<PAGE> 1
As filed with the Securities and Exchange Commission on October 14, 1997
Registration No. 333-29893
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
GROUP 1 AUTOMOTIVE, INC.
(Name of Registrant as specified in its charter)
<TABLE>
<C> <C> <C>
DELAWARE 5511 76-0506313
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
</TABLE>
950 ECHO LANE, SUITE 350
HOUSTON, TEXAS 77024
(713) 467-6268
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
B. B. HOLLINGSWORTH, JR.
950 ECHO LANE, SUITE 350
HOUSTON, TEXAS 77024
(713)467-6268
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
<TABLE>
<C> <C>
JOHN S. WATSON PATRICIA A. CERUZZI
VINSON & ELKINS L.L.P. SULLIVAN & CROMWELL
1001 FANNIN STREET, 36TH FLOOR 125 BROAD STREET
HOUSTON, TEXAS 77002 NEW YORK, NEW YORK 10004
(713) 758-2222 (212) 558-4000
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION, OCTOBER 14, 1997
4,800,000 SHARES
GROUP 1 AUTOMOTIVE, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
---------------------
Of the 4,800,000 shares of Common Stock offered hereby, 4,428,136 shares
are being sold by the Company and 371,864 shares are being sold by the Selling
Stockholder. See "Principal and Selling Stockholders". The Company will not
receive any of the proceeds from the sale of the shares being sold by the
Selling Stockholder. Each share of Common Stock includes one right to purchase
one one-thousandth of a share of Junior Participating Preferred Stock, which
rights become exercisable upon the occurrence of certain events. See
"Description of Capital Stock -- Stockholder Rights Plan".
Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price per share will be between $10.00 and $12.00. For factors to be considered
in determining the initial public offering price, see "Underwriting".
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
The Common Stock has been approved for listing, subject to notice of
issuance, on the New York Stock Exchange under the symbol "GPI".
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDER(2)
-------------- ------------ ----------- -------------------
<S> <C> <C> <C> <C>
Per Share........................ $ $ $ $
Total(3)......................... $ $ $ $
</TABLE>
- ---------------
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
(2) Before deducting estimated expenses of $5.0 million payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 720,000 shares at the initial public offering price per
share, less the underwriting discount, solely to cover over-allotments. If
such option is exercised in full, the total initial public offering price,
underwriting discount and proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting".
---------------------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be ready for delivery in New York, New York on or about
October , 1997, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
NATIONSBANC MONTGOMERY SECURITIES, INC.
---------------------
The date of this Prospectus is October , 1997.
<PAGE> 3
[GRAPHICS]
THIS PROSPECTUS INCLUDES STATISTICAL DATA REGARDING THE AUTOMOTIVE
RETAILING INDUSTRY. UNLESS OTHERWISE INDICATED, SUCH DATA IS TAKEN OR DERIVED
FROM INFORMATION PUBLISHED BY (I) THE INDUSTRY ANALYSIS DIVISION OF THE NATIONAL
AUTOMOBILE DEALERS ASSOCIATION ("NADA") IN ITS NADA DATA 1996, (II) CRAIN
COMMUNICATIONS INC. IN ITS AUTOMOTIVE NEWS 100-YEAR ALMANAC, 1996 MARKET DATA
BOOK AND 1997 MARKET DATA BOOK, (III) ADT AUTOMOTIVE, INC. IN ITS 1997 USED CAR
MARKET REPORT OR (IV) THE BUREAU OF THE CENSUS IN THE U.S. DEPARTMENT OF
COMMERCE IN ITS STATISTICAL ABSTRACT OF THE UNITED STATES 1996 FROM THE NATIONAL
DATA BOOK.
NO MANUFACTURER (AS DEFINED UNDER "RISK FACTORS -- MANUFACTURERS' CONTROL
OVER DEALERSHIPS" ON PAGE 13 OF THIS PROSPECTUS) HAS BEEN INVOLVED, DIRECTLY OR
INDIRECTLY, IN THE PREPARATION OF THIS PROSPECTUS OR IN THE OFFERING BEING MADE
HEREBY. NO MANUFACTURER HAS MADE ANY STATEMENTS OR REPRESENTATIONS IN CONNECTION
WITH THE OFFERING OR PROVIDED ANY INFORMATION OR MATERIALS THAT WERE USED IN
CONNECTION WITH THE OFFERING, AND NO MANUFACTURER HAS ANY RESPONSIBILITY FOR THE
ACCURACY OR COMPLETENESS OF THIS PROSPECTUS. THE COMPANY HAS AGREED TO INDEMNIFY
EACH MANUFACTURER WITH WHICH IT HAS A FRANCHISE AGREEMENT AGAINST CERTAIN
LIABILITIES THAT MAY BE INCURRED IN CONNECTION WITH THE OFFERING, INCLUDING
LIABILITIES UNDER THE SECURITIES ACT OF 1933.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVERALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN THE
COMMON STOCK, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
2
<PAGE> 4
PROSPECTUS SUMMARY
Group 1 Automotive, Inc. was formed in December 1995 to acquire automobile
dealerships and related operations and has conducted limited operations to date.
Immediately prior to the closing of the offering made hereby (the "Offering"),
Group 1 Automotive, Inc. will acquire, in separate simultaneous transactions
(collectively, the "Acquisitions") in exchange for $5.4 million and 9,079,084
shares of its Common Stock, par value $.01 per share ("Common Stock"), 13
corporations (each a "Founding Company" and, collectively, the "Founding
Companies") that own automobile dealerships and related operations that are
currently part of four separate dealership groups (the "Founding Groups"). The
Offering is conditioned on the consummation of the Acquisitions. Unless
otherwise indicated, all references to "Group 1 Automotive" herein mean Group 1
Automotive, Inc. prior to consummation of the Acquisitions, and all references
to the "Combined Company" and the "Company" herein mean Group 1 Automotive,
Inc., as consolidated with the Founding Groups following consummation of the
Acquisitions.
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, all share, per share
and financial information set forth herein (i) have been adjusted retroactively
to give effect to (a) the Acquisitions and (b) a 900-for-one split of the
outstanding shares of Common Stock of Group 1 Automotive effected on December
13, 1996, and (ii) assume no exercise of the Underwriters' over-allotment
option. See "Underwriting". Investors should carefully consider the information
set forth in "Risk Factors".
THE COMBINED COMPANY
The Combined Company was founded to become a leading operator and
consolidator in the highly fragmented automotive retailing industry. The
Combined Company owns 30 automobile dealership franchises ("dealerships") and
five collision service centers located in Texas and Oklahoma, and sells new and
used cars and light trucks, provides maintenance and repair services, sells
replacement parts and provides related financing, insurance and service
contracts. The Combined Company represents 21 American and Asian brands
including Acura, Chevrolet, Chrysler, Dodge, Eagle, GMC, Honda, Isuzu, Jeep,
Kia, Lexus, Lincoln, Mazda, Mercury, Mitsubishi, Nissan, Oldsmobile, Plymouth,
Pontiac, Suzuki and Toyota. The Combined Company's dealerships include the
second largest Toyota dealership in the United States as measured by 1996 new
retail unit sales and one of the largest dealership groups in Oklahoma.
The principals of the Founding Groups have over 90 years of combined
experience in the automotive retailing industry with family ownership dating
back as far as 1917. In addition, the principals of the Founding Groups have
been recognized as leaders in the automotive retailing industry, serving at
various times in leadership positions in state and national industry
organizations. The Combined Company's dealerships have also received numerous
awards based on various performance measures. The principals of the Founding
Groups will continue to manage their businesses and play a significant role in
the Combined Company's operating and acquisition strategies.
The Combined Company believes that its structural, managerial and
operational strengths include (i) brand and geographic diversity; (ii) the
ability to capitalize on regional economies of scale; (iii) cost savings derived
from nationally centralized financing and administrative functions; (iv) the
experience of the Combined Company's senior management in successfully
consolidating and operating in highly fragmented industries; (v) the
reputations, experience and performance of the Combined Company's management and
principals as leaders in the automotive retailing industry; (vi) the established
customer base and local name recognition of the Combined Company's dealerships;
(vii) the Combined Company's proven ability to source high quality used vehicles
cost-effectively through trade-ins and off-lease programs; and (viii) access to
equity incentives to attract and retain high quality personnel.
The Combined Company will pursue a growth strategy led by a management team
with extensive experience in consolidation and the management of growth
companies. B.B. Hollingsworth, Jr., Chairman of the Board, President and Chief
Executive Officer of the Combined Company, has experience not only in
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<PAGE> 5
the automotive retailing industry, but also in consolidating a major national
industry, having served in various senior management capacities, including
President, of Service Corporation International during its early growth period
as the world's leading consolidator of the funeral industry. In addition, John
T. Turner, Senior Vice President -- Corporate Development, has been actively
involved in the acquisition efforts of several companies involved in industry
consolidations, including Service Corporation International, The Loewen Group,
Inc. and Paragon Family Services, Inc. See "Management".
The U.S. automotive retailing industry is estimated to have annual sales in
excess of $600 billion, with the 100 largest dealer groups generating less than
10% of total sales revenue and controlling approximately 5% of the 22,000
existing franchised dealership locations (representing approximately 53,000
dealerships). It is estimated that sales by franchised automobile dealers
account for one-fifth of the nation's total retail sales of all products and
merchandise. The Combined Company believes that the enormous size and the
fragmentation of the industry, together with increasing capital costs of
operating automobile dealerships, lack of a viable exit strategy (especially for
larger dealerships) and the aging of dealership owners provide an attractive
environment for consolidation opportunities. In addition, many successful and
entrepreneurial, "megadealers" have expressed interest in expanding their
operations, but have been restrained by a lack of capital. The Combined Company
believes that it provides an attractive opportunity for these megadealers due to
the Combined Company's formation by a consolidation of similar megadealers, its
access to the public capital markets, and its position as a vehicle for growth.
BUSINESS STRATEGY
The Combined Company plans to achieve its goal of becoming a leading
consolidator, while maintaining its high operating standards in the automotive
retailing industry, by (i) enhancing growth through acquisitions and (ii)
implementing an operating strategy that focuses on decentralized dealership
operations, nationally centralized administrative functions, the expansion of
higher margin businesses, a commitment to customer service and the
implementation of new technology initiatives. By complementing the Combined
Company's industry leaders, management talent and proven operating capabilities
with its corporate management team which is experienced in achieving and
managing long-term growth in a consolidation environment, the Combined Company
believes that it is in a strong position to execute this strategy.
GROWTH THROUGH ACQUISITIONS
The Combined Company intends to implement an aggressive, yet disciplined,
acquisition program by pursuing (i) large, profitable and well managed
"platform" acquisitions in large metropolitan and high-growth suburban
geographic markets that the Combined Company does not currently serve and (ii)
smaller "add-on" acquisitions that will allow the Combined Company to increase
brand diversity, capitalize on regional economies of scale and offer a greater
breadth of products and services in each of the markets in which it operates. In
this regard, the Combined Company has negotiated and executed an arrangement
letter with Chase Securities Inc. and Comerica Bank for a $125 million credit
facility (the "Credit Facility"), of which a portion will be used, in
combination with the Combined Company's common stock, for acquisitions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Combined Founding Groups' Commitments -- Credit Facility".
ENTERING NEW GEOGRAPHIC MARKETS. The Combined Company intends to expand
into geographic markets it does not currently serve by acquiring large,
profitable and well established megadealers ("platforms") that, like the
Founding Groups, are leaders in their regional markets. The Combined Company
will target new platform megadealers having superior operational and financial
management personnel which the Combined Company will seek to retain. The
Combined Company believes that retaining existing high quality management will
enable acquired megadealers to continue to operate effectively with management
personnel who understand the local market, while allowing the Combined Company
to source future acquisitions more effectively and expand its operations without
having to employ and train untested new personnel. Moreover, the Combined
Company believes that it is well
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<PAGE> 6
positioned to pursue larger, well established acquisition candidates as a result
of its depth of management, the Combined Company's capital structure and the
reputation of the principals of the Founding Groups as leaders in the automotive
retailing industry.
EXPANDING WITHIN EXISTING MARKETS. The Combined Company plans to acquire
additional dealerships in each of the markets in which it operates ("add-ons"),
including acquisitions that increase the brands, products or services offered in
that market. The Combined Company believes that these acquisitions will
facilitate operating efficiencies and cost savings on a regional level in areas
such as facility and personnel utilization, vendor consolidation and
advertising. The Combined Company has recently entered into definitive
agreements to acquire, subject to manufacturer approval and a due diligence
investigation, two dealerships in Texas for aggregate payments of $9.0 million
in cash. These two acquisitions, if consummated, would also require the Combined
Company to incur approximately $13.0 million of floorplan indebtedness in
connection with the purchase of vehicle inventories of the dealerships.
MANUFACTURERS' LIMITATIONS ON ACQUISITIONS. The Combined Company's
acquisition program may be limited to some extent by the Manufacturers. Under
the limitations currently imposed by the Manufacturers (as defined herein), the
Combined Company could acquire no more than five additional Toyota dealerships,
two additional Lexus dealerships, four additional Honda dealerships, one
additional Acura dealership, approximately 400 additional Ford and Lincoln
Mercury dealerships and 10 additional GM dealership locations (within the next
two years, subject to being increased). The Combined Company currently owns two
Toyota, one Lexus, three Honda, two Acura, one Lincoln and one Mercury franchise
and three GM dealership locations. The other Manufacturers, which have no such
limitations, accounted for the following approximate number of dealerships in
the United States, as of December 31, 1996: Chrysler Corporation, 13,000 (at
4,600 locations); Nissan, 1,200; Mitsubishi, 500; Isuzu, 500; Suzuki, 300; and
Kia, 200. In addition, all of the Manufacturers, whether or not they have
numerical limitations on the number of dealerships that may be acquired, require
the Combined Company to obtain the consent of the applicable Manufacturer prior
to the acquisition of any dealership franchises of such Manufacturer. In
addition, the Combined Company has not yet entered into any agreement with
American Honda with respect to the approval of the proposed acquisitions of the
Honda and Acura dealerships by the Combined Company and with respect to future
acquisitions of such dealerships. See "Risk Factors -- Manufacturers' Control
over Dealerships", "Risk Factors -- No Agreement with American Honda Motor Co.,
Inc.", "Risk Factors -- Risks Relating to Failure to Meet Manufacturer CSI
Scores" and "Risk Factors -- Dependence on Acquisitions for Growth;
Manufacturers' Restrictions on Acquisitions".
Of the approximately 15 million new vehicles sold in the United States in
1996, approximately 31.3% were manufactured by General Motors Corporation
("GM"), 25.4% were manufactured by Ford Motor Company, 16.2% were manufactured
by Chrysler Corporation, 7.7% were manufactured by Toyota Motor Corp., 5.6% were
manufactured by Honda Motor Co., Ltd, 5.0% were manufactured by Nissan Motor
Co., Ltd and 8.8% were manufactured by other manufacturers.
OPERATING STRATEGY
The Combined Company intends to implement an operating strategy that
focuses on decentralized dealership operations, nationally centralized
administrative functions, expansion of higher margin businesses, commitment to
customer service and new technology initiatives.
The Combined Company has formed an operations committee comprised of the
chief operating officers of the Founding Groups and the general managers of the
dealerships in order to identify and share best practices. The Combined Company
intends to incorporate the key officers and management of future acquisitions
into this operations committee. The Combined Company believes that this
operations committee will promote the widespread application of the Combined
Company's broad strategic initiatives, facilitate the integration of the
Founding Groups and future acquisitions and improve operating efficiency and
overall customer satisfaction.
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DECENTRALIZED DEALERSHIP OPERATIONS. The Combined Company believes that
decentralizing its dealership operations on a regional, or platform, basis will
enable it to provide superior customer service and a focused, market-specific
responsiveness to sales, service, marketing and inventory control. Local
presence and an in-depth knowledge of customers' needs and preferences are
important in generating internally-driven market share growth. By coordinating
certain operations on a platform basis, the Combined Company believes that it
will achieve cost savings in such areas as vendor consolidation, facility and
personnel utilization and advertising. The Combined Company intends to create
incentives for entrepreneurial management teams and sales forces at the regional
level through the use of stock options and/or cash bonus programs.
NATIONALLY CENTRALIZED ADMINISTRATIVE FUNCTIONS. The consolidation of
purchasing power on a centralized basis in the area of financing should result
in significant cost savings. For example, in connection with the Offering, all
of the Combined Company's floorplan financing will benefit from interest rate
reductions. Rate reductions have already become effective with respect to
approximately 75% of the Combined Company's floorplan debt. The current
reductions range between 25 and 225 basis points. Additionally, the Combined
Company's Credit Facility, once closed, will result in further rate reductions.
Subsequent to the Offering, the Combined Company intends to refinance
approximately $50 million in floorplan financing with the Credit Facility. The
impact of these changes is expected to reduce the Combined Company's annual
interest expense by more than $1.0 million. Furthermore, the Combined Company
expects that significant cost savings can be achieved through the consolidation
of administrative functions such as risk management, employee benefits and
employee training. For example, the Combined Company has negotiated insurance
coverage that is expected to result in annual cost savings of approximately 25
to 30 percent.
EXPAND HIGHER MARGIN ACTIVITIES. The Combined Company is focused on
expanding its higher margin businesses such as used vehicle retail sales,
service and parts and finance and insurance. While each of the Combined
Company's platforms will be able to operate independently in a manner consistent
with its specific market's characteristics, each platform will pursue an
integrated strategy to grow each of these higher margin businesses to enhance
profitability and stimulate internal growth. With a competitive advantage in
sourcing, the ability to provide manufacturer-backed extended service contracts,
and attractive lease financing, new vehicle franchises are especially well
positioned to capitalize on industry growth in used vehicle sales. In addition,
each of the Combined Company's dealerships offers an integrated service and
parts department, which provides an important source of recurring higher margin
revenues. The Combined Company also has the opportunity on each new or used
vehicle sold to generate incremental revenues from the sale of extended service
contracts, credit insurance policies and finance and lease contracts. Each of
these business areas will be a focus of internal growth.
FOUNDING GROUPS
The Combined Company was formed by a consolidation of the businesses of the
following previously separate dealership groups:
HOWARD GROUP. This group is one of the largest dealership groups in
Oklahoma, consisting of Acura, Chevrolet, Chrysler, Dodge, Eagle, GMC, Honda,
Isuzu, Jeep, Mazda, Plymouth, Pontiac and Toyota dealerships located in Oklahoma
City (the "Howard Group"). Additionally, the Howard Group has entered into an
agreement to purchase a Chevrolet dealership in Tulsa, Oklahoma for the
assumption of all of its liabilities, which are currently approximately $2.5
million. See "The Acquisitions". Robert E. Howard II, the principal owner, has
been involved in the automotive retailing industry for over 28 years. In 1996,
the Howard Group sold 8,181 new vehicles. From 1994 to 1996, the Howard Group's
revenues increased by $54.7 million, or 24.1%, to $282.0 million from $227.3
million. During this period, gross profit increased $9.3 million, or 32.9%, to
$37.6 million from $28.3 million.
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MCCALL GROUP. This group consists of the second largest Toyota dealership
in the United States, as ranked by 1996 new retail unit sales, and a Lexus
dealership, both located in Houston, Texas (the "McCall Group"). Sterling B.
McCall, Jr., the principal owner, has been involved in the automotive retailing
industry for more than 27 years, having been granted the first stand-alone
exclusive Toyota dealership in Houston. In 1996, the McCall Group sold 6,458 new
vehicles. From 1994 to 1996, the McCall Group's revenues increased by $111.2
million, or 62.7%, to $288.5 million from $177.3 million. During this period,
gross profit increased $14.3 million, or 57.9%, to $39.0 million from $24.7
million.
SMITH GROUP. This group consists of an Acura dealership in Houston, Texas,
Honda, GMC, Oldsmobile, Mitsubishi, Lincoln, Mercury and Kia dealerships in
Beaumont, Texas, a Nissan dealership in Richardson, Texas (a suburb of Dallas)
and two Nissan dealerships, one Mitsubishi dealership and one Suzuki dealership
in the Austin, Texas area (the "Smith Group"). The Smith family has been in the
automotive retailing business since 1917. In 1996, the Smith Group sold 5,983
new vehicles. From 1994 to 1996, the Smith Group's revenues increased by $1.2
million, or 0.6%, to $218.3 million from $217.1 million. During this period,
gross profit increased $1.9 million, or 7.0%, to $29.1 million from $27.2
million.
KINGWOOD GROUP. This group consists of one Honda and one Isuzu dealership
in Kingwood, Texas, a suburb of Houston (the "Kingwood Group"). The Honda
dealership was established in 1989 and the Isuzu dealership was established in
1996. Mr. Hollingsworth, and John H. Duncan, a director of the Combined Company,
own interests in these dealerships. In 1996, the Kingwood Group sold 756 new
vehicles. From 1994 to 1996, the Kingwood Group's revenues increased by $4.9
million, or 15.8%, to $35.9 million from $31.0 million. During this period,
gross profit increased $1.5 million, or 39.5%, to $5.3 million from $3.8
million.
CONSIDERATION PAID IN THE ACQUISITIONS
The following table sets forth the consideration being paid for each
Founding Group:
<TABLE>
<CAPTION>
CONSIDERATION
-------------------------
COMMON
STOCK CASH VALUE(1)
--------- ---------- -----------
<S> <C> <C> <C>
Howard Group........................... 3,574,472(2) $2,300,000 $27,857,475
McCall Group........................... 2,318,826 -- 16,579,606
Smith Group............................ 2,725,933 -- 20,922,097
Kingwood Group......................... 459,853 $3,100,000 6,387,949
--------- ---------- -----------
Total........................ 9,079,084 $5,400,000 $71,747,127
========= ========== ===========
</TABLE>
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(1) The value of the shares of Common Stock issued in connection with the
Acquisitions (other than the Common Stock to be sold by the Selling
Stockholder) was discounted by 35% from the assumed initial public offering
price to give effect to the two year lock-up that each stockholder of the
Founding Companies entered into in connection with the Acquisitions. This
discount was based on an independent valuation study as to the impact of the
restrictions on the value of the Common Stock. If the shares of Common Stock
issued in the Acquisitions were valued at an assumed initial public offering
price of $11.00 per share, the value of the consideration paid in the
Acquisitions would be: Howard Group -- $41,619,192; McCall
Group -- $25,507,086; Smith Group -- $29,985,263 and Kingwood
Group -- $8,158,383.
(2) Includes 592,303 shares of Common Stock issued to Mr. Howard in the
Acquisitions as payment for a Chevrolet Dealership in Tulsa, Oklahoma (the
"Tulsa Dealership"). These shares will be held in escrow pending the
consummation of the Combined Company's acquisition of the Tulsa Dealership.
GM has denied its approval of this acquisition due to the Howard Group's
failure to meet GM's required CSI score levels. The Combined Company's
acquisition of the Tulsa Dealership will be consummated upon receipt of GM
approval for such acquisition. Upon consummation of this
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acquisition, the escrowed shares will be released to Mr. Howard. However, if
such acquisition is not consummated with GM's approval within two years of the
Acquisitions, the escrowed shares will be distributed pro rata to the
stockholders of the Founding Companies and Mr. Howard will retain the right
to acquire the Tulsa Dealership. This pro rata distribution will be
allocated among the Founding Groups as follows: the McCall Group, 161,834
shares; the Smith Group, 190,246 shares; the Howard Group, 208,129 shares;
and the Kingwood Group, 32,094 shares. Thus, the escrowed shares will
remain outstanding regardless of whether the Combined Company's acquisition
of the Tulsa dealership is consummated, and the Combined Company will
receive no additional consideration or assets if the acquisition of the
Tulsa Dealership is not consummated. See "The Acquisitions" for a
description of the consideration to be paid in connection with the
acquisition of the Tulsa Dealership. See also "Risk Factors -- Risks
Relating to Failure to Meet Manufacturer CSI Scores".
The consideration to be paid by Group 1 Automotive for each of the Founding
Companies was determined by negotiations among the principals of the Founding
Companies as to the relative value of each of the Founding Companies. As such,
no one individual determined the consideration to be paid in connection with the
Acquisitions. Group 1 Automotive and the Founding Companies did not use an
independent third party to determine the relative values of each of the Founding
Companies but agreed among themselves on the values attributable to each of the
Founding Companies based on an evaluation of each of the Founding Companies'
operating results and prospects for growth.
CONSIDERATION RECEIVED BY RELATED PARTIES
In connection with the Acquisitions, the following directors, officers and
stockholders owning more than 5% of the Common Stock together with their spouses
and affiliates will receive shares of Common Stock as follows: Mr.
Hollingsworth -- 196,368 shares of Common Stock (excluding the 350,000 shares of
Common Stock that Mr. Hollingsworth currently owns); Mr. Howard -- 2,910,374
shares of Common Stock; Mr. McCall -- 1,461,031 shares of Common Stock; Mr.
Smith -- 679,181 shares of Common Stock; Mr. Duncan -- 196,368 shares of Common
Stock; Mr. Whalen -- 774,040 shares of Common Stock. In addition, Mr. Howard
will receive $2.3 million in cash in the Acquisitions.
The following directors, officers and 5% stockholders together with their
affiliates have guaranteed, as of June 30, 1997, aggregate indebtedness of
certain of the Founding Companies as follows: Mr. Hollingsworth -- $2.7 million;
Mr. Howard -- $37.8 million; Mr. McCall -- $30.6 million; Mr. Smith -- $5.2
million; Mr. Duncan -- $2.7 million. In connection with the Acquisitions, the
Combined Company has agreed to take all commercially reasonable efforts to
obtain the release of guarantees by certain of the Founding Company stockholders
of certain secured debt of the Founding Companies.
Directors, officers and 5% stockholders, or affiliates of such persons, who
have incurred indebtedness that is secured by guarantees of certain Founding
Companies and the amounts of such indebtedness, as of June 30, 1997, are as
follows: Mr. Howard, approximately $7.8 million; Mr. McCall and affiliates,
approximately $8.0 million; and Mr. Smith and affiliates, approximately $4.6
million. With the exception of the Round Rock guarantee described below, all
applicable lenders have agreed to release such guarantees upon consummation of
the Offering. One of the Founding Companies (Round Rock Nissan) will continue to
guarantee approximately $2.4 million of indebtedness of SKLR Round Rock, L.C., a
limited liability company in which Mr. Smith owns a 22% interest. If such
guarantee is not released within 90 days of consummation of the Acquisitions,
the Combined Company will have the option to acquire certain property securing
such indebtedness. See "Certain Transactions -- Loans".
In connection with the Acquisitions, all related party receivables and
payables are being settled. Such transactions will result in a net payment of
$19,720, as of June 30, 1997, by the McCall Group to Mr. McCall. Additionally,
as part of the Acquisitions, certain of the Founding Companies will distribute
pre-acquisition S corporation accumulated adjustment accounts to their
stockholders. Such distributions will result in the payment of approximately
$97,104 to Mr. Hollingsworth, $3.4 million to Mr. Howard, $337,500 to Mr. Smith
and $97,104 to Mr. Duncan
8
<PAGE> 10
Certain of the properties leased by the Founding Companies are owned by
officers, directors or 5% stockholders of the Combined Company or their
affiliates. As part of the Acquisitions, the Founding Companies will replace
each of these related party leases (with the exception of one related party
lease described in "Certain Transactions -- Leases") with a standard lease
agreement. The rent on each of these properties will initially be the same as
the rent on the properties prior to consummation of the Acquisitions subject to
adjustment every five years based on the Consumer Price Index. For a detailed
description of these leases, see "Certain Transactions -- Leases".
Messrs. McCall and Whalen own 18% and 11%, respectively, of Dealer
Solutions, L.L.C. ("DSL"), which provides management information systems,
software and related services to certain dealerships of the Combined Company and
receives certain fees in connection therewith. For a detailed description of the
agreement between DSL and the Combined Company, see "Certain
Transactions -- Other".
Upon the completion of the Offering, options to purchase 325,000 shares of
Common Stock at the initial public offering price will be granted to officers
and directors of the Company as compensation for future services to be rendered
to the Combined Company as follows: Mr. Hollingsworth -- 100,000; Mr.
Turner -- 125,000; Mr. Thompson -- 80,000; Mr. Duncan -- 10,000 and Mr. Bidwell
- -- 10,000.
Group 1 Automotive was incorporated in Delaware in December 1995, and its
principal executive offices are located at 950 Echo Lane, Suite 350, Houston,
Texas. Its telephone number is (713) 467-6268.
THE OFFERING (1)
<TABLE>
<S> <C>
Common Stock offered by the Combined Company.......... 4,428,136 shares
Common Stock offered by the Selling Stockholder....... 371,864 shares
Total............................................ 4,800,000 shares
Common Stock to be outstanding after the
Offering(2)......................................... 13,957,220 shares
Proposed NYSE Symbol.................................. GPI
Use of Proceeds....................................... The estimated net proceeds to the Combined
Company of the Offering will be $41.0
million, of which approximately $5.4 million
will be used to pay the cash portion of the
Acquisitions and approximately $31.4 million
will be used to repay outstanding
indebtedness. The balance will be used for
working capital and general corporate
purposes, including potential acquisitions.
See "Certain Transactions" and "Use of
Proceeds".
</TABLE>
- ---------------
(1) Assumes that the Underwriters' over-allotment option is not exercised.
(2) Includes 9,079,084 shares of Common Stock to be issued in connection with
the Acquisitions. Excludes 565,000 shares of Common Stock subject to options
granted under the Combined Company's 1996 Stock Incentive Plan, 750,950
shares of Common Stock subject to options to be granted under the Combined
Company's 1996 Stock Incentive Plan prior to completion of the Offering and
an additional 684,050 shares of Common Stock reserved for issuance under the
1996 Stock Incentive Plan. See "Management -- 1996 Stock Incentive Plan".
Also excludes 200,000 shares of Common Stock which may be issued under the
1998 Employee Stock Purchase Plan. See "Management -- 1998 Employee Stock
Purchase Plan".
RISK FACTORS
See "Risk Factors" beginning on page 13 for a description of certain risks
relevant to an investment in the Common Stock.
9
<PAGE> 11
SUMMARY FINANCIAL DATA
Group 1 Automotive will acquire the Founding Groups immediately prior to
the consummation of the Offering. For financial statement purposes, however, the
Howard Group has been identified as the accounting acquiror. The following
summary financial data presents, for the year ended December 31, 1996, and as of
and for the six months ended June 30, 1997, certain historical and pro forma
data for the Founding Groups. See "Selected Financial Data" and the Pro Forma
Financial Statements and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------
HOWARD MCCALL SMITH KINGWOOD PRO FORMA(1)
-------- -------- -------- -------- ------------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(2):
Revenues
New vehicle sales............... $164,979 $166,382 $124,174 $13,784 $469,318
Used vehicle sales.............. 88,477 90,895 60,579 18,075 258,027
Parts & service sales........... 21,173 24,454 28,631 2,925 77,184
Other dealership revenues,
net.......................... 7,387 6,811 4,895 1,165 21,117
-------- -------- -------- ------- --------
Total revenues............... 282,016 288,542 218,279 35,949 825,646
Cost of sales..................... 244,396 249,560 189,169 30,640 712,772
-------- -------- -------- ------- --------
Gross profit................. 37,620 38,982 29,110 5,309 112,874
Goodwill amortization............. 37 -- 67 -- 761
Selling, general and
administrative expenses......... 30,731 35,072 23,644 3,997 93,510
-------- -------- -------- ------- --------
Income from operations....... 6,852 3,910 5,399 1,312 18,603
Other income and expense
Interest expense, net........... (1,194) (2,748) (1,710) (439) (3,576)
Other income (expense), net..... (69) (45) 223 67 175
-------- -------- -------- ------- --------
Income before taxes.......... 5,589 1,117 3,912 940 15,202
Provision for income taxes........ 382 178 678 41 6,305
-------- -------- -------- ------- --------
Net income................... $ 5,207 $ 939 $ 3,234 $ 899 $ 8,897
======== ======== ======== ======= ========
Earnings per share................ $ 0.62
Weighted average shares
outstanding..................... 14,373
OTHER DATA:
Gross margin...................... 13.3% 13.5% 13.3% 14.8% 13.7%
Operating margin.................. 2.4% 1.4% 2.5% 3.6% 2.3%
Pre-tax margin.................... 2.0% 0.4% 1.8% 2.6% 1.8%
Retail new vehicles sold.......... 8,181 6,458 5,983 756 21,378
Retail used vehicles sold......... 7,779 4,496 3,844 1,101 17,220
</TABLE>
10
<PAGE> 12
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
--------------------------------------------------------
HOWARD MCCALL SMITH KINGWOOD PRO FORMA(1)
-------- -------- -------- -------- ------------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(2):
Revenues
New vehicle sales............... $ 84,922 $ 81,609 $ 75,203 $10,095 $251,830
Used vehicle sales.............. 54,354 49,796 35,153 9,264 148,567
Parts & service sales........... 10,763 12,305 14,082 1,251 38,400
Other dealership revenues,
net.......................... 4,006 3,243 3,021 634 11,546
-------- -------- -------- ------- --------
Total revenues............... 154,045 146,953 127,459 21,244 450,343
Cost of sales..................... 134,130 127,276 109,914 18,275 389,093
-------- -------- -------- ------- --------
Gross profit................. 19,915 19,677 17,545 2,969 61,250
Goodwill amortization............. 20 -- 28 4 353
Selling, general and
administrative expenses......... 16,433 17,546 13,818 2,416 50,865
-------- -------- -------- ------- --------
Income from operations....... 3,462 2,131 3,699 549 10,032
Other income and expense
Interest expense, net........... (808) (504) (941) (93) (1,113)
Other income (expense), net..... 34 (34) (19) -- (18)
-------- -------- -------- ------- --------
Income before taxes.......... 2,688 1,593 2,739 456 8,901
Provision for income taxes........ 166 637 531 21 3,655
-------- -------- -------- ------- --------
Net income................... $ 2,522 $ 956 $ 2,208 $ 435 $ 5,246
======== ======== ======== ======= ========
Earnings per share................ $ 0.36
Weighted average shares........... 14,373
OTHER DATA:
Gross margin...................... 12.9% 13.4% 13.8% 14.0% 13.6%
Operating margin.................. 2.2% 1.5% 2.9% 2.6% 2.2%
Pre-tax margin.................... 1.7% 1.1% 2.1% 2.1% 2.0%
Retail new vehicles sold.......... 4,093 3,037 3,972 523 11,625
Retail used vehicles sold......... 4,312 2,149 2,181 561 9,203
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
---------------------------------
PRO FORMA
PRO FORMA(3) AS ADJUSTED(4)(5)
------------ -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................... $ (551) $ 43,927
Inventories................................................. 107,260 107,260
Total assets................................................ 206,713 206,701
Total debt.................................................. 107,026 75,591
Stockholders' equity........................................ 43,782 84,091
</TABLE>
- ---------------
(1) Pro forma information gives effect to (i) the Acquisitions on an historical
basis, (ii) the consummation of the Offering and (iii) certain pro forma
adjustments to the historical financial statements. See Pro Forma Financial
Statements and the notes thereto beginning on page F-3 for a description of
the pro forma adjustments.
(2) The individual Founding Groups' Income Statement Data do not total to the
Pro Forma total since such individual Founding Groups' Income Statement Data
represent historical information before Pro Forma entries.
(3) Gives effect to the Acquisitions on an historical basis and certain pro
forma adjustments. See Pro Forma Financial Statements and the notes thereto
beginning on page F-3 for a description of the pro forma adjustments.
(4) Assumes that the Underwriters' over-allotment option is not exercised. See
"Underwriting".
(5) Gives effect to the sale of the shares offered by the Combined Company
hereby and the application of the net proceeds therefrom. See "Use of
Proceeds".
11
<PAGE> 13
SUMMARY INDIVIDUAL FOUNDING GROUP FINANCIAL DATA
The following table presents certain summary financial data for each of the
Founding Groups.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1994 1995(1) 1996(1) 1996 1997(1)
-------- -------- -------- -------- --------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
HOWARD GROUP:
Revenues........................ $227,259 $254,003 $282,016 $140,650 $154,045
Gross profit.................... 28,267 32,230 37,620 18,996 19,915
Selling, general and
administrative expenses...... 24,253 26,166 30,768 15,032 16,453
Income from operations.......... 4,014 6,064 6,852 3,964 3,462
MCCALL GROUP:
Revenues........................ $177,320 $218,888 $288,542 $137,216 $146,953
Gross profit.................... 24,747 30,157 38,982 18,939 19,677
Selling, general and
administrative expenses...... 22,477 27,752 35,072 16,959 17,546
Income from operations.......... 2,270 2,405 3,910 1,980 2,131
SMITH GROUP:
Revenues........................ $217,077 $221,258 $218,279 $108,173 $127,459
Gross profit.................... 27,157 28,593 29,110 14,343 17,545
Selling, general and
administrative expenses...... 21,727 22,824 23,711 11,575 13,846
Income from operations.......... 5,430 5,769 5,399 2,768 3,699
KINGWOOD GROUP:
Revenues........................ $ 31,036 $ 34,459 $ 35,949 $ 17,912 $ 21,244
Gross profit.................... 3,837 4,589 5,309 2,691 2,969
Selling, general and
administrative expenses...... 3,277 3,569 3,997 1,963 2,420
Income from operations.......... 560 1,020 1,312 728 549
</TABLE>
- ---------------
(1) The Combined Company anticipates increases in revenues and decreases in cost
of sales and selling, general and administrative expenses. The owners of the
Founding Groups currently have agreements in place which decrease the fees
and commissions paid to the dealerships for sales of certain finance and
insurance products and increase the cost of certain aftermarket products.
Upon completion of the Acquisitions, such agreements will be terminated and
the dealerships will recognize an immediate increase in revenues and
decrease in cost of sales. Additionally, certain employees and owners of the
Founding Groups have agreed to reductions in compensation that will result
in a decrease in selling, general and administrative expenses upon
completion of the Acquisitions. The items above are not reflected in the
financial data presented and would have resulted in an increase in income
from operations of the combined Founding Groups of approximately $4.3
million in 1995, $5.0 million in 1996 and $2.1 million for the six months
ended June 30, 1997.
12
<PAGE> 14
RISK FACTORS
Prospective purchasers should carefully consider the following factors, as
well as the other information and financial data contained in this Prospectus,
before purchasing the shares of Common Stock offered hereby.
ABSENCE OF COMBINED OPERATING HISTORY
Group 1 Automotive, which was incorporated in December 1995, has conducted
limited operations to date in connection with the Acquisitions and the Offering.
The Founding Groups have been operated and managed as separate independent
entities to date, and the Combined Company's future operating results will
depend in part on its ability to integrate the operations of these businesses
and manage the combined enterprise. The Combined Company's management group has
been assembled only recently, and there can be no assurance that the management
group will be able to effectively and profitably integrate the Founding Groups
and any future acquisitions, or to effectively manage the combined entity. The
inability of the Combined Company to do so could have a material adverse effect
on the Combined Company's business, financial condition and results of
operations.
MANUFACTURERS' CONTROL OVER DEALERSHIPS
Each of the Combined Company's dealerships sells automobiles pursuant to
franchise agreements with automobile manufacturers or authorized distributors of
the manufacturers. The term "Manufacturers" as used herein means Ford Motor
Company ("Ford Motor"), General Motors Corporation ("GM"), Toyota Motor Corp.
and its United States affiliate, Toyota Motor Sales, U.S.A., Inc. (collectively,
"Toyota Motor"), Honda Motor Co., Ltd. ("Honda Motor") and its United States
affiliate, American Honda Motor Co., Inc. ("American Honda"), Nissan Motor Co.,
Ltd. ("Nissan Motor") and its United States affiliate, Nissan Motor North
America, Inc., ("Nissan North America"), Chrysler Corporation, Mitsubishi Motor
Sales of America, Inc., ("Mitsubishi Motor"), American Isuzu Motors, Inc.
("American Isuzu"), American Suzuki Motor Corporation and Kia Motors America,
Inc., but does not include Mazda Motor of America, Inc. since the sole Mazda
franchise owned by the Howard Group is in the process of being sold. Through the
terms and conditions of these franchise agreements, Manufacturers exert
considerable influence over the operations of the Combined Company's
dealerships. Each of the franchise agreements includes provisions for the
termination or non-renewal of the manufacturer-dealer relationship for a variety
of causes including any unapproved change of ownership or management and other
material breaches of the franchise agreement. Prior approval of the relevant
manufacturers is required with respect to acquisitions of automobile
dealerships, and a manufacturer may deny the Combined Company's application to
make an acquisition or seek to impose further restrictions on the Combined
Company as a condition to granting approval of an acquisition. See
"-- Dependence on Acquisitions for Growth; Manufacturers' Restrictions on
Acquisitions" and "-- No Agreement with American Honda Motor Co., Inc.". Certain
state laws, however, limit the ability of automobile manufacturers to reject
proposed transfers of dealerships, notwithstanding the terms of any dealer or
franchise agreement. See "-- No Agreement with American Honda Motor Co., Inc."
and "Business -- Franchise Agreements". The loss of one or more of the Combined
Company's franchise agreements could have a material adverse effect on the
Combined Company's business, financial condition and results of operations.
As a condition to granting their consent to the Acquisitions, the
Manufacturers have imposed restrictions on the Combined Company. These
restrictions include restrictions on (i) the acquisition of more than a
specified percentage of the Common Stock (20% in the case of GM, Toyota Motor,
Nissan North America and American Isuzu and 50% in the case of Ford Motor and
Mitsubishi Motor) by any one person who in the opinion of the Manufacturer is
unqualified to own a dealership of such Manufacturer or has interests
incompatible with the Manufacturer, (ii) certain material changes in the
Combined Company or extraordinary corporate transactions such as a merger, sale
of a material amount of assets or change in the Board of Directors or management
of the Combined Company which could have a material adverse effect on the
Manufacturer's image or reputation or could be materially incompatible with the
Manufacturer's interests; (iii) the removal of a dealership general manager
without the consent of the
13
<PAGE> 15
Manufacturer; and (iv) the use of dealership facilities to sell or service new
vehicles of other Manufacturers. If the Combined Company is unable to comply
with these restrictions, the Manufacturer may require the Combined Company to
(i) sell the assets of the dealerships to the Manufacturer or to a third party
acceptable to the Manufacturer, or (ii) terminate the dealership agreements with
the Manufacturer.
The agreements with the Manufacturers generally provide for periodic
reporting and notice provisions as a means of determining whether the Combined
Company is in compliance with the restrictions contained in those agreements. A
Manufacturer, upon its determination of a violation of the restrictions, will
notify the Combined Company of the violation and the Combined Company will
generally have a period to cure the violation. If the Combined Company disputes
the Manufacturer's claim of a violation or is unwilling or unable to cure the
violation, the Manufacturer may enforce the remedies specified in the agreement
through judicial or regulatory proceedings or in certain instances through
arbitration.
DEPENDENCE ON ACQUISITIONS FOR GROWTH; MANUFACTURERS' RESTRICTIONS ON
ACQUISITIONS
Growth in the Combined Company's revenues and earnings will depend
significantly on the Combined Company's ability to acquire and consolidate
profitable dealerships. There can be no assurance that the Combined Company will
be able to identify, acquire or profitably manage and integrate additional
dealerships, if any, into the Combined Company, or that it will be able to do so
without substantial costs, delays or other operational or financial problems. In
addition, increased competition for acquisition candidates may develop, which
could result in fewer acquisition opportunities available to the Combined
Company and/or higher acquisition prices. Further, acquisitions involve a number
of special risks, including possible adverse effects on the Combined Company's
operating results, diversion of resources and management's attention, inability
to retain key acquired personnel, risks associated with unanticipated events or
liabilities and amortization of acquired intangible assets, some or all of which
could have a material adverse effect on the Combined Company's business,
financial condition and results of operations. Finally, the ability of the
Combined Company to grow through acquisitions could be significantly affected by
the price of the Common Stock since the Combined Company intends to grow
substantially through the issuance of its Common Stock in acquisitions. Any
substantial decline in the price of the Common Stock could, therefore, have a
material adverse effect on the Combined Company's growth strategy.
The Combined Company is required to obtain the consent of the applicable
Manufacturer prior to the acquisition of any dealership franchises. Obtaining
the consent of the Manufacturers for acquisitions of dealerships could take a
significant amount of time. Obtaining the approvals of the Manufacturers for the
Acquisitions has taken almost one year, although the Combined Company believes
that subsequent acquisitions by the Combined Company will take significantly
less time since the Combined Company has current completed applications and/or
agreements with all Manufacturers except American Honda. Nevertheless, if the
Combined Company experiences delays in obtaining, or fails to obtain, approvals
of the Manufacturers for acquisitions of dealerships, the Combined Company's
growth strategy could be materially adversely affected. In determining whether
to approve an acquisition, the Manufacturers may consider many factors,
including the moral character, business experience, financial condition,
ownership structure and CSI scores of the Combined Company. In addition,
Manufacturers may limit the number of such Manufacturers' dealerships that may
be owned by the Combined Company or the number that may be owned in a particular
geographic area. For example, Toyota Motor currently limits the number of
dealerships which may be owned by any one group to seven Toyota and three Lexus
dealerships nationally and restricts the number of dealerships that may be owned
to (i) the greater of one dealership, or 20% of the Toyota dealer count in a
"Metro" market (multiple Toyota dealership markets as defined by
14
<PAGE> 16
Toyota Motor), (ii) the lesser of five dealerships or 5% of the Toyota
dealerships in any Toyota region (currently 12 geographic regions), and (iii)
two Lexus dealerships in any one of the four Lexus geographic areas. Toyota
Motor further requires that at least nine months elapse between acquisitions.
Similarly, it is currently the policy of American Honda to restrict any company
from holding more than seven Honda or more than three Acura franchises
nationally and to restrict the number of franchises to (i) one Honda dealership
in a "Metro" market (a metropolitan market represented by two or more Honda
dealers) with two to 10 Honda dealership points, (b) two Honda dealerships in a
Metro market with 11 to 20 Honda dealership points, (iii) three Honda
dealerships in a Metro market with 21 or more Honda dealership points, (iv) no
more than 4% of the Honda dealerships in any one of the 10 Honda geographic
zones, (v) one Acura dealership in a Metro market (a metropolitan market with
two or more Acura dealership points), and (vi) two Acura dealerships in any one
of the six Acura geographic zones. Toyota Motor and American Honda also prohibit
ownership of contiguous dealerships and the dualing of a franchise with any
other brand without their consent, which the Combined Company believes will not
impose any significant limitation on its acquisitions of Toyota, Lexus, Honda or
Acura dealerships. Ford Motor currently limits the number of dealerships to the
greater of (a) 15 Ford and 15 Lincoln Mercury dealerships, or (b) the number of
dealerships with total retail sales of new vehicles in the preceding calendar
year that would equal not more than 5% of total Ford and Lincoln Mercury
vehicles sold at retail in the United States during that year, which number may
not exceed 33 1/3% of the dealerships in any market area, as defined from time
to time by Ford Motor for its dealership network, having more than three
authorized Ford dealerships in them (currently approximately 400 dealerships).
GM has limited the number of GM dealerships that the Combined Company may
acquire during the next two years to 10 additional GM dealership locations (any
one dealership, however, may include a number of different GM franchises, such
as a combination of GMC, Pontiac and Buick franchises), which number may be
increased on a case-by-case basis. In addition, GM limits the maximum number of
GM dealerships that the Combined Company may acquire to 50% of the GM
dealerships, by franchise line, in a GM-defined geographic market area having
multiple GM dealers (currently approximately 10,000 dealerships). The Combined
Company currently owns two Toyota, one Lexus, three Honda, two Acura, one
Lincoln and one Mercury franchise and three GM dealership locations.
NO AGREEMENT WITH AMERICAN HONDA MOTOR CO., INC.
The Combined Company and American Honda have not entered into any agreement
with respect to the approval by American Honda of the proposed acquisitions of
the Honda and Acura dealerships by the Combined Company and the Combined Company
intends to acquire the Honda and Acura dealerships without the approval of
American Honda. Unlike any of the other Manufacturers, American Honda has stated
to the Combined Company that its policy on public ownership requires that (i)
public ownership of the Common Stock of the Combined Company not exceed 49% of
the outstanding Common Stock of the Combined Company; (ii) more than 50% of the
Common Stock of the Combined Company be owned by persons approved by American
Honda and transfer of any of the shares owned by these approved persons be
subject to American Honda's prior approval; and (iii) American Honda have the
right to approve each stockholder of the Combined Company who owns 5% or more of
the Combined Company's Common Stock other than institutional investors who may
own up to 10% of the Combined Company's Common Stock. Except for the
restrictions listed above, the Combined Company is prepared to agree with the
other requirements of American Honda's policy on public ownership, which include
the Combined Company's agreement to be bound by the terms of the Honda and Acura
Automobile Sales and Service Agreements, the requirement that the removal of the
Executive Manager and Dealer Manager of the Honda and Acura dealerships shall
require the prior approval of American Honda, the maintenance of separate,
freestanding, exclusive dealerships for the sales and service of Honda and Acura
vehicles, and sale of the assets of the dealerships or termination of the
franchise agreement as a remedy for violation of such requirements. See
"-- Manufacturers' Control Over Dealerships" and "-- Dependence on Acquisitions
for Growth; Manufacturers' Restrictions on Acquisitions." In addition the
Combined Company was willing to agree, in the context of the Combined Company's
overall proposal to American Honda, to the restrictions imposed by American
Honda on the number of dealerships that may be owned by the Combined Company as
described under "-- Dependence on Acquisitions for Growth; Manufac-
15
<PAGE> 17
turers' Restrictions on Acquisitions". American Honda has notified Group 1
Automotive that consummation of the acquisitions of the Honda and Acura
dealerships included in the Acquisitions without American Honda's consent would
be a material breach of its dealer agreements and policy on public ownership.
Moreover, American Honda notified Group 1 Automotive that such consent would not
be granted unless the Combined Company agreed to all of the provisions of
American Honda's dealer agreements and policy on public ownership, which
American Honda has stated it believes conform to the provisions of the Texas
Motor Vehicle Commission Code.
If the Combined Company and American Honda are unable to reach an agreement
prior to the closing of the Acquisitions, in the opinion of Vinson & Elkins
L.L.P., Texas counsel to the Combined Company, and Abowitz, Rhodes & Dahnke,
P.C., Oklahoma counsel to the Combined Company, a refusal by American Honda to
consent to the transfer to the Combined Company of the Honda and Acura
dealerships prior to the closing of the Acquisitions would not likely enable
American Honda either to prevent such transfers or terminate the transferred
franchises. Texas counsel to the Combined Company have opined that American
Honda's current position should not prevent the transfer of the Honda and Acura
dealerships in Texas to the Combined Company under the applicable provisions of
the Texas Motor Vehicle Commission Code, which legislation, among other things
prohibits an automobile manufacturer from rejecting a proposed transfer of a
dealership franchise if the transferee is of good moral character and meets the
manufacturer's written, reasonable, and uniformly applied standards or
qualifications relating to the transferee's business experience and financial
qualifications. In Texas counsel's opinion, American Honda would not likely
prevail on an opposition to the proposed franchise transfers even if American
Honda asserts an objection under the Texas Motor Vehicle Commission Code
because: the Combined Company's Honda and Acura dealerships will initially, and
are intended to continue to, be managed by management that American Honda
previously has approved, a majority of the Combined Company's Board of Directors
will initially, and is intended to continue to, consist of individuals whom
American Honda previously has approved to own Honda or Acura dealerships, and
American Honda previously has approved the Chief Executive Officer of the
Combined Company to own a Honda dealership. Similarly, Oklahoma counsel have
opined that, although Oklahoma does not have a specific statutory provision
regulating the transfer of automobile dealerships, the Oklahoma statutory
provisions regulating termination or cancellation of dealerships would likely
apply to any challenge to a refusal by American Honda to consent to the transfer
to the Combined Company of Honda or Acura dealerships. In the opinion of
Oklahoma counsel, in order to prevail on such a refusal, American Honda would be
required to establish that its refusal was reasonable, based upon factors that
are closely related to the proposed assignee's likelihood of successful
performance under the franchise agreement. In Oklahoma counsel's opinion,
considerations relevant to that determination include: (1) whether the proposed
dealer has adequate working capital; (2) the extent of prior experience of the
proposed dealer; (3) whether the proposed dealer has been profitable in the
past; (4) the location of the proposed dealer; (5) the prior sales performance
of the proposed dealer; (6) the business acumen of the proposed dealer; (7) the
suitability of combining the franchise in question with other franchisees at the
same location; and (8) whether the proposed dealer provides the manufacturer
sufficient information regarding its qualifications. In the opinion of Oklahoma
counsel, a refusal by American Honda to consent to the transfer to the Combined
Company of the Honda and Acura dealerships would likely be deemed unreasonable
under each of these factors inasmuch as American Honda previously approved each
of those dealerships and, thus, presumptively acknowledged that those
dealerships each have adequate working capital, and that their managements
possess sufficient experience, prior sales performance and business acumen to
qualify as Honda or Acura dealers. The opinions of Texas and Oklahoma counsel
each state that the respective statutes that they construe have not been
interpreted in any published judicial decision in the context of the issue
raised by the Acquisitions. Therefore, it is possible that a court applying
those provisions might decide to adopt a wholly different interpretation of the
law. Moreover, notwithstanding the foregoing, the matters addressed by Texas and
Oklahoma counsel are not free from doubt, and accordingly, there can be no
assurance that the Combined Company would prevail in any such proceedings. In
addition, there can be no assurance that American Honda will not institute
proceedings to attempt to prevent the Acquisitions or future acquisition of, or
challenge the ownership of, the Honda and
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<PAGE> 18
Acura dealerships by the Combined Company. While the Combined Company believes
that it would prevail in any such proceedings, any such proceedings could occupy
significant time of the management of the Combined Company and adversely affect
the ability of the Combined Company to acquire additional Honda and Acura
dealerships. Further, there can be no assurance that any proceedings brought by
American Honda would be brought on grounds relating to the statutory schemes
described above. If American Honda were to prevail in any such proceedings
against the Combined Company, and if the Combined Company were required to
dispose of its Honda and Acura dealerships or terminate its franchise agreements
with American Honda, any such requirement could have a material adverse effect
on the Combined Company. See Note 2 to the Pro Forma Financial Information
included elsewhere in this Prospectus for a description of the amounts
attributable to the Honda and Acura dealerships in the Pro Forma Combined
Statement of Operations and the Pro Forma Combined Balance Sheet of the Combined
Company.
While the Combined Company hopes that it will be able to enter into a
satisfactory agreement with American Honda subsequent to the closing of the
Offering and intends to continue to pursue that goal, there can be no guarantee
that any such agreement will be reached. If the Combined Company is unable to
conclude an acceptable agreement with American Honda, future acquisitions of
Honda and Acura dealerships could be adversely affected. In that connection, one
of the future acquisitions described in "Use of Proceeds" includes an Acura
franchise. That franchise is not material to the proposed acquisition, and the
Combined Company has not determined whether such Acura franchise will be
acquired without American Honda's approval or whether such franchise will be
eliminated from the proposed acquisition if American Honda fails to approve its
acquisition by the Combined Company. Future acquisitions of Honda or Acura
franchises will be evaluated by the Combined Company on a case-by-case basis if
no agreement is reached with American Honda. The Combined Company currently does
not intend to acquire Honda and Acura dealerships that would violate the
restrictions imposed by American Honda on the number of Honda and Acura
dealerships that the Combined Company could acquire under American Honda's
current policy.
American Honda instituted litigation against Republic Industries, Inc.
("Republic"), a publicly held company, in the United States District Court in
Los Angeles, California in May 1997 to prevent Republic from acquiring Honda and
Acura dealerships without complying with American Honda's Dealer Agreements and
policy on public ownership. That case was dismissed on September 29, 1997. On
October 1, 1997, American Honda sued Republic in the United States District
Court in Memphis, Tennessee and in the United States District Court in Mobile,
Alabama asking the courts to determine that Honda's withholding of its consent
to Republic's proposed acquisition of three dealerships in Tennessee and one in
Alabama is a lawful enforcement of American Honda's Dealer Agreements and policy
on public ownership. American Honda has asserted claims for interference with
contractual relations and unfair competition and has sought monetary,
declaratory and injunctive relief in this litigation based on Republic's failure
to comply with American Honda's Dealer Agreements and policy on public
ownership, alleging that: (i) more than 49% of Republic's stock is held by
persons who have not been approved by American Honda; (ii) Republic has acquired
one Honda and one Acura dealership in Florida, has agreements to acquire seven
more Honda dealerships and has plans to acquire 50 Honda and 13 Acura
dealerships in the near term, which acquisitions violate the limitation on the
number of Honda and Acura dealerships contained in American Honda's policy on
public ownership; (iii) Republic has refused to provide all documentation and
information required by American Honda; (iv) Republic is emphasizing the sale of
used cars; (v) Republic has strong ties to and dealings with American Honda's
direct competitors through Republic's rental car operations; (vi) Republic is
attempting to develop "AutoNation USA" as a national brand to the detriment of
the Honda and Acura brand images; (vii) Republic and its senior management had
no history of operations in automotive retailing prior to August 1996; and
(viii) past conduct of the senior management of Republic raises doubts about
Republic's qualifications to own Honda and Acura dealerships.
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RISKS RELATING TO FAILURE TO MEET MANUFACTURER CSI SCORES
Many manufacturers attempt to measure customers' satisfaction with
automobile dealerships through systems generally known as the customer
satisfaction index ("CSI"). These manufacturers may use a dealership's CSI
scores as a factor in evaluating applications for additional dealership
acquisitions and participation by a dealership in incentive programs. Certain
dealerships of the Combined Company have had difficulty from time to time
meeting their Manufacturers' CSI standards. The components of the various
manufacturer CSI scores have been modified from time to time in the past, and
there is no assurance that such components will not be further modified or
replaced by different systems in the future. The Combined Company's dealerships'
CSI scores in the past have not had a material adverse effect on these
dealerships. However, the CSI scores of the Howard Group's GM dealerships are
currently below GM levels as required under the GM publication Policies for
Changes in GM Dealership Ownership/Management ("GM Policies"), and as a result,
the acquisition of a Chevrolet dealership in Tulsa, Oklahoma by the Howard Group
has been denied by GM. See "The Acquisitions". Under the GM Policies each GM
dealership must maintain CSI scores that are at or above its respective
zone/branch average for the overall dealership purchase/delivery category and
the overall dealership service visit category. Exceptions will be considered if
(i) the score in each category is no lower than 0.2 points below the applicable
zone/branch average or 0.12 points below national divisional 12 month averages;
and (ii) a business plan for the dealership is provided to improve CSI results
in the categories to zone/branch average within two years; and/or (iii) a
positive sustaining trend has been displayed in the dealership's CSI results in
the categories. The scores for the Howard Group's GMC, Pontiac and Chevrolet
dealerships for the purchase/delivery category for the twelve months ended April
1997 were 3.13, 3.09 and 3.18, respectively, while the respective zone average
were 3.45, 3.43 and 3.44. The scores for the Howard Group's GMC, Pontiac and
Chevrolet dealerships for the service category for the twelve months ended April
1997 were 2.71, 2.58 and 2.92, respectively, while the respective zone averages
were 3.09, 3.11 and 3.19. The scores for the Howard Group's GMC, Pontiac and
Chevrolet dealerships for the purchase/delivery category for the three months
ended June 1997 were 3.31, 3.33 and 3.18, respectively, while the respective
zone averages were 3.47, 3.42 and 3.44. The scores for the Howard Group's GMC,
Pontiac and Chevrolet dealerships for the service category for the three months
ended June 1997 were 2.84, 2.66 and 3.05, respectively, while the respective
zone averages were 3.12, 3.13 and 3.23. GM will not permit the Howard Group to
acquire the Chevrolet dealership in Tulsa, Oklahoma until the CSI scores attain
the required level, which could occur any time in the future. If, however, the
Howard Group fails to obtain GM's approval for the acquisition of the Chevrolet
dealership in Tulsa, Oklahoma within two years after the completion of the
Acquisitions, the Howard Group's agreement to acquire the Chevrolet dealership
in Tulsa, Oklahoma will be terminated. See "The Acquisitions". If such CSI
scores fail to reach required levels, the Combined Company's ability to acquire
GM dealerships could be adversely affected. Moreover, failure of the Combined
Company's dealerships to comply with the CSI standards of GM as well as other
Manufacturers at any given time in the future could adversely affect the growth
strategy of the Combined Company.
