acknowledges that the Seller has in the past,
currently has, and in the future may possibly have access to certain
confidential information of the Company, including, but not limited
to, list of accounts, operational policies, and pricing and cost
policies that are valuable, special and unique assets of the Company
(the "Confidential Information"). Each Seller agrees that the Seller
will not disclose such Confidential Information to any person or
entity for any purpose or reason whatsoever except to authorized
representatives of the Purchaser, or as required by law, unless the
Confidential Information becomes known to the public generally
through no fault of the Seller. In the event of a breach or
threatened breach by either of the Sellers of this subparagraph, the
Purchaser shall be entitled to an injunction restraining the Seller
from disclosing, in whole or in part, such Confidential Information.
Nothing herein shall be construed as prohibiting the Purchaser from
pursuing any other available remedy for such breach or threatened
breach, including the recovery of damages.
B. PURCHASER'S NON-DISCLOSURE OF CONFIDENTIAL INFORMATION REGARDING THE
COMPANY. Purchaser acknowledges that it has in the past, currently
has, and in the future may possibly have access to Confidential
Information. The Purchaser agrees that it will not disclose such
Confidential Information to any person or entity for any purpose or
reason whatsoever, except to authorized representatives of the
Purchaser, or as required by law, unless such Confidential
Information becomes known to the public generally through no fault of
the Purchaser. In the event of a breach or threatened breach by
Purchaser of the provisions of this subparagraph, the Sellers shall
be entitled to an injunction
17
<PAGE>
restraining the Purchaser from disclosing, in whole or in part, such
Confidential Information. Nothing herein shall be construed as
prohibiting the Sellers from pursuing any other available remedy for
such breach or threatened breach, including the recovery of damages.
Any other provision of this Agreement to the contrary
notwithstanding, Purchaser's obligations not to disclose the
Confidential Information shall terminate at Closing.
C. INSIDER LIABILITY. Each Seller acknowledges that trading in the
Purchaser's securities by persons possessing material non-public
information may result in private lawsuits for damages or to civil or
criminal proceedings by the Securities and Exchange Commission. Each
Seller also acknowledges that liability may be imposed on insiders
who privately disclose otherwise non-public material information
where such disclosure coincide with trading Purchaser's securities by
such insiders or by the recipients of such information.
D. SELLERS' NON-DISCLOSURE OF CONFIDENTIAL INFORMATION REGARDING THE
PURCHASER. Each Seller acknowledges that the Seller may possibly have
access to certain confidential information of the Purchaser. Each
Seller agrees that the Seller will not disclose such confidential
information to any person or entity for any purpose or reason
whatsoever except as requested by law, unless the confidential
information becomes known to the public generally through no fault of
the Seller. In the event of a breach or threatened breach by either
of the Sellers of this subparagraph, the Purchaser shall be entitled
to an injunction restraining the Seller from disclosing, in whole or
in part, such confidential information. Nothing herein shall be
construed as prohibiting the Purchaser from pursuing any other
available remedy for such breach or threatened breach, including the
recovery damages.
14. ADDITIONAL AGREEMENTS OF PURCHASER AND SELLERS.
A. INSURANCE. In the event the transactions contemplated by this
Agreement causes any of the insurance policies of the Company to
lapse and the insurance policy is a "claims made" policy, Sellers
agree to purchase a "tail" policy that will cover any condition,
activity, or event that would have been covered under the "claims
made" policy had the claim been made prior to the Closing Date. All
such "tail" policies shall be purchased at the Sellers' cost and
expense.
B. STOCK OF THE PURCHASER. The certificates representing the restricted
common stock of Purchaser that is issued to the Sellers shall bear a
restrictive legend that the stock has not been registered under
applicable federal and state securities laws. It is understood and
agreed that Purchaser has not agreed to register the restricted
common stock of Purchaser that is to be issued to either Seller.
C. TERMINATION.
I) MUTUAL CONSENT. This Agreement may be terminated by the
written consent of the parties.
