<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. 1)
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
CROSS-CONTINENT AUTO RETAILERS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
N/A
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
COMMON STOCK
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(2) Aggregate number of securities to which transaction applies:
13,573,908
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
$10.70
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(4) Proposed maximum aggregate value of transaction:
$145,240,816
-----------------------------------------------------------------------
(5) Total fee paid:
$29,048.16
-----------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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<PAGE>
[LOGO]
CROSS-CONTINENT AUTO RETAILERS, INC.
1201 S. TAYLOR ST.
P.O. BOX 750
AMARILLO, TEXAS 79105-0750
PH. 806.374.8653
FAX 806.374.3818
DECEMBER 3, 1998
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
Cross-Continent Auto Retailers, Inc. (the "COMPANY") which will be held on
Tuesday, January 5, 1999, at 2:00 p.m., local time, at Amarillo National's
Plaza-Two, 2nd floor conference room, 500 South Taylor Street, Amarillo, Texas
79101 (the "SPECIAL MEETING").
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve and adopt the Agreement and Plan of Merger dated September
3, 1998 (the "MERGER AGREEMENT"), providing for the merger (the "MERGER") of
RI/BG Merger Corp., a wholly owned subsidiary of Republic Industries, Inc.
("REPUBLIC"), with and into the Company. Upon consummation of the Merger, the
Company will become a wholly owned subsidiary of Republic and the Company's
stockholders (the "STOCKHOLDERS") will be entitled to receive $10.70 in cash,
without interest, for each share of the Company's common stock (along with each
associated junior preferred stock purchase right) held by them.
Details of the proposed Merger Agreement are set forth in the accompanying
Proxy Statement which you are urged to read carefully in its entirety. A copy of
the Agreement and Plan of Merger is also attached to the Proxy Statement as
Appendix A.
The Company's Board of Directors has carefully considered and unanimously
approved the Merger Agreement and the Merger and has determined that the Merger
is fair to, and in the best interest of, the Company and the Stockholders.
Accordingly, the Board of Directors unanimously recommends that the Stockholders
vote FOR approval of the Merger Agreement and the Merger. The Board of Directors
has been advised by Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated, that, in its opinion, the consideration to be paid by Republic in
the Merger is fair, from a financial point of view, to the Stockholders as of
the date of such fairness opinion. A copy of such opinion is attached to the
Proxy Statement as Appendix C, and you are urged to read such opinion in its
entirety.
In the material accompanying this letter, you will find a Notice of Special
Meeting of Stockholders, a Proxy Statement relating to the actions to be taken
by the Stockholders at the Special Meeting, and a proxy card. The Proxy
Statement more fully describes the proposed Merger and the related transactions
to be considered at the Special Meeting and includes certain information
concerning the Company and Republic. We urge you to read the Proxy Statement
carefully.
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE SPECIAL MEETING.
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE
PROMPTLY COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT IN THE
ENCLOSED, POSTAGE PREPAID ENVELOPE AS PROMPTLY AS POSSIBLE. ANY STOCKHOLDER
ATTENDING THE SPECIAL MEETING MAY VOTE IN PERSON EVEN IF HE OR SHE HAS RETURNED
A PROXY CARD.
Very truly yours,
/S/ BILL GILLILAND
BILL GILLILAND
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
1201 SOUTH TAYLOR STREET
AMARILLO, TEXAS 79101
(806) 374-8653
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
---------------------
Notice is hereby given that a Special Meeting of Stockholders of
Cross-Continent Auto Retailers, Inc., a Delaware corporation (the "COMPANY"),
will be held at Amarillo National's Plaza-Two, 2nd floor conference room, 500
South Taylor Street, Amarillo, Texas 79101, on Tuesday, January 5, 1999, at 2:00
p.m., local time for the following purposes:
(1) To consider and vote upon a proposal to approve the Agreement and Plan
of Merger, dated as of September 3, 1998, by and among the Company,
Republic Industries, Inc. ("REPUBLIC") and RI/ BG Merger Corp., a wholly
owned subsidiary of Republic ("MERGER SUB"), and the related merger
pursuant to which (i) RI/BG Merger Corp. will be merged with and into the
Company, and (ii) each outstanding share of common stock, par value $.01
per share, of the Company (along with each associated junior preferred
stock purchase right) will be converted into the right to receive $10.70
in cash, without interest; and
(2) To transact such other business as may properly come before the meeting
and any adjournment thereof.
The Board of Directors has fixed the close of business of on November 23,
1998 as the record date for determination of stockholders entitled to receive
notice of and to vote at the Special Meeting and at any adjournment thereof.
Your attention is directed to the Proxy Statement submitted with this
Notice.
BY ORDER OF THE BOARD OF DIRECTORS,
/S/ R. WAYNE MOORE
R. Wayne Moore,
SECRETARY
Amarillo, Texas
December 3, 1998
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES THAT YOU OWN. EVEN IF
YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE DATE AND SIGN THE ENCLOSED PROXY
CARD AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. YOUR PROXY MAY BE REVOKED
AT ANY TIME PRIOR TO THE VOTE AT THE SPECIAL MEETING BY NOTICE TO THE SECRETARY
OF THE COMPANY OR BY EXECUTION AND DELIVERY OF A SUBSEQUENTLY DATED PROXY. IF
YOU ATTEND THE SPECIAL MEETING, YOU MAY WITHDRAW YOUR PROXY AND VOTE IN PERSON.
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
----------------
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 5, 1999
---------------------
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors (the "BOARD") of Cross-Continent Auto
Retailers, Inc. (the "COMPANY") for use at the Special Meeting of stockholders
of the Company (the "STOCKHOLDERS") to be held at the time and place and for the
purposes set forth in the accompanying Notice of Special Meeting, and any
postponements or adjournments thereof (the "SPECIAL MEETING").
All duly executed proxies received by the Company prior to the Special
Meeting will be voted in accordance with the instructions specified therein. As
to a matter for which no instruction has been specified in a properly executed
proxy, the shares represented thereby will be voted by the person named therein
(1) FOR the proposal (the "PROPOSAL") to approve the Agreement and Plan of
Merger, dated as of September 3, 1998 (the "MERGER AGREEMENT"), by and among the
Company, Republic Industries, Inc. ("REPUBLIC"), and RI/BG Merger Corp, a wholly
owned subsidiary of Republic ("MERGER SUB") and the related merger pursuant to
which (i) Merger Sub will be merged with and into the Company and (ii) each
outstanding share of common stock, par value $.01 per share, of the Company
along with each associated junior preferred stock purchase right (collectively,
the "COMMON STOCK") will be converted into the right to receive $10.70 in cash,
without interest, and (2) in the discretion of the persons named in the proxy,
to transact any other business that may properly come before the Special
Meeting. A Stockholder who attends the Special Meeting may, if he or she wishes,
vote by ballot at the Special Meeting, thereby canceling any proxy previously
given. In addition, a Stockholder giving a proxy may revoke it at any time
before it is voted at the Special Meeting by delivering a written notice of
revocation to the Secretary of the Company or by delivering a properly executed
proxy bearing a later date.
The Board of Directors does not intend to bring any matters before the
Special Meeting other than those set forth in the accompanying Notice of Special
Meeting and does not know of any additional matters to be brought before the
Special Meeting by others.
The Board of Directors has fixed the close of business on November 23, 1998
(the "RECORD DATE") as the record date for the determination of the Stockholders
entitled to notice of and to vote at the Special Meeting. At that date, there
were outstanding 13,573,908 shares of Common Stock. The holders of Common Stock
will be entitled to one vote per share on each matter submitted at the Special
Meeting. The Company has no other class of stock outstanding.
This Proxy Statement and the accompanying proxy are first being mailed to
stockholders
on or about December 7, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
FORWARD-LOOKING STATEMENTS................................................................................. 1
SUMMARY OF PROXY STATEMENT................................................................................. 2
The Companies............................................................................................ 2
The Special Meeting...................................................................................... 3
The Merger............................................................................................... 4
SELECTED CONSOLIDATED FINANCIAL DATA....................................................................... 7
THE SPECIAL MEETING........................................................................................ 8
Date, Time and Place..................................................................................... 8
Purpose.................................................................................................. 8
Record Date.............................................................................................. 8
Required Vote............................................................................................ 8
Proxies.................................................................................................. 9
THE MERGER................................................................................................. 10
General.................................................................................................. 10
Background of the Merger................................................................................. 10
Opinion of Financial Advisor............................................................................. 11
Reasons for the Merger; Recommendation of the Board...................................................... 15
Merger Consideration..................................................................................... 16
Options.................................................................................................. 16
Payment of Merger Consideration and for Eligible Options................................................. 16
Merger Agreement......................................................................................... 17
Closing; Effective Time.................................................................................. 19
Conditions to Consummation of the Merger................................................................. 19
Waiver, Amendment and Termination........................................................................ 21
Regulatory Filings and Approvals......................................................................... 21
Interests of Certain Persons in the Merger............................................................... 22
Accounting Treatment..................................................................................... 23
VOTING AGREEMENT........................................................................................... 23
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO STOCKHOLDERS...................................... 24
DELAWARE STATUTORY APPRAISAL RIGHTS........................................................................ 25
CERTAIN INFORMATION CONCERNING THE COMPANY................................................................. 27
Business................................................................................................. 27
Property................................................................................................. 36
Legal Proceedings........................................................................................ 36
Stock Prices and Dividends............................................................................... 37
Security Ownership of Principal Stockholders and Management.............................................. 38
Availability of Independent Accountants.................................................................. 39
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 40
General.................................................................................................. 40
Results of Operations for Three Months Ended September 30, 1998.......................................... 43
Results of Operations for Nine Months Ended September 30, 1998........................................... 46
Results of Operations 1997 v. 1996....................................................................... 50
Results of Operations 1996 v. 1995....................................................................... 56
Liquidity and Capital Resources.......................................................................... 58
Seasonality.............................................................................................. 60
Year 2000 Issues......................................................................................... 60
PRO FORMA CONSOLIDATED FINANCIAL DATA...................................................................... 61
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED)....................................................... 62
CERTAIN INFORMATION CONCERNING REPUBLIC AND MERGER SUB..................................................... 63
STOCKHOLDER PROPOSALS FOR THE 1999 ANNUAL MEETING OF CROSS-CONTINENT AUTO RETAILERS, INC................... 64
OTHER MATTERS.............................................................................................. 64
AVAILABLE INFORMATION...................................................................................... 64
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
APPENDIX A--Agreement and Plan of Merger................................................................... A-1
APPENDIX B--Voting Agreement............................................................................... B-1
APPENDIX C--Fairness Opinion of Dain Rauscher Wessels...................................................... C-1
APPENDIX D-- Section 262 of the Delaware General Corporate Law--Appraisal Rights........................... D-1
</TABLE>
ii
<PAGE>
FORWARD-LOOKING STATEMENTS
The statements, other than statements of historical facts included in this
Proxy Statement, including statements set forth under "Summary," "Certain
Information Concerning the Company," and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" regarding the Company's future
financial position, business strategy, budgets, project costs and plans and
objectives of management for future operations and recent and future
acquisitions, are forward-looking statements. In addition, forward-looking
statements generally can be identified by the use of forward-looking terminology
such as "may," "will," "expect," "intends," "estimate," "anticipate," or
"believe" or the negative thereof or variation thereon or similar terminology.
Although the Company believes the expectations reflected in such forward-looking
statements will prove correct, there can be no assurance that such expectations
will prove to have been correct. Stockholders are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this Proxy Statement. Other than as prescribed by law, the Company undertakes no
obligation to publicly release any revisions to these forward-looking statements
to reflect events or circumstances after the date of this Proxy Statement or to
reflect the occurrence of unanticipated events. Important factors that could
cause actual results to differ materially from the Company's expectations may
include, but are not limited to, local, regional and national economic
conditions, changes in consumer demand for products offered by the Company,
manufacturer employee strikes and other matters that may adversely affect the
availability of products and pricing, state and federal regulatory environment,
availability of additional funding for acquisitions, failure to assimilate the
operations and personnel of the previously acquired dealership or dealerships
that are acquired in the future, failure of the Merger, and other risks
identified in the Company's previous filings with the Securities and Exchange
Commission (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.
1
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SUMMARY OF PROXY STATEMENT
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE
IN THIS PROXY STATEMENT. THE SUMMARY IS NECESSARILY INCOMPLETE AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO DETAILED INFORMATION CONTAINED ELSEWHERE HEREIN
AND THE APPENDICES HERETO. STOCKHOLDERS ARE URGED TO READ CAREFULLY ALL SUCH
MATERIAL. UNLESS THE CONTENT INDICATES OTHERWISE, REFERENCE TO THE "COMPANY"
REFERS TO CROSS-CONTINENT AUTO RETAILERS, INC. AND ITS SUBSIDIARIES.
THE COMPANIES
CROSS-CONTINENT
The Company was incorporated in the State of Delaware in May 1996, and in
June 1996 acquired all of the capital stock of eight companies under common
ownership (the "REORGANIZATION"). See "CERTAIN INFORMATION CONCERNING THE
COMPANY." The Common Stock is listed on the New York Stock Exchange ("NYSE")
under the symbol "XC." 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 is a leading operator and acquirer of retail automotive
dealerships. The Company currently owns and operates four dealerships in Texas,
four in Nevada, one in Colorado and one in Oklahoma. Through these dealerships
the Company offers a total of ten brands, at eleven retail locations. The
Company generates its revenues from sales of new and used vehicles, fees for
repair and maintenance services, sale of replacement parts, and fees and
commissions from arranging financing, extended warranties, and credit insurance
in connection with vehicle sales.
The Company's founder, Chairman of the Board, and Chief Executive Officer,
Bill A. Gilliland, has managed automobile dealerships since 1966 and acquired
the Company's first dealership, Quality Nissan, Inc. in Amarillo, Texas 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. Since the Company's September 1996 initial
public offering, the Company has acquired six dealerships and, subject to the
Merger Agreement and the Merger, is actively pursuing additional acquisitions.
The Company is currently the only Chevrolet and Nissan dealer in the
Amarillo, Texas market and the only BMW, Volkswagen and Audi dealer in the Las
Vegas, Nevada market.
REPUBLIC AND MERGER SUB
Republic operates subsidiaries in the automotive retail and automotive
rental industries. Republic owns the nation's largest chain of franchised
automotive dealerships and is building a chain of used vehicle megastores that
it operates under the AutoNation USA-SM- brand name. See "CERTAIN INFORMATION
CONCERNING REPUBLIC AND MERGER SUB." Republic also owns National Car Rental
System, Inc. ("NATIONAL"), Alamo Rent-A-Car, Inc. ("ALAMO"), and several other
vehicle rental companies.
Republic's automotive retail business consists of the sale, lease and
financing of new and used vehicles and related automotive services and products.
Republic has acquired or contracted to acquire over 350 franchised automotive
dealerships which own and operate franchises granted by the manufacturers of
approximately 36 different brands of cars and light trucks. Republic also owns
and operates 31 AutoNation USA used vehicle megastores, and has 8 franchised
AutoNation USA used vehicle megastores.
Republic's automotive rental business primarily rents vehicles on a daily or
weekly basis to leisure and business travelers principally from on-airport or
near airport locations through Alamo and National. Republic's automotive rental
business operates in all 50 states in the United States, and in Canada, the
Caribbean, Latin America, the Pacific, Australia, Europe, Africa and the Middle
East.
2
<PAGE>
Republic also owns 63.9 percent of Republic Services, Inc., one of the
leading providers of non-hazardous solid waste collection and disposal services
in the United States.
Republic was incorporated in Oklahoma in 1980 and reincorporated in Delaware
in 1991. Republic's common stock, par value $.01 per share is listed on NYSE
under the symbol "RII." Republic's principal executive office is located at
Republic Tower, 110 S.E. 6th Street, Ft. Lauderdale, Florida 33301 and its
telephone number is (954) 769-6000.
Merger Sub was incorporated in September 1998 for purposes of the
transactions contemplated by the Merger Agreement and has engaged in no other
business.
THE SPECIAL MEETING
DATE, TIME AND PLACE
The Special Meeting is scheduled to be held on Tuesday, January 5, 1999 at
2:00 p.m., local time, at Amarillo National's Plaza-Two, 2nd floor conference
room, 500 South Taylor Street, Amarillo, Texas 79101. See "THE SPECIAL
MEETING--Date, Time and Place."
PURPOSE
At the Special Meeting, the holders of Common Stock entitled to vote at the
Special Meeting will be asked to consider and vote upon the Proposal to approve
the Merger Agreement and the related Merger. See "THE SPECIAL MEETING--Purpose."
Upon the terms and subject to the conditions of the Merger Agreement, at the
Effective Time, among other things: (i) each issued and outstanding share of
Common Stock will be converted into the right to receive $10.70 in cash, without
interest; and (ii) Merger Sub will be merged with and into the Company, with the
Company surviving the Merger as a wholly owned subsidiary of Republic.
RECORD DATE
The Board has fixed the close of business on November 23, 1998 as the Record
Date for the determination of the holders of Common Stock entitled to notice of
and to vote at the Special Meeting. On the Record Date, there were 13,573,908
shares of Common Stock outstanding and held by approximately 61 holders of
record. See "THE SPECIAL MEETING--Record Date."
REQUIRED VOTE
A majority of the issued and outstanding shares of Common Stock entitled to
vote at the Special Meeting must be represented, either in person or by proxy to
constitute a quorum at the Special Meeting. See "The Special Meeting--Required
Vote." Under the Delaware General Corporation Law (the "DGCL") the affirmative
vote of at least a majority of the Common Stock issued and outstanding is
required to approve the Merger Agreement. Because approval of the Merger
Agreement requires the affirmative vote of at least a majority of the Common
Stock issued and outstanding as of the Record Date, abstentions, failures to
vote and broker non-votes will have the same effect as a vote against approval
of the Merger Agreement and the Merger. Each holder of record of shares of
Common Stock on the Record Date is entitled to one vote per share of Common
Stock held by such Stockholder on each proposal to be presented to Stockholders
at the Special Meeting.
Bill A. Gilliland, Sandra E. Gilliland, Twenty-Two Ten, Ltd., Xaris, Ltd.
and The Gilliland Group Family Partnership (each a "VOTING AGREEMENT
STOCKHOLDER" and collectively the "VOTING AGREEMENT STOCKHOLDERS") are parties
to the Voting Agreement with Republic, dated September 3, 1998 (the "VOTING
AGREEMENT"). Pursuant to the Voting Agreement, each Voting Agreement Stockholder
has agreed, subject to the terms and conditions of the Voting Agreement, to vote
all of the shares of Common Stock beneficially owned by each of them
(representing approximately 60.18% of the outstanding shares of
3
<PAGE>
Common Stock entitled to vote at the Special Meeting) in favor of approval of
the Merger Agreement. See "VOTING AGREEMENT."
PROXIES
All shares of Common Stock represented by properly executed proxies received
prior to or at the Special Meeting and not revoked will be voted in accordance
with the instructions indicated in such proxies. Properly executed proxies that
do not contain voting instructions will be voted for approval of the Merger
Agreement. Stockholders are urged to mark the box on the proxy to indicate how
their Common Stock is to be voted. Any Stockholder who executes and returns a
proxy may revoke such proxy at any time before it is voted by: (i) notifying the
Secretary of the Company in writing at 1201 South Taylor Street, Amarillo, Texas
79101; (ii) granting a subsequent proxy; or (iii) appearing in person and voting
at the Special Meeting. Attendance at the Special Meeting will not in and of
itself constitute revocation of a proxy.
THE MERGER
FORM OF MERGER; MERGER CONSIDERATION; OPTIONS
At the Effective Time (as defined herein), Merger Sub will be merged with
and into the Company, and the Company will survive as a wholly-owned subsidiary
of Republic. In addition, at the Effective Time, each issued and outstanding
share of Common Stock will cease to be outstanding and will be converted into
the right to receive $10.70 in cash, without interest (the "MERGER
CONSIDERATION"). See "THE MERGER--Merger Consideration."
Also, at the Effective Time, each option to purchase shares of Common Stock
(each an "ELIGIBLE OPTION" and collectively the "ELIGIBLE OPTIONS") outstanding
immediately prior to the Effective Time (whether or not such option was fully
vested) with a per share exercise price of less than the Merger Consideration
will be automatically converted into the right to receive cash in an amount
equal to the product of (i) the Merger Consideration less the exercise price and
(ii) the number of shares of Common Stock for which such Eligible Option is
exercisable. Pursuant to the terms of the Merger Agreement and the Amended and
Restated 1996 Stock Option Plan (the "STOCK OPTION PLAN"), all other options to
purchase shares of Common Stock will be eliminated at the Effective Time.
PAYMENT OF MERGER CONSIDERATION AND OPTIONS
Within at least ten business days following the Closing, the Company, as the
Surviving Corporation, will cause to be sent to each holder of record of Common
Stock or an Eligible Option, transmittal materials for use in exchanging all of
their certificates representing Common Stock or Eligible Options. See "THE
MERGER--Payment of Merger Consideration and for the Eligible Options."
Following the Effective Time and upon surrender of all of the certificates
representing Common Stock or Eligible Options registered in the name of a holder
of Common Stock (or indemnity satisfactory to Republic or the party designated
as the paying agent (the "PAYING AGENT") if any of such certificates are lost,
stolen or destroyed), together with a properly completed letter of transmittal,
the Paying Agent will mail to such holder a check representing the Merger
Consideration or payment for the Eligible Options.
CONDITIONS TO MERGER
The respective obligations of the Company, Republic and Merger Sub, to
effect the Merger and the other transactions contemplated by the Merger
Agreement are subject to the satisfaction at or prior to the Effective Time of
the following conditions, any or all of which may be waived by the party
entitled to the benefit thereof, in whole or in part including: (i) the Merger
Agreement and the Merger shall have been approved and adopted by the requisite
vote of the Stockholders; (ii) the Surviving Corporation shall have
4
<PAGE>
entered into Employment Agreements with Bill A. Gilliland, Chairman of the Board
and Chief Executive Officer of the Company, Robert W. Hall, Vice Chairman of the
Board of the Company, and John W. Gaines, Vice President--Finance, Treasurer and
a Director of the Company, (collectively, the "EMPLOYMENT AGREEMENTS"); and
(iii) Republic shall have received all consents required under the Franchise
Agreements (as defined in the Merger Agreement ) between the Company and the
Factories (as defined in the Merger Agreement) or shall have entered into new
arrangements and Franchise Agreements of the type generally in use at that time
to operate a dealership of each of the Factories at the current locations of the
dealerships; (iv) Republic shall have obtained any applicable dealer license or
other approvals required under state laws or the applicable state motor vehicle
authorities and all other governmental authorities with respect to the
transactions contemplated thereby, except for any failures to obtain any such
licenses or approvals which, individually or in the aggregate, do not have and
could not reasonably be expected to have a material adverse effect on Republic
or the Company; and (v) the divestiture of certain dealerships. See "THE
MERGER--Conditions to Consummation of the Merger" and " THE MERGER--Regulatory
Filings and Approvals."
SOME OF THESE CONDITIONS TO THE CONSUMMATION OF THE MERGER, INCLUDING THE
APPROVALS OF THE FACTORIES, ARE BEYOND THE CONTROL OF THE COMPANY OR REPUBLIC.
WHILE REPUBLIC AND THE COMPANY HAVE AGREED TO TAKE ALL COMMERCIALLY REASONABLE
ACTIONS NECESSARY TO CONSUMMATE THE MERGER, THERE CAN BE NO ASSURANCE THE
COMPANY AND REPUBLIC WILL BE ABLE TO OBTAIN THE NECESSARY APPROVALS OF THE
FACTORIES OR CONSUMMATE THE CONTEMPLATED DIVESTITURES.
OPINION OF FINANCIAL ADVISOR
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated ("DAIN
RAUSCHER WESSELS"), the Company's financial advisor, has delivered a written
opinion to the Board, dated September 2, 1998, that, as of such date, the
consideration to be received by the Stockholders in the Merger is fair to the
Stockholders from a financial point of view. See "THE MERGER--Opinion of
Financial Advisor" and Appendix C.
RECOMMENDATION OF THE BOARD
THE BOARD BELIEVES THAT THE MERGER AGREEMENT, INCLUDING THE MERGER
CONSIDERATION, IS FAIR AND IN THE BEST INTERESTS OF THE STOCKHOLDERS.
ACCORDINGLY, THE BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE
MERGER AND RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER
AGREEMENT AND THE MERGER. THE BOARD'S RECOMMENDATION IS BASED UPON A NUMBER OF
FACTORS DESCRIBED IN THIS PROXY STATEMENT. See "THE MERGER--Reasons for the
Merger; Recommendation of the Board."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the Merger Agreement and the Merger, the Stockholders should
be aware that certain executive officers and directors of the Company have
certain interests in the Merger that may present them with potential conflicts
of interest with respect to the Merger. See "THE MERGER--Interests of Certain
Persons in the Merger."
In connection with the Merger, Republic will employ Messrs. Gilliland, Hall
and Gaines for four years. During the first year, Messrs. Gilliland, Hall and
Gaines will receive monthly salaries of $25,000, $20,000 and $15,000,
respectively, and during the final three years, each executive will receive a
nominal salary. In addition, Republic will grant options to acquire common stock
of Republic to the executive officers of the Company. The options will vest over
a four year period and the exercise price will be the closing price of the
common stock of Republic the day prior to the Closing Date.
In addition, for a period of six years following the Effective Time,
Republic has agreed not to amend, repeal or otherwise modify the indemnification
or exculpation provisions of the Company's Certificate of Incorporation or
Bylaws in any way that would be materially adverse to the officers, directors,
employees
5
<PAGE>
or agents of the Company prior to or at the Effective Time. The Company as the
Surviving Corporation has also agreed to purchase directors and officers
insurance for such individuals for a period of six years following the Effective
Time, subject to certain limits.
The Stockholders should also be aware that the directors and executive
officers of the Company hold Eligible Options to acquire, in the aggregate,
448,024 shares of Common Stock. These Eligible Options will be converted into
the right to receive from Republic cash in the amount equal to the difference
between $10.70 and the respective exercise prices for the Eligible Options.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO STOCKHOLDERS
The transfer of Common Stock pursuant to the Merger will be a taxable
transaction for Federal income tax purposes under the Internal Revenue Code of
1986, as amended (the "CODE"), and may also be a taxable transaction under
applicable state, local or foreign income or other tax laws. See "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO STOCKHOLDERS." Generally, for
Federal income tax purposes, a U.S. Holder (as defined herein) will recognize
gain or loss equal to the difference between the amount of cash received by the
U.S. Holder pursuant to the Merger and the aggregate tax basis in the Common
Stock canceled pursuant to the Merger. Gain or loss will be calculated
separately for each block of Common Stock canceled pursuant to the Merger. A
dissenting Stockholder will recognize gain or loss for Federal income tax
purposes measured by the difference between the cash received by such
Stockholder resulting from an appraisal of such Stockholder's Common Stock and
such Stockholder's tax basis in such Common Stock.
Gain (or loss) will be capital gain (or loss), assuming that such Common
Stock is held as a capital asset. Capital gains of individuals, estates and
trusts generally are subject to a maximum Federal income tax rate of: (i) 39.6%
if, at the Effective Time, the Stockholder held the Common Stock for not more
than one year; and (ii) 20% if the Stockholder held such Common Stock for more
than one year at such time. Capital gains of corporations generally are taxed at
the Federal income tax rates applicable to corporate ordinary income. In
addition, under present law, the ability to use capital losses to offset
ordinary income is limited.
APPRAISAL RIGHTS
The Stockholders are entitled to appraisal rights under Section 262 of the
DGLC. See "DELAWARE STATUTORY APPRAISAL RIGHTS." A person having a beneficial
interest in Common Stock held of record in the name of another person, such as a
broker or nominee, must act promptly to cause the record holder to follow the
steps summarized below properly and in a timely manner to perfect whatever
appraisal rights the beneficial owner may have.
Under the DGCL, the Stockholders who do not wish to accept pursuant to the
Merger the consideration provided for in the Merger Agreement and who follow the
procedures set forth in Section 262 will be entitled to have their Common Stock
appraised by the Delaware Court of Chancery and to receive payment in cash of
the "fair value" of such Common Stock, exclusive of any element of value arising
from the accomplishment or expectation of the Merger, together with a fair rate
of interest, if any, as determined by such court. The "fair value" may be more
or less than the Merger Consideration. The full text of Section 262 is reprinted
in its entirety as Appendix D.
6
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations and balance sheet data for
the 1997, 1996, 1995, 1994, and 1993 fiscal years were derived from the
Company's audited consolidated financial statements. The selected consolidated
results of operations data for the nine months ended September 30, 1998 and 1997
and the consolidated balance sheet data at September 30, 1998 are derived from
the unaudited financial statements of the Company and, in the opinion of
management, reflect all of the adjustments necessary for a fair presentation of
its results of operation and financial condition. All such adjustments are of a
normal recurring nature. The results of operations for an interim period are not
necessarily indicative of results that may be expected for a full year or any
other interim period. This selected 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 included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30
------------------------------------------------ ------------------
1993 1994 1995(4) 1996(3) 1997(2) 1997 1998(1)
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenues
Vehicle sales................................... $150,205 $163,721 $212,984 $283,977 $413,675 $315,043 $428,961
Other operating revenue......................... 15,159 18,047 23,210 37,606 58,443 44,150 63,575
-------- -------- -------- -------- -------- -------- --------
Total revenues.................................. 165,364 181,768 236,194 321,583 472,118 359,193 492,536
Cost of sales..................................... 139,626 153,446 198,702 271,650 390,856 296,756 405,145
-------- -------- -------- -------- -------- -------- --------
Gross profit...................................... 25,738 28,322 37,492 49,933 81,262 62,437 87,391
Selling, general and administrative............... 17,194 18,522 25,630 36,490 61,512 45,429 67,187
Depreciation and amortization..................... 992 934 951 1,207 2,658 1,814 2,868
Management fees(5)................................ 2,536 3,183 4,318 -- -- -- --
Employee stock compensation(6).................... -- -- -- 1,099 -- -- --
Employee severance charge(7)...................... -- -- -- -- -- -- 815
Merger related expenses(8)........................ -- -- -- -- -- -- 750
Loss from sale of dealerships..................... -- -- -- -- 347 347 --
-------- -------- -------- -------- -------- -------- --------
Operating income.................................. 5,016 5,683 6,593 11,137 16,745 14,847 15,771
Interest expense, net............................. (1,848) (1,950) (3,088) (3,193) (5,819) (4,066) (6,660)
-------- -------- -------- -------- -------- -------- --------
Income before income taxes........................ 3,168 3,733 3,505 7,944 10,926 10,781 9,111
Income tax expense................................ 1,173 1,351 1,310 3,362 4,213 4,157 3,649
-------- -------- -------- -------- -------- -------- --------
Net income........................................ $ 1,995 $ 2,382 $ 2,195 $ 4,582 $ 6,713 $ 6,624 $ 5,462
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Basic and diluted net income per share............ $ 0.20 $ 0.24 $ 0.22 $ 0.42 $ 0.49 $ 0.48 $ 0.40
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
AS OF DECEMBER 31, 1998(1)
---------------------------------------------- ----------------------
1993 1994 1995(4) 1996(3) 1997(2)
------ ------ ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital................................... $ 135 $ 50 $ 536 $33,781 $ 3,088 $ 17,443
Total assets...................................... 43,513 47,579 83,407 142,446 197,273 192,997
Long-term debt.................................... 7,887 7,150 11,859 10,568 44,263 41,529
Total liabilities................................. 40,774 42,538 76,306 83,928 134,011 122,273
Stockholders' equity.............................. 2,739 5,041 7,101 58,518 63,262 70,724
Book Value per share.............................. $ .28 $ .51 $ .72 $ 4.24 $ 4.70 $ 5.21
</TABLE>
- ------------------------
(1) The results for the nine months ended September 30, 1998 include the results
of Chaisson (as defined herein) from the date of acquisition, January 1,
1998.
7
<PAGE>
(2) The results for the year ended December 31, 1997 include the results of
operations of Douglas Toyota (as defined herein) and Toyota West (as defined
herein) from the date of the acquisitions, April 1, 1997; and the results of
operations of Nissan West (as defined herein) from its date of acquisition,
July 1, 1997 and, the results of Performance (as defined herein) from
January 1, 1997 through the date of disposition.
(3) The results for the year ended December 31, 1996 include the results of
operations of Lynn Hickey Dodge (as defined herein) from the date of
acquisition, October 1, 1996.
(4) The results for the year ended December 31, 1995 include the results of
operations 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.
(5) As of January 1, 1996, the Company no longer pays management fees to
Gilliland Group Family Partnership.
(6) 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.
(7) The Company recorded a pre-tax charge of $815,000 during the nine months
ended September 30, 1998, representing employee severance incurred with the
realignment of management and certain other personnel.
(8) The Company incurred and recorded expenses related to the Merger of
approximately $750,000 during the quarter ended September 30, 1998.
THE SPECIAL MEETING
DATE, TIME AND PLACE
The Special Meeting is scheduled to be held on Tuesday, January 5, 1999, at
2:00 p.m., local time, at Amarillo National's Plaza--Two, 2nd floor conference
room 500 South Taylor Street, Amarillo, Texas 79101.
PURPOSE
At the Special Meeting, the holders of Common Stock entitled to vote at the
Special Meeting will be asked to consider and vote upon the Proposal to approve
the Merger Agreement, and the related Merger. Upon the terms and subject to the
conditions of the Merger Agreement, at the Effective Time, among other things:
(i) each issued and outstanding share of Common Stock will be converted into the
right to receive $10.70 in cash, without interest; and (ii) Merger Sub will be
merged with and into the Company, with the Company surviving the Merger as a
wholly owned subsidiary of Republic.
RECORD DATE
The Board has fixed the close of business on November 23, 1998 as the Record
Date for the determination of the holders of Common Stock entitled to notice of
and to vote at the Special Meeting. On the Record Date, there were 13,573,908
shares of Common Stock outstanding and held by approximately 61 holders of
record.
REQUIRED VOTE
A majority of the issued and outstanding shares of Common Stock entitled to
vote at the Special Meeting must be represented, either in person or by proxy to
constitute a quorum at the Special Meeting. Under the DGCL, the affirmative vote
of at least a majority of the Common Stock issued and outstanding is required to
approve the Merger Agreement.
8
<PAGE>
If an executed proxy is returned and the Stockholder has abstained from
voting on approval of the Merger Agreement and the Merger, the Common Stock
represented by such proxy will be considered present at the Special Meeting for
purposes of determining a quorum and for purposes of calculating the vote, but
will not be considered to have been voted in favor of approval of the Merger
Agreement and the Merger. Because approval of the Merger Agreement requires the
affirmative vote of at least a majority of the Common Stock issued and
outstanding as of the Record Date, abstentions, failures to vote and broker
non-votes will have the same effect as a vote against approval of the Merger
Agreement and the Merger.
As of the Record Date, directors and executive officers of the Company and
their affiliates had the right to vote approximately 64.07% of all outstanding
shares of the Common Stock entitled to vote at the Special Meeting. Each of the
Voting Agreement Stockholders is a party to the Voting Agreement with Republic
pursuant to which each Voting Agreement Stockholder has agreed, subject to the
terms and conditions of the Voting Agreement, to vote all of the shares of
Common Stock beneficially owned by each of them (representing approximately
60.18% of the outstanding shares of Common Stock entitled to vote at the Special
Meeting) in favor of approval of the Merger Agreement. See "VOTING AGREEMENT."
Each holder of record of shares of Common Stock on the Record Date is entitled
to one vote per share of Common Stock held by such Stockholder on each proposal
to be presented to Stockholders at the Special Meeting.
PROXIES
All shares of Common Stock represented by properly executed proxies received
prior to or at the Special Meeting and not revoked will be voted in accordance
with the instructions indicated in such proxies. Properly executed proxies that
do not contain voting instructions will be voted for approval of the Merger
Agreement. Stockholders are urged to mark the box on the proxy to indicate how
their Common Stock is to be voted.
It is not expected that any matter other than those referred to herein will
be brought before the Special Meeting and only matters relating to the Merger
may be brought before the Special Meeting unless further notice is given to the
Stockholders. If, however, other matters are properly presented, the persons
named as proxies will vote in accordance with their own judgment with respect to
such matters, unless authority to do so is withheld in the proxy. Shares
represented by proxies that have been voted against approval of the Merger
Agreement will not be voted in respect of any motion made for adjournment of the
Special Meeting for purposes of soliciting additional votes to approve the
Merger Agreement and the Merger.
Any Stockholder who executes and returns a proxy may revoke such proxy at
any time before it is voted by: (i) notifying the Secretary of the Company in
writing at 1201 South Taylor Street, Amarillo, Texas 79101; (ii) granting a
subsequent proxy; or (iii) appearing in person and voting at the Special
Meeting. Attendance at the Special Meeting will not in and of itself constitute
revocation of a proxy.
The expenses incurred in connection with the printing and mailing of this
Proxy Statement will be borne by the Company. The Company will request banks,
brokers and other intermediaries holding shares beneficially owned by others to
send this Proxy Statement to and obtain proxies from such beneficial owners and
will reimburse such holders for their reasonable expenses in so doing. The
Company has retained Morrow & Co., Inc. to aid in the solicitation of proxies.
It is estimated that the cost of these services will be approximately $3,000
plus expenses. The cost of soliciting proxies will be borne by the Company.
Proxies may also be solicited by certain executive officers, directors or
employees of the Company, without additional compensation. Proxies may be
solicited by personal interview, mail, telephone, facsimile or other electronic
transmission.
STOCKHOLDERS SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH THEIR PROXIES. A
LETTER OF TRANSMITTAL WITH INSTRUCTIONS FOR THE SURRENDER OF STOCK
9
<PAGE>
CERTIFICATES REPRESENTING COMMON STOCK WILL BE MAILED AS SOON AS PRACTICABLE
AFTER THE EFFECTIVE TIME.
THE MERGER
GENERAL
THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT ARE TO BE EFFECTED IN
ACCORDANCE WITH THE TERMS AND CONDITIONS OF THE MERGER AGREEMENT, A COPY OF
WHICH IS ATTACHED HERETO AS APPENDIX A, AND INCORPORATED HEREIN BY REFERENCE.
THE FOLLOWING DESCRIPTION OF THE MERGER AGREEMENT DOES NOT PURPORT TO BE
COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT.
BACKGROUND OF THE MERGER
BACKGROUND
In January 1998, Mr. Gilliland received a call from an intermediary
representing a privately held automotive retail group to explore the possibility
of a merger with or acquisition of the Company by such group. Between January
1998 and May 7, 1998, the principals of and advisors for the two companies
exchanged information about each company and had numerous discussions about the
possibility of a merger or acquisition but did not come to an agreement. During
this time and until the Board met on September 2, 1998 to approve the Merger,
Messrs. Gilliland, Hall and Gaines met individually with or had telephone
conversations with the other members of the Board to discuss the status of
management's discussions about the possibility of a merger or sale of the
Company.
In April 1998, the Company began exploratory discussions with a second
privately held automotive group and forwarded financial information to both the
first and second groups. While in New York to make a presentation at the Morgan
Stanley Dean Witter Automotive Retailing Day Industry Conference, Messrs.
Gilliland and Gaines met with representatives of the second group. The parties
concluded that there was too great of a difference in the valuations being
discussed by the two parties and no further discussions were held with the
second group.
Following a preliminary conversation at the industry conference referred to
above, on May 15, 1998, Mr. Gilliland telephoned Mr. Steve Berrard, Co-Chief
Executive Officer and President of Republic, and invited Mr. Berrard to open
discussions about a possible merger. Republic expressed interest and later that
day, Thomas Hawkins, Senior Vice President--Corporate Development of Republic,
telephoned Mr. Gilliland and invited him to meet in Washington, D.C. in
connection with an industry conference. On May 18, 1998, Mr. Gilliland met in
Washington D.C. with Mr. Hawkins and Thomas Butler, Vice President--Corporate
Development of Republic, and discussed the broad outlines of a potential merger
transaction between the two companies.
On May 21, 1998, Republic requested financial information concerning the
Company, which the Company promptly provided. On May 22, 1998, representatives
of the third automotive group telephoned Mr. Gaines to discuss a possible
acquisition and requested certain information regarding the Company, which also
was provided the same day.
On May 26, 1998, the Company received from Republic and executed a Use and
Disclosure of Confidential Information Agreement with Republic. Discussions
continued between the Company and Republic by telephone, including conversations
on June 16, 1998 and June 29, 1998 between Mr. Gilliland and Mr. Hawkins, but
discussions were discontinued at the end of June because there was no consensus
on potential valuations of the Company.
On June 12, 1998, Messrs. Gilliland, Hall and Gaines had a telephonic
meeting with representatives from the third group and discussed the possibility
of a stock-for-stock merger. Representatives of the third group suggested
entering into a letter of intent that would give it certain exclusive rights.
The Company
10
<PAGE>
informed this group that the Company was evaluating the Company's options and
was not in a position to sign an exclusive agreement at that time. No further
discussions were held with the third group.
On July 17, 1998, Mr. Gilliland received a telephone call from
representatives of a fourth automotive group to discuss the possibility of
whether or not the Company had any interest in merging with this fourth group.
Between July 19, 1998 and the middle of August 1998, the Company entered into
serious discussions with the fourth group. During this time, the fourth group
conducted preliminary due diligence on the Company and discussed various
valuations for the Company. These discussions primarily consisted of
stock-for-stock transactions with valuations ranging from $8.75 per share of
Common Stock to $10.50 per share, based on the fourth group's then current stock
price. Because of a significant decline in the fourth group's stock price and
based on discussions with individual members of the Board, management did not
believe the valuations were in a range that were adequate for a transaction of
this type and no further discussions were held.
On August 18, 1998, Mr. Gilliland telephoned Mr. Hawkins to explore the
possibility of renewed discussions with Republic. From August 22, 1998 through
August 24, 1998, the Company provided additional financial information to
Republic and Messrs. Gilliland and Gaines had a number of telephone
conversations with Republic representatives concerning the possible terms of a
merger transaction.
On August 25, 1998, Messrs. Gilliland, Hall, and Gaines, met in Fort
Lauderdale with Messrs. Berrard, Hawkins, Butler and Michael Maroone, President
of Republic's Automotive Retail Group, and continued their discussions. The
Company's representatives indicated to Republic they were not prepared to
recommend going forward at the valuations that were under discussion, and
returned to Amarillo.
On August 27 and August 28, 1998, Messrs. Gilliland and Hawkins had further
telephone conversations, and discussed a proposed valuation of the Company's
stock of $10.70 per share, subject to further due diligence and other terms and
conditions. Based on such discussions, representatives of the Company and
Republic commenced more extensive diligence and had discussions of more detailed
terms of a potential merger on August 29 and August 30, 1998. Representatives
met again in Amarillo from August 31, 1998 through September 2, 1998, during
which time Republic conducted further due diligence and the parties negotiated
the terms of a possible merger. On September 2, Republic made a firm offer at
$10.70 per share on the terms set forth in the Merger Agreement.
On the evening of September 2, 1998, the Board met with representatives of
management, Dain Rauscher Wessels and Winstead Sechrest & Minick P.C., outside
legal counsel. During this meeting, the Board continued the individual
discussions that Messrs. Gilliland, Hall and Gaines had with the other Board
members since the beginning of the year regarding the sale of the Company in
general and the Merger specifically. See "--Reasons for the Merger;
Recommendation of the Board." After considering the benefits of the Merger, the
terms of the Merger Agreement and alternatives to the Merger, the Board
unanimously approved the Merger Agreement. The Board also amended the Rights
Agreement dated September 20, 1996, by and between the Company and the Bank of
New York to exclude the Merger Agreement or Voting Agreement from triggering the
Rights Agreement.
OPINION OF FINANCIAL ADVISOR
GENERAL
The Company retained Dain Rauscher Wessels to provide an opinion as to the
fairness to the Stockholders, from a financial point of view, of the
consideration to be received by such holders in the Merger. Dain Rauscher
Wessels was selected by the Board to prepare such fairness opinion based on its
expertise in transactions similar to the Merger and its historic investment
banking relationship and familiarity with the Company. Dain Rauscher Wessels
rendered its opinion on September 2, 1998 to the
11
<PAGE>
Company's Board that, as of such date, the consideration to be received by the
holders of the Common Stock in the Merger is fair to the holders of the Common
Stock from a financial point of view.
THE FULL TEXT OF DAIN RAUSCHER WESSELS' OPINION DATED SEPTEMBER 2, 1998,
WHICH SUMMARIZES THE ASSUMPTIONS MADE, MATTERS CONSIDERED, THE SCOPE AND
LIMITATIONS OF THE REVIEW UNDERTAKEN AND THE PROCEDURES FOLLOWED BY DAIN
RAUSCHER WESSELS, IS ATTACHED AS APPENDIX C TO THIS PROXY STATEMENT. THE
STOCKHOLDERS ARE URGED TO READ THE OPINION IN ITS ENTIRETY AND THE SUMMARY OF
THE OPINION IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE FULL TEXT OF SUCH OPINION.
No limitations were placed on Dain Rauscher Wessels by the Board with
respect to the investigation made or the procedures followed in preparing and
rendering its opinion, except that Dain Rauscher Wessels was not asked to
solicit, and did not solicit, proposals from other parties regarding any sale or
merger of the Company, nor did Dain Rauscher Wessels analyze or pursue any
alternative transactions to the Merger. Dain Rauscher Wessels' opinion was for
the information and assistance of the Board in connection with its evaluation of
the Merger and is not intended to be and does not constitute a recommendation to
any Stockholder as to how such Stockholder should vote on the Merger Agreement
and Merger. Dain Rauscher Wessels was not requested to and did not make any
recommendation as to the form or amount of consideration to be received by the
Stockholders in the Merger, which was determined through negotiations between
the Company and Republic.
In connection with its review of the Merger, and in arriving at its opinion,
Dain Rauscher Wessels, among other things, (i) reviewed and analyzed the
financial terms of the Merger Agreement; (ii) reviewed and analyzed certain
publicly available financial and other data with respect to the Company and
certain other relevant historical and operating data (including internal
financial forecasts of the Company on a stand-alone basis) relating to the
Company made available to Dain Rauscher Wessels from published sources and from
the internal records of the Company; (iii) conducted discussions with members of
the senior management of the Company with respect to the business and prospects
of the Company on a stand-alone basis; (iv) reviewed the reported prices and
trading activity for the Common Stock; (v) compared the financial performance of
the Company and the prices of the Company's Common Stock with that of certain
other comparable publicly-traded companies and their securities; and (vi)
reviewed the financial terms and stock price premiums paid, to the extent
publicly available, of certain comparable merger transactions. In addition, Dain
Rauscher Wessels conducted such other analyses and examinations and considered
such other financial, economic and market criteria as it deemed necessary in
arriving at its opinion.
As set forth in its opinion, Dain Rauscher Wessels did not independently
verify the accuracy and completeness of the financial and other information
furnished to it by the Company. Dain Rauscher Wessels did not make an
independent evaluation or appraisal of the assets and liabilities of the
Company. Additionally, Dain Rauscher Wessels was not asked to and did not
consider the possible effects of any litigation, other legal claims or any other
contingent matters. With respect to the financial forecasts and projections used
in its analysis, Dain Rauscher Wessels relied upon the assertion of the
Company's management that the projections reflect the best currently available
estimates and judgments of the expected future financial performance of the
Company. Dain Rauscher Wessels' opinion was based upon market, economic,
financial, legal and other conditions as they existed and could be evaluated as
of the date of the opinion and any subsequent change in such conditions would
require a reevaluation of such opinion. In addition, Dain Rauscher Wessels did
not take into account any cost savings or operational efficiencies that may be
achieved following the Merger with Republic, including elimination of public
company expense, administrative overhead and interest cost reductions.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The summary
of the Dain Rauscher Wessels analyses set forth below does not purport to be a
complete description of the presentation by Dain Rauscher Wessels to the Board.
In arriving at its opinion, Dain Rauscher Wessels did not attribute any
particular weight to any analysis or
12
<PAGE>
factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Dain
Rauscher Wessels believes that the information reviewed and the analyses
conducted must be considered as a whole and that selecting portions of its
analyses, without considering all analyses and factors, would create an
incomplete view of the evaluation process underlying Dain Rauscher Wessels'
Opinion.
In performing its analyses, Dain Rauscher Wessels considered general,
economic, market, and financial conditions and other matters, many of which are
beyond the control of the Company. The analyses performed by Dain Rauscher
Wessels (and summarized below) are not necessarily indicative of actual values
or actual future results, which may be significantly more or less favorable than
suggested by such analyses. Any estimates contained in these analyses are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than as set forth
herein. Additionally, analyses relating to the value of a business do not
purport to be appraisals or to reflect the prices at which the business actually
may be sold.
FINANCIAL ANALYSIS
The following is a brief summary of certain financial analyses performed by
Dain Rauscher Wessels in connection with providing its written opinion to the
Board of the Company on September 2, 1998:
DISCOUNTED CASH FLOW ANALYSIS. The discounted cash flow analysis
aggregated: (i) the present value of the projected free cash flow (defined as
earnings before interest and taxes ("EBIT"), less taxes, less increases in
working capital, less capital expenditures, plus depreciation and amortization,
plus increases in deferred tax liabilities through 2002) and (ii) the present
value of a terminal value (the hypothetical value of selling the enterprise in
its entirety) in the year 2002. The terminal value for the Company was
determined by applying various multiples of the Company's estimated EBIT in
2002. The Company's free cash flow stream and terminal value were discounted to
present values using discount rates ranging from 13% to 15%. Dain Rauscher
Wessels arrived at such discount rates based upon the consideration of a number
of factors, including cost of capital, required rates of return to investors,
and risks attributable to the uncertainty of achieving the projected cash flows.
The Merger Consideration of $10.70 per share compared favorably to all of the
intrinsic values developed from this analysis.
ANALYSIS OF SELECTED PUBLICLY TRADED COMPANIES. Dain Rauscher Wessels
compared selected historical and projected financial information of the Company
to publicly traded companies Dain Rauscher Wessels deemed to be comparable to
the Company. Such information included the ratio of market value to historical
pretax income and price per share to projected 1998 and 1999 EPS. Dain Rauscher
Wessels also examined the ratio of the enterprise value (equity market value
plus debt less cash) to historical revenue, EBIT, and historical earnings before
interest, taxes, depreciation, and amortization ("EBITDA"). Dain Rauscher
Wessels selected comparable companies that generally operate and acquire retail
automotive dealerships. Companies reviewed by Dain Rauscher Wessels included
Group 1 Automotive, Inc., Lithia Motors, Inc., Sonic Automotive, Inc., and
United Auto Group (the "COMPARABLE COMPANIES").
The foregoing multiples were applied to historical financial results of the
Company for the latest-twelve-month ("LTM") period ended June 30, 1998 and
projected financial results of the Company. Dain Rauscher Wessels determined a
range of multiples for the Comparable Companies of .13 to .20 times LTM revenue,
3.3 to 9.6 times LTM EBITDA, 3.7 to 12.6 times LTM EBIT, 5.8 to 17.0 times LTM
pretax income, 10.0 to 13.8 times calendar 1998 net income, and 8.1 to 10.7
times calendar 1999 net income. The median multiples for the Comparable
Companies were .16 times LTM revenue, 4.3 times LTM EBITDA, 4.6 times LTM EBIT,
6.6 times LTM pretax income, 11.3 times calendar projected, forward-looking,
estimated 1998 net income, and 9.4 times calendar projected 1999 net income.