DEPENDENCE ON AUTOMOBILE MANUFACTURERS
The success of each of the Combined Company's dealerships is highly
dependent upon the overall success of the line of vehicles that each dealership
sells. New vehicles manufactured by Toyota Motor, GM, Honda Motor, Nissan Motor,
and Chrysler Corporation accounted for approximately 34%, 17%, 16%, 14% and 9%,
respectively, of the Combined Company's new vehicle unit sales for 1996. No
other Manufacturer accounted for more than 3% of new vehicle retail unit sales
of the Combined Company during 1996.
The Combined Company's business is affected to varying degrees by the
demand for its Manufacturers' vehicles, and by the financial condition,
management, marketing, production and distribution capabilities of such
Manufacturers. In addition, the timing, structure and amount of Manufacturer
sales incentives and rebates impact the timing and profitability of the Combined
Company's sales transactions and such incentives and rebates change frequently
based on decisions of the Manufacturers. Events such as labor disputes and other
production disruptions that may adversely affect a Manufacturer may
18
<PAGE> 20
also adversely affect the Combined Company. Similarly, the delivery of vehicles
from Manufacturers later than scheduled, which may occur particularly during
periods of new product introductions, can lead to reduced sales during such
periods. Moreover, any event that causes adverse publicity involving such
Manufacturers may have an adverse effect on the Combined Company regardless of
whether such event involves any of the Combined Company's dealerships.
The Combined Company also depends on its Manufacturers to provide it with a
desirable mix of new vehicles. The most popular vehicles generally produce the
highest profit margins and are frequently the most difficult to obtain from the
Manufacturers. If the Combined Company is unable to obtain sufficient quantities
of the most popular models its profitability may be adversely affected. In some
instances, in order to obtain additional allocations of these vehicles, the
Combined Company may elect to purchase a larger number of less desirable models
than it would otherwise purchase. Sales of less desirable models may result in
lower profit margins than sales of the more popular vehicles.
The Combined Company's franchise agreements with its Manufacturers do not
give the Combined Company the exclusive right to sell a Manufacturer's product
within a given geographic area. Accordingly, a Manufacturer could grant another
dealer a franchise to start a new dealership in proximity to one or more of the
Combined Company's locations or an existing dealer could move its dealership to
a location which would compete directly with the Combined Company, although
certain state laws provide a mechanism for challenging such action in advance
through administrative or legal proceedings. If the Combined Company cannot
prevent a Manufacturer from granting a new franchise near to one of the Combined
Company's dealerships, such grant could have a material adverse effect on the
Combined Company and its operations.
RISKS RELATED TO ACQUISITION FINANCING; FUTURE CAPITAL REQUIREMENTS
The Combined Company currently intends to finance future acquisitions by
issuing shares of its Common Stock as full or partial consideration for acquired
dealerships. The extent to which the Combined Company will be able or willing to
issue Common Stock for acquisitions will depend on the market value of the
Common Stock from time to time and the willingness of potential acquisition
candidates to accept Common Stock as part of the consideration for the sale of
their businesses. Since the Combined Company will focus initially on large
"platform" acquisitions, it is possible that the Combined Company will issue a
significant number of additional shares of Common Stock in connection with such
acquisitions in the near future. Such additional shares of Common Stock could be
as much as, or more than, the number of outstanding shares of Common Stock after
giving effect to the Offering. To the extent that the Combined Company is unable
or unwilling to do so, the Combined Company may be required to use available
cash or other sources of debt or equity financings. The Combined Company has
negotiated and executed an arrangement letter for a bank credit facility with
Chase Securities, Inc and Comerica Bank. The Credit Facility will provide the
Combined Company with a secured revolving line of credit of up to $125 million
which may be used for general corporate purposes, acquisitions, capital
expenditures, working capital and floor plan financing. The Combined Company
currently expects that the net proceeds from the Offering, other existing
resources and the Credit Facility will be sufficient to fund its acquisition
program and other cash needs for at least the next 12 months. However, no
assurance can be given that the net proceeds from the Offering, other existing
resources and the Credit Facility will be sufficient to fund its acquisition
program and other cash needs, or that the Combined Company will be able to
obtain adequate additional capital from other sources. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Combined Founding Groups' Commitments -- Credit Facility".
RELIANCE ON KEY PERSONNEL
The Combined Company depends to a large extent upon the abilities and
continued efforts of its executive officers and the senior management of the
Founding Groups, including B. B. Hollingsworth, Jr., Robert E. Howard, II,
Sterling B. McCall, Jr., Charles M. Smith, John T. Turner and Scott L. Thompson.
Furthermore, the Combined Company will likely be dependent on the senior
management of any
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<PAGE> 21
businesses acquired in the future. If any of these persons becomes unavailable
to continue in such capacity, or if the Combined Company is unable to attract
and retain other qualified employees, the Combined Company's business or
prospects could be adversely affected. Although the Combined Company has entered
into an employment agreement with each of its executive officers, there can be
no assurance that any individual will continue in his present capacity with the
Combined Company for any particular period of time. The Combined Company
currently does not have key man insurance for any of its officers and senior
management. See "Management".
SUBSTANTIAL COMPETITION
The automotive retailing industry is highly competitive with respect to
price, service, location and selection. The Combined Company competes with
automobile dealerships (including public franchised dealership consolidators),
private market buyers and sellers of used vehicles, used vehicle dealerships,
service center chains and independent service and repair shops. In the new
vehicle area, the Combined Company competes with other franchised dealers. The
Combined Company does not have any cost advantage in purchasing new vehicles
from the Manufacturers, and typically relies on advertising, merchandising,
sales expertise, service reputation and location of its dealerships to sell new
vehicles. In recent years, the Combined Company has also faced competition from
non-traditional sources such as companies that sell automobiles on the Internet,
automobile rental agencies, independent leasing companies, used-car
"superstores" and price clubs associated with established consumer agencies such
as the American Automobile Association, some of which use non-traditional sales
techniques such as one-price shopping. In addition, Ford Motor has announced
that it is exploring the possibility of going into business with some of its
dealers to create automotive superstores in selected markets. Some of these
recent market entrants may have greater financial, marketing and personnel
resources than the Combined Company, and/or lower overhead or sales costs. In
the parts and service area, the Combined Company also competes with a number of
regional or national chains which offer selected parts and services at prices
that may be lower than the Combined Company's prices. In addition, there can be
no assurance that the Combined Company's strategy will be more effective than
the strategies of its competitors.
CYCLICALITY
Sales of motor vehicles, particularly new vehicles, historically have been
subject to substantial cyclical variation. The Combined Company believes that
the industry is affected by many factors, including general economic conditions,
consumer confidence, the level of personal discretionary spending, interest
rates and credit availability. There can be no assurance that the industry will
not experience sustained periods of decline in vehicle sales, particularly new
vehicle sales, in the future. Any such decline could have a material adverse
effect on the Combined Company.
SEASONALITY
The automobile industry is subject to seasonal variations in revenues.
Demand for automobiles is generally lower during the winter months than in other
seasons, particularly in regions of the United States associated with harsh
winters. Accordingly, the Combined Company expects its revenues and operating
results generally to be lower in its first and fourth quarters than in its
second and third quarters.
IMPORTED PRODUCTS
A significant portion of the Combined Company's new vehicle business
involves the sale of vehicles, parts or vehicles composed of parts that are
manufactured outside the United States. As a result, the Combined Company's
operations are subject to customary risks of importing merchandise, including
fluctuations in the value of currencies, import duties, exchange controls, trade
restrictions, work stoppages and general political and economic conditions in
foreign countries. The United States or the countries from which the Combined
Company's products are imported may, from time to time, impose new quotas,
duties, tariffs or other restrictions, or adjust presently prevailing quotas,
duties or tariffs,
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<PAGE> 22
which could affect the Combined Company's operations and its ability to purchase
imported vehicles and/or parts.
GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL MATTERS
The Combined Company is subject to a wide range of federal, state and local
laws and regulations, such as local licensing requirements, consumer protection
laws and environmental requirements governing, among other things, discharges to
the air and water, the storage of petroleum substances and chemicals, the
handling and disposal of wastes, and the remediation of contamination arising
from spills and releases. The violation of these laws and regulations can result
in civil and criminal penalties being levied against the Combined Company or in
a cease and desist order against operations that are not in compliance. Future
acquisitions by the Combined Company may also be subject to governmental
regulation, including antitrust reviews. The Combined Company believes that it
substantially complies with all applicable laws and regulations relating to its
business, but future laws and regulations may be more stringent and require the
Combined Company to incur significant additional costs. See
"Business -- Governmental Regulations" and "Business -- Environmental Matters".
ANTI-TAKEOVER EFFECTS OF STOCKHOLDER RIGHTS PLAN AND THE COMBINED COMPANY'S
CHARTER AND BYLAWS
Prior to the Offering, the Combined Company intends to adopt a stockholder
rights plan. This plan and certain provisions of the Combined Company's
Certificate of Incorporation, as amended ("Charter"), and Bylaws ("Bylaws") may
have the effect of discouraging, delaying or preventing a change in control of
the Combined Company or unsolicited acquisition proposals that a stockholder
might consider favorable. These include provisions providing for a Board of
Directors with staggered, three-year terms, permitting the removal of a director
from office only for cause, allowing only the Board of Directors to set the
number of directors, requiring super-majority or class voting to effect certain
amendments to the Charter and Bylaws, limiting the persons who may call special
stockholders' meetings, limiting stockholder action by written consent and
establishing advance notice requirements for nominations for election to the
Board of Directors or for proposing matters that can be acted upon at
stockholders' meetings. The Delaware General Corporation Law requires
super-majority voting thresholds to approve certain "business combinations"
between interested stockholders and the Combined Company which may render more
difficult or tend to discourage attempts to acquire the Combined Company. In
addition, the Combined Company's Board of Directors has the authority to issue
shares of preferred stock ("Preferred Stock") in one or more series and to fix
the rights and preferences of the shares of any such series without stockholder
approval. Any series of Preferred Stock is likely to be senior to the Common
Stock with respect to dividends, liquidation rights and, possibly, voting
rights. The ability to issue Preferred Stock could also have the effect of
discouraging unsolicited acquisition proposals, thus affecting the market price
of the Common Stock and preventing stockholders from obtaining any premium
offered by the potential buyer. In addition, certain of the Combined Company's
dealer agreements prohibit the acquisition of more than a specified percentage
of the Common Stock (20% in the case of GM, Toyota and Nissan and 50% in the
case of Ford) of the Combined Company without the consent of the relevant
Manufacturers. See "Management -- Executive Officers and Directors", "Principal
and Selling Stockholders" and "Description of Capital Stock".
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
Sales of substantial amounts of Common Stock in the public market
subsequent to the Offering could adversely affect the market price of the Common
Stock. Upon consummation of the Acquisitions and the Offering, the Combined
Company will have 13,957,220 shares of Common Stock outstanding (14,677,220
shares if the Underwriters' overallotment option is exercised in full). Of these
shares, the 4,800,000 shares of Common Stock offered hereby (5,520,000 shares if
the Underwriters' overallotment option is exercised in full) will be freely
tradable without restriction or further registration under the Securities Act of
1933, as amended (the "Securities Act"), except for shares held by persons
deemed
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<PAGE> 23
to be "affiliates" of the Combined Company or acting as "underwriters" as those
terms are defined in the Securities Act. The remaining 9,157,220 shares of
Common Stock outstanding will be "restricted securities" within the meaning of
Rule 144 under the Securities Act and will be eligible for resale subject to the
volume, manner of sale, holding period and other limitations of Rule 144.
Currently, 565,000 shares of Common Stock are issuable under existing stock
options granted to certain executive officers and employees of the Combined
Company. Options exercisable for 750,950 shares of Common Stock will be granted
to directors and employees under the Combined Company's 1996 Stock Incentive
Plan prior to completion of the Offering. An additional 684,050 shares of Common
Stock are reserved for issuance to employees and directors of the Combined
Company under the Combined Company's 1996 Stock Incentive Plan. In addition,
200,000 shares of Common Stock are reserved for issuance to employees of the
Combined Company under the 1998 Employee Stock Purchase Plan. See
"Management -- 1996 Stock Incentive Plan", "Management -- 1998 Employee Stock
Purchase Plan", "Description of Capital Stock" and "Shares Eligible for Future
Sale".
Pursuant to the Stock Purchase Agreements entered into in connection with
the Acquisitions, each of the stockholders of the Founding Companies, other than
the Selling Stockholder with respect to the shares he is selling in the
Offering, has agreed with the Combined Company not to sell or otherwise dispose
of shares of Common Stock received in the Acquisitions for a period of two years
from the closing date of the Acquisitions. In addition, pursuant to an
Underwriting Agreement between the Combined Company, the Selling Stockholder and
the Underwriters, the Combined Company, the executive officers and directors of
the Combined Company and the Selling Stockholder have agreed not to offer, sell
or otherwise dispose of any shares of Common Stock for a period of 180 days from
the date of this Prospectus without the consent of the representatives of the
Underwriters, other than (i) pursuant to employee stock option plans existing,
or upon the conversion or exchange of convertible or exchangeable securities
outstanding, on the date of this Prospectus, or (ii) in connection with and as
consideration for acquisitions of automobile dealerships, provided that the
proposed transferee agrees in writing for the benefit of the Underwriters to be
bound by the foregoing provisions. See "Shares Eligible for Future Sale" and
"Underwriting".
NO PRIOR PUBLIC MARKET AND DETERMINATION OF OFFERING PRICE
Prior to the Offering, there has been no public market for the Common
Stock. The Common Stock has been approved for listing, subject to notice of
issuance, on the New York Stock Exchange. However, there can be no assurance
that an active trading market will develop subsequent to the Offering or, if
developed, that it will be sustained. The initial public offering price of the
Common Stock will be determined through negotiations between the Combined
Company and the representatives of the Underwriters and may bear no relationship
to the price at which the Common Stock will trade after the Offering. For
information relating to the factors to be considered in determining the initial
public offering price, see "Underwriting". Prices for the Common Stock after the
Offering may be influenced by a number of factors, including the liquidity of
the market for the Common Stock, investor perceptions of the Combined Company
and the automotive retailing industry and general economic and other conditions.
Sales of substantial amounts of Common Stock in the public market subsequent to
the Offering could adversely affect the market price of the Common Stock.
POSSIBLE VOLATILITY OF PRICE
The market price of the Common Stock could be subject to wide fluctuations
in response to a number of factors, including quarterly variations of operating
results, investor perceptions of the Combined Company and automotive retailing
industry and general economic and other conditions.
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<PAGE> 24
THE ACQUISITIONS
Group 1 Automotive will acquire all of the issued and outstanding stock of
the Founding Companies in the Acquisitions immediately prior to the consummation
of the Offering pursuant to 13 separate stock purchase agreements (the "Stock
Purchase Agreements"). The Founding Companies are each part of one of the four
separate and distinct Founding Groups.
The Stock Purchase Agreements, provide that acquisition of each Founding
Company is subject to certain conditions including, among others: (i) the
continuing accuracy on the closing date of the representations and warranties of
the applicable Founding Company, the stockholders of such Founding Company and
the Combined Company; (ii) the performance of each of the covenants by the
applicable Founding Company, the stockholders of such Founding Company and the
Combined Company, including the removal of certain related party agreements;
(iii) the expiration or termination of the applicable waiting period under the
HSR Act with respect to such acquisition (which has been satisfied); (iv) the
obtainment of all permits, approvals and consents of securities or "blue sky"
commissions of each jurisdiction and of any other governmental agency or
authority, where failure to obtain such permit, approval or consent would have a
material adverse effect; and (v) the entering into an Underwriting Agreement by
the Combined Company and the Underwriters in connection with the Offering. The
Offering is conditioned upon, among other things, the consummation of the
acquisition of 100% of the Founding Companies.
The Stock Purchase Agreements provide that the parties thereto will not be
liable for the breach, after consummation of the Acquisitions, of any of the
representations, warranties or covenants contained in such agreements, except:
confidentiality obligations, non-competition provisions applicable to certain
stockholders, transfer restrictions on the Common Stock received in the
Acquisitions and termination of all dealership guarantees of stockholder debt.
As part of the Stock Purchase Agreements, certain stockholders of the
Founding Companies have agreed to enter into the employment agreements and/or
the lease agreements described elsewhere in this Prospectus. See
"Management -- Executive Compensation; Employment Agreements", and "Certain
Transactions -- Leases". In connection with their employment with the Company,
certain of such stockholders will receive options to purchase Common Stock. See
"Management -- 1996 Stock Incentive Plan". In addition, certain stockholders of
the Founding Companies, including Messrs. Howard, McCall, Smith and
Hollingsworth and certain of the general managers and key employees of the
Founding Companies, have agreed not to compete with the Combined Company for
five years from the closing of the Acquisitions. See "Management -- Executive
Compensation; Employment Agreements". For a discussion of the consideration to
be received by officers, directors and 5% stockholders in connection with the
Acquisitions, see "Summary -- Consideration Received by Related Parties".
The consideration to be paid by the Combined Company in the Acquisitions is
approximately $5.4 million of cash and 9,079,084 shares of Common Stock. The
Combined Company is recording approximately $26.8 million of goodwill in
connection with the Acquisitions. The consideration to be paid by Group 1
Automotive for each of the Founding Companies was determined by negotiations
among the principals of the Founding Companies as to the relative value of each
of the Founding Companies. As such, no one individual determined the
consideration to be paid in connection with the Acquisitions. Group 1 Automotive
and the Founding Companies did not use an independent third party to determine
the relative values of each of the Founding Companies but agreed among
themselves on the values attributable to each of the Founding Companies based on
an evaluation of each of the Founding Companies' operating results and prospects
for growth.
The Howard Group has entered into an agreement to purchase a Chevrolet
dealership in Tulsa, Oklahoma (the "Tulsa Dealership"). The consideration to be
paid by the Combined Company in connection with this acquisition is as follows:
(i) assumption of the Tulsa Dealership's liabilities, which consist of a $2.5
million loan made by Mr. Howard to such dealership bearing interest at the prime
rate plus 100 basis points and (ii) 592,303 shares of Common Stock (having a
value of approximately
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<PAGE> 25
$4.2 million based on the 35% discounted assumed initial public offering price)
to be issued in the Acquisitions. See "Certain Transactions".
GM has denied its approval of this acquisition due to the Howard Group's
failure to meet GM's required CSI score levels. A portion of the shares of
Common Stock to be received by Mr. Howard in the Acquisitions is attributable to
the anticipated future value of the Tulsa Dealership. The 592,303 shares of
Common Stock to be issued to Mr. Howard in connection with the Acquisitions,
representing the consideration to be paid to Mr. Howard for the Combined
Company's acquisition of the Tulsa Dealership, will be held in escrow pending
consummation of the Combined Company's acquisition of the Tulsa Dealership.
The Howard Group's acquisition of the Tulsa Dealership will be consummated
upon receipt of GM approval for such acquisition. Upon consummation of this
acquisition, the escrowed shares will be released to Mr. Howard. However, if
such acquisition is not consummated with GM's approval within two years of the
Offering, the Combined Company's agreement to acquire the Tulsa Dealership will
terminate, the escrowed shares will be distributed pro rata to the stockholders
of the Founding Companies and Mr. Howard will retain the right to acquire the
Tulsa Dealership. This pro rata distribution will be allocated among the
Founding Groups as follows: the McCall Group, 161,834 shares; the Smith Group,
190,246 shares; the Howard Group, 208,129 shares; and the Kingwood Group, 32,094
shares. Thus, the escrowed shares will remain outstanding regardless of whether
the Combined Company's acquisition of the Tulsa Dealership is consummated, and
the Combined Company will receive no additional consideration or assets if the
acquisition of the Tulsa Dealership is not consummated.
The treatment of the escrowed shares and the terms and conditions upon
which such shares are to be released were the subject of negotiations among the
Founding Groups. The Board of Directors of the Combined Company considers the
potential pro rata distribution of the escrowed shares (triggered by the
Combined Company's failure to acquire the Tulsa Dealership) a fair reallocation
of the Common Stock issued in the Acquisitions based upon the relative value of
the contributions made by each Founding Group to the Combined Company.
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The following table sets forth the consideration being paid for each
Founding Group:
<TABLE>
<CAPTION>
CONSIDERATION
----------------------------
COMMON STOCK CASH VALUE(1)
------------ ---------- -----------
<S> <C> <C> <C>
Howard Group........................... 3,574,472(2) $2,300,000 $27,857,475
McCall Group........................... 2,318,826 -- 16,579,606
Smith Group............................ 2,725,933 -- 20,922,097
Kingwood Group......................... 459,853 $3,100,000 6,387,949
--------- ---------- -----------
Total........................ 9,079,084 $5,400,000 71,747,127
========= ========== ===========
</TABLE>
- ---------------
(1) The value of the shares of Common Stock issued in connection with the
Acquisitions (other than the Common Stock to be sold by the Selling
Stockholder) was discounted by 35% from the assumed initial public offering
price to give effect to the two year lock-up that each stockholder of the
Founding Companies entered into in connection with the Acquisitions. This
discount was based on an independent valuation study as to the impact of the
restrictions on the value of the Common Stock. If the shares of Common Stock
issued in the Acquisitions were valued at an assumed initial public offering
price of $11.00 per share, the value of the consideration paid in the
Acquisitions would be: Howard Group -- $41,619,192; McCall
Group -- $25,507,086; Smith Group -- $29,985,263 and Kingwood
Group -- $8,158,383.
(2) Includes 592,303 shares of Common Stock issued to Mr. Howard in the
Acquisitions as payment for the Tulsa Dealership. These shares will be held
in escrow pending the consummation of the Combined Company's acquisition of
the Tulsa Dealership. GM has denied its approval of this acquisition due to
the Howard Group's failure to meet GM's required CSI score levels. The
Combined Company's acquisition of the Tulsa Dealership will be consummated
upon receipt of GM approval for such acquisition. Upon consummation of this
acquisition, the escrowed shares will be released to Mr. Howard. However, if
such acquisition is not consummated with GM's approval within two years of
the Acquisitions, the escrowed shares will be distributed pro rata to the
stockholders of the Founding Companies and Mr. Howard will retain the right
to acquire the Tulsa Dealership. This pro rata distribution will be
allocated among the Founding Groups as follows: the McCall Group, 161,834
shares; the Smith Group, 190,246 shares; the Howard Group, 208,129 shares;
and the Kingwood Group, 32,094 shares. See also "Risk Factors -- Risks
Relating to Failure to Meet Manufacturer CSI Scores".
In connection with the Acquisitions, the following directors, officers and
stockholders owning more than 5% of the Common Stock together with their spouses
and affiliates will receive shares of Common Stock as follows: Mr.
Hollingsworth -- 196,368 shares of Common Stock (excluding the 350,000 shares of
Common Stock that Mr. Hollingsworth currently owns); Mr. Howard -- 2,910,374
shares of Common Stock; Mr. McCall -- 1,461,031 shares of Common Stock; Mr.
Smith -- 679,181 shares of Common Stock; Mr. Duncan -- 196,368 shares of Common
Stock; Mr. Whalen -- 774,040 shares of Common Stock. In addition, Mr. Howard
will receive $2.3 million in cash in the Acquisitions. See "Principal and
Selling Stockholders".
In connection with Acquisitions, all related party receivables and payables
are being settled. Such transactions will result in a net payment of $19,720, as
of June 30, 1997, by the McCall Group to Mr. McCall. Additionally, as part of
the Acquisitions, certain Founding Companies will distribute an aggregate of
approximately $6.2 million from pre-acquisition S corporation accumulated
adjustment accounts to their stockholders as follows: $4.5 million to the
stockholders of the Howard Group (including approximately $3.4 million to Mr.
Howard), $1.3 million to the stockholders of the Smith Group (including $337,500
to Mr. Smith) and $0.4 million to the stockholders of the Kingwood Group
(including $97,104 to Mr. Hollingsworth and $97,104 to Mr. Duncan). In addition,
in connection with the Acquisitions, Mr. Howard intends to acquire certain
nonoperating assets (recreational vehicles and
25
<PAGE> 27
properties) owned by the Howard Group and pay the Combined Company approximately
$2.0 million. The Combined Company believes that $2.0 million approximates the
fair market value of the assets. The Combined Company believes that these assets
approximate fair market value because the assets are being sold to Mr. Howard at
a price equal to their net book value and the majority of such assets were
acquired by the Howard Group within the last 18 months.
In connection with the Acquisitions, the Combined Company anticipates
increases in revenues and decreases in cost of sales related to certain third
party products sold by the dealerships. Certain of the principals of the
Founding Companies currently have agreements in place that decrease the fees and
commissions paid to the dealerships for sales of certain finance and insurance
products and increase the cost of certain aftermarket products. These
arrangements resulted in the payment of $732,916 to Mr. McCall and $728,647 to
Mr. Whalen during the year ended December 31, 1996 and $357,144 to Mr. McCall
and $404,020 to Mr. Whalen during the six months ended June 30, 1997. Upon
completion of the Acquisitions, such agreements will be terminated and the
Combined Company will recognize an immediate increase in revenues and decrease
in cost of sales related to the products sold.
26
<PAGE> 28
The following is a description of each of the Founding Groups and the
dealerships that they each own:
<TABLE>
<CAPTION>
FOUNDING GROUP FOUNDING COMPANY FRANCHISE LOCATION
- -------------- ---------------- --------- --------
<S> <C> <C> <C>
Howard Group Howard Pontiac-GMC, Inc. Chrysler Oklahoma City,
("Bob Howard Automall") Eagle Oklahoma
GMC
Isuzu
Jeep
Mazda
Plymouth
Pontiac
Bob Howard Chevrolet, Inc. Chevrolet Oklahoma City,
Oklahoma
Bob Howard Automotive-H, Inc. Honda Oklahoma City,
("Bob Howard Honda/Acura") Acura Oklahoma
Bob Howard Motors, Inc. Toyota Oklahoma City,
("Bob Howard Toyota") Oklahoma
Bob Howard Dodge, Inc. Dodge Oklahoma City,
Oklahoma
McCall Group Southwest Toyota, Inc. Toyota Houston, Texas
("Sterling McCall Toyota")
SMC Luxury Cars, Inc. Lexus Houston, Texas
("Sterling McCall Lexus")
Smith Group Mike Smith Autoplaza, Inc. GMC Beaumont, Texas
Honda
Kia
Lincoln
Mercury
Mitsubishi
Oldsmobile
Smith, Liu & Kutz, Inc. Mitsubishi Austin, Texas
("Town North") Nissan
Suzuki
Courtesy Nissan, Inc. Nissan Richardson, Texas
Smith, Liu & Corbin, Inc. Acura Houston, Texas
("Acura Southwest")
Round Rock Nissan, Inc. Nissan Round Rock, Texas
Kingwood Group Foyt Motors, Inc. Honda Kingwood, Texas
Isuzu
</TABLE>
27
<PAGE> 29
USE OF PROCEEDS
The net proceeds to the Combined Company from the sale of 4,428,136 shares
of Common Stock offered hereby are estimated to be $41.0 million ($48.4 million
if the Underwriters' over-allotment option is exercised in full) assuming an
initial public offering price of $11.00 per share, the midpoint of the range of
the initial public offering price set forth on the cover page of this Prospectus
and after deducting the underwriting discount and estimated expenses of the
Offering. Of the net proceeds, approximately $5.4 million will be used to pay
the cash portion of the purchase price for the Acquisitions. In addition,
approximately $31.4 million will be used to repay indebtedness with maturities
of less than one year with a weighted average interest rate of approximately
8.0%. The remainder of the net proceeds will be used for working capital and
general corporate purposes.
The Combined Company intends to pursue acquisitions in the future which
will be financed with cash, Common Stock or a combination of both cash and
Common Stock. The Combined Company has identified and has held preliminary
discussions with numerous potential acquisition candidates. In addition, the
Combined Company has recently entered into definitive agreements to acquire two
dealerships in Texas for aggregate payments to the sellers of approximately $9.0
million in cash. These two acquisitions, if consummated, would also require the
Combined Company to incur approximately $13.0 million of floorplan indebtedness
in connection with the purchase of the vehicle inventories of the dealerships.
The agreements are subject to a number of significant conditions, including
Manufacturer approval and completion of a due diligence review of the
dealerships. There can be no assurance that the conditions will be satisfied or
that the transactions will be consummated. The Combined Company has negotiated
and executed an arrangement letter with Chase Securities, Inc. and Comerica Bank
for a $125 million credit facility. The Credit Facility will be used for general
corporate purposes, acquisitions, capital expenditures, working capital and
floorplan financing. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Combined Founding Groups'
Commitments -- Credit Facility".
DIVIDEND POLICY
The Combined Company intends to retain all of its earnings to finance the
growth and development of its business, including future acquisitions, and does
not anticipate paying any cash dividends on its Common Stock for the foreseeable
future. Any future change in the Combined Company's dividend policy will be made
at the discretion of the Board of Directors of the Combined Company and will
depend upon the Combined Company's operating results, financial condition,
capital requirements, general business conditions and such other factors as the
Board of Directors deems relevant. In addition, the Credit Facility will include
restrictions on the ability of the Combined Company to pay dividends without the
consent of the lender. See "Description of Capital Stock".
28
<PAGE> 30
DILUTION
The pro forma net tangible book value of the Combined Company as of June
30, 1997 was $1.63 per share of Common Stock. Pro forma net tangible book value
per share is determined by dividing the pro forma tangible net worth of the
Combined Company (pro forma tangible assets less pro forma total liabilities) by
the total number of outstanding shares of Common Stock. After giving effect to
the sale by the Company of the 4,428,136 shares offered hereby and the receipt
of an assumed $41.0 million of net proceeds from the Offering (based on an
assumed initial public offering price of $11.00 per share and net of the
underwriting discounts and estimated offering expenses), pro forma net tangible
book value of the Combined Company at June 30, 1997 would have been $4.00 per
share. This represents an immediate increase in pro forma net tangible book
value of $2.37 per share to existing stockholders and an immediate dilution of
$7.00 per share to the new investors purchasing Common Stock in the Offering.
(If all outstanding stock options were exercised, pro forma tangible net book
value would be $3.89 per share.) The following table illustrates the per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Pro forma net tangible book value per share before giving
effect to the Offering and the related expenses........ $ 1.63
Increase in pro forma net tangible book value per share
attributable to the Offering........................... 2.37
Pro forma net tangible book value per share after giving
effect to the Offering.................................... 4.00
------
Dilution per share to new investors......................... $ 7.00
======
</TABLE>
The following table sets forth, on a pro forma basis as of June 30, 1997,
the number of shares of Common Stock purchased from the Combined Company, the
total consideration paid to the Combined Company and the average price per share
paid to the Combined Company by existing stockholders and new investors
purchasing shares from the Combined Company in the Offering (before deducting
underwriting discounts and commissions and estimated offering expenses)
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 9,529,084 68.3% $15,563,092 24.2% $ 1.63
New investors.............. 4,428,136 31.7 48,709,496 75.8 11.00
---------- ----- ----------- -----
Total............ 13,957,220 100.0% $64,272,588 100.0%
========== ===== =========== =====
</TABLE>
The foregoing computations assume no exercise of outstanding stock options
granted under the Combined Company's 1996 Stock Incentive Plan. Options to
purchase 1,315,950 shares of Common Stock will have been granted under the 1996
Stock Incentive Plan as of the completion of the Offering, of which 750,950 will
be exercisable at the initial public offering price per share and 565,000 will
be exercisable at $2.90 per share. In addition, 684,050 additional shares of
Common Stock are reserved for future issuance under the 1996 Stock Incentive
Plan and 200,000 additional shares of Common Stock are reserved for future
issuance under the 1998 Employee Stock Purchase Plan. See "Management -- 1996
Stock Incentive Plan" and "Management -- 1998 Employee Stock Purchase Plan".
29
<PAGE> 31
CAPITALIZATION
The following table sets forth, as of June 30, 1997, the historical
capitalization of the Howard Group (the accounting acquiror), the pro forma
capitalization of the Combined Company and the pro forma as adjusted
capitalization of the Combined Company which gives effect to the issuance and
sale by the Company of the 4,428,136 shares of Common Stock offered hereby (at
an assumed initial public offering price of $11.00 per share, the midpoint of
the range of the initial public offering price set forth on the cover page of
this Prospectus, and after deducting the underwriting discount and estimated
expenses of the Offering) and the application of a portion of the estimated net
proceeds therefrom to pay existing indebtedness. See "Use of Proceeds". This
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the unaudited Pro Forma
Financial Statements of the Combined Company and the related notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-----------------------------------------
PRO FORMA
HISTORICAL(1) PRO FORMA AS ADJUSTED
------------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt (including current portion of long-term
debt).................................................. $37,838 $ 98,806 $ 67,371
Long-term debt........................................... 154 8,220 8,220
------- -------- --------
Total debt..................................... 37,992 107,026 75,591
Stockholders' equity:
Preferred Stock, par value $.01 per share, 1,000,000
shares authorized; no shares issued and
outstanding......................................... -- -- --
Common Stock, par value $.01 per share, 50,000,000
shares authorized; 9,529,084 shares issued and
outstanding, pro forma; 13,957,220 shares issued and
outstanding, pro forma as adjusted(2)............... 492 95 139
Additional paid-in capital............................. 6,623 47,681 87,946
Treasury stock, at cost................................ (809) -- --
Retained earnings (deficit)............................ 4,521 (3,994) (3,994)
------- -------- --------
Total stockholders' equity..................... 10,827 43,782 84,091
------- -------- --------
Total capitalization........................... $48,819 $150,808 $159,682
======= ======== ========
</TABLE>
- ---------------
(1) Reflects the historical capitalization of the Howard Group, the accounting
acquiror. Does not give effect to the distribution of $4.5 million from the
S Corporation accumulated adjustment account which is to be made in
connection with the Acquisitions.
(2) Excludes (i) an aggregate of 565,000 shares of Common Stock subject to
options granted pursuant to the Combined Company's 1996 Stock Incentive Plan
and (ii) 750,950 shares of Common Stock subject to options to be granted to
certain employees and directors of the Combined Company prior to completion
of the Offering under the Combined Company's 1996 Stock Incentive Plan. See
"Management -- 1996 Stock Incentive Plan".
30
<PAGE> 32
SELECTED FINANCIAL DATA
Group 1 Automotive will acquire the Founding Groups immediately prior to
the consummation of the Offering. For financial statement presentation purposes,
however, the Howard Group has been identified as the accounting acquiror. The
following selected historical financial data of the Howard Group as of December
31, 1995 and 1996 and for each of the three years in the period ended December
31, 1996, have been derived from the audited financial statements of the Howard
Group included elsewhere in this Prospectus. The following selected historical
financial data for the Howard Group as of December 31, 1992, 1993 and 1994 and
for each of the two years in the period ended December 31, 1993 and as of and
for the six months ended June 30, 1996 and June 30, 1997, have been derived from
the unaudited financial statements of the Howard Group, which have been prepared
on the same basis as the audited financial statements and, in the opinion of the
Howard Group, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such data. See the Pro Forma
Financial Statements and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------- ------------------------------
PRO PRO
FORMA FORMA
1992 1993 1994 1995 1996 1996(1) 1996 1997 1997(1)
-------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues................ $127,936 $167,252 $227,259 $254,003 $282,016 $825,646 $140,650 $154,045 $450,343
Cost of sales........... 110,303 146,943 198,992 221,773 244,396 712,772 121,654 134,130 389,093
-------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit.......... 17,633 20,309 28,267 32,230 37,620 112,874 18,996 19,915 61,250
Goodwill amortization... -- -- 21 27 37 761 15 20 353
Selling, general and
administrative
expenses.............. 13,931 16,610 24,232 26,139 30,731 93,510 15,017 16,433 50,865
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income from
operations.......... 3,702 3,699 4,014 6,064 6,852 18,603 3,964 3,462 10,032
Other income and expense
Interest expense,
net................. (847) (729) (1,102) (1,604) (1,194) (3,576) (680) (808) (1,113)
Other income
(expense), net...... 6 (28) 9 (81) (69) 175 (28) 34 (18)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income before income
taxes............... 2,861 2,942 2,921 4,379 5,589 15,202 3,256 2,688 8,901
Provision for income
taxes................. 553 367 768 744 382 6,305 307 166 3,655
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income............ $ 2,308 $ 2,575 $ 2,153 $ 3,635 $ 5,207 $ 8,897 $ 2,949 $ 2,522 $ 5,246
======== ======== ======== ======== ======== ======== ======== ======== ========
Earnings per share...... $ .62 $ .36
Weighted average shares
outstanding........... 14,373 14,373
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
AS OF DECEMBER 31, ----------------------------
------------------------------------------------ PRO PRO FORMA AS
1992 1993 1994 1995 1996 FORMA(2) ADJUSTED(2)(3)(4)
-------- ------- ------- ------- ------- -------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................. $ 2,600 $ 2,435 $ 2,356 $ 4,708 $ 6,436 $ (551) $ 43,927
Inventories..................................... 24,101 23,180 34,699 39,573 47,674 107,260 107,260
Total assets.................................... 32,938 32,955 51,124 61,641 72,874 206,713 206,701
Total debt, including current portion........... 23,355 21,199 31,601 37,320 42,887 107,026 75,591
Stockholders' equity............................ 3,779 3,637 5,346 8,620 12,210 43,782 84,091
</TABLE>
- ---------------
(1) Gives effect to (i) the Acquisitions on an historical basis (ii) the
consummation of the Offering and (iii) certain pro forma adjustments to the
historical financial statements. See Pro Forma Financial Statements and the
notes thereto beginning on page F-3 for a description of the pro forma
adjustments.
(2) Gives effect to the Acquisitions on an historical basis and certain pro
forma adjustments. See Pro Forma Financial Statements and the notes thereto
beginning on page F-3 for a description of the pro forma adjustments.
(3) Assumes that the Underwriters' over-allotment option is not exercised. See
"Underwriting".
(4) Gives effect to the sale of the shares offered by the Combined Company
hereby and the application of the net proceeds therefrom. See "Use of
Proceeds".
31
<PAGE> 33
OTHER FINANCIAL DATA
Group 1 Automotive will acquire the Founding Groups immediately prior to
the consummation of the Offering. For financial statement purposes, however, the
Howard Group has been identified as the accounting acquiror. The following
summary financial data presents, for the year ended December 31, 1996, and for
the six months ended June 30, 1997, certain historical and pro forma data for
the Founding Groups. See "Selected Financial Data" and the Pro Forma Financial
Statements and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------
HOWARD MCCALL SMITH KINGWOOD PRO FORMA(1)
-------- -------- -------- -------- ------------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(2):
Revenues
New vehicle sales.................. $164,979 $166,382 $124,174 $13,784 $469,318
Used vehicle sales................. 88,477 90,895 60,579 18,075 258,027
Parts & service sales.............. 21,173 24,454 28,631 2,925 77,184
Other dealership revenues, net..... 7,387 6,811 4,895 1,165 21,117
-------- -------- -------- ------- --------
Total revenues.................. 282,016 288,542 218,279 35,949 825,646
Cost of sales........................ 244,396 249,560 189,169 30,640 712,772
-------- -------- -------- ------- --------
Gross profit.................... 37,620 38,982 29,110 5,309 112,874
Goodwill amortization................ 37 -- 67 -- 761
Selling, general and administrative
expenses........................... 30,731 35,072 23,644 3,997 93,510
-------- -------- -------- ------- --------
Income from operations.......... 6,852 3,910 5,399 1,312 18,603
Other income and expense
Interest expense, net.............. (1,194) (2,748) (1,710) (439) (3,576)
Other Income (expense), net........ (69) (45) 223 67 175
-------- -------- -------- ------- --------
Income before taxes............. 5,589 1,117 3,912 940 15,202
Provision for income taxes........... 382 178 678 41 6,305
-------- -------- -------- ------- --------
Net income...................... $ 5,207 $ 939 $ 3,234 $ 899 $ 8,897
======== ======== ======== ======= ========
Earnings per share................... $ 0.62
Weighted average shares
outstanding........................ 14,373
OTHER DATA:
Gross margin......................... 13.3% 13.5% 13.3% 14.8% 13.7%
Operating margin..................... 2.4% 1.4% 2.5% 3.6% 2.3%
Pre-tax margin....................... 2.0% 0.4% 1.8% 2.6% 1.8%
New vehicles sold.................... 8,181 6,458 5,983 756 21,378
Retail used vehicles sold............ 7,779 4,496 3,844 1,101 17,220
</TABLE>
32
<PAGE> 34
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
----------------------------------------------------------
PRO
HOWARD MCCALL SMITH KINGWOOD FORMA(1)
--------- --------- --------- --------- ----------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(2):
Revenues
New vehicle sales................... $ 84,922 $ 81,609 $ 75,203 $10,095 $251,830
Used vehicle sales.................. 54,354 49,796 35,153 9,264 148,567
Parts & service sales............... 10,763 12,305 14,082 1,251 38,400
Other dealership revenues, net...... 4,006 3,243 3,021 634 11,546
-------- -------- -------- ------- --------
Total revenues................... 154,045 146,953 127,459 21,244 450,343
Cost of sales......................... 134,130 127,276 109,914 18,275 389,093
-------- -------- -------- ------- --------
Gross profit..................... 19,915 19,677 17,545 2,969 61,250
Goodwill amortization................. 20 -- 28 4 353
Selling, general and administrative
expenses............................ 16,433 17,546 13,818 2,416 50,865
-------- -------- -------- ------- --------
Income from operations........... 3,462 2,131 3,699 549 10,032
Other income and expense
Interest expense, net............... (808) (504) (941) (93) (1,113)
Other Income (expense), net......... 34 (34) (19) -- (18)
-------- -------- -------- ------- --------
Income before taxes.............. 2,688 1,593 2,739 456 8,901
Provision for income taxes............ 166 637 531 21 3,655
-------- -------- -------- ------- --------
Net income....................... $ 2,522 $ 956 $ 2,208 $ 435 $ 5,246
======== ======== ======== ======= ========
Earnings per share.................... $ 0.36
Weighted average shares............... 14,373
OTHER DATA:
Gross margin.......................... 12.9% 13.4% 13.8% 14.0% 13.6%
Operating margin...................... 2.2% 1.5% 2.9% 2.6% 2.2%
Pre-tax margin........................ 1.7% 1.1% 2.1% 2.1% 2.0%
New vehicles sold..................... 4,093 3,037 3,972 523 11,625
Retail used vehicles sold............. 4,312 2,149 2,181 561 9,203
</TABLE>
- ---------------
(1) Pro forma information gives effect to (i) the Acquisitions on an historical
basis, (ii) the consummation of the Offering, and (iii) certain pro forma
adjustments to the historical financial statements. See Pro Forma Financial
Statements and the notes thereto beginning on page F-3 for a description of
the pro forma adjustments.
(2) The individual Founding Groups' Income Statement Data do not total to the
Pro Forma total since such individual Founding Groups' Income Statement Data
represent historical information before Pro Forma entries.
33
<PAGE> 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Founding
Groups' Financial Statements and related notes thereto and "Selected Financial
Data" appearing elsewhere in this Prospectus.
OVERVIEW
The Combined Company was founded to become a leading operator and
consolidator in the highly fragmented automotive industry. The Combined Company
owns 30 automobile dealerships located in Texas and Oklahoma. The Combined
Company represents 21 American and Asian brands including Acura, Chevrolet,
Chrysler, Dodge, Eagle, GMC, Honda, Isuzu, Jeep, Kia, Lexus, Lincoln, Mazda,
Mercury, Mitsubishi, Nissan, Oldsmobile, Plymouth, Pontiac, Suzuki and Toyota.
Additionally, the Combined Company provides maintenance and repair services at
its 30 dealerships and five collision service centers. The Combined Company
utilizes approximately 500 service bays in providing these services. The
Combined Company is experiencing significant momentum in its financial results.
From 1994 to 1996, the Combined Company's pro forma revenues increased by $172.5
million, or 26.4%, to $825.6 million from $653.1 million. During this period,
pro forma gross profit increased $27.5 million, or 32.2%, to $112.9 million from
$85.4 million, to 13.7% from 13.1% of revenues. The Combined Company expects
that a significant portion of its future growth will be derived from
acquisitions of additional dealerships.
The Combined Company plans to achieve its goal of becoming a leading
consolidator, while maintaining its high operating standards in the automotive
retailing industry, by (i) emphasizing growth through acquisitions and (ii)
implementing an operating strategy that focuses on decentralized dealership
operations, nationally centralized administrative functions, the expansion of
higher margin businesses, a commitment to customer service and the
implementation of new technology initiatives. By complementing the Combined
Company's industry leaders, management talent and proven operating capabilities
with its corporate management team which is experienced in achieving and
managing long-term growth in a consolidation environment, the Combined Company
believes that it is in a strong position to execute this strategy.
The Combined Company has diverse sources of revenues, including: new car
sales, new truck sales, used car sales, used truck sales, manufacturer
remarketed vehicle sales, parts sales, service sales, collision repair services,
finance fees, insurance commissions, extended service contract sales,
documentary fees and after-market product sales. Sales revenues include sales to
retail customers, other dealers and wholesalers. Other dealership revenue
includes revenue from the sale of financing, insurance and extended service
contracts, net of a provision for anticipated chargebacks and documentary fees
charged to customers.
The Combined Company's gross profit will vary as the Combined Company's
merchandise mix (the mix between new vehicle sales, used vehicle sales, parts
and service sales, collision repair services and other dealership revenues)
changes. The gross margin realized by the Combined Company on the sale of its
products and services generally varies between approximately 6.5% and 60.0%,
with new vehicle sales generally resulting in the lowest gross margin and parts
and service sales generally resulting in the highest gross margin. Revenues from
other dealership revenues contribute a disproportionate share of gross,
operating and pre-tax margins. When the Combined Company's new vehicle sales
increase or decrease at a rate greater than the Combined Company's other revenue
sources, the Combined Company's gross margin will respond inversely. Factors
such as seasonality, weather, cyclicality and manufacturers' advertising and
incentives may impact the Combined Company's merchandise mix and, therefore
influence the Combined Company's gross margin.
Selling, general and administrative expenses consist primarily of
compensation for sales, administrative, finance and general management
personnel, rent, marketing, insurance and utilities. Interest expense consists
of interest charges on interest-bearing debt, including floorplan inventory
financing, net
34
<PAGE> 36
of interest credits received from certain manufacturers and interest income
earned. The Founding Groups have been managed throughout the periods presented
as independent private companies and their results of operations reflect
different tax structures (S Corporations and C Corporations) which have
influenced, among other things, their historical levels of owners' compensation.
These owners and certain key employees have agreed to certain reductions in
their compensation and benefits in connection with the organization of the
Combined Company.
Group 1 Automotive, which has conducted limited operations to date other
than in connection with the Offering, intends to integrate certain functions
over a period of time and install practices that have been successful at other
franchises and in other retail segments ("best practices"). This integration and
installation of best practices may present opportunities to increase revenues
and reduce costs but may also necessitate additional costs and expenditures for
corporate administration, including expenses necessary to implement the Combined
Company's acquisition strategy. These various costs and possible cost-savings
and revenue enhancements may make historical operating results not comparable
to, or indicative of, future performance.
PRO FORMA COMBINED FOUNDING GROUPS' DATA
The pro forma combined Founding Groups' data for 1994, 1995 and 1996 and
the six months ended June 30, 1996, and June 30, 1997, do not purport to present
the combined Founding Groups in accordance with generally accepted accounting
principles, but represent a summation of certain data of the individual Founding
Groups on an historical basis including the effects of the pro forma
adjustments. This data will not be comparable to and may not be indicative of
the Combined Company's post-combination results of operations because (i) the
Founding Groups were not under common control of management and had different
tax structures (S Corporations and C Corporations) during the periods presented
and (ii) the Combined Company will use the purchase method to establish a new
basis of accounting to record the Acquisitions.
The following tables sets forth certain unaudited pro forma combined data
of the Founding Groups for the periods indicated:
OPERATIONS DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1994 1995 1996
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
New vehicle sales.................. $391,709 60.0% $422,348 57.9% $469,318 56.8%
Used vehicle sales................. 184,179 28.2 222,373 30.5 258,027 31.3
Parts and service sales............ 61,024 9.3 65,599 9.0 77,184 9.3
Other dealership revenues, net..... 16,228 2.5 19,033 2.6 21,117 2.6
-------- ------ -------- ------ -------- ------
Total revenues............... 653,140 100.0 729,353 100.0 825,646 100.0
Cost of sales....................... 567,729 86.9 632,100 86.7 712,772 86.3
-------- ------ -------- ------ -------- ------
Gross profit........................ $ 85,411 13.1% $ 97,253 13.3% $112,874 13.7%
======== ====== ======== ====== ======== ======
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------
1996 1997
------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
New vehicle sales.................. $227,170 56.2% $251,830 55.9%
Used vehicle sales................. 129,602 32.0 148,567 33.0
Parts and service sales............ 36,667 9.1 38,400 8.5
Other dealership revenues, net..... 10,933 2.7 11,546 2.6
-------- ------ -------- ------
Total revenues............... 404,372 100.0 450,343 100.0
Cost of sales....................... 348,486 86.2 389,093 86.4
-------- ------ -------- ------
Gross profit........................ $ 55,886 13.8% $ 61,250 13.6%
======== ====== ======== ======
</TABLE>
NEW VEHICLE DATA
<TABLE>
<CAPTION>
PRO FORMA COMBINED COMPANY'S NEW VEHICLE DATA
----------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Retail unit sales................... 19,361 20,357 21,378 10,391 11,625
Retail sales revenue................ $391,709 $422,348 $469,318 $227,170 $251,830
Gross profit........................ $ 25,802 $ 29,252 $ 34,421 $ 16,602 $ 18,819
Gross margin........................ 6.6% 6.9% 7.3% 7.3% 7.5%
Average gross profit per retail unit
sold.............................. $ 1,333 $ 1,437 $ 1,610 $ 1,598 $ 1,619
</TABLE>
35
<PAGE> 37
USED VEHICLE DATA
<TABLE>
<CAPTION>
PRO FORMA COMBINED COMPANY'S USED VEHICLE DATA
----------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Retail unit sales................... 13,147 15,358 17,220 8,705 9,203
Retail sales revenue(1)............. $147,914 $185,665 $219,183 $110,091 $120,854
Gross profit........................ $ 14,594 $ 17,560 $ 21,358 $ 11,014 $ 10,655
Gross margin........................ 9.9% 9.5% 9.7% 10.0% 8.8%
Average gross profit per retail
unit sold......................... $ 1,110 $ 1,143 $ 1,240 $ 1,265 $ 1,158
</TABLE>
- ---------------
(1) Excludes wholesale revenues.
PARTS AND SERVICE DATA
<TABLE>
<CAPTION>
PRO FORMA COMBINED COMPANY'S PARTS AND SERVICE DATA
----------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales revenue....................... $ 61,024 $ 65,599 $ 77,184 $ 36,667 $ 38,400
Gross profit........................ $ 28,787 $ 31,408 $ 35,978 $ 17,337 $ 20,230
Gross margin........................ 47.2% 47.9% 46.6% 47.3% 52.7%
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
REVENUES. Revenues increased $45.9 million, or 11.4%, from $404.4 million
for the six months ended June 30, 1996 to $450.3 million for the six months
ended June 30, 1997. New vehicle sales increased $24.6 million, or 10.8%, from
$227.2 million for the six months ended June 30, 1996 to $251.8 million for the
six months ended June 30, 1997. The increase is primarily attributable to new
franchise operations, strong customer acceptance of the Combined Company's
products, particularly Lexus and Nissan, and successful marketing efforts. The
new franchise operations include a Dodge franchise acquired by the Howard Group
in May 1996 ("Bob Howard Dodge") and a new Nissan franchise awarded to the Smith
Group during 1996. Used vehicle sales increased $19.0 million, or 14.7%, from
$129.6 million for the six months ended June 30, 1996 to $148.6 million for the
six months ended June 30, 1997. This increase is primarily attributable to the
new franchise operations and successful marketing efforts. Parts and service
sales increased $1.7 million, or 4.6%, from $36.7 million for the six months
ended June 30, 1996 to $38.4 million for the six months ended June 30, 1997. The
increase is attributable to the new franchise operations and a growing customer
base at the McCall Lexus franchise. Other dealership revenues increased $0.6
million or 5.5% from $10.9 million for the six months ended June 30, 1996 to
$11.5 million for the six months ended June 30, 1997. The increase is due
primarily to an increase in the number of retail new and used vehicle sales.
GROSS PROFIT. Gross profit increased $5.4 million, or 9.7% from $55.9
million for the six months ended June 30, 1996 to $61.3 million for the six
months ended June 30, 1997. The increase is attributable to increased sales
offset by a reduced gross margin. The gross margin declined from 13.8% for the
six months ended June 30, 1996 to 13.6% for the six months ended June 30, 1997.
The reduced gross margin resulted primarily from a decline in used vehicle gross
margin, offset by an increase in new vehicle and parts and service gross
margins.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES. Revenues increased $96.2 million, or 13.2%, from $729.4 million
for the year ended December 31, 1995 to $825.6 million for the year ended
December 31, 1996. New vehicle revenues
36
<PAGE> 38
increased $47.0 million, or 11.1%, from $422.3 million for the year ended
December 31, 1995 to $469.3 million for the year ended December 31, 1996. This
increase is primarily attributable to increased sales at all but one of the
Founding Groups with the McCall Group accounting for $40.6 million of the
increase. New and expanded franchise operations, primarily the Howard Group's
new Dodge franchise, successful marketing efforts and strong customer acceptance
of the Combined Company's products, particularly Toyota, Lexus and Chevrolet,
contributed to the increase. The Smith Group had an $8.0 million decline in new
vehicle revenues caused by reduced unit sales at its Dallas Nissan franchise.
Used vehicle revenues increased $35.6 million, or 16.0%, from $222.4 million for
the year ended December 31, 1995 to $258.0 million for the year ended December
31, 1996. All of the Founding Groups' had increases in used vehicle revenues
with the McCall Group accounting for $22.6 million of the increase. The increase
is attributable primarily to a strong used vehicle market and successful
marketing efforts. Parts and service sales increased $11.6 million, or 17.7%,
from $65.6 million for the year ended December 31, 1995 to $77.2 million for the
year ended December 31, 1996. The increase is primarily attributable to new and
expanded operations at McCall Lexus, and increased vehicle sales. Other
dealership revenues increased $2.1 million or 11.1% from $19.0 million for the
year ended December 31, 1995 to $21.1 million for the year ended December 31,
1996. The increase is due primarily to an increase in the number of retail new
and used vehicle sales.
GROSS PROFIT. Gross profit increased $15.6 million, or 16.0%, from $97.3
million for the year ended December 31, 1995 to $112.9 million for the year
ended December 31, 1996. The increase is attributable to increased revenues and
an increase in gross margin from 13.3% for the year ended December 31, 1995 to
13.7% for the year ended December 31, 1996. The increase in gross margin is
primarily due to a change in the merchandise mix as parts and service sales
became a greater percentage of total revenues. Additionally, gross margin on new
retail vehicle sales increased from 6.9% for the year ended December 31, 1995 to
7.3% for the year ended December 31, 1996. The gross margin on used retail
vehicle sales increased from 9.5% for the year ended December 31, 1995, to 9.7%
for the year ended December 31, 1996. However, gross margin on parts and service
sales decreased from 47.9% for the year ended December 31, 1995 to 46.6% for the
year ended December 31, 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES. Revenues increased $76.3 million, or 11.7%, from $653.1 million
for the year ended December 31, 1994 to $729.4 million for the year ended
December 31, 1995. New vehicle revenues increased $30.6 million, or 7.8% from
$391.7 million for the year ended December 31, 1994 to $422.3 million for the
year ended December 31, 1995. The increase is the result of increased sales at
all but one of the Founding Groups. The increase in revenue is attributable to
new franchise operations at Bob Howard Honda/Acura which was acquired during
1994, successful marketing efforts and strong customer acceptance of the
Combined Company's products. Used vehicle revenues increased $38.2 million, or
20.7%, from $184.2 million for the year ended December 31, 1994 to $222.4
million for the year ended December 31, 1995. The increase is primarily
attributable to the new franchise operations and successful marketing efforts.
Parts and service sales increased $4.6 million, or 7.5%, from $61.0 million for
the year ended December 31, 1994 to $65.6 million for the year ended December
31, 1995. The increase is primarily attributable to the new dealership
operations and increased vehicle sales. Other dealership revenues increased $2.8
million or 17.3% from $16.2 million for the year ended December 31, 1994 to
$19.0 million for the year ended December 31, 1995. The increase is due
primarily to an increase in the number of retail new and used vehicle sales.
GROSS PROFIT. Gross profit increased $11.9 million, or 13.9%, from $85.4
million for the year ended December 31, 1994 to $97.3 million for the year ended
December 31, 1995. The increase is attributable to increased revenues and an
improved gross margin. Changes in the merchandise mix and certain product gross
margins resulted in the Combined Company's gross margin increasing from 13.1%
for the year ended December 31, 1994 to 13.3% for the year ended December 31,
1995. The gross margin on new retail vehicle sales increased from 6.6% for the
year ended December 31, 1994 to 6.9% for the year ended December 31, 1995. The
gross margin for used retail vehicle sales declined from 9.9% for the year
37
<PAGE> 39
ended December 31, 1994 to 9.5% for the year ended December 31, 1995. Parts and
service gross margin increased from 47.2% for the year ended December 31, 1994
to 47.9% for the year ended December 31, 1995.
COMBINED FOUNDING GROUPS' COMMITMENTS
CREDIT FACILITY
The Combined Company has negotiated and executed an arrangement letter with
Chase Securities, Inc. and Comerica Bank for a $125 million Credit Facility
which may be used for acquisitions, floorplan financing, general corporate
purposes, capital expenditures and working capital. The arrangement letter
provides for Chase Securities, Inc. to use commercially reasonable efforts to
assemble a syndicate of financial institutions subsequent to the Offering. Chase
Securities, Inc. and Comerica Bank have committed for approximately 50% of the
Credit Facility. At the Combined Company's option, the Credit Facility may bear
interest based on a designated London Interbank Offering Rate plus a margin
ranging from 150 to 275 basis points. The Credit Facility matures three years
from the date the loan is closed and is secured by certain of the Combined
Company's assets.
FLOORPLAN FINANCING
As of June 30, 1997, the Combined Company had approximately $97.5 million
of floorplan debt outstanding. The Combined Company intends to repay $31.4
million of floorplan indebtedness with the proceeds of the Offering. Currently,
the Founding Group's floorplan financing is provided by seven sources. In
connection with the Offering, all of the Combined Company's floorplan financing
will benefit from interest rate reductions. Rate reductions have already become
effective with respect to approximately 75% of the Combined Company's floorplan
debt. The current reductions range between 25 and 225 basis points.
Additionally, subsequent to the Offering, the Combined Company intends to
refinance approximately $50 million in floorplan financing with the Credit
Facility.