II) BY THE PURCHASER. This Agreement may be terminated by written
notice of termination given by the Purchaser to each Seller if a
material default should be made by either Seller in the
observance of or in the due and timely performance by either
Seller of any of the agreements and covenants herein contained,
or if there shall have been
18
<PAGE>
a material breach by either Seller of any of the warranties and
representations herein contained, or if the conditions of this
Agreement to be complied with or performed by Sellers at or
before Closing shall not have been complied with or performed
at the time required for such compliance or performance and
such noncompliance or nonperformance shall not have been waived
by the Purchaser.
(III) BY THE SELLERS. This Agreement may be terminated by written
notice of termination given by the Sellers to the Purchaser if
a material default should be made by the Purchaser in the
observance of or in the due and timely performance by the
Purchaser of any agreements and covenants of the Purchaser
herein contained, or if there shall have been a material breach
by the Purchaser of any of the warranties and representations
of the Purchaser, of if the conditions of this Agreement to be
complied with or performed by the Purchaser at or before
Closing shall not have been complied with or performed at the
time required for such compliance or performance and such
noncompliance or nonperformance shall not have been waived by
the Sellers.
D. REGISTRATION RIGHTS AGREEMENT. Sellers and Purchaser agree to execute
and deliver a Registration Rights Agreement (the "Registration Rights
Agreement") covering the restricted common stock of the Purchaser
that will be acquired by Sellers at Closing.
E. HART-SCOTT-RODINO NOTIFICATION. By March 20, 1997, the parties shall,
if and to the extent required by law, file all reports or other
documents required or requested by the FTC or the Justice Department
under the HSR Act, and all regulations promulgated thereunder,
concerning the transactions contemplated by this Agreement, and
comply promptly with any request by the FTC or the Justice Department
for additional information concerning such transaction, so that the
waiting period specified in the HSR Act will expire as soon as
reasonably possible after the execution and delivery of this
Agreement. The parties agree to furnish to one another such
information concerning the Purchaser, the Sellers, and the Company as
the parties need to perform their obligations hereunder. The
Purchaser agrees to pay all filing fees and costs due governmental
agencies with regard to the HSR Act notification and compliance.
F. PHYSICAL INVENTORIES. Prior to Closing, Purchaser and Sellers shall
conduct a physical inventory of all parts, accessories, new vehicles,
and used vehicles owned by the Company and shall determine the fair
market value of the used vehicle, new vehicle and parts and
accessories inventories. The physical inventories shall be
collectively referred to in this Agreement as the "Physical
Inventories." The fair market value of the used vehicle inventory,
new vehicle inventory, and parts and accessories inventory shall be
determined as follows:
i) Sellers and Purchaser shall examine the used vehicle inventory
and agree to the fair market value of the used vehicle inventory. If
Purchaser and Sellers fail to agree on the fair market value of any
used vehicle, Sellers shall purchase the used vehicle and such used
vehicle shall be removed from the used vehicle inventory
ii) Sellers and Purchaser shall calculate the fair market value of
the new vehicle inventory. The fair market value of each new vehicle
shall be an
19
<PAGE>
amount equal to the Company's book value for the new vehicle. The
fair market value for each 1995 or 1996 demonstrator shall be an
amount equal to the Company's book value for the demonstrator, less
$.15 per mile over 5,000 miles on the odometer as depreciation for
demo service. The fair market value of any new vehicle shall be
decreased by an amount equal to the Company's actually incurred
internal cost of repair for any physically damaged vehicle. The
Sellers agree that all factory rebates and other credits on any new
vehicles shall be retained by the Company.
iii) Sellers and Purchaser shall examine the parts and accessories
inventory and agree to the fair market value of the parts and
accessories inventory. If Purchaser and Sellers fail to agree on the
fair market value of any parts or accessories, Sellers shall purchase
the parts or accessories and such parts or accessories shall be
removed from the parts and accessories inventory. The Sellers agree
that all rebates and credits on any parts or accessories shall be
retained by the Company.
G. SECTION 338(H)(10) ELECTIONS.
(i) Each Seller agrees to make elections under Section 338(h)(10)
of the Internal Revenue Code and all comparable elections under
state and local tax law with respect to the Company.