These multiples compared to corresponding multiples of the Company, based on a
$10.70 per share purchase price for the Common Stock, of .3 times LTM Revenue,
8.1 times LTM EBITDA, 9.6 times LTM EBIT, and 14.5 times LTM pretax income. In
addition, the corresponding forward-looking multiples of the Company based on
estimates of 1998 and 1999 net income each compare favorably to the relevant
median multiples of the
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Comparable Companies. The above-mentioned multiples of the value to be paid to
the Stockholders in the Merger compare favorably to the median multiples in all
cases.
ANALYSIS OF SELECTED MERGER AND ACQUISITION TRANSACTIONS. Dain Rauscher
Wessels compared the proposed Merger with selected merger and acquisition
transactions ("COMPARABLE TRANSACTIONS") involving target companies engaged in
operating and acquiring retail automotive dealerships. In examining these
transactions, Dain Rauscher Wessels analyzed certain income statement and
balance sheet parameters of the acquired company relative to the consideration
offered. The foregoing multiples were applied to historical financial results of
the Company for the twelve-month period ended June 30, 1998. Multiples analyzed
included enterprise value to LTM revenue, LTM EBIT, LTM EBITDA and market value
to LTM pretax income. The enterprise value in the Comparable Transactions ranged
from .1 to .3 times LTM revenue, 6.0 to 17.5 times LTM EBIT, and 5.7 to 21.5
times LTM EBITDA. The market value ranged from 6.3 to 15.5 times LTM pretax
income. The median enterprise value multiples were .2 times LTM revenue, 10.1
times LTM EBIT and 8.9 times LTM EBITDA. The median market value multiple of LTM
pretax income was 9.2 times. These multiples compared to corresponding multiples
of the Company, based on a $10.70 per share purchase price for the Common Stock,
of .3 times LTM revenue, 8.1 times LTM EBITDA, 9.6 times LTM EBIT, and 14.5
times LTM pretax income. The multiples of the value to be paid to the
Stockholders in the Merger are within the range of the high and low multiples of
the Comparable Transactions and compare favorably to the median multiples in all
cases.
ANALYSIS OF MARKET PERFORMANCE. Dain Rauscher Wessels compared the premium
of the proposed purchase price per share of Common Stock with the premiums paid
in recent merger and acquisition transactions of comparable transaction size.
Dain Rauscher Wessels examined the price paid per share in recent transactions
compared to the closing price per share one day prior to announcement and one
month prior to announcement. The premiums paid over the closing price one day
prior to announcement ranged from 1.1% to 87.5%, with a median premium of 25.2%.
The premiums paid over the closing price one month prior to announcement ranged
from -26.5% to 173.9% with a median premium of 38.9%. These premiums compared to
per share purchase price premiums in the Merger of 67.8% over the closing price
of the Common Stock on September 1, 1998 and 47.6% over the closing price of the
Common Stock one month prior to announcement. The premiums to be paid to the
Company are within the range of the high and low premiums of the recent
transactions.
No company or transaction used in the above analysis is identical to the
Company or the Merger. Accordingly, an analysis of the results of the foregoing
is not mathematical; rather it involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
companies and other factors that could affect the public trading values of the
Company and those to which it is compared.
The Company has agreed to pay Dain Rauscher Wessels a fee of $475,000 for
the delivery of its written opinion that is included in this Proxy Statement.
The Company has also agreed to reimburse Dain Rauscher Wessels for its
reasonable out-of-pocket expenses and to indemnify Dain Rauscher Wessels against
certain liabilities including those arising under the federal securities laws or
relating to or arising out of Dain Rauscher Wessels' engagement by the Company.
Dain Rauscher Wessels, as part of its investment banking services, is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, corporate restructurings, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. Dain
Rauscher Wessels acted as a co-manager of the initial public offering of the
Company on September 23, 1996. In the ordinary course of business, Dain Rauscher
Wessels acts as a market maker and broker in the publicly traded securities of
the Company and receives customary compensation in connection therewith, and
also provides research coverage for the Company for its own account and for the
accounts of its customers and, accordingly, may at any time hold a long or short
position in such securities.
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REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD
The Board believes that the terms of the Merger Agreement and the Merger and
the other transactions contemplated thereby are fair to, and are in the best
interests of, the Company and the Stockholders. Accordingly, the Board has
unanimously approved the Merger Agreement and the Merger and recommends approval
of the Merger Agreement by the Stockholders. In considering the recommendation
of the Board with respect to the Merger Agreement and the Merger, Stockholders
should be aware that certain members of the Company's management and the Board
have certain interests in the Merger that are in addition to the interests of
Stockholders generally. See "--Interests of Certain Persons in the Merger." In
reaching its decision, the Board considered numerous factors, consulted with the
Company's management and legal counsel, and received a fairness opinion from
Dain Rauscher Wessels. The principal reasons, to which relative weights were not
assigned, for the Board's approval and its recommendation to the Stockholders
are as follows:
(1) Information and analyses relating to the financial performance,
condition, business operations and prospects of the Company, and current
industry, economic and market conditions.
(2) The possibility of alternatives to the Merger for enhancing
Stockholder value, including the possibility of transactions with other
parties and the valuations discussed with other parties.
(3) The ability of the Company to compete as an independent company.
(4) The economic terms of the Merger Agreement, including the Merger
Consideration. With respect to the Merger Consideration, the Board
considered that the Merger Consideration: (i) had been determined through
arm's-length negotiations; and (ii) represented a premium of 67.8% over the
closing price one day prior to the Board's meeting on September 2, 1998 and
a premium of 47.6% over the closing price one month prior to the
announcement of the Merger Agreement. See "--Opinion of Financial Advisor."
(5) The other terms and conditions of the Merger Agreement, including
the ability of the Board to pursue an unsolicited acquisition proposal
should its fiduciary duties so require.
(6) The fact that the Merger Agreement, which generally prohibits the
Company from soliciting, or engaging in discussions or negotiating with, any
third party regarding any potential acquisition of the Company, including a
merger, acquisition or exchange of all or any material portion of the assets
of, or equity interest in, the Company, does permit the Company to furnish
information to, or negotiate with, any third party that has submitted a
proposal for such an acquisition, provided that certain conditions are met.
See "--Merger Agreement--No Solicitation." The Board believes that these
provisions of the Merger Agreement do not unduly restrict the ability of a
third party to make a proposal meeting the applicable conditions relating to
such an acquisition, or the Board's ability to consider and act upon such a
proposal if made.
(7) The structure of the Merger, including the facts that the Merger is
a "cash-for-stock" transaction rather than a "stock-for-stock" transaction,
and the volatility of the current stock market.
(8) The financial presentation of Dain Rauscher Wessels on September 2,
1998 and its September 2, 1998 oral opinion that the Merger Consideration is
fair, from a financial point of view, to the Stockholders as of the date of
such opinion and based upon and subject to certain assumptions, limitations
and other matters stated therein and the written opinion from Dain Rauscher
Wessels dated September 2, 1998. See "--Opinion of Financial Advisor."
(9) Presentations from, and discussion with, certain executive officers
of the Company, Dain Rauscher Wessels and Winstead Sechrest & Minick P.C.,
outside legal counsel, regarding the terms and conditions of the Merger
Agreement.
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The Board also considered the following potentially negative factors in its
deliberations concerning the merger:
(1) The fact that the Merger Consideration is generally a taxable
transaction to the Stockholders.
(2) The requirements by Republic of the Voting Agreement and the payment
of Republic's expenses if the Merger Agreement is terminated under certain
circumstances. See "--Merger Agreement."
After careful consideration of the foregoing factors and consultation with
its legal and financial advisors, the Board unanimously approved the Merger
Agreement and the Merger.
THE BOARD BELIEVES THAT THE MERGER AGREEMENT AND THE MERGER CONSIDERATION,
IS FAIR AND IN THE BEST INTERESTS OF THE STOCKHOLDERS. ACCORDINGLY, THE BOARD
HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE MERGER AND RECOMMENDS THAT
THE STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND THE MERGER.
MERGER CONSIDERATION
The Merger Consideration was arrived at through arms'-length negotiations
between Republic and the Company. See "--Background of the Merger." Each share
of Common Stock outstanding at the Effective Time will cease to be outstanding
and will be converted into the right to receive $10.70 in cash, without
interest.
OPTIONS
At the Effective Time, each Eligible Option will be automatically converted
into the right to receive cash in an amount equal to the product of (i) the
Merger Consideration less the exercise price and (ii) the number of shares of
Common Stock for which such Eligible Option is exercisable. Pursuant to the
terms of the Merger Agreement and the Stock Option Plan, all other options to
purchase shares of Common Stock will be eliminated at the Effective Time.
PAYMENT OF MERGER CONSIDERATION AND FOR ELIGIBLE OPTIONS
As soon as reasonably practicable after the Effective Time, but in no event
later than ten business days following the Closing (as defined herein), the
Company, as the Surviving Corporation, will cause to be sent to each holder of
record of Common Stock or an Eligible Option, transmittal materials for use in
exchanging all of their certificates representing Common Stock or Eligible
Option. The transmittal materials will contain information and instructions with
respect to the surrender of certificates of Common Stock or Eligible Options.
STOCKHOLDERS SHOULD NOT SEND IN THEIR SHARE CERTIFICATES UNTIL THEY RECEIVE
THE LETTER OF TRANSMITTAL FORM AND INSTRUCTIONS.
Following the Effective Time and upon surrender of all of the certificates
representing Common Stock or Eligible Options registered in the name of a holder
of Common Stock (or indemnity satisfactory to Republic or the Paying Agent if
any of such certificates are lost, stolen or destroyed), together with a
properly completed letter of transmittal, the Paying Agent will mail to such
holder a check representing the Merger Consideration or payment for the Eligible
Options.
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MERGER AGREEMENT
REPRESENTATIONS AND WARRANTIES.
The Merger Agreement contains various customary representations and
warranties of the Company and Republic made to the other relating to, among
other things: (i) each of the Company's, Republic's and Merger Sub's respective
organizations and similar corporate matters and the organizations and similar
corporate matters regarding the respective subsidiaries of the Company and
Republic; (ii) the Company's and its subsidiaries' respective capital structure;
(iii) the authorization, execution, delivery, performance and enforceability of
the Merger Agreement and related matters; (iv) any conflicts under articles or
certificates of incorporation or bylaws, required consents or approvals and
violations of certain instruments or law; (v) in the case of the Company (a)
documents filed with the Commission and the accuracy of the information
contained therein, (b) the absence of certain specified material changes, (c)
the absence of material litigation, (d) employee benefit matters, (e) the
validity of title to properties, (f) identification and status of material
contracts, (g) the validity of all required permits and licenses required for
the Company to conduct its business, and (h) certain environmental, insurance
and tax matters; and (vi) compliance with applicable laws.
CONDUCT OF BUSINESS PRIOR TO THE EFFECTIVE TIME.
Pursuant to the terms of the Merger Agreement, the Company has agreed to
conduct the Company's and its subsidiaries' businesses in the ordinary course
consistent with past practice. More specifically, the Company has agreed that,
except as contemplated by the Merger Agreement, it shall not, among other
things, do any of the following without the prior written consent of Republic:
(i) sell, pledge, dispose of or encumber (or permit any subsidiary of the
Company to sell, pledge, dispose of or encumber) any assets of the Company or
any Subsidiary of the Company, except in the ordinary course of business
consistent with past practice; (ii) amend or propose to amend its Certificate of
Incorporation, or Articles of Incorporation, as applicable, or Bylaws; (iii)
split, combine or reclassify any outstanding shares of its capital stock, or
declare, set aside or pay any dividend or distribution payable in cash, stock,
property or otherwise with respect to such shares; (iv) redeem, purchase,
acquire or offer to acquire (or permit any subsidiary of the Company to redeem,
purchase, acquire or offer to acquire) any shares of its capital stock; (v)
issue, sell, pledge or dispose of, or agree to issue, sell, pledge or dispose
of, any additional shares of, or securities convertible or exchangeable for, or
any options, warrants or rights of any kind to acquire any shares of, its
capital stock of any class or other property or assets whether pursuant to the
company stock plans or otherwise; PROVIDED that the Company may issue shares of
Common Stock upon the exercise of currently outstanding options; (vi) acquire
(by merger, consolidation or acquisition of stock or assets) any corporation,
partnership or other business organization or division thereof; (vii) except for
vehicle financing in the ordinary course of business consistent with past
practice, incur any indebtedness for borrowed money or issue any debt
securities; (viii) enter into or modify any material contract, except in the
ordinary course of business and consistent with past practice; (ix) terminate,
modify, assign, waive, release or relinquish any material contract rights or
amend any material rights or claims not in the ordinary course of business; (x)
settle or compromise any material claim, action, suit or proceeding pending or
threatened against the Company or any Subsidiary of the Company; (xi) grant any
increase in the salary or other compensation of its employees or enter into any
employment agreement or make any loan to or enter into any transaction of any
other nature with any employee of the Company or any Subsidiary of the Company,
except in the ordinary course of business consistent with past practice; (xii)
adopt or amend, in any material respect, except as contemplated thereby or as
may be required by applicable law or regulation, any collective bargaining,
bonus, profit sharing, compensation, stock option, restricted stock, pension,
retirement, deferred compensation, employment or other employee benefit plan,
agreement, trust, fund, plan or arrangement for the benefit or welfare of any
directors, officers or employees (including, without limitation, any such plan
or arrangement relating to severance or termination pay); and (xiii) take any
action that would make any representation or warranty of the Company under the
Merger Agreement to
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be inaccurate in any respect at, or as of any time prior to, the Effective Time,
or omit to take any action necessary to prevent any such representation or
warranty from being inaccurate in any respect at any such time.
The Company has entered into a contract to acquire a certain dealership in
Las Vegas, Nevada. The proposed purchase price is approximately $12.5 million
consisting of approximately $9.0 million in cash, $3.2 million in seller
financed notes and approximately $300,000 in value of the Common Stock. The
Company has not obtained approval from the related manufacturer, and the
purchase contract expires January 1, 1999. As a result, the Company has entered
into a Stock Purchase Agreement with Republic to sell to Republic the subsidiary
that operates this dealership and has the right to acquire it. The Company has
advanced approximately $1.5 million towards the closing of this transaction.
NO SOLICITATION
The Company has agreed, pursuant to the terms of the Merger Agreement, that
it shall not, until the Effective Time or the termination of the Merger
Agreement, and will cause its respective officers, directors, employees, and
other agents not to, directly or indirectly, encourage, solicit, participate in
or initiate discussions or negotiations with, or provide any information to, any
corporation, partnership, person or other entity or "group" (as defined in
Section 13(d) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT")) (other than Republic or Merger Sub, or any affiliate, associate or
designees thereof ) with respect to any inquiries or the making of any offer or
proposal (including, without limitation, any offer or proposal to the
stockholders of the Company) concerning an Acquisition Transaction (an
"ACQUISITION PROPOSAL"); PROVIDED, HOWEVER, that the Company may, directly or
indirectly, furnish information and access pursuant to an appropriate
confidentiality agreement, in each case only in response to an unsolicited
request for information or access, to any person making a written Superior
Proposal (as hereinafter defined) to the Board, and may participate in
discussions and negotiate with such person concerning any such Superior
Proposal, if and only if the Board determines in good faith, based upon the
written advice of outside counsel to the Company reasonably acceptable to
Republic ("COUNSEL"), that failing to provide such information or access or to
participate in such discussions or negotiations would constitute a breach of the
Board's fiduciary duty under applicable law and PROVIDED, FURTHER, that nothing
herein shall prevent the Board from taking, and disclosing to the Stockholders,
a position contemplated by Rules 14d-9 and 14e-2 promulgated under the Exchange
Act with regard to any tender offer; PROVIDED, FURTHER, that the Board shall not
recommend that the Stockholders tender their shares of Common Stock (or approve
any such Superior Proposal in any meeting of the Stockholders to approve any
such Superior Proposal) in connection with any such Superior Proposal unless the
Board shall have determined in good faith, based upon the written advice of
Counsel, that failing to take such action would constitute a breach of the
Board's fiduciary duty to the Stockholders under applicable law.
The Board is required to: (i) notify Republic immediately if any Superior
Proposal is made and shall in such notice indicate the identity of the offeror
and the terms and conditions of any such Superior Proposal; and (ii) keep
Republic promptly apprised of significant developments as to such Superior
Proposal. The Company has agreed not to release any third party from, or waive
any provisions of, any confidentiality or standstill agreement to which the
Company is a party, unless the Board has determined in good faith, based upon
the written advice of Counsel to the Company, that failing to release such third
party or waive such provisions would constitute a breach of the fiduciary duties
of the Board to Stockholders under applicable law.
The term "ACQUISITION TRANSACTION" means any acquisition (with certain
specified exceptions) or exchange of all or any material portion of the assets
of, or any equity interest in, the Company or any of the Subsidiaries of the
Company (by direct purchase from the Company, tender or exchange offer or
otherwise) or any business combination, merger or similar transaction (including
an exchange of stock or assets) with or involving the Company or any Subsidiary
or any division of the Company. The term "SUPERIOR PROPOSAL" means an
Acquisition Proposal made by a third-party after the date hereof, which was
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not encouraged, solicited or initiated by the Company, the Subsidiaries or any
of their affiliates or any of their respective officers, directors, employees,
representatives or agents, the value of which Acquisition Proposal to the
Stockholders has been determined by the Board of Directors to be materially
greater than the value to such Stockholders represented by the transactions
contemplated thereby.
CLOSING; EFFECTIVE TIME
The closing (the "CLOSING") of the transactions contemplated by the
Agreement will take place: (i) at the offices of Morrison & Foerster L.L.P., 775
Page Mill Road in Palo Alto, California 94304, on the first business day on
which the last to be fulfilled or waived of the conditions set forth in Article
VII of the Merger Agreement shall be fulfilled or waived in accordance with the
Agreement (the "CLOSING DATE"); or (ii) at such other place and time and/or on
such other date as the Company and Republic may agree as soon as practicable
following the receipt of all necessary and regulatory and Stockholders'
approvals and the expiration of all mandatory waiting periods relative thereto.
See "--Waiver, Amendment and Termination." The Merger will become effective at
the time and on the date on which the Delaware Certificate of Merger has been
duly filed with the Secretary of State of Delaware (the "EFFECTIVE TIME")
CONDITIONS TO CONSUMMATION OF THE MERGER
The respective obligations of the Company, Republic and Merger Sub, to
effect the Merger and the other transactions contemplated by the Merger
Agreement are subject to the satisfaction at or prior to the Effective Time of
the following conditions, any or all of which may be waived by the party
entitled to the benefit thereof, in whole or in part: (i) the Merger Agreement
and the Merger shall have been approved and adopted by the requisite vote of the
Stockholders; (ii) the expiration or earlier termination of any waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR ACT")
shall have occurred; and (iii) the Surviving Corporation shall have entered into
the Employment Agreements.
In addition, the obligations of Republic and Merger Sub to effect the Merger
and the other transactions contemplated by the Merger Agreement are subject to
the satisfaction at or prior to the Effective Time of the following additional
conditions, any or all of which may be waived by Republic and Merger Sub, in
whole or in part: (i) no preliminary or permanent injunction or other order,
decree or ruling issued by any court of competent jurisdiction nor any statute,
rule, regulation or order entered, promulgated or enacted by any governmental,
regulatory or administrative agency or authority shall be in effect that would
restrain the effective operation of the business of the Company and the
Subsidiaries from and after the Effective Time, and no proceeding challenging
the Merger Agreement or the transactions contemplated thereby or seeking to
prohibit, alter, prevent or materially delay the Merger shall be pending before
any court, arbitrator or governmental agency, body or official; (ii) all of the
representations and warranties of the Company set forth in the Merger Agreement
shall have been true and correct on the date of the Merger Agreement, and (a)
with respect to all such representations and warranties that are not subject to
materiality (or similar) qualifiers, shall be true and correct in all material
respects on the Closing Date (subject to any transactions and other actions
permitted or required to be taken pursuant to the Merger Agreement), with the
same force and effect as if made on such date, and (b) with respect to all such
representations and warranties that are subject to materiality (or similar)
qualifiers shall be true and correct on the Closing Date in accordance with
their terms, with the same force and effect as if made on such date; (iii) the
Company shall have performed, in all material respects, all of its covenants and
obligations under the Merger Agreement; (iv) the Chief Executive Officer of the
Company shall have executed and delivered to Republic a certificate, in form
reasonably acceptable to Republic, certifying as to the matters set forth in
clauses (ii) and (iii) above; (v) between September 3, 1998 and the Closing
Date, there shall not have occurred any fact, circumstance, development or event
which has or could reasonably be expected to have a Material Adverse Effect on
the Company, and the Company shall have delivered to Republic a certificate,
dated as of the Closing Date, to that effect; (vi) Republic shall have received
an opinion of counsel to the Company reasonably acceptable to Republic, dated as
of the Closing Date, in
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form and substance reasonably acceptable to Republic; (vii) Republic shall have
received all consents required under the Franchise Agreements (as defined in the
Merger Agreement ) between the Company and the Factories (as defined in the
Merger Agreement) or shall have entered into new arrangements and Franchise
Agreements of the type generally in use at that time to operate a dealership of
each of the Factories at the current locations of the dealerships, subject only
to such additional terms and conditions as are acceptable to Republic, and the
Closing shall be in compliance with any agreements then in effect between
Republic and any Factories; (viii) the Company and Republic shall have received
such other consents to the Merger and other transactions contemplated thereby
and waivers of rights to terminate or modify any rights or obligations of the
Company or the Subsidiaries, from any person or entity from whom such consent or
waiver is required, under any material contract or any law or regulation (other
than the HSR Act, or who as a result of the transactions contemplated thereby,
would have such rights to terminate or modify such material contracts, either by
the terms thereof or as a matter of law, except for any failures to obtain any
such consent which, individually or in the aggregate, do not have and could not
reasonably be expected to have a Material Adverse Effect on Republic or the
Company; and (ix) Republic shall have obtained any applicable dealer license or
other approvals required under state laws or the applicable state motor vehicle
authorities and all other governmental authorities with respect to the
transactions contemplated thereby, except for any failures to obtain any such
licenses or approvals which, individually or in the aggregate, do not have and
could not reasonably be expected to have a Material Adverse Effect on Republic
or the Company; and (x) the Voting Agreement shall have been observed and shall
continue to be in full force and effect in accordance with their respective
terms. To satisfy the conditions of the Merger, as set forth in the Merger
Agreement, the Company will divest the Company's Denver, Colorado dealership, as
well as the Company's interest in the pending acquisition of a California
dealership. In addition, Nissan Motor Corporation U.S.A ("NISSAN") has asserted
a right to require the disposition or termination of the Company's two Nissan
dealerships in connection with the Merger. The Company and Republic believe
Nissan's position is without any merit, and will vigorously pursue all legal
remedies available in the event Nissan takes any action to attempt to enforce
its asserted rights.
The obligations of the Company to effect the Merger and the other
transactions contemplated by the Merger Agreement are subject to the
satisfaction at or prior to the Effective Time of the following additional
conditions, any or all of which may be waived by the Company, in whole or in
part: (i) all of the representations and warranties of Republic and Merger Sub
set forth in the Merger Agreement shall have been true and correct on the date
of the Merger Agreement, and (a) with respect to all such representations and
warranties that are not subject to materiality (or similar) qualifiers, shall be
true and correct in all material respects on the Closing Date (subject to any
transactions and other actions permitted or required to be taken pursuant to the
Merger Agreement), with the same force and effect as if made on such date, and
(b) with respect to all such representations and warranties that are subject to
materiality (or similar) qualifiers shall be true and correct on the Closing
Date in accordance with their terms, with the same force and effect as if made
on such date; (ii) Republic and Merger Sub shall have performed, in all material
respects, all of their covenants and obligations under the Merger Agreement; and
(iii) no preliminary or permanent injunction or other order, decree or ruling
issued by any court of competent jurisdiction nor any statute, rule, regulation
or order entered, promulgated or enacted by any governmental, regulatory or
administrative agency or authority shall be in effect that would prevent the
consummation of the Merger as contemplated thereby.
SOME OF THESE CONDITIONS TO THE CONSUMMATION OF THE MERGER, INCLUDING THE
APPROVALS OF THE FACTORIES, ARE BEYOND THE CONTROL OF THE COMPANY OR REPUBLIC.
WHILE REPUBLIC AND THE COMPANY HAVE AGREED TO TAKE ALL COMMERCIALLY REASONABLE
ACTIONS NECESSARY TO CONSUMMATE THE MERGER, THERE CAN BE NO ASSURANCE THE
COMPANY AND REPUBLIC WILL BE ABLE TO OBTAIN THE NECESSARY APPROVALS OF THE
FACTORIES OR CONSUMMATE THE CONTEMPLATED DIVESTITURES.
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WAIVER, AMENDMENT AND TERMINATION
The Company, on the one hand, and Republic and Merger Sub, on the other
hand, may, each in its sole discretion, by written notice to the other party:
(i) extend the time for the performance of any of the obligations or other
actions of the other under the Merger Agreement; (ii) waive any inaccuracies in
the representations or warranties of the other party contained in the Merger
Agreement or in any document delivered pursuant to the Merger Agreement; (iii)
waive compliance with any of the conditions of the other party contained in the
Merger Agreement; or (iv) waive performance of any of the obligations of the
other party under the Merger Agreement.
The Merger Agreement may be varied, amended or supplemented at any time
before or after the approval and adoption of the Merger Agreement by the
Stockholders by action of the respective Boards of Directors of the Company,
Republic and Merger Sub, without action by the stockholders thereof; PROVIDED
that, after approval and adoption of the Merger Agreement by the Stockholders,
no such variance, amendment or supplement shall, without consent of such
Stockholders, reduce the amount or alter the form of the consideration that the
holders of the Common Stock is entitled to receive upon the Effective Time.
The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time, whether before or after approval by the
Stockholders: (i) by mutual action of the Boards of Directors of Republic and
the Company; (ii) by either Republic or the Company, if the Merger shall not
have been effected on or prior to the close of business on September 3, 1999,
unless, in any case, such event has been caused by the breach of the Merger
Agreement by the party seeking such termination; (iii) by Republic, if the Board
withdraws, modifies or amends in a manner adverse to Republic its approval or
recommendation of the Merger (or failed to re-affirm its approval or
recommendation within ten days after Republic's request following receipt by the
Company of an Acquisition Proposal) to the Stockholders, or approves, recommends
or endorses any Superior Proposal; or (iv) by Republic or the Company, upon the
occurrence of any material breach by the other party of any of its
representations, warranties, covenants or agreements, which breach is not cured
within fifteen days after written notice of such breach is delivered by the
non-breaching party.
If the Merger Agreement is terminated by Republic because the Board
withdrew, modified or amended in a manner adverse to Republic, its approval or
recommendation of the Merger (or failed to re-affirm its approval or
recommendation within ten days after Republic's request) to the Stockholders, or
approved, recommended or endorsed a Superior Proposal, the Company has an
obligation to pay, within ten days of written demand from Republic, all of
Republic's reasonable out-of-pocket costs and expenses.
REGULATORY FILINGS AND APPROVALS
The Merger is subject to the requirements of the HSR Act, which provides
that certain transactions may not be consummated until required information and
materials have been furnished to the Antitrust Division of the Justice
Department (the "ANTITRUST DIVISION") and the Federal Trade Commission (the
"FTC") and certain waiting periods have expired or been terminated. On September
25, 1998, the Company and Republic filed the required information and materials
with the Antitrust Division and the FTC and requested early termination of the
waiting period under the HSR Act. The waiting period under the HSR Act expired
on October 25, 1998. The requirements of the HSR Act will be satisfied if the
Merger is consummated within one year from the expiration of the waiting period.
However, the Antitrust Division or the FTC may challenge the Merger on
antitrust grounds either before or after expiration of the waiting period.
Accordingly, at any time before or after the Effective Time, either the
Antitrust Division or the FTC could take such action under the antitrust laws as
it deems necessary or desirable in the public interest, or certain other persons
could take action under the antitrust laws, including seeking to enjoin the
Merger. Additionally, at any time before or after the Effective Time,
notwithstanding that the waiting period under the HSR Act has expired, any state
could take such action
21
<PAGE>
under the antitrust laws as it deems necessary or desirable in the public
interest. There can be no assurance that a challenge to the Merger will not be
made or that, if such a challenge is made, the Company will prevail.
The Merger is also subject to certain state statutes and regulations that
require that the regulatory agencies overseeing motor vehicle sales approve the
change of ownership or be given a notice of a change of ownership. In
California, Nevada and Oklahoma, Republic is required to file an application for
approval, and in Colorado and Texas, Republic is required to file a notice prior
to the change of ownership.
The Company is unaware of any other material governmental or regulatory
approval required for consummation of the Merger, other than compliance with
applicable securities laws and filings under the DGCL.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the Merger Agreement and the Merger, the Stockholders should
be aware that certain executive officers and directors of the Company have
certain interests in the Merger that may present them with potential conflicts
of interests with respect to the Merger.
FUTURE EMPLOYMENT
In connection with the Merger, Republic will employ Messrs. Gilliland, Hall
and Gaines for four years. Mr. Gilliland will be employed as the Chief Executive
Officer of the Company and Messrs. Hall and Gaines will be employed as Vice
Presidents of the Company. Each of these executives will be employed full-time
for the first year following the Merger, and part-time during the final three
years. During the first year, Messrs. Gilliland, Hall and Gaines will receive
monthly salaries of $25,000, $20,000 and $15,000, respectively, and during the
final three years, each executive will receive a nominal salary.
Messrs. Gilliland and Hall will be subject to certain non-competition
provisions that will severely restrict their ability to compete in the
automobile business for a period of five years after the Closing Date.
In addition, Republic will grant options to acquire common stock of Republic
to the executive officers of the Company. Mr. Gilliland will receive options to
acquire 501,818 shares. Mr. Hall will receive options to acquire 80,000 shares.
Mr. Gaines will receive options to acquire 30,000 shares. R. Wayne Moore, Esq.,
Secretary and General Counsel, will receive options to acquire 10,000 shares.
Mr. Charles D. Winton, Chief Accounting Officer, will receive options to acquire
10,000 shares. The options will vest over a four year period and the exercise
price will be the closing price of the common stock of Republic the day prior to
the Closing Date.
INDEMNIFICATION
For a period of six years following the Effective Time, Republic has agreed
not to amend, repeal or otherwise modify the indemnification or exculpation
provisions of the Company's Certificate of Incorporation or Bylaws in any way
that would be materially adverse to the officers, directors, employees or agents
of the Company prior to or at the Effective Time. The Company, as the Surviving
Corporation, has also agreed to purchase directors and officers insurance for
such individuals for a period of six years following the Effective Time, subject
to certain limits.
STOCK OPTION PLANS
Each of the directors and executive officers of the Company listed below
hold Eligible Options to acquire, in the aggregate, 448,024 shares of Common
Stock. These Eligible Options will be converted into the right to receive from
Republic cash in the amount equal to the difference of $10.70 and the exercise
22
<PAGE>
price. The executive officers and directors of the Company have options to
acquire the number of shares at a weighted average exercise price as set forth
below:
<TABLE>
<CAPTION>
AMOUNT TO BE RECEIVED
NUMBER OF SHARES WEIGHTED AVERAGE AT CLOSING FOR
NAME UNDERLYING COMMON STOCK EXERCISE PRICE OPTIONS
- ---------------------------------------------- ------------------------ ---------------- ---------------------
<S> <C> <C> <C>
Bill A. Gilliland............................. 127,907 $ 8.0136 $ 343,609.36
Robert W. Hall................................ 72,326 $ 8.0193 $ 193,884.31
John W. Gaines................................ 61,163 $ 8.0625 $ 161,317.41
R. Wayne Moore................................ 28,953 $ 8.0625 $ 76,363.54
Charles D. Winton............................. 61,163 $ 8.0625 $ 161,317.41
R. Douglas Spedding........................... 46,512 $ 8.0625 $ 122,675.40
John H. Marmaduke............................. 25,000 $ 8.0875 $ 65,312.50
Robert F. Green............................... 25,000 $ 8.0875 $ 65,312.50
</TABLE>
ACCOUNTING TREATMENT
The Merger will be accounted for as a "purchase" transaction under generally
accepted accounting principles. Accordingly, the earnings of the Company will be
combined with the earnings of Republic from and after the Effective Time and any
goodwill or other intangibles recorded in the transaction will be amortized
through charges to income in future periods.
VOTING AGREEMENT
As further inducement for Republic to enter into the Agreement, the Voting
Agreement Stockholders entered into the Voting Agreement which is attached
hereto as Appendix B, whereby each of the Voting Agreement Stockholders agreed
to vote all of the shares of Common Stock beneficially owned by them in favor of
certain matters, including without limitation, the approval and adoption of the
Merger Agreement, and against, among other things, any recapitalization, merger,
stock purchase, sale of assets or other Acquisition Proposal between the Company
and any person or entity other than Republic, and any action or agreement that
would result in a breach of any covenant, representation or warranty or any
obligation of the Company under the Merger Agreement. However, if the Company
executes a definitive agreement for a Superior Proposal (a "DEFINITIVE
AGREEMENT"), the Voting Agreement Stockholders' voting obligations will be
suspended, and they may vote in favor of the Superior Proposal. In the event the
transaction contemplated by the Definitive Agreement is consummated, each Voting
Agreement Stockholder is obligated to pay Republic the amount of consideration
they are to receive in such transaction (including amounts to be paid in the
future or amounts held in escrow) that is in excess of the aggregate Merger
Consolidation the Voting Agreement Stockholders would have received in the
Merger. The Voting Agreement Stockholders beneficially own an aggregate of
8,265,224 shares of Common Stock (excluding options currently exercisable) or
60.18% of the outstanding shares of Common Stock as of the Record Date. Republic
did not pay additional consideration to any Voting Agreement Stockholder in
connection with the execution and delivery of the Voting Agreement.
The Voting Agreement terminates upon the earlier to occur of: (i) the
Effective Time; (ii) the termination of the Merger Agreement by mutual consent
of the Company and Republic; and (iii) the later of (x) September 3, 1999 and
(y) the date on which the Definitive Agreement terminates or the principal
transactions contemplated thereby are consummated and all payments owed to
Republic by the Voting Agreement Stockholders under the Voting Agreement have
been paid.
23
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
OF THE MERGER TO STOCKHOLDERS
The following is a general discussion of certain United States Federal
income tax consequences of the receipt of cash by a holder of Common Stock
pursuant to the Merger. Except as specifically noted, this discussion applies
only to a U.S. Holder.
A "U.S. HOLDER" means a holder of Common Stock that is (i) a citizen or
resident of the United States, (ii) a corporation or other entity taxable as a
corporation created or organized in or under the laws of the United States or
any political subdivision thereof or therein, (iii) an estate the income of
which is subject to United States Federal income taxation regardless of its
source, or (iv) a trust if (x) a court within the United States is able to
exercise primary supervision over the administration of the trust and (y) one or
more United States fiduciaries have the authority to control all substantial
decisions of the trust. A "Non-U.S. Holder" is a holder of Common Stock that is
not a U.S. Holder.
The transfer of Common Stock pursuant to the Merger will be a taxable
transaction for Federal income tax purposes under the Code, and may also be a
taxable transaction under applicable state, local or foreign income or other tax
laws. Generally, for Federal income tax purposes, a U.S. Holder will recognize
gain or loss equal to the difference between the amount of cash received by the
U.S. Holder pursuant to the Merger and the aggregate tax basis in the Common
Stock canceled pursuant to the Merger. Gain or loss will be calculated
separately for each block of Common Stock canceled pursuant to the Merger. A
dissenting Stockholder will recognize gain or loss for Federal income tax
purposes measured by the difference between the cash received by such
Stockholder resulting from an appraisal of such Stockholder's Common Stock and
such Stockholder's tax basis in such Common Stock.
Gain (or loss) will be capital gain (or loss), assuming that such Common
Stock is held as a capital asset. Capital gains of individuals, estates and
trusts generally are subject to a maximum Federal income tax rate of (i) 39.6%
if, at the Effective Time, the Stockholder held the Common Stock for not more
than one year, and (ii) 20% if the Stockholder held such Common Stock for more
than one year at such time. Capital gains of corporations generally are taxed at
the Federal income tax rates applicable to corporate ordinary income. In
addition, under present law, the ability to use capital losses to offset
ordinary income is limited.
A Stockholder that surrenders Common Stock pursuant to the Merger may be
subject to 31% backup withholding unless the Stockholder provides its Taxpayer
Identification Number ("TIN") and certifies that such number is correct or
properly certifies that it is awaiting a TIN, or unless an exemption applies. A
Stockholder that does not furnish its TIN may be subject to a penalty imposed by
the Internal Revenue Service ("IRS").
If backup withholding applies to a Stockholder, the paying agent is required
to withhold 31% from payments to such Stockholder. Backup withholding is not an
additional tax. Rather, the amount of the backup withholding can be credited
against the Federal income tax liability of the person subject to the backup
withholding, provided that the required information is given to the IRS. If
backup withholding results in an overpayment of tax, a refund can be obtained by
the Stockholder upon filing an income tax return.
THE FOREGOING DISCUSSION MAY NOT BE APPLICABLE WITH RESPECT TO COMMON STOCK
RECEIVED PURSUANT TO THE EXERCISE OF EMPLOYEE STOCK OPTIONS OR OTHERWISE AS
COMPENSATION OR WITH RESPECT TO HOLDERS OF COMMON STOCK WHO ARE SUBJECT TO
SPECIAL TAX TREATMENT UNDER THE CODE, SUCH AS NON-U.S. HOLDERS, LIFE INSURANCE
COMPANIES, TAX-EXEMPT ORGANIZATIONS, FINANCIAL INSTITUTIONS, DEALERS IN
SECURITIES OR CURRENCIES, PERSONS WHO HOLD COMMON STOCK AS A POSITION IN A
"STRADDLE" OR AS PART OF A "HEDGING" OR "CONVERSION" TRANSACTION AND PERSONS
THAT HAVE A FUNCTIONAL CURRENCY OTHER THAN THE U.S. DOLLAR, AND MAY NOT APPLY TO
A HOLDER OF COMMON STOCK IN LIGHT OF INDIVIDUAL CIRCUMSTANCES. STOCKHOLDERS ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE PARTICULAR TAX
CONSEQUENCES TO THEM (INCLUDING THE APPLICATION AND EFFECT OF ANY STATE, LOCAL
OR FOREIGN INCOME AND OTHER TAX LAWS) OF THE MERGER.
24
<PAGE>
DELAWARE STATUTORY APPRAISAL RIGHTS
The Stockholders are entitled to appraisal rights under Section 262 of the
DGCL. A PERSON HAVING A BENEFICIAL INTEREST IN COMMON STOCK HELD OF RECORD IN
THE NAME OF ANOTHER PERSON, SUCH AS A BROKER OR NOMINEE, MUST ACT PROMPTLY TO
CAUSE THE RECORD HOLDER TO FOLLOW THE STEPS SUMMARIZED BELOW PROPERLY AND IN A
TIMELY MANNER TO PERFECT WHATEVER APPRAISAL RIGHTS THE BENEFICIAL OWNER MAY
HAVE.
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW PERTAINING
TO APPRAISAL RIGHTS UNDER THE DGCL AND IS QUALIFIED IN ITS ENTIRETY BY THE FULL
TEXT OF SECTION 262, WHICH IS REPRINTED IN ITS ENTIRETY AS APPENDIX D TO THIS
PROXY STATEMENT. All references in Section 262 and in this summary to a
"stockholder" are to the record holder of the Common Stock as to which appraisal
rights are asserted. As used herein, "SURVIVING CORPORATION" means the Company
as the corporation surviving the Merger.
Under the DGCL, the Stockholders who do not wish to accept pursuant to the
Merger the consideration provided for in the Merger Agreement and who follow the
procedures set forth in Section 262 will be entitled to have their Common Stock
appraised by the Delaware Court of Chancery and to receive payment in cash of
the "fair value" of such Common Stock, exclusive of any element of value arising
from the accomplishment or expectation of the Merger, together with a fair rate
of interest, if any, as determined by such court.
Under Section 262, where an agreement of merger (E.G., the Merger Agreement)
is to be submitted for approval at a meeting of stockholders, as in the case of
the Special Meeting, the corporation, not less than 20 days prior to the
meeting, must notify each of its stockholders entitled to appraisal rights that
such appraisal rights are available and include in such notice a copy of Section
262. This Proxy Statement shall constitute such notice to the holders of Common
Stock and the applicable statutory provisions of the DGCL are attached to this
Proxy Statement as Appendix D. Any Stockholder who wishes to exercise such
appraisal rights, or who wishes to preserve his right to do so, should review
the following discussion and Appendix D carefully because failure to timely and
properly comply with the procedures specified will result in the loss of
appraisal rights under the DGCL.
A Stockholder wishing to exercise his appraisal rights must deliver to the
Secretary of the Company, before the vote on the Merger Agreement at the Special
Meeting, a written demand for appraisal of his Common Stock and must not vote
his Common Stock of stock in favor of approval and adoption of the Merger
Agreement. Because a proxy which does not contain voting instructions will,
unless revoked, be voted for approval and adoption of the Merger Agreement, a
Stockholder who votes by proxy and who wishes to exercise his appraisal rights
must: (i) vote against approval and adoption of the Merger Agreement; or (ii)
abstain from voting on approval and adoption of the Merger Agreement. Neither
voting (in person or by proxy) against, abstaining from voting on or failing to
vote on the proposal to approve and adopt the Merger Agreement will constitute a
written demand for appraisal within the meaning of Section 262. The written
demand for appraisal must be in addition to and separate from any such proxy or
vote. In addition, a holder of Common Stock wishing to exercise his appraisal
rights must hold of record such Common Stock on the date the written demand for
appraisal is made and must continue to hold such Common Stock until the
Effective Time.
Only a Stockholder of record is entitled to assert appraisal rights for the
Common Stock registered in that holder's name. A demand for appraisal should be
executed by or on behalf of the Stockholder of record, fully and correctly, as
his or her name appears on the stock certificates. If the shares of Common Stock
are owned of record in a fiduciary capacity, such as by a trustee, guardian or
custodian, execution of the demand should be made in that capacity, and if the
shares of Common Stock are owned of record by more than one person, as in a
joint tenancy and tenancy in common, the demand should be executed by or on
behalf of all joint owners. An authorized agent, including one or more joint
owners, may execute a demand for appraisal on behalf of a holder of record;
however, the agent must identify the record owner or owners and expressly
disclose the fact that, in executing the demand, the agent is agent for such
owner or owners. A record holder such as a broker who holds Common Stock as
nominee for several beneficial
25
<PAGE>
owners may exercise appraisal rights with respect to the Common Stock held for
one or more beneficial owners while not exercising such rights with respect to
the Common Stock held for other beneficial owners; in such case, the written
demand should set forth the number of Common Stock as to which appraisal is
sought and when no number of Common Stock is expressly mentioned, the demand
will be presumed to cover all Common Stock held in the name of the record owner.
Stockholders who hold their Common Stock in brokerage accounts or other nominee
forms and who wish to exercise appraisal rights are urged to consult with their
brokers to determine the appropriate procedures for the making of a demand for
appraisal by such a nominee. All written demands for appraisal should be
delivered to R. Wayne Moore, Secretary of the Company, either in person or by
mail (certified mail, return receipt requested, being the recommended form of
transmittal) addressed to him at Cross-Continent Auto Retailers, Inc., 1201
South Taylor, Amarillo, Texas 79101.
Within ten days after the Effective Time, the Surviving Corporation must
send a notice as to the effectiveness of the Merger to each former stockholder
of the Company who has made such a written demand for appraisal and who has not
voted in favor of approval and adoption of the Merger Agreement. Within 120 days
after the Effective Time, but not thereafter, the Surviving Corporation, or any
Stockholder who is entitled to appraisal rights under Section 262 and has
complied with the requirements of Section 262, may file a petition in the
Delaware Court of Chancery demanding a determination of the fair value of the
Common Stock. The Surviving Corporation is under no obligation to and has no
present intention to file a petition in respect to the appraisal of the fair
value of the Common Stock. Accordingly, it is the obligation of the Stockholders
to initiate all necessary action to perfect their appraisal rights within the
time prescribed in Section 262.
Within 120 days after the Effective Time, any Stockholder who has complied
with the requirements under Section 262 for exercise of appraisal rights will be
entitled, upon written request, to receive from the Surviving Corporation a
statement setting forth the aggregate number of shares of Common Stock with
respect to which demands for appraisal have been received and which have not
voted in favor of approval and adoption of the Merger Agreement, and the
aggregate number of holders of such Common Stock. Such statements must be mailed
within ten days after a written request therefor has been received by the
Surviving Corporation.
If a petition for appraisal is duly filed by a Stockholder and a copy
thereof is delivered to the Surviving Corporation, the Surviving Corporation
will then be obligated within 20 days to provide the Delaware Court of Chancery
with a duly verified list containing the names and addresses of all holders of
Common Stock who have demanded appraisal of their Common Stock. After notice to
such Stockholders, the Delaware Court of Chancery is empowered to conduct a
hearing upon the petition to determine those Stockholders who have complied with
Section 262 and who have become entitled to appraisal rights under that section.
The Delaware Court of Chancery may require the Stockholders who have demanded
payment for their Stock to submit their stock certificates to the Register in
Chancery for a notation thereon of the pendency of the appraisal proceedings;
and if any stockholder fails to comply with such direction, the Delaware Court
of Chancery may dismiss the proceedings as to such Stockholder.
After determining the Stockholders entitled to an appraisal, the Delaware
Court of Chancery will appraise the "fair value" of their Common Stock,
exclusive of any element of value arising from the accomplishment or expectation
of the Merger, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. Stockholders considering seeking
appraisal should be aware that the fair value of their Common Stock as
determined under Section 262 could be more than, the same as OR LESS THAN the
Merger Consideration they would receive pursuant to the Merger Agreement if they
did not seek appraisal of their Common Stock and that investment banking
opinions as to fairness from a financial point of view are not necessarily
opinions as to fair value under Section 262. The Delaware Supreme Court has
stated that "proof of value by any techniques or methods which are generally
considered acceptable in the financial community and otherwise admissible in
court" should be considered in the appraisal proceedings. In addition, Delaware
courts have decided that the statutory appraisal
26
<PAGE>
remedy, depending on factual circumstances, may or may not be a dissenter's
exclusive remedy. The Court also will determine the amount of interest, if any,
to be paid upon the amounts to be received by persons whose Common Stock have
been appraised. The costs of the action may be determined by the Court and taxed
upon the parties as the Court deems equitable. The Court also may order that all
or a portion of the expenses incurred by any Stockholder in connection with an
appraisal, including, without limitation, reasonable attorneys' fees and the
fees and expenses of experts utilized in the appraisal proceeding, be charged
pro rata against the value of all of the Common Stock entitled to appraisal.
Any Stockholder who has duly demanded an appraisal in compliance with
Section 262 will not be entitled, after the Effective Time, to vote the Common
Stock subject to the appraisal demand for any purpose or be entitled to the
payment of dividends or other distributions on those shares of stock (except
dividends or other distributions, other than the Merger Consideration, payable
to holders of record of Common Stock as of a date prior to the Effective Time).
If any Stockholder who demands appraisal of his Common Stock under Section
262 fails to perfect, or effectively withdraws or loses, his right to appraisal
as provided in the DGCL, the Common Stock of such Stockholder will be converted
into the right to receive the Merger Consideration in accordance with the Merger
Agreement. A Stockholder will fail to perfect, or effectively lose or withdraw,
his right to appraisal if he votes for approval and adoption of the Merger
Agreement (or submits a proxy without voting instructions) or if no petition for
appraisal is filed within 120 days after the Effective Time of the Merger or if
the Stockholder delivers to the Company (or, after the Effective Time, to the
Surviving Corporation) a written withdrawal of his demand for appraisal and an
acceptance of the Merger, except that any such attempt to withdraw made more
than 60 days after the Effective Time will require the written approval of the
Surviving Corporation.
FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 OF THE DGCL FOR
PERFECTING APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS.
CERTAIN INFORMATION CONCERNING THE COMPANY
BUSINESS
GENERAL
The Company was incorporated in the State of Delaware in May 1996, and in
June 1996 acquired all of the capital stock of eight companies under common
ownership. 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 is a leading operator and acquirer of retail automotive
dealerships. The Company currently owns and operates four dealerships in Texas,
four in Nevada, one in Colorado and one in Oklahoma. Through these dealerships
the Company offers a total of ten brands, at eleven retail locations. The
Company generates its revenues from sales of new and used vehicles, fees for
repair and maintenance services, sale of replacement parts, and fees and
commissions from arranging financing, extended warranties, and credit insurance
in connection with vehicle sales.
The Company's founder, Chairman of the Board, and Chief Executive Officer,
Bill A. Gilliland, has managed automobile dealerships since 1966 and acquired
the Company's first dealership, Quality Nissan, Inc. in Amarillo, Texas 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. Since the Company's September 1996 initial
public offering, the Company has acquired six dealerships and, subject to the
Merger Agreement and the Merger, is actively pursuing additional acquisitions.
The Company is currently the only Chevrolet and Nissan dealer in the
Amarillo, Texas market and the only BMW, Volkswagen and Audi dealer in the Las
Vegas, Nevada market.
27
<PAGE>
The Company owns and/or operates the following dealerships:
<TABLE>
<CAPTION>
DEALERSHIP NAME MARKET YEAR ACQUIRED
- ---------------------------------------------- ------------------------------ ---------------
<S> <C> <C>
Plains Chevrolet(1)........................... Amarillo, Texas 1991
Midway Chevrolet(1)........................... Amarillo, Texas 1988
Westgate Chevrolet(1)......................... Amarillo, Texas 1991
Quality Nissan(1)............................. Amarillo, Texas 1982
Lynn Hickey Dodge............................. Oklahoma City, Oklahoma 1996
Denver Toyota(2)(3)........................... Denver, Colorado 1997
Toyota West................................... Las Vegas, Nevada 1997
Nissan West(4)................................ Las Vegas, Nevada 1997
Chaisson Motor Cars(5)........................ Las Vegas, Nevada 1998
Chaisson BMW.................................. Henderson, Nevada 1998
Las Vegas Honda(6)............................ Las Vegas, Nevada (7)
Toyota By the Bay(3).......................... San Diego, California (7)
</TABLE>
- ------------------------
(1) Acquired pursuant to the Reorganization
(2) Name changed from Douglas Toyota in March 1998
(3) The Company anticipates that these dealerships will be divested
simultaneously with the consummation of the Merger.
(4) Name changed from Jack Biegger Nissan in August 1997
(5) Multi-line dealer selling BMW, Volkswagen, Audi, Bentley and Rolls-Royce
(6) The Company has entered into a Stock Purchase Agreement to sell to Republic
the subsidiary that operates Las Vegas Honda and that has the rights to
acquire it.
(7) Acquisitions are pending and are being operated pursuant to management
agreements.
ACQUISITIONS AND DIVESTITURES.
Effective April 1, 1997, the Company acquired Toyota West Sales and Service,
Inc. in Las Vegas, Nevada ("TOYOTA WEST") and Douglas Toyota, Inc. in Denver,
Colorado ("DENVER TOYOTA," and collectively "SPEDDING TOYOTA"). Spedding Toyota
is engaged in the retail sales of new and used vehicles and in the retail and
wholesale sales of replacement parts and vehicle servicing. The total purchase
price of approximately $40.7 million was funded with $28.7 million in cash, $6.0
million of which was financed with bank debt, 279,720 shares of the Company's
common stock valued at approximately $5.0 million, and a seller financed note in
the amount of $7.0 million which matures in 2002. The seller note was repaid in
the second fiscal quarter of 1997. In connection with the acquisition of
Spedding Toyota, the Company purchased one tract of land from R. Douglas
Spedding, now an Officer of the Company, and one tract from RDS, Inc., which is
an affiliate of Mr. Spedding, in exchange for a total of $7.5 million in seller-
financed notes. The Spedding Toyota acquisition was accounted for as a purchase
and the operating results of Spedding Toyota have been included in the
accompanying consolidated statements of operations since April 1, 1997. To
satisfy the conditions of the Merger, as set forth in the Merger Agreement, the
Company will divest its Denver Toyota operations. The Company expects the
divestiture to coincide with the completion of the Merger; however there can be
no assurance the divestiture or the Merger will be complete.