LEASES
The Founding Groups lease various facilities and equipment under operating
lease agreements, including leases with related parties. In connection with the
Acquisitions, the Combined Company intends to replace certain of its leases with
new leases that will have terms of 30 years and will be cancelable at the
Combined Company's option ten years from execution of the lease and at the end
of each subsequent five year period. Such leases will initially have the same
rent as the currently existing leases and will be subject to increase every five
years based on a percentage of the Consumer Price Index. See "Certain
Transaction -- Leases". Future minimum lease payments for existing operating
leases are as follows: $6.6 million in 1997, $6.5 million in 1998, $6.0 million
in 1999, $5.2 million in 2000 and $3.9 million in 2001.
INDIVIDUAL FOUNDING GROUPS
The selected historical financial information presented in the tables below
is derived from the respective audited financial statements of the individual
Founding Groups included elsewhere herein. The following discussion should be
read in conjunction with the Financial Statements of the Founding Groups and the
notes thereto appearing elsewhere in this Prospectus. The financial statements
of the Kingwood Group have not been separately included within this Prospectus
because the Kingwood Group does not qualify as a significant subsidiary under
the Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 80
and, accordingly, are not required to be presented. The Kingwood Group's results
of operations and statement of financial position are included in the Pro Forma
Financial Statements.
For financial statement presentation purposes, as required by the rules and
regulations of the Securities Act, the Howard Group has been identified as the
accounting acquiror.
38
<PAGE> 40
RESULTS OF OPERATIONS -- HOWARD GROUP
This group is one of the largest dealership groups in Oklahoma, consisting
of Acura, Chevrolet, Chrysler, Dodge, Eagle, GMC, Honda, Isuzu, Jeep, Mazda,
Plymouth, Pontiac and Toyota dealerships located in Oklahoma City. Robert E.
Howard II, the principal owner, has been involved in the automotive retailing
industry for over 28 years. Bob Howard opened his first dealership in 1978 which
later became the foundation for the Bob Howard Automall ("Bob Howard Automall").
The Bob Howard Automall currently houses the Chrysler, Eagle, GMC, Isuzu, Jeep,
Mazda, Plymouth and Pontiac franchises.
The following table sets forth certain selected financial data and data as
a percentage of revenues for the Howard Group for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1994 1995 1996
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
New vehicle sales.................... $136,831 60.2% $151,227 59.5% $164,979 58.5%
Used vehicle sales................... 69,862 30.8 79,448 31.3 88,477 31.4
Parts and service sales.............. 14,402 6.3 16,940 6.7 21,173 7.5
Other dealership revenue, net........ 6,164 2.7 6,388 2.5 7,387 2.6
-------- ----- -------- ----- -------- -----
Total revenues................. 227,259 100.0 254,003 100.0 282,016 100.0
Cost of sales......................... 198,992 87.6 221,773 87.3 244,396 86.7
-------- ----- -------- ----- -------- -----
Gross profit.......................... 28,267 12.4 32,230 12.7 37,620 13.3
Selling, general and administrative
expenses............................. 24,253 10.7 26,166 10.3 30,768 10.9
-------- ----- -------- ----- -------- -----
Income from operations................ 4,014 1.7 6,064 2.4 6,852 2.4
Other income and expense:
Interest expense, net................ (1,102) (0.5) (1,604) (0.6) (1,194) (0.4)
Other income (expense) net........... 9 -- (81) (0.1) (69) --
-------- ----- -------- ----- -------- -----
Income before income taxes............ 2,921 1.2 4,379 1.7 5,589 2.0
Provision (benefit) for income
taxes................................ 768 0.3 744 0.3 382 0.1
-------- ----- -------- ----- -------- -----
Net income............................ $ 2,153 0.9% $ 3,635 1.4% $ 5,207 1.9%
======== ===== ======== ===== ======== =====
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------
1996 1997
------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
New vehicle sales.................... $ 82,523 58.7% $ 84,922 55.1%
Used vehicle sales................... 44,036 31.3 54,354 35.3
Parts and service sales.............. 10,142 7.2 10,763 7.0
Other dealership revenue, net........ 3,949 2.8 4,006 2.6
-------- ----- -------- -----
Total revenues................. 140,650 100.0 154,045 100.0
Cost of sales......................... 121,654 86.5 134,130 87.1
-------- ----- -------- -----
Gross profit.......................... 18,996 13.5 19,915 12.9
Selling, general and administrative
expenses............................. 15,032 10.7 16,453 10.7
-------- ----- -------- -----
Income from operations................ 3,964 2.8 3,462 2.2
Other income and expense:
Interest expense, net................ (680) (0.5) (808) (0.5)
Other income (expense) net........... (28) -- 34 --
-------- ----- -------- -----
Income before income taxes............ 3,256 2.3 2,688 1.7
Provision (benefit) for income
taxes................................ 307 0.2 166 0.1
-------- ----- -------- -----
Net income............................ $ 2,949 2.1% $ 2,522 1.6%
======== ===== ======== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
REVENUES. Revenues increased $13.3 million, or 9.5%, from $140.7 million
for the six months ended June 30, 1996 to $154.0 million for the six months
ended June 30, 1997. New vehicle sales increased $2.4 million, or 2.9%, from
$82.5 million for the six months ended June 30, 1996 to $84.9 million for the
six months ending June 30, 1997. The increase is primarily attributable to sales
generated by Bob Howard Dodge and the Toyota franchise which were partially
offset by reduced sales at Bob Howard Automall. Used vehicle sales increased
$10.4 million, or 23.6%, from $44.0 million for the six months ended June 30,
1996 to $54.4 million for the six months ended June 30, 1997. This increase is
attributable to sales generated by Bob Howard Dodge in addition to increased
sales at all of the Howard Group's other franchises. Parts and service sales
increased $0.7 million, or 6.9%, from $10.1 million for the six months ended
June 30, 1996 to $10.8 million for the six months ended June 30, 1997. The
increase is attributable primarily to sales generated by Bob Howard Dodge. Other
dealership revenues increased $0.1 million or 2.6% from $3.9 million for the six
months ended June 30, 1996 to $4.0 million for the six months ended June 30,
1997. The increase is due primarily to an increase in the number of retail used
vehicle sales while the number of retail new vehicle sales was stable.
GROSS PROFIT. Gross profit increased $0.9 million, or 4.7%, from $19.0
million for the six months ended June 30, 1996 to $19.9 million for the six
months ended June 30, 1997. The increase is attributable primarily to increased
sales, offset partially by reduced vehicle gross margins at certain of the
Howard Group's franchises. The Howard Group's gross margin declined from 13.5%
for the six months ended June 30, 1996 to 12.9% for the six months ended June
30, 1997 due primarily to increased competitive pressures in the marketplace.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.5 million or 10.0% from $15.0 million for
the six months ended June 30, 1996 to $16.5 million for the six months ended
June 30, 1997. The increase is primarily attributable to expenses
39
<PAGE> 41
incurred by Bob Howard Dodge, which was acquired late in the second quarter of
1996. Selling, general and administrative expenses, as a percentage of total
revenues, remained constant at 10.7% for the six month periods ended June 30,
1996 and June 30, 1997.
INTEREST EXPENSE, NET. Interest expense, net, increased $0.1 million or
14.3% from $0.7 million for the six months ended June 30, 1996 to $0.8 million
for the six months ended June 30, 1997. Interest expense increased primarily due
to interest expense incurred by Bob Howard Dodge and increased vehicle
inventories carried at certain of the Howard Group's franchises.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES. Revenues increased by $28.0 million, or 11.0% from $254.0 million
for the year ended December 31, 1995 to $282.0 million for the year ended
December 31, 1996. New vehicle sales increased $13.8 million, or 9.1%, from
$151.2 million for the year ended December 31, 1995 to $165.0 million for the
year ended December 31, 1996. The increase is primarily attributable to strong
sales at the Chevrolet franchise and the acquisition of Bob Howard Dodge, offset
by reduced sales at Bob Howard Automall. Used vehicle revenues increased $9.1
million, or 11.5%, from $79.4 million for the year ended December 31, 1995 to
$88.5 million for the year ended December 31, 1996. This increase is
attributable to the acquisition of Bob Howard Dodge and the Howard Group's
successful marketing efforts at all of the Howard Group's other franchises.
Parts and service sales increased $4.3 million, or 25.4%, from $16.9 million for
the year ended December 31, 1995 to $21.2 million for the year ended December
31, 1996. The increase is attributable to increased sales at each of the Howard
Group's franchises and new sales from the acquisition of Bob Howard Dodge. Other
dealership revenues increased $1.0 million or 15.6% from $6.4 million for the
year ended December 31, 1995 to $7.4 million for the year ended December 31,
1996. The increase is due primarily to an increase in the number of retail new
and used vehicle sales.
GROSS PROFIT. Gross profit increased by $5.4 million, or 16.8%, from $32.2
million for the year ended December 31, 1995 to $37.6 million for the year ended
December 31, 1996. The increase is attributable to increased sales and
improvement in the Howard Group's gross profit margin from 12.7% for the year
ended December 31, 1995 to 13.3% for the year ended December 31, 1996. The gross
margin improved as revenues from parts and service and other dealership revenues
became a greater percentage of total revenues.
SELLING, GENERAL AND ADMINISTRATION EXPENSES. Selling, general and
administration expenses increased $4.6 million, or 17.6%, from $26.2 million for
the year ended December 31, 1995 to $30.8 million for the year ended December
31, 1996. The increase is primarily attributable to costs related to the newly
acquired Bob Howard Dodge and variable incentive pay to employees which is
related to the increase in revenues. As a percentage of total revenues, selling,
general and administrative expenses increased from 10.3% for the year ended
December 31, 1995 to 10.9% for the year ended December 31, 1996.
INTEREST EXPENSE, NET. Interest expense, net, decreased $0.4 million, or
25.0%, from $1.6 million for the year ended December 31, 1995 to $1.2 million
for the year ended December 31, 1996. The decrease is attributable to an
approximately 50 basis point decrease in the average floorplan interest rate and
increased manufacturer assistance, partially offset by interest expense incurred
by the newly acquired Bob Howard Dodge.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES. Revenues increased by $26.7 million, or 11.7%, from $227.3
million for the year ended December 31, 1994 to $254.0 million for the year
ended December 31, 1995. New vehicle sales increased $14.4 million, or 10.5%,
from $136.8 million for the year ended December 31, 1994 to $151.2 million for
the year ended December 31, 1995. The increase is primarily attributable to
strong sales growth of the Chevrolet franchise due to strong customer acceptance
of Chevrolet products and successful marketing efforts, and the inclusion of a
full year of revenues for the Honda and Acura franchises acquired during 1994.
Used vehicle sales increased $9.5 million, or 13.6%, from $69.9 million
40
<PAGE> 42
for the year ended December 31, 1994 to $79.4 million for the year ended
December 31, 1995. This increase is primarily attributable to successful
marketing efforts and the inclusion of a full year of revenues for the Honda and
Acura franchises acquired during 1994. Parts and service sales increased $2.5
million or 17.4% from $14.4 million for the year ended December 31, 1994 to
$16.9 million for the year ended December 31, 1995. The overall increase is
primarily attributable to continued steady growth driven by increased vehicle
sales. Other dealership revenues increased $0.2 million or 3.2% from $6.2
million for the year ended December 31, 1994 to $6.4 million for the year ended
December 31, 1995. The increase is due primarily to an increase in the number of
retail new and used vehicle sales.
GROSS PROFIT. Gross profit increased by $3.9 million, or 13.8%, from $28.3
million for the year ended December 31, 1994 to $32.2 million for the year ended
December 31, 1995. The increase is primarily attributable to increased sales.
Additionally, the gross margin improved from 12.4% for the year ended December
31, 1994 to 12.7% for the year ended December 31, 1995 due primarily to parts
and service revenues becoming a greater percentage of total revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.9 million, or 7.8%, from $24.3 million for
the year ended December 31, 1994 to $26.2 million for the year ended December
31, 1995. The increase is primarily attributable to variable incentive pay to
employees which is related directly to the increase in revenues. Selling,
general and administrative expenses declined as a percentage of revenues from
10.7% for the year ended December 31, 1994 to 10.3% for the year ended December
31, 1995.
INTEREST EXPENSE, NET. Interest expense, net, increased $0.5 million, or
45.5%, from $1.1 million for the year ended December 31, 1994 to $1.6 million
for the year ended December 31, 1995. The increase is primarily attributable to
an approximately 170 basis point increase in the average floorplan interest rate
and an increase in inventory to support growing retail sales.
LIQUIDITY AND CAPITAL RESOURCES -- HOWARD GROUP
The Howard Group's principal sources of liquidity are cash on hand, cash
from operations and floor plan financing.
The following table sets forth historical selected information from the
Howard Group statements of cash flows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- ------------------
1994 1995 1996 1996 1997
------- ------ ------- ------- -------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities.......................... $ 4,204 $7,197 $ 7,332 $ 1,884 $ 2,406
Net cash used in investing
activities.......................... (3,032) (1,303) (4,615) (4,335) (89)
Net cash used in financing
activities.......................... (157) (520) (1,558) (2,112) (4,059)
------- ------ ------- ------- -------
Net increase (decrease) in cash and
cash equivalents.................... $ 1,015 $5,374 $ 1,159 $(4,563) $(1,742)
======= ====== ======= ======= =======
</TABLE>
CASH FLOWS
Total cash and cash equivalents at June 30, 1997, were $9.9 million.
For the three year period ended December 31, 1996, the Howard Group
generated $18.7 million in net cash from operating activities, primarily from
net income plus depreciation and amortization. Net cash flow from operating
activities remained stable for the years ended December 31, 1995 and December
31, 1996.
Net cash from operating activities increased from $1.9 million for the six
months ended June 30, 1996 to $2.4 million for the six months ended June 30,
1997, primarily due to change in inventories, floor plan financing and accounts
payable and accrued liabilities.
41
<PAGE> 43
The change in net cash used in investing activities was attributable to
purchases of property and equipment and the purchases of the Honda and Acura
franchises in 1994 and the Dodge franchise in 1996.
The change in net cash used in financing activities was primarily
attributable to dividends paid in excess of cash received from contributions and
stock issuances.
FLOORPLAN FINANCING
The Howard Group currently obtains floorplan financing for its vehicle
inventory primarily through General Motors Acceptance Corporation ("GMAC"). As
of June 30, 1997, the Howard Group had approximately $37.8 million of floorplan
financing outstanding. The debt bears interest at a rate of prime minus 75 basis
points. Interest expense on floorplan notes payable, before manufacturer
interest assistance, totaled approximately $2.4 million, $3.4 million and $3.1
million for the year ended December 31, 1994, 1995 and 1996. Manufacturer
interest assistance, which is recorded as a reduction to interest expense,
totaled approximately $1.4 million, $1.9 million and $2.0 million for the years
ended December 31, 1994, 1995 and 1996.
LEASES
The Howard Group leases various real estate, facilities and equipment under
operating lease agreements, including leases with related parties. In connection
with the Acquisitions, the Howard Group intends to replace certain existing
leases with leases that have terms of 30 years and will be cancellable at the
Combined Company's option ten years from execution of the lease and at the end
of each subsequent five year period. Such leases initially will have the same
rent as the existing leases and will be subject to increases every five years
based on a percentage of the Consumer Price Index. See "Certain
Transactions -- Leases". Future minimum lease payments of existing operating
leases are as follows: $2.9 million in 1997, $2.9 million in 1998, $2.5 million
in 1999, $2.2 million in 2000 and $1.7 million in 2001.
OTHER
The Howard Group had working capital of $6.4 million as of December 31,
1996. Historically, the Howard Group has funded its operations with internally
generated cash flow and borrowings from lenders. While there can be no
assurance, based on current facts and circumstances, management believes it has
adequate cash flows and financing alternatives to fund its current operations.
42
<PAGE> 44
RESULTS OF OPERATIONS -- MCCALL GROUP
This group consists of the second largest Toyota dealership in the United
States, as ranked by 1996 new unit sales, and a Lexus dealership, both located
in Houston, Texas. Sterling B. McCall, Jr., the principal owner, has been
involved in the automotive retailing industry for more than 27 years.
The following table sets forth certain selected financial data and data as
a percentage of revenues for the McCall Group for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1994 1995 1996
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
New vehicle sales............... $105,402 59.5% $125,810 57.5% $166,382 57.6%
Used vehicle sales.............. 49,872 28.1 68,332 31.2 90,895 31.5
Parts and service sales......... 17,939 10.1 19,432 8.9 24,454 8.5
Other dealership revenue, net... 4,107 2.3 5,314 2.4 6,811 2.4
-------- ------ -------- ------ -------- ------
Total revenues................ 177,320 100.0 218,888 100.0 288,542 100.0
Cost of sales.................... 152,573 86.0 188,731 86.2 249,560 86.5
-------- ------ -------- ------ -------- ------
Gross profit..................... 24,747 14.0 30,157 13.8 38,982 13.5
Selling, general and
administrative expenses......... 22,477 12.7 27,752 12.7 35,072 12.1
-------- ------ -------- ------ -------- ------
Income from operations........... 2,270 1.3 2,405 1.1 3,910 1.4
Other expense:
Interest expense, net........... (2,463) (1.4) (3,215) (1.5) (2,748) (1.0)
Other expense, net.............. (6) -- (44) -- (45) --
-------- ------ -------- ------ -------- ------
Income (loss) before income
taxes........................... (199) (0.1) (854) (0.4) 1,117 0.4
Provision for income taxes....... 232 0.1 283 0.1 178 0.1
-------- ------ -------- ------ -------- ------
Net income (loss)................ $ (431) (0.2)% (1,137) (0.5)% $ 939 0.3%
======== ====== ======== ====== ======== ======
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------
1996 1997
----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
New vehicle sales............... $78,633 57.3% $81,609 55.5%
Used vehicle sales.............. 44,237 32.2 49,796 33.9
Parts and service sales......... 11,042 8.1 12,305 8.4
Other dealership revenue, net... 3,304 2.4 3,243 2.2
------- ----- ------- -----
Total revenues................ 137,216 100.0 146,953 100.0
Cost of sales.................... 118,277 86.2 127,276 86.6
------- ----- ------- -----
Gross profit..................... 18,939 13.8 19,677 13.4
Selling, general and
administrative expenses......... 16,959 12.4 17,546 11.9
------- ----- ------- -----
Income from operations........... 1,980 1.4 2,131 1.5
Other expense:
Interest expense, net........... (1,526) (1.1) (504) (0.4)
Other expense, net.............. (28) -- (34) --
------- ----- ------- -----
Income (loss) before income
taxes........................... 426 0.3 1,593 1.1
Provision for income taxes....... 72 -- 637 0.4
------- ----- ------- -----
Net income (loss)................ $ 354 0.3% $ 956 0.7%
======= ===== ======= =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
REVENUES. Revenues increased $9.8 million, or 7.1%, from $137.2 million for
the six months ended June 30, 1996 to $147.0 million for the six months ended
June 30, 1997. New vehicle sales increased $3.0 million, or 3.8%, from $78.6
million for the six months ended June 30, 1996 to $81.6 million for the six
months ending June 30, 1997. The increase is primarily attributable to
successful marketing efforts and continued strong customer support of Lexus
products partially offset by a decline in sales at the Toyota franchise, due to
product availability limitations. Used vehicle sales increased $5.6 million, or
12.7%, from $44.2 million for the six months ended June 30, 1996 to $49.8
million for the six months ended June 30, 1997. This increase is primarily
attributable to successful marketing efforts. Parts and service sales increased
$1.3 million, or 11.8%, from $11.0 million for the six months ended June 30,
1996 to $12.3 million for the six months ended June 30, 1997. The increase is
primarily attributable to growth in vehicle sales at the Lexus franchise,
resulting in new parts and service customers. Other dealership revenues declined
$0.1 million or 3.0% from $3.3 million for the six months ended June 30, 1996 to
$3.2 million for the six months ended June 30, 1997. The decline is due
primarily to a slight decline in the number of retail new and used vehicle
sales. New vehicle revenues increased despite the decline in the number of units
sold as higher cost Lexus franchise sales more than offset the reduced Toyota
franchise sales.
GROSS PROFIT. Gross profit increased $0.8 million, or 4.2%, from $18.9
million for the six months ended June 30, 1996 to $19.7 million for the six
months ended June 30, 1997. The increase is due to increased sales offset by a
decline in the gross margin from 13.8% for the six months ended June 30, 1996 to
13.4% for the six months ended June 30, 1997. The decline in gross margin is
primarily due to reduced margins on used vehicle sales at the Toyota franchise
as new sales management reduced the inventory level, which also reduced interest
expense.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expenses increased $0.5 million, or 2.9%, from $17.0 million for
the six months ended June 30, 1996 to
43
<PAGE> 45
$17.5 million for the six months ended June 30, 1997. The increase is primarily
attributable to variable incentive pay to employees which is related directly to
the increase in the revenues. As a percentage of total revenues, selling,
general and administrative expenses declined from 12.4% for the six months ended
June 30, 1996 to 11.9% for the six months ended June 30, 1997.
INTEREST EXPENSE, NET. Interest expense, net, decreased $1.0 million, or
66.7%, from $1.5 million for the six months ended June 30, 1996 to $0.5 million
for the six months ended June 30, 1997. The decrease is attributable to
increased manufacturer interest assistance and reduced inventory levels.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES. Revenues increased by $69.6 million, or 31.8%, from $218.9
million for the year ended December 31, 1995 to $288.5 million for the year
ended December 31, 1996. New vehicle sales increased $40.6 million, or 32.3%,
from $125.8 million for the year ended December 31, 1995 to $166.4 million for
the year ended December 31, 1996. The increase is primarily attributable to
successful marketing efforts, continued strong customer support of Toyota and
Lexus products, the installation of a new management team at the Lexus franchise
in February 1996 and showroom expansions at both the Toyota and Lexus franchises
in 1996. Used vehicle revenues increased $22.6 million, or 33.1%, from $68.3
million for the year ended December 31, 1995 to $90.9 million for the year ended
December 31, 1996. This increase is attributable to successful marketing
efforts. Parts and service sales increased $5.1 million, or 26.3%, from $19.4
million for the year ended December 31, 1995, to $24.5 million for the year
ended December 31, 1996. The increase is primarily attributable to the addition
of a state-of-the-art collision service center at the Lexus franchise in late
1995 and increased vehicle sales. Other dealership revenues increased $1.5
million or 28.3% from $5.3 million for the year ended December 31, 1995 to $6.8
million for the year ended December 31, 1996. The increase is due primarily to
an increase in the number of retail new and used vehicle sales.
GROSS PROFIT. Gross profit increased by $8.8 million, or 29.1%, from $30.2
million for the year ended December 31, 1995 to $39.0 million for the year ended
December 31, 1996. The increase is attributable to increased sales, net of a
minor decline in gross margin from 13.8% for the year ended December 31, 1995 to
13.5% for the year ended December 31, 1996. The slight decline in gross margin
is primarily due to an increase in new and used vehicle revenues as a percentage
of total revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $7.3 million, or 26.3%, from $27.8 million for
the year ended December 31, 1995 to $35.1 million for the year ended December
31, 1996. The increase is primarily attributable to variable incentive pay to
employees and increased marketing expense, both of which are related to the
increase in revenues. As a percentage of revenues, selling, general and
administrative expenses decreased from 12.7% for the year ended December 31,
1995 to 12.1% for the year ended December 31, 1996 as fixed costs were spread
over a larger pool of revenue.
INTEREST EXPENSE, NET. Interest expense, net, decreased $0.5 million, or
15.6%, from $3.2 million for the year ended December 31, 1995 to $2.7 million
for the year ended December 31, 1996. The decrease is attributable to an
approximately 50 basis point decrease in the average floorplan interest rate as
well as to improved inventory management.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES. Revenues increased $41.6 million, or 23.5%, from $177.3 million
for the year ended December 31, 1994 to $218.9 million for the year ended
December 31, 1995. New vehicle sales increased $20.4 million, or 19.4%, from
$105.4 million for the year ended December 31, 1994 to $125.8 million for the
year ended December 31, 1995. The increase is primarily attributable to
successful marketing efforts and continued strong customer support of Toyota
products. Used vehicle sales increased $18.4 million, or 36.9%, from $49.9
million for the year ended December 31, 1994 to $68.3 million for the year ended
December 31, 1995. This increase is primarily attributable to successful
marketing efforts. Parts and service sales increased $1.5 million, or 8.4%, from
$17.9 million for the year
44
<PAGE> 46
ended December 31, 1994 to $19.4 million for the year ended December 31, 1995.
The increase is attributable to continued steady growth driven by increased
vehicle sales. Other dealership revenues increased $1.2 million or 29.3% from
$4.1 million for the year ended December 31, 1994 to $5.3 million for the year
ended December 31, 1995. The increase is due primarily to an increase in the
number of retail new and used vehicle sales.
GROSS PROFIT. Gross profit increased $5.5 million, or 22.3% from $24.7
million for the year ended December 31, 1994 to $30.2 million for the year ended
December 31, 1995. The increase is attributable to increased sales, net of a
minor decline in gross margin from 14.0% for the year ended December 31, 1994 to
13.8% for the year ended December 31, 1995. The slight decline in gross margin
is primarily due to an increase in used vehicle revenues as a percentage of
total revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $5.3 million, or 23.6%, from $22.5 million for
the year ended December 31, 1994 to $27.8 million for the year ended December
31, 1995. The increase is primarily attributable to variable incentive pay to
employees and increased marketing expense, both of which are related to the
increase in revenues. Selling, general and administrative expenses, as a
percentage of revenues, remained constant at 12.7% for the year ended December
31, 1994 and for the year ended December 31, 1995.
INTEREST EXPENSE, NET. Interest expense, net, increased $0.7 million, or
28.0%, from $2.5 million for the year ended December 31, 1994 to $3.2 million
for the year ended December 31, 1995. The increase is attributable primarily to
an approximately 170 basis point increase in the floorplan interest rate.
LIQUIDITY AND CAPITAL RESOURCES -- MCCALL GROUP
The McCall Group's principal sources of liquidity are cash on hand, cash
from operations and floor plan financing.
The following table sets forth historical selected information from the
McCall Group statements of cash flows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- ------------------
1994 1995 1996 1996 1997
------- ------ ------- -------- -------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities............................. $(1,499) $2,576 $(5,416) $ (9,900) $(2,592)
Net cash used in investing activities.... (159) (252) (1,467) (1,339) (1,172)
Net cash provided by (used in) financing
activities............................. (342) 326 348 462 98
------- ------ ------- -------- -------
Net increase (decrease) in cash and cash
equivalents............................ $(2,000) $2,650 $(6,535) $(10,777) $(3,666)
======= ====== ======= ======== =======
</TABLE>
CASH FLOWS
Total cash and cash equivalents at June 30, 1997, were $10.4 million.
For the three years ended December 31, 1996, the McCall Group generated
$0.8 million in cash flow from net income plus depreciation and amortization.
Net cash flow from operating activities declined from $2.6 million for the year
ended December 31, 1995 to $(5.4) million for the year ended December 31, 1996.
The decline is due primarily to the usage of funds by the McCall Group to pay
down floorplan notes payable and increase inventories. These funds plus other
working capital were primarily invested in inventory to support the McCall
Group's significant growth.
For the six months ended June 30, 1997, the McCall Group generated net cash
flow of $1.2 million from net income plus depreciation and amortization. Floor
plan notes payable paydowns resulted in the net use of cash by operating
activities.
45
<PAGE> 47
The change in net cash used in investing activities for the three years
ended December 31, 1996, was primarily attributable to purchases of property and
equipment for the Lexus franchise's new collision service center added in 1995
and showroom expansions at both franchises during 1996.
The change in net cash used in investing activities for the six months
ended June 30, 1997, was primarily attributable to purchases of property and
equipment for the Toyota franchise's used vehicle showroom expansion.
The change in net cash related to financing activities was primarily
attributable to changes in long term debt and cash flows provided by payments on
subscriptions receivable and issuance of common stock.
FLOORPLAN FINANCING
The McCall Group currently obtains floorplan financing for its vehicle
inventory primarily through Toyota Motor Credit Corporation. As of June 30,
1997, the McCall Group had approximately $20.2 million of outstanding floorplan
financing. The debt bears interest at rates ranging from prime minus 75 basis
points to prime minus 100 basis points. Interest expense on floorplan notes
payable, before manufacturer interest assistance, totaled approximately $2.4
million, $3.1 million and $2.5 million for the years ended December 31, 1994,
1995 and 1996, respectively. Manufacturer interest assistance, which is recorded
as a reduction to interest expense, totaled approximately $82,000, $91,000 and
$136,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
LEASES
The McCall Group leases various real estate, facilities and equipment under
operating lease agreements, including leases with related parties. In connection
with the Acquisitions, the McCall Group intends to replace certain existing
leases with leases that have terms of 30 years and will be cancellable at the
Combined Company's option ten years from execution of the lease and at the end
of each subsequent five year period. Such leases initially will have the same
rent as the existing leases and will be subject to increases every five years
based on a percentage of the Consumer Price Index. See "Certain
Transactions -- Leases". Future minimum lease payments for existing operating
leases are as follows: $2.3 million in 1997, $2.2 million in 1998, $2.1 million
in 1999, $2.0 million in 2000 and $1.4 million in 2001.
OTHER
The McCall Group is required to buy certain retail loans from a third party
lender if the loans become delinquent. These loans are due from individuals who
have difficulty obtaining financing and may not have otherwise been able to
secure other financing to purchase a vehicle. These loans carry an interest rate
of prime plus approximately 9% and are secured by the vehicle sold to the
individual. As of June 30, 1997, the aggregate balance of these loans was
approximately $10.2 million. The McCall Group had charge-offs relating to these
loans of $200,000, $232,000, and $539,000 for the years ending December 31,
1994, 1995 and 1996, respectively. The increase in charge-offs during 1996 and
the additions to the reserve for guaranteed loan losses during 1996 are directly
attributable to the increase in loans guaranteed by the McCall Group from 1994
through 1996. The McCall Group sold approximately $3.5 million, $4.5 million and
$7.5 million of full recourse loans to the lender for the years ended December
31, 1994, 1995 and 1996, and had guaranteed loans outstanding of $7.4 million
and $10.4 million at December 31, 1995 and 1996, respectively. Due to the
increase in the number of loans outstanding during this three year period, the
McCall Group experienced a larger number of charge-offs during 1996 than in
prior years. The McCall Group's loan loss reserve has been determined based on
historical charge-off experience, and has remained relatively flat as a
percentage of guaranteed loans outstanding. Management has reviewed the status
of these loans and, based on current facts and circumstances, does not believe
the above described commitment will significantly impact the Combined Company's
operations or liquidity.
46
<PAGE> 48
The McCall Group had working capital of $2.1 million as of December 31,
1996, excluding the reserve for finance, insurance and service contract
chargebacks and the accumulated LIFO reserve. Historically, the McCall Group has
funded its operations with internally generated cash flows and borrowings from
lenders. While there can be no assurance, based on current facts and
circumstances, management believes it has adequate cash flows and financing
alternatives to fund its current operations.
RESULTS OF OPERATIONS -- SMITH GROUP
This group consists of an Acura dealership in Houston, Texas, Honda, GMC,
Oldsmobile, Mitsubishi, Lincoln, Mercury and Kia dealerships in Beaumont, Texas,
a Nissan dealership in Richardson, Texas (a suburb of Dallas) and two Nissan
dealerships, one Mitsubishi dealership and one Suzuki dealership in Austin,
Texas. The Smith family has been in the automotive retailing business since
1917.
The following table sets forth certain historical selected financial data
and data as a percentage of revenues for the Smith Group for the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1994 1995 1996
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
New vehicle sales............. $136,917 63.1% $132,150 59.7% $124,174 56.9%
Used vehicle sales............ 49,549 22.8 57,363 25.9 60,579 27.8
Parts and service sales....... 25,502 11.7 26,238 11.9 28,631 13.1
Other dealership revenue,
net......................... 5,109 2.4 5,507 2.5 4,895 2.2
-------- ------ -------- ------ -------- ------
Total revenues.............. 217,077 100.0 221,258 100.0 218,279 100.0
Cost of sales.................. 189,920 87.5 192,665 87.1 189,169 86.7
-------- ------ -------- ------ -------- ------
Gross profit................... 27,157 12.5 28,593 12.9 29,110 13.3
Selling, general and
administrative expenses....... 21,727 10.0 22,824 10.3 23,711 10.8
-------- ------ -------- ------ -------- ------
Income from operations......... 5,430 2.5 5,769 2.6 5,399 2.5
Other income and expense:
Interest expense, net......... (2,147) (1.0) (2,956) (1.3) (1,710) (0.8)
Other income (expense), net... (29) -- 202 0.1 223 0.1
-------- ------ -------- ------ -------- ------
Income before income taxes..... 3,254 1.5 3,015 1.4 3,912 1.8
Provision for income taxes..... 455 0.2 562 0.3 678 0.3
-------- ------ -------- ------ -------- ------
Net income..................... $ 2,799 1.3% $ 2,453 1.1% $ 3,234 1.5%
======== ====== ======== ====== ======== ======
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------
1996 1997
------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
New vehicle sales............. $ 59,437 54.9% $ 75,203 59.0%
Used vehicle sales............ 32,073 29.7 35,153 27.6
Parts and service sales....... 14,045 13.0 14,082 11.0
Other dealership revenue,
net......................... 2,618 2.4 3,021 2.4
-------- ----- -------- -----
Total revenues.............. 108,173 100.0 127,459 100.0
Cost of sales.................. 93,830 86.7 109,914 86.2
-------- ----- -------- -----
Gross profit................... 14,343 13.3 17,545 13.8
Selling, general and
administrative expenses....... 11,575 10.7 13,846 10.9
-------- ----- -------- -----
Income from operations......... 2,768 2.6 3,699 2.9
Other income and expense:
Interest expense, net......... (825) (0.8) (941) (0.8)
Other income (expense), net... 18 -- (19) --
-------- ----- -------- -----
Income before income taxes..... 1,961 1.8 2,739 2.1
Provision for income taxes..... 322 0.3 531 0.4
-------- ----- -------- -----
Net income..................... $ 1,639 1.5% $ 2,208 1.7%
======== ===== ======== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
REVENUES. Revenues increased $19.3 million, or 17.8%, from $108.2 million
for the six months ended June 30, 1996 to $127.5 million for the six months
ended June 30, 1997. New vehicle sales increased $15.8 million, or 26.6%, from
$59.4 million for the six months ended June 30, 1996 to $75.2 million for the
six months ended June 30, 1997. The increase is primarily attributable to the
addition of the new Nissan franchise during 1996 located just north of Austin,
Texas. Additionally, sales at the Smith Group's Nissan franchises were
positively impacted by manufacturer incentive programs. Used vehicle sales
increased $3.1 million, or 9.7%, from $32.1 million for the six months ended
June 30, 1996 to $35.2 million for the six months ended June 30, 1997. The
increase is due primarily to the addition of the new Nissan franchise during
1996, offset by declines at other franchises in the Smith Group. The declines
were caused in large part by the strong new vehicle sales capturing many used
vehicle customers. Parts and service sales increased $0.1 million, or 0.7%, from
$14.0 million for the six months ended June 30, 1996 to $14.1 million for the
six months ended June 30, 1997. The increase is primarily attributable to the
addition of the new Nissan franchise during 1996, while the other franchises
declined slightly from year to year. Other dealership revenue increased $0.4
million or 15.4% from $2.6 million for the six months ended June 30, 1996 to
$3.0 million for the six months ended June 30, 1997. The increase is due
primarily to an increase in the number of retail new and used vehicle sales.
47
<PAGE> 49
GROSS PROFIT. Gross profit increased $3.2 million, or 22.4%, from $14.3
million for the six months ended June 30, 1996 to $17.5 million for the six
months ended June 30, 1997. The increase is attributable to increased sales and
an increase in the gross margin from 13.3% for the six months ended June 30,
1996 to 13.8% for the six months ended June 30, 1997. The gross margin was
favorably impacted by manufacturer incentive programs which increased new
vehicle gross margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling general and
administrative expenses increased $2.2 million, or 19.0%, from $11.6 million for
the six months ended June 30, 1996 to $13.8 million for the six months ended
June 30, 1997. The increase is primarily attributable to variable incentive pay
to employees and expenses relating to the new Nissan franchise opened in 1996.
As a percentage of revenues, selling, general and administrative expenses
increased slightly from 10.7% for the six months ended June 30, 1996 to 10.9%
for the six months ended June 30, 1997.
INTEREST EXPENSE, NET. Interest expense, net, increased $0.1 million or
12.5% from $0.8 million for the six months ended June 30, 1996 to $0.9 million
for the six months ended June 30, 1997. The increase is primarily due to the
addition of the new Nissan franchise opened in 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES. Revenues decreased $3.0 million, or 1.4%, from $221.3 million for
the year ended December 31, 1995 to $218.3 million for the year ended December
31, 1996. New vehicle sales decreased $8.0 million, or 6.1%, from $132.2 million
for the year ended December 31, 1995 to $124.2 million for the year ended
December 31, 1996. The decrease is primarily attributable to reduced unit sales
at the Smith Group's Dallas Nissan franchise. The sales were impacted by changes
in the franchise's market place and consumer preferences in the region. The
decline was partially offset by revenues generated by a new Nissan franchise
located just north of Austin, Texas, opened in late 1996. Used vehicle sales
increased $3.2 million, or 5.6%, from $57.4 million for the year ended December
31, 1995 to $60.6 million for the year ended December 31, 1996. The increase is
primarily attributable to increased focus on used vehicle sales by the Dallas
Nissan franchise in response to changes in its new vehicle market conditions.
Parts and service sales increased $2.4 million, or 9.2%, from $26.2 million for
the year ended December 31, 1995 to $28.6 million for the year ended December
31, 1996. Other dealership revenues decreased $0.6 million or 10.9% from $5.5
million for the year ended December 31, 1995 to $4.9 million for the year ended
December 31, 1996. The decrease is due primarily to a decline in the number of
retail new vehicle sales, partially offset by an increase in the number of
retail used vehicle sales.
GROSS PROFIT. Gross profit increased by $0.5 million, or 1.8%, from $28.6
million for the year ended December 31, 1995 to $29.1 million for the year ended
December 31, 1996. Gross profit increased, despite decreased sales, due to a
higher gross margin. The gross margin increased as higher margin parts and
service sales increased and became a greater percentage of total revenues. Gross
margin increased from 12.9% for the year ended December 31, 1995 to 13.3% for
the year December 31, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $0.9 million, or 3.9%, from $22.8 million
for the year ended December 31, 1995 to $23.7 million for the year ended
December 31, 1996. The increase is primarily attributable to marketing expenses
relating to the opening of the Smith Group's new Nissan franchise in Austin,
Texas. As a percentage of total revenues, selling, general and administrative
expenses increased from 10.3% for the year ended December 31, 1995 to 10.8% for
the year ended December 31, 1996.
INTEREST EXPENSE, NET. Interest expense, net, decreased by $1.3 million, or
43.3%, from $3.0 million for the year ended December 31, 1995 to $1.7 million
for the year ended December 31, 1996. The decrease is attributable to an
approximately 50 basis point decrease in the average floorplan interest rate,
increased floorplan assistance payments from the Manufacturers and reduced
average floorplan levels.
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<PAGE> 50
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES. Revenues increased $4.2 million, or 1.9%, from $217.1 million for
the year ended December 31, 1994 to $221.3 million for the year ended December
31, 1995. New vehicle sales decreased $4.7 million or 3.4% from $136.9 million
for the year ended December 31, 1994 to $132.2 million for the year ended
December 31, 1995. The decline is primarily due to a reduced level of customer
support of the Smith Group's products. Used vehicle sales increased $7.9
million, or 16.0%, from $49.5 million for the year ended December 31, 1994 to
$57.4 million for the year ended December 31, 1995. The increase is primarily
attributable to increased focus on used vehicle sales in response to changes in
the Smith Group's new vehicle market conditions. Parts and service sales
increased $0.7 million, or 2.7%, from $25.5 million for the year ended December
31, 1994 to $26.2 million for the year ended December 31, 1995. The growth is
primarily attributable to continued steady growth driven by overall increased
vehicle sales. Other dealership revenues increased $0.4 million or 7.8% from
$5.1 million for the year ended December 31, 1994 to $5.5 million for the year
ended December 31, 1995. The increase is due primarily to an increase in the
number of retail used vehicle sales, partially offset by a decline in the number
of retail new vehicle sales.
GROSS PROFIT. Gross profit increased $1.4 million, or 5.1%, from $27.2
million for the year ended December 31, 1994 to $28.6 million for the year ended
December 31, 1995. The increase is attributable to increased revenues and
improved gross margin, as higher margin parts and service sales increased and
became a greater percentage of total revenues. Gross margin increased from 12.5%
for the year ended December 31, 1994 to 12.9% for the year ended December 31,
1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.1 million, or 5.1% from $21.7 million for
the year ended December 31, 1994 to $22.8 million for the year ended December
31, 1995. As a percentage of revenues, selling, general and administrative
expenses increased from 10.0% for the year ended December 31, 1994 to 10.3% for
the year ended December 31, 1995.
INTEREST EXPENSE, NET. Interest expense, net, increased $0.9 million, or
42.9%, from $2.1 million for the year ended December 31, 1994 to $3.0 million
for the year ended December 31, 1995. The increase is primarily attributable to
an approximately 170 basis point increase in the average floorplan interest
rate.
LIQUIDITY AND CAPITAL RESOURCES -- SMITH GROUP
The Smith Group's principal sources of liquidity are cash on hand, cash
from operations and floor plan financing.
The following table sets forth selected information from the Smith Group
statements of cash flows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ -----------------
1994 1995 1996 1996 1997
------ ------ ------ ------- -------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities.......................... $1,170 $4,975 $4,534 $ 2,355 $ 2,109
Net cash used in investing
activities.......................... (218) (700) (858) (298) (360)
Net cash used in financing
activities.......................... (905) (2,081) (2,343) (1,382) (1,413)
------ ------ ------ ------- -------
Net increase in cash and cash
equivalents......................... $ 47 $2,194 $1,333 $ 675 $ 336
====== ====== ====== ======= =======
</TABLE>
CASH FLOWS
Total cash and cash equivalents at June 30, 1997, were $9.4 million.
For the three year period ended December 31, 1996, the Smith Group
generated $10.7 million in net cash from operating activities, primarily from
net income plus depreciation and amortization.
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<PAGE> 51
Net cash from operating activities decreased from $2.4 million for the six
months ended June 30, 1996 to $2.1 million for the six months ended June 30,
1997, as cash generated by increased net income for the six months ended June
30, 1997 of $0.6 million and changes in inventories and floorplan financing were
offset by changes in accounts payable and accrued liabilities and accounts
receivable.
The change in net cash used in investing activities was primarily
attributable to purchases of property and equipment relating to the new Nissan
franchise in Austin, Texas and various facility improvements and computer
equipment purchases at the other Smith Group franchises.
The change in net cash used in financing activities was primarily
attributable to net borrowings and repayments of debt and distributions to the
stockholders.
FLOORPLAN FINANCING
The Smith Group currently obtains floorplan financing for its vehicle
inventory through Ford Motor Credit Company, NationsBank and Nissan Motor
Acceptance Corporation. As of June 30, 1997, the Smith Group had approximately
$33.5 million of floorplan indebtedness outstanding. The debt bears interest at
rates ranging from prime to prime plus 175 basis points for new and used
vehicles. Interest expense on floorplan notes payable, before manufacturer
interest assistance, totaled approximately $2.2 million, $3.2 million and $2.5
million for the years ended December 31, 1994, 1995 and 1996, respectively.
Manufacturer interest assistance, which is recorded as a reduction to interest
expense, totaled approximately $0.7 million, $0.8 million and $1.1 million for
the years ended December 31, 1994, 1995 and 1996, respectively. Payments on the
notes are due when the related vehicles are sold and are collateralized by
substantially all new and used vehicles.
LEASES
The Smith Group leases various facilities and equipment under operating
lease agreements, including leases with related parties. Certain of these leases
are noncancelable and expire on various dates through August 2013. These lease
agreements are subject to renewal under essentially the same terms and
conditions as the original leases. In connection with the Acquisitions, the
Smith Group intends to replace certain existing leases with leases that will
have terms of 30 years and will be cancellable at the Combined Company's option
ten years from execution of the lease and at the end of each subsequent five
year period. Such leases initially will have the same rent as the existing
leases and will be subject to increases every five years based on a percentage
of the Consumer Price Index. See "Certain Transactions -- Leases". Future
minimum lease payments for existing operating leases are as follows: $1.4
million in 1997, $1.4 million in 1998, $1.4 million in 1999, $1.0 million in
2000 and $0.8 million in 2001.
OTHER
The Smith Group had working capital of $8.1 million as of December 31,
1996, adjusted for the accumulated LIFO reserves. Historically, the Smith Group
has funded its operations with internally generated cash flow and borrowings
from lenders. While there can be no assurance, based on current facts and
circumstances, management believes it has adequate cash flows and financing
alternatives to fund its current operations.
CYCLICALITY
The Combined Company's operations, like the automotive retailing industry
in general, can be impacted by a number of factors relating to general economic
conditions, including consumer business cycles, consumer confidence, economic
conditions, availability of consumer credit and interest rates. Although the
above factors, among others, can impact the Combined Company's business, the
Combined Company believes the impact on its operations of future negative trends
in such factors will be somewhat mitigated by its (i) strong parts, service and
collision repair services, (ii) variable cost salary structure, (iii) geographic
diversity, and (iv) product diversity.
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<PAGE> 52
SEASONALITY
The Combined Company's operations are subject to seasonal variations, with
the second and third quarters generally contributing more operating profit than
the first and fourth quarters. This seasonality is driven by three primary
forces: (i) Manufacturer-related factors, primarily the historical timing of
major manufacturer incentive programs and model changeovers, (ii)
weather-related factors, which primarily affect parts and service and (iii)
consumer buying patterns.
EFFECTS OF INFLATION
Due to the relatively low levels of inflation experienced in fiscal 1994,
1995 and 1996 and the six months of 1997, inflation did not have a significant
effect on the results of the combined Founding Groups during those periods.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein are not based on historical facts, but
are forward-looking statements that are based upon numerous assumptions about
future conditions that could prove not to be accurate. Such forward-looking
statements include, without limitation, the statements regarding the trends in
the industry set forth in the Prospectus Summary and under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" regarding the Combined Company's anticipated future financial
results and position. Although the Combined Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from the
Combined Company's expectations are disclosed in this Prospectus, including but
not limited to the matters described in "Risk Factors".
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<PAGE> 53
BUSINESS
GENERAL
OVERVIEW
The Combined Company was founded to become a leading operator and
consolidator in the highly fragmented automotive retailing industry. The
Combined Company owns 30 automobile dealerships and five collision service
centers located in Texas and Oklahoma, and sells new and used cars and light
trucks, provides maintenance and repair services, sells replacement parts and
provides related financing, insurance and extended service contracts. The
Combined Company represents 21 American and Asian brands operating two Acura,
one Chevrolet, one Chrysler, one Dodge, one Eagle, two GMC, three Honda, two
Isuzu, one Jeep, one Kia, one Lexus, one Lincoln, one Mazda, one Mercury, two
Mitsubishi, three Nissan, one Oldsmobile, one Plymouth, one Pontiac, one Suzuki
and two Toyota dealerships. The Combined Company's dealerships include the
second-largest Toyota dealership in the United States as measured by 1996 new
retail unit sales and one of the largest dealership groups in Oklahoma.
The principals of the Founding Groups have over 90 years of combined
experience in the automotive retailing industry with family ownership dating
back as far as 1917. In addition, the principals of the Founding Groups have
been recognized as leaders in the automotive retailing industry, serving at
various times in leadership positions in state and national industry
organizations. The Combined Company's dealerships have also received numerous
awards based on various performance measures. The principals of the Founding
Groups will continue to manage their businesses and play a significant role in
the Combined Company's operating and acquisition strategies.
The Combined Company believes that its structural, managerial and
operational strengths include (i) brand and geographic diversity; (ii) the
ability to capitalize on regional economies of scale; (iii) cost savings derived
from nationally centralized financing and administrative functions; (iv) the
experience of the Combined Company's senior management in successfully
consolidating and operating in highly fragmented industries; (v) the
reputations, experience and performance of the Combined Company's management and
principals as leaders in the automotive retailing industry; (vi) the established
customer base and local name recognition of the Combined Company's dealerships;
(vii) the Combined Company's proven ability to source high quality used vehicles
cost-effectively through trade-ins and off-lease programs; and (viii) access to
equity incentives to attract and retain high quality personnel.
The Combined Company will pursue a growth strategy led by a management team
with extensive experience in consolidation and the management of growth
companies. B.B. Hollingsworth, Jr., Chairman of the Board, President and Chief
Executive Officer of the Combined Company, has experience not only in the
automotive retailing industry, but also in consolidating a major national
industry, having served in various senior management capacities, including
President, of Service Corporation International during its early growth period
as the world's leading consolidator of the funeral industry. In addition, John
T. Turner, Senior Vice President -- Corporate Development, has been actively
involved in the acquisition efforts of several companies involved in industry
consolidations, including Service Corporation International, The Loewen Group,
Inc. and Paragon Family Services, Inc. See "Management".
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<PAGE> 54
FOUNDING GROUPS
The following table sets forth retail unit sales for new vehicles for each
of the Founding Groups for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1994 1995 1996
----------------------- ----------------------- -----------------------
UNITS SOLD PERCENTAGE UNITS SOLD PERCENTAGE UNITS SOLD PERCENTAGE
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Howard Group......... 7,381 38.1% 7,782 38.2% 8,181 38.3%
McCall Group......... 4,239 21.9 5,030 24.7 6,458 30.2
Smith Group.......... 7,023 36.3 6,815 33.5 5,983 28.0
Kingwood Group....... 718 3.7 730 3.6 756 3.5
------ ----- ------ ----- ------ -----
Total................ 19,361 100.0% 20,357 100.0% 21,378 100.0%
====== ===== ====== ===== ====== =====
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------
1996 1997
----------------------- -----------------------
UNITS SOLD PERCENTAGE UNITS SOLD PERCENTAGE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Howard Group......... 4,148 39.9% 4,093 35.2%
McCall Group......... 3,072 29.6 3,037 26.1
Smith Group.......... 2,810 27.0 3,972 34.2
Kingwood Group....... 361 3.5 523 4.5
------ ----- ------ -----
Total................ 10,391 100.0% 11,625 100.0%
====== ===== ====== =====
</TABLE>
THE HOWARD GROUP. The Howard Group is one of the largest dealership groups
in Oklahoma, consisting of Acura, Chevrolet, Chrysler, Dodge, Eagle, GMC, Honda,
Isuzu, Jeep, Mazda, Plymouth, Pontiac and Toyota dealerships located in Oklahoma
City. Additionally, the Howard Group has entered into an agreement to purchase a
Chevrolet dealership in Tulsa, Oklahoma for the assumption of its liabilities
which are currently approximately $2.5 million. See "The Acquisitions". Mr.
Howard, the principal owner, has been involved in the automotive retailing
industry for over 28 years.
MCCALL GROUP. The McCall Group consists of the second largest Toyota
dealership in the United States, as ranked by 1996 new retail unit sales, and
one Lexus dealership, both located in Houston, Texas. Mr. McCall, the principal
owner, has been involved in the automotive retailing industry for more than 27
years, having been granted the first stand-alone exclusive Toyota dealership in
Houston, Texas.
SMITH GROUP. The Smith Group consists of one Acura dealership in Houston,
Texas, Honda, GMC, Oldsmobile, Mitsubishi, Lincoln, Mercury and Kia dealerships
in Beaumont, Texas, a Nissan dealership in Richardson, Texas (a suburb of
Dallas) and two Nissan dealerships, one Mitsubishi dealership and one Suzuki
dealership in the Austin, Texas area. The Smith family has been in the
automotive retailing business since 1917.
KINGWOOD GROUP. The Kingwood Group consists of one Honda and one Isuzu
dealership in Kingwood, Texas, a suburb of Houston. The Honda dealership was
established in 1989 and the Isuzu dealership was established in 1996. Mr.
Hollingsworth and John H. Duncan, a director of the Combined Company, own
interests in these dealerships.
ACQUISITIONS AND MANUFACTURER AWARDED DEALERSHIP
The Founding Groups have a history of successfully acquiring and
integrating dealerships. Since 1994 the Founding Groups have acquired four
dealerships and were awarded one new franchise by a Manufacturer. For the year
ended December 31, 1996, these dealerships represented $63.8 million in total
revenues, two of which had only part year revenues in 1996. The Howard Group
acquired a Honda and an Acura dealership in 1994 and a Dodge dealership in 1996;
all of which are located in Oklahoma City. The Smith Group was awarded a new
Nissan franchise in Austin, Texas in December 1996. The Kingwood Group acquired
an Isuzu dealership in Houston, Texas in late 1996.
INDUSTRY OVERVIEW
With more than $600 billion in 1996 sales, automotive retailing is the
largest retail trade sector in the United States. The industry is highly
fragmented and largely privately held with approximately 22,000 automobile
dealership locations representing more than 53,000 franchised dealerships. In
1996, U.S. franchised automobile dealers sold 15.1 million new vehicles and 19.2
million used vehicles for sales of approximately $328.4 billion and $171.8
billion, respectively. It is estimated that sales by franchised automobile
dealers account for one-fifth of the nation's total retail sales of all products
and merchandise. Since 1992, new vehicle revenues have grown at a 10.5% compound
annual rate. Over the same period,
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<PAGE> 55
used vehicle revenues have grown at a 14.6% compound annual rate. Slower unit
volume growth over this time period has been offset by the rising prices
associated with new vehicles and, on average, the higher prices paid for later
model high quality used vehicles which now comprise a significant part of the
used vehicle market. Automobile sales are affected by many factors, including
rates of employment, income growth, interest rates, weather patterns and other
national and local economic conditions, automotive innovations and general
consumer sentiment. See "Risk Factors -- Cyclicality" and "Risk
Factors -- Seasonality".
The following table sets forth new and used vehicle sales by franchised
automobile dealers in the United States for each of the five years ended
December 31, 1996. New vehicles can only be sold at retail by franchised
dealerships. The following table excludes sales of used vehicles by
nonfranchised dealerships and casual sales by individuals. Nonfranchised
dealerships and individuals had aggregate sales of $117.3 billion, $133.2
billion, $173.8 billion, $181.3 billion and $172.4 billion, respectively, for
each of the five years ended December 31, 1996.
<TABLE>
<CAPTION>
UNITED STATES FRANCHISED DEALERS' VEHICLE SALES
-----------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(UNITS IN MILLIONS; DOLLARS IN BILLIONS)
<S> <C> <C> <C> <C> <C>
New vehicle unit sales................. 12.9 13.9 15.1 14.8 15.1
New vehicle sales...................... $220.6 $253.0 $289.9 $302.7 $328.4
Used vehicle unit sales................ 15.1 16.3 17.8 18.5 19.2
Used vehicle sales..................... $ 99.5 $115.0 $138.6 $157.0 $171.8
Total vehicle sales.................... $320.1 $368.0 $428.5 $459.7 $500.2
Annual growth in total vehicle sales... --% 15.0% 16.5% 7.3% 8.8%
</TABLE>
Manufacturers originally established franchised dealer networks for the
distribution of their vehicles as single-dealership, single-owner operations. In
return for distribution rights within specified territories, Manufacturers
exerted significant influence over such matters as a dealer's location,
inventory size and composition and merchandising programs, as well as the
identity of owners and managers. This strict control contributed to the
proliferation of small dealerships, which at their peak in the late 1940s
numbered in excess of 46,000 dealership locations. Several manufacturers went
out of business in the 1950s, and the number of dealership locations decreased
to 36,000 by 1960.
Significant industry changes took place in the 1970s when fuel shortages
forced dramatic increases in gasoline prices and foreign manufacturers increased
their penetration of the U.S. market with fuel-efficient, low-cost vehicles. As
a result of these competitive pressures, dealers were able to negotiate
significant changes in the traditional distribution system with manufacturers.
Dealers began to add foreign franchises and the phenomenon of the
multi-franchise automobile dealer, or megadealer, emerged, prompting the
significant acquisition and consolidation activities of the 1980s. The easing of
restrictions against megadealers, competitive pressures upon undercapitalized
dealerships and the aging of dealership owners has led to further consolidation
of the industry. Since 1960, the number of dealership locations has declined 39%
to the current 22,000 level.
As the industry has evolved, so has the dealership profile. Over the past
three decades, there has been a trend toward fewer, but larger, dealerships. In
1996, each of the largest 100 dealer groups had more than $200 million in
revenues. Although significant consolidation has taken place since its
inception, the industry today remains highly fragmented, with the largest 100
dealer groups generating less than 10% of total sales revenues and controlling
approximately 5% of all franchised dealerships. The Combined Company believes
that these factors, together with increasing capital requirements for operating
automobile dealerships, lack of a viable exit strategy (especially for larger
dealerships) and the aging of dealership owners provide an attractive
environment for consolidation opportunities.
As with retailers generally, automobile dealership profitability varies
widely and depends in part on the effective management of inventory, marketing,
quality control and responsiveness to customers. Since 1991, retail automobile
dealerships in the United States have earned on average between 12.9%
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<PAGE> 56
and 14.1% total gross margin on sales with smaller dealerships generally
realizing a higher gross margin than larger dealerships. New vehicle sales were
the smallest proportionate contributors to dealers' gross profits during this
period, most recently earning an average gross margin of 6.5% in 1996. Used
vehicles provided higher gross margins than new vehicles during this period,
with an average used vehicle gross margin of 11.0% in 1996. Dealerships also
offer a range of other services and products, including repair and warranty
work, replacement parts, extended service contracts, financing and credit
insurance.
BUSINESS STRATEGY
The Combined Company plans to achieve its goal of becoming a leading
consolidator, while maintaining its high operating standards in the automotive
retailing industry, by (i) emphasizing growth through acquisitions and (ii)
implementing an operating strategy that focuses on decentralized dealership
operations, nationally centralized administrative functions, the expansion of
higher margin businesses, a commitment to customer service and the
implementation of new technology initiatives. By complementing the Combined
Company's industry leaders, management talent and proven operating capabilities
with its corporate management team which is experienced in achieving and
managing long-term growth in a consolidation environment, the Combined Company
believes that it is in a strong position to execute this strategy.
GROWTH THROUGH ACQUISITIONS
The Combined Company intends to implement an aggressive, yet disciplined,
acquisition program by pursuing (i) large, profitable and well managed
"platform" acquisitions in large metropolitan and high-growth suburban
geographic markets that the Combined Company does not currently serve and (ii)
smaller "add-on" acquisitions that will allow the Combined Company to increase
brand diversity, capitalize on regional economies of scale and offer a greater
breadth of products and services in each of the markets in which it operates. In
this regard, the Combined Company has negotiated and executed an arrangement
letter with Chase Securities Inc. and Comerica Bank for a $125 million Credit
Facility, of which a portion will be used, in combination with the Combined
Company's common stock, for acquisitions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Combined Founding
Groups' Commitments -- Credit Facility".
ENTERING NEW GEOGRAPHIC MARKETS. The Combined Company intends to expand
into geographic markets it does not currently serve by acquiring large,
profitable and well established megadealers that, like the Founding Groups, are
leaders in their regional markets. The Combined Company will target new platform
megadealers having superior operational and financial management personnel which
the Combined Company will seek to retain. The Combined Company believes that
retaining existing high quality management will enable acquired megadealers to
continue to operate effectively with management personnel who understand the
local market while allowing the Combined Company to source future acquisitions
more effectively and expand its operations without having to employ and train
untested new personnel. Moreover, the Combined Company believes that it is well
positioned to pursue larger, well established acquisition candidates as a result
of its depth of management, the Combined Company's capital structure and the
reputation of the principals of the Founding Groups as leaders in the automotive
retailing industry.