(ii) Purchaser and Sellers shall jointly file Form 8023-A with the
Internal Revenue Service in accordance with Section 338 of the
Internal Revenue Code and the regulations thereunder no later
than the 15th day of the ninth month beginning after the month
that includes the Closing Date in accordance with Internal
Revenue Code Section 338(g) and Treasury Regulation Section
1.338(h)(10)-1(d)(2).
(iii) Purchaser and Sellers shall allocate the Purchase Price to the
assets conveyed pursuant to this Agreement using a reasonable
asset valuation which will be agreed to by Purchaser and
Sellers no later than ninety (90) days after the Closing Date.
In all events, however, Purchaser and Sellers agree to
conformity of the treatment of all asset allocations with
respect to the Section 338(h)(10) elections.
H. PAYMENT OF THE BROKER'S FEE. Purchaser and Sellers agree to pay the
Broker's fee in the following proportions:
a) Sellers 50%
b) Purchaser 50%
I. LOANS FROM THE SELLERS. Sellers agree that they will prohibit the
Company from borrowing amounts on the loans from The Jack Biegger
Revocable Living Trust and The Dale M. Edwards Revocable Family Trust
that cause the aggregate outstanding balances of the loans to exceed
$3,625,000.00. At Closing the Company will (i) execute and deliver to
the Sellers a promissory note in the original principal amount of
$400,000.00, payable in sixty (60) equal monthly installments,
bearing interest at the lowest rate of interest per annum that is
allowable under the Internal Revenue Code for installment sales, and
containing the same offset provisions as the Note, (ii) pay the
outstanding balance (up to $2,225,000) on the note payable by the
Company to The Jack Biegger Revocable Living Trust, and (iii) pay the
outstanding balance (up to $1,000,000) on the note payable by the
Company to The Dale M. Edwards Revocable Family Trust; in full
satisfaction of the note
20
<PAGE>
payable by the Company to The Jack Biegger Revocable Living Trust and
the note payable by the Company to The Dale M. Edwards Revocable
Family Trust.
15. GENERAL PROVISIONS.
A. ENTIRE AGREEMENT. This Agreement contains and constitutes the entire
agreement between the parties regarding the subject matter hereof and
supersedes all prior agreements and understandings between the
parties relating to the subject matter of this Agreement. There are
no agreements, understandings, restrictions, warranties or
representations between the parties relating to the subject matter
hereof other than those set forth in this Agreement. This Agreement
is not intended to have any legal effect whatsoever, or to be a
legally binding agreement, or any evidence thereof, until it has been
signed by each Seller, the Company, and the Purchaser.
B. EXHIBITS. Preliminary drafts of the following exhibits shall be
prepared by Sellers and the Company by April 10, 1997 and delivered
to Purchaser for Purchaser's review. Final exhibits shall be prepared
by Sellers and the Company, initialed by the parties, and attached to
this Agreement at Closing. When attached to this Agreement, the
exhibits shall be made a part of this Agreement by reference.
Exhibit "A" - Promissory Note
Exhibit "B" - Officers and Directors
Exhibit "C" - Real Property and Leases
Exhibit "D" - Tangible Personal Property
Exhibit "E" - Inventories
Exhibit "F" - Permits and Licenses
Exhibit "G" - Intellectual Property
Exhibit "H" - Encumbrances
Exhibit "I" - Guaranties
Exhibit "J" - Legal Actions
Exhibit "K" - Contracts and Agreements
Exhibit "L" - Employee Benefit Plans
Exhibit "M" - Insurance
Exhibit "N" - Personnel
Exhibit "O" - Accounts and Notes Receivable
Exhibit "P" - Bank Accounts and Powers of Attorney
Exhibit "Q" - Underground Storage Tanks
Exhibit "R" - Contracts in Transit
Exhibit "S" - Warranties
C. THIRD PARTY CONSENTS. The Sellers and the Purchaser mutually agree to
cooperate and use reasonable, good faith efforts to prepare all
documentation, to effect all filings and to obtain all permits,
consents, approvals, and authorizations of all third parties and
governmental bodies as may be necessary to consummate the
transactions contemplated by this Agreement.