In 1997, the Company made the decision to divest the Performance Nissan and
Performance Dodge dealerships in Oklahoma City, Oklahoma. Effective July 1,
1997, the Company sold 100% of the stock in Performance Dodge, Inc. and
Performance Nissan, Inc. (collectively "PERFORMANCE"), to Benji Investments,
Ltd., a Texas limited partnership controlled by Mr. Emmett M. Rice, Jr., the
Company's former Chief
28
<PAGE>
Operating Officer (also a stockholder and former director of the Company). The
Company received 760,000 shares of Common Stock, valued at the time at a total
of $8.7 million. During the quarter ended June 30, 1997, the Company recorded a
loss on the disposition of $347,000, including selling expenses. In connection
with the sale, the Company repaid $4.3 million in long-term debt associated with
the dealerships. The Company also retained ownership of the Performance Dodge
facilities and the related mortgage, and is leasing such facilities to
Performance Dodge, Inc. The term of the lease is fifteen years with annual
rental of approximately $253,000. Upon completion of the transaction, Mr. Emmett
M. Rice Jr. resigned his positions as Chief Operating Officer and Director of
the Company.
Effective July 1, 1997, the Company acquired Sahara Nissan, Inc. ("NISSAN
WEST") in Las Vegas, Nevada. Nissan West is engaged in the retail sales of new
and used vehicles and in the retail and wholesale sales of replacement parts and
vehicle servicing. The total purchase price of approximately $14.3 million was
funded with $11.3 million in cash, $9 million of which was financed, 125,983
shares of the Company's common stock valued at approximately $2.0 million, and
$1.0 million in seller financed notes. The Nissan West acquisition was accounted
for as a purchase and the operating results of Nissan West have been included in
the accompanying consolidated statements of operations since July 1, 1997.
Nissan has asserted a right to require the disposition or termination of Nissan
West in connection with the Merger. The Company and Republic believe Nissan's
position is without any merit, and will vigorously pursue all legal remedies
available in the event Nissan takes any action to attempt to enforce its
asserted rights.
Effective January 1, 1998 the Company acquired JRJ Investments, Inc.
("CHAISSON") which owns Chaisson Motor Cars, a multi-line dealership operating
in Las Vegas, Nevada, and Chaisson BMW, in Henderson, Nevada. The purchase price
was $18.8 million, including acquisition costs. The cash portion, $14.0 million,
was funded under the Company's credit line and from available working capital.
The December 31, 1997 Balance Sheet included an earnest money deposit of
approximately $4.0 million. The Company also issued a note for $2.8 million
payable to the seller bearing interest at 8%. The Company also issued 128,205
shares of its Common Stock to the seller. The Company has guaranteed the seller
a price of the Common Stock of $15.60 per share one year from the date of
closing, January 5, 1999. To the extent the stock price is less than $15.60 the
Company must make up the difference in cash or by issuing additional shares of
Common Stock to provide a total value of $2.0 million as of January 5, 1999. At
September 30, 1998, the Company would have had to pay approximately $734,000.
At the time of the Company's acquisition of Chaisson, the Company received
approval of the acquisition from the various manufacturers. However, some of the
approvals were conditional. The company received a letter from Volkswagen of
America, Inc. ("VOLKSWAGEN") approving the issuance of a dealer agreement
subject to facility upgrade and expansion. Audi of America, Inc. ("AUDI") also
issued a letter approving a dealer agreement subject to the Company's
implementing the "Audi Brand Separation." The Company currently is remodeling
the old Toyota West facility for a combined Volkswagen and Audi dealership. The
Company believes this new facility will comply with requirements for issuance of
dealer agreements by Volkswagen and Audi. In addition some of the dealer
agreements relating to the dealerships related to Chaisson are up for renewal.
See "--Dealership Operations--Vehicle and Parts Suppliers."
The Company has entered into a contract to acquire a certain dealership in
California. The proposed purchase price is approximately $5.5 million consisting
of approximately $6.0 million consisting of approximately $4.1 million cash,
$1.4 million in seller financial notes and approximately $500,000 in assumed
debt. During the nine months ended September 30, 1998, the Company advanced
approximately $2.1 million towards the closing of this transaction. To satisfy
the conditions of the Merger, as set forth in the Merger Agreement, the Company
will divest the Company's interest in this pending acquisition of this
California dealership. The Company expects the divestiture to coincide with the
completion of the Merger, however there can be no assurance the divestiture or
the Merger will be completed.
The Company has entered into a contract to acquire a certain dealership in
Nevada. The proposed purchase price is approximately $12.5 million consisting of
approximately $9.0 million in cash, $3.2 million
29
<PAGE>
in seller financed notes and approximately $300,000 in value of the Common
Stock. The Company has advanced approximately $1.5 million towards the closing
of this transaction. The Company has not obtained approval from the related
manufacture and the purchase contract expires January 1, 1999. As a result the
Company has entered into a Stock Purchase Agreement with Republic to sell to
Republic the subsidiary that operates this dealership and has the right to
acquire it.
The Company's revenues have increased from approximately $165.4 million in
1993 to approximately $472.1 million in 1997. Pro forma sales for 1997 were
approximately $532.5 million, giving a full year effect to the acquisition of
Spedding Toyota, Nissan West and JRJ Investments and the divestiture of
Performance. In 1997, the Company's actual gross profit percentage was 17.2%,
compared to the industry average of 12.8% according to the National Automobile
Dealers Association ("N.A.D.A.").
DEALERSHIP OPERATIONS
The Company owns ten dealerships which operate eleven retail locations. The
Company also has two pending acquisitions and operates these dealerships
pursuant to management agreements. 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, inventory turnover and other
operating conditions at each dealership.
NEW VEHICLE SALES. The Company sells ten domestic and imported brands
ranging from economy to luxury cars, sport utility vehicles, minivans and 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. In
1997, the Company sold 9,722 new vehicles generating revenues of $217.2 million,
which constituted 46.0% of the Company's total revenues. The Company generated
gross profit percentage for new vehicle sales of 10.5% in 1997, as compared to
the industry average for 1997 of 6.4%, according to N.A.D.A.
USED VEHICLE SALES. In 1997, the Company's used vehicle sales generated
revenues of $196.5 million, which constituted 41.6% of the Company's total
revenue. The Company's retail used vehicle and truck sales have grown from 4,532
units in 1993 to 13,120 units in 1997. The Company attributes this growth to
acquisitions and, 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 vehicles
coming off short term leases. In addition, increases in new vehicle prices have
prompted a growing segment of the vehicle-buying population to purchase used
vehicles 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 1997, 1996 and 1995.
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 profit percentage on used vehicle sales. Excluding inter-dealer
and wholesale transactions, the
30
<PAGE>
Company's gross profit percentage on retail used vehicle sales was 13.6% in
1997, as compared to the industry average for 1997 of 10.8% according to
N.A.D.A.
<TABLE>
<CAPTION>
COMPANY'S USED VEHICLE SALES
-----------------------------------------------------
1997(1) 1996(1) 1995(1) 1994 1993
-------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Retail unit sales................................. 13,120 8,145 6,170 4,816 4,532
Retail sales revenue.............................. $156,611 $104,842 $75,677 $50,019 $44,655
Retail gross profit percentage.................... 13.6% 12.3% 13.7% 15.7% 16.5%
Wholesale unit sales.............................. 8,274 7,423 5,372 5,201 4,983
Wholesale sales revenue........................... $ 39,858 $ 41,423 $22,813 $22,897 $14,538
Wholesale gross profit percentage................. (5.0)% (1.8)% (3.4)% (6.0)% (8.2)%
Total unit sales.................................. 21,394 15,568 11,542 10,017 9,515
Total sales revenue............................... $196,469 $146,265 $98,490 $72,916 $59,193
Total gross profit percentage..................... 9.8% 8.3% 9.8% 8.9% 10.4%
</TABLE>
- ------------------------
(1) Figures shown reflect actual used vehicle sales activity and do not include
the full year effect of the acquisitions completed in 1997, 1996 and 1995 or
the divesture in 1997.
PARTS AND SERVICE. The Company provides parts and service primarily for the
vehicle makes sold by its dealerships but also services other makes of vehicles.
In 1997, the Company's parts and service operations generated $36.3 million in
revenues, or 7.7% of total revenues. In 1997, the Company's parts and service
operation generated gross profit percentage of 51.7%, including the sale of
parts at wholesale to independent repair shops, compared to an industry average
of 43.2% according to N.A.D.A.
The Company attributes its profitability in parts and service to its
comprehensive management system, including the use of a variable rate pricing
structure, the adoption of a team concept in servicing vehicles and the
cultivation of strong customer relationships through an emphasis on preventive
maintenance. Also, critical to the profitability of the Company's parts and
service business is the efficient management of parts inventory.
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
higher than 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 basic repairs and
maintenance, 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. 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 vehicles 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.
31
<PAGE>
FINANCE AND INSURANCE (F&I). The Company 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 financing for 76.1% of
its new vehicle unit sales and 69.9% of its used vehicle unit sales in 1997, as
compared to 42% and 51%, respectively, for the average U.S. dealership (1996
data). 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 and
affordable.
At the time of a new vehicle sale, the Company offers extended warranties to
supplement the warranties offered by auto makers. 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,
recognizes the associated commission income immediately and is typically
assessed a chargeback against a portion of the commissions if the contract is
terminated prior to its scheduled maturity for any reason, such as early
repayment or default. In 1997, the Company sold warranties on 47.5% and 55.0%,
respectively, of its new and used vehicle unit sales. The Company believes these
penetration rates exceed the industry averages.
The Company arranges for credit life insurance policies to be sold to
customers which provide for repayment of the vehicle loan if the obligor dies
while the loan is outstanding. The Company also arranges for 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
a third party, 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 1997, the
Company sold such insurance on 21.3% and 16.5%, respectively, of the new and
used vehicle unit sales 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 insurance premium the customer will be required to pay.
The Company believes that its "counseling" approach during the sales process
increases the likelihood that a customer will be satisfied with the vehicle
purchase over a longer time period.
The Company's marketing and advertising activities vary among its
dealerships and among its markets. Generally, the Company advertises primarily
through newspapers, radio or television to reach the Company's targeted customer
base. Under arrangements with the auto makers, the Company receives a subsidy
for its advertising expenses incurred in connection with that auto maker's
vehicles.
The Company is marketing and advertising over the Internet. The Company's
Hickey Dodge, Westgate Chevrolet and Chaisson Motor Cars dealerships currently
have a series of Internet web pages which have been designed to promote and
advertise the dealership's products and services.
VEHICLE AND PARTS SUPPLIERS
The Company depends primarily on the manufacturers represented by its
various dealerships for supply of new vehicles and replacement parts. As the
Company acquires dealerships representing other manufacturers, 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 other dealers and
wholesalers.
32
<PAGE>
The Company enters into agreements with the manufacturers that supply new
vehicles and parts to each of its dealerships. Management currently believes
that it will be able to renew each and all of these agreements upon expiration;
however, there can be no assurance that each and all of these agreements will be
renewed. These agreements generally limit locations of dealerships and retain
manufacturer approval rights over changes in dealership management and
ownership. Each manufacturer is also entitled to terminate these agreements for
a dealership if the dealership is in material breach of the terms.
The Company's agreement with the Dodge division of Chrysler Corporation
("DODGE") stipulates that the Company could lose its Dodge dealership upon any
change in ownership of a controlling number of shares in the Company.
Under the June 1996 supplemental agreements with the Chevrolet division
("CHEVROLET") of General Motors Corporation ("GM"), Chevrolet has the right,
under certain circumstances, to terminate the agreements with the Company upon
the acquisition by any person or entity of 20% or more of the Common Stock
outstanding. In addition, the Company has agreed to comply with the General
Motors (GM) 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 supplemental Agreements require that the Company bring any GM
dealership acquired after the initial public 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 Agreements and a buyback of the
related dealership assets by GM. The Company believes that this aspect of the
June 1996 supplemental Agreements does not present a significant risk to its
business or future operating results.
Under the Company's agreements with Nissan, Nissan has the right to
terminate the agreements with the Company if, under certain circumstances,
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. Nissan has advised the Company that the facility where Nissan West is
located does not meet Nissan's current requirements. The Company is currently in
discussions with Nissan to come to a mutual agreement regarding Nissan West's
facility.
Under the agreements with Toyota Motor Sales, U.S.A., Inc. ("TOYOTA"),
Toyota has the right to terminate the agreements with the Company if acceptable
customer satisfaction is not maintained. Toyota also limits the number of Toyota
dealerships the Company may acquire within a nine month period to one and the
number of Toyota dealerships that the Company may own to nine.
Under the Company's agreement with BMW of North America, Inc. ("BMW"), the
Company sells BMWs at two locations. The primary dealership is in Henderson,
Nevada. The Company also sells BMWs at a satellite location in Las Vegas,
Nevada, along with other brands of vehicles. The original term of the agreement
with BMW expired on June 29, 1998. BMW has verbally extended the agreement to
allow the Company to make certain changes to the Company's Nevada operations,
including making the satellite location exclusively BMW. Once these changes have
been made, the Company expects to enter into a new written agreement with BMW.
The agreement with BMW contains various provisions regarding the satellite
location, including giving the Company the first option to convert it to an
independent dealership if BMW determines such a dealership is required. If the
Company does not exercise this option, it must close BMW operations at the
satellite location.
On February 27, 1998, Land Rover North America, Inc. ("LAND ROVER") issued a
letter extending the Company's agreement with Land Rover until February 28,
1999. The extension was based on the Company's agreement to construct a new Land
Rover facility in the Las Vegas, Nevada market. Land Rover indicated in a letter
to the Company, dated November 5, 1998, that it has elected to exercise its
right to repurchase the Land Rover operations in Las Vegas, Nevada. The Company
is currently negotiating the terms of the repurchase and expects to consummate
the sale by early January 1999. For the nine months
33
<PAGE>
ended September 30, 1998, the Company's revenue from the sale of Land Rovers
constituted less than 1.0% of the Company's consolidated revenue.
The Company's ability to expand operations depends, in part, on obtaining
the consent of manufacturers to the acquisition or establishment of additional
dealerships.
The Company's total sales of new vehicles may be adversely affected by a
manufacturer inability or unwillingness to furnish one or more dealerships with
an adequate supply of models popular in the Company's markets. A dealership that
lacks sufficient inventory to satisfy demand for a particular model may purchase
additional vehicles from other franchised dealers throughout the United States,
although such sales frequently are at prices higher than those charged by the
manufacturer.
COMPETITION
The retail automotive industry in which the Company operates is highly
competitive. The Company competes with both dealers offering the same product
line as the Company and dealers offering other auto makers' vehicles. The
Company also competes with local dealerships, large multi-franchise auto
dealerships, dealership groups, auto brokers and leasing and rental companies.
Some of the Company's larger competitors have greater financial resources and
are more widely known than the Company. The Company may also face increased
competition from certain automobile "superstores." Such "superstores" have
emerged recently in various areas of the United States and are beginning to
expand nationally. The Company currently competes with "superstores" in the
Denver, Colorado and the Las Vegas, Nevada markets, and the Company expects
other such "superstores" to expand their operations into these markets, other
markets in which the Company currently operates, or new markets the Company may
enter. The Company also competes with other automobile retailers that sell
vehicles through non-traditional methods, such as the Internet.
The Company believes that the principal competitive factors in vehicle sales
are the marketing campaigns conducted by auto makers, 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. The Company believes that its
dealerships are competitive in these areas.
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, Texas; Oklahoma City, Oklahoma;
Denver, Colorado; San Diego, California; and Las Vegas, Nevada markets.
Conditions and competitive pressures affecting these markets, such as
price-cutting by dealers in these areas, or in any new markets the Company may
enter, could adversely affect the Company, although the retail automobile
industry as a whole might not be affected.
34
<PAGE>
The Company believes that its acquisition strategies will result in broader
geographic diversification and a broader diversification of manufacturer brands
which could lessen the risks associated with local and regional economic factors
and other competitive pressures.
REGULATION
The Company's operations are subject to regulation, supervision and
licensing under various federal, state and local statutes, ordinances and
regulations. Various state and federal regulatory agencies, such as the
Occupational Safety and Health Administration and the U.S. Environmental
Protection Agency, have jurisdiction over the operation of the Company's
dealerships, repair shops, body shops and other operations, with respect to
matters such as consumer protection, workers' safety and laws regarding clean
air and water.
The relationship between a franchised automobile dealership and a
manufacturer is governed by various federal and state laws established to
protect dealerships from the generally unequal bargaining power between the
parties. Federal laws, as well as certain state laws, prohibit a manufacturer
from terminating or failing to renew a franchise without good cause.
Manufacturers are also prohibited from preventing or attempting to prevent any
reasonable changes in the capital structure or the manner in which a dealership
is financed. Manufacturers are, however, entitled to object to a sale or change
of management where such an objection is materially related to the character,
financial ability or business experience of the proposed transferee.
Automobile dealers and manufacturers are also subject to various federal and
state laws established to protect consumers, including so-called "Lemon Laws"
which require a manufacturer or the dealer to replace a new vehicle or accept
its return in exchange for a full refund within one year after initial purchase
if the vehicle does not conform to the manufacturer's express warranties and the
dealer or manufacturer, after a reasonable number of attempts, is unable to
correct or repair the defect. Federal laws require certain written disclosures
to be provided on new vehicles, including mileage and pricing information. In
addition, the financing and insurance activities of the Company are subject to
certain statutes governing credit reporting, debt collection, and insurance
industry regulation.
The imported automobiles purchased by the Company are subject to United
States customs duties and, in the ordinary course of its business, the Company
may, from time to time, be subject to claims for duties, penalties, liquidated
damages, or other charges.
As with automobile dealerships generally, and parts, service and body shop
operations in particular, the Company's business involves the use, handling and
contracting for recycling or disposal of hazardous or toxic substances or
wastes. The Company believes that it does not have any material environmental
liabilities and that continued compliance with environmental laws, ordinances
and regulations will not, individually or in the aggregate, have a material
adverse effect on the Company's results of operations or financial condition.
EMPLOYEES
As of October 31, 1998 the Company employed approximately 1,199 people, of
whom approximately 162 were employed in managerial positions, 476 were employed
in non-managerial sales positions, 202 were employed in non-managerial parts and
service positions and 359 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 provides certain executive officers, managers and other employees with
options to purchase
35
<PAGE>
Common Stock and believes this equity incentive will be attractive to existing
and prospective employees of the Company.
The Company believes that its relationship with its employees is good.
Because of its dependence on the auto makers, however, the Company may be
affected by labor strikes, work slowdowns and walkouts at the auto makers'
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.
PROPERTY
The Company's principal executive offices are located at 1201 South Taylor
Street, Amarillo, Texas and are leased from The Gilliland Group Family
Partnership, an affiliate of Messrs. Gilliland and Hall. The Company sold and
leased back the real property where the Company has its dealerships in the
Amarillo, Texas area, Denver, Colorado area and Las Vegas, Nevada area. The
leases are initially for ten years and have two ten year renewal options. The
Company also owns the Performance Dodge real estate in Oklahoma City, Oklahoma
and leases it to Performance Dodge, Inc. under a fifteen year lease. See "--
Business--Acquisitions and Divestitures." Other than certain upgrades and
requirements to provide exclusive dealerships at the Company's Nevada
operations, the Company believes that its facilities are adequate for its
current needs. See "Certain of--Business--Vehicle and Parts Suppliers." 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.
LEGAL PROCEEDINGS
The Company is a defendant in three class action lawsuits that have been
filed by several claimants against approximately 700 automobile dealerships
across the State of Texas. The plaintiffs allege that the charging of the
vehicle inventory taxes to vehicle purchasers constitutes fraud, violates the
Texas Deceptive Trade Practices Act, and constitutes price fixing in violation
of the Clayton Antitrust Act. The Texas Automobile Dealers Association has hired
counsel to represent the defendants in these lawsuits. The defendants have
denied the allegations and the affiliates contend that they have charged the
vehicle inventory taxes to vehicle purchasers in compliance with applicable law.
The Company has answered interrogatories and document production requests in one
of the lawsuits. The defendants intend to vigorously defend their position.
Certain customers of Denver Toyota have filed complaints with the Motor
Vehicle Dealer Board of the State of Colorado. The Company is working with this
dealer board to resolve these complaints. In addition, from time to time, the
Company is named in claims involving the manufacture of automobiles, contractual
disputes and other matters arising from 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.
36
<PAGE>
STOCK PRICES AND DIVIDENDS
The Company has only one class of Common Stock and it is traded on the NYSE
under the trading symbol "XC." The following table sets forth for the calendar
quarters indicated, the high and low sales prices for the Common Stock on the
NYSE. The Common Stock was not publicly traded prior to September 24, 1996.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1996
Third Quarter (September 24-30)(1)................ 23 19 7/8
Fourth Quarter.................................... 27 1/8 18 1/2
1997
First Quarter..................................... 23 1/2 14 3/4
Second Quarter.................................... 17 7/8 9 5/8
Third Quarter..................................... 13 7/16 8
Forth Quarter..................................... 13 8
1998
First Quarter..................................... 9 3/16 6 1/4
Second Quarter.................................... 9 6 15/16
Third Quarter..................................... 10 5 3/4
Fourth Quarter (through December 3, 1998)......... 10 9 1/4
</TABLE>
- ------------------------
(1) The Common Stock was not publicly traded prior to September 24, 1996.
The high and low sales price per share of Common Stock on September 2, 1998,
the business day preceding the announcement of the Merger, was $6 5/8 and
$6 7/16, respectively, and on December 3, 1998, the last full trading day for
which closing prices were available at the time of printing this Proxy
Statement, was $9 7/8 and $9 13/16, respectively.
The Company has never paid a cash dividend on its Common Stock, and it does
not anticipate paying any cash dividends in the foreseeable future.
37
<PAGE>
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth, as of the Record Date, certain information
with respect to the beneficial ownership (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended) direct or indirect, of (i) each
person who is the beneficial owner of more than five percent of any class of the
outstanding voting securities of the Company; (ii) each director of the Company,
and each executive officer of the Company, and (iii) all directors and executive
officers of the Company as a group. Unless otherwise indicated, all shares
indicated as beneficially owned are held with sole voting and investment power.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
COMMON SHARES OUTSTANDING
NAME OF BENEFICIAL OWNERS BENEFICIALLY OWNED COMMON SHARES
- -------------------------------------------------- ------------------ -------------
<S> <C> <C>
Bill Gilliland(1)................................. 6,771,876(2)(3) 49.42%
Xaris, Ltd.(1).................................... 1,634,355 12.04%
Robert W. Hall(1)................................. 1,693,681(3)(4) 12.41%
Twenty-Two Ten, Ltd.(1)........................... 1,524,355 11.23%
John W. Gaines.................................... 31,263(5) *
Charles D. Winton................................. 31,263(5) *
R. Douglas Spedding............................... 322,876(6) 2.37%
R. Wayne Moore.................................... 20,753(7) *
John H. Marmaduke................................. 43,900(8) *
Robert F. Green................................... 257,455(9) 1.89%
Heartland Advisors, Inc.(10)...................... 1,467,600 10.81%
The Equitable Companies, Inc.(11)................. 1,098,600 8.09%
All directors and executive officers (8
persons)........................................ 9,173,067(12) 65.74%
</TABLE>
- ------------------------
* Less than one percent.
(1) The address is 1201 South Taylor Street, Amarillo, Texas 79101.
(2) Includes 127,907 shares of Common Stock issuable upon the exercise of
outstanding stock options and the 1,634,355 shares of Common Stock owned of
record by Xaris, Ltd. Mr. Gilliland controls Xaris Management Co., Inc.,
the general partner of Xaris Ltd. As President and sole director, Mr.
Gilliland disclaims beneficial ownership of these shares. These shares are
subject to the Voting Agreement. See "VOTING AGREEMENT."
(3) Includes 97,000 owned of record by the Gilliland Group Family Partnership.
Messrs. Gilliland and Hall are managing partners of the Gilliland Group
Family Partnership. Messrs Gilliland and Hall disclaims beneficial
ownership of such shares except to the extent of their pecuniary interests
therein. These shares are subject to the Voting Agreement. See "VOTING
AGREEMENT."
(4) Includes 72,326 shares of Common Stock issuable upon the exercise of
outstanding stock options and the 1,524,355 shares of Common Stock held of
record by Twenty-Two Ltd. Mr. Hall holds a controlling interest in the
general partner of Twenty-Two Ltd. These shares are subject to the Voting
Agreement. See "VOTING AGREEMENT."
(5) Includes 31,163 shares of Common Stock issuable upon the exercise of
outstanding stock options.
(6) Includes 46,512 shares of Common Stock issuable upon the exercise of
outstanding stock options.
(7) Includes 19,953 shares of Common Stock issuable upon the exercise of
outstanding stock options.
(8) Includes 25,000 shares of Common Stock issuable upon the exercise of
outstanding stock options.
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<PAGE>
(9) Includes 22,000 shares of Common Stock held in the Genevieve Currie Green
Revocable Living Trust, dated October 15, 1993, of which Mr. Green is the
Trustee, 14,100 shares of Common Stock owned of record by Mr. Green, as
Custodian for several of his children under the Uniform Gifts to Minor Act,
and 3,525 shares of Common Stock of record by Mr. Green's daughter. Mr.
Green disclaims beneficial ownership of these shares of Common Stock.
(10) Based on Heartland Advisors, Inc.'s Schedule 13G/A, filed with the
Commission on April 13, 1998, Heartland Advisors, Inc.'s address is 790 N.
Milwaukee Street, Milwaukee, Wisconsin 53202
(11) Based on The Equitable Companies, Inc.'s Schedule 13G, filed with the
Commission on February 13, 1998, The Equitable Companies, Inc.'s address
is 1290 Avenue of the Americas, New York, New York 10104.
(12) Includes the shares of Common Stock referred to in Notes (2)-(9).
AVAILABILITY OF INDEPENDENT ACCOUNTANTS
Representatives of PricewaterhouseCoopers LLP, independent accountants to
the Company, will be present at the Special Meeting, will have the opportunity
to make a statement, should they desire to do so, and are expected to be
available to respond to appropriate questions.
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company currently owns and operates a group of automobile dealerships in
the Amarillo, Texas, Oklahoma City, Oklahoma, Denver, Colorado and Las Vegas,
Nevada markets. The financial condition and results of operations reported
herein are based upon the results of operations of the dealerships operated by
the Company for the time periods reported. The Company generates its revenues
from sales of new and used vehicles, fees for repair and maintenance services,
sale of replacement parts, and fees and commissions from arranging financing,
extended warranties, and credit insurance in connection with vehicle sales.
The Company entered into the Merger Agreement, which provides for a
wholly-owned subsidiary of Republic to be merged with and into the Company. Upon
consummation of the proposed Merger, the Company will become a wholly-owned
subsidiary of Republic, and the Stockholders will be entitled to receive $10.70
in cash, without interest, for each share of the Common Stock held by them. To
satisfy the conditions of the Merger, as set forth in the Merger Agreement, the
Company will divest the Company's Denver, Colorado dealership, and will divest
the Company's interest in one of its pending acquisitions in California. The
divestiture of these dealerships is expected to coincide with the completion of
the Merger; however, there can be no assurance the divestitures or the Merger
will be completed.
Until the Merger is completed, the proposed Merger, and the proposed
transactions contemplated thereunder, may be a distraction to certain key
employees of the Company and could have a negative impact on the Company's
results of operations. While the Company plans to minimize the distractions to
key employees, there can be no assurance that the distraction will not occur.
In April 1997, the Company completed the purchase of Toyota West in Las
Vegas, Nevada and Denver Toyota in Denver, Colorado, from owner R. Douglas
Spedding. In July 1997, the Company acquired Nissan West in Las Vegas, Nevada.
In January, 1998, the Company acquired Chaisson, also in Las Vegas. The term
"Acquisitions" refers collectively to the aforementioned dealerships but only
for the time period in which the dealership is not included in the same periods
of 1998 and 1997. The Acquisitions were accounted for as purchases and,
accordingly, the operating results of the acquired dealerships have been
included in the operating results of the Company since their respective dates of
acquisition. The Company also has two acquisitions pending in Nevada and
California and is currently operating those dealerships under management
agreements.
Effective July 1, 1997, the Company completed the sale of Performance to
Benji Investments, Ltd., a Texas limited partnership controlled by Emmett M.
Rice, Jr., a former Officer and Director of the Company (the "DIVESTITURE").
Because of the significant growth of the Company since its formation, as a
result of the aforementioned Merger Acquisitions and the Divestiture the
Company's historical results of operating its period-to-period comparisons of
such results and certain financial data may not be meaningful or indicative of
future results.
40
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
CONSOLIDATED MARGIN STATISTICS
<TABLE>
<CAPTION>
QTR. ENDED QTR. ENDED YTD YTD
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS, EXCEPT UNITS AND PERCENTAGES)
<S> <C> <C> <C> <C>
New vehicle sales
Units........................... 3,719 2,891 9,946 7,393
Revenue......................... $ 89,399 $ 65,260 $ 241,690 $ 163,550
Average selling price........... $ 24.0 $ 22.6 $ 24.3 $ 22.1
Used vehicle sales(1)
Units........................... 6,444 5,691 18,814 16,631
Revenue......................... $ 63,208 $ 52,818 $ 187,272 $ 151,493
Average selling price........... $ 9.8 $ 9.3 $ 10.0 $ 9.1
Total Vehicles Sales
Units........................... 10,163 8,582 28,760 24,024
Revenue......................... $ 152,607 $ 118,078 $ 428,962 $ 315,043
Other operating revenue
Finance and insurance........... $ 6,809 $ 5,231 $ 17,898 $ 13,975
Parts and service............... 13,700 10,242 38,221 26,879
Other revenue................... 2,667 1,233 7,455 3,296
-------- -------- -------- --------
Total other operating
revenue..................... 23,176 16,706 63,574 44,150
Total revenue..................... $ 175,783 $ 134,784 $ 492,536 $ 359,193
-------- -------- -------- --------
-------- -------- -------- --------
Gross profit
New vehicles.................... $ 8,777 $ 6,523 $ 23,878 $ 17,288
Used vehicles(1)................ 6,572 5,882 18,793 15,375
Finance and insurance........... 6,381 4,772 16,735 12,592
Parts and service............... 7,643 5,313 20,530 13,886
Other revenue................... 2,667 1,233 7,455 3,296
-------- -------- -------- --------
Total gross profit................ $ 32,040 $ 23,723 $ 87,391 $ 62,437
-------- -------- -------- --------
-------- -------- -------- --------
Gross profit percent
New vehicles.................... 9.8% 10.0% 9.9% 10.6%
Used vehicles(1)................ 10.4% 11.1% 10.0% 10.1%
Finance and insurance........... 93.7% 91.2% 93.5% 90.1%
Parts and service............... 55.8% 51.9% 53.7% 51.7%
Other revenue................... 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
Total gross profit percent........ 18.2% 17.6% 17.7% 17.4%
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
- ------------------------
(1) Used vehicle information includes the Company's retail and wholesale used
vehicle activities.
41
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
(1)SAME STORE COMPARISONS MARGIN STATISTICS
<TABLE>
<CAPTION>
QTR. ENDED QTR. ENDED YTD YTD
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS, EXCEPT UNITS AND PERCENTAGES)
<S> <C> <C> <C> <C>
New vehicle sales
Units........................... 3,238 2,891 6,947 6,637
Revenue......................... $ 74,347 $ 65,260 $ 160,287 $ 149,522
Average selling price........... $ 23.0 $ 22.6 $ 23.1 $ 22.5
Used vehicle sales(2)
Units........................... 5,840 5,691 13,782 14,467
Revenue......................... $ 54,872 $ 52,818 $ 130,113 $ 133,866
Average selling price........... $ 9.4 $ 9.3 $ 9.4 $ 9.3
Total Vehicles Sales
Units........................... 9,078 8,582 20,729 21,104
Revenue......................... $ 129,219 $ 118,078 $ 290,400 $ 283,388
Other operating revenue
Finance and insurance........... $ 6,168 $ 5,231 $ 13,223 $ 12,546
Parts and service............... 10,903 10,241 24,130 23,003
Other revenue................... 2,303 1,233 4,948 2,944
-------- -------- -------- --------
Total other operating
revenue..................... 19,374 16,705 42,301 38,493
Total revenue..................... $ 148,593 $ 134,783 $ 332,701 $ 321,881
-------- -------- -------- --------
-------- -------- -------- --------
Gross profit
New vehicles.................... $ 7,359 $ 6,523 $ 15,508 $ 15,761
Used vehicles(2)................ 6,092 5,882 12,950 14,631
Finance and insurance........... 5,741 4,772 12,216 11,230
Parts and service............... 6,030 5,313 13,027 12,364
Other revenue................... 2,303 1,233 4,948 2,944
-------- -------- -------- --------
Total gross profit................ $ 27,525 $ 23,723 $ 58,649 $ 56,930
-------- -------- -------- --------
-------- -------- -------- --------
Gross profit percent
New vehicles.................... 9.9% 10.0% 9.7% 10.5%
Used vehicles(2)................ 11.1% 11.1% 10.0% 10.9%
Finance and insurance........... 93.1% 91.2% 92.4% 89.5%
Parts and service............... 55.3% 51.9% 54.0% 53.7%
Other revenue................... 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
Total gross profit percent........ 18.5% 17.6% 17.6% 17.7%
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
- ------------------------
(1) "Same Store" information relates to the dealerships for which their results
of operations are included in the Consolidated Statements of Operations for
the same periods of 1998 and 1997.
(2) Used vehicle information includes the Company's retail and wholesale used
vehicle activities.
42
<PAGE>
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 1998
REVENUES AND GROSS PROFIT
NEW VEHICLES. Same store unit sales (which are defined as the results of the
Company's dealerships which are included in the Consolidated Statements of
Operation for the same periods in 1998 and 1997) increased 347 units, or 12.0%,
from the third quarter of 1997 to the third quarter of 1998. The increase in
same store unit sales is primarily attributable to an increase in same store
unit sales in the Las Vegas, Nevada, and Denver, Colorado, markets, partially
offset by a decrease in same store unit sales in the Amarillo, Texas, market.
Unit sales in the Denver and Las Vegas markets increased 501 units, or 35.1%,
primarily attributable to the relocation of the Company's Toyota dealerships to
new larger facilities and to a continuation of manufacturer consumer incentive
programs designed to stimulate retail demand for new vehicles. The consumer
incentives offered by the manufacturers generally consist of discounts, rebates
and favorable financing and leasing programs. Unit sales in the Amarillo market
declined 263 units, or 22.4%, primarily attributable to the GM strike that
caused a disruption in the availability of new vehicle inventory at the
Company's Chevrolet dealerships. Same store average selling price per unit
increased $387, or 1.7%, primarily attributable to model mix and manufacturer
cost increases passed on in the sales price of new vehicles. As a result of
these factors, same store sales increased by approximately $9.1 million, or
13.9% from the third quarter of 1997 to the third quarter of 1998. The Chaisson
acquisition added approximately $15.1 million in new vehicle revenue and 481 new
unit sales with an average price of $31,293.
Same store gross profit on new vehicle sales increased approximately
$836,000, or 12.8% which is primarily attributable to the increase in same store
new vehicle unit sales. The Chaisson acquisition added approximately $1.4
million in gross profit with a gross profit percentage of 9.4%. The Company
expects lower new vehicle sales and gross profit in the fourth fiscal quarter of
1998 as the Company enters its slower selling season.
The table below sets forth a reconciliation of new vehicle units, revenues,
and gross profit from the third quarter of 1997 to the third quarter of 1998
accounting for the variance in same store results and the Acquisitions.
<TABLE>
<CAPTION>
UNITS REVENUES GROSS PROFIT
--------- ------------- ------------
<S> <C> <C> <C>
Quarter ended September 30, 1997........................ 2,891 $ 65,260,000 $ 6,523,000
Same store variance..................................... 347 9,087,000 836,000
Acquisitions............................................ 481 15,052,000 1,418,000
--------- ------------- ------------
Quarter ended September 30, 1998........................ 3,719 $ 89,399,000 $ 8,777,000
--------- ------------- ------------
--------- ------------- ------------
</TABLE>
USED VEHICLES. Same store unit sales increased 149 units, or 2.6%, including
retail and wholesale sales primarily attributable to the Company's continued
efforts to improve its used vehicle operations at its existing dealerships. Same
store sales, excluding the Oklahoma City, Oklahoma market, increased by
approximately $5.4 million, or 11.6%. Unit sales in Oklahoma City, Oklahoma
declined by 248 units in the third quarter of 1998 compared to the third quarter
of 1997. Management believes the decline in unit sales at the Oklahoma City,
Oklahoma dealership is primarily attributable to the Company's continued efforts
to change the sales method to eliminate low margin, highly promotional, volume
selling. The Chaisson acquisition added approximately $8.3 million in used
vehicle revenue and 604 used vehicle unit sales with an average price of
$13,801.
Same store gross profit excluding the Oklahoma City, Oklahoma market
increased approximately $407,000, or 7.7%, from the third quarter of 1997 to the
third quarter of 1998, which is primarily attributable to increased used vehicle
unit sales. The Chaisson acquisition added approximately $480,000 in gross
profit with a gross profit percentage of 5.7%. Chaisson's gross profit margin is
lower than the
43
<PAGE>
Company's other dealerships, primarily due to the fact that Chaisson sells on
average a higher priced used vehicle.
The table below sets forth a reconciliation of used vehicle units, revenues,
and gross profit from the third quarter months of 1997 to the third quarter of
1998 accounting for the variance in same store results and the Acquisitions.
<TABLE>
<CAPTION>
UNITS REVENUES GROSS PROFIT
--------- ------------- ------------
<S> <C> <C> <C>
Quarter ended September 30, 1997........................ 5,691 $ 52,818,000 $ 5,882,000
Same store variance..................................... 149 2,054,000 210,000
Acquisitions............................................ 604 8,336,000 480,000
--------- ------------- ------------
Quarter ended September 30, 1998........................ 6,444 $ 63,208,000 $ 6,572,000
--------- ------------- ------------
--------- ------------- ------------
</TABLE>
OTHER OPERATING REVENUE. Finance and insurance (F&I) revenue primarily
represents fees and commissions the Company earns for selling and placing
customers' retail finance and lease contracts, credit life insurance contracts
and third party extended warranty contracts. Same store F&I revenue increased
approximately $937,000, or 17.9%, primarily attributable to increased vehicle
sales and F&I penetration rates at the Company's dealerships in the Las Vegas,
Nevada and Denver, Colorado markets. The Chaisson acquisition added
approximately, $641,000 in F&I revenue.
Same store F&I gross profit increased approximately $969,000 or 20.3%, from
the third quarter of 1997 to the third quarter of 1998. Gross profit percentage
increased to 93.1% in the third quarter of 1998 from 91.2% in the third quarter
of 1997, primarily attributable to a decrease in the cost of extended warranties
period, primarily attributable to a reduction in extended warranty costs.
Parts and service revenue represents the retail and wholesale sales of
repair and replacement parts and the sale of labor for servicing customers
vehicles. Same store parts and service revenue increased approximately $662,000,
or 6.5%, primarily attributable to increased capacity at the Company's two
recently relocated dealerships. The Chaisson acquisition added approximately
$2.8 million in parts and service revenue.
Same store parts and service gross profit increased approximately $717,000,
or 13.5%. The gross profit percentage increased from 51.9% in the third quarter
of 1997 to 55.3% in the third quarter of 1998, primarily attributable to a
change in the mix of retail and wholesale parts and service sales. The Chaisson
acquisition added approximately $1.6 million in gross profits from parts and
service activities with a gross profit percentage of 57.7%.
Other revenue primarily consists of documentation fees charged by the
Company to its customers on vehicle sales. The amount of fees is usually
governed by state statute, regulation or regulatory agency. Also included in the
other revenue are management fee income and rental income. Same store revenue
and gross profit from other revenue increased $1.1 million, or 86.8%, from the
third quarter of 1997 primarily as a result of the management fee revenue from
two dealerships the Company currently manages under management agreements. The
Chaisson acquisition added approximately $364,000 in other revenue and gross
profit primarily from documentation fees. The Company expects the management fee
component of other revenue to decline as the two management agreements expire.
Both management agreements, which accounted for approximately $824,000 in other
revenue and gross profit for the three months ended September 30, 1998, are
expected to terminate in late 1998 and early 1999.
44
<PAGE>
The table below sets forth a reconciliation of other operating revenue and
gross profit by major category accounting for the variance in the same store
results and the acquisitions.
<TABLE>
<CAPTION>
F&I PARTS & SERVICE OTHER REVENUE TOTAL
---------------------- -------------------- ---------------------- --------------------
GROSS GROSS GROSS GROSS
REVENUE PROFIT REVENUE PROFIT REVENUE PROFIT REVENUE PROFIT
----------- --------- --------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Quarter ended September 30,
1997......................... $ 5,231 $ 4,772 $ 10,241 $ 5,313 $ 1,233 $ 1,233 $ 16,705 $ 11,318
Same store variance............ 937 969 662 717 1,070 1,070 2,669 2,756
Acquisitions................... 641 640 2,797 1,613 364 364 3,802 2,617
----------- --------- --------- --------- ----------- --------- --------- ---------
Six months ended June 30,
1998......................... $ 6,809 $ 6,381 $ 13,700 $ 7,643 $ 2,667 $ 2,667 $ 23,176 $ 16,691
----------- --------- --------- --------- ----------- --------- --------- ---------
----------- --------- --------- --------- ----------- --------- --------- ---------
</TABLE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A). Selling, general and
administrative expenses increased approximately $8.0 million, to $24.8 million
for the third quarter ended September 30, 1998. The primary reasons for the
increase in selling, general and administrative expenses are the inclusion of
the Chaisson acquisition which added approximately $3.4 million in expense, rent
expense attributable to the sale and leaseback transaction that was completed in
the second quarter of 1998 which increased expense approximated $1.0 million,
and overall higher corporate and operating expenses as a result of the Company's
acquisition strategy. In the comparable period last year, the Company modified
pay plans of certain officers and key employees resulting in a reduction in
compensation expense of approximately $1.3 million. The Company believes the
selling, general and administrative expenses will increase in the future due to
the Company's acquisition strategy and additional lease expense as a result of
the sale and leaseback transaction.
The Company incurred and recorded merger-related expenses of approximately
$750,000 during the quarter ended September 30, 1998. The Company will record
all additional merger-related expenses as incurred until the proposed Merger is
consummated or abandoned.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
approximately $214,000, primarily attributable to the inclusion of amortization
expense as a result of the Chaisson acquisition. The Company expects this
expense to increase throughout 1998 as compared to 1997 due to a full year
impact from the Acquisitions.
INTEREST EXPENSE. The Company's interest expense, net of interest income,
increased approximately $231,000 from the comparable period last year primarily
due to higher debt levels and floor plan interest expense resulting from the
Chaisson acquisition which was partially offset by reduced mortgage financing as
a result of the sale and leaseback transaction. The Chaisson acquisition added
approximately $186,000 in interest expense for the three month period ended
September 30, 1998. Long-term debt increased from approximately $39.7 million at
September 30, 1997 to approximately $42.4 million at September 30, 1998,
primarily due to debt incurred to finance the Acquisitions. The Company expects
interest expense to increase throughout 1998 due to the full year effect of the
additional long-term debt and increased floor plan notes attributable to the
Acquisitions. These increases will be partially offset by reduced interest
associated with property mortgages which were repaid with the proceeds from the
sale leaseback transaction. Net interest expense may be further impacted by the
future direction of interest rates.
INCOME TAX PROVISION. The Company's effective tax rate for the quarter ended
September 30, 1998 approximated 44.8%, compared to 37.3%, for the quarter ended
September 30, 1997. The Company recorded merger-related expenses of $750,000
during the quarter ended September 30, 1998, which are not deductible for
purposes of calculating federal income tax. Before the charge for non-deductible
merger expenses, the effective tax rate for the quarter ended September 30, 1998
approximated 36.5%. The decrease in the effective tax rate is attributable to a
higher percentage of the Company's taxable income
45
<PAGE>
being generated in Nevada, which has no state income tax. Excluding
non-deductible merger-related expenses, management expects the effective tax
rate for 1998 to remain in the 36.5% to 37.5% range.
BASIC AND DILUTED NET INCOME PER SHARE. Basic and diluted net income per
share was $.13 for the third quarter of 1998 compared to $.19 for the third
quarter of 1997. Excluding the non-deductible merger expenses of $750,000, the
Company's basic and diluted net income per share was $.19 for the third quarter
ended September 30, 1998.
RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 1998
REVENUES AND GROSS PROFIT.
NEW VEHICLES. Same store unit sales increased 310 units, or 4.7%, from the
first nine months of 1997 to the first nine months of 1998. The increase in same
store unit sales is primarily attributable to an increase in same store unit
sales in the Las Vegas, Nevada, and Denver, Colorado, markets, partially offset
by a decrease in same store unit sales in the Amarillo, Texas, market. Unit
sales in the Denver and Las Vegas markets increased 497 units, or 19.8%,
primarily attributable to the relocation of the Company's Toyota dealerships to
new larger facilities and to a continuation of manufacturer consumer incentive
programs designed to stimulate retail demand for new vehicles. The consumer
incentives offered by the manufacturers generally consist of discounts, rebates
and favorable financing and leasing programs. Unit sales in the Amarillo market
declined 336 units, or 10.7%, primarily attributable to the GM strike that
caused a disruption in the availability of new vehicle inventory at the
Company's Chevrolet dealerships. As a result of these factors, same store sales
increased by approximately $10.8 million, or 7.2%, from the nine months ended
September 30, 1997 to the nine months ended September 30, 1998. Same store sales
average selling price per unit increased $544, or 2.4%. The Acquisitions added
approximately $81.4 million in new vehicle revenue and 2,999 new unit sales with
an average price of $27,143. The average sales price at the dealerships acquired
in the Acquisitions, excluding Chaisson which sells higher priced vehicles, was
$22,270.
Same store gross profit on new vehicle sales decreased approximately
$253,000, or 1.6%, primarily attributable to higher inventory costs at the
Amarillo dealerships affected by the GM strike. The Company purchased new
vehicle inventory from other dealers in an attempt to mitigate the effect of the
GM strike. The units purchased from the other dealers were purchased at a higher
cost than units purchased directly from GM. The Acquisitions added approximately
$8.4 million in gross profit with a gross profit percentage of 10.3%.
The table below sets forth a reconciliation of new vehicle units, revenues,
and gross profit from the first nine months of 1997 to the first nine months of
1998 accounting for the variance in same store results, the Acquisitions and
Divestiture.
<TABLE>
<CAPTION>
UNITS REVENUES GROSS PROFIT
--------- -------------- -------------
<S> <C> <C> <C>
Nine months ended September 30, 1997...................................... 7,393 $ 163,550,000 $ 17,288,000
Same store variance....................................................... 310 10,765,000 (253,000)
Acquisitions.............................................................. 2,999 81,403,000 8,370,000
Effects of the Divestiture................................................ (756) (14,028,000) (1,527,000)
--------- -------------- -------------
Nine months ended September 30, 1998...................................... 9,946 $ 241,690,000 $ 23,878,000
--------- -------------- -------------
--------- -------------- -------------
</TABLE>
USED VEHICLES. Same store unit sales decreased 685 units, or 4.7%, including
retail and wholesale sales. Same store sales, excluding the Oklahoma City,
Oklahoma dealership, increased by approximately $10.8 million, or 7.1%,
primarily attributable to the Company's continued focus on improving used
vehicle operations at its existing dealerships. Unit sales at the Oklahoma City,
Oklahoma dealership declined by 1,594 units in the first nine months of 1998.
Management believes the decline in unit sales at the Oklahoma
46
<PAGE>
City, Oklahoma dealership is primarily attributable to a less than desirable
used vehicle inventory, the Company's continued effort to change the sales
method to eliminate low margin highly promotional volume selling and high
personnel turnover. The Acquisitions added approximately $57.2 million used
vehicle revenue and 5,032 used vehicle unit sales at an average price of
$11,359.
Same store gross profit decreased approximately $1.7 million, or 11.5%,
primarily attributable to the decline in sales at the Company's Oklahoma City,
Oklahoma dealership. The Acquisitions added approximately $5.8 million in gross
profit with a gross profit percentage of 10.2%.
The table below sets forth a reconciliation of used vehicle units, revenues,
and gross profit from the first nine months of 1997 to the first nine months of
1998 accounting for the variance in same store results, the Acquisitions and
Divestiture.
<TABLE>
<CAPTION>
UNITS REVENUES GROSS PROFIT
--------- -------------- -------------
<S> <C> <C> <C>
Nine months ended September 30, 1997.................................... 16,631 $ 151,493,000 $ 15,375,000
Same store variance..................................................... (685) (3,753,000) (1,681,000)
Acquisitions............................................................ 5,032 57,159,000 5,843,000
Effects of the Divestiture.............................................. (2,164) (17,627,000) (744,000)
--------- -------------- -------------
Nine months ended September 30, 1998.................................... 18,814 $ 187,272,000 $ 18,793,000
--------- -------------- -------------
--------- -------------- -------------
</TABLE>
OTHER OPERATING REVENUE. Finance and insurance (F&I) revenue primarily
represents fees and commissions the Company earns for selling and placing
customers' retail finance and lease contracts, credit life insurance contracts
and third party extended warranty contracts. Same store F&I revenue increased
approximately $677,000, or 5.4%, primarily attributable to an increase in unit
sales at the Denver, Colorado and Las Vegas, Nevada dealerships. The
Acquisitions added approximately $4.7 million in F&I revenue.
Same store F&I gross profit increased by approximately $986,000, or 8.8%,
from the first nine months of 1997 to the first nine months of 1998. Same store
gross profit percentage increased from 89.5% to 92.4% for the comparable nine
month periods, primarily attributable to a reduction in extended warranty costs.
Parts and service revenue represents the retail and wholesale sales of
repair and replacement parts and the sale of labor for servicing customers
vehicles. Same store parts and service revenue increased approximately $1.1
million, or 4.9%, in the first nine months of 1998 compared to the first nine
months of 1997. Same store parts and service revenue, excluding the Oklahoma
City, Oklahoma dealership, increased by approximately $2.5 million, or 13.4%,
primarily attributable to increased capacity at the Company's two recently
relocated dealerships. The Acquisitions added approximately $14.1 million in
parts and service revenue.
Same store parts and service gross profit increased approximately $663,000,
or 5.4%. Same store gross profit percentage increased from 53.7% to 54.0% for
the comparable nine months, primarily attributable to a change in the mix of
retail and wholesale parts and service sales. The Acquisitions added
approximately $7.5 million in parts and service gross profit at a gross profit
percentage of 53.2%.
Other revenue primarily consists of documentation fees charged by the
Company to its customers on vehicle sales. The amount of fees is usually
governed by state statute, regulation or regulatory agency. Also included in the
other revenue is management fee income and rental income. Same store other
revenue and gross profit increased $2.0 million, or 68.1%, from the first nine
months of 1997 to the first nine months of 1998, primarily as a result of the
management fee revenue from two dealerships the Company currently manages under
management agreements. The Acquisitions added approximately $2.5 million in
other revenue and gross profit primarily from documentation fees. The
Acquisitions are located in states which
47
<PAGE>
permit higher documentation fees compared to the Company's other same store
dealerships. The Company expects the management fee component of other revenue
to decline as the two management agreements expire. Both management agreements,
which accounted for approximately $2.0 million in other revenue and gross profit
for the nine months ended September 30, 1998, are expected to terminate in late
1998 and early 1999.