EXPANDING WITHIN EXISTING MARKETS. The Combined Company plans to acquire
additional dealerships in each of the markets in which it operates, including
acquisitions that increase the brands, products or services offered in that
market. The Combined Company believes that these acquisitions will facilitate
operating efficiencies and cost savings on a regional level in areas such as
facility and personnel utilization, vendor consolidation and advertising. The
Combined Company has recently entered into definitive agreements to acquire,
subject to manufacturer approval and a due diligence investigation, two
dealerships in Texas for aggregate payments of $9.0 million in cash. These two
acquisitions, if consummated, would also require the Combined Company to incur
approximately $13.0 million of floorplan indebtedness in connection with the
purchase of vehicle inventories of the dealerships.
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<PAGE> 57
MANUFACTURERS' LIMITATIONS ON ACQUISITIONS. The Combined Company's
acquisition program may be limited to some extent by the Manufacturers. Under
the limitations currently imposed by the Manufacturers, the Combined Company
could acquire no more than five additional Toyota dealerships, two additional
Lexus dealerships, four additional Honda dealerships, one additional Acura
dealership, approximately 400 additional Ford and Lincoln Mercury dealerships
and 10 additional GM dealership locations (within the next two years, subject to
being increased). The Combined Company currently owns two Toyota, one Lexus,
three Honda, two Acura, one Lincoln and one Mercury franchise and three GM
dealership locations. The other Manufacturers, which have no such limitations,
accounted for the following approximate number of dealerships in the United
States, as of December 31, 1996: Chrysler Corporation, 13,000 (at 4,600
locations); Nissan, 1,200; Mitsubishi, 500; Isuzu, 500; Suzuki, 300; and Kia,
200. In addition, all of the Manufacturers, whether or not they have numerical
limitations on the number of dealerships that may be acquired, require the
Combined Company to obtain the consent of the applicable Manufacturer prior to
the acquisition of any dealership franchises of such Manufacturer. In addition,
the Combined Company has not yet entered into any agreement with American Honda
with respect to the approval of the proposed acquisitions of the Honda and Acura
dealerships by the Combined Company and with respect to future acquisitions of
such dealerships. See "Risk Factors -- Manufacturers' Control over Dealerships",
"Risk Factors -- No Agreement with American Honda Motor Co., Inc.", "Risk
Factors -- Risks Relating to Failure to Meet Manufacturer CSI Scores" and "Risk
Factors -- Dependence on Acquisitions for Growth; Manufacturers' Restrictions on
Acquisitions".
Of the approximately 15 million new vehicles sold in the United States in
1996, approximately 31.3% were manufactured by GM, 25.4% were manufactured by
Ford Motor, 16.2% were manufactured by Chrysler Corporation, 7.7% were
manufactured by Toyota Motor, 5.6% were manufactured by Honda Motor, 5.0% were
manufactured by Nissan Motor and 8.8% were manufactured by other manufacturers.
OPERATING STRATEGY
The Combined Company intends to implement an operations strategy that
focuses on decentralized dealership operations, nationally centralized
administrative functions, expansion of higher margin businesses, commitment to
customer service and new technology initiatives.
The Combined Company has formed an operations committee comprised of the
chief operating officers of the Founding Groups and the general managers of the
dealerships in order to identify and share best practices. The Combined Company
intends to incorporate the key officers and management of future acquisitions
into this operations committee. The Combined Company believes that this
operations committee will promote the widespread application of the Combined
Company's broad strategic initiatives, facilitate the integration of the
Founding Groups and future acquisitions and improve operating efficiency and
overall customer satisfaction.
DECENTRALIZED DEALERSHIP OPERATIONS. The Combined Company believes that
decentralizing its dealership operations on a regional, or platform, basis will
enable it to provide superior customer service and a focused, market-specific
responsiveness to sales, service, marketing and inventory control. Local
presence and an in-depth knowledge of customers' needs and preferences are
important in generating internally-driven market share growth. By coordinating
certain operations on a platform basis, the Combined Company believes that it
will achieve cost savings in such areas as vendor consolidation, facility and
personnel utilization and advertising. The Combined Company intends to create
incentives for entrepreneurial management teams and sales forces at the regional
level through the use of stock options and/or cash bonus programs.
NATIONALLY CENTRALIZED ADMINISTRATIVE FUNCTIONS. The consolidation of
purchasing power on a centralized basis in the area of financing should result
in significant additional cost savings. For example, in connection with the
Offering, all of the Combined Company's floorplan financing will benefit from
interest rate reductions. Rate reductions have already become effective with
respect to approximately
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75% of the Combined Company's floorplan debt. The current reductions range
between 25 and 225 basis points. Additionally, the Combined Company's Credit
Facility, once closed, will result in further rate reductions. Subsequent to the
Offering, the Combined Company intends to refinance approximately $50 million in
floorplan financing with the Credit Facility. The impact of these changes is
expected to reduce the Combined Company's annual interest expense by more than
$1.0 million. Furthermore, the Combined Company expects that significant cost
savings can be achieved through the consolidation of administrative functions
such as risk management, employee benefits and employee training. For example,
the Combined Company has negotiated insurance coverage that is expected to
result in annual cost savings of approximately 25 to 30 percent.
EXPAND HIGHER MARGIN ACTIVITIES. The Combined Company is focused on
expanding its higher margin businesses such as used vehicle retail sales,
service and parts and finance and insurance. While each of the Combined
Company's platforms will be able to operate independently in a manner consistent
with its specific market's characteristics, each platform will pursue an
integrated strategy to grow each of these higher margin businesses to enhance
profitability and stimulate internal growth. With a competitive advantage in
sourcing, the ability to provide manufacturer-backed extended service contracts,
and attractive lease financing, new vehicle franchises are especially well
positioned to capitalize on industry growth in used vehicle sales. In addition,
each of the Combined Company's dealerships offers an integrated service and
parts department, which provides an important source of recurring higher margin
revenues. The Combined Company also has the opportunity on each new or used
vehicle sold to generate incremental revenues from the sale of extended service
contracts, credit insurance policies and finance and lease contracts. Each of
these business areas will be a focus of internal growth.
COMMITMENT TO CUSTOMER SERVICE. The Combined Company is focused on
providing a high level of customer service to meet the needs of an increasingly
sophisticated and demanding automotive consumer. The Combined Company strives to
cultivate lasting relationships with its customers, which it believes enhances
the opportunity for significant repeat and referral business. For example, the
Combined Company regards its service and repair activities as an integral part
of its overall approach to customer service, providing an opportunity to foster
ongoing relationships with the Combined Company's customers and deepen customer
loyalty. The Combined Company's dealerships continuously review their selling
processes in their effort to satisfy their customers.
DEALERSHIP OPERATIONS
The Combined Company has established a management structure that promotes
and rewards entrepreneurial spirit, individual pride and responsibility and the
achievement of team goals. Each dealership's general manager is ultimately
responsible for the operation, personnel and financial performance of the
dealership. The general manager is complemented with a management team
consisting of a new vehicle sales manager, used vehicle sales manager, service
and parts managers and finance managers. Each dealership is operated as a
distinct profit center, in which dealership general managers are given a high
degree of autonomy. The Combined Company believes that the general manager and
the other members of the dealership management team, as long-time members of
their local communities, are best able to judge how to conduct day-to-day
operations based on the team's experience in and familiarity with its local
market.
The Combined Company's dealerships engage in a number of inter-related
businesses: new vehicle sales; used vehicle sales; service and parts operations;
and finance and insurance.
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<PAGE> 59
NEW VEHICLE SALES
The Combined Company represents 21 American and Asian brands of economy,
family, sports and luxury cars and light trucks and sport utility vehicles. This
brand and product diversity reduces the risk of changes in customer preferences
as well as over-dependence on any one Manufacturer. The Combined Company intends
to pursue an acquisition strategy that will enhance its brand diversity. The
following table sets forth for 1996, certain information relating to the brands
of new vehicles sold at retail by the Combined Company:
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
NEW VEHICLES NEW VEHICLES
MANUFACTURER SOLD AT RETAIL SOLD AT RETAIL
------------ -------------- --------------
<S> <C> <C>
Toyota................................................. 6,346 29.7%
Nissan................................................. 3,060 14.3
Honda.................................................. 2,531 11.8
Chevrolet.............................................. 1,602 7.5
GMC.................................................... 1,199 5.6
Lexus.................................................. 989 4.6
Acura.................................................. 836 3.9
Pontiac................................................ 699 3.3
Mitsubishi............................................. 599 2.8
Mazda.................................................. 590 2.8
Dodge.................................................. 553 2.6
Jeep................................................... 536 2.5
Chrysler............................................... 360 1.7
Plymouth............................................... 356 1.6
Isuzu.................................................. 285 1.3
Kia.................................................... 277 1.3
Mercury................................................ 169 0.8
Oldsmobile............................................. 165 0.8
Eagle.................................................. 75 0.4
Suzuki................................................. 69 0.3
Lincoln................................................ 48 0.2
Other.................................................. 34 0.2
------ -----
Total........................................ 21,378 100.0%
====== =====
</TABLE>
The Combined Company's new vehicle retail sales include traditional new
vehicle retail lease transactions and lease-type transactions, both of which are
arranged by the Combined Company. New vehicle leases generally have short terms,
which brings the consumer back to the market sooner than if the purchase were
debt financed. In addition, leases provide the Combined Company with a steady
source of late-model, off-lease vehicles for its used vehicle inventory.
Generally, leased vehicles remain under factory warranty for the term of the
lease, which allows the Combined Company to provide repair service to the lessee
throughout the lease term.
The Combined Company seeks to provide customer-oriented service designed to
meet the needs of its customers and establish lasting relationships that will
result in repeat and referral business. For example, the Combined Company's
dealerships strive to: (i) employ more efficient selling approaches; (ii)
utilize computer technology that decreases the time necessary to purchase a
vehicle; (iii) engage in extensive follow-up after a sale in order to develop
long-term relationships with customers; and (iv) extensively train their sales
staffs to be able to meet the needs of the customer. The Combined Company
continually evaluates innovative ways to improve the buying experience for its
customers and believes that its ability to share best practices among its
dealerships gives it an advantage over smaller dealerships.
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<PAGE> 60
The Combined Company acquires substantially all its new vehicle inventory
from Manufacturers. Manufacturers allocate a limited inventory among their
franchised dealers based primarily on sales volume and input from dealers. The
Combined Company finances its inventory purchases through revolving credit
arrangements known in the industry as floorplan facilities. As a result of its
size and based on discussions with several lenders, the Combined Company
believes it will be able to secure floorplan financing on terms more favorable
than those generally available to smaller dealers.
USED VEHICLE SALES
The Combined Company sells used vehicles at each of its franchised
dealerships. Sales of used vehicles have become an increasingly significant
source of profit for the Combined Company. Sales of used vehicles as a
percentage of total vehicles sold by the Combined Company has increased from
40.4% in 1994 to 44.6% in 1996. Consumer demand for used vehicles has increased
as prices of new vehicles have risen and as more high quality used vehicles have
become available. Furthermore, used vehicles typically generate higher gross
margins than new vehicles because of their limited comparability and the
somewhat subjective nature of their valuation. The Combined Company intends to
continue growing its used vehicle sales operations by maintaining a high quality
inventory, providing competitive prices and extended service contracts for its
used vehicles and continuing to promote used vehicle sales.
Profits from sales of used vehicles are dependent primarily on the ability
of the Combined Company's dealerships to obtain a high quality supply of used
vehicles and effectively manage that inventory. The Combined Company's new
vehicle operations provide the Combined Company's used vehicle operations with a
large supply of high quality trade-ins and off-lease vehicles, which are the
best sources of high quality used vehicles. The Combined Company supplements its
used vehicle inventory with used vehicles purchased at auctions.
The Combined Company generally maintains a 45 to 60 day supply of used
vehicles and offers to other dealers and wholesalers used vehicles that the
Combined Company does not retail to customers. Trade-ins may be transferred
among dealerships to provide balanced inventories of used vehicles at each of
the Combined Company's dealerships. The Combined Company believes that
acquisitions of additional dealerships will expand its internal market for
transfers of used vehicles among its dealerships and, therefore, increase the
ability of each of the Combined Company's dealerships to offer the same brand of
used vehicles as it sells new and to maintain a balanced inventory of used
vehicles. The Combined Company intends to develop integrated computer inventory
systems that will allow it to coordinate vehicle transfers between its
dealerships, primarily on a regional basis.
The Combined Company has taken several steps towards building client
confidence in its used vehicle inventory, one of which includes its
participation in the Manufacturers' certification processes which are available
only to new vehicle franchises. This process makes these used vehicles eligible
for new vehicle benefits such as new vehicle finance rates and extended
Manufacturer warranties. In addition, the Combined Company's dealerships offer
extended warranties covering the used vehicles that each of its dealerships
sells.
The Combined Company believes that franchised dealership strengths in
offering used vehicles include: (i) access to trade-ins on new vehicle
purchases, which are typically lower mileage and higher quality relative to
trade-ins on used car purchases, (ii) access to late-model, low mileage
off-lease vehicles, and (iii) the availability of Manufacturer certification and
extended Manufacturer warranties for the Combined Company's higher quality used
vehicles. This supply of high quality trade-ins and off-lease vehicles reduces
the Combined Company's dependence on auction vehicles, which are typically a
higher cost source of used vehicles.
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PARTS AND SERVICE
The Combined Company provides parts and service at each of its franchised
dealerships primarily for the vehicle makes sold by its dealerships. The
Combined Company provides maintenance and repair services at its 30 dealerships
and five collision service centers. The Combined Company utilizes approximately
500 service bays in providing these services. The Combined Company performs both
warranty and non-warranty service work.
Historically, the automotive repair industry has been highly fragmented.
However, the Combined Company believes that the increased use of advanced
technology in vehicles has made it difficult for independent repair shops to
retain the expertise to perform major or technical repairs. Additionally,
Manufacturers permit warranty work to be performed only at franchised
dealerships. Hence, unlike independent service stations, or independent and
superstore used car dealerships with service operations, the Combined Company's
franchised dealerships are qualified to perform work covered by Manufacturer
warranties. Given the increasing technological complexity of motor vehicles and
the trend toward extended manufacturer and dealer warranty periods for new
vehicles, the Combined Company believes that an increasing percentage of repair
work will be performed at the Combined Company's franchised dealerships each of
which have the sophisticated equipment and skilled personnel necessary to
perform such repairs and offer extended service contracts.
The Combined Company attributes its profitability in parts and service to a
comprehensive management system, including the use of a variable rate pricing
structure, cultivation of strong client relationships through an emphasis on
preventive maintenance and the efficient management of parts inventory.
In charging for its mechanics' labor, the Combined 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
priced based on market conditions for different parts. The Combined Company
believes that variable rate pricing helps the Combined Company to achieve
overall gross margins in parts and service superior to those of certain
competitors who rely on fixed labor rates and percentage markups.
The Combined Company seeks to retain each purchaser of a vehicle as a
customer of the Combined Company's service and parts departments. The Combined
Company's dealerships have systems in place that track their customers'
maintenance records and notify owners of vehicles purchased at the dealerships
when their vehicles are due for periodic services. The Combined Company regards
its service and repair activities as an integral part of its overall approach to
customer service, providing an opportunity to foster ongoing relationships with
the Combined Company's customers and deepen customer loyalty.
The dealerships' parts departments support their respective sales and
service divisions. Each of the Combined Company's dealerships sells
factory-approved parts for vehicle makes and models sold by that dealership.
These parts are either used in repairs made by the dealership or sold at retail
to its customers or at wholesale to independent repair shops. Currently, each of
the Combined Company's dealerships employs its own parts manager and
independently controls its parts inventory and sales. Dealerships that sell the
same new vehicle makes have access to each other's computerized inventories and
frequently obtain unstocked parts from other dealerships.
OTHER DEALERSHIP OPERATIONS
Other dealership revenues consist primarily of finance and insurance
income. The Combined Company arranges financing for its customers' vehicle
purchases, sells vehicle service contracts and arranges selected types of credit
insurance in connection with the financing of vehicle sales. The Combined
Company places heavy emphasis on finance and insurance ("F&I") and offers
advanced F&I training to its finance and insurance managers. This emphasis
resulted in the Combined Company's arranging of financing for 68% of its new
vehicle sales and 55% of its used vehicle sales in 1996, as compared to 60% and
56% respectively, in 1995. Typically, the Combined Company's dealerships
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forward proposed financing contracts to Manufacturers' captive finance
companies, selected commercial banks or other financing parties. The Combined
Company receives a finance fee from the lender for arranging the financing and
is typically assessed a charge-back 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, companies must arrange financing for a
customer that is competitive (i.e., the customer is more likely to accept the
financing terms and the loan is less likely to be refinanced) and affordable
(i.e., the loan is more likely to be repaid).
At the time of a new vehicle sale, the Combined Company offers extended
service contracts to supplement the Manufacturer warranty. Additionally, the
Combined Company sells primary service contracts for used vehicles. Currently,
the Combined Company primarily sells service contracts of third party vendors,
for which it recognizes a commission upon the sale of the contract. The Combined
Company also sells its own service contracts at one location and recognizes the
associated revenue over the life of the contract. In 1996, the Combined Company
sold service contracts on 36% and 44% of its new and used vehicle sales,
respectively.
The Combined Company also offers certain types of credit insurance to
customers who finance their vehicle purchases through the Combined Company. The
Combined Company sells credit life insurance policies to these customers, which
policies provide for repayment of the vehicle loan if the obligor dies while the
loan is outstanding. The Combined Company also sells accident and health
insurance policies, which provide payment of the monthly loan obligations during
a period in which the obligor is disabled.
FRANCHISE AGREEMENTS
Each of the Combined Company's dealerships operates pursuant to a franchise
agreement between the applicable Manufacturer and the subsidiary of the Combined
Company that operates such dealership. The typical automotive franchise
agreement specifies the locations at which the dealer has the right and the
obligation to sell motor vehicles and related parts and products and to perform
certain approved services in order to serve a specified market area. The
designation of such areas and the allocation of new vehicles among dealerships
are subject to the discretion of the Manufacturer, which generally does not
guarantee exclusivity within a specified territory. A franchise agreement may
impose requirements on the dealer concerning such matters as the showrooms, the
facilities and equipment for servicing vehicles, the maintenance of inventories
of vehicles and parts, the maintenance of minimum net working capital and the
training of personnel. Compliance with these requirements is closely monitored
by the Manufacturer. In addition, Manufacturers require each dealership to
submit a financial statement of operations on a monthly and annual basis. The
franchise agreement also grants the dealer the non-exclusive right to use and
display the Manufacturer's trademarks, service marks and designs in the form and
manner approved by the Manufacturer.
Each franchise agreement sets forth the name of the person approved by the
Manufacturer to exercise full managerial authority over the dealership's
operations and the names and ownership percentages of the approved owners of the
dealership and contains provisions requiring the Manufacturer's prior approval
of changes in management or transfers of ownership of the dealership. Each of
the Combined Company's dealerships is owned, directly or indirectly, by the
Combined Company at the subsidiary level. A number of Manufacturers prohibit the
acquisition of a substantial ownership interest in the Combined Company or
transactions that may affect management control of the Combined Company, in each
case without the approval of the Manufacturer. See "Risk
Factors -- Manufacturers' Control Over Dealerships", "Risk Factors -- No
Agreement with American Honda Motor Co., Inc." and "Risk Factors -- Dependence
on Acquisitions for Growth; Manufacturers' Restrictions on Acquisitions".
Most franchise agreements expire after a specified period of time, ranging
from one to five years, and the Combined Company expects to renew any expiring
agreements in the ordinary course of business. The typical franchise agreement
provides for early termination or non-renewal by the Manufacturer under certain
circumstances such as change of management or ownership without Manufacturer
approval, insolvency or bankruptcy of the dealership, death or incapacity of the
dealer manager, conviction of a
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dealer manager or owner of certain crimes, misrepresentation of certain
information by the dealership or dealer manager or owner to the Manufacturer,
failure to adequately operate the dealership, failure to maintain any license,
permit or authorization required for the conduct of business, or material breach
of other provisions of the franchise agreement. The dealership is typically
entitled to terminate the franchise agreement at any time without cause.
The automobile franchise relationship is also governed by various federal
and state laws established to protect dealerships from the general unequal
bargaining power between the parties. The following discussion of state court
and administrative holdings and various state laws is based on management's
beliefs and may not be an accurate description of the state court and
administrative holdings and various state laws. The state statutes generally
provide that it is a violation for a manufacturer to terminate or fail to renew
a franchise without good cause. These statutes also provide that the
manufacturer is prohibited from unreasonably withholding approval for a proposed
change in ownership of the dealership. Acceptable grounds for disapproval
include material reasons relating to the character, financial ability or
business experience of the proposed transferee. Accordingly, certain provisions
of the franchise agreements, particularly as they relate to a manufacturer's
rights to terminate or fail to renew the franchise, have repeatedly been held
invalid by state courts and administrative agencies.
Under Texas law, despite the terms of contracts between manufacturers and
dealers, manufacturers may not unreasonably withhold approval of a transfer of a
dealership. It is unreasonable under Texas law for a manufacturer to reject a
prospective transferee of a dealership who is of good moral character and who
otherwise meets the manufacturer's written, reasonable and uniformly applied
standards or qualifications relating to the prospective transferee's business
experience and financial qualifications. In addition, under Texas and Oklahoma
law and the laws of other states, franchised dealerships may challenge
manufacturers' attempts to establish new franchises in the franchised dealers'
markets, and state regulators may deny applications to establish new dealerships
for a number of reasons, including a determination that the manufacturer is
adequately represented in the region. Texas and Oklahoma law limit the ability
of manufacturers to terminate or fail to renew franchises. In addition, other
laws in Texas and elsewhere limit the ability of manufacturers to withhold their
approval for the relocation of a franchise or require that disputes be
arbitrated. In addition, a manufacturer's license to distribute vehicles in
Texas and Oklahoma may be revoked if, among other things, the manufacturer has
forced or attempted to force an automobile dealer to accept delivery of motor
vehicles not ordered by that dealer. In Oklahoma, a manufacturer's license to
operate in the state may be revoked or suspended upon a finding that a
manufacturer has coerced or intimidated a dealer or acted dishonestly or failed
to act in accordance with reasonable standards of fair dealing. For further
discussion regarding Texas and Oklahoma law with regard to the transfer of
automobile franchises, see "Risk Factors -- No Agreement with American Honda
Motor Co., Inc."
COMPETITION
The automotive retailing industry is extremely competitive. In large
metropolitan areas, consumers have a number of choices in deciding where to
purchase a new or used vehicle and where to have such a vehicle serviced.
In the new vehicle area, the Combined Company competes with other
franchised dealers in each of its marketing areas. The Combined Company does not
have any cost advantage in purchasing new vehicles from the Manufacturers, and
typically relies on advertising and merchandising, sales expertise, service
reputation and location of its dealerships to sell new vehicles. In recent
years, automobile dealers have also faced increased competition in the sale or
lease of new vehicles from independent leasing companies, on-line purchasing
services and warehouse clubs. In addition, Ford Motor has announced that it is
exploring the possibility of going into business with some of its dealers to
create automotive superstores in selected markets.
In used vehicles, the Combined Company competes with other franchised
dealers, independent used car dealers, automobile rental agencies, private
parties and used car "superstores" for supply and
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resale of used vehicles. Used car "superstores" have recently opened in certain
markets in which the Combined Company competes, including Houston, Texas. In
addition, the Combined Company expects that additional used car "superstores"
will open in other markets in which the Combined Company competes. See "-- Used
Vehicle Sales".
The Combined Company believes that the principal competitive factors in
vehicle sales are the marketing campaigns conducted by Manufacturers, 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 particular brands of
automobiles, pricing (including Manufacturer rebates and other special offers)
and warranties. The Combined Company believes that its dealerships are
competitive in all of these areas.
The Combined Company competes against franchised dealers to perform
warranty repairs and against other automobile dealers, franchised and
independent service center chains and independent garages for non-warranty
repair and routine maintenance business. The Combined Company competes with
other automobile dealers, service stores and auto parts retailers in its parts
operations. The Combined 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 Manufacturer's brands and models and the quality
of customer service. A number of regional or national chains offer selected
parts and services at prices that may be lower than the Combined Company's
prices.
FACILITIES
Set forth in the table below is certain information relating to the
properties that the Combined Company uses in its business. Certain of the leases
described below reflect the terms of new leases to be entered into by the
Combined Company in connection with the Acquisitions. See "Certain
Transactions -- Leases".
<TABLE>
<CAPTION>
OCCUPANT LOCATION USE LEASE/OWN
-------- -------- --- ---------
<S> <C> <C> <C>
HOWARD GROUP
Bob Howard Automall... 13300 N. Broadway New and used car sales; Lease; expires in 2027 and is cancelable at
Extension, service; F&I the Combined Company's option in 2007 and at
Oklahoma City, Oklahoma the end of each subsequent five year period
13220 N. Broadway New and used car sales; Lease; expires in 2027 and is cancelable at
Extension, service; F&I the Combined Company's option in 2007 and at
Oklahoma City, Oklahoma the end of each subsequent five year period
715 W. Memorial Road, Storage and make ready Lease; current term is month-to-month
Oklahoma City, Oklahoma facility
Bob Howard 13130 N. Broadway New and used car sales; Lease; expires in 2027 and is cancelable at
Chevrolet........... Extension, service; F&I the Combined Company's option in 2007 and at
Oklahoma City, Oklahoma the end of each subsequent five year period
Bob Howard Toyota..... 13200 N. Broadway New and used car sales; Lease; expires in 2027 and is cancelable at
Extension, service; F&I the Combined Company's option in 2007 and at
Oklahoma City, Oklahoma the end of each subsequent five year period
</TABLE>
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<TABLE>
<CAPTION>
OCCUPANT LOCATION USE LEASE/OWN
-------- -------- --- ---------
<S> <C> <C> <C>
Bob Howard
Honda/Acura......... 14137 N. Broadway New and used car sales; Lease; expires in 2001
Extension, service; F&I
Edmond, Oklahoma
3700 S. Broadway Collision services Lease; expires in 1999
Extension, center
Edmond, Oklahoma
Bob Howard Dodge...... 616 W. Memorial Road, New and used car sales; Lease; expires in 2001
Edmond, Oklahoma service; collision
services center; F&I
MCCALL GROUP
9400 Southwest Freeway New and used car sales; Lease; two leases which expire in 2027 and
Sterling McCall Toyota.. Houston, Texas service; F&I are cancelable at the Combined Company's
option in 2007 and at the end of each
subsequent five year period
6015 Skyline Collision services Lease; expires in 2027 and is cancelable at
Houston, Texas center the Combined Company's option in 2007 and at
the end of each subsequent five year period
Sterling McCall 10422 Southwest Freeway New and used car sales; Lease; expires in 2027 and is cancelable at
Lexus............... Houston, Texas service; F&I the Combined Company's option in 2007 and at
the end of each subsequent five year period
10610 Wilcrest Collision services Lease; expires in 2027 and is cancelable at
Houston, Texas center the Combined Company's option in 2007 and at
the end of each subsequent five year period
10430 Southwest Freeway New & Used Car Sales Lease; expires in 2000 with an option to
Houston, Texas extend until 2005
SMITH GROUP
Courtesy Nissan....... 1777 North Central Expwy. New and used car sales; Lease; expires in 2013
Richardson, Texas service; F&I
421 Industrial Boulevard Storage and make ready Lease; expires in 1997
Richardson, Texas facility
Mike Smith 1515 I-10 South New and used car sales; Lease; expires in 2027 and is cancelable at
Autoplaza........... Beaumont, Texas service; collision the Combined Company's option in 2007 and at
services center; F&I the end of each subsequent five year period
Town North............ 9150 U.S. Highway 183 New and used car sales; Owned by dealership
Austin, Texas service; F&I
9112 U.S. Highway 183 New and used car sales; Owned by dealership
Austin, Texas service; F&I
9008 United Drive Used car sales Lease; expires in 2001
Austin, Texas
9094 U.S. Highway 183 Storage Facility Lease; expires in 2001
Austin, Texas
9400 United Drive Storage Facility Lease; expires December 31, 1997 and
Austin, Texas automatically renews for successive one year
terms unless notice given by either party
8908 McCann Street Storage Facility Lease; month to month; may be terminated by
Austin, Texas either party with 30 days written notice
</TABLE>
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<TABLE>
<CAPTION>
OCCUPANT LOCATION USE LEASE/OWN
-------- -------- --- ---------
<S> <C> <C> <C>
Round Rock Nissan..... 3050 North IH 35 New and used car sales; Lease; expires in 2027 and is cancelable at
Austin, Texas service; F&I the Combined Company's option in 2007 and at
the end of each subsequent five year period
Acura Southwest....... 10455 Southwest Freeway New and used car sales; Owned by dealership
Houston, Texas service; F&I
KINGWOOD GROUP
Foyt Motors........... 22575 Highway 59 N New and used car sales; Owned by dealership
Kingwood, Texas service; F&I
22577 Highway 59 N New and used car sales; Owned by dealership
Kingwood, Texas service; F&I
401 South I.H. 45 Used car sales; F&I Owned by dealership
Conroe, Texas
</TABLE>
GOVERNMENTAL REGULATIONS
A number of regulations affect the Combined Company's business of
marketing, selling, financing and servicing automobiles. The Combined Company
also is subject to laws and regulations relating to business corporations
generally.
Under Texas and Oklahoma law, the Combined Company must obtain a license in
order to establish, operate or relocate a dealership or provide certain
automotive repair services. These laws also regulate the Combined Company's
conduct of business, including its advertising and sales practices. Other states
may have similar requirements.
The Combined Company's financing activities with its customers are subject
to federal truth in lending, consumer leasing and equal credit opportunity
regulations as well as state and local motor vehicle finance laws, installment
finance laws, insurance laws, usury laws and other installment sales laws. Some
states regulate finance fees that may be paid as a result of vehicle sales.
Penalties for violation of any of these laws or regulations may include
revocation of certain licenses, assessment of criminal and civil fines and
penalties, and in certain instances, create a private cause of action for
individuals. The Combined Company believes that it complies substantially with
all laws and regulations affecting its business and does not have any material
liabilities under such laws and regulations and that compliance with all such
laws and regulations will not, individually or in the aggregate, have a material
adverse effect on the Combined Company's capital expenditures, earnings, or
competitive position, and the Combined Company does not anticipate that such
compliance will have a material effect on the Combined Company in the future.
ENVIRONMENTAL MATTERS
The Combined Company is subject to a wide range of federal, state, and
local environmental laws and regulations, including those governing discharges
to the air and water, the storage of petroleum substances and chemicals, the
handling and disposal of wastes, and the remediation of contamination arising
from spills and releases. As with automobile dealerships generally, and service
and parts and collision repair center operations in particular, the Combined
Company's business involves the generation, use, handling and disposal of
hazardous or toxic substances or wastes. Operations involving the management of
hazardous and nonhazardous wastes are subject to requirements of the federal
Resource Conservation and Recovery Act and comparable state statutes. Pursuant
to these laws, federal and state environmental agencies have established
approved methods for storage, treatment, and disposal of regulated wastes with
which the Combined Company must comply.
The Combined Company's business also involves the use of aboveground and
underground storage tanks. Under applicable laws and regulations, the Combined
Company is responsible for the proper use, maintenance and abandonment of
regulated storage tanks owned or operated by it, and for remediation
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of subsurface soils and groundwater impacted by releases from such existing or
abandoned aboveground or underground storage tanks. In addition to these
regulated tanks, the Combined Company owns, operates, or has otherwise abandoned
other underground and aboveground devices or containers (e.g., automotive lifts
and service pits) that may not be classified as regulated tanks, but which are
capable of releasing stored materials into the environment, thereby potentially
obligating the Combined Company to remediate any soils or groundwater resulting
from such releases.
The Combined Company is also subject to laws and regulations governing
remediation of contamination at facilities it operates or to which it sends
hazardous or toxic substances or wastes for treatment, recycling or disposal.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the legality of the original conduct, on certain classes of persons
that are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
the disposal site or sites where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances released at
such sites. Under CERCLA, these "responsible parties" may be subject to joint
and several liability for the costs of cleaning up the hazardous substances that
have been released into the environment, for damages to natural resources and
for the costs of certain health studies, and it is not uncommon for neighboring
landowners and other third parties to file claims for personal injury and
property damage allegedly caused by the release of hazardous substances.
Further, the Federal Water Pollution Control Act, also known as the Clean
Water Act, and comparable state statutes prohibit discharges of pollutants into
regulated waters without authorized National Pollution Discharge Elimination
System (NPDES) and similar state permits, require containment of potential
discharges of oil or hazardous substances, and require preparation of spill
contingency plans. The Combined Company expects to implement programs that
address wastewater discharge requirements as well as containment of potential
discharges and spill contingency planning.
Environmental laws and regulations have become very complex and it has
become very difficult for businesses that routinely handle hazardous and
non-hazardous wastes to achieve and maintain full compliance with all applicable
environmental laws. Like virtually any network of automobile dealerships and
vehicle service facilities, from time to time the Combined Company can be
expected to experience incidents and encounter conditions that will not be in
compliance with environmental laws and regulations. However, none of the
Founding Companies have been subject to any material environmental liabilities
in the past and the Combined Company does not anticipate that any material
environmental liabilities will be incurred in the future. Furthermore, the
Combined Company is in the process of establishing an environmental management
program that is intended to reduce the risk of noncompliance with environmental
laws and regulations. Nevertheless, environmental laws and regulations and their
interpretation and enforcement are changed frequently and the Combined Company
believes that the trend of more expansive and more strict environmental
legislation and regulations is likely to continue. Hence, there can be no
assurance that compliance with environmental laws or regulations or the future
discovery of unknown environmental conditions will not require additional
expenditures by the Combined Company, or that such expenditures would not be
material. See "Risk Factors -- Governmental Regulations and Environmental
Matters".
EMPLOYEES
As of June 30, 1997, the Combined Company employed 1,503 people, of whom
approximately 196 were employed in managerial positions, 533 were employed in
non-managerial sales positions, 551 were employed in non-managerial parts and
service positions and 223 were employed in administrative support positions. The
Combined Company intends, upon completion of the Offering, to provide certain
executive officers and managers with options to purchase Common Stock and
believes this equity incentive will be attractive to existing and prospective
employees of the Combined Company. See "Management -- 1996 Stock Incentive Plan"
and "1998 Employee Stock Purchase Plan".
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The Combined Company believes that its relationships with its employees are
favorable. None of the Combined Company's employees is represented by a labor
union. Because of its dependence on the Manufacturers, however, the Combined
Company may be affected by labor strikes, work slowdowns and walkouts at the
Combined Company Manufacturers' manufacturing facilities.
LEGAL PROCEEDINGS AND INSURANCE
From time to time, the Combined Company is named in claims involving the
manufacture of automobiles, contractual disputes and other matters arising in
the ordinary course of the Combined Company's business. Currently, no legal
proceedings are pending against or involve the Combined 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 Combined
Company.
Because of their vehicle inventory and nature of business, automobile
retail dealerships generally require significant levels of insurance covering a
broad variety of risks. The Combined Company's insurance includes an umbrella
policy with a $50 million per occurrence limit (upon consummation of the
Offering) as well as insurance on its real property, comprehensive coverage for
its vehicle inventory, general liability insurance, employee dishonesty coverage
and errors and omissions insurance in connection with its vehicle sales and
financing activities.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below are the Combined Company's executive officers and
directors, together with their positions and ages.
<TABLE>
<CAPTION>
EXPIRATION OF
NAME AGE POSITION TERM AS DIRECTOR
---- --- -------- ----------------
<S> <C> <C> <C>
B.B. Hollingsworth, Jr............ 55 Chairman, President and Chief Executive 2000
Officer
Robert E. Howard, II.............. 50 Director; President of Howard Group 2000
Sterling B. McCall, Jr............ 62 Director; President of McCall Group 1998
Charles M. Smith.................. 51 Director; President of Smith Group 1999
John T. Turner.................... 53 Senior Vice President -- Corporate
Development
Scott L. Thompson................. 38 Senior Vice President -- Chief Financial
Officer and Treasurer
Frank R. Todaro................... 50 Vice President -- Corporate Services
John H. Duncan.................... 69 Director 1999
Bennett E. Bidwell................ 70 Director 1998
</TABLE>
Set forth below is a brief description of the business experience of the
directors and executive officers of the Combined Company.
B.B. HOLLINGSWORTH, JR. has served as President, Chief Executive Officer
and Director of the Combined Company since August 1996. Prior to joining the
Combined Company, Mr. Hollingsworth spent nineteen years with Service
Corporation International ("SCI"), where he directed an acquisition program that
established SCI as the world's leading consolidator of the funeral industry. He
joined SCI in 1967, was then named Vice President for Corporate Development, was
named Vice President and Chief Financial Officer in 1972, and was elected
President and named Director in 1975. He served as President and Director of SCI
from 1975 until retirement in 1986. From 1986 to 1996, Mr. Hollingsworth served
as a consultant to SCI. Mr. Hollingsworth is a shareholder and director of Foyt
Motors, Inc., a Founding Company. He has served as a director of several public
and private companies.
ROBERT E. HOWARD, II. has served as a Director of the Combined Company
since April 1997. Mr. Howard will also serve as President of Howard Group upon
consummation of the Acquisitions. Mr. Howard has more than 28 years experience
in the automotive retailing industry. From 1969 to 1977, he served in various
management positions at franchised dealerships. Since 1978 he has been a
shareholder and has served as Chairman of Howard Pontiac-GMC, Inc., a franchised
dealership within the Howard Automall umbrella and a Founding Company. Mr.
Howard is also Chairman and a shareholder of the following additional Founding
Companies: Bob Howard Chevrolet, Bob Howard Honda/Acura, Bob Howard Toyota and
Bob Howard Dodge. He is a recipient of the 1997 Time Magazine Quality Dealer
Award and presently serves as Chairman of the Oklahoma Motor Vehicle Commission
and as a Director of the Oklahoma City Metropolitan Automobile Dealers
Association.
STERLING B. MCCALL, JR. has served as Director of the Combined Company
since August 1996. Mr. McCall will also serve as President of McCall Group upon
consummation of the Acquisitions. Mr. McCall has over 27 years experience in the
automotive retailing industry and is Chairman of Sterling McCall Toyota and
Sterling McCall Lexus, both Founding Companies. He has been a shareholder and
has served as President or Chairman of Sterling McCall Toyota and Sterling
McCall Lexus since their inception in 1969 and 1989, respectively. He is a
former Director of the American International Automobile Dealers Association, a
former Director and Chairman of the Houston Automobile Dealers Association and a
former Chairman of the Gulf States Toyota Dealer Council, and presently is a
Director of the Texas Automobile Dealers Association. Mr. McCall has won the
Time Magazine Quality Dealer Award and the Sports Illustrated Dealer of
Distinction Award.
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CHARLES M. SMITH has served as Director of the Combined Company since its
formation in December 1995. Mr. Smith will also serve as president of Smith
Group upon consummation of the Acquisitions. Mr. Smith has more than 28 years
experience in the automotive retailing industry. From 1968 to 1980, he served in
various capacities in dealerships owned and operated by the Smith family. From
1980 to 1985, he owned and operated his own automobile dealership. Since 1985 he
has served as managing partner of Smith & Liu Management Company, the management
entity for the Smith Group dealerships prior to the Acquisitions. He is Chairman
of the American International Automobile Dealers Association and is Vice
Chairman of the Texas Automobile Dealers Association. He has won the Time
Magazine Quality Dealer Award and the Sports Illustrated All-Star Dealer Award.
JOHN T. TURNER has served as the Combined Company's Senior Vice
President -- Corporate Development since December 1996. Prior to joining the
Combined Company, Mr. Turner functioned as Managing Director -- Corporate
Development, Europe for SCI. From 1990 to 1993, Mr. Turner served as Senior Vice
President -- Operations and Director of The Loewen Group, Inc. From 1986 to
1990, he served as President and Director of Paragon Family Services, Inc. From
1981 to 1986, he served as Senior Vice President -- Corporate Development for
SCI. Mr. Turner was a partner in Arthur Young & Company from 1977 to 1981.
Currently he is a director of COREStaff, Inc.
SCOTT L. THOMPSON has served as Senior Vice President -- Chief Financial
Officer and Treasurer of the Combined Company since December 1996. From 1991 to
1996, Mr. Thompson served as Executive Vice President, Operations and Finance
for KSA Industries, Inc., a diversified enterprise with interests in automotive
retailing, energy and professional sports. Among Mr. Thompson's other
responsibilities within the KSA group of companies, he served as a Vice
President and director of three Houston-area automobile dealerships with
aggregate annual revenues of $180 million. Additionally, in connection with his
position at KSA Industries, Inc. he served as a director of Adams Resources
Energy, Inc., a public oil and gas company. He is a Certified Public Accountant,
and from 1980 to 1991 he held various positions with Arthur Andersen LLP.
FRANK R. TODARO has served as Vice President -- Corporate Services of the
Combined Company since March 1997. From 1993 to 1997, Mr. Todaro served as a
self employed consultant providing marketing and management consulting services.
From 1985 to 1993, Mr. Todaro was a Principal with Ernst & Young where he served
as the Director of General Management Consulting and later the Director of
Marketing. From 1972 to 1985, Mr. Todaro served in various managerial and sales
positions with engineering consulting firms.
JOHN H. DUNCAN was elected Director of the Combined Company in June 1997.
Since 1988, Mr. Duncan has been a private investor with holdings in the
automotive, oil and gas and real estate industries. From 1958 to 1968, Mr.
Duncan served as President of Gulf & Western Industries (now Paramount
Communications), a company which he co-founded. Mr. Duncan currently serves as a
director, Chairman of the Executive Committee and member of the Compensation
Committee of Enron Corporation and a director and Chairman of the Compensation
Committee of Enron Oil Trading & Transportation. Mr. Duncan also serves on the
Board of Trustees of Southwestern University, the Board of Trustees of the Texas
Heart Institute and the Board of Visitors of the University of Texas (M.D.
Anderson) Cancer Foundation.
BENNETT E. BIDWELL was elected Director of the Combined Company in June
1997. Mr. Bidwell joined Chrysler Corporation as Executive Vice President in
1983 and was elected to the Board of Directors in that same year. He was named
Vice Chairman of Chrysler Corporation in 1985, Vice Chairman of Chrysler Motors
Corporation in 1987 and President - Product and Marketing of Chrysler Motors
Corporation in 1988. From 1988 to 1990, Mr. Bidwell served as Chairman of
Chrysler Motors Corporation. Mr. Bidwell retired from Chrysler Corporation in
1993. Prior to joining Chrysler, Mr. Bidwell spent 27 years with Ford Motor
Company, and from 1981 to 1983 he was President and Chief Operating Officer of
The Hertz Corporation. His past directorships include National Steel Corporation
(1981-1983) and McDonald & Company Securities, Inc. (1992-1995). Mr. Bidwell
currently serves as a director for Kerr-McGee Corporation, International
Management Group, Budd Company and Kelly Management Group.
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COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE
The Audit Committee consists of Messrs. Duncan and Bidwell. The Audit
Committee has responsibility for, among other things, (i) recommending the
selection of the Combined Company's independent accountants, (ii) reviewing and
approving the scope of the independent accountants' audit activity and extent of
non-audit services, (iii) reviewing with Management and the independent
accountants the adequacy of the Combined Company's basic accounting systems and
the effectiveness of the Combined Company's internal audit plan and activities,
(iv) reviewing with Management and the independent accountants the Combined
Company's financial statements and exercising general oversight of the Combined
Company's financial reporting process and (v) reviewing the Combined Company's
litigation and other legal matters that may affect the Combined Company's
financial condition and monitoring compliance with the Combined Company's
business ethics and other policies.
COMPENSATION COMMITTEE
The Compensation Committee consists of Messrs. Duncan and Bidwell. This
committee has general supervisory power over, and the power to grant awards
under the 1996 Stock Incentive Plan. The Compensation Committee has
responsibility for, among other things, (i) reviewing the recommendations of the
Chief Executive Officer as to appropriate compensation of the Combined Company's
principal executive officers and certain other key personnel and the Chief
Executive Officer; (ii) examining periodically the general compensation
structure of the Combined Company and (iii) supervising the welfare and pension
plans and compensation plans of the Combined Company.
CHAIRMAN'S COUNCIL
The Chairman's Council initially consists of Messrs. Howard, McCall and
Smith. The Chairman's Council may recommend up to three individuals to be
nominated as directors, which recommendation may be accepted at the sole
discretion of the Board of Directors. Members of the Chairman's Council may be
appointed or removed at any time by the Board of Directors and all members of
the Chairman's Council shall be subject to annual election by the Board of
Directors.
DIRECTORS COMPENSATION
Directors who are full-time employees of the Combined Company do not
receive a retainer or fees for service on the Board of Directors or on
committees of the Board. Members of the Board of Directors who are not full-time
employees of the Combined Company receive an annual fee of $6,000 and a fee of
$1,500 for attendance at each meeting of the Board of Directors. Directors also
receive the use of one demonstrator vehicle or the economic equivalent. In
addition, directors of the Combined Company (including directors who are not
full-time employees of the Combined Company) are eligible for grants of stock
options and other awards pursuant to the 1996 Stock Incentive Plan. Upon
consummation of the Offering, Messrs. Duncan and Bidwell will each receive
options to purchase 10,000 shares of Common Stock at the initial public offering
price.
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EXECUTIVE COMPENSATION; EMPLOYMENT AGREEMENTS
The following table sets forth certain summary information concerning the
compensation provided by the Combined Company in 1996 to its Chief Executive
Officer. No other person serving as an executive officer during 1996 earned
$100,000 or more in combined salary and bonus during such year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1)(2)
--------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY(3) BONUS COMPENSATION
--------------------------- --------- -------- ------------
<S> <C> <C> <C>
B.B. Hollingsworth, Jr., Chairman, President and Chief
Executive Officer......................................... $60,000 $ -- $ --
</TABLE>
- ---------------
(1) Amounts exclude perquisites and other personal benefits because such
compensation did not exceed the lesser of $50,000 or 10% of the total annual
salary and bonus reported.
(2) In addition, in March 1997 Mr. Hollingsworth, Jr. was granted options to
purchase 100,000 shares of Common Stock at $2.90 per share.
(3) Reflects amounts that were earned by Mr. Hollingsworth during 1996. Such
amounts have not been paid and are contingent upon the closing of the
Acquisitions and the Offering.
The Combined Company anticipates that during 1997, its most highly
compensated executive officers will be Messrs. Hollingsworth, Howard, McCall,
Smith, Turner and Thompson. Each of these executive officers will enter into an
employment agreement with the Combined Company, which will be effective upon
consummation of the Acquisitions and the Offering. The employment agreements
provide for the following base salaries for 1997: B.B. Hollingsworth,
Jr. -- $360,000; Robert E. Howard, II -- $300,000; Sterling B. McCall,
Jr. -- $300,000; Charles M. Smith -- $300,000; John T. Turner -- $250,000; and
Scott L. Thompson -- $180,000. The employment agreements also provide that such
officers' participation in bonus plans will be governed by the bonus and
incentive plans adopted by the Board of Directors in which the officer is a
participant. Currently, the Board of Directors has not adopted any bonus or
incentive plans.
Each employment agreement is for a term of five years, and unless
terminated or not renewed by the Combined Company or the employee, the term will
continue thereafter on a month-to-month basis terminable at any time by either
the Combined Company or the employee, with or without cause, upon thirty days
notice. In the event of a termination of employment by the Combined Company
without cause or by the employee due to an uncorrected material breach of the
employment agreement by the Combined Company, the employee is entitled to
receive his or her base salary paid bi-weekly until the end of his contract
term. In the event of an involuntary termination of employment following a
merger, consolidation or dissolution of the Combined Company or a sale of all
its assets, the employee is entitled to a lump sum payment equal to the amount
of base pay he is entitled to under the remainder of his contract. The Combined
Company is not obligated to pay any amounts to the employee other than his pro
rata base salary through the date of his or her termination upon (i) voluntary
termination of employment by the employee; (ii) termination of employment by the
Combined Company for cause (as defined); (iii) death of the employee; or (iv)
long-term disability of the employee. During the period of employment and for a
period of three years after termination of employment, the employees are
generally prohibited from competing or assisting others to compete with the
Combined Company. Mr. Howard, however, will be permitted to own and operate the
Chevrolet dealership in Tulsa, Oklahoma, together with other related franchises,
if the Combined Company's agreement to acquire the Tulsa Chevrolet dealership is
terminated. See "The Acquisitions". In addition, during the period of employment
and for a period of five years after termination of employment, the employees
are generally prohibited from inducing any other employee to terminate
employment with the Combined Company.
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1996 STOCK INCENTIVE PLAN
In November 1996, the Board of Directors and the stockholders of the
Combined Company adopted the Combined Company's 1996 Stock Incentive Plan (the
"Plan"). The purpose of the Plan is to provide directors, employees (key
operating managers at the dealerships) and consultants of the Combined Company
and its subsidiaries additional incentive and reward opportunities designed to
enhance the profitable growth of the Combined Company. The Plan provides for the
granting of incentive stock options intended to qualify under Section 422 of the
Code, options that do not constitute incentive stock options and restricted
stock awards. The Plan is administered by the Compensation Committee of the
Board of Directors. In general, the Compensation Committee is authorized to
select the recipients of awards and the terms and conditions of those awards.
The number of shares of Common Stock that may be issued under the Plan may
not exceed 2,000,000 shares (subject to adjustment to reflect stock dividends,
stock splits, recapitalizations and similar changes in the Combined Company's
capital structure). Shares of Common Stock which are attributable to awards
which have expired, terminated or been canceled or forfeited are available for
issuance or use in connection with future awards. The maximum number of shares
of Common Stock that may be subject to awards granted under the Plan to any one
individual during any calendar year may not exceed 500,000 (subject to
adjustment to reflect stock dividends, stock splits, recapitalizations and
similar changes in the Combined Company's capital structure).
The price at which a share of Common Stock may be purchased upon exercise
of an option granted under the Plan will be determined by the Compensation
Committee but (i) in the case of an incentive stock option, such purchase price
will not be less than the fair market value of a share of Common Stock on the
date such option is granted, and (ii) in the case of an option that does not
constitute an incentive stock option, such purchase price will not be less than
80% of the fair market value of a share of Common Stock on the date such option
is granted. Shares of Common Stock that are the subject of a restricted stock
award under the Plan will be subject to restrictions on disposition by the
holder of such award and an obligation of such holder to forfeit and surrender
the shares to the under certain circumstances (the "Forfeiture Restrictions").
The Forfeiture Restrictions will be determined by the Compensation Committee in
its sole discretion, and the Compensation Committee may provide that the
Forfeiture Restrictions will lapse upon (a) the attainment of one or more
performance targets established by the Compensation Committee, (b) the award
holder's continued employment with the Combined Company or continued service as
a consultant or director for a specified period of time, (c) the occurrence of
any event or the satisfaction of any other condition specified by the
Compensation Committee in its sole discretion or (d) a combination of any of the
foregoing.
No awards under the Plan may be granted after ten years from the date the
Plan was adopted by the Board of Directors. The Plan will remain in effect until
all awards granted under the Plan have been satisfied or expired. The Board of
Directors in its discretion may terminate the Plan at any time with respect to
any shares of Common Stock for which awards have not been granted. The Plan may
be amended, other than to increase the maximum aggregate number of shares that
may be issued under the Plan or to change the class of individuals eligible to
receive awards under the Plan, by the Board of Directors without the consent of
the stockholders of the Combined Company. No change in any award previously
granted under the Plan may be made which would impair the rights of the holder
of such award without the approval of the holder.
In December 1996, the Combined Company issued options to purchase 205,000
shares of Common Stock at $2.90 per share as follows: 125,000 shares to John T.
Turner and 80,000 shares to Scott L. Thompson. Each of these options will vest
16.7% per year after the issuance of the options. In March 1997, the Combined
Company issued options to purchase an additional 360,000 shares of Common Stock
at $2.90 per share to certain employees of the Combined Company, including the
following executive officers: B.B. Hollingsworth, Jr. -- 100,000 shares, John T.
Turner -- 80,000 shares and Scott L. Thompson -- 80,000 shares. In addition,
upon consummation of the Acquisitions and the Offering, the Combined Company
will issue options to purchase 750,950 shares of Common Stock at the initial
public
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offering price to certain employees and directors of the Combined Company,
including the following executive officers: Mr. Hollingsworth -- 100,000, Mr.
Turner -- 125,000 and Mr. Thompson -- 80,000.
The following table provides certain information regarding options granted
during 1996:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE VALUE AT
NUMBER OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS EXERCISE STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM
OPTIONS EMPLOYEES PRICE EXPIRATION ------------------------------
NAME GRANTED (#) IN FISCAL YEAR ($/ SH) DATE 5% ($) 10% ($)
---- ----------- -------------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
John T. Turner........ 125,000(1) 61.0% $2.90 12/13/06 1,480,000 2,074,000
Scott L. Thompson..... 80,000(1) 39.0% $2.90 12/13/06 947,000 1,326,000
</TABLE>
- ---------------
(1) The options were granted in December 1996 and vest 16.7% annually.
1998 EMPLOYEE STOCK PURCHASE PLAN
In September 1997, the Board of Directors and the stockholders of the
Combined Company adopted the Combined Company's 1998 Employee Stock Purchase
Plan (the "Purchase Plan"). The Purchase Plan authorizes the issuance of up to
200,000 shares of Common Stock (subject to adjustment in the event of stock
dividends, stock splits and certain other events) and provides that no options
may be granted under the Purchase Plan after June 30, 2007. The Purchase Plan is
available to all employees of the Combined Company and its participating
subsidiaries who are employed as of January 1, 1998 or the first day of each
successive April, July, October and January thereafter (a "Date of Grant").
However, an employee may not be granted an option under the Purchase Plan if
after the granting of the option such employee would be deemed to own 5% or more
of the combined voting power or value of all classes of stock of the Combined
Company. A committee appointed by the Board of Directors (the "Committee") is
charged with the general administration of the Purchase Plan and has the
authority to designate any present or future subsidiary of the Combined Company
as a participating subsidiary.
For each three-month period beginning on a Date of Grant (an "Option
Period") during the term of the Purchase Plan, unless the Committee determines
otherwise, each eligible employee may authorize payroll deductions to be made
during the Option Period, which amounts are used at the end of the Option Period
to acquire shares of Common Stock at 85% of the fair market value of the Common
Stock on the first or the last day of the Option Period, whichever is lower.
Employees have discretion to determine the amount of their payroll deduction
under the Purchase Plan, subject to the limit that not more than 10% of
compensation may be deducted in any Option Period and other limitations set
forth in Section 423 of the Code. No employee may purchase Common Stock under
the Purchase Plan valued at more than $25,000 for each calendar year in
accordance with the provisions of the Code. An employee may withdraw from the
Purchase Plan, in whole but not in part, at any time prior to the last day of an
Option Period, by delivering a withdrawal notice to the Combined Company. In the
event an employee withdraws, the Combined Company will refund the entire amount
of the payroll deductions during the Option Period, without interest.
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CERTAIN TRANSACTIONS
In connection with the formation of Group 1 Automotive in December 1995,
Group 1 Automotive issued 1,000 shares of Common Stock for $500 to Smith & Liu
Management Company, a Texas general partnership which has provided management
services to the Smith Group dealerships prior to consummation of the
Acquisitions ("Smith & Liu"). Mr. Smith is a partner of Smith & Liu and a
director of the Combined Company. In July 1996, Group 1 Automotive acquired
1,000 shares of Common Stock from Smith & Liu for aggregate consideration of
$500 and issued 500 shares to Mr. Hollingsworth for an aggregate consideration
of $5,000. Subsequently, Group 1 Automotive split its outstanding common stock
on a 900-for-one basis accomplished as a stock dividend. For a description of
the Acquisitions, see "The Acquisitions".
In order to finance the expenses of Group 1 Automotive prior to the
Acquisitions and the Offering, Smith & Liu, the Howard Group, the McCall Group,
the Smith Group and the Kingwood Group made loans to Group 1 Automotive, as of
October 14, 1997, of $87,960, $353,626, $592,231, $504,399 and $144,170,
respectively. These advances all have maturities of less than one year and bear
interest at a rate of 7% per annum. As of October 14, 1997, interest accrued on
loans from Smith & Liu, the Howard Group, the McCall Group, the Smith Group and
the Kingwood Group equaled $5,654, $6,783, $18,836, $13,065 and $4,290,
respectively.
Certain officers, directors and stockholders, or their affiliates, of the
Combined Company have engaged in transactions with the Founding Companies prior
to consummation of the Acquisitions. Except for the transactions described
below, none of these transactions will continue after consummation of the
Acquisitions. For a discussion of these transactions for the three years ended
December 31, 1996 and for the six months ended June 30, 1997, see the Notes to
Combined Financial Statements.
LEASES
Certain of the properties leased by the Founding Companies are owned by
officers, directors or holders of 5% or more of the Common Stock of the Combined
Company or their affiliates. As part of the Acquisitions, the Founding Companies
have agreed to replace each of the existing leases with officers, directors or
5% stockholders (the "Related Party Leases") with a standard lease agreement for
each property. However, one Related Party Lease, covering the real estate and
facilities of the Howard collision repair center, will remain in place between
Bob Howard Honda/Acura, as lessee, and North Broadway Real Estate, an Oklahoma
limited liability company owned 50% by Robert E. Howard II and 50% by an
unrelated third party. This lease provides for a five-year term ending July 1,
1999 and a monthly rental rate of $9,000, and requires Bob Howard Honda/Acura to
pay all applicable property taxes, maintain adequate insurance and repair or
replace the leased building if necessary.
The term of each lease that is to be replaced is for 30 years and is
cancelable at the Combined Company's option ten years from execution of the
lease and at the end of each subsequent five year period. Additionally, the
Combined Company has a right of first refusal to acquire the property. The lease
requires the Combined Company to be responsible for taxes, insurance and, in
certain circumstances, maintenance. Each of the Related Party Leases and the
rents payable thereunder are described below. Under each of the Related Party
Leases, the rent is subject to increases every five years based on increases in
the Consumer Price Index. The Combined Company believes that the terms of the
Related Party Leases, taken as a whole, are no less favorable to the Combined
Company than could be obtained from unaffiliated parties.
Sterling McCall Toyota leases property owned by SMC Investment, Inc. ("SMC
Investment") and used by Sterling McCall Toyota as a repair center. Mr. McCall
and his affiliates own all of the stock of SMC Investment. The lease provides
for a monthly rental of $7,000 per month. The property and fixtures subject to
this lease secure indebtedness of SMC Investment. The amount of such
indebtedness outstanding as of June 30, 1997 was approximately $0.7 million.
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Sterling McCall Toyota leases property that is owned by a partnership of
which Mr. McCall is a partner and that is used by Sterling McCall Toyota as a
storage lot. The lease provides for a monthly rental of $7,000. The property and
fixtures subject to this lease secure indebtedness of Mr. McCall. The amount of
such indebtedness outstanding as of June 30, 1997 was approximately $0.2
million.
Sterling McCall Toyota leases property that is owned by two partnerships of
which Mr. McCall is a partner and that is used by Sterling McCall Toyota as an
automobile dealership. The lease provides for a monthly rental of $70,000. The
property and fixtures subject to this lease secure indebtedness of two
affiliates of Mr. McCall. The amount of such indebtedness outstanding as of June
30, 1997 was approximately $4.6 million.