D. FURTHER ACTIONS. From time to time, as and when requested by any
parties hereto, the other parties shall execute and deliver, or cause
to be executed and delivered, all such documents and instruments and
shall take, or cause to be taken, all such further or other actions
as such other parties may reasonably deem necessary or desirable to
consummate the transactions contemplated by this Agreement.
21
<PAGE>
E. PUBLICITY. The parties hereto agree that no public release or
announcement concerning the terms of the transactions contemplated by
this Agreement shall be issued by any party without the prior written
consent of the other parties (which consent shall not be unreasonably
withheld), except as such release or announcement may be required by
law, in which case the party required to make the release or
announcement shall allow the other parties reasonable time to comment
on such release or announcement in advance of such issuance.
F. AMENDMENT. This Agreement may not be amended, modified, or terminated
except by an instrument in writing signed by all parties to this
Agreement.
G. CONSTRUCTION. All pronouns and any variations thereof shall be deemed
to refer to the masculine, feminine or neuter gender thereof or to
the plurals of each, as the identity of the person or persons or the
context may require. The descriptive headings contained in this
Agreement are for reference purposes only and are not intended to
describe, interpret, define or limit the scope, extent or intent of
this Agreement or any provision contained in this Agreement.
H. INVALIDITY. If any provision contained in this Agreement shall for
any reason be held to be invalid, illegal, void or unenforceable in
any respect, such provision shall be deemed modified so as to
constitute a provision conforming as nearly as possible to such
invalid, illegal, void or unenforceable provision while still
remaining valid and enforceable; and the remaining terms or
provisions contained herein shall not be affected thereby.
I. PAYMENT OF EXPENSES. Whether or not the transactions contemplated by
this Agreement is consummated, each of the parties to this Agreement
shall be responsible for its own costs and expenses incurred in
connection with the preparation and negotiation of this Agreement and
with the transactions contemplated hereby.
J. BINDING EFFECT AND ASSIGNMENT. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their
respective legal representatives, successors and permitted assigns.
Only with the prior written consent of the Sellers, which consent
shall not be unreasonably withheld, the Purchaser may assign its
rights under this Agreement to a related entity, and the Purchaser
and its assignee shall be fully obligated, responsible and liable for
the performance of the Purchaser's obligations hereunder regardless
of any such assignment. Neither Seller may assign any of his rights
or delegate any of his obligations hereunder. Any assignment in
violation hereof shall be void.
K. ATTORNEYS' FEES. In the event any party instigates litigation to
enforce or protect its rights under this Agreement, the party
prevailing in any such litigation shall be entitled, in addition to
all other relief, to reasonable attorneys' fees, out-of-pocket costs
and disbursements relating to such litigation.
L. NOTICES. All notices and other communications hereunder shall be (i)
in writing, dated with the current date of such notice, and signed by
the party giving such notice, and (ii) mailed, postpaid, registered
or
22
<PAGE>
certified, return receipt requested, addressed to the party to be
notified, or delivered by personal delivery or by overnight courier.
Notice shall be deemed given when received by the party to be
notified or when the party to be notified refuses to accept delivery
of the notice. The initial addresses of the parties shall be as
follows:
IF TO PURCHASER:
Cross-Continent Auto Retailers, Inc.
1201 S. Taylor
P.O. Box 750
Amarillo, Texas 79105-0750
ATTENTION: ROBERT W. HALL
IF TO SELLERS:
Jack Biegger
20 Wild Dunes Court
Las Vegas, Nevada 89113
and
Dale Edwards
9601 Coral Way
Las Vegas, Nevada 89117
The parties hereto shall have the right from time to time to change
their respective addresses by not less than ten (10) days prior
written notice to the other parties.
M. DEFINITION OF KNOWLEDGE. As used in this Agreement, a Seller's or the
Company's "knowledge" shall include the knowledge of the Seller and
the employees and agents of the Company. Each representation and
warranty that is limited to a Seller's or the Company's "knowledge"
is made with the understanding that the Seller or the Company has
examined whatever sources of information as are in the possession or
control of the Seller or the Company in order to verify the truth and
accuracy of such representation and warranty.
N. TIME IS OF THE ESSENCE. Time shall be of the essence with respect to
this Agreement and the consummation of the transactions contemplated
hereby.