The table below sets forth a reconciliation of other operating revenue and
gross profit by major category accounting for the variance in same store
results, the Acquisitions and Divestiture.
<TABLE>
<CAPTION>
F&I PARTS & SERVICE OTHER REVENUE TOTAL
-------------------- -------------------- ---------------------- --------------------
GROSS GROSS GROSS GROSS
REVENUE PROFIT REVENUE PROFIT REVENUE PROFIT REVENUE PROFIT
--------- --------- --------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Nine months ended September
30, 1997.................. $ 13,975 $ 12,592 $ 26,879 $ 13,886 $ 3,296 $ 3,296 $ 44,150 $ 29,774
Same store variance......... 677 986 1,127 663 2,004 2,004 3,808 3,653
Acquisitions................ 4,675 4,519 14,091 7,503 2,507 2,507 21,273 14,529
Effects of the
Divestiture............... (1,429) (1,362) (3,876) (1,522) (352) (352) (5,657) (3,236)
--------- --------- --------- --------- ----------- --------- --------- ---------
Nine months ended September
30, 1998.................. $ 17,898 $ 16,735 $ 38,221 $ 20,530 $ 7,455 $ 7,455 $ 63,574 $ 44,720
--------- --------- --------- --------- ----------- --------- --------- ---------
--------- --------- --------- --------- ----------- --------- --------- ---------
</TABLE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A). Selling, general and
administrative expenses increased approximately $21.8 million for the comparable
nine month periods of 1997 to 1998. The Acquisitions added approximately $20.8
million while the Divestiture reduced selling, general and administrative
expenses approximately $5.6 million. The Company's selling, general and
administrative expenses were 13.6% of revenues for the nine months ended
September 30, 1998 versus 12.6% for the nine months ended September 30, 1997.
This increased percentage is primarily attributable to higher corporate and
operating expenses as a result of the Company's acquisition strategy and
increased lease expense as a result of the sale and leaseback transaction. In
the third quarter of 1997, the Company modified pay plans of certain officers
and key employees resulting in a reduction in compensation expense of
approximately $1.3 million. The Company expects additional lease expense for the
remainder of 1998 as a result of the sale and leaseback transaction. The
annualized rent expense under the contract is $4.1 million for the properties,
net of the amortization of the deferred gain.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
approximately $1.1 million, or 58.1%, primarily attributable to the inclusion of
amortization expense from the Acquisitions. The Company expects this expense to
increase throughout 1998 due to a full year impact from the Acquisitions.
INTEREST EXPENSE. The Company's interest expense, net of interest income,
increased approximately $2.6 million from the comparable period last year due to
higher debt levels and floor plan interest expense resulting from the
Acquisitions. The Acquisitions added approximately $1.2 million in interest
expense for the nine month period ended September 30, 1998. The Company's
long-term debt increased from approximately $39.7 million at September 30, 1997
to approximately $42.4 million at September 30, 1998, primarily due to debt
incurred to finance the Acquisitions. The Company expects interest expense to
increase throughout 1998 due to the full year effect of the additional long-term
debt and increased floor plan notes payable attributable to the Acquisitions.
These increases will be partially offset by reduced interest associated with
property mortgages which were repaid with the proceeds from the sale leaseback
transaction. Net interest expense may be further impacted by additional
borrowings to finance acquisitions and the future direction of interest rates.
INCOME TAX PROVISION. The effective tax rate for the nine months ended
September 30, 1998 was 40.0%, compared to the Company's effective income tax
rate for the nine months ended September 30,
48
<PAGE>
1997 of approximately 38.6%. Before the charge for non-deductible merger-related
expenses, the effective rate for the nine months ended September 30, 1998 was
37.0%. Excluding non-deductible merger-related expenses, management expects its
effective tax rate for 1998 to be in the 36.5% to 37.5% range.
BASIC AND DILUTED NET INCOME PER SHARE--Basic and diluted net income per
share decreased from $.48 in the first nine months of 1997 to $.40 in the first
nine months of 1998. Before considering an employee severance charge and a
merger-related expense charge during the nine months ended September 30, 1998,
and a loss recorded on the Divestiture in 1997, basic net income per share
remained unchanged at $.50. Diluted net income per share before the respective
charges decreased from $.50 in 1997 to $.49 in 1998. The weighted average shares
outstanding and diluted weighted average shares outstanding decreased from
approximately 13.8 million to approximately 13.6 million for the nine-month
periods of 1997 and 1998 primarily due to treasury shares received in the
Divestiture offset by shares issued in the Acquisitions.
The Company believes several factors are in place that will affect net
income throughout the remainder of 1998 and into 1999. The Company expects lower
volume of new and used vehicle sales in the fourth and first quarters as these
are traditionally slower selling seasons. The Company anticipates additional
non-deductible merger-related expenses will be incurred. Also the plan to divest
certain operations as a result of the Merger, or any other realignment of its
dealerships, may have a negative impact on revenues, gross profits, and selling,
general and administrative expenses. Also, the Company expects certain
dealership management agreements to expire in late 1998 and early 1999. During
the nine months ended September 30, 1998, fees from these dealership management
agreements accounted for approximately $2.0 million in revenue and gross profit.
The Company does not expect volume or margin growth in its Amarillo, Texas
market and expects negative comparisons for Oklahoma City, Oklahoma for both
volume and gross profit. While the Denver, Colorado and Las Vegas, Nevada
markets continue to grow, national and regional sales trends indicate flat
demand for new vehicles throughout 1998.
49
<PAGE>
RESULTS OF OPERATIONS 1997 V. 1996
<TABLE>
<CAPTION>
SAME STORE
CONSOLIDATED COMPARISONS(1)
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(THOUSANDS, EXCEPT UNITS AND PERCENTAGES)
<S> <C> <C> <C> <C>
New vehicle sales
Units............................................. 9,722 6,408 4,296 4,668
Revenue........................................... $ 217,206 $ 137,712 $ 99,442 $ 105,215
Average selling price............................. $ 22.3 $ 21.5 $ 23.1 $ 22.5
Used vehicle sales (2)
Units............................................. 21,394 15,568 9,776 11,549
Revenue........................................... $ 196,469 $ 146,265 $ 94,068 $ 111,479
Average selling price............................. $ 9.2 $ 9.4 $ 9.6 $ 9.7
Total vehicle sales
Units............................................. 31,116 21,976 14,072 16,217
Revenue........................................... $ 413,675 $ 283,977 $ 193,510 $ 216,694
Other Operating revenue
Finance and insurance............................. $ 17,787 $ 12,520 $ 8,198 $ 9,120
Parts and service................................. 36,348 23,808 17,135 16,083
Other revenue..................................... 4,308 1,278 1,235 817
--------- --------- --------- ---------
Total other operating revenue....................... 58,443 37,606 26,568 26,020
--------- --------- --------- ---------
Total Revenue....................................... $ 472,118 $ 321,583 $ 220,078 $ 242,714
--------- --------- --------- ---------
--------- --------- --------- ---------
Gross Profit
New vehicles...................................... $ 22,818 $ 14,856 $ 10,595 $ 11,544
Used vehicles..................................... 19,269 12,140 7,013 9,398
Finance and insurance............................. 16,082 9,975 7,046 7,443
Parts and service................................. 18,785 11,684 8,510 8,397
Other revenue..................................... 4,308 1,278 1,235 817
--------- --------- --------- ---------
Total gross profit.................................. $ 81,262 $ 49,933 $ 34,399 $ 37,599
--------- --------- --------- ---------
--------- --------- --------- ---------
Gross profit percent
New vehicles...................................... 10.5% 10.8% 10.7% 11.0%
Used vehicles..................................... 9.8% 8.3% 7.5% 8.4%
Finance and insurance............................. 90.4% 79.7% 85.9% 81.6%
Parts and service................................. 51.7% 49.1% 49.7% 52.2%
Other revenue..................................... 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- ---------
Total gross profit percent.......................... 17.2% 15.5% 15.6% 15.5%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------
(1) "Same Store" information relates to the dealerships for which their results
of operations are included in the Consolidated Statements of Operations for
the same periods of 1997 and 1996.
(2) Used vehicle information includes the Company's retail and wholesale used
vehicle activities.
50
<PAGE>
REVENUES AND GROSS PROFITS
NEW VEHICLES.
<TABLE>
<CAPTION>
CONSOLIDATED SAME STORE COMPARISONS
-------------------------- -------------------------
1997 1996 1997 1996
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Unit sales........................................ 9,722 6,408 4,296 4,668
Average price per unit............................ $ 22,342 $ 21,491 $ 23,148 $ 22,540
New vehicle revenue............................... $217,206,000 $137,712,000 $99,442,000 $105,215,000
New vehicle gross profit.......................... $ 22,818,000 $ 14,856,000 $10,595,000 $ 11,544,000
Gross profit percentage........................... 10.5% 10.8% 10.7% 11.0%
</TABLE>
Same store unit sales (which are defined as the results of the Company's
Amarillo, Texas market for the year of 1997 and 1996 plus the fourth fiscal
quarter of 1997 and 1996 for the Oklahoma City, Oklahoma market, exclusive of
Performance) decreased 372 units, or 8.0%. Unit sales in Oklahoma City, Oklahoma
declined 115 units, or 33.7%, in 1997 compared to 1996. Management believes the
decline in unit sales for same store comparisons is attributed to a decrease in
demand for new vehicles which is consistent with regional and national trends in
1997, a less desirable new vehicle inventory at the Company's Dodge dealership
in Oklahoma City due to a manufacturer's labor strike earlier in 1997,
elimination of low margin fleet sales in the Oklahoma City, Oklahoma market and
a higher than expected dealership management turnover. Same store average
selling prices per unit increased $608, or 2.7%, due to model mix and
manufacturer cost increases passed on in the sales price of new vehicles. The
results of these factors from 1996 to 1997 were an approximate $5.8 million
decrease in same store revenue from new vehicle sales, of which approximately
$2.4 million is attributed to the Oklahoma City, Oklahoma market. The
Acquisitions added approximately $103.7 million in new vehicle revenue and 4,670
new units sales with an average price of $22,213.
Same store gross profit on new vehicle sales decreased approximately
$949,000, or 8.2%, from 1996 to 1997. This decline is primarily attributable to
the decrease in new vehicle sales and to a lesser extent a decline in new
vehicle gross profit percentage, both as a result of the factors discussed
above. The Acquisitions added approximately $10.7 million in gross profit with a
gross profit percentage of 10.3%. The table below sets forth a reconciliation of
new vehicle revenue, units and gross profit from 1996 to 1997 accounting for the
variance in same store results, the Acquisitions and excluding Performance:
<TABLE>
<CAPTION>
UNITS REVENUES GROSS PROFIT
----- ------------ ------------
<S> <C> <C> <C>
Year ended December 31, 1996...................... 6,408 $137,712,000 $ 14,856,000
Same store variance............................... (372) (5,773,000) (949,000)
Acquisitions...................................... 4,670 103,737,000 10,697,000
Effects of the Divestiture........................ (984) (18,470,000) (1,786,000)
----- ------------ ------------
Year ended December 31, 1997...................... 9,722 $217,206,000 $ 22,818,000
----- ------------ ------------
----- ------------ ------------
</TABLE>
USED VEHICLES.
<TABLE>
<CAPTION>
CONSOLIDATED SAME STORE COMPARISONS
-------------------------- -------------------------
1997 1996 1997 1996
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Unit Sales........................................ 21,394 15,568 9,776 11,549
Average price per unit............................ $ 9,183 $ 9,395 $ 9,622 $ 9,653
Used vehicle revenue.............................. $196,469,000 $146,265,000 $94,068,000 $111,479,000
Used vehicle gross profit......................... $ 19,269,000 $ 12,140,000 $ 7,013,000 $ 9,398,000
Gross profit percentage........................... 9.8% 8.3% 7.5% 8.4%
</TABLE>
51
<PAGE>
Same store unit sales decreased 1,773 units or 15.4%, for both retail and
wholesale. Unit sales in Oklahoma City, Oklahoma declined by 925 units, or
65.1%, in 1997 compared to 1996. Management believes the decline in unit sales
for same store comparisons is attributed to a decrease in demand for used
vehicles which is consistent with regional trends in 1997, a less than desirable
used vehicle inventory at the Company's Dodge dealership in Oklahoma City,
Oklahoma due to lower volume of new vehicle sales which generates a significant
percentage of used vehicles available for sale from trade-ins, a Company effort
to change the sales methods in Oklahoma City, Oklahoma to eliminate low margin
highly promotional volume selling and higher than expected dealership management
turnover. The results of these factors from 1996 to 1997 were an approximate
$17.4 million decrease in same store revenue from used vehicle sales, of which
approximately $8.3 million is attributed to the Oklahoma City, Oklahoma market.
The Acquisitions added approximately $84.8 million used vehicle revenue and
9,454 used vehicle units sales at an average price of $8,967.
Same store gross profit decreased approximately $2.4 million, or 25.4%, from
1996 to 1997. This decline is primarily attributable to the decrease in used
vehicle sales and to a lesser extent a decline in the used vehicle gross profit
percentage, both as a result of the factors discussed above. The Acquisitions
added approximately $11.5 million in gross profit with a gross profit percentage
of 13.6%. The Acquisitions had a higher gross profit percentage from used
vehicle operations as a result of wholesaling fewer vehicles and a lower average
cost of used vehicles compared to same store operations. The table sets forth a
reconciliation of used vehicle revenue, units and gross profit from 1996 to 1997
accounting for the variance in same store results, the Acquisitions and
excluding Performance:
<TABLE>
<CAPTION>
UNITS REVENUES GROSS PROFIT
------ ------------ ------------
<S> <C> <C> <C>
Year ended December 31, 1996...................... 15,568 $146,265,000 $ 12,140,000
Same store variance............................... (1,773) (17,411,000) (2,385,000)
Acquisitions...................................... 9,454 84,774,000 11,515,000
Effects of the Divestiture........................ (1,855) (17,159,000) (2,001,000)
------ ------------ ------------
Year ended December 31, 1997...................... 21,394 $196,469,000 $ 19,269,000
------ ------------ ------------
------ ------------ ------------
</TABLE>
The used vehicle analysis and tables above include the results of both the
Company's retail and wholesale used vehicle activities. The tables below set
forth supplemental information related to the Company's wholesale activities
only:
<TABLE>
<CAPTION>
MARGIN STATISTICS
--------------------------------------------------
CONSOLIDATED SAME STORE COMPARISONS
------------------------ ------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Units............................................. 8,274 7,423 4,791 5,520
Average selling price............................. $ 4,817 $ 5,580 $ 5,807 $ 5,753
Revenue........................................... $39,858,000 $41,423,000 $27,821,000 $31,758,000
Gross loss........................................ $ 1,996,000 $ 760,000 $ 1,068,000 $ 590,000
Gross loss percentage............................. 5.0% 1.8% 3.8% 1.9%
</TABLE>
<TABLE>
<CAPTION>
RECONCILIATION
-------------------------------
UNITS REVENUES GROSS LOSS
------ ----------- ----------
<S> <C> <C> <C>
Year ended December 31, 1996...................... 7,423 $41,423,000 $ 760,000
Same store variance............................... (729) (3,937,000) 478,000
Acquisitions...................................... 2,588 8,692,000 457,000
Effects of the Divestiture........................ (1,008) (6,320,000) 301,000
------ ----------- ----------
Year ended December 31, 1997...................... 8,274 $39,858,000 $1,996,000
------ ----------- ----------
------ ----------- ----------
</TABLE>
52
<PAGE>
The Company believes that the factors, as discussed above, that led to a
15.4% decline in total used vehicle units significantly contributed to an
increase in the wholesale loss from 1996 to 1997. Approximately $1.1 million of
the 1997 wholesale losses incurred in the Oklahoma City, Oklahoma market.
OTHER OPERATING REVENUE.
<TABLE>
<CAPTION>
SAME STORE
CONSOLIDATED COMPARISONS
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue
Finance and insurance................................. $ 17,787 $ 12,520 $ 8,198 $ 9,120
Parts and service..................................... 36,348 23,808 17,135 16,083
Other revenue......................................... 4,308 1,278 1,235 817
--------- --------- --------- ---------
Total............................................... $ 58,443 $ 37,606 $ 26,568 $ 26,020
--------- --------- --------- ---------
--------- --------- --------- ---------
Gross Profit
Finance and insurance................................. $ 16,082 $ 9,975 $ 7,046 $ 7,443
Parts and service..................................... 18,785 11,684 8,510 8,397
Other revenue......................................... 4,308 1,278 1,235 817
--------- --------- --------- ---------
Total............................................... $ 39,175 $ 22,937 $ 16,791 $ 16,657
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Finance and insurance (F&I) revenue primarily represents fees and
commissions the Company earns for selling and placing customer's retail finance
and lease contracts, credit life insurance contracts and third party extended
warranty contracts. Same store comparisons from 1996 to 1997 reveal a decrease
in F&I revenue of $922,000, or 10.1%. Prior to July 1, 1996 the Company sold
in-house warranties and deferred the revenue from the sale of these contracts.
The deferred revenue is being amortized into F&I revenue on a straight line
method over the life of the respective in-house warranty contracts. This revenue
item decreased from approximately $2.7 million in 1996 to approximately $1.5
million in 1997, and will continue to decrease in future years. Adjusting for
the amortization of in-house warranty revenue, all other same store F&I revenue
increased $287,000 or 4.5%. This increase is the result of a full year, versus
six months in 1996, of the sale of third party extended warranty contracts
partially offset by a reduction in vehicle retail sales. The Acquisitions added
approximately $8.2 million in revenue from F&I activities.
Same store F&I gross profit percentage increased from 81.6% in 1996 to 85.9%
in 1997 due to the full year impact of the sale of third party extended warranty
contracts versus only six months of such revenue in 1996. Third party extended
warranty contracts have minimal cost of sales and therefore have a significantly
higher gross profit percentage. The Acquisitions added approximately $7.7
million in gross profit from F&I activities in 1997 at a gross profit percentage
of 95%. The Acquisitions have experienced a higher gross profit percentage as
they have sold third party extended warranty contracts.
Parts and service revenue represents the wholesale and retail sales of
repair and replacement parts and the sale of labor for servicing customers
vehicles. Same store parts and service revenue increased approximately $1.1
million, or 6.5%, in 1997 from 1996. This increase is attributed to an increase
in same store wholesale parts business and an increase in repair services
provided to customers. The Acquisitions added approximately $15.3 million in
revenue from their parts and service activities.
Same store parts and service gross profit increased from 1996 to 1997 by
approximately $113,000, or 1.3%. The gross profit percentage declined from 52.2%
in 1996 to 49.7% in 1997. This decrease in the gross profit percentage and
increase gross profit amount is attributed to the heavier weighting of the
wholesale parts business which has lower gross profit and lower gross profit
percentage than retail parts sales. The Acquisitions added approximately $8.7
million from parts and service activities at a gross profit
53
<PAGE>
percentage of 56.6%. The Acquisitions have historically been heavily weighted
toward retail parts and service activities, excluding Lynn Hickey Dodge.
Other revenue primarily consists of documentation fees charged by the
Company to its customers on vehicle sales. The amount the Company can charge and
application of these fees is usually governed by state statute, regulation or
regulatory agency. Also included in other revenue is rental income and
miscellaneous income. Same store revenue and gross profit from other revenue
increased $418,000, or 51.2%, from 1996 to 1997. The primary factors causing the
increase was the commencement of the lease on the property rented to Performance
Dodge in connection with the sale of Performance and increased miscellaneous
income. The Acquisitions added approximately $2.7 million in other revenue and
gross profit primarily from documentation fees. The Acquisitions are located in
states which permit higher documentation fees compared to the Company's same
store dealerships.
The table below sets forth a reconciliation of other operating revenue and
gross profit by major category accounting for the variance in same store
results, the Acquisitions and excluding Performance.
<TABLE>
<CAPTION>
PARTS AND
F&I SERVICE OTHER REVENUE TOTAL
---------------- ---------------- ---------------- ----------------
GROSS GROSS GROSS GROSS
REVENUE PROFIT REVENUE PROFIT REVENUE PROFIT REVENUE PROFIT
------- ------- ------- ------- ------- ------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1996........................... $12,520 $ 9,975 $23,808 $11,684 $1,278 $1,278 $37,606 $22,937
Same store variance.................................... (922) (397) 1,052 113 418 418 548 134
Acquisitions........................................... 8,160 7,740 15,337 8,687 2,720 2,720 26,217 19,147
Effects of the Divestiture............................. (1,971) (1,236) (3,849) (1,699) (108) (108) (5,928) (3,043)
------- ------- ------- ------- ------- ------ ------- -------
Year ended December 31, 1997........................... $17,787 $16,082 $36,348 $18,785 $4,308 $4,308 $58,443 $39,175
------- ------- ------- ------- ------- ------ ------- -------
------- ------- ------- ------- ------- ------ ------- -------
</TABLE>
Total same store other operating revenue increased by approximately $548,000
or 2.1%, due to the increase in parts and service revenue and other revenue
which was partially offset by a decrease in F&I revenue. The Acquisitions added
approximately $26.2 million to other operating revenue from F&I, parts and
services and other activities.
Same store gross profit from other operating revenue increased approximately
$134,000, or .8%. This increase is primarily attributed to the increase in other
revenue and parts and service activities offset partially by a decrease in same
store F&I activities. The Acquisitions added approximately $19.1 million in
other operating revenue gross profit from F&I, parts and service and other
activities.
TOTAL REVENUE AND GROSS PROFIT.
<TABLE>
<CAPTION>
SAME STORE
CONSOLIDATED COMPARISONS
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue
Vehicle revenue................................... $ 413,675 $ 283,977 $ 193,510 $ 216,694
Other operating revenue........................... 58,443 37,606 26,568 26,020
--------- --------- --------- ---------
Total revenue................................... $ 472,118 $ 321,583 $ 220,078 $ 242,714
--------- --------- --------- ---------
--------- --------- --------- ---------
Gross Profit
Vehicle gross profit.............................. $ 42,087 $ 26,996 $ 17,608 $ 20,942
Other operating gross profit...................... 39,175 22,937 16,791 16,657
--------- --------- --------- ---------
Total gross profit.............................. $ 81,262 $ 49,933 $ 34,399 $ 37,599
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
54
<PAGE>
Same store total revenue decreased approximately $22.6 million, or 9.3%,
from 1996 to 1997. The primary factors contributing to this decrease in same
store total revenue was the decline in same store used vehicle revenue of
approximately $17.4 million and the decline in new vehicle revenue of
approximately $5.8 million discussed above. This total decline of approximately
$23.2 million, or 10.7%, in total same store vehicle revenue was slightly offset
by an increase in same store other operating revenue of $548,000 for the reasons
given above. The Acquisitions added total revenue of approximately $214.7
million with approximately $188.5 million coming from vehicle sales and
approximately $26.2 million coming from other operating revenue.
Same store gross profit decreased approximately $3.2 million, or 8.5%, from
1996 to 1997. Same store gross profit percentage increased from 15.5% to 15.6%
from 1996 to 1997. The primary factors contributing to the reduced gross profit
from same store results was an approximately $3.3 million reduction in gross
profit from new and used vehicle sales, approximately $949,000 from new vehicle
sales and approximately $2.4 million from used vehicle sales, due to the factors
discussed above. The reduction in same store gross profit from vehicle sales was
partially offset by an increase in other operating revenue gross profit of
$134,000 for the reasons outlined above. The Acquisitions added approximately
$41.4 million in gross profit from their new and used vehicle sales and other
operating revenue. The table below is a reconciliation of vehicle sales and
other operating revenue gross profit and revenue from 1996 to 1997 accounting
for the variance in same store results, the Acquisitions and excluding
Performance.
<TABLE>
<CAPTION>
REVENUE GROSS PROFIT
------------------------------------ -----------------------------------
OTHER OTHER
OPERATING OPERATING
VEHICLE SALES REVENUE TOTAL VEHICLE SALES REVENUE TOTAL
------------- --------- -------- ------------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1996........................... $283,977 $37,606 $321,583 $26,996 $22,937 $49,933
Same store variance.................................... (23,184) 548 (22,636) (3,334) 134 (3,200)
Acquisitions........................................... 188,511 26,217 214,728 22,212 19,147 41,359
Effects of the Divestiture............................. (35,629) (5,928) (41,557) (3,787) (3,043) (6,830)
------------- --------- -------- ------------- --------- -------
Year ended December 31, 1997........................... $413,675 $58,443 $472,118 $42,087 $39,175 $81,262
------------- --------- -------- ------------- --------- -------
------------- --------- -------- ------------- --------- -------
</TABLE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A)
Selling, general and administrative expenses, including employee stock
compensation recorded in 1996 of approximately $1.1 million, increased
approximately $23.9 million from 1996 to 1997. Approximately $30.9 million was
added from the Acquisitions and the effects of the Divestiture was a reduction
in SG&A of approximately $5.4 million. Same store and corporate expenses
declined approximately $1.6 million from 1996 to 1997, or 5.9%. The primary
reasons for the reduction in same store and corporate expenses relates to the
absence in 1997 of approximately $1.1 million of employee stock compensation
expense and a $600,000 employee bonus paid in 1996, both recorded prior to the
Company's initial public offering. The Company has pursued many efforts to
reduce costs such as restructuring its liability insurance program, altering pay
plans and reducing the same store employee count from 657 at December 31, 1996
to 531 at December 31, 1997. These efforts have resulted in approximately
offsetting the increasing cost of doing business. SG&A expense was 13.0% of
revenues in 1997 versus 11.3% in 1996. This increased percentage is primarily
due to the loss of operating leverage from a reduction in same store revenue and
the fact that the Acquisitions have historically had higher SG&A expense
compared to their revenues than same store operations.
55
<PAGE>
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased approximately $1.5 million, or 120%,
from 1996 to 1997. The primary factor behind this increase was the Acquisitions,
which added approximately $1.5 million in depreciation and amortization of
acquisition intangibles.
OTHER INCOME (EXPENSE)
Other income (expense) consists of interest income and expense. Net interest
increased approximately $2.6 million from 1996 to 1997, or 82%. The reason for
this increase was the increase in long-term debt from $11.9 million at December
31, 1996 to $45.0 million at December 31, 1997, incurred primarily to finance
the Acquisitions and an increase in floor plan notes payable from $46.3 million
at December 31, 1996 to $53.4 million at December 31, 1997, due to inventory
fluctuations and the Acquisitions.
INCOME TAX PROVISION
Income taxes increased from approximately $3.4 million in 1996 to
approximately $4.2 million in 1997, or 25%. The primary factor for the increase
was a 37.5% increase in pretax profits. The effective tax rate in 1996 was 42.3%
compared to 38.6% for 1997. The primary reason for a higher effective tax rate
in 1996 was the establishment of a valuation allowance for certain net operating
loss carry forwards.
NET INCOME AND BASIC AND DILUTED NET INCOME PER SHARE
Net income increased approximately $2.1 million, or 47%, in 1997 over 1996.
The table sets forth a reconciliation of income before interest and taxes from
1996 to 1997 accounting for same store variance, the Acquisitions, sale of
Performance, and loss on such sale (in thousands):
<TABLE>
<S> <C>
Income before interest and taxes year ended December 31, 1996...... $ 11,137
Same store variance................................................ (1,685)
Acquisitions....................................................... 8,945
Effects of the Divestiture......................................... (1,305)
Loss on the Divestiture............................................ (347)
---------
Income before interest and taxes year ended December 31, 1997...... $ 16,745
---------
---------
</TABLE>
Basic and diluted net income per share increased from $.42 in 1996 to $.49
in 1997 or 16.7%. The weighted average shares outstanding increased from
approximately 11.0 million in 1996 to approximately 13.7 million in 1997
primarily due to the shares issued in the offering, shares issued in connection
with the Acquisitions and a reduction due to the treasury shares received in the
sale of Performance.
RESULTS OF OPERATIONS 1996 V. 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 in West Texas during 1996, which had a negative impact on the
Amarillo market area.
56
<PAGE>
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.
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 65.1% 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 profit percentage on other
operating revenue was up slightly to 61.0% in 1996 as compared to 60.8% in 1995.
The reduction in the gross profit percentage 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 profit percentage 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 the gross profit percentage 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A)
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.
Furthermore, in connection with the Company's reorganization, the Company
recorded an executive bonus of $600,000, which was expensed in 1996.
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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.
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 acquisition of 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 did not recognize
the benefit for certain separate company losses incurred by the parent company
in 1996.
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 Gilliland Group Family
Partnership, 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.
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. The Company has met these liquidity requirements primarily through
cash flow generated from operating activities, floor plan financing, borrowings
under credit agreements with manufacturer captive finance companies and
commercial banks and the proceeds from its initial public offering. Floor plan
financing from manufacturer captive finance companies and commercial banks
represents the primary source of financing for vehicle inventories.
During the first nine months of 1998, cash provided from operating
activities totaled approximately $10.1 million, compared to net cash provided
from operating activities of approximately $9.0 million during the first nine
months of 1997. The increase is primarily attributable to a reduction in
inventory as the Company enters the slower selling season which is traditionally
the fourth and first fiscal quarters of the year. During 1997, the Company
generated net cash of approximately $8.7 million from operating activities,
compared to $7.7 million in 1996. The increase is primarily attributable to the
decrease in same store accounts receivable and inventory levels and an increase
in net income, partially offset by a decrease in accounts payable and accrued
expenses and other liabilities.
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Cash provided from investing activities of approximately $13.0 million
during the first nine months of 1998 related primarily to the net proceeds
received on the sale and leaseback transactions offset by the acquisition of
Chaisson and the construction costs related to the two new dealership facilities
for Denver Toyota and Toyota West. The Company completed all of the sale and
leaseback transactions during the first six months of 1998, which netted
approximately $35.4 million in proceeds. During 1997, cash used in investing
activities approximated $56.1 million primarily due to the acquisitions of
Spedding Toyota and Nissan West as well as the construction progress payments
made on the new dealership facilities in Denver and Las Vegas. Expenditures
related to the purchase of the Acquisitions totaled approximately $43.3 million.
Construction progress payments made in 1997 approximated $10.6 million during
1997. The Construction progress payments were funded from cash on hand and
interim financing provided by an Interim Construction and Master Loan Agreement
for $7.4 million. The amount outstanding at December 31, 1997 was approximately
$4.8 million. Upon completion of the construction the facilities were sold to a
third party under a sale and leaseback contract entered into by the Company on
December 31, 1997. The Company currently anticipates that any future
acquisitions will be financed with a combination of debt, stock, and cash.
The Company finances its purchases of new vehicle inventory with
manufacturer captive finance companies and commercial banks. The Company also
maintains lines of credit with manufacturer captive finance companies and
commercial banks for the financing of used vehicle inventories. The lenders
receive 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 a few days of the
sale of such vehicle by the Company. The Company periodically renegotiates the
terms of its financing, including the interest rate. At September 30, 1998, the
Company had outstanding floor plan debt of approximately $51.2 million which
incurred an average annual interest rate of approximately 8.8% during the first
nine months of 1998.
The Company began financing its used vehicle operations at its Denver Toyota
and Toyota West dealerships on January 16, 1998. The amount of this floor plan
line is $3.0 million and is provided by R. Douglas Spedding, an officer of the
Company. The notes mature on December 1, 1998 and bear an interest rate of 9%.
Total amount outstanding at September 30, 1998 was approximately $2.4 million.
Cash used in financing activities totaled approximately $31.2 million for
the first nine months of 1998 compared to cash provided of approximately $4.3
million for the first nine months of 1997. The Company's cash used in financing
activities for the nine months ended September 30, 1998 related primarily to the
cash used in reducing floor plan debt and retiring mortgage debt and affiliate
debt in connection with the sale and leaseback transaction of approximately
$20.7 million. During 1997, cash provided from financing activities approximated
$25.6 million. The increase was mainly attributable to $37.0 million of advances
under the credit facility to fund the Acquisitions, to refinance certain debt
incurred by the Acquisitions and to make deposits on pending acquisitions. The
Company re-paid $7.0 million of seller notes incurred in the Spedding Toyota
purchase and approximately $4.3 million of debt associated with the Divestiture
and other long-term debt of approximately $6.0 million.
The Company has entered into a contract to acquire a certain dealership in
California. The proposed purchase price is approximately $6.0 million consisting
of approximately $4.1 million in cash and $1.4 million in seller-financed notes
and $500,000 in assumed debt. During the first nine months of 1998, the Company
advanced approximately $2.1 million towards the closing of this transaction. To
satisfy the conditions of the Merger, as set forth in the Merger Agreement, the
Company will divest the Company's interest in this pending acquisition of this
California dealership. The Company expects the divestiture to coincide with the
completion of the Merger; however, there can be no assurance the divestiture or
the Merger will be completed.
The Company has entered into a contract to acquire a certain dealership in
Nevada. The proposed purchase price is approximately $12.5 million consisting of
approximately $9.0 million in cash, $3.2 million
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<PAGE>
in seller financed notes and approximately $300,000 in value of the Company's
common stock. During the first nine months of 1998 the Company advanced
approximately $1.5 million towards the closing of this transaction. The Company
has not obtained approval from the related manufacturer, and the Purchase
Contract expires January 1, 1999. As a result, the Company has entered into a
Stock Purchase Agreement with Republic to sell to Republic the subsidiary that
operates this dealership and has the rights to acquire it.
The Company has incurred a deferred tax liability of approximately $4.0
million in connection with the change in its tax basis of accounting for
inventory from LIFO to FIFO effective for 1996. The Company believes that it is
required to pay this liability in six annual installments, beginning in 1997,
and believes that it will be able to pay such obligation with cash provided by
operations.
The Company believes that its existing capital resources, including cash on
hand, cash from operations, and funds available under the credit facility will
be sufficient to run the Company's operations in the ordinary course of business
and fund its debt service requirements. Additional financing may be required to
fund the pending Acquisitions should the Merger not be completed. To the extent
the Company pursues additional acquisitions, it most likely will need to raise
additional capital either through the public or private issuance of equity or
debt securities or through additional bank borrowings.
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.
YEAR 2000 ISSUES
The Year 2000 ("Y2K") issue is a global concern that computer programs,
processors and embedded chips programmed to recognize date formats with
two-digit years will not be able to distinguish between the year 1900 and the
year 2000. As a result, companies are at risk for possible mistakes or system
failures that could cause disruptions in their business operations. The Company
has initiated its plan of action to address the Y2K issue. This plan of action
is necessary to insure that the Company's hardware, software and data feeds that
consider and process date sensitive information will continue to function
properly after December 31, 1999.
The Company's plan of action has identified all areas of material concern
and has separated the concerns between mission critical systems and non-mission
critical systems. The mission critical systems have been primarily identified as
operational and financial computer systems, dealership communication systems,
electronic parts cataloging systems, telecommunication systems and outside
vendor systems. These mission critical systems have been and will be addressed
first in the Company's Y2K plan of action. The non-mission critical systems have
been primarily identified as dealership security systems and a network of
personal computers.
The Company utilizes an integrated operational and financial computer
information system that supports the Company's core business processes,
including vehicle sales, parts and service sales, customer financing, inventory
management, payroll and accounting. The Company has identified this integrated
information system as its primary mission critical system. One vendor supplies
the Company's operational and financial computer software for its primary
mission critical systems. On November 1, 1998, the Company upgraded its primary
mission critical system to the most current release of the software that is
certified Y2K compliant. All of the Company's existing dealerships are on this
system except Chaisson. To install the Y2K compliant software at Chaisson, the
Company will need to upgrade the dealerships' existing computer system or
further expand the Company's primary computer system to include the Chaisson
dealerships. The Company has developed a plan of action to bring Chaisson into
Y2K compliance by the end of the first quarter of 1999.
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With the upgrade of the Company's primary mission critical system, all
dealerships' electronic parts cataloging systems (EPC) and most dealership
communications systems (DCS) and are now Y2K compliant. Three dealerships have
ordered and are awaiting upgraded DCS's from their respective franchisors. These
DCS upgrades are expected to be completed by the end of the second quarter of
1999.
The Company's two pending Acquisitions were not included in the upgrade of
the primary mission critical system. The Company has received documentation from
the pending Acquisitions' primary system vendor that upgrades to bring their
systems into Y2K compliance will be shipped in 1998. Should the upgrade not
bring the system into Y2K compliance, the Company has contingently planned to
convert the two pending Acquisitions' systems to the primary computer system
used by the Company's existing dealerships which is currently Y2K compliant. The
Company's plan of action for the two pending Acquisitions is contingent on the
selling, assigning or divesting of its interest in the dealerships as related to
the Merger.
As of November 1, 1998, the Company had completed testing all the dealership
telecommunication systems. The Company has identified four dealerships whose
phone systems will need to be upgraded or replaced. The Company has also
initiated a plan to send letters of compliance to major vendors used by each
dealership, in order to verify Y2K compliance by the vendor. The major vendors
include, but are not limited to, automobile manufacturers, automobile parts
suppliers, banks, finance companies and warranty companies.
The Company's plan of action to test all identified non-mission critical
systems is in process and will be intensified once the mission critical systems
issues have been addressed. The Company is currently testing all Company
personal computers and related software. All personal computers and software
will be Y2K compliant by the end of 1999. The Company does not anticipate any
material costs related to the personal computer and software upgrades.
The upgrade for the primary mission critical system was supplied and
installed by the Company's primary vendor and all costs were covered by the
Company's existing maintenance and support fees. The Company anticipates leasing
the Y2K compliant upgrade for the existing system at Chaisson at a cost of
approximately $126,000. The DCS upgrades yet to be installed on the primary
mission critical system are anticipated to be leased at a cost of approximately
$10,000 each. If the Company determines that the primary integrated computer
system needs to be upgraded for the Chaisson dealerships or the pending
Acquisitions, each dealership conversion will be leased at a cost of
approximately $125,000. Upgrading or replacing the four dealerships' phone
systems has been estimated to cost up to $200,000. The funds for updating or
replacing the phone systems will be provided by funds from normal operations.
The Company will be expensing Y2K costs as incurred.
The failure to correct a material Y2K problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. The Company is
concerned that failure to correct a material Y2K problem could cause
manufacturers problems in shipping inventory to the dealerships and cause
financial institutions problems in financing customer purchases and providing
the necessary cash flow for normal day-to-day operations. At this time, the
Company cannot determine whether failure to correct a material Y2K problem will
have material and adverse effects on the Company's operations. The Company
believes that the plan of action for Y2K compliance it has undertaken will
significantly reduce the possibility of material and adverse effects on the
Company's operations.
PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated statement of operations for
the year ended December 31, 1997 reflects the historical accounts of the Company
for the year ended December 31, 1997, adjusted to give pro forma effect to: (a)
the April 1997 acquisition of Spedding Toyota; (b) the July 1997
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acquisition of Nissan West; (c) the January 1998 acquisition of Chaisson; and
(d) the July 1997 disposition of Performance, as if these transactions had
occurred at the beginning of 1997.
The pro forma consolidated financial data and the accompanying notes should
be read in conjunction with the Company's Consolidated Financial Statements and
the related notes, and the financial statements and related notes of Nissan
West, which are included elsewhere in this proxy. The Company believes that the
assumptions used in the following statements provide a reasonable basis on which
to present the pro forma financial data. The pro forma consolidated financial
data is provided for information purposes only and should not be construed to be
indicative of the Company's results of operations had the transactions described
above been consummated on the dates assumed and are not intended to project the
Company's results of operations for any future period.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
ACTUAL ADJUSTED
ACTUAL SPEEDING NISSAN ACTUAL ACTUAL PRO FORMA
COMPANY(1) TOYOTA(1) WEST(1) CHAISSON(1) PERFORMANCE(2) ADJUSTMENTS PRO FORMA
---------- --------- -------- -------------- -------------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Vehicle sales.................... $413,675 $44,738 $ 23,923 $81,823 $(31,655) $ $532,504
Other operating revenue.......... 58,443 5,285 3,659 11,785 (5,656) 73,516
---------- --------- -------- ------- -------------- ----------- ---------
Total revenues................... 472,118 50,023 27,582 93,608 (37,311) 606,020
Cost of sales...................... 390,856 41,139 22,926 79,306 (31,805) 502,422
---------- --------- -------- ------- -------------- ----------- ---------
Gross profit..................... 81,262 8,884 4,656 14,302 (5,506) 103,598
Expenses
Selling, general and
administrative................. 61,512 6,991 3,505 10,581 (5,601) 76,988
Depreciation and amortization.... 2,658 102 70 480 (120) 953(3) 4,143
Loss of sale from Income before
interest and taxes............... 347 -- -- -- -- -- 347
---------- --------- -------- ------- -------------- ----------- ---------
16,745 1,791 1,081 3,241 215 (953) 22,120
Other income (expense)
Interest income.................. 1,224 181 -- -- -- (940)(4) 465
Interest expense................. (7,043) (436) (549) (1,165) 681 (1,627)(4) (10,139)
---------- --------- -------- ------- -------------- ----------- ---------
Income before income taxes....... 10,926 1,536 532 2,076 896 (3,520) 12,446
Income tax provision............. 4,213 -- -- -- 335 231(5) 4,779
---------- --------- -------- ------- -------------- ----------- ---------
Net income....................... $ 6,713 1,536 532 2,076 561 (3,751) 7,667
---------- --------- -------- ------- -------------- ----------- ---------
---------- --------- -------- ------- -------------- ----------- ---------
Basic and diluted net income per
share............................ $ .49 $ .56(6)
---------- ---------
---------- ---------
Weighted average common shares
outstanding...................... 13,683 13,574(6)
---------- ---------
---------- ---------
</TABLE>
- ------------------------
(1) Actual results of operations reflect the historical results of the Company
for the year ended December 31, 1997; the historical results of Spedding
Toyota for the three months ended March 31, 1997; the historical results of
Nissan West for the six months ended June 30, 1997; the historical results
of Chaisson for the 12 months ended December 31, 1997.
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(2) Reflects the removal of the historical results of Performance, which was
sold by the Company in July 1997.
(3) Reflects the estimated additional amortization that would have been recorded
had Spedding Toyota, Nissan West, and Chaisson been acquired as of the
beginning of 1997. The amount of pro forma amortization is based on the
period from January 1, 1997 to the date of each respective acquisition, the
amount of intangible assets, and a weighted average life of the intangible
assets of approximately 35 years. The amount of intangible assets, including
goodwill, purchased in the acquisitions of Spedding Toyota, Nissan West, and
Chaisson was approximately $37 million, $13 million, and $17.4 million,
respectively. The related pro form amortization for 1997 associated with
Spedding Toyota, Nissan West, and Chaisson is $270,000, $185,000, and
$498,000, respectively.
(4) Reflects estimated reduction in interest income and increase in interest
expense as if the acquisitions of Spedding Toyota, Nissan West, and Chaisson
had occurred as of the beginning of 1997. The amount of the pro forma
interest adjustments is based on the net reduction in cash and the increase
in debt as a result of each acquisition, an interest rate of approximately
8.25% on debt and cash investments, and the period from January 1, 1997 to
the date of each respective acquisition.
(5) Reflects the estimated income tax effect of the adjustments described in
footnotes (2) through (4) above, using an incremental tax rate of 37%. Also
reflects the estimated income tax adjustments as if the acquired dealerships
were taxable entities, using an incremental tax rate of 37%; no income tax
provision was recorded in the historical accounts of Spedding Toyota, Nissan
West, and Chaisson as such dealerships operated within S Corporations and
the income was passed through to the respective owners for taxation.
(6) The pro forma net income per share reflects net reduction in shares
outstanding as if these acquisitions described above and the disposition of
Performance had occurred as of the beginning of 1997. See the table below
for a reconciliation of pro forma weighted average shares outstanding.
<TABLE>
<S> <C>
Actual Shares Outstanding January 1, 1997....................... 13,800,000
Shares issued for Spedding Toyota............................... 279,720
Shares issued for Nissan West................................... 125,983
Shares issued for Chaisson...................................... 128,205
Shares received for Performance................................. (760,000)
---------
Pro forma shares outstanding.................................... 13,573,908
---------
---------
</TABLE>
CERTAIN INFORMATION CONCERNING REPUBLIC AND MERGER SUB
Republic operates subsidiaries in the automotive retail and automotive
rental industries. Republic owns the nation's largest chain of franchised
automotive dealerships and is building a chain of used vehicle megastores that
it operates under the AutoNation USA(SM) brand name. Republic also owns
National, Alamo, and several other vehicle rental companies.
Republic's automotive retail business consists of the sale, lease and
financing of new and used vehicles and related automotive services and products.
According to Automotive News, an industry trade publication, Republic is the
single largest automotive retailer in the United States as measured by total
annual revenue. Republic has organized its retail operations into ten regional
districts which cover 28 major domestic markets. Republic has acquired or
contracted to acquire over 350 franchised automotive dealerships which own and
operate franchises granted by the manufacturers of approximately 36 different
brands of cars and light trucks. Republic also owns and operates 31 AutoNation
USA used vehicle megastores, and has 8 franchised AutoNation USA vehicle
megastores.
Republic's automotive rental business primarily rents vehicles on a daily or
weekly basis to leisure and business travelers principally from on-airport or
near airport locations through Alamo and National.
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Republic's automotive rental business operates in all 50 states in the United
States, and in Canada, the Caribbean, Latin America, the Pacific, Australia,
Europe, Africa and the Middle East. In 1997, Republic operated an average
aggregate domestic rental fleet of approximately 310,000 vehicles. According to
Auto Rental News, an industry trade publication, Republic has the largest
combined automotive rental fleet in the United States.
Republic also owns approximately 63.9 percent of the outstanding shares of
Republic Services, Inc. Republic Services, Inc. is one of the leading providers
of non-hazardous solid waste collection and disposal services in the United
States. Republic's various operating units provide solid waste collection
services for commercial, industrial, municipal and residential customers,
primarily in the Sunbelt and other high growth areas of the country.
Republic was incorporated in Oklahoma in 1980 and reincorporated in Delaware
in 1991. Republic's common stock, par value $.01 per share is listed on NYSE
under the symbol "RII." Republic's principal executive office is located at
Republic Tower, 110 S.E. 6th Street, Ft. Lauderdale, Florida 33301 and its
telephone number is (954) 769-6000.
Merger Sub was incorporated in September 1998 for purposes of the
transactions contemplated by the Merger Agreement and has engaged in no other
business.
STOCKHOLDER PROPOSALS FOR THE 1999 ANNUAL MEETING
OF CROSS-CONTINENT AUTO RETAILERS, INC.
If the Merger is not consummated, stockholder proposals for the 1999 Annual
Meeting must be submitted to the Secretary of the Company no later than December
10, 1998, in order to be considered for inclusion in the proxy materials for
such meeting. The inclusion of any such proposal will be subject to applicable
rules of the Commission.
OTHER MATTERS
At the time of the preparation of this Proxy Statement, the Company had not
been informed of any matters to be presented by or on behalf of the Company or
its management for action at the Special Meeting other than those listed in the
Notice of Special Meeting of Stockholders and referred to herein. If any other
matters come before the meeting or any adjournment thereof, the persons named in
the enclosed proxy will vote on such matters according to their best judgment.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, and in accordance therewith files reports, proxy
statements and other information with the Commission. The Commission file number
for the Company is 001-11881. Such reports and other information may be
inspected and copied at the Commission's Public Reference Section, Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, where copies can be obtained at
prescribed rates, as well as at the Commission's regional offices at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
Suite 1300, New York, New York 10048. The Commission also maintains a website
that contains reports, proxy and other information filed electronically with the
Commission, the address of which is
']http://www.sec.gov. Shares of Common Stock are listed on the NYSE and copies
of documents filed with the Commission may also be inspected at the offices of
the NYSE at 20 Broad Street, New York, New York 10005, where copies may be
obtained at prescribed rates.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN AS CONTAINED HEREIN IN CONNECTION WITH THE MATTERS
DESCRIBED HEREIN, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
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THIS PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THE SECURITIES OFFERED BY THIS PROXY STATEMENT OR A
SOLICITATION OF A PROXY IN ANY JURISDICTION WHERE, OR TO OR FROM ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. THE DELIVERY OF THIS
PROXY STATEMENT SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
STOCKHOLDERS ARE URGED TO SIGN THE ENCLOSED PROXY, WHICH IS SOLICITED ON
BEHALF OF THE BOARD, AND RETURN IT AT ONCE IN THE ENCLOSED ENVELOPE.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS.......................................................................... F-2
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995................. F-3
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1997 AND 1996.................................................. F-4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 1997..... F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995................. F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................................................. F-7
INDEPENDENT ACCOUNTANTS' REVIEW REPORT..................................................................... F-29
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997...... F-30
CONSOLIDATED BALANCE SHEETS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND THE YEAR ENDED DECEMBER 31,
1997..................................................................................................... F-31
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997................ F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)..................................................... F-33
FINANCIAL STATEMENTS OF SAHARA NISSAN, INC................................................................. F-39
REPORT OF INDEPENDENT ACCOUNTANTS.......................................................................... F-40
BALANCE SHEET AT JUNE 30, 1997 AND DECEMBER 31, 1996....................................................... F-41
STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 AND FOR THE YEAR ENDED DECEMBER
31, 1996................................................................................................. F-42
STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 AND FOR THE YEAR ENDED DECEMBER
31, 1996................................................................................................. F-43
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1996 AND SIX MONTHS ENDED
JUNE 30, 1997............................................................................................ F-44
NOTES TO FINANCIAL STATEMENTS.............................................................................. F-45
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Cross-Continent Auto Retailers, Inc.