Sterling McCall Lexus leases property that is owned by a partnership of
which Mr. McCall is a partner and that is used by SMC Luxury Cars as an
automobile dealership. The lease provides for a monthly rental of $70,000. The
property and fixtures subject to this lease secure indebtedness of an affiliate
of Mr. McCall. The amount of such indebtedness outstanding as of June 30, 1997
was approximately $3.4 million.
Sterling McCall Lexus leases property that is owned by Mr. McCall and that
is used by Sterling McCall Lexus as a repair center. The lease provides for a
monthly rental of $6,500. The property subject to this lease secures
indebtedness of Mr. McCall. The amount of such indebtedness outstanding as of
June 30, 1997 was approximately $0.4 million.
Mike Smith Autoplaza leases property owned by a general partnership, of
which the children of Charles M. Smith are partners. The property is used by
Mike Smith Autoplaza as an automobile dealership. The leases provide for monthly
rental payments of $46,500. The property and fixtures subject to this lease
secure indebtedness of an affiliate of Mr. Smith. The amount of such
indebtedness outstanding as of June 30, 1997 was approximately $2.2 million.
Round Rock Nissan leases property owned by SKLR Round Rock, L.L.C., a Texas
limited liability corporation in which Charles M. Smith, has an ownership
interest. The property is used by Round Rock Nissan as an automobile dealership.
The lease provides for current monthly rental payments of $32,000. The property
and fixtures subject to this lease secure indebtedness of an affiliate of Mr.
Smith. The amount of such indebtedness outstanding as of June 30, 1997 was
approximately $2.4 million.
Bob Howard Automall leases two properties owned by Mr. Howard and used by
Bob Howard Automall as automobile dealerships. These leases relating to these
properties provide for aggregate monthly rentals of $85,862. The property and
fixtures subject to this lease secure indebtedness of Mr. Howard. The amount of
such indebtedness outstanding as of June 30, 1997 was approximately $3.6
million.
Bob Howard Chevrolet leases property owned by Mr. Howard and used by Bob
Howard Chevrolet as an automobile dealership. The lease relating to this
property provides for a monthly rental of $48,500. The property and fixtures
subject to this lease secure indebtedness of Mr. Howard. The amount of such
indebtedness outstanding as of June 30, 1997 was approximately $3.3 million.
Bob Howard Honda/Acura leases property owned by North Broadway Real Estate,
L.L.C., an Oklahoma limited liability company in which Mr. Howard owns a 50%
interest. This property is used as a collision repair center, and the lease
relating to this property provides for a monthly rental of $9,000.
Bob Howard Toyota leases property owned by Mr. Howard and used by Bob
Howard Toyota as an automobile dealership. The lease relating to this property
provides for a monthly rental of $33,500. The property and fixtures subject to
this lease secure indebtedness of Mr. Howard. The amount of such indebtedness
outstanding as of June 30, 1997 was $0.9 million.
Certain of the property and the fixtures leased to the Combined Company
serve as collateral for various indebtedness of the principals of the Founding
Companies and certain affiliates of such principals, as described above. Each of
such principals have agreed to take all action necessary to secure an agreement
from each of the lenders that, upon a default of any of such principals, such
lenders
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<PAGE> 77
will honor the lease and will not disturb the Combined Company's right to
possession of the applicable property under the lease. Such principals of the
Founding Companies have also agreed to grant an option to purchase the
applicable leased premises at a price equal to the outstanding indebtedness that
is secured by the property if the principals of the Founding Companies have not
obtained such an agreement from the lenders within 90 days after consummation of
the Acquisitions.
LOANS
Certain of the Founding Groups have incurred indebtedness which has been
personally guaranteed by their stockholders or by entities controlled by their
stockholders. The Combined Company intends to repay, refinance or otherwise take
steps to remove these personal guarantees. It is the intention of management
that as soon as practicable after the Acquisitions and the Offering, the debt of
the Combined Company will cease to be personally guaranteed by any of its
officers, directors or stockholders.
The following table sets forth, as of June 30, 1997, the indebtedness of
the Founding Groups which is guaranteed by stockholders of the Founding Groups:
<TABLE>
<CAPTION>
DEBTOR GUARANTOR PRINCIPAL AMOUNT
------ --------- ----------------
(IN MILLIONS)
<S> <C> <C>
Town North Nissan........... Charles Smith, W.C. Smith, Ronald Kutz, Randall Ross, Kuo $ 3.4
Kang Liu, Daniel C.Y. Liu
Acura Southwest............. Charles Smith, Daniel C.Y. Liu, Ralph O'Connor 1.4
Foyt Motors................. B.B. Hollingsworth, Jr., John Duncan, Robert Struzynski, 2.7
A.J. Foyt, Jr.
Round Rock Nissan........... Charles Smith, Daniel C.Y. Liu, Ronald Kutz, William 0.4
Lawrence, Randall Ross, Janet Sopronyi, Thomas Park
Bob Howard Automall......... Robert E. Howard II 15.8
Bob Howard Honda/Acura...... Robert E. Howard II 5.3
Bob Howard Chevrolet........ Robert E. Howard II 8.4
Bob Howard Dodge............ Robert E. Howard II 5.3
Bob Howard Toyota........... Robert E. Howard II 3.0
Sterling McCall Toyota...... Sterling B. McCall, Jr. 0.2
Sterling McCall Toyota...... Sterling B. McCall, Jr. 14.1
Sterling McCall Toyota and
Sterling McCall Lexus..... Sterling B. McCall, Jr. 10.2
Sterling McCall Lexus....... Sterling B. McCall, Jr. 6.1
</TABLE>
Certain principals of the Founding Groups, and certain affiliates of such
principals, have incurred indebtedness which is guaranteed by certain of the
Founding Companies. With the exception of the Round Rock Nissan guarantee
described below, all applicable lenders have agreed to release the Founding
Companies from their guarantees of indebtedness of the principals and their
affiliates. These releases will be effective upon the consummation of the
Offering. Following is a list of indebtedness of principals and their affiliates
which will cease to be guaranteed by the Founding Companies upon consummation of
the Offering: Mr. Howard, approximately $7.8 million, Mr. McCall and affiliates,
approximately $8.0 million; and Mr. Smith and affiliates, approximately $2.2
million.
Upon consummation of the Offering, Round Rock Nissan will continue to be a
guarantor of indebtedness incurred by SKLR Round Rock, L.C., a limited liability
company in which Charles M. Smith owns a 22% interest. No other entity
comprising the Combined Company will be liable under Round Rock Nissan's
guarantee. At June 30, 1997, the outstanding principal amount of this
indebtedness was approximately $2.4 million. However, if Round Rock Nissan's
guarantee of this indebtedness is not removed within 90 days after consummation
of the Acquisitions, the Combined Company will have an option to acquire the
land and fixtures securing such indebtedness (which is the property on which
Round Rock Nissan is located) at a price equal to such indebtedness. The
Combined Company currently
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<PAGE> 78
intends to acquire such land and fixtures if the guarantee is not released. In
connection with a proposed refinancing of SKLR Round Rock, L.C.'s debt on such
land and fixtures, a local real estate appraisal firm provided the Combined
Company with a verbal estimate of value of $2.6 million, which exceeds SKLR
Round Rock L.C.'s outstanding loan balance on such property by approximately
$200,000. Since the Combined Company believes that the fair market value of the
property is greater than the outstanding indebtedness guaranteed by Round Rock
Nissan, the Combined Company expects that it would record negative goodwill in
connection with the acquisition.
If the Combined Company's acquisition of the Tulsa Dealership is
consummated, the Combined Company will assume a loan made by Mr. Howard to the
Tulsa Dealership. The amount outstanding under this loan is approximately $2.5
million, and bears interest at the prime rate plus 100 basis points. If the
Combined Company's acquisition of the Tulsa Dealership is not consummated, this
loan will not be assumed by the Combined Company. See "The Acquisitions".
OTHER
Sterling McCall Toyota and Sterling McCall Lexus have entered into an
agreement with Dealer Solutions, L.L.C. ("DSL") pursuant to which DSL is to
provide management information systems software and related services to the
dealerships. Pursuant to the agreement, the dealerships will pay a monthly
maintenance fee of approximately $2,500 until the earlier of the time the
dealerships' existing contract for such services with a different vendor
terminates or March 1999, at which time the monthly maintenance fee will
increase to approximately $12,500 per month for the remainder of the five year
term of the agreement. After an initial five-year term, this agreement is
subject to successive automatic one-year extensions with the same terms and fees
unless terminated by either party with thirty days notice. In addition, upon
installation of the software system at Sterling McCall Lexus, an installation
fee of $20,000 will be paid to DSL. No installation fee has been paid by
Sterling McCall Toyota. Mr. McCall, his affiliates and family members own
approximately 18% of DSL and Kevin H. Whalen (who will beneficially own more
than 5% of the outstanding shares of Common Stock after the Acquisitions and the
Offering) owns approximately 11% of DSL. The Combined Company is currently only
committed to implement this system in Sterling McCall Toyota and Sterling McCall
Lexus. The Combined Company does not currently have any formal plans to
implement this system in its other dealerships. The Combined Company believes
that the Combined Company has acquired these systems from DSL on terms, taken as
a whole, that are no less favorable than those that could be obtained from
non-affiliated third parties.
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<PAGE> 79
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Combined Company's Common Stock: (a) as of August 31, 1997
after giving effect to the Acquisitions and (b) following the sale of the shares
of Common Stock offered hereby, by (i) each person known to beneficially own
more than 5% of the outstanding shares of Common Stock; (ii) each of the
Combined Company's directors; (iii) each named executive officer; (iv) each
Selling Stockholder, and (v) all executive officers and directors as a group.
All persons listed have sole voting and dispositive power over the shares
indicated as owned by such person unless otherwise indicated.
<TABLE>
<CAPTION>
SHARES OF COMMON SHARES OF COMMON
STOCK BENEFICIALLY STOCK TO BE BENEFICIALLY
OWNED BEFORE OFFERING OWNED AFTER OFFERING
-------------------------- -----------------------------
NUMBER SHARES TO NUMBER
NAME OF BENEFICIAL OWNER OF SHARES(1) PERCENTAGE BE SOLD OF SHARES(1) PERCENTAGE(2)
------------------------ ------------ ---------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C>
B.B. Hollingsworth, Jr(3)(6)..... 546,368 5.7% -- 546,368 3.9%
Robert E. Howard, II(4)(6)....... 2,910,374 30.5 -- 2,910,374 20.9
Sterling B. McCall, Jr(5)(6)..... 1,461,031 15.3 -- 1,461,031 10.5
Charles M. Smith(6).............. 679,181 7.1 -- 679,181 4.9
John H. Duncan................... 196,368 2.1 -- 196,368 1.4
5851 San Felipe, Suite 850
Houston, Texas 77056
Bennett E. Bidwell............... -- -- -- -- --
626 Yarboro Drive
Bloomfield Hills, Michigan
48304
W. C. Smith...................... 619,773 6.5 371,864 247,909 1.8
3400 South Loop West
Houston, Texas 77025
SMC Investment, Inc. ............ 637,475 6.7 -- 637,475 4.6
9400 Southwest Freeway
Houston, Texas 77074
Kevin H. Whalen(6)............... 774,040 8.1 -- 774,040 5.5
All directors and executive
officers as a group (9 persons
including the directors and
executive officers named
above)......................... 5,793,322 60.8% -- 5,793,322 41.5%
</TABLE>
- ---------------
(1) Does not include options to purchase stock that are not exercisable within
60 days of August 31, 1997.
(2) Assumes that the Underwriters' overallotment option is not exercised.
(3) Excludes 100,000 shares of Common Stock held in trust for the benefit of Mr.
Hollingsworth's children. Mr. Hollingsworth is not the trustee of such
trust, does not have or share voting or investment power over the Common
Stock held by the trust and disclaims beneficial ownership of such shares.
(4) Includes 592,303 shares of Common Stock issued to Mr. Howard which will be
held in escrow and may be distributed pro rata to the stockholders of the
Founding Companies under certain conditions. See "The Acquisitions".
(5) Includes (i) 637,475 shares owned by SMC Investment, Inc. which is
controlled by Mr. McCall; (ii) 250,248 shares owned by Gulf Coast Family
Limited Partnership which is controlled by Mr. McCall; (iii) 106,041 shares
owned by SBM-T Family Limited Partnership which is controlled by Mr. McCall;
and (iv) 30,629 shares owned by Mr. McCall's spouse.
(6) Have an address c/o the Combined Company's principal executive offices at
950 Echo Lane, Suite 350, Houston, Texas 77024.
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<PAGE> 80
DESCRIPTION OF CAPITAL STOCK
The Combined Company's authorized capital stock consists of 50,000,000
shares of Common Stock and 1,000,000 shares of Preferred Stock, par value $.01
per share ("Preferred Stock"). After giving effect to the Acquisitions, but
prior to consummation of the Offering, the Combined Company will have
outstanding 9,529,084 shares of Common Stock and no shares of Preferred Stock.
Upon completion of the Offering, the Combined Company will have outstanding
13,957,220 shares of Common Stock (14,677,220 shares if the Underwriters'
over-allotment option is exercised in full) and no shares of Preferred Stock.
COMMON STOCK
Subject to any special voting rights of any series of Preferred Stock that
may be issued in the future, the holders of the Common Stock are entitled to one
vote for each share held on all matters voted upon by stockholders, including
the election of directors. Holders of Common Stock are not entitled to cumulate
their votes in elections of directors.
Subject to the rights of any then outstanding shares of Preferred Stock,
the holders of the Common Stock are entitled to such dividends as may be
declared in the discretion of the Board of Directors out of funds legally
available therefor. Holders of Common Stock are entitled to share ratably in the
net assets of the Combined Company upon liquidation after payment or provision
for all liabilities and any preferential liquidation rights of any Preferred
Stock then outstanding. The holders of Common Stock have no preemptive rights to
purchase shares of stock of the Combined Company. Shares of Common Stock are not
subject to any redemption provisions and are not convertible into any other
securities of the Combined Company. All outstanding shares of Common Stock are,
and the shares of Common Stock to be issued pursuant to the Offering will be
upon payment therefor, fully paid and non-assessable.
PREFERRED STOCK
Preferred Stock may be issued from time to time by the Board of Directors
in one or more series. Subject to the provisions of the Combined Company's
Charter and limitations prescribed by law, the Board of Directors is expressly
authorized to adopt resolutions to issue the shares, to fix the number of shares
and to change the number of shares constituting any series and to provide for or
change the voting powers, designations, preferences and relative participating,
optional or other special rights, qualifications, limitations or restrictions
thereof, including dividend rights (including whether dividends are cumulative),
dividend rates, terms of redemption (including sinking fund provisions),
redemption prices, conversion rights and liquidation preferences of the shares
constituting any series of the Preferred Stock, in each case without any further
action or vote by the stockholders. One of the effects of undesignated Preferred
Stock may be to enable the Board of Directors to render more difficult or to
discourage an attempt to obtain control of the Combined Company by means of a
tender offer, proxy contest, merger or otherwise, and thereby to protect the
continuity of the Combined Company's management. The issuance of shares of the
Preferred Stock pursuant to the Board of Directors' authority described above
may adversely affect the rights of the holders of Common Stock. For example,
Preferred Stock issued by the Combined Company may rank prior to the Common
Stock as to dividend rights, liquidation preference or both, may have full or
limited voting rights and may be convertible into shares of Common Stock.
Accordingly, the issuance of shares of Preferred Stock may discourage bids for
the Common Stock or may otherwise adversely affect the market price of the
Common Stock.
CERTAIN ANTI-TAKEOVER AND OTHER PROVISIONS OF THE CHARTER AND BYLAWS
In addition to the Combined Company's Board of Directors to issue Preferred
Stock, the Charter and the Bylaws of the Combined Company contain certain
provisions that could have an anti-takeover effect.
79
<PAGE> 81
CLASSIFIED BOARD OF DIRECTORS AND LIMITATIONS ON REMOVAL OF DIRECTORS
The Combined Company's Board of Directors is divided into three classes.
The directors of each class are elected for three-year terms, with the terms of
the three classes staggered so that directors from a single class are elected at
each annual meeting of stockholders. Stockholders may remove a director only for
cause upon the vote of holders of at least 80% of the voting power of the
outstanding shares of Common Stock. In general, the Board of Directors, not the
stockholders, has the right to appoint persons to fill vacancies on the Board of
Directors.
NO WRITTEN CONSENT OF STOCKHOLDERS
The Charter provides that any action required or permitted to be taken by
the stockholders of the must be taken at a duly called annual or special meeting
of stockholders. In addition, special meetings of the stockholders may be called
only by the Board of Directors.
BUSINESS COMBINATIONS UNDER DELAWARE LAW
The Combined Company is a Delaware corporation and is subject to Section
203 of the Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of
the Combined Company's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with the Combined Company for three
years following the date that person becomes an interested stockholder unless
(a) before that person became an interested stockholder, the Combined Company's
Board of Directors approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination; (b) upon
completion of the transaction that resulted in the interested stockholder
Combined Company's becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock outstanding at the time the
transaction commenced (excluding stock held by directors who are also officers
of the Combined Company and by employee stock plans that do not provide
employees with the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer); or (c) following
the transaction in which that person became an interested stockholder, the
business combination is approved by the Combined Company's Board of Directors
and authorized at a meeting of stockholders by the affirmative vote of the
holders of at least two-thirds of the outstanding voting stock not owned by the
interested stockholder. Under Section 203, these restrictions also do not apply
to certain business combinations proposed by an interested stockholder following
the announcement or notification of one of certain extraordinary transactions
involving the Combined Company and a person who was not an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of a majority of the Combined Company's directors,
if that extraordinary transaction is approved or not opposed by a majority of
the directors who were directors before any person became an interested
stockholder in the previous three years or who were recommended for election or
elected to succeed such directors by a majority of such directors then in
office.
STOCKHOLDER RIGHTS PLAN
Immediately prior to completion of the Offering, the Combined Company's
Rights Plan (the "Rights Plan") will take effect. Under the Rights Plan, each
Right entitles the registered holder under the circumstances described below to
purchase from the Combined Company one one-thousandth of a share of Junior
Participating Preferred Stock, $.01 par value per share (the "Preferred
Shares"), of the Combined Company at a price of $65 per one one-thousandth of a
Preferred Share (the "Purchase Price"), subject to adjustment. The description
and terms of the Rights will be set forth in a Rights Agreement (the "Rights
Agreement") to be entered into by the Combined Company and ChaseMellon
Shareholders Services, L.L.C., as Rights Agent (the "Rights Agent") prior to
consummation of the Offering and this description of the Rights is qualified in
its entirety by reference to the Rights Agreement.
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<PAGE> 82
Until the Distribution Date (as defined below), the Rights will attach to
all Common Stock certificates representing outstanding shares and no separate
Right Certificate will be distributed. Accordingly, a right will be issued for
each share of Common Stock issued in the Offering. The Rights will separate from
the Common Stock and a Distribution Date will occur upon the earlier of (i) 10
business days following a public announcement that a person or group of
affiliated or associated persons (an "Acquiring Person") has acquired beneficial
ownership of 20% or more of the outstanding Voting Shares (as defined in the
Rights Agreement) of the Combined Company, or (ii) 10 business days following
the commencement or announcement of an intention to commence a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 20% or more of such outstanding Voting Shares.
Until the Distribution Date (or earlier redemption or expiration of the
Rights) the Rights will be evidenced by the certificates representing such
Common Stock. As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights (the "Right Certificates") will be mailed to
holders of record of the Common Stock as of the close of business on the
Distribution Date and such separate Right Certificates alone will thereafter
evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights will
expire on the tenth anniversary date of the closing of the Offering (the "Final
Expiration Date"), unless the Final Expiration Date is extended or the Rights
are earlier redeemed or exchange by the Combined Company as described below.
If a person or group were to acquire 20% or more of the Voting Shares of
the Combined Company, each Right then outstanding (other than Rights
beneficially owned by the Acquiring Person which would become null and void)
would become a right to buy that number of shares of Common Stock (or under
certain circumstances, the equivalent number of one one-thousandths of a
Preferred Share) that at the time of such acquisition would have a market value
of two times the Purchase Price of the Right.
If the Combined Company were acquired in a merger or other business
combination transaction or assets constituting more than 50% of its consolidated
assets or producing more than 50% of its earning power or cash flow were sold,
proper provision will be made so that each holder of a Right will thereafter
have the right to receive, upon the exercise thereof at the then current
Purchase Price of the Right, that number of shares of common stock of the
acquiring company which at the time of such transaction would have a market
value of two times the Purchase Price of the Right.
The dividend and liquidation rights, and the non-redemption feature, of the
Preferred Shares are designed so that the value of one one-thousandth of a
Preferred Share purchasable upon exercise of each Right will approximate the
value of one share of Common Stock. The Preferred Shares issuable upon exercise
of the Rights will be non-redeemable and rank junior to all other series of the
Combined Company's preferred stock. Each whole Preferred Share will be entitled
to receive a quarterly preferential dividend in an amount per share equal to the
greater of (i) $1.00 in cash, or (ii) in the aggregate, 1,000 times the dividend
declared on the Common Stock. In the event of liquidation, the holders of
Preferred Shares will be entitled to receive a preferential liquidation payment
equal to the greater of (i) $1,000 per share, or (ii) in the aggregate, 1,000
times the payment made on the shares of Common Stock. In the event of any
merger, consolidation or other transaction in which the shares of Common Stock
are exchanged for or changed into other stock or securities, cash or other
property, each whole Preferred Share will be entitled to receive 1,000 times the
amount received per share of Common Stock. Each whole Preferred Share shall be
entitled to 1,000 votes on all matters submitted to a vote of the stockholders
of the Combined Company, and Preferred Shares shall generally vote together as
one class with the Common Stock and any other capital stock on all matters
submitted to a vote of stockholders of the Combined Company.
The offer and sale of the Preferred Shares issuable upon exercise of the
Rights will be registered with the Commission and such registration will not be
effective until the Rights become exercisable.
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<PAGE> 83
The number of one one-thousandths of a Preferred Share or other securities
or property issuable upon exercise of the Rights, and the Purchase Price
payable, are subject to customary adjustments from time to time to prevent
dilution.
The number of outstanding Rights and the number of one one-thousandths of a
Preferred Share issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the Common Stock or a stock dividend
on the Common Stock payable in Common Stock or a subdivision, consolidation or
combination of the Common Stock occurring, in any such case, prior to the
Distribution Date.
At any time after the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 20% or more of the outstanding
Voting Shares of the Combined Company and before the acquisition by a person or
group of 50% or more of the outstanding Voting Shares of the Combined Company,
the Board of Directors may, at its option, issue Common Stock in mandatory
redemption of, and in exchange for, all or part of the then outstanding and
exercisable Rights (other than Rights owned by such person or group which would
become null and void) at an exchange ratio of one share of Common Stock (or one
one-thousandth of a Preferred Share) for each two shares of Common Stock for
which each Right is then exercisable, subject to adjustment.
At any time prior to the first public announcement that a person or group
has become the beneficial owner of 20% or more of the outstanding Voting Shares,
the Board of Directors of the Combined Company may redeem all but not less than
all the then outstanding Rights at a price of $0.01 per Right (the "Redemption
Price"). The redemption of the Rights may be made effective at such time, on
such basis and with such conditions as the Board of Directors in its sole
discretion may establish. Immediately upon the action of the Board of Directors
ordering redemption of the Rights, the right to exercise the Rights will
terminate and the only right of the holders of Rights will be to receive the
Redemption Price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Combined Company, including, without limitation,
the right to vote or to receive dividends.
The terms of the Rights may be amended by the Board of Directors of the
Combined Company without the consent of the holders of the Rights, including an
amendment to extend the Final Expiration Date, and, provided a Distribution Date
has not occurred, to extend the period during which the Rights may be redeemed,
except that after the first public announcement that a person or group has
become the beneficial owner of 20% or more of the outstanding Voting Shares, no
such amendment may materially and adversely affect the interests of the holders
of the Rights.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Combined
Company on terms not determined by the Board of Directors to be in the best
interests of all stockholders. The Rights will not interfere with a merger or
other business combination approved by the Board of Directors, prior to the time
that a person or group has acquired beneficial ownership of 20% or more of the
Common Stock, since the rights may be redeemed by the Combined Company prior to
that time.
LIMITATION OF LIABILITY OF OFFICERS AND DIRECTORS -- INDEMNIFICATION
Delaware law authorizes corporations to limit or eliminate the personal
liability of officers and directors to corporations and their stockholders for
monetary damages for breach of officers' and directors' fiduciary duty of care.
The duty of care requires that, when acting on behalf of the corporation,
officers and directors must exercise an informed business judgment based on all
material information reasonably available to them. Absent the limitations
authorized by Delaware law, officers and directors are accountable to
corporations and their stockholders for monetary damages for conduct
constituting gross negligence in the exercise of their duty of care. Delaware
law enables corporations to limit available relief to equitable remedies such as
injunction or rescission. The Charter limits the liability of officers and
directors of the Combined Company to the Combined Company or its stockholders to
the fullest extent permitted by Delaware law. Specifically, officers and
directors of the Combined Company will not be
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<PAGE> 84
personally liable for monetary damages for breach of an officer's or director's
fiduciary duty in such capacity, except for liability (i) for any breach of the
officer's or director's duty of loyalty to the Combined Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the officer and director derived an improper personal
benefit.
The inclusion of this provision in the Charter may have the effect of
reducing the likelihood of derivative litigation against officers and directors,
and may discourage or deter stockholders or management from bringing a lawsuit
against officers and directors for breach of their duty of care, even though
such an action, if successful, might otherwise have benefitted the Combined
Company and its stockholders. Both the Combined Company's Charter and Bylaws
provide indemnification to the Combined Company's officers and directors and
certain other persons with respect to certain matters to the maximum extent
allowed by Delaware law as it exists now or may hereafter be amended. These
provisions do not alter the liability of officers and directors under federal
securities laws and do not affect the right to sue (nor to recover monetary
damages) under federal securities laws for violations thereof.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar of the Common Stock, as well as the rights
agent under the Rights Plan is ChaseMellon Shareholder Services, L.L.C.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Acquisitions and completion of the Offering,
assuming no exercise of the Underwriters' over-allotment option, the Combined
Company will have 13,957,220 shares of Common Stock outstanding (14,677,220
shares if the Underwriters' over-allotment option is exercised in full). Of
these outstanding shares of Common Stock, the 4,800,000 shares sold in the
Offering (5,520,000 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradeable without restriction unless acquired
by affiliates of the Combined Company. None of the remaining 9,157,220
outstanding shares of Common Stock have been registered under the Securities
Act, which means that they may be resold publicly only upon registration under
the Securities Act or in compliance with an exemption from the registration
requirements of the Securities Act, including the exemption provided by Rule 144
thereunder.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of the acquisition of restricted shares of Common
Stock from either the Combined Company or any affiliate of the Combined Company,
the acquiror or subsequent holder thereof may sell, within any three month
period commencing 90 days after the date of this Prospectus, a number of shares
that does not exceed the greater of 1% of the then outstanding shares of the
Common Stock (139,572 shares upon completion of the Offering), or the average
weekly trading volume of the Common Stock on the New York Stock Exchange during
the four calendar weeks preceding the date on which notice of the proposed sale
is sent to the Commission. Sales under Rule 144 are also subject to certain
manner of sale provisions, notice requirements and the availability of current
public information about the Combined Company. If two years have elapsed since
the later of the date of the acquisition of restricted shares of Common Stock
from the Combined Company or any affiliate of the Combined Company, a person who
is not deemed to have been an affiliate of the Combined Company at any time for
90 days preceding a sale would be entitled to sell such shares under Rule 144
without regard to the volume limitations, manner of sale provisions or notice
requirements.
Pursuant to the Stock Purchase Agreements entered into in connection with
the Acquisitions, each of the stockholders of the Founding Companies, other than
the Selling Stockholder to the extent of the shares to be sold by him in the
Offering, has agreed with the Combined Company not to sell the shares of Common
Stock that they receive in the Acquisitions for a period of two years after the
date of consummation of the Acquisitions. In addition, pursuant to an
Underwriting Agreement between the
83
<PAGE> 85
Combined Company, the Selling Stockholder and the Underwriters, the Combined
Company and its officers, directors and stockholders who beneficially own
9,157,220 shares of Common Stock in the aggregate have agreed not to sell or
otherwise dispose of any shares of Common Stock and certain other securities of
the Combined Company for a period of 180 days after the date of this Prospectus
without the prior written consent of the representatives. See "Underwriting".
Prior to the Offering, there has been no public market for the Common
Stock. No prediction can be made regarding the effect, if any, that public sales
of shares of Common Stock or the availability of shares for sale will have on
the market price of the Common Stock after the Offering. Sales of substantial
amounts of the Common Stock in the public market following the Offering, or the
perception that such sales may occur, could adversely affect the market price of
the Common Stock and could impair the ability of the Combined Company to raise
capital through sales of its equity securities.
84
<PAGE> 86
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Combined Company and the Selling Stockholder have agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom Goldman, Sachs
& Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and NationsBanc
Montgomery Securities, Inc. are acting as representatives, has severally agreed
to purchase from the Combined Company and the Selling Stockholder, the
respective number of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------- ------------
<S> <C>
Goldman, Sachs & Co.........................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
NationsBanc Montgomery Securities, Inc......................
Total............................................. 4,800,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at such
price less a concession of $ per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to certain
brokers and dealers. After the shares of Common Stock are released for sale to
the public, the offering price and other selling terms may from time to time be
varied by the representatives.
The Combined Company has granted the Underwriters an option exercisable for
30 days after the date of this Prospectus to purchase up to an aggregate of
720,000 additional shares of Common Stock to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 4,800,000 shares of Common
Stock offered.
The Combined Company, its officers and directors and the stockholders of
the Combined Company, including the Selling Stockholder, have agreed that,
during the period beginning from the date of this Prospectus and continuing to
and including the date 180 days after the date of this Prospectus, they will not
offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock, any securities of the Combined Company which are substantially similar to
the shares of Common Stock or which are convertible or exchangeable for
securities which are substantially similar to the shares of Common Stock (other
than (i) pursuant to employee stock option plans existing, or on the conversion
or exchange of convertible or exchangeable securities outstanding, on the date
of this Prospectus or (ii) in connection with and as consideration for
acquisitions of automobile dealerships; provided that the proposed transferee
agrees in writing for the benefit of the Underwriters to be bound by the
foregoing provisions)
85
<PAGE> 87
without the prior written consent of the representatives, except for the shares
of Common Stock offered in connection with the Offering.
The representatives of the Underwriters have informed the Combined Company
that they do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares of
Common Stock offered by them.
Prior to this Offering, there has been no public market for the shares. The
initial public offering price will be negotiated among the Combined Company, the
Selling Stockholder and the representatives. Among the factors to be considered
in determining the initial public offering price of the Common Stock, in
addition to prevailing market conditions, will be the Combined Company's
historical performance, estimates of the business potential and earnings
prospects of the Combined Company, an assessment of the Combined Company's
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.
The Common Stock has been approved for listing, subject to notice of
issuance, on the New York Stock Exchange under the symbol "GPI". In order to
meet one of the requirement for listing the Common Stock on the New York Stock
Exchange, the Underwriters have undertaken to sell lots of 100 or more shares to
a minimum of 2,000 beneficial holders.
In connection with the Offering, the Underwriters may purchase and sell
Common Stock in the open market. These transactions may include overallotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with the Offering. Stabilizing transactions consist of
certain bids or purchases for the purpose of preventing or retarding a decline
in the market price of the Common Stock; and syndicate short positions involve
the sale by the Underwriters of a greater number of shares of Common Stock than
they are required to purchase from the Combined Company in the Offering. The
Underwriters may also impose a penalty bid, whereby selling concessions allowed
to syndicate members or other broker-dealers in respect of the Common Stock sold
in the Offering for their account may be reclaimed by the syndicate if such
Common Stock is repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Common Stock which may be higher than the price that might
otherwise prevail in the open market. These transactions may be effected on the
New York Stock Exchange, in the over-the-counter market or otherwise, and these
activities, if commenced, may be discontinued at any time.
The Combined Company and the Selling Stockholder have agreed to indemnify
the several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933.
VALIDITY OF COMMON STOCK
The validity of the shares of Common Stock offered hereby is being passed
upon for the Combined Company and the Selling Stockholder by Vinson & Elkins
L.L.P., Houston, Texas, and for the Underwriters by Sullivan & Cromwell, New
York, New York. John S. Watson, the Secretary of the Combined Company, is a
partner of Vinson & Elkins L.L.P.
EXPERTS
The audited financial statements included in this Prospectus have been
audited, the pro forma statement of operations for the year ended December 31,
1996 has been examined and the pro forma financial statements as of and for the
six months ended June 30, 1997 have been reviewed by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
86
<PAGE> 88
AVAILABLE INFORMATION
The Combined Company has not previously been subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended. The Combined
Company has filed with the Securities and Exchange Commission (the "Commission")
a Registration Statement on Form S-1 (the "Registration Statement") under the
Securities Act, with respect to the offer and sale of Common Stock pursuant to
this Prospectus. This Prospectus, filed as a part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement
or the exhibits and schedules thereto in accordance with the rules and
regulations of the Commission and reference is hereby made to such omitted
information. Statements made in this Prospectus concerning the contents of any
contract, agreement or other document filed as an exhibit to the Registration
Statement are summaries of the terms of such contracts, agreements or documents
and are not necessarily complete. Reference is made to each such exhibit for a
more complete description of the matters involved and such statements shall be
deemed qualified in their entirety by such reference. The Registration Statement
and the exhibits and schedules thereto filed with the Commission may be
inspected, without charge, and copies may be obtained at prescribed rates, at
the public reference facility maintained by the Commission at its principal
office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. The Commission also maintains a
Website (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. For further information pertaining to the Common Stock
offered by this Prospectus and the Combined Company, reference is made to the
Registration Statement.
The Combined Company intends to furnish to its stockholders annual reports
containing audited financial statements certified by independent auditors and
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial statements.
87
<PAGE> 89
INDEX TO FINANCIAL PAGES
<TABLE>
<S> <C>
Group 1 Automotive, Inc. -- Pro Forma Financial Information
Report of Independent Public Accountants.................. F-2
Pro Forma Combined Statement of Operations December 31,
1996................................................... F-3
Pro Forma Combined Balance Sheet -- June 30, 1997......... F-4
Pro Forma Combined Statement of Operations -- June 30,
1997................................................... F-5
Notes to Pro Forma Financial Statements................... F-6
Group 1 Automotive, Inc. -- Financial Statements
Report of Independent Public Accountants.................. F-11
Balance Sheets............................................ F-12
Statements of Operations.................................. F-13
Statements of Stockholders' Equity (Deficit).............. F-14
Statements of Cash Flows.................................. F-15
Notes to Financial Statements............................. F-16
Howard Group -- Combined Financial Statements
Report of Independent Public Accountants.................. F-21
Combined Balance Sheets................................... F-22
Combined Statements of Operations......................... F-23
Combined Statements of Stockholders' Equity............... F-24
Combined Statements of Cash Flows......................... F-25
Notes to Combined Financial Statements.................... F-26
McCall Group -- Combined Financial Statements
Report of Independent Public Accountants.................. F-36
Combined Balance Sheets................................... F-37
Combined Statements of Operations......................... F-38
Combined Statements of Stockholders' Deficit.............. F-39
Combined Statements of Cash Flows......................... F-40
Notes to Combined Financial Statements.................... F-41
Smith Group -- Combined Financial Statements
Report of Independent Public Accountants.................. F-54
Combined Balance Sheets................................... F-55
Combined Statements of Operations......................... F-56
Combined Statements of Stockholders' Equity............... F-57
Combined Statements of Cash Flows......................... F-58
Notes to Combined Financial Statements.................... F-59
</TABLE>
F-1
<PAGE> 90
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Group 1 Automotive, Inc.,
We have examined the pro forma adjustments reflecting the transactions
described in Note 2 and the application of those adjustments to the historical
amounts in the accompanying pro forma combined statement of operations of Group
1 Automotive, Inc. for the year ended December 31, 1996. The historical combined
statement of operations was derived from the historical financial statements of
Group 1 Automotive, Inc., Howard Group, McCall Group and Smith Group, which were
audited by us, appearing elsewhere herein, and Kingwood Group, which was audited
by us and not separately presented herein. Such pro forma adjustments are based
upon management's assumptions described in Notes 3, 4 and 5. Our examination was
made in accordance with standards established by the American Institute of
Certified Public Accountants and, accordingly, included such procedures as we
considered necessary in the circumstances.
In addition, we have reviewed the related pro forma adjustments reflecting
the transactions described in Note 2 and the application of those adjustments to
the historical amounts in the accompanying pro forma combined balance sheet of
Group 1 Automotive, Inc. as of June 30, 1997, and the pro forma combined
statement of operations for the six months then ended. These historical combined
financial statements were derived from the historical unaudited financial
statements of Group 1 Automotive, Inc., Howard Group, McCall Group, and Smith
Group which were reviewed by us, appearing elsewhere herein, and Kingwood Group,
which was reviewed by us, and not appearing elsewhere herein. Such pro forma
adjustments are based on management's assumptions as described in Notes 3, 4 and
5. Our review was conducted in accordance with standards established by the
American Institute of Certified Public Accountants.
The objective of this pro forma financial information is to show what the
significant effects on the historical information might have been had the
transaction occurred at an earlier date. However, the pro forma combined
financial statements are not necessarily indicative of the results of operations
or related effects on financial position that would have been attained had the
above-mentioned transaction actually occurred earlier.
In our opinion, management's assumptions provide a reasonable basis for
presenting the significant effects directly attributable to the above-mentioned
transaction described in Note 2, the related pro forma adjustments give
appropriate effect to those assumptions, and the pro forma column reflects the
proper application of those adjustments to the historical financial statement
amounts in the pro forma combined statement of operations for the year ended
December 31, 1996.
A review is substantially less in scope than an examination, the objective
of which is the expression of an opinion on management's assumptions, the pro
forma adjustments and the application of those adjustments to historical
financial information. Accordingly, we do not express such an opinion on the pro
forma adjustments or the application of such adjustments to the pro forma
combined balance sheet as of June 30, 1997, and the pro forma combined statement
of operations for the six months then ended. Based on our review, however,
nothing came to our attention that caused us to believe that management's
assumptions do not provide a reasonable basis for presenting the significant
effects directly attributable to the above mentioned transaction described in
Note 2, that the related pro forma adjustments do not give appropriate effect to
those assumptions, or that the pro forma and as adjusted columns do not reflect
the proper application of those adjustments to the historical financial
statement amounts in the pro forma combined balance sheet as of June 30, 1997,
and the pro forma combined statement of operations for the six months then
ended.
Arthur Andersen LLP
Houston, Texas
May 9, 1997
F-2
<PAGE> 91
GROUP 1 AUTOMOTIVE, INC. AND FOUNDING GROUPS
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
GROUP 1 HOWARD MCCALL SMITH KINGWOOD TOTAL
-------- ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
New vehicle sales............................ $ -- $164,978,710 $166,381,686 $124,173,950 $13,783,723 $469,318,069
Used vehicle sales........................... -- 88,477,330 90,895,516 60,579,545 18,074,591 258,026,982
Parts & service sales........................ -- 21,173,371 24,454,187 28,630,577 2,925,513 77,183,648
Other dealership revenues, net............... -- 7,386,747 6,810,908 4,895,329 1,165,553 20,258,537
-------- ------------ ------------ ------------ ----------- ------------
Total revenues........................... -- 282,016,158 288,542,297 218,279,401 35,949,380 824,787,236
COST OF SALES................................ -- 244,396,047 249,560,060 189,169,263 30,640,004 713,765,374
-------- ------------ ------------ ------------ ----------- ------------
Gross Profit............................. -- 37,620,111 38,982,237 29,110,138 5,309,376 111,021,862
GOODWILL AMORTIZATION........................ -- 36,982 -- 67,015 -- 103,997
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................... 95,008 30,731,251 35,072,460 23,643,889 3,997,111 93,539,719
-------- ------------ ------------ ------------ ----------- ------------
Income (loss) from operations............ (95,008) 6,851,878 3,909,777 5,399,234 1,312,265 17,378,146
OTHER INCOME AND EXPENSE
Interest expense, net........................ -- (1,193,810) (2,747,719) (1,710,157) (439,164) (6,090,850)
Other Income (expense), net.................. -- (69,328) (45,094) 222,470 66,957 175,005
-------- ------------ ------------ ------------ ----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES........ (95,008) 5,588,740 1,116,964 3,911,547 940,058 11,462,301
PROVISION FOR INCOME TAXES................... 381,752 177,772 677,751 41,015 1,278,290
-------- ------------ ------------ ------------ ----------- ------------
NET INCOME (LOSS)........................ $(95,008) $ 5,206,988 $ 939,192 $ 3,233,796 $ 899,043 $ 10,184,011
======== ============ ============ ============ =========== ============
<CAPTION>
PRO FORMA % OF
ADJUSTMENTS PRO FORMA REVENUES
----------- ------------ --------
<S> <C> <C> <C>
REVENUES:
New vehicle sales............................ $ -- $469,318,069 56.8%
Used vehicle sales........................... -- 258,026,982 31.3%
Parts & service sales........................ -- 77,183,648 9.3%
Other dealership revenues, net............... (858,864) 21,117,401 2.6%
----------- ------------ ------
Total revenues........................... (858,864) 825,646,100 100.0%
COST OF SALES................................ (992,988) 712,772,386 86.3%
----------- ------------ ------
Gross Profit............................. (1,851,852) 112,873,714 13.7%
GOODWILL AMORTIZATION........................ 656,655 760,652 0.1%
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................... (29,487) 93,510,232 11.3%
----------- ------------ ------
Income (loss) from operations............ (1,224,684) 18,602,830 2.3%
OTHER INCOME AND EXPENSE
Interest expense, net........................ (2,514,839) (3,576,011) (0.5)%
Other Income (expense), net.................. -- 175,005 0.0%
----------- ------------ ------
INCOME (LOSS) BEFORE INCOME TAXES........ (3,739,523) 15,201,824 1.8%
PROVISION FOR INCOME TAXES................... 5,026,889 6,305,179 0.7%
----------- ------------ ------
NET INCOME (LOSS)........................ $1,287,366 $ 8,896,645 1.1%
=========== ============ ======
Earnings Per Share $ .62
============
Weighted average shares outstanding 14,373,265
============
</TABLE>
The accompanying notes are an integral part of these
pro forma combined financial statements
F-3
<PAGE> 92
GROUP 1 AUTOMOTIVE, INC. AND FOUNDING GROUPS
PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
GROUP 1 HOWARD MCCALL SMITH KINGWOOD TOTAL
---------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......... $ 10,344 $ 9,936,653 $10,427,402 $ 9,405,257 $ 1,936,862 $ 31,716,518
Accounts receivable, net.......... -- 6,200,606 2,689,166 4,876,051 613,847 14,379,670
Due from affiliates............... -- -- 1,062,854 -- -- 1,062,854
Inventories....................... -- 45,202,216 15,025,873 33,099,771 5,806,901 99,134,761
Notes receivable, net............. -- -- 340,523 -- 482,683 823,206
Prepaid expenses.................. -- 889,780 151,675 641,495 171,133 1,854,083
Deferred income tax benefit....... -- -- 1,735,044 182,081 35,967 1,953,092
---------- ----------- ----------- ----------- ----------- ------------
Total current assets........ 10,344 62,229,255 31,432,537 48,204,655 9,047,393 150,924,184
PROPERTY AND EQUIPMENT, net........ 52,480 3,820,115 3,924,236 9,935,715 4,299,315 22,031,861
NOTES RECEIVABLE................... -- 513,585 -- -- 891,578 1,405,163
DEFERRED INCOME TAX BENEFIT........ -- -- 104,882 -- -- 104,882
GOODWILL, net...................... -- 1,436,473 -- 2,281,636 330,004 4,048,113
OTHER ASSETS....................... 2,783,868 731,069 1,887,640 550,452 48,369 6,001,398
---------- ----------- ----------- ----------- ----------- ------------
Total assets................ $2,846,692 $68,730,497 $37,349,295 $60,972,458 $14,616,659 $184,515,601
========== =========== =========== =========== =========== ============
CURRENT LIABILITIES:
Floor plan notes payable.......... $ -- $37,816,102 $20,216,458 $33,522,252 $ 5,945,717 $ 97,500,529
Current maturities of long-term
debt............................ -- 21,659 78,736 1,034,180 171,288 1,305,863
Due to affiliates................. 1,067,384 -- 1,082,574 -- -- 2,149,958
Deferred income taxes............. -- 401,972 -- -- -- 401,972
Accounts payable and accrued
expenses........................ 3,466,325 18,864,797 15,732,890 9,272,030 1,340,850 48,676,892
---------- ----------- ----------- ----------- ----------- ------------
Total current liabilities... 4,533,709 57,104,530 37,110,658 43,828,462 7,457,855 150,035,214
LONG-TERM DEBT, net of current
maturities........................ -- 153,661 576,330 4,493,037 2,996,756 8,219,784
LONG-TERM DEFERRED INCOME TAXES.... -- 58,604 -- 197,611 8,288 264,503
OTHER LONG-TERM LIABILITIES........ -- 586,724 412,124 -- 594,641 1,593,489
COMMITMENTS AND CONTINGENCIES...... -- -- -- -- -- --
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock...................... 4,500 491,500 71,278 3,090 2,756 573,124
Additional paid-in capital........ 4,995 6,622,802 3,222,043 6,369,228 919,325 17,138,393
Treasury stock, at cost........... 0 (808,798) -- (395,297) -- (1,204,095)
Retained earnings (deficit)....... (1,696,512) 4,521,474 (4,043,138) 6,476,327 2,637,038 7,895,189
---------- ----------- ----------- ----------- ----------- ------------
Total stockholders' equity
(deficit)................. (1,687,017) 10,826,978 (749,817) 12,453,348 3,559,119 24,402,611
---------- ----------- ----------- ----------- ----------- ------------
Total liabilities and
stockholders' equity...... $2,846,692 $68,730,497 $37,349,295 $60,972,458 $14,616,659 $184,515,601
========== =========== =========== =========== =========== ============
<CAPTION>
POST
PRO FORMA MERGER AS
ADJUSTMENTS PRO FORMA ADJUSTMENTS ADJUSTED
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......... $ (3,909,261) $ 27,807,257 $ 4,157,000 $ 31,964,257
Accounts receivable, net.......... -- 14,379,670 -- 14,379,670
Due from affiliates............... (1,062,854) -- -- --
Inventories....................... 8,124,770 107,259,531 -- 107,259,531
Notes receivable, net............. -- 823,206 -- 823,206
Prepaid expenses.................. -- 1,854,083 -- 1,854,083
Deferred income tax benefit....... (1,953,092) -- -- --
------------ ------------ ------------ ------------
Total current assets........ 1,199,563 152,123,747 4,157,000 156,280,747
PROPERTY AND EQUIPMENT, net........ (2,000,000) 20,031,861 -- 20,031,861
NOTES RECEIVABLE................... -- 1,405,163 -- 1,405,163
DEFERRED INCOME TAX BENEFIT........ (104,882) -- -- --
GOODWILL, net...................... 24,170,458 28,218,571 -- 28,218,571
OTHER ASSETS....................... (1,067,383) 4,934,015 (4,168,868) 765,147
------------ ------------ ------------ ------------
Total assets................ $ 22,197,756 $206,713,357 $ (11,868) $206,701,489
============ ============ ============ ============
CURRENT LIABILITIES:
Floor plan notes payable.......... $ -- $ 97,500,529 $ 31,435,496 $ 66,065,033
Current maturities of long-term
debt............................ -- 1,305,863 -- 1,305,863
Due to affiliates................. (3,300,042) 5,450,000 5,450,000 --
Deferred income taxes............. 377,975 23,997 -- 23,997
Accounts payable and accrued
expenses........................ 282,540 48,394,352 3,435,868 44,958,484
------------ ------------ ------------ ------------
Total current liabilities... (2,639,527) 152,674,741 40,321,364 112,353,377
LONG-TERM DEBT, net of current
maturities........................ -- 8,219,784 -- 8,219,784
LONG-TERM DEFERRED INCOME TAXES.... (179,177) 443,680 -- 443,680
OTHER LONG-TERM LIABILITIES........ -- 1,593,489 -- 1,593,489
COMMITMENTS AND CONTINGENCIES...... -- -- -- --
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock...................... 477,833 95,291 (44,281) 139,572
Additional paid-in capital........ (30,542,322) 47,680,715 (40,265,215) 87,945,930
Treasury stock, at cost........... (1,204,095) --
Retained earnings (deficit)....... 11,889,532 (3,994,343) -- (3,994,343)
------------ ------------ ------------ ------------
Total stockholders' equity
(deficit)................. (19,379,052) 43,781,663 (40,309,496) 84,091,159
------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity...... $(22,197,756) $206,713,357 $ 11,868 $206,701,489
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
pro forma combined financial statements
F-4
<PAGE> 93
GROUP 1 AUTOMOTIVE, INC. AND FOUNDING GROUPS
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
GROUP 1 HOWARD MCCALL SMITH KINGWOOD TOTAL
----------- ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
New vehicle sales................... $ -- $ 84,922,460 $ 81,608,967 $ 75,203,290 $10,094,813 $251,829,530
Used vehicle sales.................. -- 54,353,896 49,796,182 35,153,070 9,264,009 148,567,157
Parts & service sales............... -- 10,762,746 12,304,906 14,081,839 1,250,878 38,400,369
Other dealership revenues, net...... -- 4,006,206 3,242,694 3,020,378 634,250 10,903,528
----------- ------------ ------------ ------------ ----------- ------------
Total revenues.................. -- 154,045,308 146,952,749 127,458,577 21,243,950 449,700,584
COST OF SALES....................... -- 134,130,539 127,275,652 109,913,986 18,275,231 389,595,408
----------- ------------ ------------ ------------ ----------- ------------
Gross Profit.................... -- 19,914,769 19,677,097 17,544,591 2,968,719 60,105,176
GOODWILL AMORTIZATION............... -- 20,360 -- 28,008 4,176 52,544
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.......................... 1,572,250 16,432,893 17,545,957 13,817,849 2,415,797 51,784,746
----------- ------------ ------------ ------------ ----------- ------------
Income (loss) from operations... (1,572,250) 3,461,516 2,131,140 3,698,734 548,746 8,267,886
OTHER INCOME AND EXPENSE
Interest expense, net............... (25,155) (807,954) (503,525) (940,371) (93,016) (2,370,021)
Other income (expense), net......... 396 34,079 (34,029) (19,035) -- (18,589)
----------- ------------ ------------ ------------ ----------- ------------
INCOME (LOSS) BEFORE INCOME
TAXES......................... (1,597,009) 2,687,641 1,593,586 2,739,328 455,730 5,879,276
PROVISION (BENEFIT) FOR INCOME
TAXES............................. -- 165,617 637,435 531,563 20,508 1,355,123
----------- ------------ ------------ ------------ ----------- ------------
NET INCOME (LOSS)............... $(1,597,009) $ 2,522,024 $ 956,151 $ 2,207,765 $ 435,222 $ 4,524,153
=========== ============ ============ ============ =========== ============
<CAPTION>
PRO FORMA % OF
ADJUSTMENTS PRO FORMA REVENUES
----------- ------------ --------
<S> <C> <C> <C>
REVENUES:
New vehicle sales................... $ -- $251,829,530 55.9%
Used vehicle sales.................. -- 148,567,157 33.0%
Parts & service sales............... -- 38,400,369 8.5%
Other dealership revenues, net...... (642,019) 11,545,547 2.6%
----------- ------------ -----
Total revenues.................. (642,019) 450,342,603 100.0%
COST OF SALES....................... (502,636) 389,092,772 86.4%
----------- ------------ -----
Gross Profit.................... (1,144,655) 61,249,831 13.6%
GOODWILL AMORTIZATION............... 300,188 352,732 0.1%
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.......................... (919,737) 50,865,009 11.3%
----------- ------------ -----
Income (loss) from operations... (1,764,204) 10,032,090 2.2%
OTHER INCOME AND EXPENSE
Interest expense, net............... (1,257,420) (1,112,601) 0.2%
Other income (expense), net......... -- (18,589) 0.0
----------- ------------ -----
INCOME (LOSS) BEFORE INCOME
TAXES......................... (3,021,624) 8,900,900 2.0%
PROVISION (BENEFIT) FOR INCOME
TAXES............................. 2,300,062 3,655,185 0.8%
----------- ------------ -----
NET INCOME (LOSS)............... $ (721,562) $ 5,245,715 1.2%
=========== ============ =====
Earnings Per Share $ 0.36
============
Weighted average shares outstanding 14,373,265
============
</TABLE>
The accompanying notes are an integral part of these
pro forma combined financial statements
F-5
<PAGE> 94
GROUP 1 AUTOMOTIVE, INC. AND FOUNDING GROUPS
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
1. GROUP 1 AUTOMOTIVE, INC.
Group 1 Automotive, Inc. has conducted no operations to date and will
acquire the Founding Groups immediately prior to the closing of the Offering.
2. BASIS OF PRESENTATION
The pro forma combined financial statements give effect to the acquisitions
by Group 1 Automotive, Inc. (Group 1), of substantially all of the net assets of
(a) Howard Group (Howard), (b) McCall Group (McCall), (c) Smith Group (Smith)
and (d) Kingwood Group (Kingwood), (together, the Founding Groups) and the
initial public offering of 4,428,136 shares of the common stock of Group 1.
Group 1 and the Founding Groups are hereinafter referred to as the Company.
These acquisitions (the Acquisitions) will occur immediately prior to the
closing of Group 1's public offering (the Offering) and will be accounted for
using the purchase method of accounting. Howard, one of the Founding Groups, has
been identified as the acquiror for financial statement presentation purposes in
accordance with SAB No. 97 as it will hold the single largest voting interest
subsequent to the Acquisitions. The pro forma combined financial statements also
give effect to the issuance of Common Stock, which will be issued by Group 1 to
the sellers of the Founding Groups immediately prior to the Offering. These
statements are based on the historical financial statements of the Founding
Groups included elsewhere in this Prospectus (except Kingwood, which has been
excluded as it is not a significant subsidiary under SAB No. 80) and the
estimates and assumptions set forth below.
The pro forma combined balance sheet gives effect to these transactions
(the Acquisitions and the Offering) as if they had occurred on June 30, 1997.
The pro forma combined statements of operations for the year ended December 31,
1996 and the six months ended June 30, 1997 give effect to these transactions as
if they had occurred at the beginning of the periods (January 1, 1996 and
January 1, 1997, respectively). Included in the pro forma combined balance sheet
and statement of operations are amounts related to Honda and Acura dealerships
(See "Risk Factors -- No Agreement with American Honda Motor Co., Inc."). These
dealerships represent, as of June 30, 1997, current assets of approximately
$19.4 million, total assets of approximately $20.9 million, current liabilities
of approximately $17.9 million and total liabilities of approximately $18.3
million. Additionally, these dealerships contributed revenues of approximately
$63.0 million and income before income taxes of approximately $1.3 million for
the six months ended June 30, 1997.
3. CONSIDERATION PAID TO FOUNDING GROUPS
The following table sets forth for each Founding Group the consideration to
be paid its common stockholders in shares of Common Stock.
<TABLE>
<CAPTION>
SHARES FAIR VALUE(1)
--------- -------------
<S> <C> <C>
Howard Group........................... 3,574,472(2) $ 25,557,475
McCall Group........................... 2,318,826 16,579,606
Smith Group............................ 2,725,933 20,922,097
Kingwood Group......................... 459,853 3,287,949
--------- ------------
Total........................ 9,079,084 $ 66,347,127
========= ============
</TABLE>
- ---------------
(1) Excludes $2.3 million and $3.1 million in cash consideration to be paid to
Howard and Kingwood Groups, respectively.
(2) Includes 592,303 shares of Common Stock issued to an owner of the Howard
Group which will be held in escrow and distributed pro rata to the
stockholders of the Founding Groups if the Combined Company's acquisition of
the Chevrolet dealership in Tulsa, Oklahoma is not consummated with General
Motors' approval within two years of the Offering.
F-6
<PAGE> 95
GROUP 1 AUTOMOTIVE, INC. AND FOUNDING GROUPS
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The holders of approximately 8,707,220 shares of Common Stock issued in
payment of the Acquisitions have agreed not to offer, sell or otherwise dispose
of any of those shares for a period of two years after the Offering and do not
have registration rights. The fair value of these shares reflects this
restriction. The remaining 371,864 shares of Common Stock issued in payment of
the Acquisitions will be sold by a shareholder at the date of the offering, and
accordingly, the value of those shares has not been adjusted from the Offering
price.
Based upon management's preliminary analysis, it is anticipated that the
historical carrying value of the Founding Groups' assets and liabilities will
approximate fair value. The amount of goodwill subsequent to the Acquisitions is
$28.2 million, with $26.8 million attributable to the acquisitions, and $1.4
million attributable to the existing goodwill of the Howard Group, the
accounting acquiror. The Company will use an estimated life of 40 years for the
amortization of goodwill. Management of Group 1 has not identified any other
material tangible or identifiable intangible assets of the Founding Groups to
which a portion of the purchase price could reasonably be allocated.
4. PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS FOR THE YEAR ENDED
DECEMBER 31, 1996 AND THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED):
The following tables set forth the components of the pro forma statement of
operations adjustments:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------------------------------------
(A) (B) (C) (D) (E) (F) TOTAL
----------- -------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Other dealership revenues,
net...................... $ (858,864) $ $ $ $ $ $ (858,864)
Cost of sales.............. (992,988) (992,988)
Goodwill amortization...... 656,655 656,655
Selling, general and
administrative
expenses................. (3,179,487) 3,150,000 (29,487)
Interest expense, net...... (2,514,839) (2,514,839)
Provision for income
taxes.................... 5,026,889 5,026,889
----------- -------- ----------- ---------- ----------- ---------- -----------
$(1,851,852) $656,655 $(3,179,487) $3,150,000 $(2,514,839) $5,026,889 $ 1,287,366
=========== ======== =========== ========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
(UNAUDITED)
------------------------------------------------------------------------------------------
(A) (B) (C) (D) (E) (F) TOTAL
----------- -------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Other dealership revenues,
net...................... $ (642,019) $ $ $ $ $ $ (642,019)
Cost of sales.............. (502,636) (502,636)
Goodwill amortization...... 300,188 300,188
Selling, general and
administrative
expenses................. (919,737) (919,737)
Interest expense, net...... (1,257,420) (1,257,420)
Provision for income
taxes.................... 2,300,062 2,300,062
----------- -------- ----------- ---------- ----------- ---------- -----------
$(1,144,655) $300,188 $ (919,737) $ -- $(1,257,420) $2,300,062 $ (721,562)
=========== ======== =========== ========== =========== ========== ===========
</TABLE>
(a) Records increases in revenues and decreases in cost of sales related to
certain third party products sold by the dealerships. The owners of one of the
Founding Groups currently have agreements in place which decrease the fees and
commissions paid to the dealerships for sales of certain finance and insurance
products and increase the cost of certain aftermarket products. The amounts
withheld are paid directly to the owners of the Founding Groups. Upon completion
of the Offering, such agreements will be terminated and the dealerships will
recognize an immediate increase in revenues and decreases in cost of sales
related to the products sold. The adjustments were determined based on the
actual cash payments to the owners during the period.