O. REMEDIES. None of the remedies provided for in this Agreement shall
be the exclusive remedy of any party for a breach of this Agreement.
The parties hereto shall have the right to seek any other remedy at
law or in equity in lieu of or in addition to any remedies provided
for in this Agreement.
P. SURVIVAL OF OBLIGATIONS. To the extent necessary to carry out the
terms and provisions of this Agreement, the obligations and rights
arising from or related to this Agreement shall survive the Closing
and shall not be merged into the various documents executed and
delivered at the time of the Closing.
Q. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties made in this Agreement or in any certificate, schedule,
document, or instrument furnished in connection with this Agreement
shall survive the Closing. Notwithstanding any investigation or
examination conducted before
23
<PAGE>
or after the Closing or the decision of any party to consummate the
transactions contemplated by this Agreement, each party shall be
entitled to rely upon the representations and warranties set forth in
this Agreement.
R. WAIVER. No waiver of any breach or default hereunder shall be
considered valid unless in writing and signed by the party giving
such waiver, and no such waiver shall be deemed a waiver of any
subsequent breach or default of the same or similar nature.
S. GOVERNING LAW. This Agreement shall be construed, enforced, and
governed in accordance with the laws of the State of Nevada, except
for matters related to any real property owned, leased or otherwise
utilized by the Company, which shall be construed, enforced, and
governed in accordance with the laws of the state in which such real
property is located.
T. VENUE. The obligations of the parties to this Agreement are
performable, and venue for any legal action arising out of this
Agreement shall lie in Potter County, Texas.
U. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
PURCHASER: CROSS-CONTINENT AUTO RETAILERS, INC.,
a Delaware corporation
By:_____________________________________________
Bill Gilliland,
Chairman and Chief Executive Officer
SELLERS: ____________________________________________
JACK BIEGGER
____________________________________________
DALE EDWARDS
24
<PAGE>
COMPANY: SAHARA DATSUN, INC.,
a Nevada corporation, dba
JACK BIEGGER NISSAN
By:________________________________
Jack Biegger, President
25
<PAGE>
AMENDMENT TO STOCK PURCHASE AGREEMENT
This Amendment to Stock Purchase Agreement (the "Amendment") is made and
entered into this _____ day of March, 1997, by and between CROSS-CONTINENT AUTO
RETAILERS, INC., a Delaware corporation ("C-CAR"), JACK BIEGGER, DALE EDWARDS,
and SAHARA NISSAN, INC., a Nevada corporation, d/b/a JACK BIEGGER NISSAN (the
"Company").
RECITALS
A. By that certain Stock Purchase Agreement (the "Agreement") dated
February 28, 1997, Jack Biegger and Dale Edwards agreed to sell all of the
issued and outstanding shares of capital stock of the Company to C-CAR.
B. C-CAR, the Company, Jack Biegger and Dale Edwards desire to amend the
Agreement.
AGREEMENT
For good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, C-CAR, the Company, Jack Biegger and Dale Edwards agree
as follows:
1. The word "Company," as used in the Agreement, shall mean Sahara Nissan,
Inc., a Nevada corporation, d/b/a Jack Biegger Nissan.
2. As modified by this Amendment, the Agreement shall remain in full force
and effect, enforceable in accordance with its terms.
3. This Amendment shall be governed by and construed and enforced in
accordance with the laws of the State of Nevada.
4. This Amendment shall be binding upon and shall inure to the benefit of
the parties hereto and their respective heirs, administrators, executors,
successors and assigns.
CROSS-CONTINENT AUTO RETAILERS, INC.,
a Delaware corporation
By:___________________________
Bill Gilliland,
Chairman and Chief Executive Officer
SAHARA NISSAN, INC., a Nevada corporation,
___________________________ d/b/a JACK BIEGGER NISSAN
JACK BIEGGER
___________________________ By:________________________
DALE EDWARDS Jack Biegger, President
<PAGE>
EXHIBIT 10.14
EMPLOYMENT CONTRACT
By this Employment contract (the "Contract"), CROSS-CONTINENT AUTO
RETAILERS, INC. ("Employer"), a Delaware corporation, located at 1201 S. Taylor,
Amarillo, Texas, employs JAMES F. PURSER ("Employee"), whose mailing address is
3512 Terry Drive, Plano, Texas 75023, who accepts employment on the following
terms and conditions:
ARTICLE 1
TERM OF EMPLOYMENT
1.1 By this Contract, Employer employs Employee and Employee accepts
employment with Employer for a period of three (3) years, beginning on April 1,
1997, or such earlier date as may be mutually agreed to by the parties in
writing.