In our opinion, the accompanying 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, 1997
and 1996, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, 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, 1998,
except as to Note 20,
which is as of February 24, 1998
F-2
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
-------- -------- --------
(THOUSANDS--EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues
Vehicle sales................................................................. $413,675 $283,977 $212,984
Other operating revenue....................................................... 58,443 37,606 23,210
-------- -------- --------
Total revenues.............................................................. 472,118 321,583 236,194
Cost of sales................................................................... 390,856 271,650 198,702
-------- -------- --------
Gross profit................................................................ 81,262 49,933 37,492
Expenses
Selling, general and administrative........................................... 61,512 36,490 25,630
Depreciation and amortization................................................. 2,658 1,207 951
Management fees paid to related party......................................... -- -- 4,318
Employee stock compensation................................................... -- 1,099 --
Loss from sale of dealerships................................................. 347 -- --
-------- -------- --------
64,517 38,796 30,899
-------- -------- --------
Income before interest and taxes.............................................. 16,745 11,137 6,593
Other income (expense)
Interest income............................................................... 1,224 1,585 830
Interest expense.............................................................. (7,043) (4,778) (3,918)
-------- -------- --------
Income before income taxes.................................................... 10,926 7,944 3,505
Income tax provision.......................................................... 4,213 3,362 1,310
-------- -------- --------
Net income.................................................................. $ 6,713 $ 4,582 $ 2,195
-------- -------- --------
-------- -------- --------
Basic and diluted net income per share.......................................... $ .49 $ .42 $ .22
-------- -------- --------
-------- -------- --------
Weighted average common shares outstanding...................................... 13,683 11,027 9,821
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................................. $ 15,173 $ 36,946
Accounts receivable................................................... 16,884 18,629
Inventories........................................................... 55,807 48,168
Other current assets.................................................. 1,792 1,088
--------- ---------
Total current assets................................................ 89,656 104,831
Property and equipment, net............................................. 33,165 13,391
Goodwill and other intangible assets, net............................... 67,988 22,094
Other assets and deferred charges....................................... 6,464 2,130
--------- ---------
Total assets........................................................ $ 197,273 $ 142,446
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Floor plan notes payable.............................................. $ 53,368 $ 46,282
Current maturities of long-term debt.................................. 727 1,345
Accounts payable...................................................... 6,117 8,623
Due to affiliates..................................................... 15,150 5,478
Accrued expenses and other liabilities................................ 10,559 7,408
Deferred income taxes................................................. 647 1,914
--------- ---------
Total current liabilities........................................... 86,568 71,050
Long-term debt.......................................................... 44,263 10,568
Other liabilities and deferred credits.................................. 3,180 2,310
--------- ---------
Total long-term liabilities......................................... 47,443 12,878
Stockholders' equity
Preferred stock, $.01 par value, 10,000,000 shares authorized, none
issued.............................................................. -- --
Common stock, $.01 par value, 100,000,000 shares authorized,
14,205,703 and 13,800,000 issued and outstanding at December 31,
1997 and 1996, respectively......................................... 142 138
Paid-in capital....................................................... 54,528 47,761
Retained Earnings..................................................... 17,332 10,619
Treasury stock, 760,000 shares at cost................................ (8,740) --
--------- ---------
Total stockholders' equity.......................................... 63,262 58,518
Commitments and contingencies (Notes 12, 14, 16, 19 and 20)
--------- ---------
Total liabilities and stockholders' equity.......................... $ 197,273 $ 142,446
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK TREASURY STOCK
--------------- -------------- ---------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ------ ------ ------ ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
Issuance of common stock pursuant to
acquisition................................ -- -- 406 4 -- -- 6,995 -- 6,999
Treasury stock acquired in disposition....... -- -- -- -- (760) (8,740) -- -- (8,740)
Other........................................ -- -- -- -- -- -- (228) -- (228)
Net income................................... -- -- -- -- -- -- -- 6,713 6,713
------ ------ ------ ------ ------ ------- ------- -------- -------
Balance at December 31, 1997................. -- $-- 14,206 $142 (760) $(8,740) $54,528 $ 17,332 $63,262
------ ------ ------ ------ ------ ------- ------- -------- -------
------ ------ ------ ------ ------ ------- ------- -------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities
Net income.................................................... $ 6,713 $ 4,582 $ 2,195
Adjustments to reconcile net income to net cash provided
(used) by operating activities..............................
Depreciation and amortization................................. 2,658 1,207 951
Net proceeds related to in-house warranties................... -- 1,586 3,345
Amortization of deferred warranty revenue..................... (1,467) (2,676) (2,136)
Employee stock compensation................................... -- 1,099 --
Deferred taxes and other...................................... 1,690 (136) (836)
Loss on sale of dealership.................................... 347 -- --
--------- --------- ---------
9,941 5,662 3,519
(Increase) decrease in
Accounts receivable........................................... 6,085 (9,246) (4,860)
Inventory..................................................... 4,143 9,156 (8,285)
Other assets.................................................. (2,056) (989) --
Increase (decrease) in
Accounts payable--trade....................................... (3,713) 3,768 3,275
Accrued expenses and other liabilities........................ (5,735) (604) (68)
--------- --------- ---------
Net cash provided (used) by operating activities............ 8,665 7,747 (6,419)
Cash flows from investing activities
Acquisition of property and equipment......................... (12,172) (1,636) (1,485)
Acquisition of dealerships.................................... (43,309) (20,052) (302)
Disposition of dealerships.................................... (569) -- --
--------- --------- ---------
Net cash used by investing activities....................... (56,050) (21,688) (1,787)
Cash flows from financing activities
Change in floor plan notes payable............................ (741) (1,220) 9,381
Due to affiliates............................................. (2,635) (476) 3,729
Net proceeds from borrowings.................................. 46,870 -- --
Long-term debt repayments..................................... (10,882) (1,515) (1,408)
Long-term debt repayments-related parties..................... (7,000) -- --
Proceeds from common stock issuance........................... -- 45,736 --
Dividends paid................................................ -- -- (135)
--------- --------- ---------
Net cash provided by financing activities................... 25,612 42,525 11,567
--------- --------- ---------
Increase (decrease) in cash and cash equivalents................ (21,773) 28,584 3,361
Cash and cash equivalents at beginning of period................ 36,946 8,362 5,001
--------- --------- ---------
Cash and cash equivalents at end of period...................... $ 15,173 $ 36,946 $ 8,362
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--GENERAL INFORMATION AND BASIS OF PRESENTATION
Cross-Continent Auto Retailers, Inc. operates in one business segment, the
retail sales and service of new and used automobiles. The Company conducts its
operations in the Amarillo, Texas, Oklahoma City, Oklahoma, Las Vegas Nevada,
and Denver, Colorado markets through three Chevrolet, one Dodge, two Toyota and
two Nissan dealerships.
The Company was incorporated in Delaware in May, 1996. In June, 1996,
shareholders of the then six existing dealerships exchanged their shares of
stock in such companies for 9,821,250 shares of the Company's stock (the
"Re-organization"). The Shareholders' ownership interest in the Company
immediately after the exchange was as follows:
<TABLE>
<S> <C>
Gilliland Group Family Partnership ("GGFP")........................... 88.2%
Emmett M. Rice, Jr.................................................... 10.3%
Other................................................................. 1.5%
</TABLE>
All of the 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, the Company 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 Cross-Continent Auto
Retailers, Inc., 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 $45.3 million. Following the
initial public offering, the Control Group remains the principal stockholder of
the Company and at December 31, 1997 owned approximately 60.7% of the Company's
issued and outstanding shares.
The accompanying consolidated financial statements consist of the accounts
of the Company, 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 sales volume, employee count, profit and actual expense or time
incurred as it related to the Company's business.
Financing associated with working capital needs and mortgage financing used
to purchase property for the dealership operations and their related interest
expense have been historically recorded on the Company's financial statements.
No other interest expense or income has been allocated to the Company in these
financial statements.
Management believes that the foregoing allocations were made on a reasonable
basis; however, the allocations of costs and expenses do not necessarily
indicate the costs that would have been or will be
F-7
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--GENERAL INFORMATION AND BASIS OF PRESENTATION (CONTINUED)
incurred by the Company on a stand-alone basis. Also, the financial information
included in the consolidated financial statements for the periods prior to the
Re-organization 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 and leases 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 contracts 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 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. Finance fees
and insurance commissions, net of chargebacks, are classified as other operating
revenue in the accompanying consolidated statement of operations (see Note 7).
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.
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.
F-8
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the respective
lives of the assets. The ranges of estimated useful lives are as follows:
<TABLE>
<S> <C>
Buildings..................................................... 30 years
Furniture and equipment....................................... 3 to 7 years
7 to 15
Leasehold improvements........................................ years
</TABLE>
When depreciable assets are sold or retired, the related cost and
accumulated depreciation are removed from the accounts. Any gains or losses are
included in selling, general and administrative expenses. Major additions and
betterments are capitalized. Maintenance and repairs which do not materially
improve or extend the lives of the respective assets are charged to operating
expenses as incurred.
GOODWILL AND OTHER INTANGIBLE ASSETS--Goodwill, $64,445,000 at December 31,
1997 and $20,623,000 at December 31, 1996 (net of accumulated amortization of
$1,866,000 and $707,000 in 1997 and 1996, 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 $3,543,000 at December 31, 1997 and $1,471,000 at December 31, 1996 (net of
accumulated amortization of $307,000 and $29,000 in 1997 and 1996, respectively)
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 has 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 $7,957,000, $3,863,000, and $
2,638,000 in 1997, 1996 and 1995, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION--The Company accounts for
stock-based employee compensation plans under the intrinsic method pursuant to
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (see Note 14).
INCOME TAXES--Deferred taxes are provided on the liability method whereby
deferred tax assets and 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
F-9
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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--Effective December 31, 1997, the Company adopted
Financial Accounting Standard No. 128, "Earnings per Share" ("FAS 128"), which
established new standards for computing and presenting earnings per share
("EPS"). The standard requires dual presentation of basic and diluted EPS on the
face of the income statement for entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
Basic EPS excludes the effects of potentially dilutive securities while diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised, converted, or resulted in the
issuance of common stock that would then share in the earnings of the entity. In
accordance with FAS 128, EPS amounts for the prior periods, including the
quarterly financial data in Note 21, have been restated.
As of December 31, 1997 and 1996, the Company had 1,149,707 and 260,394
stock options outstanding, respectively, which are potentially dilutive to the
Company's basic EPS. No options or other potentially dilutive securities were
outstanding prior to 1996. For 1997 and 1996, basic and diluted EPS are the same
because of the insignificant effect of options on the EPS computation (the
options add 102,183, and 13,180 outstanding shares, using the treasury stock
method, for diluted EPS purposes in 1997 and 1996, respectively). An additional
12,100 options with an exercise price of $15.50 per share were outstanding at
December 31, 1997 which were not reflected in the diluted EPS computation
because the exercise price was higher than the average price of the Company's
stock during the period such options were outstanding; accordingly, such options
would have been anti-dilutive.
In prior periods, the Company had not reported EPS prior to October 1, 1996
because the capital structure of the Company before the Reorganization and
initial public offering were not comparable with the capital structure after the
Reorganization and initial public offering. However, in February 1998, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 98 ("SAB
98"), which requires, among other things, entities, following an initial public
offering, to report EPS for all periods presented even if the capital structure
prior to the offering is not comparable to the capital structure after the
offering. In accordance with SAB 98, the Company reported, on the Statement of
Operations, EPS for all periods presented as if the 9,821,250 shares issued in
the June 1996 Reorganization had been outstanding at the beginning of each
period presented.
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.
RECLASSIFICATIONS--Certain prior year amounts have been reclassified to
conform to the 1997 presentation.
F-10
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
NOTE 3--ACQUISITIONS AND DISPOSITIONS
Effective February 2, 1995, the Company acquired Performance Nissan, Inc.
(formerly Jim Glover Nissan, Inc.) in Oklahoma City, Oklahoma. 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. The
acquisition was 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 through the date of
disposition. The cost of the acquisition has been allocated on the basis of the
estimated fair market value of the assets acquired and the liabilities assumed.
A summary of the purchase price allocation for Performance Nissan is
presented below (in thousands):
<TABLE>
<S> <C>
Net working capital................................................. $ 76
Equipment........................................................... 61
Goodwill............................................................ 1,300
---------
Total........................................................... $ 1,437
---------
---------
</TABLE>
Effective December 4, 1995, the Company acquired Performance Dodge, Inc.
(formerly Jim Glover Dodge, Inc.) in Oklahoma City, Oklahoma. 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. The remaining purchase price approximating
$302,000 was provided with available cash. The acquisition was 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 through the date of disposition. The cost of the acquisition has
been allocated on the basis of the estimated fair market value of the assets
acquired and the liabilities assumed.
A summary of the purchase price allocation for Performance Dodge is
presented below (in thousands):
<TABLE>
<S> <C>
Net working capital................................................. $ 1,160
Property and equipment.............................................. 1,992
Goodwill............................................................ 2,700
---------
Total........................................................... $ 5,852
---------
---------
</TABLE>
Effective July 1, 1997, the Company sold 100% of the stock in Performance
Dodge, Inc. and Performance Nissan, Inc. ("Performance"), to Benji Investments,
Ltd., a Texas limited partnership controlled by Emmett M. Rice, Jr., the
Company's former Chief Operating Officer (also a shareholder and
F-11
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--ACQUISITIONS AND DISPOSITIONS (CONTINUED)
former Director of the Company). The Company received 760,000 shares of the
Company's stock valued at a total of $8.7 million. During the quarter ended June
30, 1997, the Company recorded a loss on the disposition of $347,000, including
selling expenses. In connection with the sale, the Company repaid $4.3 million
in long-term debt associated with these dealerships. The Company also retained
ownership of the Performance Dodge facilities and the related mortgage, and is
leasing such facilities to Performance Dodge. The term of the lease is fifteen
years with annual rental of approximately $253,000. Upon completion of the
transaction, Mr. Emmett M. Rice, Jr. resigned as an Officer and Director of the
Company. The combined revenue and operating loss for these dealerships included
in the Consolidated Statement of Operations for 1997, 1996, and 1995 are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenue.......................................... $ 37,312 $ 37,567 $ 78,869
Operating loss................................... $ 561 $ 338 $ 306
</TABLE>
Effective October 1, 1996, the Company acquired Hickey Dodge ("Hickey") in
Oklahoma City, Oklahoma. Hickey 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 was
accounted for as a purchase, and the operating results of Hickey 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 Lynn Hickey Dodge is
presented below (in thousands):
<TABLE>
<S> <C>
Net working capital................................................ $ 4,760
Property and equipment............................................. 430
Goodwill and other intangibles..................................... 14,862
---------
Total.......................................................... $ 20,052
---------
---------
</TABLE>
Effective April 1, 1997, the Company acquired Toyota West Sales and Service,
Inc. in Las Vegas, Nevada and Douglas Toyota, Inc. in Denver, Colorado
(collectively "Spedding Toyota"). Spedding Toyota is engaged in the retail sales
of new and used vehicles and in the retail and wholesale sales of replacement
parts and vehicle servicing. The total purchase price of approximately $40.7
million was funded with $28.7 million in cash, $6 million of which was financed
with bank debt, 279,720 shares of the Company's common stock valued at
approximately $5.0 million, and a seller financed note in the amount of $7
million which matures in 2002. The seller note was repaid in the second fiscal
quarter of 1997 with proceeds from the Company's credit facility (see Note 10).
In connection with the acquisition of Spedding Toyota, the Company purchased two
tracks of land from R. Douglas Spedding, now an Officer of the Company, in
exchange for a total of $7.5 million in seller-financed notes. The principal
amount, together with interest at the prime rate, matures October, 1998. The
land will be used to relocate both the Spedding dealerships to newly constructed
facilities. The Spedding Toyota acquisition was accounted for as a purchase and
the operating results of Spedding Toyota have been included in the accompanying
consolidated statements of
F-12
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--ACQUISITIONS AND DISPOSITIONS (CONTINUED)
operations since April 1, 1997. The cost of the Spedding Toyota acquisition,
including acquisition costs, 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 Spedding Toyota is presented
below (in thousands):
<TABLE>
<S> <C>
Net working capital................................................ $ 2,330
Property and equipment............................................. 1,264
Goodwill and other intangibles..................................... 37,120
---------
Total.......................................................... $ 40,714
---------
---------
</TABLE>
Effective July 1, 1997, the Company acquired Sahara Nissan, Inc. ("Nissan
West") in Las Vegas, Nevada. Nissan West is engaged in the retail sales of new
and used vehicles and in the retail and wholesale sales of replacement parts and
vehicle servicing. The total purchase price of approximately $14.3 million was
funded with $11.3 million in cash, $9 million of which was financed with
borrowings on the Company's credit facility (see Note 10), 125,983 shares of the
Company's common stock valued at approximately $2.0 million, and $1.0 million in
seller financed notes. The Nissan West acquisition was accounted for as a
purchase and the operating results of Nissan West have been included in the
accompanying consolidated statements of operations since July 1, 1997. The cost
of the Nissan West acquisition, including acquisition costs, 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 Nissan West is presented
below (in thousands):
<TABLE>
<S> <C>
Net working capital................................................ $ 899
Property and equipment............................................. 476
---------
Goodwill and other intangibles..................................... 12,900
---------
Total.......................................................... $ 14,275
---------
---------
</TABLE>
The unaudited consolidated statement of operations data is presented below
on a pro forma basis as though the acquisition of Lynn Hickey Dodge, Spedding
Toyota and Nissan West had all occurred as of the beginning of 1996 (in
thousands, except per share data).
<TABLE>
<CAPTION>
UNAUDITED
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Pro forma revenue.................................. $549,478.00 $691,529.00
Pro forma net income............................... $ 7,293.00 $11,298.00
Pro forma basic and diluted net income per share... $ 0.53 $ 0.80
</TABLE>
The adjustments to arrive at pro forma revenue include additional revenue
based on the historic revenue of Lynn Hickey Dodge, Spedding Toyota and Nissan
West prior to the acquisition of each. Adjustments to net income to arrive at
pro forma net income include additional amortization expense related to
purchased goodwill, increased interest expense associated with acquisition debt,
and the tax effects of these adjustments.
F-13
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--ACQUISITIONS AND DISPOSITIONS (CONTINUED)
The pro forma results of operations information is not necessarily
indicative of the operating results that would have occurred had the
acquisitions been consummated as of the beginning of each period, nor is it
necessarily indicative of future operating results.
NOTE 4--MAJOR SUPPLIERS
The Company owns and operates three Chevrolet, two Nissan, one Dodge and two
Toyota automobile dealerships. The Company enters into agreements
("Agreements{s}"), with the manufacturers that supply new vehicles and parts to
each of its dealerships. The Company's existing Chevrolet Agreements have
remaining terms of approximately two years, expiring in 2000. The Nissan
Agreements expire in 1999 and 2002. The Dodge Agreement has no stated expiration
date. The Toyota Agreements expire in 1999. Management currently believes that
it will be able to renew each and all of the Agreements upon expiration;
however, there can be no assurance that each and all of the Agreements will be
renewed.
The Agreements generally limit locations of dealerships and retain
manufacturer approval rights over changes in dealership management and
ownership. Each manufacturer is also entitled to terminate the Agreement for a
dealership if the dealership is in material breach of the terms. The Agreement
with Dodge stipulates that the Company could lose its Dodge dealership upon any
change in ownership of a controlling number of shares in the Company. Under the
June 1996 supplemental Agreements with Chevrolet, Chevrolet has the right, under
certain circumstances, to terminate the Agreements with the Company upon the
acquisition by any person or entity of 20% or more of the Common Stock
outstanding. In addition, the Company has agreed to comply with the General
Motors (GM) 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 supplemental Agreements require that the Company bring any GM
dealership acquired after the initial public 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 Agreements and a buyback of the
related dealership assets by GM. The Company believes that this aspect of the
June 1996 supplemental Agreements does not present a significant risk to its
business or future operating results. Under the Company's Agreements with
Nissan, Nissan has the right to terminate the Agreements with the Company 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. Under the Agreements with Toyota, Toyota has the right to terminate the
Agreements with the Company if acceptable customer satisfaction is not
maintained. Toyota also limits the number of Toyota dealerships the Company may
acquire within a nine month period to one as well as an aggregate limit of nine
Toyota dealerships that the Company may own.
The Company's ability to expand operations depends, in part, on obtaining
the consent of manufacturers to the acquisition or establishment of additional
dealerships.
NOTE 5--ACCOUNTS RECEIVABLE
Contracts in transit and vehicle receivables primarily represent receivables
from manufacturer's captive finance companies such as General Motor Acceptance
Corporation (GMAC), Chrysler Credit Corporation and Toyota Motor Credit
Corporation and banks and finance companies which provide funding for customer
vehicle financing. These receivables are normally collected in less than 30 days
from
F-14
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--ACCOUNTS RECEIVABLE (CONTINUED)
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 for the Company's customers.
Amounts due from manufacturers represent receivables for parts and service work
performed on vehicles pursuant to the manufacturers warranty coverage.
Receivables from manufacturers also include amounts due in connection with the
purchase of vehicles ("holdback") pursuant to the dealership agreement; such
amounts are generally remitted to the Company on a monthly or quarterly basis.
The accounts receivable balances at December 31, 1997 and 1996 are comprised
of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Contracts in transit and vehicle receivables.............. $ 10,432 $ 12,615
Trade..................................................... 3,300 2,801
Due from manufacturers.................................... 2,421 2,552
Other..................................................... 1,072 796
--------- ---------
17,225 18,764
Less allowance for doubtful accounts...................... (341) (135)
--------- ---------
Total accounts receivable............................. $ 16,884 $ 18,629
--------- ---------
--------- ---------
</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 manufacturers' captive finance companies, and, to a lesser extent,
with financial institutions with strong credit ratings. Cash invested with the
manufacturers' captive finance companies can be withdrawn at any time. At
December 31, 1997, the amounts invested with the captive finance companies
approximated $13,657,000 with interest rates of 8.25% to 9.25%. At times,
amounts invested with financial institutions may be in excess of FDIC insurance
limits. As of December 31, 1997, the Company has not experienced any losses on
its cash equivalents.
Concentrations of credit risk with respect to customer receivables are
limited primarily to manufacturers' captive finance companies, financial
institutions and banks. Credit risk arising from receivables from commercial
customers is minimal due to the large number of customers comprising the
Company's customer base. The Company's operations and therefore it customers are
concentrated in Amarillo, Texas and Las Vegas, Nevada. During the year ended
December 31, 1997 the percentage of the Company's sales generated from its
dealerships located in Las Vegas, Nevada and Amarillo, Texas approximated 20.2%
and 44.2%, respectively. Management believes that the percentage derived from
its Las Vegas, Nevada dealerships will increase during 1998 as these dealerships
were acquired during 1997.
F-15
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Balance at January 1.............................. $ 2,209 $ 2,056 $ 1,595
Provision......................................... 3,390 2,016 1,917
Acquisitions and dispositions..................... 1,694 -- --
Actual chargebacks................................ (3,242) (1,863) (1,456)
--------- --------- ---------
Ending allowance balance at December 31,.......... $ 4,051 $ 2,209 $ 2,056
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 8--INCOME TAX MATTERS
Components of income tax expense consist of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current
Federal........................................... $ 2,273 $ 3,041 $ 1,910
State............................................. 461 457 265
Deferred............................................ 1,479 (136) (865)
--------- --------- ---------
Total income tax expense.......................... $ 4,213 $ 3,362 $ 1,310
--------- --------- ---------
--------- --------- ---------
</TABLE>
Income tax expense for the year ended December 31, 1997, 1996 and 1995 is
different than the amount computed by applying the U.S. federal income tax rate
to income before income taxes. The reasons for these differences are as follows
(in thousands except percentages):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Income before income taxes......................... $ 10,926 $ 7,944 $ 3,505
Statutory tax rate................................. 34% 34% 34%
Federal income tax at statutory rate............... 3,715 2,701 1,192
State income tax, net of federal benefit........... 220 229 97
Valuation allowance................................ -- 405 --
Other.............................................. 278 27 21
--------- --------- ---------
Total income tax expense........................... $ 4,213 $ 3,362 $ 1,310
--------- --------- ---------
--------- --------- ---------
Effective tax rate................................. 38.6% 42.3% 37.4%
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-16
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--INCOME TAX MATTERS (CONTINUED)
The net deferred tax liability consists of the following components as of
December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax liabilities
Goodwill amortization................................... $ (1,138) $ (619)
Inventory............................................... (2,689) (3,260)
--------- ---------
Other................................................... (337) (279)
--------- ---------
(4,164) (4,158)
--------- ---------
Deferred tax assets
Deferred warranty revenue............................... 897 1,669
Chargeback allowance.................................... 1,458 817
Net operating loss carryforward......................... 511 1,207
Other................................................... 157 50
--------- ---------
3,023 3,743
Valuation Allowance..................................... (405) (405)
--------- ---------
2,618 3,338
--------- ---------
Net deferred tax liability.............................. $ (1,546) $ (820)
--------- ---------
--------- ---------
The net deferred tax liability is classified as follows
Other assets--non-current............................... $ -- $ 1,094
Deferred tax liability--current......................... (647) (1,914)
Deferred tax liability--non-current..................... (899) --
--------- ---------
Net deferred tax liability.............................. $ (1,546) $ (820)
--------- ---------
--------- ---------
</TABLE>
As of December 31, 1997, the Company has net federal and state operating
loss carryforwards of approximately $3.6 million, which expire in 2001. 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 the date of the change 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,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Inventories at cost
New vehicles and demonstrators.......................... $ 40,046 $ 30,341
Used vehicles........................................... 13,001 15,366
Parts and accessories................................... 2,760 2,461
--------- ---------
Total inventory....................................... $ 55,807 $ 48,168
--------- ---------
--------- ---------
</TABLE>
F-17
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--DEBT
Notes payable and long-term debt (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Floor plan note payable to
General Motors Acceptance Corporation (GMAC) with
interest at prime(1) less .25%, collateralized by
vehicle inventory..................................... $ 32,854 $ 32,110
Floor plan note and credit line payable to
Chrysler Credit Corporation (CCC) with interest at
prime(1) plus .75% to 1.50%, collateralized by vehicle
inventory and other dealership assets................. 13,290 14,172
Floor plan note payable to Toyota Motor Credit
Corporation (TMCC) with interest at prime(1) plus .50%
collateralized by vehicle inventory................... 7,224 --
Mortgage loans at prime(1), less .25% to
prime(1) plus 1.0% maturing in 2000 through 2002,
monthly principal payments aggregating $45,500 plus
interest, collateralized by related property.......... 7,062 7,618
Notes Payable to Jack Biegger Revocable
Living Trust with interest at 6.45%, monthly principal
payments of $12,410 including interest, maturing July
1, 2002............................................... 589 --
Note Payable to Dale M. Edwards Revocable Trust
with interest at 6.45%, monthly principal payments of
$7,133 including interest, maturing July 1, 2002...... 339 --
Note Payable to Chase Bank Texas, Credit Facility, with
interest at London Interbank Offered Rates (LIBOR)
plus 2.00%, or prime(1) plus .25%. The LIBOR rate at
December 31, 1997 was 5.8125%......................... 37,000 --
Note Payable to GMAC with interest at prime(1)
less .25%, collateralized by property and inventory... -- 4,295
--------- ---------
98,358 58,195
Debt payable within one year..........................
Floor plan notes payable............................ (53,368) (46,282)
Current maturities.................................. (727) (1,345)
--------- ---------
Total long-term debt.............................. $ 44,263 $ 10,568
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(1) The prime interest rate at December 31, 1997 was 8.50%, and was 8.25% at
December 31, 1996.
F-18
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--DEBT (CONTINUED)
Due to affiliates (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Land purchase notes payable to R. Douglas
Spedding with interest at prime(1) maturing October 31,
1998, collateralized by the related property........... $ 7,500 $ --
Construction note payable to R. Douglas
Spedding with interest at prime(1) plus 1%, maturing
October 31, 1998, collateralized by the related
property............................................... 4,807 --
Due to affiliates on demand, with an average rate of 8.0%
at December 31, 1997, and 1996........................... 2,843 5,478
--------- ---------
Debt payable within one year............................. $ 15,150 $ 5,478
--------- ---------
--------- ---------
Scheduled maturities..................................... $ 12,307 $ --
--------- ---------
--------- ---------
</TABLE>
Scheduled maturities of long-term debt, including amounts due to affiliates
subsequent to December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998............................................................... $ 13,034
1999............................................................... 740
2000............................................................... 39,231
2001............................................................... 2,191
2002............................................................... 2,101
---------
Total............................................................ $ 57,297
---------
---------
</TABLE>
During 1997 the Company capitalized $649,000 of interest cost relating to
construction of certain dealership facilities. No interest was capitalized in
previous years.
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.
See Note 18 for information on amounts due to affiliates.
On June 26, 1997 the Company entered into a credit facility with Chase Bank
Texas. The Company may draw advances under the facility for acquisitions and
general corporate purposes. The facility is revolving in nature in that the
Company may draw funds and repay advances under the terms, but at no time can
the maximum amount outstanding exceed $40 million. Three million dollars ( $3.0
million) was available at December 31, 1997. The note is secured by the stock of
the Company's subsidiaries except for those that have entered into dealer
agreements with Nissan Motor Corporation In U.S.A. The credit facility has a
three year term which expires on June 26, 2000, and the full amount of any
outstanding balance is then due and payable. The Company may repay any advance
under the facility prior to maturity without prepayment penalty or premium. The
Company has the option of two alternative interest rates based on the London
Interbank Offered Rate (LIBOR) and the Chase Bank Texas base rate as they may
exist from time to time. The interest rate on LIBOR based loans is the LIBOR
rate for the time period of
F-19
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--DEBT (CONTINUED)
the advance plus a margin of 1.25 to 2.00 percentage points depending upon the
Company's leverage ratio. The interest rate of base rate loans is the Chase Bank
Texas base rate plus a margin of 0 to .25 percentage points depending upon the
Company's leverage ratio. Of the $37 million outstanding under the facility at
December 31, 1997 $30 million had an interest rate of 7.8125% and $7 million had
interest rate of 8.75%. The Company also pays a commitment fee for the unused
portion of the line of .25 to .50 percentage points depending upon the leverage
ratio of the Company. The note agreement contains several affirmative and
negative covenants including a leverage test, a cash flow test, a minimum net
worth test, a fixed charged coverage test, an interest coverage test,
restrictions on the payment of dividends, limits on maintenance type capital
expenditures and limits on the increase of additional debt and liens.
NOTE 11--ACCRUED EXPENSES AND OTHER LIABILITIES (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Payroll and bonuses........................................ $ 1,655 $ 1,625
Deferred warranty revenue-current portion.................. 1,029 2,216
Chargeback allowance....................................... 4,051 2,209
Other...................................................... 3,824 1,358
--------- ---------
$ 10,559 $ 7,408
--------- ---------
--------- ---------
</TABLE>
NOTE 12--PROPERTY AND EQUIPMENT (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Land...................................................... $ 9,358 $ 1,858
Buildings................................................. 11,584 9,863
Construction in progress.................................. 10,509 670
Furniture, fixtures and equipment......................... 7,900 6,407
--------- ---------
39,351 18,798
Less: accumulated depreciation............................ (6,186) (5,407)
--------- ---------
$ 33,165 $ 13,391
--------- ---------
--------- ---------
</TABLE>
As of December 31, 1997, construction in progress primarily represents cost
accumulated in the construction of the Toyota dealership facilities in Denver,
Colorado and Las Vegas, Nevada as discussed in Notes 3 and 18. Total
construction contract commitments associated with these projects total
approximately $14.6 million, including costs incurred to date. As discussed in
Note 20, the Company has signed an agreement to sell and leaseback these
facilities upon completion in the first half of 1998.
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
F-20
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--EMPLOYEE BENEFIT PLANS (CONTINUED)
voluntary contributions to the plan. The Company has not made any contributions
to the plan for the three years ended December 31, 1997.
NOTE 14--STOCK OPTIONS AND STOCK PLANS
The Company has 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 persons 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.
The following tables summarize stock options information for 1997 and 1996.
There were no options granted prior to 1996.
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- --------------- --------- ---------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year.... 260,394 $ 16.44 -- --
Granted................................. 1,065,479 $ 8.69 260,394 $ 16.44
Exercised............................... -- -- -- --
Canceled................................ 176,166 $ 18.85 -- --
--------- ---------
Options outstanding, end of year.......... 1,149,707 $ 8.89 260,394 $ 16.44
--------- ---------
--------- ---------
Options exercisable, end of year.......... 969,861 $ 9.16 180,394 $ 15.19
Options available for grant, end of
year.................................... 360,601 1,249,914
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE REMAINING AVERAGE NUMBER OF AVERAGE
OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
RANGE OF EXERCISED PRICES OUTSTANDING LIFE (MONTHS) PRICE EXERCISABLE PRICE
- ------------------------------------- ----------- ------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 0.00 - $ 0.01...................... 25,000 110 $ 0.01 -- $ --
7.70 - 9.62...................... 861,213 115 8.05 723,189 8.05
9.63 - 11.55...................... 105,000 114 10.00 101,000 10.00
11.56 - 13.47...................... 6,000 113 13.08 1,200 13.08
13.48 - 15.40...................... 139,394 104 14.00 139,394 14.00
15.41 - 19.25...................... 13,100 111 15.79 5,078 16.24
</TABLE>
The tables above include actions taken by the Company during the third
quarter of 1997. The Company modified the pay plans of certain officers and key
employees for the three months ended September 30, 1997 resulting in a reduction
in compensation expense of approximately $1.3 million. As part of the modified
pay plans, the Company granted to these officers and employees options to
purchase 492,214 shares of the Company's common stock at an exercise price of
$8.06 per share representing the
F-21
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--STOCK OPTIONS AND STOCK PLANS (CONTINUED)
market price of the shares on the date of grant. The options were fully vested
when granted. The Company advanced to these officers and employees an aggregate
of approximately $821,000 which is to be repaid to the Company by no later than
February 1999.
The Company canceled 169,038 previously issued options at an exercise price
range of $18.00 to $19.25 per share. The Company issued new options with an
exercise price of $8.06 per share which was the market price on the measurement
date.
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Net income (in thousands)
As reported............................................... $ 6,713 $ 4,582
Pro-forma................................................. 3,925 3,794
Basic and diluted net income per share
As reported............................................... $ .49 $ .42
Pro-forma................................................. .29 .34
</TABLE>
The weighted average fair market value at grant date of the 1,040,479 and
260,394 options issued at market during 1997 and 1996 was $6.35 and $8.63 per
option, respectively. The grant date fair market value of 25,000 options with an
exercise price below market price granted during 1997 was $18.74 per option.
Such market value estimates were derived from the Black Scholes option-pricing
model as of the date of each grant using the following weighted average
assumptions for the 1997 and 1996 grants; dividend yield of 0.0%; expected
volatility of 45% and 28%, respectively; risk free interest rate of 6.1% and
6.4%, respectively; and expected lives of seven years.
The Company may grant shares of restricted stock, which are subject to
forfeiture, 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. The Company has not made any grants of restricted stock
to date.
Pursuant to an agreement dated April 1, 1996 between a former Company
executive and GGFP, GGFP agreed to sell 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. In 1997, the Company recorded approximately $56,000 of
compensation expense related to certain options granted in 1997 with an exercise
price that was below the market value of the Company's common stock at the
measurement date.
F-22
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 acquirer, worth twice as much as the exercise price. The
Company may, at the discretion of the Board of Directors lower this threshold of
19.9% to 10% of the common stock then outstanding. If the Company is unable to
issue a sufficient number of shares of common stock to permit the exercise in
full of the rights for common stock, it will issue shares of junior preferred
stock upon exercise of the rights. The junior preferred stock is non-redeemable
and junior to any other preferred stock of the Company. The provisions of the
junior preferred stock are designed to provide that each one one-hundredth of a
share of junior preferred stock issuable upon exercise of a right approximates
the value of one share of common stock. Each whole share of junior preferred
stock will accrue a quarterly dividend of $1 and a dividend equal to 100 times
any dividend paid on the common stock. Upon liquidation of the Company, each
whole share of junior preferred stock will have a liquidation preference of $100
plus an amount equal to 100 times the amount paid on any shares of common stock.
Each share of junior preferred stock will entitle its holder to 100 votes on
matters submitted to the Company's stockholders, which votes will be cast with
the votes of the holders of common stock. If the Company were merged,
consolidated or involved in a similar transaction, each share of junior
preferred stock would entitle its holder to receive 100 times the amount
received by holders of common stock in the merger or similar transaction.
NOTE 16--COMMITMENTS AND CONTINGENCIES
Richard V. Holland, a former general manager of Westgate Chevrolet, Inc., a
subsidiary of the Company, has brought a lawsuit against the Company, Gilliland
Group, Inc., an affiliate of the Control Group, and Emmett Rice, Jr., a former
officer and director of the Company, Richard V. Holland v. Gilliland Group,
Inc., et al., Cause No. 97-00028 in the 261st Judicial District Court of Travis
County, Texas. Mr. Holland is claiming that the defendants breached an oral
employment agreement by which Mr. Holland was to allegedly receive ten percent
(10%) of the stock of Westgate Chevrolet, Inc. The Company and the other
defendants have specifically denied the existence of any such agreement and
intend to vigorously defend their position. The lawsuit is in its early stages
and no discovery has taken place, other than exchanging written interrogatories
and requests for production of documents. Depositions are scheduled to be
conducted in the near future. The Company believes, based on opinion of counsel,
that there is less than a reasonable likelihood that the plaintiff will be
successful.
The Company is a defendant in three class action lawsuits that have been
filed by several claimants against approximately 700 automobile dealerships
across the State of Texas. The plaintiffs allege that the charging of the
vehicle inventory taxes to vehicle purchasers constitutes fraud, violates the
Texas Deceptive Trade Practices Act, and constitutes price fixing in violation
of the Clayton Antitrust Act. The Texas Automobile Dealers Association has hired
counsel to represent the defendants in these lawsuits. The defendants have
denied the allegations and the affiliates contend that they have charged the
vehicle inventory taxes to vehicle purchases in compliance with applicable law.
The lawsuits are in their early stages and no discovery has been conducted other
than the Company has answered interrogatories and
F-23
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED)
document production request in one of the lawsuits. The defendants intend to
vigorously defend their position.
The Company has not recorded any liability in the accompanying Consolidated
Balance Sheets for any of the above described claims.
The Company is a party to various other 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 the financial condition, results of
operations or cash flows of the Company.
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 customer's loans. These financial guarantees have historically
represented an immaterial portion of its sales. The Company's exposure for
financial guarantees is less than the customers full contractual obligations
outstanding under such financial guarantees which at December 31, 1997 were less
than $5.0 million. No material loss is anticipated as a result of such
guarantees.
The Company has entered into a contract to acquire a certain dealership in
California. The proposed purchase price is approximately $5.5 million consisting
of approximately $4.0 million cash, $1.4 million in seller financed notes and
$100,000 in value of the Company's common stock. In January 1998 the Company
advanced approximately $1.7 million towards the closing of this transaction. The
Company expects to complete the transaction by the end of the second fiscal
quarter of 1998. The Company has been managing the dealership since December 1,
1997 under a management agreement. The Company provides management of day to day
operations in exchange for a non-refundable fee equal to the dealership's net
profit before tax during the period of the management agreement. The fee for
December 1997 was approximately $31,000.
The Company has entered into a contract to acquire a certain dealership in
Nevada. The proposed purchase price is approximately $12.5 million consisting of
approximately $9.0 million in cash, $3.2 million in seller financed notes and
approximately $300,000 in value of the Company's common stock. The Company
expects to complete this transaction by the end of the second fiscal quarter of
1998. The Company began managing the dealership under a management agreement on
February 1, 1998. The agreement requires the Company to provide management of
day to day operations in exchange for a non-refundable fee equal to the
dealership's net profit before tax during the period of the management agreement
less a fixed amount of $70,000 per month.
F-24
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest paid.................................................... $ 6,468 $ 4,772 $ 3,697
Income taxes paid................................................ $ 2,699 $ 3,177 $ 1,707
</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 14). In 1997 the Company acquired three dealerships
which were partially financed with debt and Company common stock (see Note 3).
Also, the disposal of two dealerships in Oklahoma City, Oklahoma in 1997
resulted in the Company receiving consideration of approximately $8.7 million in
treasury stock.
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 and 1995, allocated expenses from GGFP to the Company approximated,
$1,302,000 and $1,090,000, respectively. These allocations are classified as
selling, general and administrative expense in the accompanying Consolidated
Statement of Operations. During 1997 the Company provided certain services,
primarily payroll related, to GGFP. GGFP reimbursed the Company approximately
$351,000 for these services. The Company no longer provides these services to
GGFP.
The Company from time to time used an airplane that was beneficially owned
by Bill Gilliland and Robert W. Hall, Chairman and Senior Vice Chairman,
respectively. The Company paid the owners $20,000 per month for fixed cost, $500
per hour for operating expenses and actual fuel cost when the airplane was used
by the Company. During 1997, 1996 and 1995 the Company paid the owners an
aggregate of $502,000, $175,000 and $199,000 respectively under the current and
similar arrangements. In the fourth quarter of 1997, this agreement was amended
due to a change in equipment. The new owner is Bill Gilliland. The agreement
provides for the Company to pay the owner $20,000 per month for fixed cost, $800
per hour for operating expenses and actual fuel cost when the airplane is used
by the Company. No payments were made under the new arrangement in 1997. The
Company believes that these fees are no less favorable to the Company than could
be obtained in an arm's-length transaction between unrelated parties. The
Company anticipates that as it pursues its acquisition strategy, its use of this
airplane will increase and its costs associated with the plane will
correspondingly increase.
In addition to the corporate allocations described above, prior to 1996, the
Company 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 Consolidated Statement of Operations. Commencing in
1996, the Company ceased to pay management fees to the Control Group.
In general, the Company is required to pay for all vehicles purchased from
the manufacturers upon delivery of the vehicles to the Company. Manufacturer's
captive finance companies provide financing for all new vehicles and certain
used vehicles. This type of financing is known as "floor plan financing" or
F-25
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--RELATED PARTY TRANSACTIONS (CONTINUED)
"flooring." Under this arrangement with the finance companies, the Company may
deposit funds with such finance companies in an amount up to a certain
percentage of the outstanding floor plan balance. Such funds earn interest at
approximately the same rate charged on outstanding floor plan balances. From
time to time certain Company executives and other affiliates will advance funds
to the Company primarily for the purpose of investing excess cash with the
finance companies. The Company acts only as an intermediary in this process. At
December 31, 1997 and 1996, funds advanced and outstanding from affiliates
approximated $2,843,000 and $5,260,000, respectively. Aggregate amounts
outstanding pursuant to these arrangements at December 31, 1997 and 1996 are
included in Due to Affiliates in the accompanying balance sheet. The amount of
interest accrued pursuant to these arrangements during 1997, 1996 and 1995
approximated $259,000, $464,000, and $226,000, respectively.
GGFP was the contracting agent for the construction of certain facilities
for the Company during 1997 and 1996. The total cost of the facilities
approximated $448,000 and $1,013,000 for 1997 and 1996, respectively. Such
amounts include approximately $106,000 and $41,000 for 1997 and 1996,
respectively, as payment to GGFP for architectural and construction management
fees.
The Company leases its corporate offices, which were expanded in 1997, from
GGFP under a five-year lease extending through June 2001 for an annual rent of
approximately $123,000.
Subsequent to the acquisition of Toyota West Sales & Service, Inc. and
Douglas Toyota, Inc. (see Note 3), the seller, R. Douglas Spedding became an
officer of the Company. In connection with the acquisition of Toyota West Sales
& Service, Inc. and Douglas Toyota, Inc., the Company purchased two tracks of
land from R. Douglas Spedding in exchange for a total of $7.5 million in
seller-financed notes (see Note 10). The tracks of land will be used to relocate
the Las Vegas, Nevada and Denver, Colorado dealerships to newly constructed
facilities. In connection with interim financing on construction projects at the
two new locations the Company entered into an Interim Construction and Master
Loan Agreement ("Loan Agreement") with R. Douglas Spedding (see Note 10 ). The
Loan Agreement provides interim financing of $7.4 million at an interest rate of
prime plus 1% for construction of new automobile dealership facilities in Las
Vegas, Nevada and Denver, Colorado. At December 31, 1997 the amount outstanding
pursuant to the Loan Agreement approximated $4,807,000 and had an interest rate
of 9.5%. Total interest paid during 1997 to R. Douglas Spedding and his
affiliates was approximately $204,000.
Upon the Company's acquisition of Spedding Toyota, the seller R. Douglas
Spedding, agreed to reimburse the Company for the cost of repair work for
customers who had purchased an extended warranty from Spedding Toyota prior to
the acquisition. In 1997 Mr. Spedding reimbursed the Company $446,000 for the
cost of such repair work. The Company also agreed to reimburse Mr. Spedding for
his office facilities in Denver, Colorado until he is relocated to the new
facility under construction in Denver, Colorado. The Company reimbursed Mr.
Spedding $155,000 in 1997 for the office cost.
During 1997, the Company sold 100% of the stock in Performance Dodge, Inc.
and Performance Nissan, Inc. to Benji Investments, Ltd., a Texas limited
partnership controlled by Emmett M. Rice, Jr., the Company's former Chief
Operating Officer (also a shareholder and former Director of the Company). The
Company recorded a loss on the disposition of $347,000 (see Note 3).
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
F-26
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19--LEASES (CONTINUED)
options ranging from 5 to 7 years (see Note 18 regarding leases with related
parties). 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 $2,308,000, $667,000 and $301,000 in 1997, 1996 and 1995,
respectively.
The aggregate minimum rental commitments for all non-cancelable operating
leases are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal year:
1998........................................... $ 2,558
1999........................................... 2,445
2000........................................... 2,322
2001........................................... 2,133
2002........................................... 1,865
---------
Thereafter..................................... 5,244
---------
$ 16,567
---------
---------
</TABLE>
NOTE 20--SUBSEQUENT EVENTS
On December 31, 1997, the Company entered into a contract with a third party
to sell all of its dealership real property in Amarillo, Texas and the
dealership real property under construction in Denver, Colorado and Las Vegas,
Nevada. The Company agreed to a sale price of $35.3 million. In connection with
the sale, the Company exercised its option to purchase certain real property
under lease used by its Quality Nissan dealership in Amarillo, Texas for
$400,000, (see Note 19) and included the property in the sale. The Company will
leaseback all the property for a term of ten years with two ten year renewal
options. The initial annual lease rate for all the property is approximately
$3.9 million triple net with annual escalation not to exceed 2.5% per year
beginning the fourth year of the initial lease term. The Company will use the
proceeds to retire approximately $5.5 million in existing mortgages, $7.5
million in existing land purchase notes, (see Notes 10 and 18) and $4.8 million
in construction notes. The remainder of the proceeds will be used to complete
the construction of the property in Las Vegas, Nevada and Denver, Colorado and
general corporate purposes including the reduction of other debt, acquisitions
and working capital needs. A gain of approximately $3.6 million on the
transaction will be deferred and amortized into income as a reduction of lease
costs over the lease term. Part of the transaction was completed on February 24,
1998 with the Company receiving $13.2 million sale proceeds for its Amarillo,
Texas property and paid off existing mortgages of approximately $5.5 million.
The balance of the transaction for the two properties in Las Vegas, Nevada and
Denver, Colorado is expected to be completed by the end of April, 1998 after all
construction is completed.
Effective January 1, 1998 the Company completed its previously announced
acquisition of JRJ Investments, Inc. which owns Chaisson Motor Cars, a
multi-line dealership operating in Las Vegas, Nevada, and Chaisson BMW, in
Henderson, Nevada. The purchase price was $18.2 million. The cash portion, $13.4
million, was funded under the Company's credit facility and from available
working capital. The December 31, 1997 Balance Sheet included a deposit of
approximately $4.0 million toward closing the transaction. The Company also
issued a note for $2.8 million payable to the seller bearing interest at 8%. The
note calls for payments in equal monthly installments of approximately $56,000
for five years. The
F-27
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20--SUBSEQUENT EVENTS (CONTINUED)
note may be repaid in full at anytime without premium or penalty. The Company
also issued 128,205 shares of its Common Stock to the seller. The Company has
guaranteed the seller a price of the Common Stock of $15.60 per share one year
from the date of closing, January 5, 1999. To the extent the stock price is less
than $15.60 the Company must make up the difference in cash or by issuing
additional shares of common stock to provide a total value of $2.0 million as of
January 5, 1999. JRJ Investments, Inc. was operated by the Company from November
1, 1997 through December 31, 1997 under a management agreement. The Company
provided management of day to day operations in exchange for a non-refundable
fee equal to the dealership's net profit before tax during the time of the
management agreement less a fixed amount of $20,000 per month. The Company
recorded approximately $228,000 from the operation of the management agreement
in the fourth quarter of 1997.
On January 16, 1998, the Company entered into floor planning notes with R.
Douglas Spedding, an officer of the Company, for $3,000,000. The purpose of the
arrangement is to provide financing for the Company's used vehicle operation at
its Toyota dealerships in Denver, Colorado and Las Vegas, Nevada. The notes
mature on June 1, 1998 and bear interest at 9%. The amount of the note is
settled and adjusted the tenth day of each month to be equal to 60% of the
borrowing base, defined as the aggregate value of the used vehicles at the two
dealerships as shown on the previous month financial statement less any other
used vehicle floor planning debt.
NOTE 21--QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
----------- ---------- ---------- ----------
(THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Net sales and operating revenue................................. $ 89,022 $ 135,387(1) $ 134,784(2) $ 112,925
Gross profit.................................................... $ 15,183 $ 23,531 $ 23,723 $ 18,825
Net income...................................................... $ 2,146 $ 1,866 $ 2,612 $ 89
Basic and diluted net income per share.......................... $ .16 $ .13 $ .19 $ .01
YEAR ENDED DECEMBER 31, 1996
Net sales and operating revenue................................. $ 71,229 $ 70,012(1) $ 76,582 $ 103,759(3)
Gross profit.................................................... $ 11,333 $ 9,987 $ 12,054 $ 16,558
Net income (loss)............................................... $ 1,599 $ 570(4) $ 1,635 $ 1,917
Basic and diluted net income (loss) per share................... $ .16 $ (.06) $ .16 $ .14
</TABLE>
- ------------------------
(1) Includes results of operations for Douglas Toyota, Inc. and Toyota West
Sales & Service, Inc. from April 1, 1997.
(2) Includes results of operations of Sahara Nissan, Inc. from July 1, 1997.
(3) Includes results of operations for Lynn Hickey Dodge from October 31, 1996.
(4) 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.
F-28
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To: The Board of Directors and Stockholders of
Cross-Continent Auto Retailers, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Cross-Continent Auto Retailers, Inc. and its subsidiaries (the "Company") as of
September 30, 1998, and the related condensed consolidated statements of income
for the three and nine month periods ended September 30, 1998 and 1997, and cash
flows for the nine month periods ended September 30, 1998 and 1997. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Company as of December 31,
1997, and the related consolidated statements of income, shareholders' equity,
and cash flows for the year then ended (not presented herein) and in our report
dated February 13, 1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the accompanying consolidated
balance sheet information as of December 31, 1997, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
PricewaterhouseCoopers LLP
Fort Worth, Texas
November 12, 1998
F-29
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS--EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Vehicle sales..................................... $ 146,220 $ 119,411 $ 276,354 $ 196,965
Other operating revenue........................... 21,002 15,976 40,399 27,444
--------- --------- --------- ---------
Total revenues.................................. $ 167,222 $ 135,387 $ 316,753 $ 224,409
Cost of sales....................................... $ 137,357 $ 111,856 $ 261,402 $ 185,695
--------- --------- --------- ---------
Gross profit...................................... $ 29,865 $ 23,531 $ 55,351 $ 38,714
--------- --------- --------- ---------
Operating expenses
Selling, general and administrative............... $ 22,262 $ 17,742 $ 42,381 $ 28,643
Depreciation and amortization..................... 912 617 1,839 998
Employee severance charge (Note 9)................ -- -- 815 --
Merger related expenses (Note 2)..................