F-7
<PAGE> 96
GROUP 1 AUTOMOTIVE, INC. AND FOUNDING GROUPS
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(b) Records the pro forma goodwill amortization expense over an estimated
useful life of 40 years.
(c) Adjusts compensation expense and management fees to the level that
certain management employees and owners of the Founding Groups will
contractually receive subsequent to the closing of the Acquisitions.
(d) Records incremental corporate overhead costs related to personnel
costs, rents, professional service fees and directors and officers liability
insurance premiums that are supported by employment agreements, lease
agreements, professional service firm fee quotes and a premium notification.
(e) Records the pro forma decrease in interest expense resulting from the
repayment of floorplan obligations with proceeds from the offering in the amount
of $31.4 million with a weighted average interest rate of 8.0%.
(f) Records the incremental provision for federal and state income taxes
relating to the compensation differential, S corporation income and other pro
forma adjustments.
F-8
<PAGE> 97
GROUP AUTOMOTIVE, INC. AND FOUNDING GROUPS
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
The following tables set forth the components of the pro forma and post
merger adjustments as of June 30, 1997:
Pro Forma Adjustments
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E) (F)
----------- ----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents........ $(6,157,000) $ $ $ $ $ (19,720)
Due from affiliates.............. (1,062,854)
Inventories...................... 3,704,416 4,420,354
Deferred income tax benefit...... 753,150
Property and equipment, net......
Deferred income tax benefit...... 205,625
Goodwill, net.................... 6,635,493 14,611,760 2,923,205
Other assets.....................
LIABILITIES AND STOCKHOLDERS
EQUITY:
Due to affiliates................ (2,300,000) (3,149,999) 1,082,574
Deferred income taxes............ (1,014,160) (1,702,691)
Accounts Payable and accrued
expenses........................ 800,000 (250,001)
Long-term deferred income
taxes........................... (101,100)
Common stock..................... 455,755 (24,169) 48,090 (1,843)
Additional paid-in capital....... (318,312) (14,525,610) (13,334,375) (2,364,025)
Treasury stock, at cost.......... (808,798) (395,297)
Retained earnings (deficit)...... 5,357,000 2,319,305 5,619,327 (4,043,138) 2,637,038
----------- ----------- ------------ ------------ ----------- -----------
$ -- $ -- $ -- $ -- $ -- $ --
=========== =========== ============ ============ =========== ===========
<CAPTION>
PRO FORMA
(G) (H) ADJUSTMENTS
----------- ----------- ------------
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents........ $ 2,000,000 $ 267,459 $ (3,909,261)
Due from affiliates.............. (1,062,854)
Inventories...................... 8,124,770
Deferred income tax benefit...... (2,706,242) (1,953,092)
Property and equipment, net...... (2,000,000) (2,000,000)
Deferred income tax benefit...... (310,507) (104,882)
Goodwill, net.................... 24,170,458
Other assets..................... (1,067,383) (1,067,383)
LIABILITIES AND STOCKHOLDERS
EQUITY:
Due to affiliates................ 1,067,383 (3,300,042)
Deferred income taxes............ 3,094,826 377,975
Accounts Payable and accrued
expenses........................ (267,459) 282,540
Long-term deferred income
taxes........................... (78,077) (179,177)
Common stock..................... 477,833
Additional paid-in capital....... (30,542,322)
Treasury stock, at cost.......... 1,204,095
Retained earnings (deficit)...... 11,889,532
----------- ----------- ------------
$ -- $ -- $ --
=========== =========== ============
</TABLE>
F-9
<PAGE> 98
GROUP AUTOMOTIVE, INC. AND FOUNDING GROUPS
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(a) Records distribution of three Founding Groups' S-Corporation
Accumulated Adjustment Accounts.
(b) Records the acquisition of the Howard Group (the accounting acquiror)
in exchange for the common stock of Group 1 and the accrued cash portion of the
purchase price to be paid from the offering proceeds, the conversion of the
S-Corporations of the Howard Group to C-Corporations upon completion of the
Acquisitions and the recognition of certain deferred tax assets of Group 1 which
were previously reserved due to uncertainty of realization.
(c)(d)(e) Records the acquisition of the Founding Groups in exchange for
the common stock of Group 1 and the accrued cash portion of the purchase price
to be paid from the offering proceeds. The following table sets forth the
goodwill recorded after the adjustment of the basis of certain assets and
liabilities upon allocation of the purchase price (including amounts
attributable to deferred tax assets and liabilities, and the adjustment of
inventory to fair value).
<TABLE>
<CAPTION>
KINGWOOD
SMITH GROUP MCCALL GROUP GROUP
----------- ------------ ----------
<S> <C> <C> <C>
Estimated total consideration:
Cash............................................. $ -- $ -- $3,100,000
Note Payable..................................... -- -- 300,000
Common Stock..................................... 20,922,097 16,579,606 3,287,949
----------- ----------- ----------
Total.................................. 20,922,097 16,579,606 6,687,949
Less: Fair value of tangible net tangible assets
acquired....................................... 14,286,604 1,967,846 3,764,744
----------- ----------- ----------
Excess of purchase price over net tangible assets
acquired....................................... $ 6,635,493 $14,611,760 $2,923,205
=========== =========== ==========
</TABLE>
(f) Records the settlement of certain related party payables and
receivables by owners of the Founding Groups.
(g) Records the sale of certain nonoperating assets to one of the owners of
a Founding Group at a price that approximates market.
(h) Records the reclassification of deferred tax assets and liabilities for
financial reporting purposes and the elimination of intercompany advances from
the Founding Groups to Group 1 upon acquisition.
Post Merger Adjustments
<TABLE>
<CAPTION>
(I) (J) (K) TOTAL
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents........ $ 41,042,496 $(5,450,000) $(31,435,496) $ 4,157,000
Other assets..................... (4,168,868) (4,168,868)
Floor plan notes payable......... 31,435,496 31,435,496
Due to affiliates................ 5,450,000 5,450,000
Accounts payable and accrued
expenses....................... 3,435,868 3,435,868
Common stock..................... (44,281) (44,281)
Additional paid-in capital....... (40,265,215) (40,265,215)
------------ ----------- ------------ ------------
$ -- $ -- $ -- $ --
============ =========== ============ ============
</TABLE>
(i) Records the proceeds from the issuance of 4,428,136 shares of Group 1
Automotive, Inc. common stock net of estimated offering costs (based on an
assumed initial public offering price of $11 per share). Offering costs consist
primarily of underwriting discounts and commissions, accounting fees, legal fees
and printing expenses.
(j) Records the settlement of the accrued cash portion of the purchase
price.
(k) Records the repayment of floorplan obligations with proceeds from the
offering.
F-10
<PAGE> 99
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Group 1 Automotive, Inc.:
We have audited the accompanying balance sheets of Group 1 Automotive, Inc.
(a Delaware corporation) (the Company) as of December 31, 1995 and 1996 and the
related statements of operations, stockholders' equity (deficit) and cash flows
for the period from Inception (December 21, 1995) to December 31, 1995, and for
the year ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1995 and 1996, and the results of its operations and cash flows for the
period from Inception to December 31, 1995 and for the year ended December 31,
1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 9, 1997
F-11
<PAGE> 100
GROUP 1 AUTOMOTIVE, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- JUNE 30,
1995 1996 1997
------------ ------------ ----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................... $ 500 $ 7,769 $ 10,344
-------- -------- ----------
Total current assets...................... 500 7,769 10,344
PROPERTY AND EQUIPMENT, net......................... -- 1,716 52,480
OTHER ASSETS........................................ -- 774,198 2,783,868
-------- -------- ----------
Total assets.............................. $ 500 $783,683 $2,846,692
======== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Advances from Founding Groups..................... $ -- $150,987 $1,067,384
Accounts payable and accrued expenses............. -- 722,704 3,466,325
-------- -------- ----------
Total current liabilities................. -- 873,691 4,533,709
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value, 2,000,000 shares
authorized in 1995 and 1996, 50,000,000 shares
authorized in 1997, 1,000, 450,000 and 450,000
shares issued and outstanding, respectively.... 10 4,500 4,500
Additional paid-in capital........................ 490 4,995 4,995
Retained deficit.................................. -- (99,503) (1,696,512)
-------- -------- ----------
Total stockholders' equity (deficit)...... 500 (90,008) (1,687,017)
-------- -------- ----------
Total liabilities and stockholders' equity
(deficit)............................... $ 500 $783,683 $2,846,692
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE> 101
GROUP 1 AUTOMOTIVE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION
(DECEMBER 21,
1995) THROUGH YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ---------------------------
1995 1996 1996 1997
------------- ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Sales............................. $ -- $ -- $ -- $ --
Other dealership revenues, net.... -- -- -- --
-------- -------- -------- -----------
Total revenues............ -- -- -- --
COST OF SALES....................... -- -- -- --
-------- -------- -------- -----------
Gross Profit.............. -- -- -- --
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.......................... -- 95,008 -- 1,572,250
-------- -------- -------- -----------
Operating loss............ -- (95,008) -- (1,572,250)
OTHER INCOME (EXPENSE)
Interest Expense, Net..... -- -- -- (24,759)
-------- -------- -------- -----------
LOSS BEFORE INCOME TAXES............ -- (95,008) -- (1,597,009)
PROVISION FOR INCOME TAXES.......... -- -- -- --
-------- -------- -------- -----------
NET LOSS............................ $ -- $(95,008) $ -- $(1,597,009)
======== ======== ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE> 102
GROUP 1 AUTOMOTIVE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
---------------- PAID-IN EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, Inception (December 21,
1995)................................ -- $ -- $ -- $ -- $ --
Stock issuance for cash........... 1,000 10 490 -- 500
------- ------ ------ ----------- -----------
BALANCE, December 31, 1995............. 1,000 10 490 -- 500
Purchase and cancellation of
treasury stock for cash......... (1,000) (10) (490) -- (500)
Stock issuance for cash........... 500 5 4,995 -- 5,000
Stock split (900-1), (Note 3)..... 449,500 4,495 -- (4,495) --
Net loss.......................... -- -- -- (95,008) (95,008)
------- ------ ------ ----------- -----------
BALANCE, December 31, 1996............. 450,000 4,500 4,995 (99,503) (90,008)
Net loss (unaudited).............. -- -- -- (1,597,009) (1,597,009)
------- ------ ------ ----------- -----------
BALANCE, June 30, 1997 (unaudited)..... 450,000 $4,500 $4,995 $(1,696,512) $(1,687,017)
======= ====== ====== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE> 103
GROUP 1 AUTOMOTIVE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCEPTION
(DECEMBER 21,
1995)
THROUGH YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -------------------------
1995 1996 1996 1997
------------- ------------ --------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................ $ -- $ (95,008) $ -- $(1,597,009)
Adjustments to reconcile net loss to net
cash used in operating activities --
Depreciation and Amortization........ -- -- -- 4,554
Changes in operating assets and
liabilities --
Increase in --
Other noncurrent assets............ -- (774,198) (2,617) (2,009,670)
Accounts payable and accrued
expenses........................ -- 722,704 2,617 2,743,621
---- --------- ------- -----------
Net cash used in operating
activities......................... -- (146,502) -- (858,504)
---- --------- ------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment..... -- (1,716) -- (55,318)
---- --------- ------- -----------
Net cash used in investing
activities......................... -- (1,716) -- (55,318)
---- --------- ------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from Founding Groups........... -- 150,987 -- 916,397
Purchase of common stock................ -- (500) -- --
Proceeds from issuance of common
stock................................ 500 5,000 -- --
---- --------- ------- -----------
Net cash provided by financing
activities......................... 500 155,487 -- 916,397
---- --------- ------- -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS............................. 500 7,269 -- 2,575
CASH AND CASH EQUIVALENTS, beginning of
period.................................. -- 500 500 7,769
---- --------- ------- -----------
CASH AND CASH EQUIVALENTS, end of
period.................................. $500 $ 7,769 $ 500 $ 10,344
==== ========= ======= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE> 104
GROUP 1 AUTOMOTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
(All discussions and disclosures with a reference date subsequent to May 9, 1997
are unaudited.)
1. BUSINESS AND ORGANIZATION:
Group 1 Automotive, Inc. (Group 1 or the Company), was founded on December
21, 1995 to become a leading operator and consolidator in the automotive
retailing industry. Group 1 intends to acquire 30 automobile dealerships and
related businesses which are currently owned by four dealership groups located
in Texas and Oklahoma (the Founding Groups) (the Acquisitions), complete an
initial public offering (the Offering) of its common stock and, subsequent to
the Offering, continue to acquire, through merger or purchase, similar companies
to expand its national and regional operations.
Group 1's primary assets at December 31, 1996 and June 30, 1997 are cash
and deferred offering costs. Group 1 has not conducted any operations, and all
activities to date have related to the Acquisitions. There is no assurance that
the Acquisitions discussed below will be completed and that Group 1 will be able
to generate future operating revenues. Funding for the deferred offering costs
has been provided by the Founding Groups. Group 1 is dependent upon the Offering
to fund the amounts due to the Founding Groups and future operations. In the
event that the Offering is not completed, Group 1 will pursue alternative
sources of funding in order to meet its current obligations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Major Suppliers and Franchise Agreements
The Founding Groups purchase substantially all of their new vehicles from
various manufacturers at the prevailing prices charged by the manufacturers to
all franchised dealers. Group 1's sales volume subsequent to the Acquisitions
could be adversely impacted by the manufacturers' inability to supply the
dealerships with an adequate supply of popular models or as a result of an
unfavorable allocation of vehicles by the manufacturers.
The dealer franchise agreements contain provisions which may limit changes
in dealership management and ownership, place certain restrictions on the
dealerships (such as minimum net worth requirements) and which also provide for
termination of the franchise agreement by the manufacturers in certain
instances. Subsequent to the Acquisitions, Group 1's ability to acquire
additional franchises from a particular manufacturer may be limited due to
certain restrictions imposed by manufacturers, the Company's ability to enter
into significant acquisitions may be restricted and the acquisition of the
Company's stock by third parties may be limited by the terms of the franchise
agreement. See "Risk Factors -- Manufacturers Control Over Dealerships" and
"Business -- Franchise Agreements" for further discussion.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets.
Other Assets
The Company has capitalized all costs incurred in connection with the
Offering as a component of other assets in the accompanying financial
statements. Upon completion of the Offering, all such costs will be offset
against additional paid-in capital. Deferred offering costs capitalized in other
assets totaled approximately $767,000 and $2,777,000 as of December 31, 1996 and
June 30, 1997, respectively.
F-16
<PAGE> 105
GROUP 1 AUTOMOTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets are received or liabilities are settled.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in determining the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. NEW ACCOUNTING PRONOUNCEMENTS
During June 1996 the Financial Accounting Standards Board (FASB) issued
statement of Financial Accounting Standards (SFAS) No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities."
During February 1997 the FASB issued SFAS No. 128 and 129 "Earnings per Share"
and "Disclosure of Information about Capital Structure," respectively, and in
June 1997 issued SFAS No. 130 and 131 "Reporting Comprehensive Income" and
"Disclosures about Segments of an Enterprise and Related Information,"
respectively. The major provisions of these statements and their impact on the
Company are discussed below.
SFAS No. 125 established criteria for recognition of a sale in conjunction
with the transfer of financial assets, under which sales may only be recognized
when the transferor has surrendered control of the assets. This statement is not
currently anticipated to have any impact on the Company as the Company does not
currently enter into transactions which fall under the scope of this statement.
SFAS No. 128 requires the presentation of basic earnings per share and
diluted earnings per share in financial statements of public enterprises rather
than primary and fully diluted earnings per share as previously required. Under
the provisions of this statement, basic earnings per share will be computed
based on weighted average shares outstanding and will exclude dilutive
securities such as options, warrants, etc. Diluted earnings per share will be
computed including the impacts of all potentially dilutive securities. The
Company will adopt this statement in December 1997, but does not anticipate that
the statement will have an impact on the Company as the Company does not have a
significant number of potentially dilutive securities outstanding.
SFAS No. 129 will require additional disclosure of information about an
entity's capital structure, including information about dividend and liquidation
preferences, voting rights, contracts to issue additional shares, conversion and
exercise prices, etc. The Company will adopt this statement in December 1997.
SFAS No. 130 requires the presentation of comprehensive income in an
entity's financial statements. Comprehensive income represents all changes in
equity of an entity during the reporting period, including net income and
charges directly to equity which are excluded from net income. This statement is
not anticipated to have any impact on the Company as the Company currently does
not enter into any transactions which result in charges (or credits) directly to
equity (such as additional minimum pension liability changes, currency
translation adjustments, unrealized gains and losses on available for sale
securities, etc.).
F-17
<PAGE> 106
GROUP 1 AUTOMOTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SFAS No. 131 will be adopted by the Company during 1998, SFAS No. 131
provides revised disclosure guidelines for segments of an enterprise based on a
management approach to defining operating segments. The Company currently
operates in only one industry segment and analyzes operations on a Company-wide
basis, therefore the statement is not expected to impact the Company.
Interim Financial Information
As is normal and customary, the interim financial statements as of June 30,
1997, and for the six months ended June 30, 1996 and 1997, are unaudited, and
certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles has not been included
herein. In the opinion of management, all adjustments necessary to fairly
present the financial position, results of operations and cash flows with
respect to the interim financial statements, have been properly included. Due to
seasonality and other factors, the results of operations for the interim periods
are not necessarily indicative of the results that will be realized for the
entire fiscal year.
Statements of Cash Flows
For purposes of the statements of cash flows, cash and cash equivalents
include all highly liquid debt instruments purchased with an original maturity
of three months or less.
3. CAPITAL STOCK AND STOCK OPTIONS
Group 1 effected a 900-for-one-stock split on December 13, 1996. The effect
of the common stock split has been accounted for as a stock dividend in the
accompanying financial statements. On February 5, 1997 the Board of Directors
increased the authorized number of shares of common stock from 2,000,000 to
50,000,000, and authorized the issuance of up to 1,000,000 shares of preferred
stock.
The Company has approved the 1996 Stock Incentive Plan (the Plan), which
provides for the granting or awarding of stock options, stock appreciation
rights and restricted stock to nonemployee directors, officers and other key
employees (including officers of the Founding Groups) and independent
contractors. The number of shares authorized and reserved for issuance under the
Plan is 2,000,000 shares. In general, the terms of the option awards (including
vesting schedules) will be established by the Compensation Committee of the
Company's Board of Directors. As of December 31, 1996, the Company has granted
options to employees covering an aggregate of 205,000 shares of common stock.
During March 1997, the Company granted additional options to employees to
purchase an aggregate of 360,000 shares of common stock under the Plan. All
outstanding options are exercisable over a period not to exceed 10 years and
vest over a six year period. The exercise price of the options under the Plan is
at least 100 percent of the estimated fair market value of the stock at the time
the option is granted.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which, if fully adopted, requires the Company to record
stock-based compensation at fair value. The Company has adopted the disclosure
requirements of SFAS No. 123 and has elected to record employee compensation
expense in accordance with Accounting Principles Board (APB) Opinion No. 25.
Accordingly, compensation expense is recorded for stock options based on the
excess of the fair market value of the common stock on the date the options were
granted over the aggregate exercise price of the options. As the exercise price
of options granted under the Plan has been equal to or greater than the market
price of the Company's stock on the date of grant, no compensation expense
related to the Plan has been recorded.
F-18
<PAGE> 107
GROUP 1 AUTOMOTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Had compensation expense for the Plan been determined consistent with SFAS No.
123, the impact on the Company's net loss would have been as follows for the
year ended December 31, 1996:
<TABLE>
<S> <C>
Net loss as reported........................................ $ 95,008
Pro forma net loss.......................................... $102,640
</TABLE>
At December 31, 1996 and June 30, 1997, no options were exercisable and
1,795,000 and 1,435,000 options, respectively, were available for future grant
under the Plan. The exercise prices of options outstanding under the Plan at
December 31, 1996 and June 30, 1997, were $2.90. The weighted average
contractual life of options outstanding at December 31, 1996 and June 30, 1997,
was 10 years. The weighted average fair value of options granted during the year
ended December 31, 1996 and the six month period ended June 30, 1997, was $2.90.
The fair value of each option grant is estimated on the date of grant using the
minimum value method with the following weighted average assumptions: a weighted
average risk-free interest rate of 5.0 percent; no expected dividend yields; and
expected lives of four years.
4. INCOME TAXES
The following tables set forth the components of the Company's deferred tax
assets as of December 31, 1996 along with a reconciliation of income tax for the
year ended December 31, 1996. The Company has recorded a valuation allowance
against its deferred tax assets as in management's opinion it is more likely
than not that such amounts may not be realized in future periods.
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Benefit at the statutory rate............................... $(32,303)
Increase (decrease) resulting from State income tax, net of
benefit for federal....................................... (2,822)
Valuation allowance....................................... 35,125
--------
$ --
========
Net operating loss carryforward............................. 35,125
Valuation allowance......................................... (35,125)
--------
Net deferred tax assets................................... $ --
========
</TABLE>
5. PROPOSED ACQUISITIONS BY GROUP 1
Group 1 has signed definitive agreements to acquire four dealership groups
(the Founding Groups) consisting of 30 automobile dealerships and related
businesses. The Founding Groups are as follows:
Howard Group -- Consisting of Howard Pontiac-GMC, Inc., Bob Howard
Chevrolet, Inc., Bob Howard Automotive-H, Inc.
(Honda/Acura), Bob Howard Motors, Inc. (Toyota) and Bob
Howard Dodge, Inc.
McCall Group -- Consisting of SMC Luxury Cars, Inc. (d.b.a. Sterling McCall
Lexus) and Southwest Toyota, Inc. (d.b.a. Sterling McCall
Toyota).
Smith Group -- Consisting of Mike Smith Autoplaza, Inc., Smith, Liu and
Kutz, Inc. (Town North), Courtesy Nissan, Inc., Smith Liu &
Corbin, Inc. (d.b.a. Acura Southwest) and Round Rock Nissan,
Inc.
Kingwood Group -- Consisting of Foyt Motors, Inc.
F-19
<PAGE> 108
GROUP 1 AUTOMOTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate consideration that will be paid by Group 1 to acquire the
Founding Groups is approximately $5.4 million in cash and 9,079,084 shares of
Group 1 common stock (based on an assumed initial public offering price of $11
per share, the midpoint of the estimated initial public offering price range).
The following table sets forth the consideration to be paid to each of the
Founding Groups.
<TABLE>
<CAPTION>
SHARES CASH
--------- ----------
<S> <C> <C>
Howard Group............................................ 3,574,472(1) $2,300,000
McCall Group............................................ 2,318,826 --
Smith Group............................................. 2,725,933 --
Kingwood Group.......................................... 459,853 3,100,000
--------- ----------
Total......................................... 9,079,084 $5,400,000
========= ==========
</TABLE>
- ---------------
(1) Includes 592,303 shares of Common Stock issued to an owner of the Howard
Group which will be held in escrow and distributed pro rata to the
stockholders of the Founding Groups if the Combined Company's acquisition of
the Chevrolet dealership in Tulsa, Oklahoma is not consummated with General
Motors' approval within two years of the Offering.
In conjunction with the Acquisitions and the Offering, the Founding Groups
have advanced funds to the Company for operations and offering costs. As of
December 31, 1996, these advances totaled $150,987 and accrued interest at a
rate of 7% per annum. As of October 14, 1997, these advances totaled $1,682,386.
F-20
<PAGE> 109
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Howard Group:
We have audited the accompanying combined balance sheets of the companies
identified in Note 1 (the Companies) as of December 31, 1995 and 1996, and the
related combined statements of operations, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Companies as of December
31, 1995 and 1996, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 9, 1997
F-21
<PAGE> 110
HOWARD GROUP
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1995 1996 1997 1997
------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......... $10,519,771 $11,679,050 $ 9,936,653 $ 5,436,653
Accounts receivable, net.......... 6,301,692 5,898,736 6,200,606 6,200,606
Inventories....................... 39,572,596 47,674,462 45,202,216 45,202,216
Prepaid expenses.................. 359,668 858,886 889,780 889,780
----------- ----------- ----------- -----------
Total current assets...... 56,753,727 66,111,134 62,229,255 57,729,255
----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT, net......... 2,810,966 4,128,880 3,820,115 3,820,115
NOTES RECEIVABLE.................... 374,826 417,675 513,585 513,585
GOODWILL, NET....................... 989,845 1,456,833 1,436,473 1,436,473
OTHER ASSETS........................ 711,753 759,714 731,069 731,069
----------- ----------- ----------- -----------
Total assets.............. $61,641,117 $72,874,236 $68,730,497 $64,230,497
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Floor plan notes payable.......... $37,035,648 $42,543,902 $37,816,102 $37,816,102
Current maturities of long-term
debt........................... 99,743 33,685 21,659 21,659
Deferred income taxes............. 690,998 357,172 401,972 401,972
Accounts payable and accrued
expenses....................... 14,219,262 16,740,525 18,864,797 18,864,797
----------- ----------- ----------- -----------
Total current
liabilities............. 52,045,651 59,675,284 57,104,530 57,104,530
----------- ----------- ----------- -----------
LONG-TERM DEBT, net of current
maturities........................ 184,199 309,779 153,661 153,661
LONG-TERM DEFERRED INCOME TAXES..... 40,409 58,604 58,604 58,604
OTHER LONG-TERM LIABILITIES......... 750,571 620,896 586,724 586,724
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock...................... 490,500 491,500 491,500 491,500
Additional paid-in capital........ 5,123,802 6,622,802 6,622,802 6,622,802
Retained earnings................. 3,814,783 5,904,169 4,521,474 21,474
Treasury stock, at cost........... (808,798) (808,798) (808,798) (808,798)
----------- ----------- ----------- -----------
Total stockholders'
equity.................. 8,620,287 12,209,673 10,826,978 6,326,978
----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity.... $61,641,117 $72,874,236 $68,730,497 $64,230,497
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-22
<PAGE> 111
HOWARD GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ ---------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
New vehicle sales............ $136,831,043 $151,226,737 $164,978,710 $ 82,522,708 $ 84,922,460
Used vehicle sales........... 69,861,948 79,447,701 88,477,330 44,036,067 54,353,896
Parts and service sales...... 14,402,326 16,940,622 21,173,371 10,141,875 10,762,746
Other dealership revenues,
net....................... 6,163,506 6,388,131 7,386,747 3,949,257 4,006,206
------------ ------------ ------------ ------------ ------------
Total revenues....... 227,258,823 254,003,191 282,016,158 140,649,907 154,045,308
COST OF SALES:
New vehicle cost of sales.... 128,795,822 141,952,762 154,682,896 77,336,926 80,403,283
Used vehicle cost of sales... 63,263,368 71,553,967 78,911,645 39,096,474 49,186,187
Parts and service cost of
sales..................... 6,932,727 8,266,771 10,801,506 5,220,454 4,541,069
------------ ------------ ------------ ------------ ------------
Total cost of
sales.............. 198,991,917 221,773,500 244,396,047 121,653,854 134,130,539
------------ ------------ ------------ ------------ ------------
Gross profit......... 28,266,906 32,229,691 37,620,111 18,996,053 19,914,769
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES...... 24,253,223 26,165,535 30,768,233 15,032,054 16,453,253
------------ ------------ ------------ ------------ ------------
Income from
operations......... 4,013,683 6,064,156 6,851,878 3,963,999 3,461,516
OTHER INCOME AND EXPENSE:
Interest expense, net........ (1,101,487) (1,604,204) (1,193,810) (679,842) (807,954)
Other income (expense), net.. 8,942 (80,446) (69,328) (28,411) 34,079
------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES..... 2,921,138 4,379,506 5,588,740 3,255,746 2,687,641
PROVISION FOR INCOME TAXES..... 767,850 744,316 381,752 306,492 165,617
------------ ------------ ------------ ------------ ------------
NET INCOME..................... $ 2,153,288 $ 3,635,190 $ 5,206,988 $ 2,949,254 $ 2,522,024
============ ============ ============ ============ ============
S-Corporation pro forma income
taxes (unaudited)............ 388,920 989,968 1,831,389 982,783 898,689
------------ ------------ ------------ ------------ ------------
Pro forma net income
(unaudited).................. $ 1,764,368 $ 2,645,222 $ 3,375,599 $ 1,966,471 $ 1,623,335
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-23
<PAGE> 112
HOWARD GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
-------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31,
1993..................... $490,000 $2,399,302 $ 1,556,192 $(808,798) $ 3,636,696
Net income............... -- -- 2,153,288 -- 2,153,288
Issuance of common
stock................. 500 999,500 -- -- 1,000,000
Dividends................ -- -- (1,443,706) -- (1,443,706)
-------- ---------- ----------- --------- -----------
BALANCE, December 31,
1994..................... 490,500 3,398,802 2,265,774 (808,798) 5,346,278
Net income............... -- -- 3,635,190 -- 3,635,190
Capital contribution..... -- 1,725,000 -- -- 1,725,000
Dividends................ -- -- (2,086,181) -- (2,086,181)
-------- ---------- ----------- --------- -----------
BALANCE, December 31,
1995..................... 490,500 5,123,802 3,814,783 (808,798) 8,620,287
Net income............... -- -- 5,206,988 -- 5,206,988
Issuance of common
stock................. 1,000 1,499,000 -- -- 1,500,000
Dividends................ -- -- (3,117,602) -- (3,117,602)
-------- ---------- ----------- --------- -----------
BALANCE, December 31,
1996..................... 491,500 6,622,802 5,904,169 (808,798) 12,209,673
Net income (unaudited)... -- -- 2,522,024 -- 2,522,024
Dividends (unaudited).... -- -- (3,904,719) -- (3,904,719)
-------- ---------- ----------- --------- -----------
BALANCE, June 30, 1997
(unaudited).............. $491,500 $6,622,802 $ 4,521,474 $(808,798) $10,826,978
======== ========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-24
<PAGE> 113
HOWARD GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income......................... $ 2,153,288 $ 3,635,190 $ 5,206,988 $ 2,949,254 $ 2,522,024
----------- ----------- ----------- ----------- -----------
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities --
Depreciation and amortization... 429,915 538,493 740,811 344,642 340,043
Deferred income taxes........... 39,207 190,787 (315,631) (178,774) 44,800
Provision for doubtful
accounts...................... 113,112 84,833 108,068 46,509 41,952
Loss (gain) on sale of assets... (56,503) 15,313 18,350 8,991 (17,628)
Changes in assets and
liabilities --
Accounts receivable........... (3,393,986) 197,696 294,888 1,451,630 (343,822)
Inventories................... (8,492,539) (4,873,611) (6,106,872) (1,762,205) 2,472,246
Prepaid expenses and other
assets..................... (58,113) 196,943 (514,167) 539,069 (2,249)
Floor plan notes payable...... 9,451,846 3,876,738 5,508,254 106,005 (4,727,800)
Accounts payable and accrued
expenses................... 4,017,618 3,334,511 2,391,588 (1,620,990) 2,076,626
----------- ----------- ----------- ----------- -----------
Total adjustments.......... 2,050,557 3,561,703 2,125,289 (1,065,123) (115,832)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used
in) operating
activities............... 4,203,845 7,196,893 7,332,277 1,884,131 2,406,192
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable....... -- (374,826) (235,054) (220,848) (95,910)
Collections on notes receivable.... -- -- 192,205 206,643 --
Purchases of property and
equipment....................... (1,197,283) (928,017) (1,977,075) (1,726,306) (272,500)
Proceeds from sale of property and
equipment....................... -- -- -- -- 278,736
Acquisition of Business............ (1,834,426) -- (2,594,994) (2,594,994) --
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities............... (3,031,709) (1,302,843) (4,614,918) (4,335,505) (89,674)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term
debt............................ (225,313) (171,910) (152,807) (76,404) (168,144)
Borrowings of long-term debt....... 512,204 13,111 212,329 92,925 --
Issuance of common stock........... 1,000,000 -- 1,500,000 -- --
Contribution from stockholders..... -- 1,725,000 -- -- --
Dividends.......................... (1,443,706) (2,086,181) (3,117,602) (2,128,403) (3,890,771)
----------- ----------- ----------- ----------- -----------
Net cash used in financing
activities............... (156,815) (519,980) (1,558,080) (2,111,882) (4,058,915)
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 1,015,321 5,374,070 1,159,279 (4,563,256) (1,742,397)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 4,130,380 5,145,701 10,519,771 10,519,771 11,679,050
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 5,145,701 $10,519,771 $11,679,050 $ 5,956,515 $ 9,936,653
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................ $ 2,295,200 $ 3,427,813 $ 3,117,601 $ 1,775,231 $ 2,006,376
Taxes........................... 715,000 475,000 924,456 514,379 10,991
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-25
<PAGE> 114
HOWARD GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(All discussions and disclosures with a reference date subsequent to May 9, 1997
are unaudited.)
1. BUSINESS AND ORGANIZATION:
Howard Group (the Companies) is primarily engaged in the retail sale of new
and used automobiles and the sale of the related finance, insurance and service
contracts thereon. In addition, the Companies sell automotive parts, provide
vehicle servicing and sell wholesale used vehicles.
The following companies are included within the combined group:
Howard Pontiac -- GMC, Inc. (Automall)
Automall consists of several franchises which conduct business at
contiguous locations in Oklahoma City, Oklahoma. The franchises
operated in this location include Pontiac, GMC, Mazda, Isuzu, Jeep,
Eagle, Chrysler and Plymouth.
Bob Howard Chevrolet, Inc. (BHC)
BHC is a Chevrolet dealership located in Oklahoma City, Oklahoma.
Bob Howard Automotive -- H, Inc. (BHH)
BHH consists of two franchises, Honda and Acura, which conduct business
at contiguous locations in Oklahoma City, Oklahoma.
Bob Howard Motors, Inc. (BHT)
BHT is a Toyota dealership located in Oklahoma City, Oklahoma.
Bob Howard Dodge, Inc. (BHD)
BHD is a Dodge dealership located in Oklahoma City, Oklahoma.
The Companies and their stockholders intend to enter into a definitive
agreement with Group 1 Automotive, Inc. (Group 1), pursuant to which all
outstanding shares of the Companies' common stock will be exchanged for cash and
shares of Group 1's common stock concurrent with the consummation of the initial
public offering of the common stock of Group 1.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying combined financial statements include the accounts of the
companies listed above. The Companies have been presented on a combined basis
due to their related operations, common ownership and common management control.
All significant intercompany balances and transactions have been eliminated in
combination.
Major Suppliers and Franchise Agreements
The Companies purchase substantially all of their new vehicles at the
prevailing prices charged by the manufacturers to all franchised dealers. The
Companies' sales volume could be adversely impacted by the manufacturers'
inability to supply the dealership with an adequate supply of popular models or
as a result of an unfavorable allocation of vehicles by the manufacturer.
The dealer franchise agreements contain provisions which may limit changes
in dealership management and ownership, place certain restrictions on the
dealerships (such as minimum working capital requirements), and which also
provide for termination of the franchise agreement by the manufacturers in
certain instances. Under certain state law, these restrictive provisions have
been repeatedly found invalid
F-26
<PAGE> 115
HOWARD GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
both by state courts and administrative agencies. See "Risk
Factors -- Manufacturers' Control Over Dealerships" and "Business -- Franchise
Agreements" for further discussion.
Revenue Recognition
Revenue from vehicle sales, parts sales and vehicle service is recognized
upon delivery to the customer.
Finance, Insurance and Service Contract Income Recognition
The Companies arrange financing for customers through various institutions
and receive financing fees equal to the difference between the loan rates
charged to customers over the predetermined financing rates set by the financing
institution. In addition, the Companies receive commissions from the sale of
credit life and disability insurance and extended service contracts to
customers.
The Companies may be charged back (chargebacks) for unearned financing
fees, insurance or service contract commissions in the event of early
termination of the contracts by customers. The revenues from financing fees and
commissions are recorded at the time of the sale of the vehicles. The reserves
for future chargebacks are based on historical operating results and the
termination provisions of the applicable contracts. Finance, insurance and
service contract income, net of estimated chargebacks, are included in other
dealership revenue in the accompanying combined financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments that have an
original maturity of three months or less at the date of purchase and contracts
in transit. Contracts in transit represent contracts on vehicles sold, for which
the proceeds are in transit from financing institutions.
Inventories
New, used and demonstrator vehicles are stated at the lower of cost or
market, determined on a specific-unit basis.
Parts and accessories are stated at the lower of cost (determined on a
first-in, first-out basis) or market.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated useful life of the asset.
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to operations
as incurred. Disposals are removed at cost less accumulated depreciation, and
any resulting gain or loss is reflected in current operations.
Goodwill
Goodwill represents the excess of the purchase price of dealerships
acquired (BHH, BHD and Automall) over the fair value of assets acquired at the
date of acquisition. Goodwill is being amortized on a straight-line basis over
40 years. Amortization expense charged to operations totaled approximately
$21,000, $27,000 and $36,000 for the years ended December 31, 1994, 1995 and
1996, respectively.
F-27
<PAGE> 116
HOWARD GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Accumulated amortization totaled approximately $93,000 and $129,000 as of
December 31, 1995 and 1996, respectively.
Income Taxes
The Companies follow the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets are realized or liabilities are settled. A valuation allowance
reduces deferred tax assets when it is more likely than not that some or all of
the deferred tax assets will not be realized.
Certain of the Companies have elected S Corporation status, as defined by
the Internal Revenue Code, whereby the Companies are not subject to taxation for
federal purposes. Under S Corporation status, the stockholders report their
share of these Companies' taxable earnings or losses in their personal tax
returns.
Environmental Liabilities and Expenditures
Accruals for environmental matters, if any, are recorded in operating
expenses when it is probable that a liability has been incurred and the amount
of the liability can be reasonably estimated. Accrued liabilities are exclusive
of claims against third parties and are not discounted.
In general, costs related to environmental remediation are charged to
expense. Environmental costs are capitalized if the costs increase the value of
the property and/or mitigate or prevent contamination from future operations.
Interest Expense
Automobile manufacturers periodically provide floorplan interest
assistance, or subsidies, which reduce the Companies' cost of financing. The
accompanying combined financial statements reflect interest expense net of
floorplan assistance.
Fair Value of Financial Instruments
The Companies' financial instruments consist primarily of floor plan notes
payable and long-term debt. The carrying amount of these financial instruments
approximates fair value due either to length of maturity or existence of
variable interest rates that approximate market rates.
Advertising
The Company expenses production and other costs of advertising as incurred.
Advertising expense for the years ended December 31, 1994, 1995 and 1996 totaled
$3,511,447, $3,422,453 and $3,245,451, respectively.
Concentration of Credit Risk
Financial instruments which potentially subject the Companies to a
concentration of credit risk consist principally of cash, cash equivalents,
contracts in transit and accounts receivable. The Company maintains cash
balances at financial institutions which may at times be in excess of federally
insured levels. The Companies grant credit to local companies in various
businesses. The Companies perform ongoing credit evaluations of their customers
and generally do not require collateral. The Companies maintain an allowance for
doubtful accounts at a level which management believes is sufficient to cover
F-28
<PAGE> 117
HOWARD GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
potential credit losses. The Companies have not incurred significant losses
related to these financial instruments to date.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in determining the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The significant estimates made by management in the
accompanying financial statements relate to reserves for future chargebacks on
finance, insurance and service contract income. Actual results could differ from
those estimates.
Interim Financial Information
As is normal and customary, the interim financial statements as of June 30,
1997, and for the six months ended June 30, 1996 and 1997, are unaudited, and
certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles has not been included
herein. In the opinion of management, all adjustments necessary to fairly
present the financial position, results of operations and cash flows with
respect to the interim financial statements, have been properly included. Due to
seasonality and other factors, the results of operations for the interim periods
are not necessarily indicative of the results that will be realized for the
entire fiscal year.
Statements of Cash Flows
For purposes of the statements of cash flows, cash and cash equivalents
include contracts in transit which are typically collected within one month.
Additionally, the net change in floor plan financing of inventory, which is a
customary financing technique in the industry, is reflected as an operating
activity in the statements of cash flows.
New Accounting Pronouncement
Effective January 1, 1996, the Companies adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS No. 121 requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset in question may not be recoverable. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value is necessary. Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Companies.
During June 1996 and June 1997 the Financial Accounting Standards Board
(FASB) issued statement of Financial Accounting Standards (SFAS) No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" and SFAS No. 130 "Reporting Comprehensive Income, respectively."
The major provisions of these statements and their impact on the Company are
discussed below.
SFAS No. 125 established criteria for recognition of a sale in conjunction
with the transfer of financial assets, under which sales may only be recognized
when the transferor has surrendered control of the assets. This statement is not
currently anticipated to have any impact on the Company as the Company does not
currently enter into transactions which fall under the scope of this statement.
SFAS No. 130 requires the presentation of comprehensive income in an
entity's financial statements. Comprehensive income represents all changes in
equity of an entity during the reporting period, including net income and
charges directly to equity which are excluded from net income. This statement is
not
F-29
<PAGE> 118
HOWARD GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
anticipated to have any impact on the Company as the Company currently does not
enter into any transactions which result in charges (or credits) directly to
equity (such as additional minimum pension liability changes, currency
translation adjustments, unrealized gains and losses on available for sale
securities, etc.).
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Amounts due from manufacturers............................ $4,051,091 $3,075,483
Parts and service receivables............................. 873,874 652,222
Warranty receivables...................................... 250,971 499,470
Due from finance companies................................ 781,383 1,002,153
Other..................................................... 404,471 777,329
---------- ----------
6,361,790 6,006,657
Less -- Allowance for doubtful accounts................... (60,098) (107,921)
---------- ----------
$6,301,692 $5,898,736
========== ==========
</TABLE>
Activity in the Companies' allowance for doubtful accounts consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1994 1995 1996
--------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year..................... $ 6,900 $ -- $ 60,098
Additions charged to expense................... 113,112 84,833 108,068
Deductions for uncollectible receivables
written off.................................. (120,012) (24,735) (60,245)
--------- -------- --------
$ -- $ 60,098 $107,921
========= ======== ========
</TABLE>
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1996
----------- -----------
<S> <C> <C>
New vehicles....................................... $30,680,418 $36,973,347
Used vehicles...................................... 7,440,761 8,612,757
Parts, accessories and other....................... 1,451,417 2,088,358
----------- -----------
$39,572,596 $47,674,462
=========== ===========
</TABLE>
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1996
----------- -----------
<S> <C> <C>
Accounts payable, trade............................ $ 6,416,124 $ 6,135,880
Reserve for finance, insurance and service contract
chargebacks...................................... 5,661,473 5,782,600
Other accrued expenses............................. 2,141,665 4,822,045
----------- -----------
$14,219,262 $16,740,525
=========== ===========
</TABLE>
F-30
<PAGE> 119
HOWARD GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ------------------------------
IN YEARS 1995 1996
------------ ----------- -----------
<S> <C> <C> <C>
Buildings.............................. 20 $ 28,675 $ 32,058
Leasehold improvements................. 7 861,361 1,086,129
Machinery and equipment................ 3 to 7 2,165,606 2,460,465
Furniture and fixtures................. 5 to 7 1,161,304 1,387,095
Company vehicles....................... 5 829,192 2,146,377
----------- -----------
Total........................ 5,046,138 7,112,124
Less -- Accumulated depreciation....... (2,235,172) (2,983,244)
----------- -----------
Property and equipment,
net........................ $ 2,810,966 $ 4,128,880
=========== ===========
</TABLE>
5. FLOOR PLAN NOTES PAYABLE:
Floor plan notes payable reflect amounts payable for the purchase of
specific vehicle inventory and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
New vehicles........................................... $33,056,624 $38,677,985
Used vehicles.......................................... 3,979,024 3,865,917
----------- -----------
Total floor plan notes payable............... $37,035,648 $42,543,902
=========== ===========
</TABLE>
Floorplan notes payable are due to one floor plan lender, bearing interest
at a rate of prime less 0.5%. As of December 31, 1995 and 1996, the weighted
average interest rate, on floorplan notes payable outstanding was 8.25% and
7.75%. Interest expense on floorplan notes payable, before manufacturer interest
assistance, totaled approximately $2,408,000, $3,410,000 and $3,112,000 for the
years ended December 31, 1994, 1995 and 1996, respectively. Manufacturer
interest assistance, which is recorded as a reduction to interest expense in the
accompanying financial statements, totaled approximately $1,350,000, $1,867,000
and $1,974,000 for the years ended December 31, 1994, 1995 and 1996,
respectively. The flooring arrangements permit the Companies to borrow up to
$58,380,000, dependent upon new and used vehicle sales and inventory levels. As
of December 31, 1996, total available borrowings under floor plan agreements
were approximately $15,836,000. Payments on the notes are due when the related
vehicles are sold and are collateralized by substantially all of the inventories
of the Companies.
6. STOCKHOLDERS' EQUITY:
Capital stock consists of the following:
<TABLE>
<CAPTION>
AUTHORIZED ISSUED OUTSTANDING PAR VALUE
---------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Common Stock --
Automall............................. 1,000,000 460,000 114,500 $ 1.00
BHC.................................. 2,000 1,000 1,000 25.00
BHH.................................. 5,000 500 500 1.00
BHT.................................. 25,000 5,000 5,000 1.00
BHD.................................. 50,000 1,000 1,000 1.00
</TABLE>
F-31
<PAGE> 120
HOWARD GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Treasury stock consists of 345,500 shares of the common stock of Automall
at a cost of approximately $809,000 at December 31, 1995 and 1996.
7. RELATED-PARTY TRANSACTIONS:
Operating Leases With Stockholder
The principal stockholder of the Companies leases the dealerships' premises
under operating leases. Additional information regarding the terms of these
leases is contained in Note 8, "Operating Leases."
The principal stockholder of the Companies has certain loans outstanding
which are secured by assets of the dealerships. See Note 10, "Commitments and
Contingencies," for a detail of loans secured by the assets of the dealerships.
Stockholder Loan Guarantees
The Companies have provided guarantees and/or pledged assets as security
for certain outstanding loan obligations of various related parties. See Note 10
"Commitments and Contingencies," for discussion of guarantee and security
arrangements provided on behalf of related parties.
Company Indebtedness Guaranteed by Stockholder
The principal stockholder of the Companies has provided a personal
guarantee relating to the repayment of floorplan obligations incurred by the
Companies. As of December 31, 1996 and June 30, 1997, floorplan obligations
guaranteed by the principal stockholder totaled approximately $42.5 million and
$37.8 million, respectively.
Advances to Group 1
The Companies have consummated a loan with Group 1 in order to finance the
expenses of Group 1 prior to the acquisition. The balance of this loan at
December 31, 1996 and June 30, 1997 was approximately $0 and $164,000,
respectively, bearing interest at a rate of 7.0% per annum.
8. OPERATING LEASES:
The Companies lease various facilities and equipment under operating lease
agreements, including leases with related parties. These leases are
noncancelable and expire on various dates through 2002. The lease agreements are
subject to renewal under essentially the same terms and conditions as the
original leases.
Future minimum lease payments for operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING RELATED THIRD
DECEMBER 31, PARTIES PARTIES TOTAL
- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
1997................................ $2,127,296 $ 742,740 $ 2,870,036
1998................................ 2,122,296 742,740 2,865,036
1999................................ 1,728,796 742,740 2,471,536
2000................................ 1,432,296 742,740 2,175,036
2001................................ 1,432,296 308,055 1,740,351
Thereafter.......................... 1,030,296 -- 1,030,296
---------- ---------- -----------
Total..................... $9,873,276 $3,279,015 $13,152,291
========== ========== ===========
</TABLE>
Total rent expense under all operating leases, including operating leases
with related parties, was approximately $2,074,000, $2,159,000 and $2,331,000
for the years ended December 31, 1994, 1995
F-32
<PAGE> 121
HOWARD GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
and 1996, respectively. Rental expense on related-party leases, which is
included in the above amounts, totaled approximately $1,847,000, $1,942,000 and
$1,960,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
9. INCOME TAXES:
The S Corporations will terminate S Corporation status concurrent with the
effective date of the Offering.
Federal and state income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
Federal --
Current...................................... $614,059 $476,615 $ 586,642
Deferred..................................... 33,010 160,631 (261,857)
State --
Current...................................... 114,584 76,914 110,741
Deferred..................................... 6,197 30,156 (53,774)
-------- -------- ---------
$767,850 $744,316 $ 381,752
======== ======== =========
</TABLE>
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1994 1995 1996
--------- ---------- -----------
<S> <C> <C> <C>
Provision at the statutory rate............ $ 993,187 $1,489,032 $ 1,900,172
Increase (decrease) resulting from --
Income of S Corporation.................. (391,102) (877,106) (1,584,686)
State income tax, net of benefit for
federal deduction..................... 79,715 70,666 37,598
Other.................................... 86,050 61,724 28,668
--------- ---------- -----------
$ 767,850 $ 744,316 $ 381,752
========= ========== ===========
</TABLE>
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax (assets) and liabilities result principally from the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
Inventory valuation.................................... $ 2,381,631 $ 2,637,029
Reserves and accruals not deductible until paid........ (1,645,669) (2,175,732)
Depreciation........................................... 40,411 58,604
Other.................................................. (44,966) (104,125)
----------- -----------
$ 731,407 $ 415,776
=========== ===========
</TABLE>
F-33
<PAGE> 122
HOWARD GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets and liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax assets --
Current.............................................. $(1,569,170) $(2,144,789)
Deferred tax liabilities --
Current.............................................. 2,260,168 2,501,961
Long-term............................................ 40,409 58,604
----------- -----------
Total........................................ 2,300,577 2,560,565
----------- -----------
Net deferred income tax liabilities.......... $ 731,407 $ 415,776
=========== ===========
</TABLE>
10. COMMITMENTS AND CONTINGENCIES:
Litigation
The Companies are defendants in several lawsuits arising from normal
business activities. Management has reviewed pending litigation with legal
counsel and believes that the ultimate liability, if any, resulting from such
actions will not have a material adverse effect on the Companies' financial
position or results of operations.
Insurance
The Companies carry a standard range of insurance coverage, including
general and business auto liability, commercial property, workers' compensation
and excess liability coverage. The Companies have not incurred significant
claims or losses on any of their insurance policies.
Stockholder Loans Guaranteed by the Companies
The principal stockholder of the Companies has various loans totaling
$8,128,000 and $7,766,120 outstanding with a financial institution as of
December 31, 1996 and June 30, 1997. The loans are guaranteed by Automall, BHC
and BHT and are secured by all of the real estate, buildings and improvements at
the dealerships. The notes mature on various dates through 2004 and bear
interest at prime less .5% (8.25% at December 31, 1996).
11. RETIREMENT PLAN:
Effective April 1, 1996, the Companies established a 401(k) salary
deferral/savings plan for the benefit of all employees. Employees electing to
participate in the plan may contribute up to 15% of annual compensation, limited
to the maximum amount that can be deducted for income tax purposes each year.
The Companies, at their discretion, have the option to match each
employee's contribution up to a maximum of 6% of annual compensation each plan
year. The Companies elected to make contributions totaling $178,000 for the year
ended December 31, 1996.
12. PROPOSED ACQUISITION BY GROUP 1:
The stockholders of the Companies intend to enter into definitive purchase
agreements with Group 1 providing for the purchase of the Companies by Group 1.
In conjunction with the acquisition of the Companies by Group 1, all existing
operating leases with related parties will be restructured under new lease
agreements and the principal stockholder of the Companies will either obtain
releases for the Companies from the stockholder loan guarantees discussed above
or will obtain alternative financing in order to obtain release from the
stockholder loan guarantees.
F-34
<PAGE> 123
HOWARD GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
13. PRO FORMA BALANCE SHEET -- JUNE 30, 1997 (UNAUDITED)
In conjunction with the proposed Acquisition by Group 1, the Howard Group
will make distributions from the S-Corporation accumulated adjustment accounts
to certain shareholders totaling $4,500,000. The pro forma balance sheet as of
June 30, 1997 gives effect to these distributions as of June 30, 1997.
14. SUBSEQUENT EVENTS (UNAUDITED)
During 1997, an affiliate of the Howard Group entered into an agreement to
acquire, subject to manufacturer approval, a Chevrolet dealership in Tulsa,
Oklahoma. The Howard Group has not received approval from the manufacturer, and
in June 1997, entered into a management contract with the owner of the Chevrolet
dealership. Group 1 expects to enter into an agreement to acquire the Chevrolet
dealership from the affiliate of the Howard Group for the assumption of the
dealership's liabilities.
F-35
<PAGE> 124
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO MCCALL GROUP:
We have audited the accompanying combined balance sheets of the companies
identified in Note 1 (the Companies) as of December 31, 1995 and 1996, and the
related combined statements of operations, stockholders' deficit and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Companies as of December
31, 1995 and 1996, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 9, 1997
F-36
<PAGE> 125
MCCALL GROUP
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents..................... $20,628,784 $14,093,483 $10,427,402
Accounts receivable, net...................... 3,535,825 4,407,835 2,689,166
Due from affiliates........................... 3,769,789 1,397,454 1,062,854
Inventories................................... 22,490,889 23,720,965 15,025,873
Notes receivable, net......................... 226,113 237,547 340,523
Prepaid expenses.............................. 123,976 294,044 151,675
Deferred income tax benefit................... 1,972,348 1,769,529 1,735,044
----------- ----------- -----------
Total current assets.................. 52,747,724 45,920,857 31,432,537
----------- ----------- -----------
PROPERTY AND EQUIPMENT, net..................... 2,492,651 3,147,017 3,924,236
LONG-TERM DEFERRED INCOME TAX BENEFIT........... -- 104,882 104,882
OTHER ASSETS.................................... 425,661 1,300,432 1,887,640
----------- ----------- -----------
Total assets.......................... $55,666,036 $50,473,188 $37,349,295
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Floor plan notes payable...................... $35,940,161 $32,219,713 $20,216,458
Current maturities of long-term debt.......... 28,553 146,303 78,736
Due to affiliates............................. 849,404 798,413 1,082,574
Accounts payable and accrued expenses......... 18,832,580 18,176,922 15,732,890
----------- ----------- -----------
Total current liabilities............. 55,650,698 51,341,351 37,110,658
----------- ----------- -----------
LONG-TERM DEBT, net of current maturities....... 180,655 410,805 576,330
LONG-TERM DEFERRED INCOME TAXES................. 112,250 -- --
OTHER LONG-TERM LIABILITIES..................... 150,000 427,000 412,124
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock.................................. 125,800 71,278 71,278
Additional paid-in capital.................... 2,930,419 3,222,043 3,222,043
Retained deficit.............................. (3,483,786) (4,999,289) (4,043,138)
----------- ----------- -----------
Total stockholders' deficit........... (427,567) (1,705,968) (749,817)
----------- ----------- -----------
Total liabilities and stockholders'
deficit............................. $55,666,036 $50,473,188 $37,349,295
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-37
<PAGE> 126
MCCALL GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ ---------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
New vehicle sales............ $105,402,077 $125,809,681 $166,381,686 $ 78,632,836 $ 81,608,967
Used vehicle sales........... 49,871,793 68,332,375 90,895,516 44,236,716 49,796,182
Parts and service sales...... 17,938,636 19,431,385 24,454,187 11,041,837 12,304,906
Other dealership revenues,
net....................... 4,107,658 5,314,141 6,810,908 3,304,178 3,242,694
------------ ------------ ------------ ------------ ------------
Total revenues....... 177,320,164 218,887,582 288,542,297 137,215,567 146,952,749
COST OF SALES:
New vehicle cost of sales.... 96,897,653 115,503,816 152,190,268 71,693,688 74,597,041
Used vehicle cost of sales... 46,511,037 64,157,498 84,806,452 41,238,717 47,659,535
Parts and service cost of
sales..................... 9,164,705 9,069,093 12,563,340 5,344,403 5,019,076
------------ ------------ ------------ ------------ ------------
Total cost of
sales.............. 152,573,395 188,730,407 249,560,060 118,276,808 127,275,652
------------ ------------ ------------ ------------ ------------
Gross profit......... 24,746,769 30,157,175 38,982,237 18,938,759 19,677,097
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES...... 22,476,554 27,751,831 35,072,460 16,958,684 17,545,957
------------ ------------ ------------ ------------ ------------
Income from
operations......... 2,270,215 2,405,344 3,909,777 1,980,075 2,131,140
OTHER INCOME AND EXPENSE:
Interest expense, net........ (2,462,618) (3,215,245) (2,747,719) (1,526,344) (503,525)
Other expense, net........... (6,511) (43,735) (45,094) (27,635) (34,029)
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME
TAXES........................ (198,914) (853,636) 1,116,964 426,096 1,593,586
PROVISION FOR INCOME TAXES..... 232,173 282,887 177,772 71,584 637,435
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS).............. $ (431,087) $ (1,136,523) $ 939,192 $ 354,512 $ 956,151
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-38
<PAGE> 127
MCCALL GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN SUBSCRIPTIONS RETAINED
STOCK CAPITAL RECEIVABLE DEFICIT TOTAL
-------- ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993................ $ 94,600 $1,961,619 $ -- $(1,916,176) $ 140,043
Net loss................................ -- -- -- (431,087) (431,087)
Issuance of common stock................ 31,200 968,800 (850,000) -- 150,000
Payments on subscriptions receivable.... -- -- 11,317 -- 11,317
-------- ---------- --------- ----------- -----------
BALANCE, December 31, 1994................ 125,800 2,930,419 (838,683) (2,347,263) (129,727)
Net loss................................ -- -- -- (1,136,523) (1,136,523)
Payments on subscriptions receivable.... -- -- 270,272 -- 270,272
Settlement of subscriptions
receivable........................... -- -- 568,411 -- 568,411
-------- ---------- --------- ----------- -----------
BALANCE, December 31, 1995................ 125,800 2,930,419 -- (3,483,786) (427,567)
Net income.............................. -- -- -- 939,192 939,192
Dividend to parent under tax sharing
agreement............................ -- -- -- (323,590) (323,590)
Purchase and retirement of treasury
stock................................ (57,898) -- -- (2,131,105) (2,189,003)
Stock issued to employees............... 3,376 291,624 -- -- 295,000
-------- ---------- --------- ----------- -----------
BALANCE, December 31, 1996................ 71,278 3,222,043 -- (4,999,289) (1,705,968)
Net income (unaudited).................. -- -- -- 956,151 956,151
-------- ---------- --------- ----------- -----------
BALANCE, June 30, 1997 (unaudited)........ $ 71,278 $3,222,043 $ -- $(4,043,138) $ (749,817)
======== ========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-39
<PAGE> 128
MCCALL GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------- ----------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................... $ (431,087) $(1,136,523) $ 939,192 $ 354,512 $ 956,151
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities --
Depreciation and amortization..................... 387,093 439,402 598,278 281,292 248,615
Deferred income taxes............................. (154,493) (514,187) (14,313) (2,197) 34,485
Provision for loan losses and doubtful accounts... 226,530 208,972 357,860 165,313 139,035
Loss (gain) on sale of assets..................... 129,930 (23,259) 32,632 15,343 --
Non-cash compensation............................. -- -- 295,000 -- --
Tax carryforward benefited........................ -- -- (323,590) (93,762) --
Changes in assets and liabilities --
Accounts receivable............................. (2,770,395) 2,651,367 (1,059,288) (135,702) 1,523,669
Inventories..................................... (2,172,325) (3,085,245) (1,230,076) 576,694 8,695,092
Due from affiliates, net........................ 1,515,356 (1,565,588) 132,341 (786,325) 618,761
Prepaid expenses................................ 274,449 (25,720) (170,068) 13,899 142,369
Other assets.................................... 30,262 (9,546) (874,771) (163,081) (487,208)
Floor plan notes payable........................ (1,113,893) (2,058,861) (3,720,448) (9,909,815) (12,003,255)
Accounts payable and accrued expenses........... 2,579,781 7,695,141 (655,658) (493,298) (2,444,459)
Other long term liabilities..................... -- -- 277,000 277,000 (14,876)
----------- ----------- ----------- ------------ ------------
Total adjustments............................. (1,067,705) 3,712,476 (6,355,101) (10,254,639) (3,547,772)
----------- ----------- ----------- ------------ ------------
Net cash provided by (used in) operating
activities.................................. (1,498,792) 2,575,953 (5,415,909) (9,900,127) (2,591,621)
----------- ----------- ----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable........................ (1,390,560) (909,260) (1,151,783) (837,412) (1,071,200)
Collections on notes receivable..................... 1,578,453 1,271,071 969,767 242,442 968,224
Purchases of property and equipment................. (346,920) (613,890) (1,285,276) (744,300) (1,069,442)
----------- ----------- ----------- ------------ ------------
Net cash used in investing activities......... (159,027) (252,079) (1,467,292) (1,339,270) (1,172,418)
----------- ----------- ----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt................ (503,368) (54,555) (164,694) (50,093) (29,111)
Borrowings of long-term debt........................ -- 110,168 512,594 512,594 127,069
Payments on subscriptions receivable................ 11,317 270,272 -- -- --
Issuance of common stock............................ 150,000 -- -- -- --
----------- ----------- ----------- ------------ ------------
Net cash provided by (used in) financing
activities.................................. (342,051) 325,885 347,900 462,501 97,958
----------- ----------- ----------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................... (1,999,870) 2,649,759 (6,535,301) (10,776,896) (3,666,081)
CASH AND CASH EQUIVALENTS, beginning of period........ 19,978,895 17,979,025 20,628,784 20,628,784 14,093,483
----------- ----------- ----------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of period.............. $17,979,025 $20,628,784 $14,093,483 $ 9,851,888 10,427,402
=========== =========== =========== ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest.......................................... $ 2,523,650 $ 3,253,486 $ 2,808,993 $ 1,560,561 $ 1,490,835
Taxes............................................. -- 227,090 818,962 286,388 168,200
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Receivables from stockholder forgiven in conjunction
with purchase of treasury stock................... -- -- 2,189,003 -- --
Settlement of subscriptions receivable from
stockholder in lieu of bonus...................... -- 568,411 -- -- --
Note received upon issuance of common stock......... 850,000 -- -- -- --
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-40
<PAGE> 129
MCCALL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(All discussions and disclosures with a reference date subsequent to May 9, 1997
are unaudited.)