ARTICLE 2
COMPENSATION
2.1 BASIC COMPENSATION. As compensation for all services rendered
under this Contract, Employee shall be paid by Employer a salary of not less
than $235,000.00 per year for each of the three years of this Contract PLUS such
increases as are consistent with the executive salary administration plan(s) of
Employer.
2.2 ADDITIONAL COMPENSATION. In addition to the Basic Compensation,
Employee shall receive:
(A) Par Value Stock Options. Employer grants Employee the right and option
to purchase from the Employer all or any part of an aggregate of
25,000 shares of non-qualified, common stock, priced at par value of
$0.01 per share, exercised proportionately over an 8-year period, as
defined in "Employee's Stock Option Agreement" (herein so called) in
the form attached hereto and incorporated herein by reference for all
purposes as Exhibit "A", which options are herein collectively
referred to as the "Par Value Stock Option".
(B) Fair Market Value Stock Options. Employer grants Employee the right
and option to purchase from the Employer all or any part of an
aggregate of an additional 25,000 shares of non-qualified, common
stock, priced at the fair market value [as defined in Employer's
Amended and Restated 1996 Stock Option Plan, a duplicate copy of which
is attached as Exhibit "B" and incorporated herein by reference for
all purposes and hereinafter referred to as the "Plan"], exercised
proportionately over a 5-year period, as defined in the Employee's
Stock Option Agreement, which options are herein collectively referred
to as the "Fair Market Value Stock Option."
<PAGE>
"Market Value Stock Option."
The Par Value Stock Option, Fair Market Value Stock Option, and the Employee's
Stock Option Agreement shall each be ratified and adopted by the "Administrator"
(as such term is defined in the Plan) and by the Board of Directors of Employer,
if such Board of Directors is not one and the same as the Administrator, all
within ten ( 10) calendar days from the date of execution of this Contract, with
a duplicate copy of such ratification(s) being attached as "Exhibit C" to this
Contract. The provisions of the Employee's Stock Option Agreement shall govern
with respect to the Par Value Stock Option and the Fair Market Value Stock
Option unless in direct conflict with this Contract.
ARTICLE 3
DUTIES OF EMPLOYEE
3.1 DUTIES. Employee is employed as Chief Financial Officer and
appointed to the Board of Directors of Employer, and shall thereafter stand for
election as a Director of Cross-Continent Auto Retailers, Inc. at the first
annual meeting hereafter held of the shareholders of Employer. The office of
Employee shall be located at 1201 S. Taylor, Amarillo, Texas.
3.2. Extent of Services. Employee shall devote his entire productive
time, ability, attention, and general energies to the business of Employer SAVE
AND EXCEPT for the nominal and ordinary administrative chores associated with
the personal investments of Employee and as otherwise consented to in writing by
Employer. During the term of the Contract, Employee shall not, directly or
indirectly, render any services of a business, commercial, or professional
nature to any other person or organization, whether or not for compensation,
without the prior written consent of Employer. The exclusive remedy of Employer
for Employee's reach of this section 3.2 shall be immediate discharge for cause.
ARTICLE 4
EMPLOYEE'S OBLIGATIONS OTHER THAN TO
PERFORM SERVICES
4.1 QUALIFICATION FOR SURETY BOND. Employee agrees to furnish all
information and take any other steps necessary to enable Employer to obtain a
fidelity bond conditioned on the rendering of a true account by Employee of all
money, goods, or other property that may come into the custody, charge, or
possession of Employee during the term of employment. All premiums on the surety
bond are to be paid by Employer. Failure by the Employee to qualify for such
bond shall constitute good cause for termination of the services of Employee
under this Contract.