Loss from sale of dealerships (Note 6)............ -- 347 -- 347
--------- --------- --------- ---------
Total operating expenses........................ $ 23,174 $ 18,706 $ 45,035 $ 29,988
--------- --------- --------- ---------
Income before interest and taxes.................. $ 6,691 $ 4,825 $ 10,316 $ 8,726
Other income (expense)
Interest income................................... $ 136 $ 96 $ 294 $ 832
Interest expense.................................. (2,500) (1,735) (4,770) (2,946)
--------- --------- --------- ---------
Income before income taxes........................ 4,327 3,186 5,840 6,612
Income tax provision.............................. 1,617 1,320 2,182 2,600
--------- --------- --------- ---------
Net Income...................................... $ 2,710 $ 1,866 $ 3,658 $ 4,012
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic and diluted net income per share.............. $ 0.20 $ 0.13 $ 0.27 $ 0.29
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares outstanding:
Basic............................................. 13,574 14,049 13,567 13,925
Diluted........................................... 13,734 14,049 13,723 13,925
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------- --------------
(UNAUDITED)
<S> <C> <C>
Current assets
Cash and cash equivalents................................. $ 7,141 $ 15,173
Accounts receivable....................................... 24,778 16,884
Inventories............................................... 60,347 55,807
Other current assets...................................... 1,543 1,792
--------------- --------------
Total current assets.................................... 93,809 89,656
Property and equipment, net................................. 9,228 33,165
Goodwill and other intangible assets, net................... 83,604 67,988
Other assets................................................ 6,356 6,464
--------------- --------------
Total assets............................................ $ 192,997 $ 197,273
--------------- --------------
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Floor plan notes payable.................................. $ 51,239 $ 53,368
Current maturities of long-term debt...................... 876 727
Accounts payable.......................................... 7,303 6,117
Due to affiliates......................................... 2,400 15,150
Accrued expenses and other liabilities.................... 13,152 10,559
Deferred income taxes..................................... 1,396 647
--------------- --------------
Total current liabilities............................... 76,366 86,568
Long-term debt.............................................. 41,529 44,263
Other liabilities and deferred credits...................... 4,378 3,180
--------------- --------------
Total long-term liabilities............................. 45,907 47,443
Stockholders' equity
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none issued................................. -- --
Common stock, $.01 par value, 100,000,000 shares
authorized, 14,205,703 issued........................... 142 142
Paid-in capital........................................... 55,054 54,528
Retained earnings......................................... 22,794 17,332
Treasury stock, 631,795 and 760,000 shares at cost at
September 30, 1998 and December 31, 1997,
respectively............................................ (7,266) (8,740)
--------------- --------------
Total stockholders' equity.............................. 70,724 63,262
Commitments and contingencies
Total liabilities and stockholders' equity.............. $ 192,997 $ 197,273
--------------- --------------
--------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income............................................................ $ 5,462 $ 6,624
Adjustments to reconcile net income to net cash used in operating
activities
Depreciation and amortization....................................... 2,868 1,814
Amortization of deferred warranty revenue........................... (1,189) (1,907)
Deferred taxes and other............................................ -- (748)
(Increase) decrease in
Accounts receivable................................................. (4,552) 4,178
Inventory........................................................... 9,677 3,812
Other assets........................................................ (227) (2,135)
Increase (decrease) in
Accounts payable--trade............................................. (3,760) (4,067)
Accrued expenses and other liabilities.............................. 1,787 1,383
--------- ---------
Net cash used in operating activities............................. 10,066 8,954
--------- ---------
Cash flows from investing activities
Acquisition of property and equipment................................. (2,291) (1,504)
Construction costs.................................................... (6,131) (4,935)
Acquisition of dealerships............................................ (13,964) (41,620)
Proceeds from sale/leaseback.......................................... 35,450 --
--------- ---------
Net cash provided by (used in) investing activities............... 13,064 (48,059)
--------- ---------
Cash flows from financing activities
Change in floor plan notes payable.................................... (12,359) (903)
Net proceeds from borrowings.......................................... -- 30,037
Long-term debt repayments............................................. (6,053) (17,702)
Due to affiliates..................................................... (443) (7,121)
Proceeds from borrowings--affiliates.................................. 3,008 --
Debt repayments--affiliates........................................... (15,315) --
--------- ---------
Net cash provided by (used in) financing activities............... (31,162) 4,311
--------- ---------
Decrease in cash and cash equivalents................................... (8,032) (34,794)
Cash and cash equivalents at beginning of period........................ 15,173 36,946
--------- ---------
Cash and cash equivalents at end of period.............................. $ 7,141 $ 2,152
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
NOTE 1. UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three and nine
months ended September 30, 1998 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998. This interim report
should be read in conjunction with the consolidated financial statements and
notes related thereto, and management's discussion and analysis of results of
operations and financial condition included in Cross-Continent Auto Retailers,
Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997. Unless
the context indicates otherwise, references to "C-CAR" or the "Company" are to
Cross-Continent Auto Retailers, Inc. and its subsidiaries. The accompanying
unaudited consolidated financial statements have been subject to review by the
Company's independent accountants whose report is included herein.
NOTE 2. MERGER
The Company entered into an Agreement and Plan of Merger, dated as of
September 3, 1998 (the "Merger Agreement"), which provides for a wholly-owned
subsidiary of Republic Industries, inc. ("Republic") to be merged with and into
the Company ("Merger"). Upon consummation of the proposed Merger, the Company
will become a wholly-owned subsidiary of Republic, and the Company's
stockholders will be entitled to receive $10.70 in cash, without interest, for
each share of the Company's common stock held by them. The Merger is subject to
certain closing conditions including government and manufacturer approvals and
the approval of the Company's stockholders. Consummation of the Merger is also
conditioned on the divestiture of the Company's dealership in Denver, Colorado,
and the divestiture, or assignment, of the Company's interest in one of its
pending acquisitions (see Note 8). The divestitures, or assignments, of these
dealerships are expected to coincide with the completion of the Merger. The
merger is expected to close in the first quarter of 1999; however, there can be
no assurance that the Merger, or the transactions contemplated thereunder, will
be completed.
Nissan has asserted a right to require the disposition or termination of the
Company's two Nissan dealerships in connection with the Merger. The Company and
Republic believe Nissan's position is without any merit, and will vigorously
pursue all legal remedies available in the event Nissan takes any action to
attempt its asserted rights.
The Company incurred and recorded merger-related expenses of approximately
$750,000 during the quarter ended September 30, 1998. The Company will record
all additional merger-related expenses as incurred until the proposed Merger is
consummated or abandoned.
NOTE 3. NET INCOME PER COMMON SHARE
As of September 30, 1998, the Company had 1,159,541 stock options
outstanding with exercise prices ranging from $8.00 to $19.25 which have been
excluded from the diluted earnings per share calculations as the effect of such
would have been anti-dilutive. The Company is contingently committed to issue
additional shares in connection with the Chaisson (as hereinafter defined)
acquisition (See Note 5). The Company has included 74,000 shares and 124,000
shares in the diluted share calculations for the three and
F-33
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
SEPTEMBER 30, 1998
NOTE 3. NET INCOME PER COMMON SHARE (CONTINUED)
nine months ending September 30, 1998, as if it were the end of the contingent
period. The actual contingent period ends January 5, 1999.
NOTE 4. RELATED PARTY TRANSACTIONS
In connection with its business travel, the Company from time to time uses
an airplane that is owned and operated by Plains Air, Inc. Plains Air, Inc. is
owned by Bill A. Gilliland, Chairman of the Board and Chief Executive Officer.
Currently, the Company pays Plains Air, Inc. $20,000 per month for fixed costs,
$800 per hour for operating expenses and actual fuel cost when the airplane is
used by the Company. During the three months ended September 30, 1998 and 1997,
the Company paid Plains Air, Inc. an aggregate of approximately $102,000 and
$130,000, respectively, for the use of the airplane; for the nine months ended
September 30, 1998 and 1997, the Company paid approximately $407,000 and
$399,000, respectively. In July, the Company began using an airplane owned by R.
Douglas Spedding, an officer of the Company, in addition to the airplane above.
The Company pays R. Douglas Spedding $800 per hour for operating expenses. For
the three and nine months ended September 30, 1998, the Company paid R. Douglas
Spedding approximately $69,000 for the use of the plane.
In general, the Company is required to pay for all vehicles purchased from
the manufacturers upon delivery of the vehicles to the Company. The Company
purchases new vehicles and certain used vehicles through financing obtained from
manufacturer's captive finance companies and a certain bank. This type of
financing is known as "floor plan financing" or "flooring." Under arrangements
with the manufacturer's captive finance companies, the Company may deposit funds
with such finance companies in an amount up to a certain percentage of the
outstanding floor plan balance. Such funds earn interest at approximately the
same rate charged on outstanding floor plan balances. From time to time certain
Company executives and other affiliates will advance funds to the Company
primarily for the purpose of investing excess cash with the finance companies.
The Company acts only as an intermediary in this process. As of September 30,
1998, the Company had withdrawn and repaid all advanced funds and interest
earned. The amount of interest accrued pursuant to these arrangements during the
three months ended September 30, 1998 approximated $62,000. The amount of
interest accrued during the nine months ended September 30, 1998 and 1997
approximated $160,000 and $193,000, respectively.
Subsequent to the acquisition of Toyota West Sales & Service, Inc. and
Douglas Toyota, Inc. (See Note 5), the seller, R. Douglas Spedding, became an
officer of the Company. In connection with the acquisition of Toyota West Sales
& Service, Inc. ("Toyota West") and Douglas Toyota, Inc. ("Denver Toyota"), the
Company purchased two tracts of land from R. Douglas Spedding in exchange for a
total of $7.5 million in seller-financed notes. The plots of land were used to
relocate the Las Vegas, Nevada and the Denver, Colorado dealerships to newly
constructed facilities. In connection with interim financing on construction
projects at the two new locations, the Company entered into an Interim
Construction and Master Loan Agreement ("Loan Agreement") with R. Douglas
Spedding. The Loan Agreement provided interim financing up to $7.7 million for
use on construction of the new automobile dealership facilities in Las Vegas,
Nevada and Denver, Colorado. Interest accrued at the prime rate plus 1% payable
monthly, and any outstanding balance, if any, was to be payable on October 31,
1998. Upon completion of the sale and leaseback transaction for Denver Toyota
and Toyota West (see Note 7), the Company retired approximately $7.7 million of
the outstanding Loan Agreement and $7.5 million of the seller-financed land
notes. The Loan Agreement and all seller-financed land notes and related
interest have been paid in full.
F-34
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
SEPTEMBER 30, 1998
NOTE 4. RELATED PARTY TRANSACTIONS (CONTINUED)
Interest on the construction and land notes totaled approximately $514,000 for
the nine-month period ended September 30, 1998, respectively.
On January 16, 1998, the Company entered into a floor plan financing
arrangement with R. Douglas Spedding, an officer of the Company, for $3.0
million. The purpose of the arrangement is to provide financing for the
Company's used vehicle operation at its Toyota dealerships in Denver, Colorado
and Las Vegas, Nevada. The notes mature on December 1, 1998 and bear interest at
9%. Total amount outstanding at September 30, 1998 was $2.4 million. The
aggregate amount outstanding is included in due to affiliates in the
accompanying balance sheet. Interest on the floor plan notes for the three and
nine months ended September 30, 1998 totaled approximately $54,000 and $148,000,
respectively.
NOTE 5. ACQUISITIONS
Effective January 1, 1998 the Company acquired JRJ Investments, Inc.
("Chaisson") which owns Chaisson Motor Cars, a multi-line dealership operating
in Las Vegas, Nevada, and Chaisson BMW, in Henderson, Nevada. The purchase price
was $18.8 million, including acquisition costs. The cash portion, $14.0 million,
was funded under the Company's credit line and from available working capital.
The Company also issued a note for $2.8 million payable to the seller bearing
interest at 8%; principal and interest on the note are payable monthly over five
years. The Company also issued 128,205 shares of its Common Stock to the seller.
The Company has guaranteed the seller a price of the Common Stock of $15.60 per
share one year from the date of closing, January 5, 1999. To the extent the
stock price is less than $15.60 the Company must make up the difference in cash
or by issuing additional shares of common stock to provide a total value of $2.0
million as of January 5, 1999. The acquisition has been accounted for as a
purchase and the results of Chaisson's operations have been included in the
Company's consolidated statement of operations since January 1, 1998. A summary
of the purchase price allocation for Chaisson is presented below (in thousands):
<TABLE>
<S> <C>
Property and equipment............................................. $ 1,620
Goodwill and other intangibles..................................... 17,197
---------
Total.......................................................... $ 18,817
---------
---------
</TABLE>
Effective July 1, 1997, the Company acquired Sahara Nissan, Inc. ("Nissan
West") for approximately $14.3 million. Effective April 1, 1997, the Company
acquired Toyota West Sales & Service, Inc. ("Toyota West"), and Douglas Toyota,
Inc. ("Denver Toyota"), for an aggregate purchase price of approximately $40.7
million. Each of these transactions have been accounted for as a purchase and
the results of operations from these dealerships have been included in the
Company's consolidated statement of operations since the date of acquisition.
The unaudited consolidated statement of operations data as of September 30,
1997 is presented below on a pro forma basis as though the acquisitions of
Chaisson, Nissan West, Toyota West, and Denver Toyota
F-35
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
SEPTEMBER 30, 1998
NOTE 5. ACQUISITIONS (CONTINUED)
(collectively, the "Acquisitions") had all occurred as of January 1, 1997 (in
thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
------------------- ------------------
<S> <C> <C>
Pro forma revenue................................... $ 156,702 $ 506,610
Pro forma net income................................ $ 2,606 $ 7,087
Pro forma net income per share...................... $ .19 $ .51
Pro forma weighted average shares................... 13,574 13,827
</TABLE>
The adjustments to arrive at pro forma revenue include the historic revenue
of the Acquisitions prior to the purchase of each. Pro forma net income includes
historic income of the Acquisitions adjusted for additional amortization expense
related to purchased goodwill and other intangibles, increased interest expense
associated with the debt incurred in the Acquisitions and the tax effects of
these adjustments.
The pro forma results of operations information is not necessarily
indicative of the operating results that would have occurred had the
Acquisitions occurred as of January 1, 1997, nor is it necessarily indicative of
future operating results.
NOTE 6. DISPOSITION
Effective July 1, 1997, the Company sold 100% of the stock in Performance
Dodge, Inc. and Performance Nissan, Inc. ("Performance"), both in the Oklahoma
City, Oklahoma market, to Benji Investments, Ltd., a Texas limited partnership
controlled by Emmett M. Rice, Jr., the Company's former Chief Operating Officer
(also a shareholder and former Director of the Company), in exchange for 760,000
shares of the Company's stock valued at a total of $8.7 million. During the
quarter ended June 30, 1997, the Company recorded an estimated loss on the
disposition of $347,000, which included estimated selling expenses. In
conjunction with the sale, the Company repaid $4.3 million in long-term debt
associated with the acquisition of these dealerships. The Company also retained
ownership of the Performance Dodge facilities and the related mortgage, and is
leasing such facilities to Benji, Investments, Ltd. The combined revenue and
operating loss from these dealerships for the six-month periods ended June 30,
1998 and 1997 are presented (in thousands) below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenue.................................................... $ -- $ 37,312
Operating loss............................................. -- (561)
</TABLE>
NOTE 7. SALE AND LEASEBACK TRANSACTIONS
On December 31, 1997, the Company entered into a contract with a third party
to sell all of its dealership real property in Amarillo, Texas and the recently
constructed dealership properties located in Denver, Colorado and Las Vegas,
Nevada. The total sales price approximated $36.0 million. In connection with the
sale, the Company exercised its option to purchase certain real property under
lease used by its Quality Nissan dealership in Amarillo, Texas for $400,000, and
included the property in the sale. The
F-36
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
SEPTEMBER 30, 1998
NOTE 7. SALE AND LEASEBACK TRANSACTIONS (CONTINUED)
Company has leased back all the property for a term of ten years with two
ten-year renewal options. The initial annual lease rate for all the property is
approximately $4.1 million triple net with annual escalation not to exceed 2.5%
per year beginning the fourth year of the initial lease term. On February 24,
1998 the Company completed the sale of the Amarillo properties. The Company
received proceeds of $13.2 million and retired existing mortgages of
approximately $5.5 million. The Denver, Colorado transaction was completed on
March 31, 1998. The Company received $8.9 million in sales proceeds and retired
approximately $3.4 million in interim construction notes and $2.0 million in
land purchase notes. The Las Vegas, Nevada transaction was completed on May 19,
1998. The Company received approximately $13.8 million in sales proceeds and
retired approximately $4.3 million in interim construction notes and $5.5
million in land purchase notes. The remaining proceeds will and have been used
for general corporate purposes including the reduction of other debt,
acquisitions and working capital needs. A gain of approximately $2.5 million has
been deferred and is being amortized into income as a reduction of lease costs
over the lease term.
NOTE 8. PENDING ACQUISITIONS
The Company has entered into a contract to acquire a certain dealership in
California. The proposed purchase price is approximately $6.0 million consisting
of approximately $4.1 million in cash, $1.4 million in seller-financed notes and
$500,000 in assumed debt. During the nine months ended September 30, 1998, the
Company advanced approximately $2.1 million towards the closing of this
transaction. Consummation of the Merger (Note 2) is conditioned on the
divestiture, or assignment, of the Company's interest in its pending acquisition
of the California dealership. The Company expects that the divestiture, or
assignment, will coincide with the completion of the Merger; however, there can
be no assurance the divestiture or the Merger will be completed.
The Company has entered into a contract to acquire a certain dealership in
Nevada. The proposed purchase price is approximately $12.5 million consisting of
approximately $9.0 million in cash, $3.2 million in seller-financed notes and
approximately $300,000 in value of the Company's common stock. The Company has
not obtained approval from the related manufacturer, and the purchase contract
expires January 1, 1999. As a result, the Company has been negotiating with and
intends to enter into an agreement with Republic to sell or assign its interest
in this Nevada dealership to Republic. The Company has advanced approximately
$1.5 million toward the closing of this transaction.
The Company is currently managing the dealerships discussed above under
management agreements. Under the agreements, the Company provides management of
day-to-day operations in exchange for non-refundable fees equal to the
dealerships' pre-tax profits above a fixed monthly amount. During the three
months and nine months ended September 30, 1998, the Company recognized
approximately $824,000 and $2.0 million, respectively, in management fee income,
which is reflected in other operating revenue in the accompanying consolidated
statements of operations. Because of the planned divestiture and/or assignment
of pending acquisitions, the Company does not expect to earn management fees
after 1998.
NOTE 9. EMPLOYEE SEVERANCE CHARGE
The Company recorded a pre-tax charge of $815,000 during the nine months
ended September 30, 1998, representing employee severance incurred with the
realignment of management and certain other personnel.
F-37
<PAGE>
CROSS-CONTINENT AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
SEPTEMBER 30, 1998
NOTE 10. CONTINGENCIES
The Company is subject to certain agreements with the various manufacturers
that supply new vehicles and parts to each of its dealerships. These agreements
generally limit the locations of dealerships, contain provisions regarding the
adequacy of facilities and retain manufacturer approval rights over changes in
dealership management and ownership. Each manufacturer is also entitled to
terminate these agreements for a dealership if the dealership is in material
breach of the terms: Nissan Motor Corp., U.S.A. ("Nissan") has advised the
Company that the facility where Nissan West is located does not meet Nissan's
current requirements. Also, the Company has agreed to make certain changes at
its BMW of north America, Inc. ("BMW") located in Las Vegas, Nevada, including
making the location exclusively a BMW retail location. The Company is developing
a facilities plan to meet the requirements of Nissan and BMW and believes it
will be able to satisfy the requirements of these manufacturers without any
significant interruption of business. However, there can be no assurance that
these plans will be acceptable to Nissan or BMW, as the case may be.
The Company is a defendant in three class action lawsuits that have been
filed by several claimants against approximately 700 automobile dealerships
across the State of Texas. The plaintiffs allege that the charging of the
vehicle inventory taxes to vehicle purchases constitutes fraud, violates the
Texas Deceptive Trade Practices Act, and constitutes price fixing in violation
of the Clayton Antitrust Act. The Texas Automobile Dealers Association has hired
counsel to represent the defendants in these lawsuits. The defendants have
denied the allegations and the affiliates contend that they have charged the
vehicle inventory taxes to vehicle purchasers in compliance with applicable law.
The Company has answered interrogatories and document production request in one
of the lawsuits. The defendants intend to vigorously defend their position.
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.
F-38
<PAGE>
SAHARA NISSAN, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1996
F-39
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Cross-Continent Auto Retailers, Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of changes in stockholders' equity and cash
flows present fairly, in all material respects, the financial position of Sahara
Nissan Inc. at December 31, 1996 and the results of their operations and their
cash flows for the year 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
audit provides a reasonable basis for the opinion expressed above.
PRICEWATERHOUSE LLP
Fort Worth, Texas
April 30, 1997
F-40
<PAGE>
SAHARA NISSAN, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER
31,
1996
-----------
JUNE 30,
1997
-----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 294 $ 1
Accounts receivable................................................ 1,849 3,075
Inventories........................................................ 7,373 7,037
Prepaid assets..................................................... 12 --
----------- -----------
Total current assets............................................. 9,528 10,113
Property and equipment, net.......................................... 1,624 1,672
Other assets......................................................... 21 21
----------- -----------
$ 11,173 $ 11,806
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Floor plan notes payable............................................. $ 6,185 $ 5,534
Accounts payable..................................................... 212 378
Accrued expenses..................................................... 948 582
Notes payable to affiliates.......................................... 3,625 3,390
----------- -----------
Total current liabilities........................................ 10,970 9,884
----------- -----------
Capital lease debt................................................... 1,230 1,236
Deferred warranty revenue............................................ 421 375
----------- -----------
Total long-term liabilities...................................... 1,651 1,611
----------- -----------
Stockholders' equity (deficit):
Common stock, no par value, 2,500 shares authorized, 750 shares
issued and outstanding........................................... 150 150
Retained earnings (deficit)........................................ (1,598 ) 161
----------- -----------
(1,448 ) 311
Commitments and contingencies (Notes 9 and 10)
----------- -----------
$ 11,173 $ 11,806
----------- -----------
----------- -----------
</TABLE>
F-41
<PAGE>
SAHARA NISSAN, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED
-------------------- DECEMBER 31,
1997 1996 1996
--------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Vehicle sales.............................................................. $ 23,923 $ 23,847 $ 56,756
Other operating revenue.................................................... 3,659 3,215 6,980
--------- --------- ------------
Total revenues........................................................... 27,582 27,062 63,736
Cost of sales................................................................ 22,926 22,570 53,904
--------- --------- ------------
Gross profit............................................................. 4,656 4,492 9,832
--------- --------- ------------
Expenses:
Selling, general and administrative expenses............................... 3,505 2,897 6,246
Depreciation and amortization.............................................. 70 66 151
--------- --------- ------------
3,575 2,963 6,397
--------- --------- ------------
Operating Income............................................................. 1,081 1,529 3,435
Interest expense on notes payable to affiliates.............................. 171 158 314
Other interest expense....................................................... 378 259 591
--------- --------- ------------
Net income................................................................... $ 532 $ 1,112 $ 2,530
--------- --------- ------------
--------- --------- ------------
</TABLE>
F-42
<PAGE>
SAHARA NISSAN, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED
-------------------- DECEMBER 31,
1997 1996 1996
--------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................................. $ 532 $ 1,112 $ 2,530
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization............................................. 70 66 151
(Increase) decrease in:
Accounts receivable..................................................... 1,226 (488) (1,493)
Inventory............................................................... (336) (502) (1,602)
Prepaid and other assets................................................ 12 (17) (6)
Increase (decrease) in:
Accounts payable........................................................ (166) (174) 57
Accrued and other liabilities........................................... 366 238 108
--------- --------- ------------
Net cash provided by (used in) operating activities........................... 1,704 235 (255)
--------- --------- ------------
Cash flows used in investing activities:
Purchase of property and equipment.......................................... -- (50) (89)
--------- --------- ------------
Cash flows from financing activities:
Change in floor plan notes payable.......................................... 651 771 2,660
Change in notes payable to affiliates....................................... 235 425 170
Distributions to stockholders............................................... (2,291) (1,376) (2,477)
Principal payments on capital lease debt.................................... (6) (5) (9)
--------- --------- ------------
Net cash provided by (used in) financing activities........................... (1,411) (185) 344
--------- --------- ------------
Increase in cash.............................................................. 293 -- --
Cash at beginning of period................................................... 1 1 1
--------- --------- ------------
Cash at end of period......................................................... $ 294 $ 1 $ 1
--------- --------- ------------
--------- --------- ------------
Supplemental cash flow information:
Cash paid for interest...................................................... $ 533 $ 436 $ 887
--------- --------- ------------
--------- --------- ------------
</TABLE>
F-43
<PAGE>
SAHARA NISSAN, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
------------------------ EARNINGS
SHARES AMOUNT (DEFICIT) TOTAL
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1995.............................................. 750 $ 150 $ 108 $ 258
Net income................................................................ -- 2,530 2,530
Distributions to stockholders............................................. -- (2,477) (2,477)
--- ----- ----------- ---------
Balance at December 31, 1996.............................................. 750 150 161 311
Net income (unaudited).................................................... -- 532 532
Distributions to stockholders (unaudited)................................. -- (2,291) (2,291)
--- ----- ----------- ---------
Balance at June 30, 1997 (unaudited)...................................... 750 $ 150 $ (1,598) $ (1,448)
--- ----- ----------- ---------
--- ----- ----------- ---------
</TABLE>
F-44
<PAGE>
SAHARA NISSAN
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS--Sahara Nissan, Inc. ("Sahara Nissan" or the "Company")
sells new and used automobiles under the name "Sahara Nissan" through a dealer
agreement with Nissan Motor Corporation U.S.A. In addition, the Company retails
and wholesales replacement parts and provides vehicle servicing in the Las
Vegas, Nevada area.
UNAUDITED INTERIM PERIODS--The following notes, insofar as they are
applicable to June 30, 1997 and the six-month periods ended June 30, 1997 and
1996, are unaudited. These interim financial statements have been prepared on
the same basis as the annual financial statements included herewith. In the
opinion of management, all adjustments, consisting only of ordinary recurring
accruals considered necessary to fairly state the unaudited financial position
at June 30, 1997 and the unaudited results of operations and cash flows for the
six months ended June 30, 1997 and 1996 have been included. Results for the six
months ended June 30, 1997 and 1996 are not necessarily indicative of results
which may be expected for any other interim period or for any year as a whole.
MAJOR SUPPLIER--Sahara Nissan purchases substantially all of its new
vehicles and parts inventory from Nissan Motor Corporation U.S.A. ("Nissan") at
the prevailing prices charged by the automobile manufacturer/distributor.
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 on notes placed with financial institutions in connection with customer
vehicle financing. Finance fees are recognized in income upon acceptance of
credit by the financial institution. Insurance income represents commissions
earned on credit life, accident and disability insurance sold in connection with
vehicles 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.
Sahara Nissan is charged back for a portion of the finance fees and
insurance commissions when the customer terminates the finance contract prior to
its scheduled maturity. The estimated allowance for these chargebacks
("chargeback allowance") is based upon the 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 statement of operations. See Note 8 for an analysis of the
allowance for estimated chargebacks.
EXTENDED WARRANTY CONTRACTS--Sahara Nissan sells extended service contracts
on new and used vehicles; these contracts generally provide extended warranty
coverage for periods of one year or 12,000 miles, up to six years or 72,000
miles, whichever comes first. The Company accounts for the sale of certain of
these 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 the sales of certain
extended warranty contracts be recognized ratably over the lives of the
contracts. Costs directly related to the sale of these contracts are deferred
and charged to expense proportionately as the revenues are recognized. Repair
costs associated with the warranty obligation are
F-45
<PAGE>
SAHARA NISSAN
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
charged to expense as incurred. The Company also sells extended service
contracts on behalf of unrelated third parties on which the Company recognizes
commission revenue at the time of the sale.
INVENTORIES--Vehicles are stated at the lower of cost or market, cost being
determined on the 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:
<TABLE>
<S> <C>
Furniture and fixtures............... 5 to 7 years
Machinery and equipment.............. 5 to 10 years
Leasehold improvements............... Lesser of the life of the lease or
asset
</TABLE>
When depreciable assets are sold or retired, the related cost and
accumulated depreciation are removed from the accounts. Any gains or losses are
included in selling, general and administrative expenses. Major additions and
betterments are capitalized. Maintenance and repairs which do not materially
improve or extend the lives of the respective assets are charged to operating
expenses as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS--Long-lived assets (i.e., property and
equipment) held and used by an entity are reviewed for impairment whenever
events or changes in circumstances indicate that the net book value of the asset
may not be recoverable. An impairment loss will be recognized if the sum of the
expected future cash flows (undiscounted and before interest) from the use of
the asset is less than the net book value of the asset. Generally, the amount of
the impairment loss is measured as the difference between the net book value of
the assets and the estimated fair value of the related assets. No impairment
losses have been incurred or recognized during the periods presented.
ADVERTISING AND PROMOTIONAL COSTS--Advertising and promotional costs are
expensed as incurred and are included in selling, general and administrative
expense in the accompanying statement of operations. Total advertising and
promotional expenses approximated $816,000 in 1996.
OTHER OPERATING REVENUE--Other operating revenue primarily consists of
finance fees, insurance commissions, sales for parts and service and revenue
recognized from extended warranty contracts.
FEDERAL INCOME TAXES--Sahara Nissan, Inc. is organized as a subchapter S
corporation under the Internal Revenue Code; therefore, the income earned by the
Company is reported on the personal tax returns of the stockholders.
Consequently, no provision for income taxes has been recorded in the
accompanying financial statements.
MANAGEMENT ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. The actual outcome associated with such
estimates could differ from the estimates made in the preparation of the
financial statements.
F-46
<PAGE>
SAHARA NISSAN
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--MAJOR SUPPLIERS AND FRANCHISE AGREEMENTS
The Company enters into agreements ("Dealer Agreements") with Nissan Motor
Corporation U.S.A. for the supply of its new vehicles and parts. Sahara Nissan's
overall sales could be adversely impacted by Nissan's inability or unwillingness
to supply the dealerships with an adequate supply of popular models. The
Company's Dealer Agreement renews annually. Management currently believes that
it will be able to continue to renew the Dealer Agreement; however, there can be
no assurance that such agreement will be renewed.
NOTE 3--ACCOUNTS RECEIVABLE
The accounts receivable balance at December 31, 1996 consists of the
following (in thousands):
<TABLE>
<CAPTION>
1996
---------
<S> <C>
Contracts in transit and vehicle receivables......................................... $ 2,245
Due from automakers.................................................................. 515
Trade and other...................................................................... 315
---------
Total accounts receivable.......................................................... $ 3,075
---------
---------
</TABLE>
Contracts in transit and vehicle receivables primarily represent receivables
from financial institutions and other regional banks which provide financing to
customers for vehicle purchases. 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, as well as finance fees due from
financial institutions associated with vehicle financing provided to the
Company's customers. Amounts due from automakers primarily represent receivables
for parts and service work performed on vehicles pursuant to the automakers'
warranty coverage (principally, Nissan). Receivables from automakers also
include amounts due from automakers in connection with the purchase of vehicles
(including holdback and other credits) pursuant to the dealership agreement;
such amounts are generally remitted to Sahara Nissan on a monthly or quarterly
basis.
NOTE 4--INVENTORIES
The inventory balance is comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER
31,
1996
-----------
JUNE 30,
1997
-----------
(UNAUDITED)
<S> <C> <C>
New vehicles and demonstrators....................... $ 6,062 $ 5,085
Used vehicles........................................ 954 1,548
Parts and accessories................................ 357 404
----------- -----------
$ 7,373 $ 7,037
----------- -----------
----------- -----------
</TABLE>
F-47
<PAGE>
SAHARA NISSAN
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--PROPERTY AND EQUIPMENT (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1996
-------------
<S> <C>
Furniture and fixtures.......................................................... $ 185
Machinery and equipment......................................................... 519
Capital lease................................................................... 1,285
Leasehold improvements.......................................................... 623
------
2,612
Less: accumulated depreciation.................................................. (940)
------
Total property and equipment.................................................. $ 1,672
------
------
</TABLE>
Depreciation expense during fiscal 1996 was $151,000.
The Company leases its dealership facility from its majority shareholder.
The noncancellable lease began on July 1, 1995 and expires in 2015. Monthly
lease payments are $36,500. The lease, excluding that portion associated with
the land (i.e., buildings and improvements), has been accounted for as a capital
lease in the accompanying financial statements. As of December 31, 1996, the
minimum future lease commitments associated with the buildings and improvements
portion of this lease are as follows (in thousands):
<TABLE>
<S> <C>
1997............................................................... $ 224
1998............................................................... 224
1999............................................................... 224
2000............................................................... 224
2001............................................................... 224
Thereafter......................................................... 3,024
---------
4,144
Less: amount representing interest................................. (2,898)
---------
Capital lease obligation........................................... $ 1,246
---------
---------
</TABLE>
The remainder of the lease payments associated with the land portion of the
lease are $214,000 per year. See operating lease commitments in Note 10.
The property recorded under capital lease has a gross carrying value of
$1,276,000 with accumulated depreciation of $96,000 as of December 31, 1996. For
the year ending December 31, 1996, the Company recorded $64,000 in depreciation
expense in connection with the leased property. The Company is also liable for
all utilities, insurance and maintenance expense.
NOTE 6--FLOOR PLAN NOTES PAYABLE
The Company finances its new and used vehicle purchases through a certain
commercial bank under a floor plan line of credit. Floor plan notes payable bear
interest at the finance company's prime rate plus 1% (approximately 9.0% at
December 31, 1996). The notes are collateralized by all of Sahara Nissan's
tangible and intangible personal property, including, but not limited to,
substantially all new, used and
F-48
<PAGE>
SAHARA NISSAN
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--FLOOR PLAN NOTES PAYABLE (CONTINUED)
demonstrator vehicles, parts and accessories inventory, accounts receivable, and
machinery and equipment. The notes are generally due within ten days of the sale
of the vehicles or within three days after receiving the sales proceeds,
whichever is sooner and accordingly, have been classified as current in the
accompanying balance sheets.
Sahara Nissan also has a line of credit with its shareholders. Outstanding
balances under the line of credit are payable on demand. The line may be
withdrawn at the shareholders' options and is guaranteed by the Company's new
and used vehicles (subordinated to the rights of the bank). At December 31,
1996, the outstanding balance under this line of credit was $3,390,000. For the
period ending December 31, 1996, the Company paid $314,000 in interest to its
shareholders on the line of credit. The line of credit bears interest at a rate
established by the shareholder/lender which is generally based on the Company's
floor plan interest rate. At December 31, 1996, the rate was 9.25%. At June 30,
1997, the balance outstanding on this line of credit was $3,625,000 (unaudited)
and the interest rate was 9.5%.
NOTE 7--ACCRUED EXPENSES AND OTHER LIABILITIES (IN THOUSANDS)
<TABLE>
<CAPTION>
1996
---------
<S> <C>
Payroll and bonuses................................................................... $ 35
Chargeback allowance.................................................................. 226
Sales tax............................................................................. 111
Third-party warranty reserve.......................................................... 87
Other................................................................................. 123
---------
$ 582
---------
---------
</TABLE>
NOTE 8--PROVISION FOR FINANCE AND INSURANCE COMMISSION CHARGEBACKS
Presented below is the change in the allowance for estimated finance and
insurance chargebacks for the fiscal year 1996 (in thousands):
<TABLE>
<CAPTION>
1996
---------
<S> <C>
Chargeback allowance at January 1..................................................... $ 167
Provision............................................................................. 190
Actual chargebacks.................................................................... (131)
---------
Chargeback allowance at December 31................................................... $ 226
---------
---------
</TABLE>
NOTE 9-- CONCENTRATIONS OF CREDIT RISK AND OTHER RISKS AND UNCERTAINTIES
Financial instruments, which potentially subject Sahara Nissan to
concentration of credit risk, consist principally of cash, cash equivalents and
accounts receivable. Sahara Nissan had no credit losses on its cash or cash
equivalents during the periods presented.
Concentrations of credit risk with respect to customer receivables are
limited primarily to automakers and certain financial institutions. Credit risk
arising from receivables from commercial customers is minimal due to the large
number of customers comprising Sahara Nissan's customer base; however, they are
concentrated in Sahara Nissan's market area, Las Vegas, Nevada. Because the
Company's vehicle and
F-49
<PAGE>
SAHARA NISSAN
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9-- CONCENTRATIONS OF CREDIT RISK AND OTHER RISKS AND UNCERTAINTIES
(CONTINUED)
other sales are generated in the Las Vegas area, a severe economic downturn
could negatively impact the Company's operating results.
The Company receives certain cash incentives from Nissan under various
programs based on models purchased and the sales volume of certain models.
During 1996, the Company recognized approximately $1,907,000 for factory
incentives, which has been recorded as a reduction of cost of sales. During the
six months ended June 30, 1997, the Company recognized $689,000 (unaudited) for
factory incentives. These incentive programs are provided at the discretion of
the manufacturer. Management expects the incentive programs to continue; however
there can be no assurance that the incentive programs will continue at the same
level.
As discussed in note 2, the Company purchases its new vehicles and certain
parts and accessories from Nissan. Many of the vehicles, components of other
vehicles and certain parts are sourced from Japan; the cost of such inventory is
impacted by changes in the exchange rate between the United States dollar and
the Japanese yen. A significant weakening of the dollar against the yen could
increase the Company's cost of inventory.
From time to time, Sahara Nissan is named in claims involving the
manufacture and selling of automobiles, contractual disputes and other matters
arising in the ordinary course of business. Currently, no legal proceedings are
pending against or involve Sahara Nissan that, in the opinion of management,
could be expected to have a material adverse effect on the financial condition
or results of operations of Sahara Nissan in the year of ultimate resolution.
Sahara Nissan is also subject to federal and state environmental
regulations, including rules relating to air and water pollution and the storage
and disposal of gasoline, oil and other chemicals and waste. Local, state and
federal regulations also affect automobile dealership advertising, sales,
service and financing activities. Sahara Nissan believes that it complies with
all applicable laws relating to its business.
NOTE 10--COMMITMENTS
The Company leases, under operating leases, certain dealership facilities,
computer equipment and storage facilities. Rent expense on all operating leases
approximated $213,984 for the year ended December 31, 1996. Future aggregate
minimum rental commitments for noncancellable operating leases, including the
land portion of the dealership facility lease (see Note 5), are as follows (in
thousands):
<TABLE>
<S> <C>
1997................................................................ $ 245
1998................................................................ 218
1999................................................................ 214
2000................................................................ 214
2001................................................................ 214
Thereafter.......................................................... 3,959
---------
$ 5,064
---------
---------
</TABLE>
F-50
<PAGE>
SAHARA NISSAN
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--RELATED PARTY TRANSACTIONS
The Company leases the property from one of its shareholders. See Note 5.
The Company also has a line of credit with its shareholders. See Note 6.
NOTE 12--SUBSEQUENT EVENTS
The stockholders of Sahara Nissan executed a purchase and sale agreement
dated February 28, 1997, whereby the stockholders agreed to sell all of the
stock in Sahara Nissan to Cross-Continent Auto Retailers, Inc. ("C-CAR"). The
purchase price consists of cash consideration of $9 million, 125,984 shares of
C-CAR common stock and a five-year, $600,000 note bearing interest at prime,
payable monthly with the principal payable in full on February 28, 2002.
F-51
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (hereinafter called this "Agreement"),
dated as of September 3, 1998, is entered into by and among Cross Continent Auto
Retailers, Inc., a Delaware corporation (the "Company"), Republic Industries,
Inc., a Delaware corporation ("Purchaser"), and RI/ BG Merger Corp., a Delaware
corporation and a wholly-owned subsidiary of Purchaser ("Merger Sub").
RECITALS
WHEREAS, the Boards of Directors of Purchaser, Merger Sub and the Company
each have determined that it is in the best interests of their respective
stockholders for Purchaser to acquire the Company upon the terms and subject to
the conditions set forth herein; and
WHEREAS, the Company, Purchaser and Merger Sub desire to make certain
representations, warranties, covenants and agreements in connection with this
Agreement.
NOW, THEREFORE, in consideration of the premises, and of the representation,
warranties, covenants and agreements contained herein the parties hereto hereby
agree as follows:
ARTICLE 1.
THE MERGER; CLOSING; EFFECTIVE TIME
1.1. THE MERGER.
Subject to the terms and conditions of this Agreement, at the Effective Time
(as hereinafter defined) Merger Sub shall be merged with and into the Company
and the separate corporate existence of Merger Sub shall thereupon cease (the
"Merger"). The Company shall be the surviving corporation in the Merger
(sometimes hereinafter referred to as the "Surviving Corporation") and shall
continue to be governed by the laws of the State of Delaware, and the separate
corporate existence of the Company with all its rights, privileges, immunities,
powers and franchises shall continue unaffected by the Merger, except as set
forth in Section 2.1. The Merger shall have the effects specified in the
Delaware General Corporation Law (the "DGCL").
1.2. CLOSING.
The closing of the Merger (the "Closing") shall take place (i) at the
offices of Morrison & Foerster LLP, 755 Page Mill Road, Palo Alto, California
94304, on the first business day on which the last to be fulfilled or waived of
the conditions set forth in Article VII hereof shall be fulfilled or waived in
accordance with this Agreement, or (ii) at such other place and time and/or on
such other date as the Company and Purchaser may agree. The date on which the
Closing occurs is hereinafter referred to as the "Closing Date."
1.3. EFFECTIVE TIME.
At the completion of the Closing, and provided that this Agreement has not
been terminated or abandoned pursuant to Article VIII hereof, the Company and
the Purchaser will cause a Certificate of Merger (the "Delaware Certificate of
Merger") to be executed and filed with the Secretary of State of the State of
Delaware as provided in Section 251 of the DGCL. The Merger shall become
effective at the time and on the date on which the Delaware Certificate of
Merger has been duly filed with the Secretary of State of Delaware, and such
time is hereinafter referred to as the "Effective Time."
A-1
<PAGE>
ARTICLE II.
CERTIFICATE OF INCORPORATION, BYLAWS AND OFFICERS
AND DIRECTORS OF THE SURVIVING CORPORATION
2.1. THE CERTIFICATE OF INCORPORATION.
The Certificate of Incorporation of the Company in effect at the Effective
Time shall be the Certificate of Incorporation of the Surviving Corporation,
until duly amended in accordance with the terms thereof and the DGCL.
2.2. THE BYLAWS.
The Bylaws of the Merger Sub in effect at the Effective Time shall be the
Bylaws of the Surviving Corporation, until duly amended in accordance with the
terms thereof and the DGCL.
2.3. OFFICERS AND DIRECTORS.
The directors and officers of Merger Sub at the Effective Time shall, from
and after the Effective Time, be the directors and officers, respectively, of
the Surviving Corporation until their successors have been duly elected or
appointed and qualified or until their earlier death, resignation or removal in
accordance with the Surviving Corporation's Certificate of Incorporation and
Bylaws.
ARTICLE III.
CONVERSION OR CANCELLATION OF SHARES IN THE MERGER
3.1. CONVERSION OR CANCELLATION OF SHARES.
The manner of converting or canceling shares of the Company and Merger Sub
in the Merger shall be as follows:
(a) At the Effective Time, each share ("Share") of the Company's common
stock, $0.01 par value per share (together with all rights associated
therewith pursuant to the Rights Agreement, as hereinafter defined, "Common
Stock"), issued and outstanding immediately prior to the Effective Time,
other than Shares that are held by stockholders ("Dissenting Stockholders")
exercising appraisal rights pursuant to Section 262 of the DGCL, shall, by
virtue of the Merger and without any action on the part of the holder
thereof, be converted into the right to receive, without interest, an amount
in cash (the "Merger Consideration") equal to $10.70. All such Shares, by
virtue of the Merger and without any action on the part of the holders
thereof, shall no longer be outstanding and shall be canceled and retired
and shall cease to exist, and each holder of a certificate representing any
such Shares shall thereafter cease to have any rights with respect to such
Shares, except the right to receive the Merger Consideration for such Shares
upon the surrender of such certificate in accordance with Section 3.2 or the
right, if any, to receive payment from the Surviving Corporation of the
"fair value" of such Shares as determined in accordance with Section 262 of
the DGCL.
(b) At the Effective Time, each Share issued and held in the Company's
treasury at the Effective Time, shall, by virtue, of the Merger and without
any action on the part of the holder thereof, cease to be outstanding, shall
be canceled and retired without payment of any consideration therefor and
shall cease to exist.
(c) At the Effective time, each share of Common Stock par value $0.01
per share, of Merger Sub issued and outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and
A-2
<PAGE>
without any action on the part of Merger Sub or the holders of such shares,
be converted into one Share of the Surviving Corporation.
3.2. PAYMENT FOR SHARES.
From and after the Closing, Purchaser shall ensure that the paying agent
appointed by Purchaser with the Company's prior reasonable approval (the "Paying
Agent") has, as and when needed, amounts sufficient in the aggregate to provide
all funds necessary for the Paying Agent to make payments pursuant to Section
3.1(a) hereof to (a) holders of Shares issued and outstanding immediately prior
to the Effective Time, and (b) the Eligible Option Holders (as hereinafter
defined). After the Effective Time, there shall be no transfers on the stock
transfer books of the Surviving Corporation of shares of capital stock of the
Company which were outstanding immediately prior to the Effective Time. Promptly
after the Effective Time, but in any event no later than ten (10) business days
after the Closing Date, the Surviving Corporation shall cause to be mailed to
each person who was, at the Effective Time, a holder of record of Shares or an
Eligible Option Holder a form (mutually agreed to by Purchaser and the Company)
of letter of transmittal and instructions for use in effecting (i) the surrender
of the certificates which, immediately prior to the Effective Time, represented
any of such Shares in exchange for payment therefor, with respect to
stockholders, and (ii) the payment to the Eligible Option Holders of all amounts
payable thereto pursuant to Section 3.5. Upon on surrender to the Paying Agent
of such certificates (with respect to the stockholders) and delivery of the
letter of transmittal, duly executed and completed in accordance with the
instructions thereto, the Surviving Corporation shall promptly cause to be paid
to each person entitled thereto (1) a check in the amount equal to the Merger
Consideration multiplied by the number of Shares held by such person, with
respect to the stockholders, and (2) with respect to an Eligible Option Holder,
a check in the amount payable to such Eligible Option Holder pursuant to Section
3.5, in each case, less any required tax withholdings. No interest will be paid
or will accrue on the amount payable to any person hereunder. In the case of a
stockholder, if payment is to be made to a person other than the registered
holder of the certificate surrendered, it shall be a condition of such payment
that the certificate so surrendered shall be properly endorsed or otherwise in
proper form for transfer and that the person requesting such payment shall pay
any transfer or other taxes required by reason of the payment to a person other
than the registered holder of the certificate surrendered or establish to the
satisfaction of the Surviving Corporation or the Paying Agent that such tax has
been paid or is not applicable. Two hundred and seventy (270) days following the
Effective Time, the Surviving Corporation shall be entitled to cause the Paying
Agent to deliver to it any funds (including any interest received with respect
thereto) made available to the Paying Agent which have not been disbursed to
holders of certificates formerly representing Shares outstanding on the
Effective Time or Eligible Option Holders, as applicable, and thereafter such
persons shall be entitled to look to the Surviving Corporation only as general
creditors thereof with respect to the cash payable hereunder. Notwithstanding
the foregoing, neither the Paying Agent nor any party hereto shall be liable to
any holder of certificates formerly representing Shares or any Eligible Option
Holder for any amount paid to a public official pursuant to any applicable
abandoned property, escheat or similar law. The Surviving Corporation shall pay
all charges and expenses, including those of the Paying Agent, in connection
with this Section.
3.3. DISSENTER'S RIGHTS.
If any Dissenting Stockholder shall be entitled to be paid the "fair value"
of his or her Shares, as provided in Section 262 of the DGCL, the Company shall
give Purchaser notice thereof and Purchaser shall have the right to participate
in all negotiations and proceedings with respect to any such demands. Neither
the Company nor the Surviving Corporation shall, except with the prior written
consent of Purchaser, voluntarily make any payment with respect to, or settle or
offer to settle, any such demand for payment. If any Dissenting Stockholder
shall fail to perfect or shall have effectively withdrawn or lost the right to
dissent, the Shares held by such Dissenting Stockholder shall thereupon be
treated as though such Shares had been converted into the Merger Consideration
pursuant to Section 3.1.
A-3
<PAGE>
3.4. TRANSFER OF SHARES AFTER THE EFFECTIVE TIME.
No transfers of Shares shall be made on the stock transfer books of the
Surviving Corporation at or after the Effective Time.
3.5. COMPANY OPTIONS.
At the Effective Time, each option (each such option, a "Company Option") to
purchase shares of Common Stock outstanding immediately prior to the Effective
Time with an exercise price per share less than the Merger Consideration shall
automatically be converted into the right to receive cash in the amount of the
product of (a) the Merger Consideration minus such exercise price, multiplied by
(b) the number of shares of Common Stock for which such Company Option is
exercisable. All other Company Options outstanding as of the Effective Time
shall automatically be terminated effective as of the Effective Time. The
holders of all Company Options subject to automatic conversion pursuant to this
Section 3.5 are herein referred to as the "Eligible Option Holders."
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Purchaser and Merger Sub as
follows:
4.1. ORGANIZATION AND QUALIFICATION.
The Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has all requisite corporate
power and authority to own or lease and operate its properties and assets and to
carry on its business as it in now being conducted. The Company is duly
qualified as a foreign corporation to do business, and is in good standing, in
each jurisdiction in which the character of its properties owned or leased or
the nature of its activities makes such qualification necessary, except for any
failures to so qualify or to be in good standing which, individually or in the
aggregate, does not have and can not reasonably be expected to have a Material
Adverse Effect (as hereinafter defined). True and complete copies of the
Certificate of Incorporation and the Bylaws of the Company (the "Organizational
Documents") have been delivered to Purchaser. The Organizational Documents are
in full force and effect. The Company is not in violation of any provision of
the Organizational Documents.
4.2. SUBSIDIARIES.
(i) Except for shares of the Subsidiaries (as hereinafter defined), the
Company does not own of record or beneficially, directly or indirectly, (a) any
shares of outstanding capital stock or securities convertible into capital stock
of any other corporation or (b) any equity or other interest in any partnership,
joint venture or other non-corporate business enterprise. Each Subsidiary is a
corporation or limited partnership, as applicable, duly organized, validly
existing and in good standing under the laws of its jurisdiction of formation
and has all requisite corporate or partnership, as applicable, power and
authority to own or lease and operate its properties and to carry on its
business as it is now being conducted. Each Subsidiary is duly qualified as a
foreign corporation or partnership, as applicable, to do business, and is in
good standing, in each jurisdiction in which the character of its properties
owned or leased or the nature of its activities makes such qualification
necessary, except for any failures to so qualify or to be in good standing
which, individually or in the aggregate, does not have and cannot reasonably be
expected to have a Material Adverse Effect. Each Subsidiary and its jurisdiction
of formation is set forth in Schedule 4.2(a) attached hereto. None of the
Subsidiaries is in violation of any provision of its organizational documents,
true and complete copies of which have been delivered to Purchaser.
A-4
<PAGE>
(ii) Except as set forth on Schedule 4.2(b), all the outstanding shares of
capital stock of each Subsidiary are validly issued, fully paid and
nonassessable and are owned directly by the Company, free and clear of any
liens, claims, charges, encumbrances or adverse claims, and there are no proxies
outstanding or restrictions on voting with respect to any such shares.
(iii) For purposes of this Agreement, the term "Subsidiary" shall mean any
corporation or other business entity of which securities or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are at the time owned by
the Company and/or one or more other Subsidiaries.
4.3. AUTHORITY.
(i) The Company has all requisite corporate power and authority to execute
and deliver this Agreement and to perform its obligations hereunder. The
execution, delivery and performance of this Agreement by the Company and the
consummation by it of the transactions contemplated hereby have been duly
authorized by the Company's Board of Directors and no other corporate
proceedings on the part of the Company are necessary to authorize this Agreement
and the transactions contemplated hereby, other than the approval and adoption
of this Agreement by a majority of the stockholders of the Company in the manner
set forth in Section 6.3, to the extent required by applicable law. This
Agreement has been duly executed and delivered by the Company and, subject (as
to the obligation to consummate the Merger) to such stockholder approval,
constitutes the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms.
(ii) Without limiting the provisions of Section 4.3(i) above, the Board of
Directors of the Company, at a meeting duly called and held has, in light of and
subject to the terms and conditions set forth herein, (a) determined that this
Agreement, the Voting Agreement (as hereinafter defined) the Merger and the
other transactions contemplated hereby and by the Voting Agreement are fair and
in the best interests of the stockholders of the Company, and (b) resolved to
recommend approval and adoption of this Agreement and the Merger.