1. BUSINESS AND ORGANIZATION:
McCall Group (the Companies) is primarily engaged in the retail sale of new
and used automobiles and the sale of the related finance, insurance and service
contracts thereon. In addition, the Companies sell automotive parts, provide
vehicle servicing and sell wholesale used vehicles.
The following companies are included within the combined group:
Southwest Toyota, Inc. (d.b.a. Sterling McCall Toyota) (SMT) -- SMT is a
Toyota dealership located in Houston, Texas.
SMC Luxury Cars, Inc. (d.b.a. Sterling McCall Lexus) (SML) -- SML is a
Lexus dealership located in Houston, Texas.
The Companies and their stockholders intend to enter into a definitive
agreement with Group 1 Automotive, Inc. (Group 1), pursuant to which all
outstanding shares of the Companies' common stock will be exchanged for cash and
shares of Group 1's common stock concurrent with the consummation of the initial
public offering of the common stock of Group 1.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying combined financial statements include the accounts of SMT
and SML. The Companies have been presented on a combined basis due to their
related operations, common ownership and common management control. All
significant intercompany balances and transactions have been eliminated in
combination. SMC Investments, Inc. (SMC) owns 100% of the issued and outstanding
stock of SML and approximately 51% of the stock of SMT. SMC is a separate
holding company which does not operate in the automobile retailing industry and
has not been included in the accompanying combined financial statements as it
will not be acquired by Group 1.
Major Suppliers and Franchise Agreements
The Companies purchase substantially all of their new vehicles from Toyota
Motor Corp. at the prevailing prices charged by the manufacturers to all
franchised dealers. The Companies' sales volume could be adversely impacted by
the manufacturers' inability to supply the dealership with an adequate supply of
popular models or as a result of an unfavorable allocation of vehicles by the
manufacturer.
The dealer franchise agreements contain provisions which may limit changes
in dealership management and ownership, place certain restrictions on the
dealerships (such as minimum net worth requirements) and which also provide for
termination of the franchise agreement by the manufacturers in certain
instances. Under certain state law, these restrictive provisions have been
repeatedly found invalid both by state courts and administrative agencies. See
"Risk Factors -- Manufacturers' Control Over Dealerships" and
"Business -- Franchise Agreements" for further discussion.
Revenue Recognition
Revenue from vehicle sales, parts sales and vehicle service is recognized
upon delivery to the customer.
Fleet Sales
SMT periodically supplies vehicles to various rental car companies as an
accommodation to the manufacturer and to better utilize dealership capacity.
These transactions generate nominal gross profit,
F-41
<PAGE> 130
MCCALL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
and in management's opinion, do not represent sales in the normal course of
business. Accordingly, sales of approximately $8.5 million, $7.7 million and
$10.8 million and cost of sales of approximately $8.1 million, $7.5 million and
$10.7 million have been excluded from the accompanying statements of operations
for the years ended December 31, 1994, 1995 and 1996 as management believes
excluding such amounts represents a more appropriate basis of presentation. The
net profit on these wholesale fleet transactions is recorded as other dealership
revenues in the accompanying statements of operations.
Finance, Insurance and Service Contract Income Recognition
The Companies arrange financing for customers through various institutions
and receive financing fees equal to the difference between the loan rates
charged to customers over the predetermined financing rates set by the financing
institution. In addition, the Companies receive commissions from the sale of
credit life and disability insurance and extended service contracts to
customers.
The Companies may be charged back (chargebacks) for unearned financing
fees, insurance or service contract commissions in the event of early
termination of the contracts by customers. The revenues from financing fees and
commissions are recorded at the time of the sale of the vehicles. The reserves
for future chargebacks are based on historical operating results and the
termination provisions of the applicable contracts. Finance, insurance and
service contract income, net of estimated chargebacks, are included in other
dealership revenue in the accompanying combined financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments that have an
original maturity of three months or less at the date of purchase and contracts
in transit. Contracts in transit represent contracts on vehicles sold, for which
the proceeds are in transit from financing institutions.
Inventories
New and demonstrator vehicles are stated at cost, determined on the
last-in, first-out (LIFO) basis, which is not in excess of market.
Used vehicles are stated at lower of cost or market, determined on a
specific unit basis.
Parts and accessories are stated at the lower of cost (determined on a
first-in, first-out basis) or market.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated life of the asset.
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to operations
as incurred. Disposals are removed at cost less accumulated depreciation, and
any resulting gain or loss is reflected in current operations.
Income Taxes
The Companies follow the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income
F-42
<PAGE> 131
MCCALL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
taxes are recorded based upon differences between the financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the underlying assets are realized or
liabilities are settled. SML is a member of a consolidated group for tax
reporting purposes. In accordance with SFAS No. 109, SML reports current and
deferred tax expense using the separate return method, resulting in tax expense
being recorded as if SML filed a separate company return for tax purposes. Under
this method, SML does not recognize benefits for net operating losses (NOL's) as
such amounts will not be refunded to SML by the consolidated group. These NOL
carryforwards are offset against the provision for taxes in subsequent
profitable years and treated as dividends to the parent when benefited. SMT is a
separate tax paying entity and is not a member of a consolidated group.
Environmental Liabilities and Expenditures
Accruals for environmental matters, if any, are recorded as operating
expenses when it is probable that a liability has been incurred and the amount
of the liability can be reasonably estimated. Accrued liabilities are exclusive
of claims against third parties and are not discounted.
In general, costs related to environmental remediation are charged to
expense. Environmental costs are capitalized if the costs increase the value of
the property and/or mitigate or prevent contamination from future operations.
Interest Expense
Automobile manufacturers periodically provide floorplan interest
assistance, or subsidies, which reduce the Companies' cost of financing. The
accompanying financial statements reflect interest expense net of floor plan
assistance.
Fair Value of Financial Instruments
The Companies' financial instruments consist primarily of floor plan notes
payable, notes receivable and long-term debt. The carrying amount of these
financial instruments approximates fair value due either to length of maturity
or existence of variable interest rates that approximate market rates.
Advertising
The Company expenses production and other costs of advertising as incurred.
Advertising expense for the years ended December 31, 1994, 1995 and 1996 totaled
$1,961,488, $2,800,699 and $4,034,050, respectively.
Concentration of Credit Risk
Financial instruments which potentially subject the Companies to a
concentration of credit risk consist principally of cash, cash equivalents,
contracts in transit and accounts receivable. The Company maintains cash
balances at financial institutions which may at times be in excess of federally
insured levels. The Companies grant credit to local companies in various
businesses. The Companies perform ongoing credit evaluations of their customers
and generally do not require collateral. The Companies maintain an allowance for
doubtful accounts at a level which management believes is sufficient to cover
potential credit losses. The Companies have not incurred significant losses
related to these financial instruments to date.
F-43
<PAGE> 132
MCCALL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in determining the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The significant estimates made by management in the
accompanying financial statements relate to reserves for future chargebacks on
finance, insurance and service contract income and reserves for retail loan loss
guarantees (Notes 2 and 11, respectively). Actual results could differ from
those estimates.
Interim Financial Information
As is normal and customary, the interim financial statements as of June 30,
1997, and for the six months ended June 30, 1996 and 1997, are unaudited, and
certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles has not been included
herein. In the opinion of management, all adjustments necessary to fairly
present the financial position, results of operations and cash flows with
respect to the interim financial statements, have been properly included. Due to
seasonality and other factors, the results of operations for the interim periods
are not necessarily indicative of the results that will be realized for the
entire fiscal year.
Statements of Cash Flows
For purposes of the statements of cash flows, cash and cash equivalents
include contracts in transit which are typically collected within one month or
less. Additionally, the net change in floor plan financing of inventory, which
is a customary financing technique in the industry, is reflected as an operating
activity in the statements of cash flows.
New Accounting Pronouncement
Effective January 1, 1996, the Companies adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS No. 121 requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset in question may not be recoverable. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value is necessary. Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Companies.
During June 1996 and June 1997 the Financial Accounting Standards Board
(FASB) issued statement of Financial Accounting Standards (SFAS) No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" and SFAS No. 130 "Reporting Comprehensive Income." The major
provisions of these statements and their impact on the Company are discussed
below.
SFAS No. 125 established criteria for recognition of a sale in conjunction
with the transfer of financial assets, under which sales may only be recognized
when the transferor has surrendered control of the assets. This statement is not
currently anticipated to have any impact on the Company as the Company does not
currently enter into transactions which fall under the scope of this statement.
SFAS No. 130 requires the presentation of comprehensive income in an
entity's financial statements. Comprehensive income represents all changes in
equity of an entity during the reporting period, including net income and
charges directly to equity which are excluded from net income. This statement is
not anticipated to have any impact on the Company as the Company currently does
not enter into any
F-44
<PAGE> 133
MCCALL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
transactions which result in charges (or credits) directly to equity (such as
additional minimum pension liability changes, currency translation adjustments,
unrealized gains and losses on available for sale securities, etc.).
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Amounts due from manufacturers............................ $1,067,573 $1,192,275
Parts and service receivables............................. 541,635 870,209
Warranty receivables...................................... 270,386 259,826
Due from finance companies................................ 984,521 1,204,624
Other..................................................... 831,682 1,180,201
---------- ----------
3,695,797 4,707,135
Less -- Allowance for doubtful accounts................... (159,972) (299,300)
---------- ----------
$3,535,825 $4,407,835
========== ==========
</TABLE>
Activity in the Companies' allowance for doubtful accounts consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
Balance, beginning of year.................... $ 33,427 $ 35,530 $159,972
Additions charged to expense.................. 35,530 159,972 187,278
Deductions for uncollectible receivables
written off................................. (33,427) (35,530) (47,950)
-------- -------- --------
$ 35,530 $159,972 $299,300
======== ======== ========
</TABLE>
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
New vehicles........................................... $14,776,185 $13,918,424
Used vehicles.......................................... 8,258,953 11,050,657
Parts, accessories and other........................... 1,502,030 1,566,156
Rental vehicles........................................ 2,452,290 1,674,747
Accumulated LIFO Reserve............................... (4,498,569) (4,489,019)
----------- -----------
$22,490,889 $23,720,965
=========== ===========
</TABLE>
If the specific unit method of inventory were used, net income would have
increased (decreased) by approximately $111,000, $305,000 and $(9,000) for the
years ended December 31, 1994, 1995 and 1996, respectively.
Activity in the Companies' allowance for uncollectible notes consists of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
Balance, beginning of year...................... $ -- $191,000 $ 240,000
Additions charged to expense.................... 191,000 49,000 170,580
Deductions for uncollectible receivables
written-off................................... -- -- (196,580)
-------- -------- ---------
$191,000 $240,000 $ 214,000
======== ======== =========
</TABLE>
F-45
<PAGE> 134
MCCALL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
Accounts payable, trade................................ $ 7,738,625 $ 7,452,034
Reserve for finance, insurance and service contract
chargebacks.......................................... 3,023,815 3,011,354
Reserve for retail loan guarantees..................... 1,471,000 1,965,000
Other accrued expenses................................. 6,599,140 5,748,534
----------- -----------
$18,832,580 $18,176,922
=========== ===========
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------------
IN YEARS 1995 1996
------------ ----------- -----------
<S> <C> <C> <C>
Leasehold improvements.................... 20 $ 2,054,158 $ 2,470,037
Machinery and equipment................... 7 878,388 1,136,461
Furniture and fixtures.................... 7 2,090,443 2,622,636
Autos and trucks.......................... 5 348,875 380,626
----------- -----------
Total........................... 5,371,864 6,609,760
Less -- Accumulated depreciation.......... (2,879,213) (3,462,743)
----------- -----------
Property and equipment, net..... $ 2,492,651 $ 3,147,017
=========== ===========
</TABLE>
5. FLOOR PLAN NOTES PAYABLE:
Floor plan notes payable reflect amounts payable for the purchase of
specific vehicle inventory and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
New vehicles........................................... $30,045,548 $24,398,255
Used vehicles.......................................... 3,475,307 6,212,001
Rental vehicles........................................ 2,419,306 1,609,457
----------- -----------
Total floor plan notes payable............... $35,940,161 $32,219,713
=========== ===========
</TABLE>
Floorplan notes payable are due to various floor plan lenders, bearing
interest at rates ranging from prime plus .5% to prime plus 1.5%. As of December
31, 1995 and 1996, the weighted average interest rate on floorplan notes payable
outstanding was 9.41 and 8.99 percent. Interest expense on floorplan notes
payable, before manufacturer interest assistance, totaled approximately
$2,369,000, $3,096,000 and $2,498,000 for the years ended December 31, 1994,
1995 and 1996. Manufacturer interest assistance, which is recorded as a
reduction to interest expense in the accompanying financial statements, totaled
approximately $82,000, $91,000 and $136,000 for the years ended December 31,
1994, 1995 and 1996. The flooring arrangements permit the Companies to borrow up
to $38,300,000 dependent upon new and used vehicle sales and inventory levels.
As of December 31, 1996, total available borrowings under the floorplan
agreements were approximately $6,080,000. Payments on the notes are due when the
related vehicles are sold and are collateralized by substantially all new and
used vehicles.
F-46
<PAGE> 135
MCCALL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
-------- ---------
<S> <C> <C>
Note payable to floorplan institution, principal payable in
monthly installments of $5,000 through August 2001,
interest payable monthly at lender's available financing
rate plus 1.5% (9.3% at December 31, 1996)................ $ -- $ 275,000
Other notes payable, maturing in varying amounts through
April 2001, with interest ranging from 5.5% to 9.6% at
December 31, 1996......................................... 209,208 282,108
-------- ---------
209,208 557,108
Less -- Current portion..................................... (28,553) (146,303)
-------- ---------
$180,655 $ 410,805
======== =========
</TABLE>
The aggregate maturities of long-term debt as of December 31, 1996, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C> <C>
1997............................................................. $146,303
1998............................................................. 141,666
1999............................................................. 124,378
2000............................................................. 103,906
2001............................................................. 40,855
--------
$557,108
========
</TABLE>
7. STOCKHOLDERS' EQUITY:
Capital stock consists of the following as of December 31, 1996:
<TABLE>
<CAPTION>
AUTHORIZED ISSUED OUTSTANDING PAR VALUE
---------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Sterling McCall Toyota.................. 500,000 70,278 70,278 $1.00
Sterling McCall Lexus................... 1,000,000 100,000 100,000 .01
</TABLE>
Treasury Stock Transactions
During 1996, SMT and its principal stockholder entered into a series of
treasury stock transactions in which SMT repurchased 57,898 shares of common
stock from its principal stockholder. In conjunction with these transactions,
SMT forgave approximately $2,189,000 of related party receivables due from
various entities owned by the principal stockholder. As part of these
transactions, SMT has agreed to repurchase in certain instances, up to 4,502
additional shares of stock from its principal stockholder in exchange for a note
payable in the amount of $2 million. This repurchase provision will be cancelled
concurrently with an initial public offering of stock by the Companies. The
shares repurchased by SMT have been constructively retired for financial
reporting purposes.
Restricted Stock Awards
During December 1996, the Companies granted 3,376 shares of stock to two
employees as compensation for prior services. The shares were issued as of the
grant date and the Companies
F-47
<PAGE> 136
MCCALL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
recorded compensation expense of $295,000 related to these shares based on the
estimated fair market value of the shares as of the grant date. The shares
issued are subject to various restrictions relating to transferability and
resale, and contain a right of first refusal for repurchase by the Companies.
8. RELATED-PARTY TRANSACTIONS:
Operating Leases
SMT and SML lease land, facilities and equipment from limited partnerships
and other entities controlled by the majority stockholder of the Companies under
operating leases. Additional information regarding the terms of these leases is
contained in Note 9 "Operating Leases".
Stockholder Loan Guarantees
The Companies have provided guarantees and/or pledged assets as security
for certain outstanding loan obligations of various related parties. See Note 11
"Commitments and Contingencies," for discussion of guarantee and security
arrangements provided on behalf of related parties.
Company Indebtedness Guaranteed by Stockholder
The principal stockholder of the Companies has provided personal guarantees
relating to the repayment of long term debt and floorplan obligations incurred
by the Companies. As of December 31, 1996 and June 30, 1997, floorplan
obligations guaranteed by the principal stockholder totaled approximately $32.2
and $20.2 million, respectively, and long term debt obligations totaled
approximately $.3 and $.2 million, respectively. In addition to the above
guarantees, the principal stockholder has also provided a personal guarantee
related to loan guarantees on second chance finance customers (see Note 11). As
of December 31, 1996 and June 30, 1997, customer notes outstanding which were
guaranteed by the Companies and the stockholder totaled approximately $10.4
million and $10.2 million, respectively.
Commissions and Management Fees
The Companies sell credit life and disability insurance policies and
extended service contracts which are underwritten by three companies owned by
the principal stockholders of the Companies, as well as similar products
provided by third parties. The Companies also sell various aftermarket products
from certain companies owned by the principal stockholders of the Companies. The
principal stockholders currently have agreements in place with these entities
which decrease the fees and commissions paid to the dealerships for the sale of
credit life and disability insurance policies and extended service contracts,
and increase the cost of aftermarket products. The amounts withheld under these
agreements are paid directly to the principal stockholders. Approximately
$675,700, $1,131,500 and $1,591,000 was withheld and paid to the stockholders
under the agreements described above, during the years ended December 31, 1994,
1995 and 1996, respectively.
The Companies pay management fees plus certain allocated and out of pocket
expenses to an entity owned by the principal stockholder of the Companies for
consultation and direct management assistance with respect to operations and
strategic planning. Management fee expense totaled approximately $1,076,400,
$1,255,800 and $1,443,000 for the years ended December 31, 1994, 1995 and 1996,
respectively.
Financing Arrangements
The dealerships arrange financing for certain second chance finance
customers through an entity owned by the principal stockholder of the Companies.
The dealerships pay a financing fee of 2% on these
F-48
<PAGE> 137
MCCALL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
finance contracts, and such contracts are non-recourse to the dealerships. Total
financing fees paid to this entity for the years ended December 31, 1994, 1995
and 1996 were approximately $--, $95,000 and $360,000. In addition to providing
financing for second chance finance customers, this entity also provides loan
servicing, collection and repossession services to the Companies related to
defaulted loans which have been repurchased by the Companies under a financing
arrangement with a third party lender. (See Note 11).
The Companies have entered into a floorplan agreement with a financing
company owned by the principal stockholder which allows for a maximum of
$1,000,000 in borrowing capacity. As of December 31, 1995 and 1996,
approximately $709,200 and $619,100, respectively, of floorplan notes payable
under this agreement are included in due to affiliates in the accompanying
financial statements and disclosed in the detail of related party balances
presented herewithin. Borrowings under the floorplan agreement bear interest at
11.75%.
Advances to Group 1
The Companies have consummated a loan with Group 1 in order to finance the
expenses of Group 1 prior to the acquisition. The balance of this loan at
December 31, 1996 and June 30, 1997 was approximately $48,000 and $403,000,
respectively, bearing interest at a rate of 7.0% per annum.
Other
The Companies have various balances payable to the principal stockholder
and related entities owned by the principal stockholder which have resulted from
short term working capital advances to the Companies by the principal
stockholder, as well as for amounts incurred under the financing agreement
discussed previously. Additionally, the Companies have various balances
receivable from the principal stockholder and related entities owned by the
principal stockholder which have resulted from short term advances by the
Companies. The table below sets forth the significant components of the amounts
due to/from related parties in the accompanying combined balance sheets:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
------------ ------------
<S> <C> <C>
Due from affiliated finance entity......................... $ 509,889 $ 778,460
Receivable from principal stockholder, other............... 3,259,900 618,994
---------- ----------
Total due from affiliates.................................. $3,769,789 $1,397,454
========== ==========
Due to affiliated floor plan company....................... $ 709,218 $ 619,138
Due to principal stockholder, other........................ 140,186 179,275
---------- ----------
Total due to affiliates.................................... $ 849,404 $ 798,413
========== ==========
</TABLE>
At June 30, 1997 the aggregate of these balances resulted in a net payable
to the principal stockholder of approximately $19,700. Subsequent to June 30,
1997, SMT executed two additional notes payable to entities owned by the
principal stockholder. These notes payable total $495,000, bear interest at
9 1/4%, and are due January 15, 1998.
9. OPERATING LEASES:
The Companies lease various facilities and equipment under operating lease
agreements, including leases with related parties. These leases are
noncancelable and expire on various dates through 2006. The lease agreements are
subject to renewal under essentially the same terms and conditions as the
original leases.
F-49
<PAGE> 138
MCCALL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments for operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING RELATED THIRD
DECEMBER 31, PARTIES PARTIES TOTAL
- ---------------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
1997......................... $1,842,000 $ 411,556 $ 2,253,556
1998......................... 1,842,000 354,084 2,196,084
1999......................... 1,842,000 234,590 2,076,590
2000......................... 1,842,000 161,908 2,003,908
2001......................... 1,282,000 73,982 1,355,982
Thereafter................... 648,000 -- 648,000
---------- ---------- -----------
$9,298,000 $1,236,120 $10,534,120
========== ========== ===========
</TABLE>
Total rent expense under all operating leases, including operating leases
with related parties, was approximately $1,636,000, $1,906,000 and $2,030,000
for the years ended December 31, 1994, 1995 and 1996, respectively. Rental
expense on related-party leases, which is included in the above amounts, totaled
$1,487,000, $1,543,000 and $1,627,000 for the years ended December 31, 1994,
1995 and 1996, respectively.
10. INCOME TAXES:
The Companies are subject to a Texas franchise tax which is an income based
tax. Federal and state income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1994 1995 1996
--------- --------- --------
<S> <C> <C> <C>
Federal --
Current....................................... $ 341,971 $ 695,074 $168,053
Deferred...................................... (133,085) (466,528) (12,618)
State --
Current....................................... 44,695 102,000 24,032
Deferred...................................... (21,408) (47,659) (1,695)
--------- --------- --------
$ 232,173 $ 282,887 $177,772
========= ========= ========
</TABLE>
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1995 1996
-------- --------- --------
<S> <C> <C> <C>
Provision (benefit) at the statutory rate........ $(67,631) $(290,236) $379,768
Increase (decrease) resulting from --
State income tax, net of benefit for federal
deduction................................... 15,369 35,865 14,742
SML NOL (benefited) not benefited.............. 184,144 584,795 (323,590)
Other.......................................... 100,291 (47,537) 106,852
-------- --------- --------
$232,173 $ 282,887 $177,772
======== ========= ========
</TABLE>
F-50
<PAGE> 139
MCCALL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Reserves and accruals not deductible until paid........... $1,760,860 $1,779,755
Other..................................................... 99,238 94,656
---------- ----------
$1,860,098 $1,874,411
========== ==========
</TABLE>
The net deferred tax assets and liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Deferred tax assets --
Current................................................. $1,972,348 $1,773,229
Long-term............................................... 7,200 182,711
---------- ----------
Total........................................... 1,979,548 1,955,940
---------- ----------
Deferred tax liabilities --
Current................................................. -- (6,836)
Long-term............................................... (119,450) (74,693)
---------- ----------
Total........................................... (119,450) (81,529)
---------- ----------
Net deferred income tax assets.................. $1,860,098 $1,874,411
========== ==========
</TABLE>
As discussed in Note 2, SML is a member of a consolidated group for tax
reporting purposes and reports income taxes under the separate return method.
During 1994 and 1995, SML did not record tax benefits of approximately $184,000
and $585,000 related to net operating losses as such amounts would not be
reimbursed by the consolidated group. During 1996, approximately $323,600 of
these benefits were offset against the provision for taxes and accounted for as
a dividend in the accompanying statement of stockholders' equity.
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Companies are defendants in several lawsuits arising from normal
business activities. Management has reviewed pending litigation with legal
counsel and believes that the ultimate liability, if any, resulting from such
action will not have a material adverse effect on the Companies' financial
position or results of operations.
Insurance
The Companies carry a standard range of insurance coverage, including
general and business auto liability, commercial property, workers' compensation
and excess liability coverage. The Companies have not incurred significant
claims or losses on any of their insurance policies.
Loan Guarantees Provided on Second Chance Financing
The Companies provide second-chance financing for certain customers through
a third party lender. Under the terms of this financing contract, customers
execute installment contracts which are guaranteed with full recourse by the
Companies. The Companies surrender all rights to the future economic benefits
related to the receivables; however, in the event that the customer defaults on
the note, the
F-51
<PAGE> 140
MCCALL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
lender requires repayment of the principal amount of the note plus earned
interest through the date of default, with repossession of the vehicle to be
performed by the applicable dealership. The Companies do not have the ability to
repurchase these receivables from the lender, and may only be required to
repurchase the receivables from the Lender in the event of default by the
customer. During the years ended December 31, 1994, 1995 and 1996, the Companies
sold approximately $3,518,000, $4,492,000 and $7,471,000, respectively, in full
recourse loans to the lender.
Total customer notes outstanding guaranteed by the dealership at December
31, 1995 and 1996 and June 30, 1997 were approximately $7,413,000, $10,434,000
and $10,190,000, respectively. The principal stockholder of the Companies has
also provided a personal guarantee to the lender related to repayment of these
customer notes. The Companies have provided reserves for future loan losses
based on historical loss trends and total guarantees outstanding.
Activity in the Companies' reserve account consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of year............................ $1,436,000 $1,360,000 $1,471,000
Additions charged to expense.......................... 124,000 343,000 1,033,000
Deductions for loans written off...................... (200,000) (232,000) (539,000)
---------- ---------- ----------
$1,360,000 $1,471,000 $1,965,000
========== ========== ==========
</TABLE>
Stockholder Loan Guarantees
The principal stockholder of the Companies has a $6,857,000 line-of-credit
outstanding with a financial institution as of December 31, 1996, which is
guaranteed by SMT and SML and is secured by all of the real estate, buildings
and improvements at the dealerships. The line of credit expires in January 2000;
however, the agreement contains a provision for two additional five-year renewal
periods. The line of credit bears interest at the lender's available financing
rate plus one and one quarter percent (9.03% at December 31, 1996). As of
December 31, 1996 and June 30, 1997, there was approximately $4.7 million and
$4.6, respectively, outstanding on the line-of-credit.
The principal stockholder of the Companies has a $1.5 million revolving
line of credit outstanding with a financial institution as of December 31, 1996,
which is guaranteed by SMT and SML. The line of credit is payable in monthly
installments of $10,000 plus interest and bears interest at prime plus three
percent (11.25% at December 31, 1996). As of December 31, 1996 and June 30,
1997, there was approximately $1,400,000 and $960,000, respectively, outstanding
on the line of credit.
The principal stockholder of the Companies has a $2 million note payable to
a financial institution at December 31, 1996, which is guaranteed by SML. The
note matured on May 13, 1997, and accrued interest at the financial
institution's base rate of interest (9.25% at December 31, 1996). The note was
extended until July 12, 1997 at maturity and was repaid in July, (see below). As
of December 31, 1996 and June 30, 1997, there was approximately $1,900,000 and
$2,000,000, respectively, outstanding on the note.
The principal stockholder of the Companies also has a $480,000 note payable
to a financial institution at December 31, 1996, which is guaranteed by SML. The
note is payable in monthly installments of $6,277, including interest, through
December 2005 and bears interest at prime plus one percent (9.25% at December
31, 1996). As of December 31, 1996 and June 30, 1997, there was approximately
$447,000 and $433,000, respectively, outstanding on the note.
Subsequent to year end, an affiliate of the principal stockholder of the
Companies entered into a $3.4 million loan with a financial institution which is
guaranteed by SML and secured by all of the real
F-52
<PAGE> 141
MCCALL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
estate, buildings and improvements at the dealership. The loan matures in July
2002 (and contains three five-year renewal options) and bears interest at a
variable rate of LIBOR plus 2.5%. At June 30, 1997 there were no amounts
outstanding on the loan. The note was funded during July and a portion of the
proceeds were utilized to repay the $2 million note discussed above.
12. PROPOSED ACQUISITION BY GROUP 1:
The stockholders of the Companies intend to enter into definitive purchase
agreements with Group 1 providing for the acquisition of the Companies by Group
1. In conjunction with the acquisition of the Companies by Group 1, all existing
operating leases with related parties will be restructured under new lease
agreements and the principal stockholder of the Companies will obtain releases
for the Companies from the stockholder loan guarantees discussed above.
F-53
<PAGE> 142
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Smith Group:
We have audited the accompanying combined balance sheets of the companies
identified in Note 1 (the Companies) as of December 31, 1995 and 1996, and the
related combined statements of operations, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Companies as of December
31, 1995 and 1996, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 9, 1997
F-54
<PAGE> 143
SMITH GROUP
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents..................... $ 7,736,878 $ 9,069,829 $ 9,405,257
Accounts receivable, net...................... 4,485,359 4,467,590 4,876,051
Due from affiliates........................... 46,007 14,580 --
Inventories................................... 27,946,621 30,637,433 33,099,771
Prepaid expenses.............................. 200,585 185,218 641,495
Deferred income tax benefit................... 246,543 182,081 182,081
----------- ----------- -----------
Total current assets.................. 40,661,993 44,556,731 48,204,655
PROPERTY AND EQUIPMENT, net..................... 9,667,539 9,819,994 9,935,715
GOODWILL, net................................... 2,387,514 2,322,307 2,281,636
OTHER ASSETS.................................... 209,951 689,453 550,452
----------- ----------- -----------
Total assets.......................... $52,926,997 $57,388,485 $60,972,458
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Floor plan notes payable...................... $27,424,232 $30,676,725 $33,522,252
Current maturities of long-term debt.......... 775,844 949,565 1,034,180
Accounts payable and accrued expenses......... 8,163,483 8,509,815 9,272,030
----------- ----------- -----------
Total current liabilities............. 36,363,559 40,136,105 43,828,462
----------- ----------- -----------
LONG-TERM DEBT, net of current maturities....... 5,607,581 5,006,474 4,493,037
LONG-TERM DEFERRED INCOME TAXES................. 246,234 217,611 197,611
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock.................................. 2,090 3,090 3,090
Additional paid-in capital.................... 5,890,228 6,369,228 6,369,228
Retained earnings............................. 5,212,602 6,051,274 6,476,327
Treasury stock, at cost....................... (395,297) (395,297) (395,297)
----------- ----------- -----------
Total stockholders' equity............ 10,709,623 12,028,295 12,453,348
----------- ----------- -----------
Total liabilities and stockholders'
equity.............................. $52,926,997 $57,388,485 $60,972,458
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-55
<PAGE> 144
SMITH GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ ---------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
New vehicle sales............ $136,916,929 $132,149,669 $124,173,950 $ 59,437,192 $ 75,203,290
Used vehicle sales........... 49,548,703 57,363,332 60,579,545 32,072,688 35,153,070
Parts and service sales...... 25,501,449 26,237,774 28,630,577 14,045,021 14,081,839
Other dealership revenues,
net....................... 5,109,438 5,506,759 4,895,329 2,618,280 3,020,378
------------ ------------ ------------ ------------ ------------
Total revenues....... 217,076,519 221,257,534 218,279,401 108,173,181 127,458,577
COST OF SALES:
New vehicle cost of sales.... 129,474,515 124,266,917 116,236,702 55,903,767 69,291,957
Used vehicle cost of sales... 45,972,361 53,162,956 56,247,629 29,697,853 32,521,318
Parts and service cost of
sales..................... 14,473,261 15,234,938 16,684,932 8,228,910 8,100,711
------------ ------------ ------------ ------------ ------------
Total cost of
sales.............. 189,920,137 192,664,811 189,169,263 93,830,530 109,913,986
------------ ------------ ------------ ------------ ------------
Gross profit......... 27,156,382 28,592,723 29,110,138 14,342,651 17,544,591
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES...... 21,726,879 22,823,685 23,710,904 11,575,049 13,845,857
------------ ------------ ------------ ------------ ------------
Income from
operations......... 5,429,503 5,769,038 5,399,234 2,767,602 3,698,734
OTHER INCOME AND EXPENSE:
Interest expense, net........ (2,146,562) (2,955,787) (1,710,157) (825,120) (940,371)
Other income (expense), net.. (28,869) 202,134 222,470 18,359 (19,035)
------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME
TAXES........................ 3,254,072 3,015,385 3,911,547 1,960,841 2,739,328
PROVISION FOR INCOME
TAXES........................ 455,385 562,415 677,751 322,136 531,563
------------ ------------ ------------ ------------ ------------
NET INCOME..................... $ 2,798,687 $ 2,452,970 $ 3,233,796 $ 1,638,705 $ 2,207,765
============ ============ ============ ============ ============
S-Corporation pro forma income
taxes (unaudited)............ 797,433 598,508 828,195 432,788 523,078
------------ ------------ ------------ ------------ ------------
Pro forma net income
(unaudited).................. $ 2,001,254 $ 1,854,462 $ 2,405,601 $ 1,205,917 $ 1,684,687
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-56
<PAGE> 145
SMITH GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
------ ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993....... $2,090 $5,890,228 $ 3,306,098 $(395,297) $ 8,803,119
Net income..................... -- -- 2,798,687 -- 2,798,687
Dividends...................... -- -- (1,787,914) -- (1,787,914)
------ ---------- ----------- --------- -----------
BALANCE, December 31, 1994....... 2,090 5,890,228 4,316,871 (395,297) 9,813,892
Net income..................... -- -- 2,452,970 -- 2,452,970
Dividends...................... -- -- (1,557,239) -- (1,557,239)
------ ---------- ----------- --------- -----------
BALANCE, December 31, 1995....... 2,090 5,890,228 5,212,602 (395,297) 10,709,623
Net income..................... -- -- 3,233,796 -- 3,233,796
Issuance of common stock....... 1,000 479,000 -- -- 480,000
Dividends...................... -- -- (2,395,124) -- (2,395,124)
------ ---------- ----------- --------- -----------
BALANCE, December 31, 1996....... 3,090 6,369,228 6,051,274 (395,297) 12,028,295
Net income (unaudited)......... -- -- 2,207,765 -- 2,207,765
Dividends (unaudited).......... -- -- (1,782,712) -- (1,782,712)
------ ---------- ----------- --------- -----------
BALANCE, March 31, 1997
(unaudited).................... $3,090 $6,369,228 $ 6,476,327 $(395,297) $12,453,348
====== ========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-57
<PAGE> 146
SMITH GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
UNAUDITED
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................... $2,798,687 $2,452,970 $3,233,796 $1,638,705 $2,207,565
---------- ---------- ---------- ---------- ----------
Adjustments to reconcile net income
to net cash provided by operating
activities --
Depreciation and amortization..... 586,847 669,312 719,991 358,701 306,904
LIFO reserve...................... 510,715 78,061 35,489 -- (68,681)
Deferred income taxes............. (1,258) 29,389 35,839 17,561 (20,000)
Provision for doubtful accounts... 64,357 61,460 49,729 26,207 37,197
Loss (gain) on sale of assets..... 51,662 (74,258) 65,088 32,245 --
Changes in assets and
liabilities --
Accounts receivable............. (1,051,312) (1,207,158) (31,960) 519,041 (445,658)
Inventories..................... (1,860,114) (4,323) (2,726,301) (2,180,430) (2,393,657)
Due from affiliates, net........ 92,489 (136,650) 31,427 36,307 14,580
Prepaid expenses................ (63,039) 264,974 (182,521) (182,521) (456,277)
Other assets.................... 159,412 (12,073) (493,584) 50,610 158,866
Floor plan notes payable........ 1,395,865 2,175,223 3,252,493 769,874 2,845,527
Accounts payable and accrued
expenses..................... (1,513,901) 678,372 346,332 1,268,456 (77,442)
---------- ---------- ---------- ---------- ----------
Total adjustments............ (1,628,277) 2,522,329 1,299,910 716,051 (98,641)
---------- ---------- ---------- ---------- ----------
Net cash provided by
operating activities....... 1,170,410 4,975,299 4,533,706 2,354,756 2,108,924
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment......................... (217,724) (699,792) (858,245) (298,018) (360,011)
---------- ---------- ---------- ---------- ----------
Net cash used in investing
activities................. (217,724) (699,792) (858,245) (298,018) (360,011)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term
debt.............................. (945,957) (899,623) (961,108) (483,792) (428,822)
Borrowings of long-term debt........ 1,828,333 375,071 533,722 -- --
Issuance of common stock............ -- -- 480,000 -- --
Dividends........................... (1,787,914) (1,557,239) (2,395,124) (897,701) (984,663)
---------- ---------- ---------- ---------- ----------
Net cash used in financing
activities................. (905,538) (2,081,791) (2,342,510) (1,381,493) (1,413,485)
---------- ---------- ---------- ---------- ----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS......................... 47,148 2,193,716 1,332,951 675,245 335,428
CASH AND CASH EQUIVALENTS,
beginning of period................. 5,496,014 5,543,162 7,736,878 7,736,878 9,069,829
---------- ---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS,
end of period....................... $5,543,162 $7,736,878 $9,069,829 $8,412,123 $9,405,257
========== ========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for --
Interest.......................... $2,562,555 $3,743,310 $2,818,402 $1,396,303 $1,844,514
Taxes............................. 390,641 522,565 543,401 258,451 445,289
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-58
<PAGE> 147
SMITH GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(All discussions and disclosures with a reference date subsequent to May 9, 1997
are unaudited.)
1. BUSINESS AND ORGANIZATION:
Smith Group (the Companies) is primarily engaged in the retail sale of new
and used automobiles and the sale of the related finance, insurance and service
contracts thereon. In addition, the Companies sell automotive parts, provide
vehicle servicing and sell wholesale used vehicles.
The following companies are included within the combined group:
Mike Smith Autoplaza, Inc. (MSAP)
MSAP consists of several franchises which conduct business at contiguous
locations in Beaumont, Texas. The franchises operated in this location
include Oldsmobile, Lincoln, Mercury, GMC, Mitsubishi, Kia and Honda.
Smith, Liu & Kutz, Inc. (Town North)
Town North consists of three companies operating several franchises
which conduct business at contiguous locations in Austin, Texas. The
franchises operated in this location include Nissan, Mitsubishi and
Suzuki.
Courtesy Nissan, Inc. (Courtesy)
Courtesy is a Nissan dealership located in Richardson, Texas.
Smith, Liu & Corbin, Inc. (d.b.a. Acura Southwest) (Acura)
Acura is an Acura dealership located in Houston, Texas.
Round Rock Nissan, Inc. (Round Rock)
Round Rock is a Nissan dealership located in Round Rock, Texas.
The Companies and their stockholders intend to enter into a definitive
agreement with Group 1 Automotive, Inc. (Group 1), pursuant to which all
outstanding shares of the Companies' common stock will be exchanged for cash and
shares of Group 1's common stock concurrent with the consummation of the initial
public offering of the common stock of Group 1.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying combined financial statements include the accounts of the
Companies listed above. The Companies have been presented on a combined basis
due to their related operations, common ownership and common management control.
All significant intercompany balances and transactions have been eliminated in
combination.
Major Suppliers and Franchise Agreements
The Companies purchase substantially all of their new vehicles from Nissan
Motor Co., Ltd., Honda Motor Co., Ltd., General Motors Corporation, Mitsubishi
Motors Corp., Suzuki Motor Co., Ltd., Ford Motor Company and Kia Motor Co., Ltd.
at the prevailing prices charged by the manufacturers to all franchised dealers.
The Companies' sales volume could be adversely impacted by the manufacturers'
inability to supply the dealership with an adequate supply of popular models or
as a result of an unfavorable allocation of vehicles by the manufacturer.
F-59
<PAGE> 148
SMITH GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The dealer franchise agreements contain provisions which may limit changes
in dealership management and ownership, place certain restrictions on the
dealerships (such as minimum net worth requirements) and which also provide for
the termination of the franchise agreement by the manufacturers in certain
instances. Under certain state law, these restrictive provisions have been
repeatedly found invalid both by state courts and administrative agencies. See
"Risk Factors -- Manufacturers' Control Over Dealerships" and
"Business -- Franchise Agreements" for further discussion.
Revenue Recognition
Revenue from vehicle sales, parts sales and vehicle service is recognized
upon delivery to the customer.
Finance, Insurance and Service Contract Income Recognition
The Companies arrange financing for customers through various institutions
and receive financing fees equal to the difference between the loan rates
charged to customers over the predetermined financing rates set by the financing
institution. In addition, the Companies receive commissions from the sale of
credit life and disability insurance and extended service contracts to
customers.
The Companies may be charged back (chargebacks) for unearned financing
fees, insurance or service contract commissions in the event of early
termination of the contracts by customers. The revenues from financing fees and
commissions are recorded at the time of the sale of the vehicles. The reserves
for future chargebacks are based on historical operating results and the
termination provisions of the applicable contracts. Finance, insurance and
service contract income, net of estimated chargebacks, are included in other
dealership revenue in the accompanying combined financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments that have an
original maturity of three months or less at the date of purchase and contracts
in transit. Contracts in transit represent contracts on vehicles sold, for which
the proceeds are in transit from financing institutions.
Inventories
New and demonstrator vehicles are stated at cost, determined on the
last-in, first-out (LIFO) basis, which is not in excess of market.
Used vehicles are stated at the lower of cost or market, determined on a
specific-unit basis.
Parts and accessories are stated at the lower of cost (determined on a
first-in, first-out basis) or market.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated life of the asset.
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to operations
as incurred. Disposals are removed at cost less accumulated depreciation, and
any resulting gain or loss is reflected in current operations.
F-60
<PAGE> 149
SMITH GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill
Goodwill represents the excess of the purchase price of dealerships
acquired (Town North Nissan, Courtesy Nissan and Mike Smith Auto Plaza) over the
fair value of assets acquired at the date of acquisition. Goodwill is being
amortized on a straight-line basis over 40 years and amortization expense
charged to operations totaled approximately $67,000 for each of the three years
in the period ended December 31, 1996. Accumulated amortization totaled
approximately $889,000 and $956,000 as of December 31, 1995 and 1996,
respectively.
Income Taxes
The Companies follow the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets are realized or liabilities are settled.
Certain of the Companies have elected S Corporation status, as defined by
the Internal Revenue Code, whereby the companies are not subject to taxation for
federal purposes. Under S Corporation status, the stockholders report their
share of these companies' taxable earnings or losses in their personal tax
returns.
Environmental Liabilities and Expenditures
Accruals for environmental matters, if any, are recorded as operating
expenses when it is probable that a liability has been incurred and the amount
of the liability can be reasonably estimated. Accrued liabilities are exclusive
of claims against third parties and are not discounted.
In general, costs related to environmental remediation are charged to
expense. Environmental costs are capitalized if the costs increase the value of
the property and/or mitigate or prevent contamination from future operations.
Interest Expense
Automobile manufacturers periodically provide floorplan interest
assistance, or subsidies, which reduce the Companies' cost of financing. The
accompanying financial statements reflect interest expense net of floor plan
assistance.
Fair Value of Financial Instruments
The Companies' financial instruments consist primarily of floor plan notes
payable and long-term debt. The carrying amount of these financial instruments
approximates fair value due either to length of maturity or existence of
variable interest rates that approximate market rates.
Advertising
The Company expenses production and other costs of advertising as incurred.
Advertising expense for the years ended December 31, 1994, 1995 and 1996 totaled
$2,241,055, $2,097,002 and $1,879,591, respectively.
Concentration of Credit Risk
Financial instruments which potentially subject the Companies to a
concentration of credit risk consist principally of cash, cash equivalents,
contracts in transit and accounts receivable. The Company
F-61
<PAGE> 150
SMITH GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
maintains cash balances at financial institutions which may at times be in
excess of federally insured levels. The Companies grant credit to local
companies in various businesses. The Companies perform ongoing credit
evaluations of its customers and generally do not require collateral. The
Companies maintain an allowance for doubtful accounts at a level which
management believes is sufficient to cover potential credit losses. The
Companies have not incurred significant losses related to these financial
instruments to date.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in determining the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The significant estimates made by management in the
accompanying financial statements relate to reserves for future chargebacks on
finance, insurance and service contract income. Actual results could differ from
those estimates.
Interim Financial Information
As is normal and customary, the interim financial statements as of June 30,
1997, and for the six months ended June 30, 1996 and 1997, are unaudited, and
certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles has not been included
herein. In the opinion of management, all adjustments necessary to fairly
present the financial position, results of operations and cash flows with
respect to the interim financial statements, have been properly included. Due to
seasonality and other factors, the results of operations for the interim periods
are not necessarily indicative of the results that will be realized for the
entire fiscal year.
Statements of Cash Flows
For purposes of the statements of cash flows, cash and cash equivalents
include contracts in transit which are typically collected within one month or
less. Additionally, the net change in floor plan financing of inventory, which
is a customary financing technique in the industry, is reflected as an operating
activity in the statements of cash flows.
New Accounting Pronouncement
Effective January 1, 1996, the Companies adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS No. 121 requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset in question may not be recoverable. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value is necessary. Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Companies.
During June 1996 and June 1997 the Financial Accounting Standards Board
(FASB) issued statement of Financial Accounting Standards (SFAS) No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" and SFAS No. 130 "Reporting Comprehensive Income." The major
provisions of these statements and their impact on the Company are discussed
below.
SFAS No. 125 established criteria for recognition of a sale in conjunction
with the transfer of financial assets, under which sales may only be recognized
when the transferor has surrendered control of the
F-62
<PAGE> 151
SMITH GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
assets. This statement is not currently anticipated to have any impact on the
Company as the Company does not currently enter into transactions which fall
under the scope of this statement.
SFAS No. 130 requires the presentation of comprehensive income in an
entity's financial statements. Comprehensive income represents all changes in
equity of an entity during the reporting period, including net income and
charges directly to equity which are excluded from net income. This statement is
not anticipated to have any impact on the Company as the Company currently does
not enter into any transactions which result in charges (or credits) directly to
equity (such as additional minimum pension liability changes, currency
translation adjustments, unrealized gains and losses on available for sale
securities, etc.).
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
------------ ------------
<S> <C> <C>
Vehicle receivables...................................... $1,080,501 $1,082,909
Amounts due from manufacturers........................... 1,224,067 1,670,776
Parts and service receivables............................ 593,526 949,874
Warranty receivables..................................... 313,040 314,391
Due from finance companies............................... 572,090 392,192
Other.................................................... 833,635 138,948
---------- ----------
4,616,859 4,549,090
Less -- Allowance for doubtful accounts.................. (131,500) (81,500)
---------- ----------
$4,485,359 $4,467,590
========== ==========
</TABLE>
Activity in the Companies' allowance for doubtful accounts consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year........................ $123,800 $123,800 $131,500
Additions charged to expense...................... 64,357 61,460 49,729
Deductions for uncollectible receivables written
off............................................. (64,357) (53,760) (99,729)
-------- -------- --------
$123,800 $131,500 $ 81,500
======== ======== ========
</TABLE>
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
------------ ------------
<S> <C> <C>
New vehicles........................................... $22,490,819 $24,302,689
Used vehicles.......................................... 5,931,163 6,936,348
Parts, accessories and other........................... 3,193,566 3,102,812
Accumulated LIFO reserve............................... (3,668,927) (3,704,416)
----------- -----------
$27,946,621 $30,637,433
=========== ===========
</TABLE>
If the specific-unit method of inventory were used, net income would have
increased by approximately $511,000, $78,000 and $35,000, for the years ended
December 31, 1994, 1995 and 1996, respectively.
F-63
<PAGE> 152
SMITH GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
------------ ------------
<S> <C> <C>
Accounts payable, trade.................................. $3,342,165 $3,696,293
Reserve for finance, insurance and service contract
chargebacks............................................ 1,633,822 1,374,780
Other accrued expenses................................... 3,187,496 3,438,742
---------- ----------
$8,163,483 $8,509,815
========== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ----------------------------
IN YEARS 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Land...................................... -- $ 4,711,997 $ 4,789,177
Buildings................................. 35 4,797,574 4,858,250
Leasehold improvements.................... 15 1,274,911 1,367,199
Machinery and equipment................... 7 1,517,522 1,720,940
Furniture and fixtures.................... 7 2,300,038 2,535,075
Autos and trucks.......................... 5 213,198 321,316
Rental vehicles........................... -- 95,294 124,023
----------- -----------
Total........................... 14,910,534 15,715,980
Less -- Accumulated depreciation.......... (5,242,995) (5,895,986)
----------- -----------
Property and equipment, net............. $ 9,667,539 $ 9,819,994
=========== ===========
</TABLE>
5. FLOOR PLAN NOTES PAYABLE:
Floorplan notes payable reflect amounts payable for the purchase of
specific vehicle inventory and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
------------ ------------
<S> <C> <C>
New vehicles........................................... $25,708,702 $27,712,804
Used vehicles.......................................... 1,715,530 2,963,921
----------- -----------
Total floor plan notes payable............... $27,424,232 $30,676,725
=========== ===========
</TABLE>
Floorplan notes payable are due to various floor plan lenders, bearing
interest at rates ranging from prime (adjusted for volume with lender (8.0% at
December 31, 1996)) to prime plus 1.75%. As of December 31, 1995 and 1996, the
weighted average interest rate on floorplan notes payable outstanding was 8.84%
and 8.66%, respectively. Interest expense on floorplan notes payable, before
manufacturer interest assistance, totaled approximately $2,248,351, $3,188,220
and $2,523,296 for the years ended December 31, 1994, 1995 and 1996.
Manufacturer interest assistance, which is recorded as a reduction to interest
expense in the accompanying financial statements, totaled approximately
$731,948, $837,201 and $1,111,068 for the years ended December 31, 1994, 1995
and 1996. The flooring arrangements permit the Companies to borrow up to
$37,212,000 dependent upon new and used vehicle sales and inventory levels. As
of December 31, 1996, total available borrowings under floor plan agreements
were approximately $6,535,000. Payments on the notes are due when the related
vehicles are sold and are collateralized by substantially all new and used
vehicles.
F-64
<PAGE> 153
SMITH GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Note payable to Texas Commerce Bank (TCB), with monthly
principal payments of $41,892, due through March 2004,
bearing interest at 7.5%, payable monthly................ $4,143,918 $3,641,136
Mortgage loan with TCB, with monthly principal payments of
$15,000, due through May 2005, bearing interest at prime
plus .25% (8.50% at December 31, 1996), payable
monthly.................................................. 1,675,000 1,494,291
Note payable to Nissan Motor Acceptance Corporation (NMAC),
with monthly principal payments of $7,500, due through
January 2002, bearing interest at prime plus 1.75% (10.0%
at December 31, 1996), payable monthly................... -- 450,000
Other notes payable, maturing in varying amounts through
November 2000 with interest ranging from prime plus .25%
to prime plus 1.5%....................................... 564,507 370,612
---------- ----------
6,383,425 5,956,039
Less -- Current portion.................................... (775,844) (949,565)
---------- ----------
$5,607,581 $5,006,474
========== ==========
</TABLE>
The Note payable to TCB due March 2004 is secured by a security interest in
the outstanding and issued capital stock of Town North and Courtesy, and is also
secured by a first priority lien on the land and buildings of Town North. The
note payable to TCB due May 2005 is secured by substantially all property,
improvements and equipment of Acura. The note payable to NMAC is secured by
substantially all of the assets of Round Rock, including vehicle inventory,
machinery and equipment. Certain stockholders of the companies have also
provided personal guarantees on the notes payable to TCB and NMAC.
The aggregate maturities of long-term debt as of December 31, 1996, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C> <C>
1997........................................................... $ 949,565
1998........................................................... 839,644
1999........................................................... 846,513
2000........................................................... 807,428
2001........................................................... 771,704
Thereafter..................................................... 1,741,185
----------
$5,956,039
==========
</TABLE>
F-65
<PAGE> 154
SMITH GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. STOCKHOLDERS' EQUITY:
Capital stock consists of the following:
<TABLE>
<CAPTION>
AUTHORIZED ISSUED OUTSTANDING PAR VALUE
---------- ------ ----------- ---------
<S> <C> <C> <C> <C>
Common stock --
MSAP........................................ 10,000 1,000 800 $1.00
Town North Nissan........................... 1,000 1,000 1,000 .01
Town North Suzuki........................... 1,000 1,000 1,000 .01
Town North Mitsubishi....................... 1,000 1,000 1,000 1.00
Courtesy.................................... 1,000 1,000 1,000 .05
Acura....................................... 2,000 2,000 2,000 .01
Round Rock.................................. 1,000 1,000 1,000 1.00
</TABLE>
Treasury stock consists of 200 shares of the common stock of MSAP at a cost
of approximately $395,000 at December 31, 1995 and 1996.
8. RELATED-PARTY TRANSACTIONS:
Operating Leases with Stockholders
MSAP and Round Rock lease land and facilities from entities owned by
various stockholders of the Companies. Additional information regarding the
terms of these leases is contained in Note 9 "Operating Leases".
Stockholder Loan Guarantees
The Companies have provided guarantees and/or pledged assets as security
far certain outstanding loan obligations of various related parties. See Note 11
"Commitments and Contingencies," for discussion of guarantee and security
arrangements provided on behalf of related parties.
Company Indebtedness Guaranteed by Stockholders
Stockholders of Acura, Town North and Round Rock have provided personal
guarantees related to the repayment of long-term debt obligations incurred by
those entities (see Note 6). As of December 31, 1996 and June 30, 1997, Company
debt guaranteed by stockholders totaled approximately $5.6 million and $5.2
million, respectively.
Insurance Commissions and Management Fees
The Companies sell credit life and disability insurance policies which are
underwritten by an entity owned by certain stockholders of the Companies. The
Companies paid commissions of approximately $88,300, $205,000 and $260,800 on
such policies sold during the years ended December 31, 1994, 1995 and 1996,
respectively.
The Companies pay management fees to an entity owned by certain
stockholders of the Companies for consultation and direct management assistance
with respect to operations and strategic planning. Management fee expense
totaled approximately $74,300, $87,700 and $75,700 for the years ended December
31, 1994, 1995 and 1996, respectively.
Other
Certain stockholders of the Companies, employees and family members have
invested funds through the dealerships in cash management accounts with the
dealerships' floorplan institutions. These
F-66
<PAGE> 155
SMITH GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
funds are not available for withdrawal by the Companies, and accordingly are
excluded from the accompanying financial statements. The amount of such funds
totalled approximately $4,163,900 and $5,516,200 as of December 31, 1995 and
1996.
Advances to Group 1
The Companies have consummated a loan with Group 1 in order to finance the
expenses of Group 1 prior to the acquisition. The balance of this loan at
December 31, 1996 and June 30, 1997 was approximately $48,000 and $403,000,
respectively, bearing interest at a rate of 7.0% per annum.
9. OPERATING LEASES:
The Companies lease various facilities and equipment under operating lease
agreements, including leases with related parties. These leases are
noncancelable and expire on various dates through August 2013. The lease
agreements are subject to renewal under essentially the same terms and
conditions as the original leases.
Future minimum lease payments for operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING RELATED THIRD
DECEMBER 31 -- PARTIES PARTIES TOTAL
- -------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1997.................................... $ 918,000 $ 500,681 $ 1,418,681
1998.................................... 918,000 479,876 1,397,876
1999.................................... 918,000 472,655 1,390,655
2000.................................... 499,500 453,149 952,649
2001.................................... 360,000 433,387 793,387
Thereafter.............................. 4,440,000 4,896,000 9,336,000
---------- ---------- -----------
Total......................... $8,053,500 $7,235,748 $15,289,248
========== ========== ===========
</TABLE>
Total rent expense under all operating leases, including operating leases
with related parties, was approximately $1,059,000, $1,088,000 and $1,157,000
for the years ended December 31, 1994, 1995 and 1996, respectively. Rental
expense on related-party leases, which is included in the above amounts, totaled
approximately $558,000, $558,000 and $591,000 for the years ended December 31,
1994, 1995 and 1996, respectively.
10. INCOME TAXES:
The S Corporations will terminate S Corporation status concurrent with the
effective date of the offering. The Companies are subject to a Texas franchise
tax which is an income based tax.
Federal and state income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Federal --
Current....................................... $298,135 $382,865 $460,166
Deferred...................................... 6,547 36,310 29,304
State --
Current....................................... 158,508 150,161 181,746
Deferred...................................... (7,805) (6,921) 6,535
-------- -------- --------
$455,385 $562,415 $677,751
======== ======== ========
</TABLE>
F-67
<PAGE> 156
SMITH GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Provision at the statutory rate............ $1,106,384 $1,025,231 $1,329,926
Increase (decrease) resulting from --
Income of S Corporation.................. (799,855) (619,972) (888,533)
State income tax, net of benefit for
federal deduction..................... 136,750 123,800 165,900
Other.................................... 12,106 33,356 70,458
---------- ---------- ----------
$ 455,385 $ 562,415 $ 677,751
========== ========== ==========
</TABLE>
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
--------- ---------
<S> <C> <C>
Reserves and accruals not deductible until paid............ $ 257,693 $ 191,862
Depreciation............................................... (246,234) (217,611)
Other...................................................... (11,150) (9,781)
--------- ---------
$ 309 $ (35,530)
========= =========
</TABLE>
The net deferred tax assets and liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
-------- --------
<S> <C> <C>
Deferred tax assets --
Current................................................... $257,693 $191,862
Long-term................................................. -- --
-------- --------
Total............................................. 257,693 191,862
-------- --------
Deferred tax liabilities --
Current................................................... 11,150 9,781
Long-term................................................. 246,234 217,611
-------- --------
Total............................................. 257,384 227,392
-------- --------
Net deferred income tax assets (liabilities)...... $ 309 $(35,530)
======== ========
</TABLE>
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Companies are defendants in several lawsuits arising from normal
business activities. Management has reviewed pending litigation with legal
counsel and believes that the ultimate liability, if any, resulting from such
actions will not have a material adverse effect on the Companies' financial
position or results of operations.