<PAGE>
ARTICLE 5
EMPLOYEE BENEFITS
5.1 HEALTH BENEFITS. Employer agrees to include Employee in the
existing and any hereafter adopted hospital, surgical, and medical benefit
plan(s) of Employer, and thereby provide coverage of Employee, the spouse of
Employee and the dependents of Employee. During any unwaived waiting period
pertaining to Employee, his spouse or dependents under any such plan, Employer
shall pay one-half of the cost of any available COBRA coverage of Employee, his
spouse and his dependents.
5.2 Health Insurance. Employee shall be reimbursed for fifty percent
(50%) of the health insurance premiums charged under any such hospital, surgical
or medical benefit plan(s) for coverage of Employee, the spouse of Employee and
the dependents of Employee thereby.
5.3 Retirement Benefits. Employee shall be eligible to participate in
all retirement plan(s) of Employer as such plan(s) now exists and all subsequent
plans and supplements thereto benefitting one or more members of the executive
class of Employer.
5.4 Living And Relocation Allowance. Employer agrees to reimburse
Employee for:
(A) Such loss, if any, as Employee suffers in the sale of the current
home of Employee up to, but not in excess of Fifteen Thousand
($15,000.00) Dollars, such a loss being deemed to have been
incurred to the extent the net sale proceeds derived by Employee
is less than the cost (including the improvements) of such home
and the incidental repair costs of preparing such home for sale;
plus,
(B) The expenses of Employee incurred prior to December 31, 1997, for:
i) Crating and moving of belongings from Dallas, Texas, to
Amarillo, Texas;
ii) Temporary living arrangements for Employee and his family
while procuring a home in Amarillo, Texas;
iii) The cost of travel for Employee, his spouse and his
dependents between Dallas and Amarillo, Texas; and
iv) Reasonable legal fees concerning this Contract.
<PAGE>
Contract.
All such reimbursement to be made promptly upon submission by Employee to
Employer of reasonable documentation and itemized account therefor.
5.5 EXECUTIVE AUTOMOBILE. Employer agrees to provide Employee with a
car allowance commensurate with such allowance as is paid or available to other
executives of Employer, or, in the alternative, furnish Employee at the cost of
Employer with an automobile of Employee's choice.
5.6 COUNTRY CLUB. Employer agrees to pay Employee's annual dues to the
Amarillo Country Club.
ARTICLE 6
REIMBURSEMENT OF EXPENSES INCURRED BY EMPLOYEE
6.1 BUSINESS EXPENSES. Employee is authorized to incur reasonable
business expenses for promoting the business of Employer, including expenditures
for business entertainment and travel. Employer shall reimburse Employee for all
such reasonable expenses upon Employee's monthly presentation of an itemized
account of the expenditures.
ARTICLE 7
PROPERTY RIGHTS OF PARTIES
7.1 TRADE SECRETS. During the term of employment, Employee will have
access to and become familiar with various trade secrets, consisting of
formulas, and compilations of information, records, and specifications owned by
Employer and regularly used in the operation of the business of Employer.
Employee must not disclose any such trade secrets, directly or indirectly, nor
use them in any way, either during the term of this Contract or at any time
thereafter, except as required in the course of his employment. All files,
records, documents, drawings, specifications, equipment, and similar items
relating to the business of Employer, whether or not prepared by Employee, will
remain the exclusive property of Employer and, except in the ordinary course of
performing services for Employer or as other wise directed or expressly
consented to by Employer, shall not be removed from the premises of Employer
without the prior written consent of Employer.
7.2 Return of Employer's Property. On the termination of employment or
whenever requested by Employer, Employee must immediately deliver to Employer
all property in Employee's possession or under Employee's control belonging to
Employer in good condition, ordinary wear and tear excepted.
<PAGE>
ARTICLE 8
OBLIGATION OF EMPLOYER
8.1 INDEMNIFICATION OF LOSSES OF EMPLOYEE. Employer shall indemnify
Employee for all losses sustained by Employee as direct result of the discharge
of his duties required by this Contract, except for losses caused by Employee's
gross negligence or willful misconduct.
8.2 Working Conditions. Employer will provide-Employee with an office
and clerical services, and any other facilities and services as are suitable to
the Employee's position or required for the performance of his duties.