(iii) The Board of Directors of the Company has received an opinion (the
"Fairness Opinion") from Dain Rauscher Wessels (the "Advisor"), the Company's
financial advisor to the effect that, as of the date of such opinion, the
consideration to be received by the holders of Shares in the Merger is fair to
such holders from a financial point of view. Such opinion has not been
withdrawn, revoked or modified. A true and complete copy of such opinion has
been delivered to Purchaser.
(iv) The Company and its Board of Directors have authorized and taken all
necessary action to amend the Rights Agreement between the Company and the Bank
of New York, as Rights Agent, dated as of September 20, 1996 (the "Rights
Agreement"), without redeeming the Rights (as defined in the Rights Agreement),
such that none of the execution, delivery or performance of this Agreement or
the Voting Agreement or the consummation of the transactions contemplated hereby
or thereby will (a) cause any Rights issued pursuant to the Rights Agreement to
become exercisable or to separate from the stock certificate to which they are
attached, (b) cause Purchaser, Merger Sub or any of their affiliates to be an
Acquiring Person (as defined in the Rights Agreement), or (c) trigger other
provisions of the Rights Agreement, including giving rise to a Distribution Date
(as defined in the Rights Agreement), and such amendment shall be in full force
and effect at all times from and after the date hereof through the Effective
Time. As of the date hereof and at all times on or prior to the Effective Time,
the restrictions to business combinations contained in Section 203 of the DGCL
are, and will be, inapplicable to the execution, delivery and performance of the
this Agreement and the Voting Agreement and to the consummation of the Merger
and the other transactions contemplated by this Agreement and the Voting
Agreement. Prior to the execution of the Voting Agreement, the Board of
Directors of the Company approved the Voting Agreement and the transactions
contemplated thereby. The foregoing actions by the Company's Board of Directors
are irrevocable (without limiting the Company's Board of Director's rights
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with respect to a Superior Proposal (as hereinafter defined)) and the same shall
survive any termination of this Agreement.
4.4. NONCONTRAVENTION.
Except as set forth on Schedule 4.4 attached hereto, the execution, delivery
and performance of this Agreement by the Company and the consummation of the
transactions contemplated hereby, will not (i) violate or conflict with any
provision of any law applicable to the Company or any of its Subsidiaries or by
which any of their respective properties or assets is bound, (ii) require the
consent, waiver, approval, license or authorization of, notification of, or any
filing by the Company with any governmental authority or any other person or
entity (other than the filing of a pre-merger notification report under the HSR
Act (as hereinafter defined), the filing with and clearance by the Securities
Exchange Commission (the "SEC") of the Proxy Statement (as hereinafter defined)
and the approval of the Company's stockholders in the manner set forth in
Section 6.3), (iii) conflict with or result in any breach of any provision of
the Organizational Documents of the Company or the respective organizational
documents of the Subsidiaries, or (iv) violate, conflict with, result in a
breach of or the acceleration of any obligation under, or constitute a default
(or an event which with notice or the lapse of time or both would become a
default) under, or give to others any right of termination, payment, amendment,
acceleration or cancellation of, or result in the creation of a lien or other
encumbrance on any property or asset of the Company or any Subsidiary pursuant
to any provision of any indenture, mortgage, lien, lease, agreement, contract,
instrument, order, judgment, ordinance, regulation or decree to which the
Company or any Subsidiary is subject or by which the Company or any Subsidiary
or any of their property or assets is bound, except with respect to clauses (i),
(ii) and (iv) where such violations, conflicts, breaches, defaults, or the
failure to give such notice, make such filing, or obtain such authorizations,
consents or approvals, would not, individually or in the aggregate, have or
reasonably be expected to have a Material Adverse Effect (as hereinafter
defined) on the Company. As used in this Agreement, the term "Material Adverse
Effect" shall mean, with respect to any party, a material adverse effect on the
business, assets (including intangible assets), condition (financial or other),
prospects or operating results of such party and its subsidiaries, taken as a
whole, including, in the case of a "Material Adverse Effect" on the Company,
such an effect on the value thereof to the Purchaser or the ability of such
party to consummate the Merger.
4.5. CAPITALIZATION.
The authorized capital stock of the Company consists in its entirety of (i)
100,000,000 shares of Common Stock, and (ii) 10,000,000 shares of preferred
stock. As of the date hereof, 13,573,908 shares of Common Stock were issued and
outstanding, all of which were duly and validly issued, fully paid and
nonassessable, and no shares of preferred stock were issued and outstanding.
Except for Company Options to purchase an aggregate of 1,161,541 shares of
Common Stock granted pursuant to the Company's Amended and Restated 1996 Stock
Option Plan (the "Company Stock Plan"), a true and complete copy of which,
together with the form of option agreement executed in connection with each
option grant, has been delivered to Purchaser, no subscription, warrant, option,
convertible security stock appreciation or other right (contingent or other) to
purchase or acquire, or any securities convertible into or exchangeable for, any
shares of any class of capital stock of the Company or any Subsidiary is
authorized or outstanding and there is not any commitment of the Company or any
Subsidiary to issue any shares, warrants, options or other such rights or to
distribute to holders of any class of its capital stock any evidences of
indebtedness or assets. Neither the Company nor any Subsidiary has any
obligation (contingent or other) to purchase, redeem or otherwise acquire any
shares of its capital stock or any interest therein or to pay any dividend or
make any other distribution in respect thereof. A true and complete list of all
of the holders of Company Options, indicating for each the number of shares of
Common Stock for which such Company Options are exercisable, the exercise price,
the vesting schedule and the termination date, is listed on Schedule 4.5(a)
attached hereto. The authorized capital stock of each Subsidiary consists in its
entirety of the shares described on Schedule 4.5(b) attached hereto, all of
which shares are issued and outstanding and
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owned beneficially and of record by the Company. The Company has no obligation,
contingent, or otherwise, which will survive the Merger, to register any of its
presently outstanding securities (or any securities that may subsequently be
issued) under the Securities Act (as hereinafter defined). The Company is not a
party or subject to any agreement or understanding, and to its Knowledge (as
hereinafter defined), except as set forth on Schedule 4.5(b), there is no
agreement or understanding between any other persons or entities that affects or
relates to the voting or giving of written consents with respect to any of the
Company's securities or the voting by a director of the Company. For the
purposes of this Agreement, the term "Knowledge" means the knowledge of the
directors and officers of the Company and the Subsidiaries, after reasonable and
diligent inquiry and investigation.
4.6. SEC FILINGS.
The Company has timely filed with the SEC all forms, reports, schedules,
statements and other documents required to be filed by it since September 24,
1996 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the rules and regulations promulgated thereunder, or the Securities Act of
1933, as amended (the "Securities Act"), and the rules and regulations
promulgated thereunder. The reports, statements and registration statements
referred to in the immediately preceding sentence (including, without
limitation, any financial statements or schedules or other information
incorporated by reference therein) are referred to in this Agreement as the
"Company SEC Filings." The Company SEC Filings (i) were prepared and filed in
compliance, in all material respects, with the requirements of the Securities
Act or the Exchange Act, as the case may be, and the rules and regulations
promulgated thereunder and (ii) did not at the time of filing (or if amended,
supplemented or superseded by a filing prior to the date hereof, on the date of
that filing) contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. None of the Subsidiaries is required to file any forms,
reports or other documents with the SEC. The Company will promptly deliver to
Purchaser copies of all Company SEC Filings filed with the SEC after the date
hereof.
4.7. FINANCIAL STATEMENTS.
(a) The consolidated financial statements of the Company included in the
Company SEC Filings have been prepared (i) from, and are in accordance with, the
books and records of the Company and its Subsidiaries, (ii) comply in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto, and (iii) in accordance
with the United States generally accepted accounting principles ("GAAP")
consistently applied and consistent with prior periods, subject, in the case of
unaudited interim consolidated financial statements, to year-end adjustments
(which consist of normal recurring accruals) and the absence of certain footnote
disclosures. The consolidated balance sheets of the Company included in the
Company SEC Filings fairly present the financial position of the Company and the
Subsidiaries as of their respective dates, and the related consolidated
statements of operations, stockholders' equity and cash flows included in the
Company SEC Filings fairly present the results of operations of the Company and
the Subsidiaries for the respective periods then ended, subject, in the case of
unaudited interim financial statements, to year-end adjustments (which consist
of normal recurring accruals) and the absence of certain footnote disclosures.
(b) Except as set forth on Schedule 4.7(b), neither the Company nor any of
the Subsidiaries has any material liabilities or obligations, whether accrued,
absolute, contingent or otherwise, except for those liabilities that were (i)
fully reflected on the consolidated balance sheet included in the Company's
Report on Form 10-Q for the quarter ended June 30, 1998, and not heretofore paid
or discharged; (ii) incurred prior to the date of such consolidated balance
sheet, which, in accordance with GAAP consistently applied, were not required to
be recorded thereon (all of which liabilities have been disclosed in the Company
SEC filings), (iii) incurred in the ordinary course of business consistent with
past practice since the date of such
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consolidated balance sheet, or (iv) any indebtedness reasonably approved by
Purchaser incurred in connection with the transactions described in Section 6.2
or as listed on Schedule 6.1.
4.8. ABSENCE OF CERTAIN CHANGES OR EVENTS.
Since June 30, 1998, the businesses of the Company and its Subsidiaries have
been conducted in the ordinary course, and neither the Company nor any
Subsidiary has (i) issued any stock, bonds or other corporate securities (or
options, warrants on other rights to acquire such securities), (ii) borrowed any
amount (other than vehicle floor plan indebtedness in the ordinary course of
business consistent with past practice) or incurred any material liabilities
(absolute or contingent), except in the ordinary course consistent with past
practice, (iii) discharged or satisfied any lien or incurred or paid any
obligation or liability (absolute or contingent) other than current liabilities
shown on the consolidated balance sheet of the Company and the Subsidiaries as
of June 30, 1998 and current liabilities incurred since the date of such balance
sheet in the ordinary course of business consistent with past practice, (iv)
declared or made any dividend, payment or distribution in cash, stock or
property to stockholders or purchased or redeemed any shares of its capital
stock or other securities, (v) mortgaged, pledged or subjected to lien any of
its assets, tangible or intangible, other than liens for current real property
taxes not yet due and payable or mechanics' or materialmens' liens, not filed of
record incurred in the ordinary course of business consistent with past
practice, (vi) sold, assigned, leased or transferred any of its material
properties or assets (other than sales of inventory in the ordinary course of
business consistent with past practice), acquired (including, without
limitation, for cash or shares of stock, by merger, consolidation, or
acquisition of stock or assets) any interest in any corporation, partnership or
other business, business organization or division thereof, or canceled any
material debts or claims (except for any such cancellations in the ordinary
course of business consistent with past practice or as otherwise contemplated
hereby), (vii) except as set forth on Schedule 4.8, made any changes in
director, officer or key employee compensation or in any bonus, insurance,
pension or other employee benefit plan (other than in the ordinary course of
business consistent with past practice), (viii) taken any action with respect to
accounting policies or procedures, except for changes required by GAAP, (ix)
agreed, in writing or otherwise, to take any of the actions listed in clauses
(i) through (viii) above, (x) suffered any Material Adverse Effect or waived any
rights of substantial value, whether or not in the ordinary course of business,
or (xi) entered into any material transaction, except in the ordinary course of
business or as otherwise contemplated hereby (other than as set forth in Section
6.2).
4.9. COMPLIANCE WITH LAWS.
Neither the Company nor any Subsidiary is in material default under or in
violation, in any material respect, of any order of any court, governmental
authority or arbitration board or tribunal to which the Company or such
Subsidiary is or was subject or in violation, in any material respect, of any
laws, ordinances, governmental rules or regulations (including, but not limited
to, those relating to export controls, labor and employment matters,
environmental matters and foreign corrupt practices) to which the Company or any
Subsidiary is or was subject. Neither the Company nor any Subsidiary has failed
to obtain any licenses, permits, franchises or other governmental authorizations
necessary to the ownership of its properties or to the conduct of its business,
except where the failure to obtain any of the foregoing would not or could not
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on the Company. All of such licenses, permits, franchises and
authorizations are and, after giving effect to the transactions contemplated
hereby, will continue to be, valid and in full force and effect. Schedule 4.9
attached hereto sets forth a list of all material licenses, permits, franchises
and authorizations held by the Company and its Subsidiaries.
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4.10. DISCLOSURE DOCUMENTS.
(i) Each document required to be filed by the Company with the SEC in
connection with the transactions contemplated hereby (collectively, the "Company
Disclosure Documents"), including, without limitation, the Proxy Statement and
any amendments or supplements thereto, will, when filed, comply as to form and
substance with the requirements of the Exchange Act.
(ii) The Proxy Statement will not (a) at the time the Proxy Statement or any
amendment or supplement thereto is first mailed to stockholders of the Company,
at the time such stockholders vote on adoption of this Agreement and at the
Effective Time, contain any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading or (b) at the time of
such stockholder vote or at the Effective Time omit any information necessary to
correct any statement that has become materially false or misleading in any
earlier communication with respect to the solicitation of any proxy for such
meeting. At the time of the filing of any Company Disclosure Document (other
than the Proxy Statement) and at the time of distribution thereof, such Company
Disclosure Document will not contain any untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
Notwithstanding the foregoing, no representation is made by the Company with
respect to information supplied by Purchaser specifically for inclusion in the
Proxy Statement or any other Company Disclosure Document that relates to
Purchaser or any affiliate or associate of Purchaser.
4.11. LITIGATION.
Except for matters 6, 7 and 8 set forth on Schedule 4.11 attached hereto,
there is no action, suit, investigation, proceeding, claim, arbitration,
mediation, unfair labor practice complaint or grievance pending or, to the
Knowledge of the Company, threatened against or affecting the Company or any
Subsidiary, or their respective properties or rights, before any court,
governmental body or arbitration board or tribunal, except for any such action,
suit, investigation, proceeding, claim, arbitration, mediation, unfair labor
practice complaint or grievance that, individually or in the aggregate, if
adversely determined, would or could reasonably be expected to have a Material
Adverse Effect on the Company (and the other significant litigation matters set
forth on Schedule 4.11 are not reasonably expected, individually or in the
aggregate, if adversely determined, to have a Material Adverse Effect on the
Company). Neither the Company nor any Subsidiary nor any of the property or
assets of any of them is subject to any order, judgment, injunction or decree.
4.12. INTELLECTUAL PROPERTY.
(i) Schedule 4.12(a) attached hereto contains a complete and accurate list
of all material trademarks, trade names, service marks, copyrights, logos,
know-how, computer software programs or applications (including any imbedded
software in instrumentation or otherwise), and tangible or intangible
proprietary information or material (collectively, the "Proprietary Property"),
including all contracts, agreements and licenses relating thereto, owned by the
Company or its Subsidiaries or in which either of them has any rights. Each of
the Company and its Subsidiaries owns, or is licensed or otherwise possesses
legally enforceable rights to use, all material Proprietary Property that is
necessary to conduct the business of each of the Company and its Subsidiaries as
currently conducted.
(ii) Except as set forth on Schedule 4. 12(b), none of the Proprietary
Property, no use thereof by the Company or any Subsidiary, and no permitted use
thereof by any licensee infringes upon or violates, in any material respect, any
copyright, trade secret or other intellectual property right of any person or
entity, and no claim or demand with respect to any such infringement or
violation has been made or, to the Knowledge of the Company, threatened, which
claim or demand, individually or when aggregated with all
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such claims and demands, if adversely determined, would or could reasonably be
expected to have a Material Adverse Effect on the Company.
(iii) The Company has adopted and is implementing a plan such that all
Proprietary Property that contains or calls on a calendar function, including,
without limitation, any function that is indexed to a computer processing unit
clock or provides specific dates or calculates spans of dates, will be able to
record, store, process and provide true and accurate dates and calculations for
dates and spans of dates including and following January 1, 2000, except for any
failures to so record, store, process and provide which do not and are not
reasonably expected to have, individually or in the aggregate, a material cost
to the Company. Pursuant to such plan, none of the Company's or the
Subsidiaries' Proprietary Property, accounting systems or other systems will be
materially adversely affected or impaired by the date change from December 31,
1999, to January 1, 2000. The cost to implement such plan has not been and will
not be material.
4.13. LABOR MATTERS.
Neither the Company nor any Subsidiary is bound by any collective bargaining
agreement or other arrangement with a labor union or association representing
any employee, nor has the Company or any Subsidiary experienced any strike, work
slowdown or stoppage, lock-out or material grievance, claim of unfair labor
practices or other collective bargaining dispute. The Company has no Knowledge
of any organizational effort presently being made or threatened by or on behalf
of any labor union with respect to the employees of the Company or any
Subsidiary.
4.14. SEVERANCE ARRANGEMENTS.
Except pursuant to the Company's severance policies as in effect on the date
hereof (which are described on Schedule 4.14 attached hereto, true and complete
copies of which have been delivered to Purchaser), or except as otherwise
described on Schedule 4.14, neither the Company nor any Subsidiary is a party to
any agreement with any employee (i) the benefits of which (including, without
limitation, severance benefits) are contingent, or the terms of which are
materially altered, upon the occurrence of the transactions contemplated hereby
or a transaction involving the Company or any Subsidiary of the nature of any of
the transactions contemplated by this Agreement, or (ii) providing severance
benefits in excess of those generally available to similarly situated employees
under the foregoing severance policies, after the termination of employment of
such employees regardless of the reason for such termination of employment.
Except as set forth on Schedule 4.14 attached hereto, neither the Company nor
any Subsidiary is a party to any employment agreement or compensation guarantee
extending for a period longer than one year from the date hereof
4.15. TAXES.
(i) Each of the Company, the Subsidiaries and any affiliated, combined or
unitary group of which any such corporation is or was a member has (a) except as
set forth on Schedule 4. 15, timely filed all federal, state, local and foreign
returns, declarations, reports, estimates, information returns and statements
("Returns") required to be filed by it in respect of any Taxes (as hereinafter
defined) for all periods, with respect to the Company, and for all periods
during which the Subsidiaries have been owned by the Company or owned by or
affiliated with Bill A. Gilliland, with respect to the Subsidiaries, which
Returns were correct and complete in all material respects, (b) timely paid or
withheld all Taxes that are due and payable, whether or not shown on any Return
(other than Taxes that are being contested in good faith by appropriate
proceedings and are adequately reserved for in the Company's most recent
consolidated financial statements described in Section 4.8 hereof), (c)
established reserves (excluding reserves for deferred taxes) that are adequate
for the payment of all Taxes not yet due and payable with respect to the Company
and the Subsidiaries through the date hereof, and (d) complied in all material
respects with all applicable laws, rules and regulations relating to the payment
and withholding of Taxes.
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(ii) Except as set forth on Schedule 4.15, there is no deficiency, claim,
audit, action, suit, proceeding, or investigation now pending or threatened
against or with respect to the Company or any Subsidiary in respect of any
Taxes. There are no requests for rulings or determinations in respect of any
Taxes pending between the Company or any Subsidiary and any taxing authority.
Except as set forth on Schedule 4.15, none of the Company or any Subsidiary
currently is the beneficiary of any extension of time within which to file any
Return.
(iii) Neither the Company nor any Subsidiary has executed or entered into (or
prior to the Effective Time will execute or enter into) with the Internal
Revenue Service or any taxing authority (a) any agreement or other document
extending or having the effect of extending the period for assessments or
collection of any Taxes for which the Company or any Subsidiary would be liable
or (b) a closing agreement pursuant to Section 7121 of the Internal Revenue Code
(the "Code"), or any predecessor provision thereof or any similar provision of
foreign, state or local Tax law that relates to the assets or operations of the
Company or any Subsidiary.
(iv) For purposes of this Agreement, "Tax" (and with correlative meaning,
"Taxes") shall mean all federal, state, local, foreign or other taxing authority
net income, franchise, sales, use, ad valorem, property, payroll, withholding,
excise, severance, transfer, employment, alternative or add-on minimum, stamp,
occupation, premium, environmental or windfall profits taxes, and other taxes,
charges, fees, levies, imposts, customs, duties, licenses or other assessments,
together with any interest and any penalties, additions to tax or additional
amounts imposed by any taxing authority.
(v) The Company has made available to Purchaser true and complete copies of
(a) all income tax audit reports, statements of deficiencies, closing or other
agreements received by or on behalf of the Company or any Subsidiary relating to
Taxes, and (b) all federal, state, local and foreign income tax Returns filed by
the Company or any Subsidiary of the Company, for all periods ending on and
after the date of the Company's formation, and of the Subsidiaries, for all
periods during which the Subsidiaries have been owned by the Company or owned by
or affiliated with Bill A. Gilliland. No claim has ever been made by an
authority in a jurisdiction where the Company, at any time, or any of the
Subsidiaries, at any time during which such Subsidiary has been owned by the
Company or owned by or affiliated with Bill A. Gilliland, does not file Returns
that it is or may be subject to taxation by such jurisdiction. The Company has
provided to Purchaser a description of the Company's and each Subsidiary's net
operating loss carryforwards, other material tax carryovers, excess loss
accounts, material tax elections, and deferred intercompany transactions.
Neither the Company nor any Subsidiary has any net operating losses or other tax
attributes presently limited under Code Sections 382, 383, or 384, or the
federal consolidated return regulations.
(vi) None of the Company and its Subsidiaries has filed a consent under Code
Section341(f) concerning collapsible corporations. None of the Company and its
Subsidiaries has made any material payments, is obligated to make any material
payments, or is a party to any agreement that under certain circumstances could
obligate it to make any material payments that will not be deductible under Code
Section280G. None of the Company and its Subsidiaries has been a United States
real property holding corporation within the meaning of Code Section897(c)(2)
during the applicable period specified in Code Section897(c)(1)(A)(ii). None of
the Company and its Subsidiaries is (or ever has been) a party to any tax
allocation or sharing agreement. None of the Company and its Subsidiaries (A)
has been a member of an affiliated group filing a consolidated federal income
Tax Return or (B) has any liability for the Taxes of any person or entity (other
than any of the Company and its Subsidiaries) under Reg. Section1.1502-6 (or any
similar provision of state, local, or foreign law), as a transferee or
successor, by contract, or otherwise.
4.16. EMPLOYEE BENEFIT PLANS.
(i) Each of the Company and the Subsidiaries has complied and currently is
in compliance in all material respects, both as to form and operation, with the
applicable provisions of the Employee
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Retirement Income Security Act of 1974, as amended ("ERISA"), and the Code, with
respect to each "employee benefit plan" as defined under Section 3(3) of ERISA
("Plan") which the Company or any Subsidiary (a) has ever adopted, maintained,
established or to which any of the same has been required to contribute to or
has ever contributed or (b) currently maintains or to which any of the same
currently contributes or is required to contribute or (c) currently participates
in or is required to participate in.
(ii) Neither the Company nor any Subsidiary has ever maintained, adopted or
established, contributed or been required to contribute to, or otherwise
participated in or been required to participate in, a "multiemployer plan" (as
defined in Section 3(37) of ERISA). No amount is due or owing from the Company
or any of its subsidiaries on account of a "multiemployer plan" (as defined in
Section 3(37) of ERISA) or on account of any withdrawal therefrom.
(iii) Notwithstanding anything else set forth herein, other than routine
claims for benefits and liability for premiums due to the Pension Benefit
Guaranty Corporation, neither the Company nor any Subsidiary has incurred any
material liability with respect to a Plan that is currently due and owing and
has not yet been satisfied, including without limitation under ERISA (including
without limitation Title I or Title IV thereof), the Code or other applicable
law, and no event has occurred, and, to the Knowledge of the Company, there
exists no condition or set of circumstances (other than the accrual or payment
of benefits under the normal terms of the Plans), that could result in the
imposition of any material liability on the Company or any Subsidiary with
respect to a Plan, including without limitation under ERISA (including without
limitation Title I or Title IV of ERISA), the Code or other applicable law with
respect to a Plan.
(iv) Except as required by applicable law, neither the Company nor any
Subsidiary has committed itself, orally or in writing, (x) to provide or cause
to be provided to any person any payments or provision of any "welfare" or
"pension" benefits (as defined in Sections 3(1) and 3(2) of ERISA) in addition
to, or in lieu of, those payments or benefits set forth under any Plan, (y) to
continue the payment of, or accelerate the payment of, benefits under any Plan,
except as expressly set forth thereunder or (z) to provide or cause to be
provided any severance or other post-employment benefit, salary continuation,
termination, disability, death, retirement, health or medical benefit to any
person (including without limitation any former or current employee) except as
set forth under any Plan.
4.17. ENVIRONMENTAL MATTERS.
The Company and the Subsidiaries are and have at all times been in
compliance, in all material respects, with all Environmental Laws governing
their businesses, operations, properties and assets, including, without
limitation: (a) all requirements relating to the Discharge and Handling of
Hazardous Substances; (b) all requirements relating to notice, record keeping
and reporting; (c) all requirements relating to obtaining and maintaining
Licenses for the ownership by each of the Company or the Subsidiaries of the
Owned Properties (as hereinafter defined) and its other properties and assets
and the operation of its business as presently conducted and the use by the
Company or the Subsidiaries of the Leased Premises (as hereinafter defined) and
(d) all applicable writs, orders, judgments, injunctions, governmental
communications, decrees, informational requests or demands issued pursuant to,
or arising under, any Environmental Laws.
(i) There are no (and, to the Knowledge of the Company, there is no basis
for any) material non-compliance orders, warning letters or notices of violation
(collectively "Notices"), claims, suits, actions, judgments, penalties, fines,
or administrative or judicial investigations of any nature or proceedings
(collectively "Proceedings") pending or, to the Knowledge of the Company,
threatened against or involving the Company or the Subsidiaries, their
businesses, operations, properties or assets or the Owned Properties or Leased
Premises, issued by any governmental authority or third party with respect to
any Environmental Laws or Licenses issued to the Company or the Subsidiaries
thereunder in connection with, related to or arising out of the ownership by the
Company or the Subsidiaries of the Owned Properties and their other properties
or assets or the operation of their businesses or the use by the Company or the
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Subsidiaries of the Leased Premises, which have not been resolved to the
satisfaction of the issuing governmental authority or third party in a manner
that would not impose any material obligation, burden or continuing liability on
Purchaser or the Company or the Subsidiaries (as wholly owned subsidiaries of
Purchaser) in the event that the transactions contemplated by this Agreement are
consummated.
(ii) Neither the Company nor the Subsidiaries have at any time Discharged,
nor have they at any time allowed or arranged for any third party to Discharge,
Hazardous Substances to, at or upon: (a) any location other than a site lawfully
permitted to receive such Hazardous Substances; (b) any parcel of real property
owned or leased at any time by the Company or the Subsidiaries (including,
without limitation, the Owned Properties and Leased Premises), except in
compliance, in all material respects, with applicable Environmental Laws; or (c)
any site which, pursuant to CERCLA or any similar state law has been placed on
the National Priorities List or its state equivalent, or the Environmental
Protection Agency or any relevant state agency has notified the Company or the
Subsidiaries that it has proposed or is proposing to place on the National
Priorities List or its state equivalent. There has not occurred, nor is there
presently occurring, a material Discharge, or threatened material Discharge of
any Hazardous Substance on, into or directly beneath the surface of any real
property owned or leased at any time by the Company or the Subsidiaries,
including, without limitation, the Owned Properties and Leased Premises.
(iii) There has been no material Discharge from or rupture of any Aboveground
Storage Tanks or Underground Storage Tanks.
(iv) Schedule 4.17 attached hereto identifies (a) all environmental audits,
assessments or occupational health studies undertaken during the prior two years
relating to or affecting the Company or the Subsidiaries, the Owned Properties
or the Leased Premises; and (b) all ground, water, soil, air or asbestos
monitoring undertaken by the Company or the Subsidiaries in the past two years
relating to or affecting the real property owned or leased at any time by the
Company or the Subsidiaries, including the Owned Properties and Leased Premises.
(v) For purposes of this Section, the following terms shall have the
meanings ascribed to them below:
"Aboveground Storage Tank" shall have the meaning ascribed to such
term in Section 6901 ET SEQ., as amended, of RCRA, or any applicable
state or local statute, law, ordinance, code, rule, regulation, order
ruling, or decree governing Aboveground Storage Tanks.
"Discharge" means any manner of spilling, leaking, dumping,
discharging, releasing, migrating or emitting, as any of such terms may
further be defined in any Environmental Law, into or through any medium
including, without limitation, ground water, surface water, land, soil or
air.
"Environmental Laws" means all federal state, regional or local
statutes, laws rules, regulations, codes, ordinances, rulings, licenses
and changes thereto which govern or relate to pollution, protection of
the environment, public health and safety, air emissions, water
discharges, waste disposal, hazardous or toxic substances, solid or
hazardous waste.
"Handle" means any manner of generating, accumulating, storing,
treating, disposing of, transporting, transferring, labeling, handling,
manufacturing or using, as any of such terms may further be defined in
any Environmental Law.
"Hazardous Substances" shall be construed broadly to include any
toxic or hazardous substance, material or waste, and any other
contaminant, pollutant or constituent thereof, whether liquid, solid,
semi-solid, sludge and/or gaseous, the presence of which requires
investigation or remediation under any Environmental Laws or which are
regulated, listed or controlled by, under or pursuant to any
Environmental Laws.
"Licenses" means, for purposes of this Section 4.17 only, all
licenses, certificates, permits, approvals, decrees and registrations
required under the Environmental Laws.
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"Underground Storage Tank" shall have the meaning ascribed to such
term in Section 6901 ET SEQ., as amended, of RCRA, or any applicable
state or local statute, law, ordinance, code, rule, regulation, order,
ruling or decree governing Underground Storage Tanks.
4.18. CERTAIN TRANSACTIONS.
Except as set forth on Schedule 4.18 attached hereto, there are no existing
or proposed transactions, agreements, arrangements or understandings between the
Company or any Subsidiary and their respective "affiliates," as such term is
defined in Rule 405 promulgated under the Securities Act.
4.19. BROKERS.
Except for the fee payable by the Company to the Advisor in connection with
the Fairness Opinion, no person is entitled to any brokerage or finder's fee or
commission in connection with the transactions contemplated by this Agreement as
a result of any action taken by or on behalf of the Company or any of the
Subsidiaries or their affiliates.
4.20. ASSETS.
(a) The Company and the Subsidiaries have good and marketable title to or a
valid leasehold interest in all of their properties and assets (tangible and
intangible), including without limitation, all the properties and assets
reflected on the Consolidated Balance Sheet included in the Company's Quarterly
Report on Form 10-Q for the three months ended June 30, 1998 (except to the
extent disposed of in the ordinary course of business consistent with past
practice), all the properties and assets purchased or otherwise acquired by the
Company or any Subsidiary since the date of thereof, and all properties and
assets used in its business. None of such properties or assets is subject to any
mortgage, pledge, lien, security interest, encumbrance, restriction or charge of
any kind material to the business of the Company taken as a whole, except as set
forth in the Company SEC Filings or Schedule 4.20(a) attached hereto. The
Company and the Subsidiaries own and operate the motor vehicle dealerships (the
"Dealerships") listed on Schedule 4.20(b) attached hereto at the locations set
forth thereon, and the Dealerships are owned and operated by the Company or the
Subsidiaries, as applicable, as indicated thereon.
(b) Except for employee owned tools, the Fixed Assets currently in use or
necessary for the business and operations of the Company and the Subsidiaries
are in good operating condition, normal wear and tear excepted. For purposes of
this Agreement, the term "Fixed Assets" means all vehicles (other than vehicles
held as inventory), machinery, equipment, tools, supplies, leasehold
improvements, furniture and fixtures, owned, used by or located on the premises
of the Company and the Subsidiaries or set forth on the balance sheet of the
Company included in the Company's filing on Report 10-Q for the quarter ended
June 30, 1998 or acquired since the date of such balance sheet.
(c) As of June 30, 1998, the inventories shown on the Consolidated Balance
Sheet included in the Company' s Quarterly Report on Form 10-Q for the three
months ended June 30, 1998 consisted in all material respects of items of a
quantity and quality useable or saleable in the ordinary course of business and
have been replenished in all material respects in the ordinary course of
business consistent with past practice. All such inventories (including any
reserves established with respect thereto) are valued on the Consolidated
Balance Sheet included in the Company's Quarterly Report on Form 10-Q for the
three months ended June 30, 1998 in accordance with GAAP consistent with past
practice.
4.21. REAL PROPERTY OWNED OR LEASED.
(i) Schedule 4.21(a) attached hereto contains the street addresses of all
real property or any interest therein owned by any of the Company or the
Subsidiaries (the parcels of real property so identified on are referred to
herein collectively as the "Owned Properties"). With respect to each such parcel
of Owned Properties the respective entity designated on Schedule 4.21(a) has
good and marketable title, free and
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clear of (1) any mortgages (except as set forth on Schedule 4.21(a)), pledges,
liens, security interests or other encumbrances securing debt for borrowed
money, or (2) any other lien, restriction, covenant, condition, easement or
exception (other than liens for real estate taxes not yet due and payable or
mechanics' or materialmens' liens not filed of record incurred in the ordinary
course of business consistent with past practice), which materially impairs the
use or value of such Owned Property to the Company.
(ii) Schedule 4.21(b) attached hereto sets forth a list of all leases,
licenses or similar agreements to which the Company or the Subsidiaries is a
party, which are for the use or occupancy of real estate (the "Leases") (true
and complete copies of which have previously been furnished to Purchaser), in
each case, setting forth: (a) the lessor and lessee thereof and the commencement
date, term and renewal rights under each of the Leases, and (b) the street
address and legal description of each property covered thereby (the "Leased
Premises"). The Leases are in full force and effect and have not been amended
and no party thereto is in default or breach under any such Lease. No event has
occurred which, with the passage of time or the giving of notice or both, would
cause a breach of or default under any of such Leases. The Company and the
Subsidiaries have valid leasehold interests in each of the Leased Premises,
which leasehold interests are free and clear of (1) any mortgages, liens and
encumbrances relating to debt for borrowed money, and (2) any other liens,
encumbrances, covenants and easements or title defects of any nature whatsoever,
which other line, encumbrance, covenant, easement or title defect could
materially impairs the use or value of the applicable Leased Premises to the
Company.
(iii) With respect to each parcel of the Owned Properties and Leased
Premises, (a) there are no pending or, to the Knowledge of the Company or any of
the Subsidiaries, threatened condemnation proceedings, suits or administrative
actions relating to any such parcel or other matters materially affecting
adversely the current use, occupancy or value thereof; (b) there are no
contracts granting to any party or parties the right of use or occupancy of any
such parcel, and there are no parties (other than the Company and the
Subsidiaries) in possession of any such parcel; and (c) except as set forth on
Schedule 4.21(c), there are no outstanding options or rights of first refusal or
similar rights to purchase any such parcel or any portion thereof or interest
therein.
4.22. INSURANCE.
The Company maintains all policies of fire, products liability, general
liability, vehicle, workers' compensation, directors' and officers' liability,
title and other insurance covering the Company or its Subsidiaries or any of
their respective property or assets that are material to the business of the
Company and the Subsidiaries, in such amounts and such terms as are customary in
the industry. Except as set forth on Schedule 4.22, there is no material claim
pending under any of such policies as to which coverage has been questioned,
denied or disputed by the underwriters of such policies and, to the Company's
Knowledge, there is no basis for any underwriter of such policy to deny any
material pending claim. All of such policies are in full force and effect in all
material respects, and no notice of cancellation or termination has been
received with respect to any such policy which has not been replaced or which
cannot be replaced on substantially similar terms prior to the date of such
cancellation or termination. All premiums due and payable under such policies
have been paid. No insurance policy or arrangement provides for any
retrospective premium adjustment, experience based liability or loss sharing
arrangement affecting the Company or any Subsidiary, except adjustments,
liabilities or loss sharing arrangements which would not be material in amount.
4.23. MATERIAL CONTRACTS.
(i) Schedule 4.23 attached hereto sets forth a list of each Material
Contract (as defined below), true, correct and complete copies of which have
been provided to Purchaser, including without limitation all franchise, sales
and service, dealer and other agreements or undertakings (the "Franchise
Agreements") with automobile manufacturers or distributors (collectively, the
"Factories"). Schedule 4.23 identifies (a) which Franchise Agreements grant the
Company and the Subsidiaries full rights and privileges
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necessary to operate the Dealerships; (b) all rights of first refusal granted to
any Factory pursuant to any of the Franchise Agreements, and (c) all Material
Contracts that require the consent of third parties to the transactions
contemplated hereby. The copy of each Material Contract furnished to Purchaser
is a true and complete copy of the document it purports to represent and
reflects all amendments thereto made through the date of this Agreement. The
Company and the Subsidiaries have not violated, in any material respect, any of
the terms or conditions of any Material Contract or any term or condition which
would permit termination or modification of any Material Contract, all of the
covenants to be performed by any other party thereto have, to the Knowledge of
the Company, been fully performed, and no material claims have been made or
issued for breach or indemnification or notice of default or termination under
any Material Contract. Each of the Material Contracts constitutes the legal.
valid and binding obligation of the Company and the Subsidiaries that is a party
thereto, each in accordance with its express terms. No event has occurred which
constitutes, or after notice or the passage of time, or both, would constitute,
a material default by any Company and the Subsidiaries under any Material
Contract, and no such event has occur-red which constitutes or would constitute
a material default by any other party. Neither of the Company and the
Subsidiaries is subject to any liability or payment resulting from renegotiation
of amounts paid under any Material Contract.
(ii) As used in this Section 4.23, the term "Material Contracts" shall mean
written or oral, (a) loan agreements, indentures. mortgages, pledges,
hypothecations, deeds of trust, conditional sale or title retention agreements,
security agreements, equipment financing obligations or guaranties, or other
sources of contingent liability in respect of any indebtedness or obligations to
any other person or entity, or letters of intent or commitment letters with
respect to same (other than those which individually provide for money borrowed
of less than $200,000); (b) the Leases; (c) leases of personal property (other
than those which individually provide for annual payments of less than
$200,000); (d) distribution, sales agency or franchise or similar agreements
(including, without limitation, the Franchise Agreements), or agreements
providing for an independent contractor's services, or letters of intent with
respect to same (other than those which individually provide for annual payments
of less than $200,000); (e) employment agreements, management service
agreements, consulting agreements, confidentiality agreements, non-competition
agreements and any other agreements relating to any employee, officer or
director of the Company and the Subsidiaries; (f) licenses, assignments or
transfers of trademarks, trade names, service marks, patents, copyrights, trade
secrets or know how, or other agreements regarding material Proprietary
Property; (g) contracts relating to pending capital expenditures by the Company
and the Subsidiaries; (h) non-competition agreements restricting the Company or
Subsidiaries in any manner; (i) any agreements pursuant to which the Company is
a party or by which it is bound relating to the issuance, registration or voting
of shares of its capital stock (or options or other rights to acquire the same);
and (j) any other contracts material to the Company or the Subsidiaries.
4.24. ADVERSE IMPACT OF ACTIONS OR PROPOSALS OF FACTORIES.
Except as set forth on Schedule 4.24, to the Knowledge of the Company, none
of the Factories nor any other dealer has taken or proposed to take any action
that could have an adverse impact on the Dealerships, including, but not limited
to, (i) relocating or closing the Dealerships; (ii) relocating any other
dealership or establishing or awarding a new franchise for a dealership to a
location that could have an adverse impact on the Dealerships; or (iii)
protesting any action taken or proposed to be taken by the Dealerships. The
Company has delivered to Purchaser copies of any written documentation or
proposals relating to the foregoing in the possession of the Company or the
Subsidiaries, including any strategic plans of the Factories relating to
distribution, marketing, facilities or divisional image or alignment or any
documentation relating to specific plans or proposals with respect to the
Dealerships. As of the date hereof, neither the Company nor the Subsidiaries
have any claims, and no basis exists (nor will any basis exist solely as a
result of the passage of time) for any claims, by the Company or the
Subsidiaries against the Factories. To the Knowledge of Company, none of the
Factories has requested any change in the
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management staff of the Dealerships and, to the Knowledge of the Company, there
exists no basis upon which the Factories would request such a change in
management staff.
4.25. RECEIVABLES.
All of the Receivables are valid and legally binding, represent bona fide
transactions and arose in the ordinary course of business of the Company or the
Subsidiaries, as the case may be. All of the Receivables are good and
collectible receivables, and will be collected in accordance with past practice
and the terms of such receivables (and in any event within six months following
the Closing Date), without set off or counterclaims, subject to the allowance
for doubtful accounts, if any, set forth on the balance sheet of the Company
included in the Company's Report on Form 10-Q for the quarter ended June 30,
1998, as reasonably adjusted since the date of such balance sheet in the
ordinary course of business. For purposes of this Agreement, the term
"Receivables" means all receivables of the Company and the Subsidiaries,
including without limitation all contracts in transit, manufacturer's warranty
receivables and all trade account receivables arising from the provision of
services, sale of inventory, notes receivable, and insurance proceeds
receivable.
4.26. VOTE REQUIRED.
The affirmative vote of the holders of a majority of the outstanding shares
of Company Common Stock is the only vote of the holders of any class or series
of the Company's capital stock necessary to approve this Agreement and the
transactions contemplated hereby.
4.27. FULL DISCLOSURE.
To the Company's Knowledge, neither any representation or warranty by the
Company in this Agreement nor any statement by the Company in any Schedule
hereto or any certificate delivered pursuant to this Agreement contains an
untrue statement of a material fact or omits to state any material fact
necessary in order to make the representations, warranties or statements made
herein or therein, in the light of the circumstances under which they were made,
not misleading.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser and Merger Sub, jointly and severally, represent and warrant to
the Company as follows:
5.1. ORGANIZATION AND QUALIFICATION.
Each of Purchaser and Merger Sub is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
all requisite corporate power and authority to own or lease and operate its
properties and assets and to carry on its business as it is now being conducted,
except as would not have a Material Adverse Effect on Purchaser. Each of
Purchaser and Merger Sub is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction in which the character
of its properties owned or leased or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified would not
have a Material Adverse Effect on Purchaser or Merger Sub, as applicable.
5.2. AUTHORITY RELATIVE TO AGREEMENT.
Each of Purchaser and Merger Sub has all requisite corporate power and
authority to enter into this Agreement and to perform its obligations hereunder.
The execution and delivery of this Agreement by Purchaser and Merger Sub and the
consummation by Purchaser and Merger Sub of the transactions contemplated hereby
have been duly authorized by the Board of Directors of Purchaser and Merger Sub,
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and no other corporate proceedings on the part of Purchaser of Merger Sub
(including, without limitation, any action by its stockholders) are necessary to
authorize this Agreement and the transactions contemplated hereby. This
Agreement has been duly executed and delivered by Purchaser and Merger Sub and
constitutes the legal, valid and binding obligation of Purchaser and Merger Sub,
enforceable against Purchaser and Merger Sub in accordance with its terms.
5.3. NON-CONTRAVENTION.
The execution, delivery and performance of this Agreement by Purchaser and
the consummation by them of the transactions contemplated hereby, will not (i)
violate or conflict with, in any material respect, any provision of any law
applicable to Purchaser or Merger Sub or by which any property or asset of them
is bound, (ii) require the consent, waiver, approval, license or authorization
of or any filing by Purchaser or Merger Sub with any public authority (other
than (a) the filing of a pre-merger notification report under the HSR Act, (b)
in connection with or in compliance with the provisions of the Exchange Act, the
DGCL, the "takeover" or "blue sky" laws of various states, (c) applicable state
statutes and regulations regulating the conduct of the Surviving Corporation's
and the Subsidiaries' business, and (d) any other filings and approvals
expressly contemplated by this Agreement), (iii) conflict with or result in any
breach of any provision of the respective certificate of incorporation or
by-laws of Purchaser or Merger Sub in any respect or (iv) except as provided on
Schedule 5.3 attached hereto, violate, conflict with, result in a breach of or
the acceleration of any obligation under, or constitute a default (or an event
which with notice or the lapse of time or both would become a default) under, or
give to others any right of termination, amendment, acceleration or cancellation
of, or result in the creation of a lien or other encumbrance on any property or
asset of Purchaser or Merger Sub pursuant to any provision of any indenture,
mortgage, lien, lease, agreement, contract, instrument, order, judgment,
ordinance, regulation or decree to which Purchaser or Merger Sub is subject or
by which Purchaser or Merger Sub or any of its property or assets is bound;
except in the case of clauses (i), (ii) and (iv) where such violations,
conflicts, breaches, defaults or the failure to give such notice, make such
filings, or obtain such authorizations, consents or approvals, would not,
individually or in the aggregate, have a Material Adverse Effect on the
Purchaser or Merger Sub.
5.4. DISCLOSURE DOCUMENTS.
None of the information supplied or to be supplied in writing by either
Purchaser or Merger Sub for inclusion in the Proxy Statement, including any
amendment or supplement to the Proxy Statement, will, at the respective times
such documents are filed, and when sent or given to stockholders of the Company,
contain any untrue statement of a material fact, or omit to state any material
fact necessary in order to make the statements made therein in light of the
circumstances under which they are made not misleading or at the time of the
Meeting and at the Effective Time, contain any untrue statement of a material
fact, or omit to state any material fact required to be stated therein or
necessary in order to make the statements made therein, in light of the
circumstances under which they are made, not false or misleading or necessary to
correct any statement in any earlier communication or the solicitation of
proxies for the Meeting which shall have become false or misleading.
Notwithstanding the foregoing, neither Purchaser nor Merger Sub makes any
representation or warranty with respect to any information that has been
supplied by the Company or any Subsidiary or their auditors, attorneys,
financial advisors, other consultants or advisors specifically for use in the
Proxy Statement or in any other documents to be filed with the SEC or any
regulatory agency in connection with the transactions contemplated hereby.
5.5. BROKERS.
No person is entitled to any brokerage or finder's fee or commission in
connection with the transactions contemplated by this Agreement as a result of
any action taken by or on behalf of Purchaser or Merger Sub.
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ARTICLE VI.
CERTAIN AGREEMENTS
6.1. CONDUCT OF THE COMPANY'S BUSINESS.
Subject solely to Section 6.2, the Company covenants and agrees that, except
as described on Schedule 6.1 attached hereto, prior to the Effective Time,
unless Purchaser shall otherwise consent in writing or as otherwise expressly
contemplated by this Agreement:
(a) the business of the Company and the Subsidiaries shall be conducted
only in, and the Company and the Subsidiaries shall not take any action
except in, the ordinary course of business and consistent with past
practice; and
(b) neither the Company nor any Subsidiary shall, directly or
indirectly, do any of the following: (i) sell, pledge, dispose of or
encumber (or permit any Subsidiary to sell, pledge, dispose of or encumber)
any assets of the Company or any Subsidiary, except in the ordinary course
of business consistent with past practice; (ii) amend or propose to amend
its Certificate of Incorporation, or Articles of incorporation, as
applicable, or Bylaws; (iii) split, combine or reclassify any outstanding
shares of its capital stock, or declare, set aside or pay any dividend or
distribution payable in cash, stock, property or otherwise with respect to
such shares; (iv) redeem, purchase, acquire or offer to acquire (or permit
any Subsidiary to redeem, purchase, acquire or offer to acquire) any shares
of its capital stock; or (v) enter into any contract, agreement, commitment
or arrangement with respect to any of the matters set forth in this
paragraph (b);
(c) neither the Company nor any Subsidiary shall (i) issue, sell, pledge
or dispose of, or agree to issue, sell, pledge or dispose of, any additional
shares of, or securities convertible or exchangeable for, or any options,
warrants or rights of any kind to acquire any shares of, its capital stock
of any class or other property or assets whether pursuant to the Company
Stock Plans or otherwise; PROVIDED that the Company may issue shares of
Company Common Stock upon the exercise of currently outstanding options
referred to in Section 4.6 hereof, (ii) acquire (by merger, consolidation or
acquisition of stock or assets) any corporation, partnership or other
business organization or division thereof, (iii) except for vehicle
financing in the ordinary course of business consistent with past practice,
incur any indebtedness for borrowed money or issue any debt securities; (iv)
enter into or modify any Material Contract, except in the ordinary course of
business and consistent with past practice; (v) terminate, modify, assign,
waive, release or relinquish any material contract rights or amend any
material rights or claims not in the ordinary course of business or (vi)
settle or compromise any material claim, action, suit or proceeding pending
or threatened against the Company or any Subsidiary;
(d) neither the Company nor any Subsidiary shall grant any increase in
the salary or other compensation of its employees or enter into any
employment agreement or make any loan to or enter into any transaction of
any other nature with any employee of the Company or any Subsidiary, except
in the ordinary course of business consistent with past practice;
(e) neither the Company nor any Subsidiary shall adopt or amend, in any
material respect, except as contemplated hereby or as may be required by
applicable law or regulation, any collective bargaining, bonus, profit
sharing, compensation, stock option, restricted stock, pension, retirement,
deferred compensation, employment or other employee benefit plan, agreement,
trust, fund, plan or arrangement for the benefit or welfare of any
directors, officers or employees (including, without limitation, any such
plan or arrangement relating to severance or termination pay); and
(f) neither the Company nor any Subsidiary shall take any action that
would make any representation or warranty of the Company hereunder
inaccurate in any respect at, or as of any time prior to, the Effective
Time. or omit to take any action necessary to prevent any such
representation or warranty from being inaccurate in any respect at any such
time.
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6.2. ACQUISITION.
The Company shall (and shall cause the applicable Subsidiaries to)
diligently perform all of their obligations to acquire Las Vegas Honda, in Las
Vegas, Nevada (the "New Dealership"), and shall consummate the same, subject and
pursuant to the terms and conditions of the acquisition agreement relating
thereto (as in effect on the date hereof), as and when required by such
agreement, provided that no modification or amendment to such agreement (or
waiver of any covenant or condition set forth therein) shall be entered into or
taken without Purchaser's prior written consent, which consent shall not be
unreasonably withheld or delayed. Upon completion of the acquisition of the New
Dealership, the New Dealership shall be deemed a "Dealership" for all purposes
of this Agreement.
6.3. STOCKHOLDER APPROVAL.
(a) As soon as reasonably practicable after the date hereof, the Company
shall take all action necessary in accordance with the DGCL and its Certificate
of Incorporation and Bylaws to call, give notice of and convene a meeting (a
"Meeting") of its stockholders to consider and vote upon the approval and
adoption of this Agreement, the Merger and the transactions contemplated hereby.
The Board of Directors shall, subject solely to the rights of the Board of
Directors with respect to a Superior Proposal (as hereinafter defined) as set
forth in Section 6.6(a), recommend that the stockholders of the Company vote to
approve and adopt this Agreement and the Merger and any other matters to be
submitted to stockholders in connection therewith.
(b) As promptly as reasonably practicable after the date hereof, the Company
shall prepare a proxy statement, prepared in accordance with the requirements of
the Exchange Act, the DGCL and the Company's Certificate of Incorporation and
Bylaws pertaining to the Merger and containing the unanimous recommendation of
the Company's Board of Directors to approve and adopt this Agreement, and the
Merger and (the "Proxy Statement"). Purchaser shall reasonably cooperate with
the Company in the preparation of the Proxy Statement and any amendments and
supplements thereto. The Proxy Statement shall not be distributed, and no
amendment or supplement thereto shall be made by the Company, without the prior
consent of Purchaser and its counsel. The Company shall use its commercially
reasonable efforts to have the Proxy Statement cleared by the SEC and shall
cause a definitive Proxy Statement to be distributed to its stockholders
entitled to vote upon the Merger as promptly as practicable thereafter.
(c) The Company shall notify Purchaser of the receipt of the comments of the
SEC and of any requests by the SEC for amendments or supplements to the Proxy
Statement or for additional information, and promptly supply Purchaser with
copies of all correspondence between the Company (or its representatives) and
the SEC (or its staff) with respect thereto, all of which correspondence shall
be subject to Purchaser's prior reasonable approval. If, at any time prior to
the Meeting, any event should occur relating to or affecting the Company or
Purchaser, or to their respective officers or directors, which event should be
described in an amendment or supplement to the Proxy Statement, the parties
shall promptly inform one another and shall cooperate in promptly preparing,
filing and clearing with the SEC and, if required by applicable securities laws,
distributing to the Company's stockholders such amendment or supplement.
(d) Concurrently herewith, each of Bill A. Gilliland, Robert W. Hall, Xaris,
Ltd. and the Gilliland Family Partnership (the "Shareholder Group") have entered
into a Voting Agreement with the Purchaser in the form attached hereto as
Exhibit 6.3 (the "Voting Agreement").
6.4. ACCESS TO INFORMATION.
(a) The Company shall, and shall cause the Subsidiaries and its and their
respective officers, directors, employees, representatives and agents to,
afford, from the date hereof to the Effective Time, the officers, employees,
representatives and agents of Purchaser reasonable access during regular
business hours to its officers, employees, agents, properties, books, records
and workpapers, and shall promptly
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furnish Purchaser all financial, operating and other information and data as
Purchaser, through its officers, employees or agents, may reasonably request.
(b) No investigation by Purchaser shall modify, impair, affect, add to or
subtract from any representations or warranties of the parties hereto or the
conditions to the obligations of the parties hereto to effect the Merger.
6.5. FURTHER ASSURANCES.
Subject to the terms and conditions herein provided, each of the parties
hereto agrees to use all commercially reasonable efforts to promptly take, or
cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective as promptly as
practicable the transactions contemplated by this Agreement, including, without
limitation, using all commercially reasonable efforts to obtain all necessary
waivers, consents and approvals and to effect all necessary registrations and
filings. Without limiting the foregoing, the parties hereto shall make promptly
their respective filings, if any, and thereafter make any other required
submissions, under the HSR Act, with respect to the transactions contemplated
hereby, and shall, if requested by Purchaser, seek early termination of the
applicable waiting period under the HSR Act. Without limiting the foregoing,
each of the parties shall use its commercially reasonable best efforts to take,
or cause to be taken, all appropriate actions, and to do, or cause to be done,
all things necessary, proper or advisable under applicable laws and regulations
to consummate and make effective the transactions contemplated herein,
including, without limitation, using its commercially reasonable efforts to
obtain all licenses, permits, consents, approvals, authorizations,
qualifications and orders of any governmental authority and parties to contracts
with the Company or the Subsidiaries as are necessary for the consummation of
the transactions contemplated hereby. Each of the parties shall make on a prompt
and timely basis all governmental or regulatory notifications and filings
required to be made by it for the consummation of the transactions contemplated
hereby.
6.6. FACTORY APPROVALS.
Without limiting Section 6.5 above, each of the parties hereto shall (a)
cooperate in the preparation and filing of, and take all appropriate actions in
connection with, the application to the Factories for approval of the
transactions contemplated hereby, and (b) use commercially reasonable efforts,
consistent with a mutually acceptable litigation strategy, to (i) defend all
lawsuits or other legal proceedings challenging this Agreement or the
consummation of the transactions contemplated hereby, (ii) lift or rescind any
injunction or restraining order or other order in connection therewith
materially adversely affecting the ability of the parties to consummate the
transactions contemplated hereby, and (iii) institute any lawsuits or legal
proceedings necessary, appropriate or advisable to obtain the approvals or
consents of the Factories to the transactions contemplated by this Agreement.
The Purchaser will have primary responsibility for directing any such lawsuits
or legal proceedings, and in accordance with such direction, the parties will
coordinate their efforts to pursue their legal remedies as contemplated above,
in order to obtain the approvals necessary to consummate the transactions
contemplated by this Agreement and to obtain appropriate relief.
6.7. INQUIRIES AND NEGOTIATIONS.
(a) The Company, the Subsidiaries, their affiliates and their respective
officers, directors, employees, representatives and agents (including, without
limitation, any investment banker, attorney or accountant retained by the
Company or any of its Subsidiaries) shall immediately cease any existing
discussions or negotiations, if any, with any parties conducted heretofore with
respect to any acquisition (except as provided on Schedule 6.1) or exchange of
all or any material portion of the assets of, or any equity interest in, the
Company or any of the Subsidiaries (by direct purchase from the Company, tender
or exchange offer or otherwise) or any business combination, merger or similar
transaction (including an exchange of
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stock or assets) with or involving the Company or any Subsidiary or any division
of the Company (an "Acquisition Transaction"). Except as set forth in this
Section 6.7(a), neither the Company, the Subsidiaries nor any of their
affiliates, nor any of their or their respective officers, directors, employees,
representatives or agents, shall, directly or indirectly, encourage, solicit,
participate in or initiate discussions or negotiations with, or provide any
information to, any corporation, partnership, person or other entity or "group"
(as defined in Section 13(d) of the Exchange Act) (other than Purchaser or
Merger Sub, any affiliate or associate of Purchaser and Merger Sub or any
designees of Purchaser and Merger Sub) with respect to any inquiries or the
making of any offer or proposal (including, without limitation, any offer or
proposal to the stockholders of the Company) concerning an Acquisition
Transaction (an "Acquisition Proposal"); provided, however, that the Company
may, directly or indirectly, furnish information and access pursuant to an
appropriate confidentiality agreement, in each case only in response to an
unsolicited request for information or access, to any person making a written
Superior Proposal (as hereinafter defined) to the Board of Directors of the
Company, and may participate in discussions and negotiate with such person
concerning any such Superior Proposal, if and only if the Board of Directors of
the Company determines in good faith, based upon the written advice of outside
counsel to the Company reasonably acceptable to Purchaser ("Counsel"), that
failing to provide such information or access or to participate in such
discussions or negotiations would constitute a breach of the Board's fiduciary
duty under applicable law and provided, further, that nothing herein shall
prevent the Board from taking, and disclosing to the Company's stockholders, a
position contemplated by Rules 14d-9 and 14e-2 promulgated under the Exchange
Act with regard to any tender offer; provided, further, that the Board shall not
recommend that the stockholders of the Company tender their Shares (or approve
any such Superior Proposal in any meeting of the stockholders of the Company to
approve any such Superior Proposal) in connection with any such Superior
Proposal unless the Board shall have determined in good faith, based upon the
written advice of Counsel to the Company, that failing to take such action would
constitute a breach of the Board's fiduciary duty to the Company's stockholders
under applicable law. The Board shall (i) notify Purchaser immediately if any
Superior Proposal is made and shall in such notice indicate the identity of the
offeror and the terms and conditions of any such Superior Proposal, and (ii)
keep Purchaser promptly apprised of significant developments as to such Superior
Proposal, The Company agrees not to release any third party from, or waive any
provisions of, any confidentiality or standstill agreement to which the Company
is a party, unless the Board shall have determined in good faith, based upon the
written advice of Counsel to the Company, that failing to release such third
party or waive such provisions would constitute a breach of the fiduciary duties
of the Board of Directors to the Company's stockholders under applicable law.
For the purposes hereof, the term "Superior Proposal" means an Acquisition
Proposal made by a third-party after the date hereof, which was not encouraged,
solicited or initiated by the Company, the Subsidiaries or any of their
affiliates or any of their respective officers, directors, employees,
representatives or agents, the value of which Acquisition Proposal to the
stockholders of the Company has been determined by the Board of Directors to be
materially greater than the value to such stockholders represented by the
transactions contemplated hereby.
(b) In connection with any Superior Proposal recommended to the stockholders
of the Company for approval, as provided above, if Purchaser does not elect to
terminate this Agreement pursuant to Section 8.1, then, upon written demand from
Purchaser, the Board of Directors of the Company shall, as promptly as
practicable thereafter, give notice of and convene a Meeting to consider and
vote upon the approval and adoption of this Agreement, the Merger and the
transactions contemplated hereby, in the manner provided in Section 6.3.
6.8. NOTIFICATION OF CERTAIN MATTERS.
The Company shall give prompt notice to Purchaser, and Purchaser shall give
prompt notice to the Company, of (i) the occurrence, or failure to occur, of any
event that such party believes would be likely to cause any of its
representations or warranties contained in this Agreement to be untrue or
inaccurate in any material respect at any time from the date hereof to the
Effective Time and (ii) any material failure of
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the Company, Purchaser or Merger Sub, as the case may be, or any officer,
director, employee or agent thereof, to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder. No such
notice shall modify, impair or constitute a waiver of any breach of any
representation, warranty or covenant, including, without limitation, any such
breach with respect to which such notice is given.
6.9. INDEMNIFICATION.
(a) The Certificate of Incorporation and Bylaws of the Surviving Corporation
shall contain the provisions with respect to indemnification and exculpation
from liability set forth in the Company's Certificate of Incorporation and
Bylaws as in effect on the date hereof, which provisions shall not be amended,
repealed or otherwise modified for a period of six years from the Effective Time
in any manner that would materially adversely affect the rights thereunder of
individuals who, on or prior to the Effective Time, were directors, officers,
employees or agents of the Company (collectively, the "Indemnified Parties"),
unless such modification is required by law.
(b) For a period of six years after the Effective Time, the Surviving
Corporation shall maintain officers' and directors' liability insurance covering
those Indemnified Parties who are currently covered by the Company's directors'
and officers' liability insurance policy, a copy of which has heretofore been
delivered to Purchaser, on terms no less favorable than the terms of such
current insurance coverage, PROVIDED, HOWEVER, that in no event shall the
Surviving Corporation be required to expend in any one year an amount in excess
of 150% of the annual premiums currently payable by the Company for such
insurance, PROVIDED, FURTHER, HOWEVER, that if the annual premiums of such
insurance coverage exceed such amount, the Surviving Corporation shall obtain a
policy with the greatest coverage available for a cost not exceeding such
amount.
(c) This Section 6.9 shall survive the consummation of the Merger at the
Effective Time, is intended to benefit the Company, Purchaser, the Surviving
Corporation and the Indemnified Parties, and shall be binding on the successors
and assigns of the Surviving Corporation.
6.10. RIGHTS PLAN.
The Company covenants and agrees that it will not (a) redeem the Rights, (b)
amend the Rights Agreement (except as provided in Section 4.32), or (c) take
an), action which would allow any Person (as defined in the Rights Agreement)
other than Purchaser to acquire beneficial ownership of 19.9% or more of the
Common Stock without causing a Distribution Date (as defined in the Rights
Agreement) to occur. Notwithstanding the foregoing, the Company may take any of
the actions described in clause (c) above, to the extent solely in connection
with a Superior Proposal and in the manner and subject to the terms and
conditions of Section 6.7.
6.11. COMPANY OPTIONS.
Prior to the Closing, the Company shall cause all outstanding amounts owed
to the Company or the Subsidiaries by holders of Company Options to be paid in
full or offset against the amounts payable to such holders pursuant to Section
3.5.
6.12. CERTAIN TRANSACTIONS.
Prior to the Closing Date, the Company shall (a) cause the Lease with
respect to the Leased Premises for its headquarters in Amarillo, Texas, to be
amended, such that, from and after the Effective Time, the same shall be
terminable by the tenant thereunder upon sixty (60) days prior written notice,
(b) cause all other contracts, agreements and understandings between the Company
or any Subsidiary and any person or entity affiliated with the Company or any
Subsidiary to be terminated, without liability to the Company or any Subsidiary,
and (c) at Purchaser's direction, use reasonable commercial efforts to divest of
any
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dealership operations on terms reasonably satisfactory to Purchaser in order to
satisfy the conditions to Closing set forth in Section 7.1.
6.13. OPTION PLAN.
At the Effective Time, the Company shall have terminated the Company Stock
Option Plan with no liability of the Company thereunder, including, without
limitation, to any of the holders of Company Options at any time (other than
obligations which will be satisfied pursuant to Section 3.5).
ARTICLE VII.
CONDITIONS TO THE MERGER
7.1. CONDITIONS TO THE MERGER RELATING TO PURCHASER AND MERGER SUB.
The obligation of Purchaser and Merger Sub to effect the Merger shall be
subject, unless waived in writing by them, to the fulfillment at or prior to the
Effective Time of the following conditions:
(a) this Agreement and the Merger hereby shall have been approved and
adopted by the requisite vote of the stockholders of the Company;
(b) no preliminary or permanent injunction or other order, decree or
ruling issued by any court of competent jurisdiction nor any statute, rule,
regulation or order entered, promulgated or enacted by any governmental,
regulatory or administrative agency or authority shall be in effect that
would restrain the effective operation of the business of the Company and
the Subsidiaries from and after the Effective Time, and no proceeding
challenging this Agreement or the transactions contemplated hereby or
seeking to prohibit, alter, prevent or materially delay the Merger shall be
pending before any court, arbitrator or governmental agency, body or
official;
(c) all of the representations and warranties of the Company set forth
in this Agreement shall have been true and correct on the date of this
Agreement, and (i) with respect to all such representations and warranties
that are not subject to materiality (or similar) qualifiers, shall be true
and correct in all material respects on the Closing Date (subject to any
transactions and other actions permitted or required to be taken pursuant to
this Agreement), with the same force and effect as if made on such date, and
(ii) with respect to all such representations and warranties that are
subject to materiality (or similar) qualifiers shall be true and correct on
the Closing Date in accordance with their terms, with the same force and
effect as if made on such date;
(d) the Company shall have performed, in all material respects, all of
its covenants and obligations under this Agreement;
(e) the Chief Executive Officer of the Company shall have executed and
delivered to Purchaser a certificate, in form reasonably acceptable to
Republic, certifying as to the matters set forth in clauses (c) and (d)
above;
(f) Between the date hereof and the Closing Date, there shall not have
occurred any fact, circumstance, development or event which has or could
reasonably be expected to have a Material Adverse Effect on the Company, and
the Company shall have delivered to Purchaser a certificate, dated as of the
Closing Date, to that effect.
(g) Purchaser shall have received an opinion of counsel to the Company
reasonably acceptable to the Purchaser, dated as of the Closing Date, in
form and substance reasonably acceptable to Purchaser;
(h) (i) Purchaser shall have received all consents required under the
Franchise Agreements between the Company and the Factories or shall have
entered into new arrangements and franchise agreements of the type generally
in use at that time to operate a dealership of each of the Factories at
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the current locations of the Dealerships, subject only to such additional
terms and conditions as are acceptable to Purchaser, and the Closing
hereunder shall be in compliance with any agreements then in effect between
the Purchaser and any Factories; (ii) the expiration or early termination of
any waiting period under the HSR Act shall have occurred; (iii) the Company
and Purchaser shall have received such other consents to the Merger and
other transactions contemplated hereby and waivers of rights to terminate or
modify any rights or obligations of the Company or the Subsidiaries, from
any person or entity from whom such consent or waiver is required, under any
Material Contract listed or required to be listed in Schedule 4.23 (other
than the Franchise Agreements) or any law or regulation (other than the HSR
Act), or who as a result of the transactions contemplated hereby, would have
such rights to terminate or modify such Material Contracts, either by the
terms thereof or as a matter of law, except for any failures to obtain any
such consent which, individually or in the aggregate, do not have and could
not reasonably be expected to have a Material Adverse Effect on Purchaser or
the Company; and (iv) Purchaser shall have obtained any applicable dealer
license or other approvals required under state laws or the applicable state
motor vehicle authorities and all other governmental authorities with
respect to the transactions contemplated hereby, except for any failures to
obtain any such licenses or approvals which, individually or in the
aggregate, do not have and could not reasonably be expected to have a
Material Adverse Effect on Purchaser or the Company;
(i) The Surviving Corporation and each of Bill A. Gilliland, Robert W.
Hall and John Gaines shall have entered into Employment Agreements (the
"Employment Agreements"), with respect to the employment of such persons by
the Surviving Corporation from and after the Closing Date, in the forms
attached hereto as Exhibits 7.1(i)(A) and 7.1(i)(B), respectively; and
(j) The Voting Agreement shall have been observed and shall continue to
be in full force and effect in accordance with their respective terms.
7.2. CONDITIONS TO THE MERGER RELATING TO THE COMPANY.
The obligation of the Company to effect the Merger shall be subject, at its
option or waiver in writing, to the fulfillment at or prior to the Effective
Time of the following conditions:
(a) this Agreement and the Merger shall have been approved and adopted
by the requisite vote of the stockholders of the Company;
(b) the expiration or earlier termination of any waiting period under
the HSR Act shall have occurred;
(c) all of the representations and warranties of the Purchaser and
Merger Sub set forth in this Agreement shall have been true and correct on
the date of this Agreement, and (i) with respect to all such representations
and warranties that are not subject to materiality (or similar) qualifiers,
shall be true and correct in all material respects on the Closing Date
(subject to any transactions and other actions permitted or required to be
taken pursuant to this Agreement), with the same force and effect as if made
on such date, and (ii) with respect to all such representations and
warranties that are subject to materiality (or similar) qualifiers shall be
true and correct on the Closing Date in accordance with their terms, with
the same force and effect as if made on such date; and
(d) Purchaser and Merger Sub shall have performed, in all material
respects, all of their covenants and obligations under this Agreement;
(e) no preliminary or permanent injunction or other order, decree or
ruling issued by any court of competent jurisdiction nor any statute, rule,
regulation or order entered, promulgated or enacted by any governmental,
regulatory or administrative agency or authority shall be in effect that
would prevent the consummation of the Merger as contemplated hereby;
(f) The Purchaser shall have entered into the Employment Agreements, the
Noncompetition Agreements.
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ARTICLE VIII.
TERMINATION AND ABANDONMENT
8.1. TERMINATION AND ABANDONMENT.
This Agreement may be terminated and the Merger may be abandoned at any time
prior to the Effective Time, whether before or after approval by the
stockholders of the Company:
(a) by mutual action of the Boards of Directors of Purchaser and the
Company;
(b) by either Purchaser or the Company, if the Merger shall not have
been effected on or prior to the close of business on the date that is one
year from the date hereof; unless, in any case, such event has been caused
by the breach of this Agreement by the party seeking such termination;
(c) by Purchaser, if the Board of Directors of the Company shall have
withdrawn, modified or amended in a manner adverse to Purchaser and Merger
Sub its approval or recommendation of the Merger (or failed to re-affirm its
approval or recommendation within ten days after Purchaser's request
following receipt by the Company's of an Acquisition Proposal) to the
Company's stockholders, or approved, recommended or endorsed any Superior
Proposal; or
(d) by Purchaser or the Company, upon the occurrence of any material
breach by the other party of any of its representations, warranties,
covenants or agreements, which breach is not cured within fifteen days after
written notice of such breach is delivered by the non-breaching party.
Any party desiring to terminate this Agreement pursuant to this Section 8.1
shall give written notice to the other party in accordance with Section 9.5.
8.2. EFFECT OF TERMINATION.
Except as provided in Sections 6.7 and 9.2 hereof, in the event of the
termination of this Agreement and the abandonment of the Merger pursuant to
Section 8.1, this Agreement shall thereafter become void and have no effect, and
no party hereto shall have any liability to any other party hereto or its
stockholders or directors or officers in respect thereof, except that nothing
herein shall relieve any party from liability for any material breach of any
representation, warranty, covenant or agreement contained herein accrued prior
to the date of termination.
ARTICLE IX.
MISCELLANEOUS
9.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
Except as provided in Section 4.3(iv) and as provided in the Voting
Agreement, the representations and warranties in this Agreement and in any
instrument delivered pursuant hereto shall not survive the Effective Time.
9.2. EXPENSES, ETC.
(a) Subject to Section 9.2(b), in the event that the transactions
contemplated by this Agreement are not consummated, then neither the Company, on
the one hand, nor Purchaser and Merger Sub, on the other hand, shall have any
obligation to pay any of the fees and expenses of the other incident to the
negotiation, preparation and execution of this Agreement, including the fees and
expenses of counsel, accountants, investment bankers and other experts.
(b) In the event the transactions contemplated by this Agreement are
terminated by Purchaser pursuant to Section 8.1(c), the Company shall within ten
(10) days after written demand from Purchaser,
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pay to Purchaser all reasonable out-of-pocket costs and expenses of Purchaser
and Merger Sub, including, without limitation, fees and expenses of counsel,
accountants and other advisors.
9.3. PUBLICITY.
The Company and Purchaser agree that they will not issue any press release
or make any other public announcement concerning this Agreement or the
transactions contemplated hereby without first consulting with the other party
and using good faith efforts to agree on the content of such release or
announcement, except that the Company or Purchaser may make such public
disclosure that it believes in good faith to be required by law, regulation or
the New York Stock Exchange (in which event such party shall consult with the
other prior to making such disclosure).
9.4. EXECUTION IN COUNTERPARTS.
For the convenience of the parties, this Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.5. NOTICES.
All notices that are required or may be given pursuant to the terms of this
Agreement shall be in writing and shall be sufficient in all respects if given
in writing and delivered by hand or national overnight courier service,
transmitted by telecopy with confirmation of receipt or mailed by registered or
certified mail (return receipt requested), postage prepaid (effective when
delivered by hand or telecopy, one business day after dispatch by overnight
courier, and on the day received after dispatch by mail), as follows:
If to Purchaser or Merger Sub, to:
Republic Industries, Inc.
Republic Tower
110 S.E. 6th Street, 20th Floor
Fort Lauderdale, Florida 33301
Attention: Jonathan P. Ferrando, Vice President
with a copy to:
Morrison & Foerster LLP
755 Page Mill Road
Palo Alto, CA 94304
Attention: Joseph Barbeau, Esq.
If to the Company, to:
Cross Continent Auto Retailers, Inc.
1201 S. Taylor Street
P.O. Box 750
Amarillo, Texas 79105-0750
Attention: Bill A. Gilliland
with a copy to:
Winstead Sechrest & Minick P.C
5400 Renaissance Tower
1201 Elm Street
Dallas, Texas 75270-21999
Attention: Thomas W. Hughes, Esq.
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or such other address or addresses as any party hereto shall have designated by
notice in writing to the other parties hereto.
9.6. WAIVERS.
The Company, on the one hand, and Purchaser and Merger Sub, on the other
hand, may, in its sole discretion, by written notice to the other, (i) extend
the time for the performance of any of the obligations or other actions of the
other under this Agreement; (ii) waive any inaccuracies in the representations
or warranties of the other contained in this Agreement or in any document
delivered pursuant to this Agreement; (iii) waive compliance with any of the
conditions of the other contained in this Agreement; or (iv) waive performance
of any of the obligations of the other under this Agreement. Except as provided
in the preceding sentence, no action taken pursuant to this Agreement,
including, without limitation, any investigation by or on behalf of any party,
shall be deemed to constitute a waiver by the party taking such action of
compliance with any representations, warranties, covenants or agreements
contained in this Agreement, The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach.
9.7. ENTIRE AGREEMENT.
This Agreement, its Schedules, the Voting Agreement and the documents
executed at the Effective Time in connection herewith constitute the entire
agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings, oral and written, among the
parties hereto with respect to the subject matter hereof. No representation,
warranty, promise, inducement or statement of intention has been made by any
party that is not embodied in this Agreement or such other documents, and none
of the parties shall be bound by, or be liable for, any alleged representation,
warranty, promise, inducement or statement of intention not embodied herein or
therein.
9.8. APPLICABLE LAW; VENUE.
(a) This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware, without regard to principles of conflict of laws.
(b) The parties to this Agreement agree that any suit, action or proceeding
arising out of, or with respect to, this Agreement shall be brought exclusively
in the Delaware Chancery Court (if jurisdiction is applicable) or in the other
state courts of Delaware or in the U.S. District Court for the District of
Delaware (as the commencing party may elect), and the parties hereby accept the
exclusive jurisdiction of such courts for the purpose of any such suit, action
or proceeding. In addition, each party hereby irrevocably waives, to the fullest
extent permitted by law, any objection which it may now or hereafter have to the
laying of venue of any such suit, action or proceeding in any such court and
hereby further irrevocably waives any claim that any such suit, action or
proceedings brought in any such court has been brought in an inconvenient forum.
9.9. BINDING EFFECT; BENEFITS.
This Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective permitted successors and assigns. Notwithstanding
anything contained in this Agreement to the contrary, nothing in this Agreement,
expressed or implied, is intended to confer on any person other than the parties
hereto or their respective permitted successors and assigns, any rights,
remedies, obligations or liabilities under or by reason of this Agreement;
PROVIDED, HOWEVER, that the provisions of Section 6.9 hereof shall accrue to the
benefit of, and shall be enforceable by, each of the Indemnified Parties.
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9.10. ASSIGNABILITY.
Neither this Agreement nor any of the parties' rights hereunder shall be
assignable by any party hereto without the prior written consent of the other
parties hereto.
9.11. AMENDMENTS.
This Agreement may be varied, amended or supplemented at any time before or
after the approval and adoption of this Agreement by the stockholders of the
Company by action of the respective Boards of Directors of the Company,
Purchaser and Merger Sub, without action by the stockholders thereof; PROVIDED
that, after approval and adoption of this Agreement by the Company's
stockholders, no such variance, amendment or supplement shall, without consent
of such stockholders, reduce the amount or alter the form of the consideration
that the holders of the capital stock of the Company shall be entitled to
receive upon the Effective Time pursuant to the terms hereof. Without limiting
the generality of the foregoing, this Agreement may only be amended, varied or
supplemented by an instrument in writing, signed by the parties hereto.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
and Plan of Merger as of the day and year first above written.
<TABLE>
<S> <C> <C>
REPUBLIC INDUSTRIES, INC.
By /s/ THOMAS S. BUTLER
-----------------------------------------
Thomas S. Butler, Vice President
RI/BG Merger Corp.
By /s/ THOMAS S. BULTER
-----------------------------------------
Thomas S. Butler, Authorized Signatory
Cross Continent Auto Retailers, Inc.
By /s/ BILL A. GILLILAND
-----------------------------------------
Bill A. Gilliland, Chief Executive Officer
</TABLE>
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APPENDIX B
CROSS CONTINENT AUTO RETAILERS, INC.
VOTING AGREEMENT
This Voting Agreement (the "Agreement") is made and entered into as of
September 3, 1998, between and among REPUBLIC INDUSTRIES, INC., a corporation
incorporated under the laws of the State of Delaware ("Purchaser"), and the
undersigned stockholders (the "Stockholders") of CROSS CONTINENT AUTO RETAILERS,
INC., a corporation organized under the laws of the State of Delaware
("Company"). All capitalized terms herein not otherwise defined shall have the
meaning ascribed to them in the Merger Agreement (as defined below).
RECITALS
Pursuant to an Agreement and Plan of Merger dated as of the date hereof (the
"Merger Agreement") by and among Purchaser, RI/BG Merger Corp., a corporation
organized under the laws of the State of Delaware ("Merger Sub") and wholly
owned subsidiary of Purchaser, and Company, Merger Sub is merging with and into
Company (the "Merger") and Company, as the surviving corporation of the Merger,
will thereby become a wholly owned subsidiary of Purchaser;
The Stockholders are the beneficial owners (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of the
shares of the outstanding Common Stock, $.01 par value per share, of Company in
the amounts indicated on the final page of this Agreement (the "Shares"); and
In consideration of the execution of the Merger Agreement by Purchaser, each
Stockholder agrees (i) not to transfer or otherwise dispose of any of its
Shares, or any other shares of capital stock of Company acquired by such
Stockholder hereafter and prior to the Expiration Date (as defined in Section
1.1 below), (ii) agrees to vote its Shares and any other such shares of capital
stock of Company in favor of and so as to facilitate consummation of the Merger
and (iii) agrees to remit to the Purchaser a Superior Proposal Payment (as
defined), subject to the conditions herein.
NOW, THEREFORE, the parties agree as follows:
1. AGREEMENT TO RETAIN SHARES.
1.1 TRANSFER AND ENCUMBRANCE. Each Stockholder agrees not to transfer
(except as may be specifically required by court order), sell, exchange,
pledge or otherwise dispose of or encumber its Shares or any New Shares, or
to make any offer or agreement relating thereto, at any time prior to the
Expiration Date. As used herein, the term "Expiration Date" shall mean the
earlier to occur of (i) such date and time as the Merger shall become
effective in accordance with the terms and provisions of the Merger
Agreement, (ii) the date on which the Merger Agreement terminates, if
terminated pursuant to Section 8.1(a) thereof, and (iii) the later of (x)
one year after the date hereof and (y) the date on which the Definitive
Agreement (as defined in Section 7 hereof) terminates or the principal
transaction contemplated thereby is consummated and any and all Definitive
Agreements Payments (as defined in Section 8 hereof) due Purchaser have been
received by Purchaser.
1.2 NEW SHARES. Each Stockholder agrees that any shares of capital
stock of Company that such Stockholder purchases or with respect to which
such Stockholder otherwise acquires beneficial ownership after the date of
this Agreement and prior to the Expiration Date ("New Shares") shall be
subject to the terms and conditions of this Agreement to the same extent as
if they constituted Shares.
2. AGREEMENT TO VOTE SHARES. At every meeting of the stockholders of
Company called with respect to any of the following, and at every adjournment
thereof, and on every action or approval by written consent of the stockholders
of Company with respect to any of the following, each Stockholder agrees it
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shall vote its Shares and any New Shares (i) in favor of approval of the Merger
Agreement, the Merger, the transactions contemplated hereby and thereby and any
matter that could reasonably be expected to facilitate the Merger and (ii)
against any proposal for any recapitalization, merger, stock purchase, sale of
assets or other business combination or other Acquisition Proposal (as defined
in the Merger Agreement) (other than the Merger) between Company and any person
or entity other than Purchaser or any other action or agreement that would
result in a breach of any covenant, representation or warranty or any other
obligation or agreement of Company under the Merger Agreement or which could
result in any of the conditions to Company's obligations under the Merger
Agreement not being fulfilled. This Agreement is intended to bind each
Stockholder as a stockholder of Company only with respect to the specific
matters set forth herein.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF STOCKHOLDER. Each
Stockholder hereby represents, warrants and covenants to Purchaser that such
Stockholder (i) is the beneficial owner of its Shares, which at the date of this
Agreement and at all times up until the Expiration Date will be free and clear
of any liens, claims, options, charges or other encumbrances; (ii) does not
beneficially own any shares of capital stock of Company other than its Shares
(excluding shares as to which such Stockholder currently disclaims beneficial
ownership in accordance with applicable law); and (iii) has full power and
authority to make, enter into and carry out the terms of this Agreement. Each
Stockholder hereby further represents, warrants and covenants to Purchaser that
(i) the execution, delivery and performance of this Agreement by such
Stockholder and the consummation of the transactions contemplated hereby, will
not (a) require the consent, waiver, approval, or authorization of any
governmental authority or any other person or entity or (b) violate, conflict
with, result in a breach of or the acceleration of any obligation under, or
constitute a default (or an event which with notice or the lapse of time or both
would become a default) under, or give to others any right of termination,
amendment, acceleration or cancellation of, or result in the creation of a lien
or other encumbrance on any property or asset of the Stockholder pursuant to any
provision of any indenture, mortgage, lien, lease, agreement, contract,
instrument, order, judgment, ordinance, regulation or decree to which the
Stockholder is subject or by which the Stockholder or any of its property or
assets is bound; (ii) the Shares held by the undersigned Stockholders
collectively represent 60.18% of the issued and outstanding Common Stock of the
Company; and (iii) the Company and its Board of Directors have authorized and
taken all necessary action to amend the rights agreement between the Company and
the Bank of New York, as Rights Agent, dated as of September 20, 1996 (the
"Rights Agreement"), without redeeming the Rights (as defined in the Rights
Agreement), such that none of the execution, delivery or performance of this
Voting Agreement or the Merger Agreement or the consummation of the transactions
contemplated hereby or thereby will (a) cause any Rights issued pursuant to the
Rights Agreement to become exercisable or to separate from the stock certificate
to which they are attached, (b) cause Purchaser, Merger Sub or any of their
affiliates to be an Acquiring Person (as defined in the Rights Agreement), or
(c) trigger other provisions of the Rights Agreement, including giving rise to a
Distribution Date (as defined in the Rights Agreement), and such amendment shall
be in full force and effect at all times from and after the date hereof through
the Effective Time. As of the date hereof and at all times on or prior to the
Effective Time, the restrictions to business combinations contained in Section
203 of the DGCL are, and will be, inapplicable to the execution, delivery and
performance of this Agreement and the Merger Agreement and to the voting of
shares and payment of consideration hereunder, the consummation of the Merger
and the other transactions contemplated by this Agreement and the Merger
Agreement. Prior to the execution of this Agreement, the Board of Directors of
the Company approved this Agreement, the Merger Agreement and the transactions
contemplated hereby and thereby.
4. ADDITIONAL DOCUMENTS. Each Stockholder hereby covenants and agrees to
execute and deliver any additional documents necessary or desirable, in the
reasonable opinion of Purchaser, to carry out the purpose and intent of this
Agreement.
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5. CONSENT AND WAIVER. Each Stockholder hereby gives any consents or
waivers that are reasonably required for the consummation of the Merger under
the terms of any agreement to which such Stockholder is a party or pursuant to
any rights such Stockholder may have. Each Stockholder further agrees to give
such additional consents and waivers as may be reasonably required for the
consummation of the Merger under the terms of any agreement to which such
Stockholder is a party or pursuant to any rights such Stockholder may have.
6. TERMINATION. This Agreement shall terminate and shall have no further
force or effect as of the Expiration Date.
7. SUSPENSION IN THE EVENT OF A SUPERIOR PROPOSAL. In the event that
Company has executed a definitive agreement for a Superior Proposal (to the
extent permitted by and as such term is defined in the Merger Agreement) (a
"Definitive Agreement"), Section 2 hereof shall be suspended (such action, a
"Suspension") and, subject to the next two sentences, have no force or effect as
and to the extent provided below. Notwithstanding the foregoing sentence, if,
upon the request of Purchaser at least three days prior to a stockholders'
meeting to approve a Definitive Agreement, any Stockholder fails to enter into
an escrow agreement with Purchaser in customary and reasonable form providing
for a Definitive Agreement Payment (as defined below) to be paid directly by the
acquiring party in the Definitive Agreement into escrow pending distribution to
Purchaser pursuant to Section 8 hereof (the "Escrow Agreement"), then any
Suspension shall automatically terminate and be deemed null, void and of no
further force or effect, and each Stockholder shall thereafter comply with the
terms of Section 2 hereof, all of which terms shall at such time be in full
force and effect. Notwithstanding the first sentence of this paragraph 7, if (i)
the transaction contemplated by a Definitive Agreement is not consummated within
the time period required by such Definitive Agreement; or (ii) a Definitive
Agreement is terminated prior to the consummation of the transaction
contemplated thereby, then, in either such case, any Suspension shall
automatically terminate and be deemed null, void and of no further force or
effect and each Stockholder shall thereafter comply with the terms of Section 2
hereof, all of which terms shall at such time be in full force and effect.
8. SUPERIOR PROPOSAL PAYMENTS. In the event a transaction contemplated by
a Definitive Agreement is consummated, each Stockholder agrees to pay to
Purchaser immediately thereafter in one lump sum payment that portion of the
consideration (in kind and in proportions as described below) received by such
Stockholder (a "Definitive Agreement Payment") with a value equal to the
difference between (i) the total value of all the consideration to be received
by such Stockholder under the terms of the Definitive Agreement, including any
amounts withheld in escrow or otherwise payable to such Stockholder at some
future date (a "Gross Payment") and (ii) the total amount of Merger
Consideration such Stockholder would have received under the terms of the Merger
Agreement if the transactions contemplated thereby had been consummated. The
Definitive Agreement Payment shall be comprised of any non-cash consideration
("Securities") and cash in the same proportion and of the same type as the
subject Stockholder's Gross Payment. For the purposes of this Section 8, the
value of any Securities shall be determined as follows:
(i) For any Securities freely tradable on the New York Stock Exchange,
the American Stock Exchange, the Nasdaq National Market or the Nasdaq Small
Cap Market, the value shall be deemed to equal the product of (a) the number
of units of Securities and (b) closing price per unit of Securities as
reported by such exchange or market on the date of the consummation of the
Definitive Agreement;
(ii) For any securities not freely tradable on the New York Stock
Exchange, the American Stock Exchange, the Nasdaq National Market or the
Nasdaq Small Cap Market, the value shall be equal to an amount agreed to by
the Stockholder and Purchaser. If Stockholder and Purchaser cannot agree on
a value for the Securities within ten (10) business days of the consummation
of the Definitive Agreement, the value of the Securities shall equal the
amount determined by a nationally recognized
B-3
<PAGE>
investment bank. Such nationally recognized investment bank shall be
selected by Purchaser, subject to Stockholder's approval, which approval
shall not be unreasonably withheld.
9. MISCELLANEOUS.
9.1 SEVERABILITY. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, then the remainder of this terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
9.2 BINDING EFFECT AND ASSIGNMENT. This Agreement and all of the
provisions hereof shall be binding upon and insure to the benefit of the
parties hereto and their respective successors and permitted assigns, but,
except as otherwise specifically provided herein, neither this Agreement nor
any of the rights, interests or obligations of the parties hereto may be
assigned by any of the parties without the prior written consent of the
other.
9.3 AMENDMENT AND MODIFICATION. This Agreement may not be modified,
amended, altered or supplemented except by the execution and delivery of a
written agreement executed by the parties hereto.
9.4 SPECIFIC PERFORMANCE; INJUNCTIVE RELIEF. The parties hereto
acknowledge that Purchaser will be irreparably harmed and that there will be
no adequate remedy at law for a violation of any of the covenants or
agreements of Stockholder set forth herein. Therefore, it is agreed that, in
addition to any other remedies that may be available to Purchaser upon such
violation, Purchaser shall have the right to enforce such covenants and
agreements by specific performance, injunctive relief or by any other means
available to Purchaser at law or in equity.
9.5 NOTICES. All notices that are required or may be given pursuant to
the terms of this Agreement shall be in writing and shall be sufficient in
all respects if given in writing and delivered by hand or national overnight
courier service, transmitted by telecopy or mailed by registered or
certified mail, return receipt requested, postage prepaid (effective when
delivered by hand or telecopy, one day after dispatch by overnight courier,
and the day actually received, if dispatched by mail), as follows:
(a) if to Purchaser or Merger Sub, to:
Republic Industries, Inc.
Republic Tower
110 S.E. 6th Street
Fort Lauderdale, Florida 33301
Attention: Jonathan P. Ferrando, Esq.
Facsimile No.: (954) 769-6340
Telephone No.: (954) 769-7224
with a copy to:
Morrison & Foerster LLP
755 Page Mill Road
Palo Alto, CA 94304
Attention: Joseph M. Barbeau, Esq.
Facsimile No.: (650) 494-0792
Telephone No.: (650) 813-5600
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<PAGE>
(b) if to the Stockholders, to:
c/o Bill A. Gilliland
1201 S. Taylor Street
P.O. Box 750
Amarillo, Texas 79105-0750
Facsimile No. (806) 374-3818
Telephone No. (806) 374-8653
with a copy to:
Winstead Sechrest & Minick P.C.
5400 Renaissance Tower
1201 Elm Street
Dallas, Texas 75270-21999
Facsimile No. (214) 745-5390
Telephone No. (214) 745-5400
Attention: Thomas W. Hughes, Esq.
9.6 GOVERNING LAW. This Amendment shall be governed by, construed and
enforced in accordance with the internal laws of the State of Delaware,
without regard to principles of conflicts of law.
9.7 ENTIRE AGREEMENT. This Agreement contains the entire understanding
of the parties in respect of the subject matter hereof, and supersedes all
prior negotiations and understandings between the parties with respect to
such subject matter.
9.8 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
9.9 EFFECT OF HEADINGS. The section headings herein are for
convenience only and shall not affect the construction or interpretation of
this Agreement.
9.10 JURISDICTION. The parties to this Agreement agree that any suit,
action or proceeding arising out of, or with respect to, this Agreement or
any judgment entered by any court in respect thereof shall be brought
exclusively in the Delaware Chancery Court (if jurisdiction is applicable)
or in the other state courts of Delaware or in the U.S. District Court for
Delaware (as the commencing party may elect), and the parties hereby accept
the exclusive jurisdiction of such courts for the purpose of any such suit,
action or proceeding. In addition, each party hereby irrevocably waives, to
the fullest extent permitted by law, any objection which it may now or
hereafter have to the laying of venue of any such suit, action or proceeding
brought in any such court has been brought in an inconvenient forum.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the day and year first above written.
PURCHASER
REPUBLIC INDUSTRIES, INC.
By: /s/ THOMAS S. BUTLER
------------------------------------------
Thomas S. Butler, Vice President Corporate
Development
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<PAGE>
STOCKHOLDERS
/s/ BILL A. GILLILAND
----------------------------------------------
Bill A. Gilliland
/s/ SANDRA E. GILLILAND
----------------------------------------------
Sandra E. Gilliland
TWENTY-TWO TEN, LTD
By: Twenty-Two Ten Management Corp., general
partner
By: /s/ ROBERT W. HALL
------------------------------------------
Robert W. Hall, president
XARIS, LTD.
By: Xaris Management Co., general partner
By: /s/ BILL A. GILLILAND
------------------------------------------
Bill A. Gilliland, president
THE GILLILAND GROUP FAMILY PARTNERSHIP
By: /s/ BILL A. GILLILAND
------------------------------------------
Bill A. Gilliland, managing partner
B-6
<PAGE>
[LOGO]
APPENDIX C
September 2, 1998
The Board of Directors
Cross-Continent Auto Retailers, Inc.
1201 South Taylor Street
Amarillo, TX 79101
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the stockholders of Cross-Continent Auto Retailers, Inc. (the
"Company"), of the consideration to be received by the stockholders pursuant to
the terms of the proposed Agreement and Plan of Merger (the "Agreement") dated
as of September 3, 1998, by and among Republic Industries, Inc, (the
"Acquiror"), RI/BG Merger Corp, and the Company Pursuant to the Agreement, RI/BG
Merger Corp will be merged with and into the Company (the "Merger"), and each
issued and outstanding share of Common Stock, $.01 par value per share, of the
Company is proposed to be converted into the right to receive, without interest,
an amount in cash equal to $10.70. The terms and conditions of the Merger are
set forth more fully in the Agreement.
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated ("Dain
Rauscher Wessels"), as part of its investment banking services, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, corporate restructurings, negotiated underwritings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. Dain Rauscher Wessels has been
retained to provide financial advisory services to the Company in connection
with the Agreement and has received a fee for these services. In addition, we
will receive a separate fee for providing this opinion. The opinion fee is not
contingent upon the consummation of the transactions contemplated by the
Agreement.
Dain Rauscher Wessels acted as a co-manager of the initial public offering
of the Company on September 23, 1996. In the ordinary course of business, Dain
Rauscher Wessels acts as a market maker and broker in the publicly traded
securities of the Company and receives customary compensation in connection
therewith, and also provides research coverage for the Company for its own
account and for the accounts of its customers and, accordingly, may at any time
hold a long or short position in such securities.
In connection with our review of the Merger, and in arriving at our opinion,
we have: (i) reviewed and analyzed the financial terms of the Agreement; (ii)
reviewed and analyzed certain publicly available financial and other data with
respect to the Company and certain other relevant historical and operating data
(including internal financial forecasts of the Company on a stand-alone basis)
relating to the Company made available to us from published sources and from the
internal records of the Company; (iii) conducted discussions with members of the
senior management of the Company with respect to the business and prospects of
the Company on a stand-alone basis; (iv) reviewed the reported prices and
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Dain Rauscher Plaza (612) 371-2800 Dain Rauscher
60 South Sixth Street Fax (612) 371-2763 Incorporated
P.O. Box 1160 Member NYSE/SIPC
Minneapolis, MN
55440-1160
</TABLE>
C-1
<PAGE>
The Board of Directors
September 2, 1998
Page 2
trading activity for the Company's Common Stock; (v) compared the financial
performance of the Company and the prices of the Company's Common Stock with
that of certain other comparable publicly-traded companies and their securities;
and (vi) reviewed the financial terms and stock price premiums paid, to the
extent publicly available, of certain comparable merger transactions. In
addition, we have conducted such other analyses and examinations and considered
such other financial, economic and market criteria as we have deemed necessary
in arriving at our opinion.
With respect to the Company's financial forecasts, upon advice of the
Company we have assumed that such forecasts have been reasonably prepared on a
basis reflecting the best currently available estimates and judgments of the
management of the Company as to the future financial performance of the Company
and that the Company will perform substantially in accordance with such
projections. We express no opinion as to such financial forecast information or
the assumptions on which they were based.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of the financial, legal, tax, operating and other information
provided to us by the Company (including without limitation the financial
statements and related notes thereto of the Company), and have not assumed
responsibility for independently verifying and have not independently verified
such information. We have not assumed any responsibility to perform, and have
not performed, an independent evaluation or appraisal of any of the respective
assets or liabilities of the Company, and we have not been furnished with any
such valuations or appraisals. In addition, we have not assumed any obligation
to conduct, and have not conducted, any physical inspection of the property or
facilities of the Company. Additionally, we have not been asked and did not
consider the possible effects of any litigation, other legal claims or any other
contingent matters.
Our opinion speaks only as of the date hereof, is based on the conditions as
they exist and information which we have been supplied as of the date hereof,
and is without regard to any market, economic, financial, legal or other
circumstances or event of any kind or nature which may exist or occur after such
date. The opinion expressed herein is provided for the information and
assistance of the Board of Directors of the Company in connection with its
consideration of the transaction contemplated by the Agreement and such opinion
does not constitute a recommendation to any stockholder as to how such
stockholder should vote with respect to such transaction. Further, our opinion
does not address the merits of the underlying decision by the Company to engage
in such transaction. Except as provided in our engagement letter, this opinion
shall not be published or otherwise used, nor shall references to Dain Rauscher
Wessels be made, without our prior written approval, except that the Company may
include this opinion in its entirety in any proxy statement or information
statement relating to the Merger sent to the Company's stockholders.
Based on our experience as investment bankers and subject to the foregoing,
including the various assumptions and limitations set forth herein, it is our
opinion that, as of the date hereof, the consideration to be received by the
holders of the Company's Common Stock pursuant to the Agreement is fair, from a
financial point of view, to the holders of the Company's Common Stock.
Very truly yours,
/s/ Dain Rauscher Wessels
Dain Rauscher Wessels
a division of Dain Rauscher
Incorporated
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<PAGE>
APPENDIX D
SECTION 262 OF DELAWARE GENERAL CORPORATE LAW
APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to Section 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constitutent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constitutent
corporation surviving a merger if the merger did not require for its
approval the vote of the stockholders of the surviving corporation as
provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constitutent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to Sections
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
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<PAGE>
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constitutent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsection (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constitutent corporations, and shall
include in such notice a copy of this section. Each stockholder electing to
demand the appraisal of his shares shall deliver to the corporation, before
the taking of the vote on the merger or consolidation, a written demand for
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares. A proxy
or vote against the merger or consolidation shall not constitute such a
demand. A stockholder electing to take such action must do so by a separate
written demand as herein provided. Within 10 days after the effective date
of such merger or consolidation, the surviving or resulting corporation
shall notify each stockholder of each constitutent corporation who has
complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, each constitutent corporation, either before
the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of stock
of such constitutent corporation who are entitled to appraisal rights of the
approval of the merger or consolidation and that appraisal rights are
available for any or all shares of such class or series of stock of such
constitutent corporation, and shall include in such notice a copy of this
section; provided that, if the notice is given on or after the effective
date of the merger or consolidation, such notice shall be given by the
surviving or resulting corporation to all such holders of any class or
series of stock of a constitutent corporation that are entitled to appraisal
rights. Such notice may, and, if given on or after the effective date of the
merger or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such
notice, demand in writing from the surviving or resulting corporation the
appraisal of such holder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and
that the stockholder intends thereby to demand the appraisal of such
holder's shares. If such notice did not notify stockholders of the effective
date of the merger or consolidation, either (i) each such constitutent
corporation shall send a second notice before the effective date of the
merger or consolidation notifying each of the holders of any class or series
of stock of such constitutent corporation that are entitled to appraisal
rights of the effective date of the merger or consolidation or (ii) the
surviving or resulting corporation shall send such a second notice to all
such holders on or within 10 days after such effective date; provided,
however, that if such second notice is sent more than 20 days following the
sending of the first notice, such second notice need only be sent to each
stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection. An
affidavit of the
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<PAGE>
secretary or assistant secretary or of the transfer agent of the corporation
that is required to give either notice that such notice has been given
shall, in the absence of fraud, be prima facie evidence of the facts stated
therein. For purposes of determining the stockholders entitled to receive
either notice, each constitutent corporation may fix, in advance, a record
date that shall be not more than 10 days prior to the date the notice is
given, provided, that if the notice is given on or after the effective date
of the merger or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day
next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion,
D-3
<PAGE>
permit discovery or other pretrial proceedings and may proceed to trial upon the
appraisal prior to the final determination of the stockholder entitled to an
appraisal. Any stockholder whose name appears on the list filed by the surviving
or resulting corporation pursuant to subsection (f) of this section and who has
submitted his certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that he is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
D-4
<PAGE>
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CROSS-CONTINENT AUTO RETAILERS, INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS, JANUARY 5, 1999
The undersigned, revoking any proxy heretofore given, hereby appoints
John W. Gaines and R. Wayne Moore, and each of them, proxies, with full power
of substitution and resubstitution, for and in the name of the undersigned,
to vote all of the shares of common stock, par value $.01 per share, of
CROSS-CONTINENT AUTO RETAILERS, INC. (the "Company") which the undersigned is
entitled to vote at the Company's Special Meeting of Stockholders to be held
at 2:00 p.m. local time, on Tuesday, January 5, 1999, at Amarillo National's
Plaza-Two, 2nd floor conference room, 500 South Taylor Street, Amarillo,
Texas 79101 and at any adjournment thereof, hereby ratifying all that said
proxies or their substitutes or resubstitutes may do by virtue hereof, and
the undersigned authorizes and instructs said proxies to vote as set forth on
the Reverse Side hereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL
AND ADOPTION OF THE AGREEMENT AND PLAN OF MERGER AND THE RELATED MERGER
LISTED IN PROPOSAL 1.
Please fill in, date, sign and mail this Proxy in the enclosed
postage-paid return envelope.
By signing and returning this Proxy, the undersigned acknowledges
receipt of the Notice of Special Meeting of Stockholders and the Proxy
Statement.
Unless a contrary direction is indicated, this Proxy will be voted FOR
the approval and adoption of the Agreement and Plan of Merger and the related
Merger listed in Proposal 1 as more specifically set forth in the Proxy
Statement; if specific instructions are indicated, this Proxy will be voted
in accordance therewith.
Cross-Continent Auto Retailers, Inc.
P.O. Box 11189
New York, N.Y. 10203-0189
(PLEASE SIGN AND DATE ON REVERSE SIDE)
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<PAGE>
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1. To approve and adopt the Agreement and Plan of Merger dated as of
September 3, 1998 by and among Cross-Continent Auto Retailers, Inc.,
Republic Industries, Inc. and RI/BG Merger Corp. and the related Merger.
/ / FOR / / AGAINST / / ABSTAIN
2. In their discretion, upon such other matters as properly come before the
meeting.
Dated:
-----------------------------------
Signature
-------------------------------
Signature
-------------------------------
(Please sign, date and return this proxy in the
enclosed postage prepaid envelope)
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Please sign exactly as name appears
hereon. When signing as attorney,
executor, administrator, trustee or
guardian, please give full title as
/ / PLEASE MARK HERE IF YOU PLAN TO such. If a corporation, please sign
ATTEND THE MEETING in full corporate name by President
or other authorized officer. If a
/ / Change of Address and/or partnership, please sign in partnership
Comments Mark Here name by authorized person. If owned
jointly, each owner should sign.
Votes must be indicated (x) in Black
or Blue Ink / /
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