ARTICLE 9
TERMINATION
9.1 TERMINATION BY EMPLOYER. In the event of fraud, insubordination,
theft, or acts of moral turpitude, Employer has the right to terminate Employee
immediately. The termination shall not prejudice any remedy that Employer may
have at law or in equity. In the event that Employee is terminated for cause as
provided in this paragraph 9. l, Employee will be entitled to no further
compensation after the date of termination.
9.2 Effect of Termination Without Cause on Compensation. In the event
of the termination of this Contract, without cause, prior to the completion of
the term of employment specified in Article 1, Employee will be entitled to all
the compensation (and Additional Compensation and options) Employee should have
received had he completed the terms of this Contract as provided for in Article
2 of this Contract, and the Employee shall for such remaining time period also
receive all the Employee Benefits provided for in Article 5. During such
remaining time period, Employee shall be deemed an independent contractor of
Employer for purposes of the Employee's Stock Option Agreement and the Plans.
ARTICLE 10
GENERAL PROVISIONS
10.1 NOTICES. All notices or other communications required under this
Contract may be effected either by personal delivery in writing or by certified
mail, return receipt requested. Notice shall be deemed to have been given when
delivered or three days after having been mailed postage prepaid to the parties
at their
<PAGE>
respective addresses as set forth above or when mailed to the last address
provided in writing to the other party by the addressee. Employer and Employee
shall have the right from time to time to change their respective addresses by
not less than ten (10) days prior written notice to the other party.
10.2 ENTIRETY AGREEMENT. This Contract and the Exhibits hereto
attached supersede all other agreements, either oral or in writing, between the
parties to this Contract with respect to the employment of Employee by Employer.
This Contract and such Exhibits contain the entire understanding of the parties
and all of the covenants and agreements between the parties with respect to the
employment of Employee by Employer.
10.3 GOVERNING LAW. The construction, enforcement, interpretation, and
validity of this Contract shall be governed by the laws of the State of Texas.
Executed on this ____ day of _______________________, 1997.
EMPLOYER: CROSS-CONTINENT AUTO RETAILERS, INC.
BY: _____________________________________
BILL GILLILAND,
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
EMPLOYEE: _____________________________________
JAMES F. PURSER
<PAGE>
Exhibit 21.1
C-CAR SUBSIDIARIES
PERFORMANCE DODGE, INC.,
an Oklahoma corporation
PERFORMANCE NISSAN, INC.,
an Oklahoma corporation
CROSS COUNTRY DODGE, INC.,
D/B/A LYNN HICKEY DODGE,
an Oklahoma corporaztion
QUALITY NISSAN, INC.,
a Texas corporation
MIDWAY CHEVROLET, INC.,
a Texas corporation
PLAINS CHEVROLET, INC.,
a Texas corporation
WESTGATE CHEVROLET, INC.,
a Texas corporation
ALLIED 2000 COLLISION CENTER, INC.,
a Texas corporation
WORKING MAN'S CREDIT PLAN, INC.,
a Texas corporation
C-CAR AUTO WHOLESALERS, INC.,
an Oklahoma corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-23003) of Cross-Continent Auto Retailers, Inc. of
our report dated February 13, 1997, except for Note 20 which is as of March 27,
1997 appearing in this Form 10-K.
PRICE WATERHOUSE LLP
Fort Worth, Texas
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 36,946
<SECURITIES> 0
<RECEIVABLES> 18,629
<ALLOWANCES> 0
<INVENTORY> 48,168
<CURRENT-ASSETS> 103,743
<PP&E> 18,798
<DEPRECIATION> 5,407
<TOTAL-ASSETS> 142,446
<CURRENT-LIABILITIES> 71,050
<BONDS> 0
0
0
<COMMON> 138
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 142,446
<SALES> 283,977
<TOTAL-REVENUES> 321,583
<CGS> 271,650
<TOTAL-COSTS> 271,650
<OTHER-EXPENSES> 38,796
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,193
<INCOME-PRETAX> 7,944
<INCOME-TAX> 3,362
<INCOME-CONTINUING> 4,582
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,582
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