F-68
<PAGE> 157
SMITH GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Insurance
The Companies carry a standard range of insurance coverage, including
general and business auto liability, commercial property, workers' compensation
and excess liability coverage. The Companies have not incurred significant
claims or losses on any of their insurance policies.
Loan Guarantees
As discussed in Note 8, MSAP and Round Rock lease land and facilities from
entities owned by certain stockholders of the Companies. Both MSAP and Round
Rock serve as guarantor on mortgage loans covering the leased facilities. MSAP
guarantees two loans which bear interest at prime and a fixed rate of 7.5% and
mature in June 2003 and March 2004, respectively. As of December 31, 1996 and
June 30, 1997, amounts outstanding or these loans totaled $2,384,272 and
$2,256,064, respectively. The loan guaranteed by Round Rock bears interest at
prime plus 1% and matures in November 2009. As of December 31, 1996 and June 30,
1997, amounts outstanding on this note totaled $2,386,258 and $2,413,136,
respectively.
12. PROPOSED ACQUISITION BY GROUP 1:
The stockholders of the Companies intend to enter into definitive purchase
agreements with Group 1 providing for the acquisition of the Companies by Group
1. In conjunction with the acquisition of the Companies by Group 1, all existing
operating leases with related parties will be restructured under new lease
agreements and the principal stockholder of the Companies will obtain releases
for the Companies from the stockholder loan guarantees discussed above.
F-69
<PAGE> 158
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 13
The Acquisitions...................... 23
Use of Proceeds....................... 28
Dividend Policy....................... 28
Dilution.............................. 29
Capitalization........................ 30
Selected Financial Data............... 31
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 34
Business.............................. 52
Management............................ 68
Certain Transactions.................. 74
Principal and Selling Stockholders.... 78
Description of Capital Stock.......... 79
Shares Eligible for Future Sale....... 83
Underwriting.......................... 85
Validity of Common Stock.............. 86
Experts............................... 86
Available Information................. 87
Index to Financial Statements......... F-1
</TABLE>
THROUGH AND INCLUDING , 1997 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
4,800,000 SHARES
GROUP 1 AUTOMOTIVE, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
---------------------------------
PROSPECTUS
---------------------------------
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
NATIONSBANC MONTGOMERY
SECURITIES, INC.
REPRESENTATIVES OF THE UNDERWRITERS
======================================================
<PAGE> 159
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses of the Offering are estimated to be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 20,073
NASD filing fee............................................. 7,524
New York Stock Exchange listing fee......................... 120,000
Legal fees and expenses..................................... 1,100,000
Accounting fees and expenses................................ 2,850,000
Printing expenses........................................... 600,000
Transfer Agent fees......................................... 2,500
Miscellaneous............................................... 299,003
----------
Total............................................. $5,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Sixth, Part II, Section I of the Company's Charter, a copy of which
is filed as Exhibit 3.1, provides that directors, officers, employees and agents
shall be indemnified to the fullest extent permitted by Section 145 of the DGCL.
Section 145 of the DGCL authorizes, inter alia, a corporation to indemnify
any person ("indemnitee") who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation), by reason of the fact that such person
is or was an officer or director of such corporation, or is or was serving at
the request of such corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided that he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. A
Delaware corporation may indemnify past or present officers and directors of
such corporation or of another corporation or other enterprise at the former
corporation's request, in an action by or in the right of the corporation to
procure a judgment in its favor under the same conditions, except that no
indemnification is permitted without judicial approval if such person is
adjudged to be liable to the corporation. Where an officer or director is
successful on the merits or otherwise in defense of any action referred to
above, or in defense of any claim, issue or matter therein, the corporation must
indemnify him against the expenses (including attorney's fees) which he actually
and reasonably incurred in connection therewith. Section 145 further provides
that any indemnification shall be made by the corporation only as authorized in
each specific case upon a determination by the (i) stockholders, (ii) Board of
Directors by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding or (iii) independent counsel if a
quorum of disinterested directors so directs. Section 145 provides that
indemnification pursuant to its provision is not exclusive of other rights of
indemnification to which a person may be entitled under any bylaw, agreement,
vote of stockholders or disinterested directors or otherwise.
Section 145 of the DGCL also empowers the Company to purchase and maintain
insurance on behalf of any person who is or was an officer or director of the
Company against liability asserted against or incurred by him in any such
capacity, whether or not the Company would have the power to indemnify
II-1
<PAGE> 160
such officer or director against such liability under the provisions of Section
145. The Company intends to purchase and maintain a directors' and officers'
liability policy for such purposes.
The form of Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement contains certain provisions for indemnification of
directors and officers of the Company and the Underwriters against civil
liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On December 21, 1995, the Company sold 1,000 shares of Common Stock to
Smith & Liu Management Company, a Texas partnership, of which Charles M. Smith
is a partner, for $500. The Company relied on an exemption under Section 4(2) of
the Securities Act in effecting this transaction.
On July 5, 1996, the Company sold 500 shares of Common Stock to B.B.
Hollingsworth, Jr. for $5,000. The Company relied on an exemption under Section
4(2) of the Securities Act in effecting this transaction.
On June 14, 1997, the Company entered into a Stock Purchase Agreement with
each of the Founding Companies and all of their respective stockholders. Under
each Stock Purchase Agreement, all of the capital stock of each Founding Company
will be acquired by the Company and each stockholder of the Founding Companies
will receive cash and/or shares of Common Stock. An aggregate of 9,079,084
shares of Common Stock will be issued in the Acquisitions. Each Acquisition will
be consummated immediately prior to the Closing of the Offering. The Company is
relying on an exemptions under Rule 506 and 4(2) under the Securities Act in
effecting this transaction.
ITEM 16. EXHIBITS
(a) Exhibits:
<TABLE>
<S> <C>
1.1 -- Form of Underwriting Agreement
*2.1 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Howard Pontiac-GMC, Inc. and the stockholders of Howard
Pontiac-GMC, Inc. dated June 14, 1997.
*2.2 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Bob Howard Motors, Inc. and the stockholders of Bob
Howard Motors, Inc. dated June 14, 1997.
*2.3 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Bob Howard Chevrolet, Inc. and the stockholders of Bob
Howard Chevrolet, Inc. dated June 14, 1997.
*2.4 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Bob Howard Automotive-H, Inc. and the stockholders of Bob
Howard Automotive-H, Inc. dated June 14, 1997.
*2.5 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Bob Howard Dodge, Inc. and the stockholders of Bob Howard
Dodge, Inc. dated June 14, 1997.
*2.6 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Southwest Toyota, Inc. and the stockholders of Southwest
Toyota, Inc. dated June 14, 1997.
*2.7 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
SMC Luxury Cars, Inc. and the stockholders of SMC Luxury
Cars, Inc. dated June 14, 1997.
*2.8 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Smith, Liu & Kutz, Inc. and the stockholders of Smith,
Liu & Kutz, Inc. dated June 14, 1997.
</TABLE>
II-2
<PAGE> 161
<TABLE>
<S> <C>
*2.9 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Smith, Liu & Corbin, Inc. and the stockholders of Smith,
Liu & Corbin, Inc. dated June 14, 1997.
*2.10 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Round Rock Nissan, Inc. and the stockholders of Round
Rock Nissan, Inc. dated June 14, 1997.
*2.11 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Mike Smith Autoplaza, Inc. and the stockholders of Mike
Smith Autoplaza, Inc. dated June 14, 1997.
*2.12 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Courtesy Nissan, Inc. and the stockholders of Courtesy
Nissan, Inc. dated June 14, 1997.
*2.13 -- Stock Purchase Agreement between Group 1 Automotive, Inc.
and the stockholders of Foyt Motors, Inc. dated June 14,
1997.
*3.1 -- Restated Certificate of Incorporation of the Company
3.2 -- Certificate of Designation of Series A Junior
Participating Preferred Stock
*3.3 -- Bylaws of the Company
4.1 -- Specimen Common Stock certificate
5.1 -- Opinion of Vinson & Elkins L.L.P.
10.1 -- Form of Employment Agreement between the Company and B.B.
Hollingsworth, Jr.
10.2 -- Form of Employment Agreement between the Company and
Robert E. Howard II.
10.3 -- Form of Employment Agreement between the Company and
Sterling B. McCall, Jr.
10.4 -- Form of Employment Agreement between the Company and
Charles M. Smith.
10.5 -- Form of Employment Agreement between the Company and John
T. Turner.
10.6 -- Form of Employment Agreement between the Company and
Scott L. Thompson.
*10.7 -- 1996 Stock Incentive Plan
*10.8 -- First Amendment to 1996 Stock Incentive Plan
*10.9 -- Form of Related Party Lease Agreement
10.10 -- Rights Agreement between Group 1 Automotive, Inc. and
ChaseMellon Shareholder Services, L.L.C., as rights agent
dated October 3, 1997.
10.11 -- 1998 Employee Stock Purchase Plan
10.12 -- Form of Agreement between Toyota Motor Sales, U.S.A., and
Group 1 Automotive, Inc.
10.13 -- Form of Supplemental Agreement to General Motors
Corporation Dealer Sales and Service Agreement.
10.14 -- Approval Letter dated December 11, 1996 from Nissan Motor
Corporation U.S.A.
10.15 -- Amendment to Approval Letter from Nissan Motor
corporation U.S.A. dated September 29
10.16 -- Supplemental Terms and Conditions between Ford Motor
Company and Group 1 Automotive, Inc. dated September 4,
1997.
10.17 -- Toyota Dealer Agreement between Gulf States Toyota, Inc.
and Southwest Toyota, Inc. dated April 5, 1993.
</TABLE>
II-3
<PAGE> 162
<TABLE>
<S> <C>
10.18 -- Lexus Dealer Agreement between Toyota Motor Sales,
U.S.A., Inc. and SMC Luxury Cars, Inc. dated August 21,
1995.
10.19 -- Commitment Letter between Group 1 Automotive, Inc., Texas
Commerce Bank National Association and Chase Securities
Inc. dated September 22, 1997.
10.20 -- Letter Agreement between Mitsubishi Motor Sales of
America, Inc. and Group 1 Automotive, Inc. dated June 20,
1997.
10.21 -- Supplemental Agreement to Dealer Sales and Service
Agreement (Public Traded Company) among Foyt Motors,
Inc., Group 1 Automotive, Inc. and American Isuzu Motors
Inc.
10.22 -- Stock Purchase Agreement Among Howard Pontiac-GMC, Inc.,
Bob Howard Automotive-East, Inc. and the Stockholder of
Bob Howard Automitive-East, Inc. dated as of September
12, 1997.
10.23 -- Form of Employment Agreement between Group 1 Automotive,
Inc. and Kevin H. Whalen.
*11.1 -- Statement re computation of per share earnings
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Vinson & Elkins L.L.P. (contained in Exhibit
5.1 hereto)
23.3 -- Consent of Abowitz, Rhodes & Dahnke, P.C.
*24.1 -- Powers of Attorney (included on the signature page to
this Registration Statement)
*27.1 -- Financial Data Schedule
</TABLE>
- ---------------
* Previously filed.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to provide at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 163
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Houston,
State of Texas, on the 14th day of October, 1997.
GROUP 1 AUTOMOTIVE, INC.
By /s/ B.B. HOLLINGSWORTH, JR.
-----------------------------------
B.B. Hollingsworth, Jr.
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities indicated on the 14th day of October, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ B.B. HOLLINGSWORTH, JR. Chairman, President and Chief Executive
- ----------------------------------------------------- Officer and Director (Principal Executive
B.B. Hollingsworth, Jr. Officer)
/s/ SCOTT L. THOMPSON Senior Vice President, Chief Financial
- ----------------------------------------------------- Officer and Treasurer (Chief Financial and
Scott L. Thompson Accounting Officer)
* Director
- -----------------------------------------------------
Robert E. Howard II
* Director
- -----------------------------------------------------
Sterling B. McCall, Jr.
* Director
- -----------------------------------------------------
Charles M. Smith
* Director
- -----------------------------------------------------
John H. Duncan
* Director
- -----------------------------------------------------
Bennett E. Bidwell
*By: /s/ SCOTT L. THOMPSON
------------------------------------------------
Scott L. Thompson
Attorney-in-fact
</TABLE>
II-5
<PAGE> 164
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
1.1 -- Form of Underwriting Agreement
*2.1 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Howard Pontiac-GMC, Inc. and the stockholders of Howard
Pontiac-GMC, Inc. dated June 14, 1997.
*2.2 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Bob Howard Motors, Inc. and the stockholders of Bob
Howard Motors, Inc. dated June 14, 1997.
*2.3 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Bob Howard Chevrolet, Inc. and the stockholders of Bob
Howard Chevrolet, Inc. dated June 14, 1997.
*2.4 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Bob Howard Automotive-H, Inc. and the stockholders of Bob
Howard Automotive-H, Inc. dated June 14, 1997.
*2.5 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Bob Howard Dodge, Inc. and the stockholders of Bob Howard
Dodge, Inc. dated June 14, 1997.
*2.6 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Southwest Toyota, Inc. and the stockholders of Southwest
Toyota, Inc. dated June 14, 1997.
*2.7 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
SMC Luxury Cars, Inc. and the stockholders of SMC Luxury
Cars, Inc. dated June 14, 1997.
*2.8 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Smith, Liu & Kutz, Inc. and the stockholders of Smith,
Liu & Kutz, Inc. dated June 14, 1997.
*2.9 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Smith, Liu & Corbin, Inc. and the stockholders of Smith,
Liu & Corbin, Inc. dated June 14, 1997.
*2.10 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Round Rock Nissan, Inc. and the stockholders of Round
Rock Nissan, Inc. dated June 14, 1997.
*2.11 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Mike Smith Autoplaza, Inc. and the stockholders of Mike
Smith Autoplaza, Inc. dated June 14, 1997.
*2.12 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Courtesy Nissan, Inc. and the stockholders of Courtesy
Nissan, Inc. dated June 14, 1997.
*2.13 -- Stock Purchase Agreement between Group 1 Automotive, Inc.
and the stockholders of Foyt Motors, Inc. dated June 14,
1997.
*3.1 -- Restated Certificate of Incorporation of the Company
3.2 -- Certificate of Designation of Series A Junior
Participating Preferred Stock
*3.3 -- Bylaws of the Company
4.1 -- Specimen Common Stock certificate
5.1 -- Opinion of Vinson & Elkins L.L.P.
10.1 -- Form of Employment Agreement between the Company and B.B.
Hollingsworth, Jr.
10.2 -- Form of Employment Agreement between the Company and
Robert E. Howard II.
10.3 -- Form of Employment Agreement between the Company and
Sterling B. McCall, Jr.
</TABLE>
<PAGE> 165
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.4 -- Form of Employment Agreement between the Company and
Charles M. Smith.
10.5 -- Form of Employment Agreement between the Company and John
T. Turner.
10.6 -- Form of Employment Agreement between the Company and
Scott L. Thompson.
*10.7 -- 1996 Stock Incentive Plan
*10.8 -- First Amendment to 1996 Stock Incentive Plan
*10.9 -- Form of Related Party Lease Agreement
10.10 -- Rights Agreement between Group 1 Automotive, Inc. and
ChaseMellon Shareholder Services, L.L.C., as rights agent
dated October 3, 1997.
10.11 -- 1998 Employee Stock Purchase Plan
10.12 -- Form of Agreement between Toyota Motor Sales, U.S.A., and
Group 1 Automotive, Inc.
10.13 -- Form of Supplemental Agreement to General Motors
Corporation Dealer Sales and Service Agreement.
10.14 -- Approval Letter dated December 11, 1996 from Nissan Motor
Corporation U.S.A.
10.15 -- Amendment to Approval Letter from Nissan Motor
corporation U.S.A. dated September 29
10.16 -- Supplemental Terms and Conditions between Ford Motor
Company and Group 1 Automotive, Inc. dated September 4,
1997.
10.17 -- Toyota Dealer Agreement between Gulf States Toyota, Inc.
and Southwest Toyota, Inc. dated April 5, 1993.
10.18 -- Lexus Dealer Agreement between Toyota Motor Sales,
U.S.A., Inc. and SMC Luxury Cars, Inc. dated August 21,
1995.
10.19 -- Commitment Letter between Group 1 Automotive, inc., Texas
Commerce Bank National Association and Chase Securities
Inc. dated September 22, 1997.
10.20 -- Letter Agreement between Mitsubishi Motor Sales of
America, Inc. and Group 1 Automotive, Inc. dated June 20,
1997.
10.21 -- Supplemental Agreement to Dealer Sales and Service
Agreement (Public Traded Company) among Foyt Motors,
inc., Group 1 Automotive, Inc. and American Isuzu Motors
Inc.
10.22 -- Stock Purchase Agreement Among Howard Pontiac-GMC, Inc.,
Bob Howard Automotive-East, Inc. and the Stockholder of
Bob Howard Automitive-East, Inc. dated as of September
12, 1997.
10.23 -- Form of Employment Agreement between Group 1 Automotive,
Inc. and Kevin H. Whalen.
*11.1 -- Statement re computation of per share earnings
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Vinson & Elkins L.L.P. (contained in Exhibit
5.1 hereto)
23.3 -- Consent of Abowitz, Rhodes & Dahnke, P.C.
*24.1 -- Powers of Attorney (included on the signature page to
this Registration Statement)
*27.1 -- Financial Data Schedule
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
GROUP 1 AUTOMOTIVE, INC.
COMMON STOCK (PAR VALUE $.01 PER SHARE)
---------------------------------------
UNDERWRITING AGREEMENT
....................., 1997
Goldman, Sachs & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated,
NationsBanc Montgomery Securities, Inc.,
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004.
Ladies and Gentlemen:
Group 1 Automotive, Inc., a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Underwriters named in Schedule I hereto (the "Underwriters") an
aggregate of 4,428,136 shares and, at the election of the Underwriters, up to
720,000 additional shares of Common Stock, par value $.01 per share ("Stock"),
of the Company, and W.C. Smith (the "Selling Stockholder") proposes, subject to
the terms and conditions stated herein, to sell to the Underwriters an
aggregate of 371,864 shares. The aggregate of 4,800,000 shares to be sold by
the Company and the Selling Stockholder is herein called the "Firm Shares" and
the aggregate of 720,000 additional shares to be sold by the Company is herein
called the "Optional Shares". The Firm Shares and the Optional Shares that the
Underwriters elect to purchase pursuant to Section 2 hereof are herein
collectively called the "Shares."
1. (a) The Company represents and warrants to, and agrees with,
each of the Underwriters that:
(i) A registration statement on Form S-1 (File No.
333-29893)(the "Initial Registration Statement") in respect of the
Shares has been filed with the Securities and Exchange Commission (the
"Commission"); the Initial Registration Statement and any
post-effective amendment thereto, each in the form heretofore
delivered to you, and, excluding exhibits thereto, to you for each of
the other Underwriters, have been declared effective by the Commission
in such form; other than a registration statement, if any, increasing
the size of the offering (a "Rule 462(b) Registration Statement"),
filed pursuant to Rule 462(b) under the Securities Act of 1933,
<PAGE> 2
as amended (the "Act"), which became effective upon filing, no other
document with respect to the Initial Registration Statement has
heretofore been filed with the Commission; and no stop order
suspending the effectiveness of the Initial Registration Statement,
any post-effective amendment thereto or the Rule 462(b) Registration
Statement, if any, has been issued and no proceeding for that purpose
has been initiated or threatened by the Commission (any preliminary
prospectus included in the Initial Registration Statement or filed
with the Commission pursuant to Rule 424(a) of the rules and
regulations of the Commission under the Act, is hereinafter called a
"Preliminary Prospectus"); the various parts of the Initial
Registration Statement and the Rule 462(b) Registration Statement, if
any, including all exhibits thereto and including the information
contained in the form of final prospectus filed with the Commission
pursuant to Rule 424(b) under the Act in accordance with Section 5(a)
hereof and deemed by virtue of Rule 430A under the Act to be part of
the registration statement at the time it was declared effective, each
as amended at the time such part of the Initial Registration Statement
became effective or such part of the Rule 462(b) Registration
Statement, if any, became or hereafter becomes effective, are
hereinafter collectively called the "Registration Statement"; and such
final prospectus, in the form first filed pursuant to Rule 424(b)
under the Act, is hereinafter called the "Prospectus";
(ii) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, and each
Preliminary Prospectus, at the time of filing thereof, conformed in
all material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder, and did not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in
reliance upon and in conformity with information furnished in writing
to the Company by an Underwriter through Goldman, Sachs & Co.
expressly for use therein;
(iii) The Registration Statement conforms, and the Prospectus
and any further amendments or supplements to the Registration
Statement or the Prospectus will conform, in all material respects to
the requirements of the Act and the rules and regulations of the
Commission thereunder and do not and will not, as of the applicable
effective date as to the Registration Statement and any amendment
thereto and as of the applicable filing date as to the Prospectus and
any amendment or supplement thereto, contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading;
provided, however, that this representation and warranty shall not
apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein;
(iv) Neither the Company nor any of the Founding Groups (as
defined in the Prospectus) has sustained since the date of the latest
audited financial statements included in the Prospectus any material
loss or interference with its business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus; and, since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, there has not been any change in the
capital stock, short-term debt or long-term debt of the Company or any
of the Founding Groups, or any material adverse change, or any
development involving a prospective material adverse change, in or
affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company or the
Founding Groups, otherwise than as set forth or contemplated in the
Prospectus;
2
<PAGE> 3
(v) The Company and each of the companies listed on Schedule A
hereto (the "Founding Companies") has good and indefeasible title to
all real property and good and marketable title to all personal
property owned by it, in each case free and clear of all liens,
encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value of such
property and do not interfere with the use made and proposed to be
made of such property by the Company and the Founding Companies; and
any real property and buildings held under lease by the Company and
the Founding Companies are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such property
and buildings by the Company and the Founding Companies, subject, as
to enforcement, to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles;
(vi) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus,
and has been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws of each
other jurisdiction in which it owns or leases properties or conducts
any business so as to require such qualification, except where the
failure to be so qualified in any such jurisdiction would not,
individually or in the aggregate, have a material adverse effect on
the ability of the Company or the Founding Companies to own or lease
their properties or conduct their businesses as described in the
Prospectus; and each of the Founding Companies has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation;
(vii) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of
the Company have been duly and validly authorized and issued, are
fully paid and non-assessable and conform to the description of the
Stock contained in the Prospectus under the caption "Description of
Capital Stock"; and all of the issued shares of capital stock of each
Founding Company have been duly and validly authorized and issued, are
fully paid and non-assessable and, upon consummation of the
transactions contemplated by the 13 stock purchase agreements, each
dated June 14, 1997, each of which is among the Company, a Founding
Company and the stockholders of such Founding Company (except for the
stock purchase agreement for Foyt Motors, Inc. (the "Foyt Agreement"),
which is among the Company and the stockholders of Foyt Motors, Inc.)
(collectively, the "Stock Purchase Agreements"), will be owned
directly or indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims;
(viii) The Shares have been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein, will
be duly and validly issued and fully paid and non-assessable and will
conform to the description of the Stock contained in the Prospectus
under the caption "Description of Capital Stock";
(ix) The issue and sale of the Shares to be sold by the Company
and the compliance by the Company with all of the provisions of this
Agreement and the consummation of the transactions contemplated herein
and in the Stock Purchase Agreements will not conflict with or result
in a breach or violation of any of the terms or provisions of, or
constitute a default under, any Dealer Agreement (as hereinafter
defined) (except as described in the Prospectus) or any indenture,
mortgage, deed of trust, loan agreement or other material agreement or
instrument to which the Company or any of the Founding Companies is a
party or by which the Company or any of the Founding Companies is
bound or to which any of the property or assets of the
3
<PAGE> 4
Company or any of the Founding Companies is subject, nor will such
action result in any violation of the provisions of the Certificate of
Incorporation or By-laws of the Company or any statute or any order,
rule or regulation of any court or governmental agency or body having
jurisdiction over the Company or any of the Founding Companies or any
of their properties; and no consent, approval, authorization, order,
registration or qualification of or with any such court or
governmental agency or body is required for the issue and sale of the
Shares or the consummation by the Company and the Founding Companies
of the transactions contemplated by this Agreement and the Stock
Purchase Agreements, except (i) the registration under the Act of the
Shares, (ii) such consents, approvals, authorizations, registrations
or qualifications as may be required under state securities or Blue
Sky laws in connection with the purchase and distribution of the
Shares by the Underwriters and (iii) the filings required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"H-S-R Act"), and the expiration or termination of the waiting period
thereunder, which period has expired or been terminated.
(x) No consent, approval or other authorization of any
automobile manufacturer is required for the issue and sale of the
Shares to be sold by the Company or the consummation of the
transactions contemplated herein or in the Stock Purchase Agreements,
except (i) the consent of each of the manufacturers named in Schedule
B hereto (collectively, the "Manufacturers' Consents"), which consents
have been obtained and are in full force and effect and (ii) as
described in the Prospectus.
(xi) Neither the Company nor any of the Founding Companies is
(i) in violation of its Certificate of Incorporation or By-laws or
(ii) in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any indenture, mortgage,
deed of trust, loan agreement, lease or other agreement or instrument
to which it is a party or by which it or any of its properties may be
bound, except where such default would not have a material adverse
effect on the current or future consolidated financial position,
stockholders' equity or results of operations of the Company and the
Founding Companies taken as a whole (a "Material Adverse Effect");
(xii) The statements set forth in the Prospectus under the
caption "Description of Capital Stock," insofar as they purport to
constitute a summary of the terms of the Stock, and under the caption
"Underwriting", insofar as they purport to describe the provisions of
the documents referred to therein, are accurate in all material
respects;
(xiii) Other than as set forth in the Prospectus, there are no
legal or governmental proceedings pending to which the Company or any
of the Founding Companies is a party or of which any property of the
Company or any of the Founding Companies is the subject which, if
determined adversely to the Company or any of the Founding Companies,
would individually or in the aggregate have a Material Adverse Effect;
and, to the best of the Company's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened
by others;
(xiv) The Company is not and, after giving effect to the
offering and sale of the Shares, will not be an "investment company"
or an entity "controlled" by an "investment company", as such terms
are defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act");
(xv) Arthur Andersen LLP, who have certified certain financial
statements of the Company and the Founding Companies, are independent
public accountants as required by the Act and the rules and
regulations of the Commission thereunder.
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(xvi) The Company and the Founding Companies have obtained all
environmental permits, licenses and other authorizations required by
federal, state and local law in order to conduct their businesses as
described in the Prospectus, except where failure to do so would not
have a Material Adverse Effect; the Company and the Founding Companies
are conducting their businesses in compliance with such permits,
licenses and authorizations and with applicable environmental laws,
except where the failure to be in compliance would not, individually
or in the aggregate, have a Material Adverse Effect; and, except as
described in the Prospectus, neither the Company nor any of the
Founding Companies is in violation of any Federal or state law or
regulation relating to the storage, handling, disposal, release or
transportation of hazardous or toxic materials, which violation would
subject it to any material liability or disability;
(xvii) The Company and the Founding Companies have all licenses,
franchises, permits, authorizations, approvals and orders and other
concessions of and from all governmental or regulatory authorities
that are necessary to own or lease their properties and conduct their
businesses as described in the Prospectus, except for such licenses,
franchises, permits authorizations, approvals and orders the failure
to obtain which would not, individually or in the aggregate, have a
Material Adverse Effect;
(xviii) The Company and each of the Founding Companies is
conducting business in compliance with all applicable statutes, rules,
regulations, standards, guides and orders administered or issued by
any governmental or regulatory authority in the jurisdictions in which
it is conducting business, except where the failure to be so in
compliance would not, individually or in the aggregate, have a
Material Adverse Effect;
(xix) The Company or, if applicable, a Founding Company, has
entered into a dealer agreement with each of the manufacturers listed
on Schedule B hereto (collectively, the "Dealer Agreements"), each of
which has been duly authorized, executed and delivered by the Company
or the applicable Founding Company, is in full force and effect and
constitutes the valid and binding agreement between the parties
thereto, enforceable in accordance with its terms, subject to
applicable Federal and state franchise laws; the Company or the
applicable Founding Companies are in compliance with all material
terms and conditions of the Dealer Agreements, and, to the best
knowledge of the Company, there has not occurred any material default
under any of the Dealer Agreements or any event that with the giving
of notice or the lapse of time would constitute a default thereunder;
(xx) Each of the Stock Purchase Agreements has been duly
authorized, executed and delivered by the parties thereto, constitutes
a valid and legally binding agreement of such party, enforceable in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles, except that no
representation is being made with respect to Sections 8.2 or 8.3 of
the Stock Purchase Agreements or with respect to Section 8.4 of the
Foyt Agreement; each of the Stock Purchase Agreements is in full force
and effect on and as of the date hereof and each of the
representations and warranties of the Company and, to the best of the
Company's knowledge, of each of the other parties thereto set forth in
the Stock Purchase Agreements was true and correct at the time such
representations and warranties were made and is true and correct at
and as of the date hereof;
(xxi) No registration under the Act or the Investment Company
Act, and no consent, approval, authorization, order, registration or
qualification of or with any court or governmental agency or body is
required for the issuance of Stock of the Company to the stockholders
of the Founding Companies pursuant to and as contemplated by the Stock
Purchase Agreements,
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<PAGE> 6
except such consents, approvals, authorizations, registrations or
qualifications as have been obtained or made; and
(xxii) No holders of any securities of the Company have any
rights to require the Company to register any securities of the
Company under the Act (other than the Selling Stockholder, with
respect to the Shares to be sold by him pursuant to this Agreement).
(b) The Selling Stockholder represents and warrants to, and agrees
with, each of the Underwriters and the Company that:
(i) All consents, approvals, authorizations and orders
necessary for the execution and delivery by the Selling Stockholder of
this Agreement and the Power of Attorney and the Custody Agreement
hereinafter referred to, and for the sale and delivery of the Shares
to be sold by such Selling Stockholder hereunder, have been obtained;
and the Selling Stockholder has full right, power and authority to
enter into this Agreement, the Power-of-Attorney and the Custody
Agreement and, upon the closing of the Acquisitions, will have full
right, power and authority to sell, assign, transfer and deliver the
Shares to be sold by such Selling Stockholder hereunder;
(ii) The sale of the Shares to be sold by the Selling
Stockholder hereunder and the compliance by the Selling Stockholder
with all of the provisions of this Agreement, the Power of Attorney
and the Custody Agreement and the consummation of the transactions
herein and therein contemplated will not conflict with or result in a
breach or violation of any of the terms or provisions of, or
constitute a default under, any statute, indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the
Selling Stockholder is a party or by which the Selling Stockholder is
bound or to which any of the property or assets of the Selling
Stockholder is subject, nor will such action result in any violation
of the provisions of any statute or any order, rule or regulation of
any court or governmental agency or body having jurisdiction over the
Selling Stockholder or the property of the Selling Stockholder;
(iii) Immediately prior to the Time of Delivery (as defined in
Section 4 hereof) the Selling Stockholder will have good and valid
title to the Shares to be sold by the Selling Stockholder hereunder,
free and clear of all liens, encumbrances, equities or claims; and,
upon delivery of such Shares and payment therefor pursuant hereto,
good and valid title to such Shares, free and clear of all liens,
encumbrances, equities or claims, will pass to the several
Underwriters;
(iv) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the
Prospectus, not to offer, sell, contract to sell or otherwise dispose
of, except as provided hereunder, any securities of the Company that
are substantially similar to the Shares, including but not limited to
any securities that are convertible into or exchangeable for, or that
represent the right to receive, Stock or any such substantially
similar securities (other than pursuant to employee stock option plans
existing on, or upon the conversion or exchange of convertible or
exchangeable securities outstanding as of, the date of this
Agreement), without your prior written consent;
(v) The Selling Stockholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result
in stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares;
(vi) To the extent that any statements or omissions made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or
any amendment or supplement thereto are made in reliance upon and in
conformity with written information furnished to the Company by the
Selling Stockholder expressly for use therein, such Preliminary
Prospectus and the Registration
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<PAGE> 7
Statement did, and the Prospectus and any further amendments or
supplements to the Registration Statement and the Prospectus, when
they become effective or are filed with the Commission, as the case
may be, will conform in all material respects to the requirements of
the Act and the rules and regulations of the Commission thereunder and
will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading;
(vii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated, such Selling Stockholder will deliver to you prior to or
at the First Time of Delivery (as hereinafter defined) a properly
completed and executed United States Treasury Department Form W-9 (or
other applicable form or statement specified by Treasury Department
regulations in lieu thereof);
(viii) Certificates in negotiable form representing all of the
Shares to be sold by the Selling Stockholder hereunder will be placed
in custody under a Custody Agreement, in the form heretofore furnished
to you (the "Custody Agreement"), duly executed and delivered by the
Selling Stockholder to ChaseMellon Shareholder Services, L.L.C., as
custodian (the "Custodian"), and the Selling Stockholder has duly
executed and delivered a Power of Attorney, in the form heretofore
furnished to you (the "Power of Attorney"), appointing the persons
indicated in Schedule II hereto, and each of them, as the Selling
Stockholder's attorneys-in-fact (the "Attorneys-in-Fact") with
authority to execute and deliver this Agreement on behalf of the
Selling Stockholder, to determine the purchase price to be paid by the
Underwriters to the Selling Stockholder as provided in Section 2
hereof, to authorize the delivery of the Shares to be sold by the
Selling Stockholder hereunder and otherwise to act on behalf of the
Selling Stockholder in connection with the transactions contemplated
by this Agreement and the Custody Agreement; and
(ix) The Shares to be held in custody for the Selling
Stockholder under the Custody Agreement are subject to the interests
of the Underwriters hereunder; the arrangements made by the Selling
Stockholder for such custody, and the appointment by the Selling
Stockholder of the Attorneys-in-Fact by the Power of Attorney, are to
that extent irrevocable; the obligations of the Selling Stockholder
hereunder shall not be terminated by operation of law, whether by the
death or incapacity of the Selling Stockholder, or by the occurrence
of any other event; if the Selling Stockholder should die or become
incapacitated, or if any other such event should occur, before the
delivery of the Shares hereunder, certificates representing the Shares
shall be delivered by or on behalf of the Selling Stockholder in
accordance with the terms and conditions of this Agreement and of the
Custody Agreement; and actions taken by the Attorneys-in-Fact pursuant
to the Power of Attorney shall be as valid as if such death,
incapacity, or other event had not occurred, regardless of whether or
not the Custodian, the Attorneys-in-Fact, or any of them, shall have
received notice of such death, incapacity, or other event.
2. Subject to the terms and conditions herein set forth, (a) the
Company and the Selling Stockholder agree, severally and not jointly, to sell
to each of the Underwriters, and each of the Underwriters agrees, severally and
not jointly, to purchase from the Company and the Selling Stockholder, at a
purchase price per share of $.............., the number of Firm Shares (to be
adjusted by you so as to eliminate fractional shares) determined by multiplying
the aggregate number of Shares to be sold by the Company and the Selling
Stockholder as set forth opposite their respective names in Schedule II hereto
by a fraction, the numerator of which is the aggregate number of Firm Shares to
be purchased by such Underwriter as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the aggregate
number of Firm Shares to be purchased by all of the
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<PAGE> 8
Underwriters from the Company and the Selling Stockholder hereunder and (b) in
the event and to the extent that the Underwriters shall exercise the election
to purchase Optional Shares as provided below, the Company agrees to sell to
each of the Underwriters, and each of the Underwriters agrees, severally and
not jointly, to purchase from the Company, at the purchase price per share set
forth in clause (a) of this Section 2, that portion of the number of Optional
Shares as to which such election shall have been exercised (to be adjusted by
you so as to eliminate fractional shares) determined by multiplying such number
of Optional Shares by a fraction the numerator of which is the maximum number
of Optional Shares which such Underwriter is entitled to purchase as set forth
opposite the name of such Underwriter in Schedule I hereto and the denominator
of which is the maximum number of Optional Shares that all of the Underwriters
are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to
purchase at their election up to 720,000 Optional Shares, at the purchase price
per share set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the Company
given within a period of 30 calendar days after the date of this Agreement and
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by you
but in no event earlier than the First Time of Delivery (as defined in Section
4 hereof) or, unless you and the Company otherwise agree in writing, earlier
than two or later than ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares,
the several Underwriters propose to offer the Firm Shares for sale upon the
terms and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours prior
notice to the Company and the Selling Stockholder shall be delivered by or on
behalf of the Company and the Selling Stockholder to Goldman, Sachs & Co., for
the account of such Underwriter, against payment by or on behalf of such
Underwriter of the purchase price therefor by wire transfer to the Company and
the Custodian on behalf of the Selling Stockholder in immediately available
funds. The Company will cause the certificates representing the Shares to be
made available for checking and packaging at least twenty-four hours prior to
the Time of Delivery (as defined below) with respect thereto at the office of
Goldman, Sachs & Co., 85 Broad Street, New York, New York 10004 (the
"Designated Office"). The time and date of such delivery and payment shall be,
with respect to the Firm Shares, 9:30 a.m., New York time, on .............,
1997 or such other time and date as Goldman, Sachs & Co. and the Company may
agree upon in writing, and, with respect to the Optional Shares, 9:30 a.m., New
York time, on the date specified by Goldman, Sachs & Co. in the written notice
given by Goldman, Sachs & Co. of the Underwriters' election to purchase such
Optional Shares, or such other time and date as Goldman, Sachs & Co. and the
Company may agree upon in writing. Such time and date for delivery of the Firm
Shares is herein called the "First Time of Delivery", such time and date for
delivery of the Optional Shares, if not the First Time of Delivery, is herein
called the "Second Time of Delivery", and each such time and date for delivery
is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or on
behalf of the parties hereto pursuant to Section 7 hereof, including the cross
receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(k) hereof, will be delivered at the offices
of Vinson & Elkins L.L.P., 1001 Fannin Street, Houston, Texas 77002 (the
"Closing Location"), and the Shares will be delivered at the Designated Office,
all at such Time of Delivery. A meeting will be held at the Closing Location
at .......p.m., Houston, Texas time, on the New York Business Day next
preceding such Time of Delivery, at which meeting the final drafts of the
documents to be delivered pursuant to the preceding sentence will be available
for review by the parties hereto. For the purposes of this Agreement, "New
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<PAGE> 9
York Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in New York are
generally authorized or obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to
file such Prospectus pursuant to Rule 424(b) under the Act not later
than the Commission's close of business on the second business day
following the execution and delivery of this Agreement, or, if
applicable, such earlier time as may be required by Rule 430A(a)(3)
under the Act; to make no further amendment or any supplement to the
Registration Statement or Prospectus which shall be reasonably
disapproved by you promptly after reasonable notice thereof; to advise
you, promptly after it receives notice thereof, of the time when any
amendment to the Registration Statement has been filed or becomes
effective or any supplement to the Prospectus or any amended
Prospectus has been filed and to furnish you with copies thereof; to
advise you, promptly after it receives notice thereof, of the issuance
by the Commission of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or prospectus, of the
suspension of the qualification of the Shares for offering or sale in
any jurisdiction, of the initiation or threatening of any proceeding
for any such purpose, or of any request by the Commission for the
amending or supplementing of the Registration Statement or Prospectus
or for additional information; and, in the event of the issuance of
any stop order or of any order preventing or suspending the use of any
Preliminary Prospectus or prospectus or suspending any such
qualification, promptly to use its best efforts to obtain the
withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under
the securities laws of such jurisdictions as you may request and to
comply with such laws so as to permit the continuance of sales and
dealings therein in such jurisdictions for as long as may be necessary
to complete the distribution of the Shares, provided that in
connection therewith the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of process
in any jurisdiction;
(c) Prior to 10:00 a.m., New York City time, on the New York
Business Day next succeeding the date of this Agreement and from time
to time, to furnish the Underwriters with copies of the Prospectus in
New York City in such quantities as you may reasonably request, and,
if the delivery of a prospectus is required at any time prior to the
expiration of nine months after the time of issue of the Prospectus in
connection with the offering or sale of the Shares and if at such time
any events shall have occurred as a result of which the Prospectus as
then amended or supplemented would include an untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made when such Prospectus is delivered, not
misleading, or, if for any other reason it shall be necessary during
such period to amend or supplement the Prospectus in order to comply
with the Act, to notify you and upon your request to prepare and
furnish without charge to each Underwriter and to any dealer in
securities as many copies as you may from time to time reasonably
request of an amended Prospectus or a supplement to the Prospectus
which will correct such statement or omission or effect such
compliance, and in case any Underwriter is required to deliver a
prospectus in connection with sales of any of the Shares at any time
nine months or more after the time of issue of the Prospectus, upon
your request but at the expense of such Underwriter, to prepare and
deliver to such Underwriter as many copies as you may request of an
amended or supplemented Prospectus complying with Section 10(a)(3) of
the Act;
(d) To make generally available to its securityholders as soon
as practicable, but in any event not later than eighteen months after
the effective date of the Registration Statement (as
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defined in Rule 158(c) under the Act), an earnings statement of the
Company and its subsidiaries (which need not be audited) complying
with Section 11(a) of the Act and the rules and regulations of the
Commission thereunder (including, at the option of the Company, Rule
158);
(e) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the
Prospectus, not to offer, sell, contract to sell or otherwise dispose
of, except as provided hereunder, any securities of the Company that
are substantially similar to the Shares, including but not limited to
any securities that are convertible into or exchangeable for, or that
represent the right to receive, Stock or any such substantially
similar securities (other than (i) pursuant to employee stock option
plans existing on, or upon the conversion or exchange of convertible
or exchangeable securities outstanding as of, the date of this
Agreement or (ii) in connection with and as consideration for
acquisitions of automobile dealerships; provided that the proposed
transferee agrees in writing for the benefit of the Underwriters to be
found by the foregoing provisions), without your prior written
consent;
(f) To furnish to its stockholders as soon as practicable
after the end of each fiscal year an annual report (including a
balance sheet and statements of income, stockholders' equity and cash
flows of the Company and its consolidated subsidiaries certified by
independent public accountants) and, as soon as practicable after the
end of each of the first three quarters of each fiscal year (beginning
with the fiscal quarter ending after the effective date of the
Registration Statement), consolidated summary financial information of
the Company and its subsidiaries for such quarter in reasonable
detail;
(g) During a period of five years from the effective date of
the Registration Statement, to furnish to you copies of all reports or
other communications (financial or other) furnished to stockholders
generally, and to deliver to you (i) as soon as they are available,
copies of any reports and financial statements furnished to or filed
with the Commission or any national securities exchange on which any
class of securities of the Company is listed; and (ii) such additional
information concerning the business and financial condition of the
Company as you may from time to time reasonably request (such
financial statements to be on a consolidated basis to the extent the
accounts of the Company and its subsidiaries are consolidated in
reports furnished to its stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of
the Shares pursuant to this Agreement in the manner specified in the
Prospectus under the caption "Use of Proceeds";
(i) To use its best efforts to list, subject to notice of
issuance, the Shares on the New York Stock Exchange (the "Exchange");
(j) To file with the Commission such reports on Form SR as may
be required by Rule 463 under the Act; and
(k) If the Company elects to rely upon Rule 462(b), the
Company shall file a Rule 462(b) Registration Statement with the
Commission in compliance with Rule 462(b) by 10:00 P.M., Washington,
D.C. time, on the date of this Agreement, and the Company shall at the
time of filing either pay to the Commission the filing fee for the
Rule 462(b) Registration Statement or give irrevocable instructions
for the payment of such fee pursuant to Rule 111(b) under the Act.
6. The Company and the Selling Stockholder covenant and agree with
one another and with the several Underwriters that (a) the Company and the
Selling Stockholder will pay or cause to be paid a pro rata share (based on the
number of Shares to be sold by the Company and the Selling Stockholder
hereunder) of the following: (i) the fees, disbursements and expenses of the
Company's counsel and accountants in connection with the registration of the
Shares under the Act and all other expenses in
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<PAGE> 11
connection with the preparation, printing and filing of the Registration
Statement, any Preliminary Prospectus and the Prospectus and amendments and
supplements thereto and the mailing and delivering of copies thereof to the
Underwriters and dealers; (ii) the cost of printing or producing any Agreement
among Underwriters, this Agreement, the Blue Sky Memorandum, closing documents
(including any compilations thereof) and any other documents in connection with
the offering, purchase, sale and delivery of the Shares; (iii) all expenses in
connection with the qualification of the Shares for offering and sale under
state securities laws as provided in Section 5(b) hereof, including the fees
and disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky survey; (iv) all fees and
expenses in connection with listing the Shares on the Exchange; and (v) the
filing fees incident to, and the fees and disbursements of counsel for the
Underwriters in connection with, securing any required review by the National
Association of Securities Dealers, Inc. of the terms of the sale of the Shares;
(b) the Company will pay or cause to be paid: (i) the cost of preparing stock
certificates; (ii) the cost and charges of any transfer agent or registrar and
(iii) all other costs and expenses incident to the performance of its
obligations hereunder which are not otherwise specifically provided for in this
Section 6; and (c) such Selling Stockholder will pay or cause to be paid all
costs and expenses incident to the performance of such Selling Stockholder's
obligations hereunder which are not otherwise specifically provided for in this
Section, including (i) any fees and expenses of counsel for such Selling
Stockholder, (ii) such Selling Stockholder's pro rata share of the fees and
expenses of the Attorneys-in-Fact and the Custodian, and (iii) all expenses and
taxes incident to the sale and delivery of the Shares to be sold by such
Selling Stockholder to the Underwriters hereunder. It is understood, however,
that the Company shall bear, and the Selling Stockholder shall not be required
to pay or to reimburse the Company for, the cost of any other matters not
directly relating to the sale and purchase of the Shares pursuant to this
Agreement, and that, except as provided in this Section, and Sections 8 and 11
hereof, the Underwriters will pay all of their own costs and expenses,
including the fees of their counsel, stock transfer taxes on resale of any of
the Shares by them, and any advertising expenses connected with any offers they
may make.
7. The obligations of the Underwriters hereunder, as to the Shares
to be delivered at each Time of Delivery, shall be subject, in their
discretion, to the condition that all representations and warranties of the
Company and of the Selling Stockholder herein are, at and as of such Time of
Delivery, true and correct, the condition that the Company and the Selling
Stockholder shall have performed all of its and their obligations hereunder
theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed
for such filing by the rules and regulations under the Act and in
accordance with Section 5(a) hereof; no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall
have been issued and no proceeding for that purpose shall have been
initiated or threatened by the Commission; and all requests for
additional information on the part of the Commission shall have been
complied with to your reasonable satisfaction. If the Company has
elected to rely upon Rule 462(b), the Rule 462(b) Registration
Statement shall have become effective by 10:00 P.M., Washington, D.C.
time, on the date of this Agreement;
(b) Sullivan & Cromwell, counsel for the Underwriters, shall
have furnished to you such opinion or opinions (a draft of each such
opinion is attached as Annex II(a) hereto), dated such Time of
Delivery, with respect to the incorporation of the Company, the
validity of the Shares being delivered at such Time of Delivery, this
Agreement, the Registration Statement, the Prospectus and such other
related matters as you may reasonably request, and such counsel shall
have received such papers and information as they may reasonably
request to enable them to pass upon such matters;
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(c) Vinson & Elkins, L.L.P., counsel for the Company, shall
have furnished to you their written opinion (a draft of each such
opinion is attached as Annex II(b) hereto), dated such Time of
Delivery, in form and substance satisfactory to you, to the effect
that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws
of the State of Delaware, with corporate power and authority to
own its properties and conduct its business as described in the
Prospectus;
(ii) The Company's authorized capital stock is as set
forth in the Prospectus, and all of the issued shares of capital
stock of the Company (including the Shares being delivered to you
at such Time of Delivery) have been duly and validly authorized
and issued and are fully paid and non-assessable; and the Shares
conform in all material respects to the description of the Stock
contained in the Prospectus under the caption "Description of
Capital Stock", insofar as such description relates to legal
matters or provisions of governing instruments;
(iii) Each of the Founding Companies has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation; and
all of the issued shares of capital stock of each such Founding
Company have been duly and validly authorized and issued, are
fully paid and non-assessable, and, upon consummation of the
transactions contemplated by the Stock Purchase Agreements, will
be owned directly or indirectly by the Company, free and clear of
all liens, encumbrances, equities or claims (such counsel being
entitled to rely in respect of the opinion in this clause upon
opinions of local counsel and in respect of matters of fact upon
certificates of officers of the Company or the Founding
Companies, provided that such counsel shall state that they
believe that both you and they are justified in relying upon such
opinions and certificates);
(iv) To the best of such counsel's knowledge and other
than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of
the Founding Companies is a party or of which any property of the
Company or any of the Founding Companies is the subject which, if
determined adversely to the Company or any of the Founding
Companies, would individually or in the aggregate have a Material
Adverse Effect; and, to the best of such counsel's knowledge, no
such proceedings are threatened or contemplated by governmental
authorities or threatened by others (such counsel being entitled
to rely in respect of the opinion in this clause, to the extent
such counsel deems appropriate, upon certificates of officers of
the Company and litigation searches of Federal and state courts
in the counties where the Company's and the Founding Companies'
principal places of business are located, provided that such
counsel shall state that they believe both you and they are
justified in so relying upon such certificates and searches);
(v) This Agreement has been duly authorized, executed
and delivered by the Company;
(vi) The issue and sale of the Shares being delivered
at such Time of Delivery to be sold by the Company and the
compliance by the Company with all of the provisions of this
Agreement and the consummation of the transactions contemplated
herein and in the Stock Purchase Agreement will not conflict with
or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any Dealer
Agreement (except as described in the Prospectus) or any
indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument known to such counsel to which the
Company or any of the Founding Companies is a party or by which
the Company or any of the Founding Companies
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<PAGE> 13
is bound or to which any of the property or assets of the Company
or any of the Founding Companies is subject and which is material
to the Company and the Founding Companies taken as a whole, nor
will such action result in any violation of the provisions of the
Certificate of Incorporation or By-laws of the Company or any
statute or any order, rule or regulation known to such counsel of
any court or governmental agency or body having jurisdiction over
the Company or any of the Founding Companies or any of their
properties (except that such counsel need express no opinion with
respect to federal or state securities laws or Blue Sky laws with
respect to this paragraph);
(ix) No consent, approval, authorization, order,
registration or qualification of or with any court or
governmental agency or body is required for the issue and sale of
the Shares or the consummation by the Company and the Founding
Companies of the transactions contemplated by this Agreement and
the Stock Purchase Agreements, except (i) the registration under
the Act of the Shares, (ii) such consents, approvals,
authorizations, registrations or qualifications as may be
required under state securities or Blue Sky laws in connection
with the purchase and distribution of the Shares by the
Underwriters and (iii) the filings required under the H-S-R Act,
and the waiting period thereunder, which has expired or been
terminated;
(x) The statements set forth in the Prospectus under
the caption "Description of Capital Stock", insofar as they
purport to constitute a summary of the terms of the Stock, and
under the caption "Underwriting", insofar as they purport to
describe the provisions of the laws and documents referred to
therein, are accurate in all material respects;
(xi) The Company is not an "investment company" or an
entity "controlled" by an "investment company", as such terms are
defined in the Investment Company Act; and
(xii) No registration under the Act or the Investment
Company Act, and no consent, approval, authorization, order,
registration or qualification of or with any court or
governmental agency or body is required for the issuance of Stock
of the Company to the stockholders of the Founding Companies
pursuant to and as contemplated by the Stock Purchase Agreements,
except such consents, approvals, authorizations, registrations or
qualifications as have been obtained or made.
Such counsel's opinion shall also state that the Registration Statement and the
Prospectus and any further amendments and supplements thereto made by the
Company prior to such Time of Delivery (other than the financial statements,
including the notes thereto, and financial statement schedules and other
financial and accounting information included therein, as to which such counsel
need express no opinion) appear on their face to comply as to form in all
material respects with the requirements of the Act and the rules and
regulations thereunder (such counsel may state that, in passing upon such form,
they have necessarily assumed the correctness and completeness of the
statements made therein). Such counsel shall also state that, although they
are not passing upon, do not assume any responsibility for, and have not
independently verified, the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus, except
for those referred to in the opinion in subsection (xi) of this Section 7(c),
and assume no responsibility for and have not independently verified the
accuracy, completeness or fairness of the financial statements, including the
notes thereto and the financial statement schedules and other financial and
accounting data included in the Registration Statement (and have not examined
the financial records from which such statements and data were derived), no
information has come to their attention that causes them to believe that the
Registration Statement or any further amendment thereto made by the Company
prior to such Time of Delivery, as
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<PAGE> 14
of the time it became effective, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or that the Prospectus
or any further amendment or supplement thereto made by the Company prior to
such Time of Delivery, as of its date or as of the Time of Delivery, included
or includes an untrue statement of a material fact or omitted or omits to state
a material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. Such counsel shall
also state that they do not know of any amendment to the Registration Statement
required to be filed or of any contracts or other documents of a character
required to be filed as an exhibit to the Registration Statement or required to
be described in the Registration Statement or the Prospectus which are not
filed or described as required;
(d) Vinson & Elkins, L.L.P., special counsel for the Selling
Stockholder, shall have furnished to you their written opinion (a
draft of each such opinion is attached as Annex II(c) hereto), dated
the First Time of Delivery, in form and substance satisfactory to you,
to the effect that:
(i) A Power-of-Attorney and a Custody Agreement have
been duly executed and delivered by the Selling Stockholder and
constitute valid and binding agreements of the Selling
Stockholder in accordance with their terms;
(ii) This Agreement has been duly executed and
delivered by or on behalf of the Selling Stockholder; and the
sale of the Shares to be sold by the Selling Stockholder
hereunder and the compliance by the Selling Stockholder with all
of the provisions of this Agreement, the Power-of-Attorney and
the Custody Agreement and the consummation of the transactions
herein and therein contemplated will not conflict with or result
in a breach or violation of any terms or provisions of, or
constitute a default under, any statute, indenture, mortgage,
deed of trust, loan agreement or other material agreement or
instrument known to such counsel to which the Selling Stockholder
is a party or by which the Selling Stockholder is bound or to
which any of the property or assets of the Selling Stockholder is
subject, nor will such action result in any violation of the
provisions of any order, rule or regulation known to such counsel
(other than applicable federal or state securities laws) of any
court or governmental agency or body having jurisdiction over the
Selling Stockholder or the property of the Selling Stockholder;
(iii) No consent, approval, authorization or order of
any court or governmental agency or body is required for the
consummation of the transactions contemplated by this Agreement
in connection with the Shares to be sold by the Selling
Stockholder hereunder, except (i) the registration under the Act
of the Shares, (ii) such consents, approvals, authorizations,
registrations or qualifications as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters, and (iii) the
filings required under the H-S-R Act and the waiting period
thereunder, which has expired or been terminated;
(iv) Immediately prior to the First Time of Delivery,
the Selling Stockholder was the holder of record of the Shares to
be sold at the First Time of Delivery by the Selling Stockholder
under this Agreement; and
(v) Good and valid title to such Shares, free and
clear of all liens, encumbrances, equities or claims, has been
transferred to each of the several Underwriters who have
purchased such Shares in good faith and without notice of any
such lien, equity or claim or any other adverse claim within the
meaning of the Uniform Commercial Code.
In rendering the opinion in paragraphs (ii) and (iv), such counsel may
rely upon a certificate of such
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<PAGE> 15
Selling Stockholder in respect of matters of fact as to ownership of, and
liens, encumbrances, equities or claims on, the Shares sold by such Selling
Stockholder, provided that such counsel shall state that they believe that both
you and they are justified in relying upon such certificate;
(e) On the date of the Prospectus at a time prior to
the execution of this Agreement, at 9:30 a.m., New York City
time, on the effective date of any post-effective amendment to
the Registration Statement filed subsequent to the date of this
Agreement and also at each Time of Delivery, Arthur Anderson LLP
shall have furnished to you a letter or letters, dated the
respective dates of delivery thereof, in form and substance
satisfactory to you, to the effect set forth in Annex I hereto
(the executed copy of the letter delivered prior to the execution
of this Agreement is attached as Annex I(a) hereto and a draft of
the form of letter to be delivered on the effective date of any
post-effective amendment to the Registration Statement and as of
each Time of Delivery is attached as Annex I(b) hereto);
(f)(i) Neither the Company nor any of the Founding
Companies shall have sustained since the date of the latest
audited financial statements included in the Prospectus any loss
or interference with its business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from any
labor dispute or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus,
and (ii) since the respective dates as of which information is
given in the Prospectus there shall not have been any change in
the capital stock, short-term debt or long-term debt of the
Company or any of the Founding Groups or any change, or any
development involving a prospective change, in or affecting the
general affairs, management, financial position, stockholders'
equity or results of operations of the Company and the Founding
Groups, otherwise than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in
Clause (i) or (ii), is in the judgment of the Representatives so
material and adverse as to make it impracticable or inadvisable
to proceed with the public offering or the delivery of the Shares
being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus;
(g) On or after the date hereof there shall not have
occurred any of the following: (i) a suspension or material
limitation in trading in securities generally on the Exchange;
(ii) a suspension or material limitation in trading in the
Company's securities on the Exchange; (iii) a general moratorium
on commercial banking activities declared by either Federal or
New York State authorities; or (iv) the outbreak or escalation of
hostilities involving the United States or the declaration by the
United States of a national emergency or war, if the effect of
any such event specified in this Clause (iv) in the judgment of
the Representatives makes it impracticable or inadvisable to
proceed with the public offering or the delivery of the Shares
being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus;
(h) The Shares at such Time of Delivery shall have
been duly listed, subject to notice of issuance, on the Exchange;
(i) The Company shall have complied with the
provisions of Section 5(c) hereof with respect to the furnishing
of prospectuses on the New York Business Day next succeeding the
date of this Agreement;
(j) The Company has obtained and delivered to the
Underwriters executed copies of an agreement from each
stockholder of each Founding Company substantially to the effect
set forth in Subsection 1(b)(iv) hereof in form and substance
satisfactory to you;
(k) The Company and the Selling Stockholder shall have
furnished or caused to be
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<PAGE> 16
furnished to you at such Time of Delivery certificates of
officers of the Company and of the Selling Stockholder,
respectively, reasonably satisfactory to you as to the accuracy
of the representations and warranties of the Company and the
Selling Stockholder, respectively, herein at and as of such Time
of Delivery, as to the performance by the Company and the Selling
Stockholder of all of their respective obligations hereunder to
be performed at or prior to such Time of Delivery, and as to such
other matters as you may reasonably request, and the Company
shall have furnished or caused to be furnished certificates as to
the matters set forth in subsections (a) and (f) of this Section;
(l) The Manufacturers' Consents shall be valid and
binding and in full force and effect;
(m) Each of the Acquisitions shall have been
consummated pursuant to the Stock Purchase Agreements, and all of
the conditions thereto, as set forth in the Stock Purchase
Agreements, shall have been satisfied; and
(n) Each of Vinson & Elkins, L.L.P. and Abowitz,
Rhodes & Dahnke, shall have furnished to the Company their
written confirmation, dated such Time of Delivery, of their
opinions previously delivered to the Company, in form and
substance satisfactory to you.
8. (a) The Company will indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse
each Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such action or
claim as such expenses are incurred; provided, however, that the Company shall
not be liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through Goldman, Sachs & Co.
expressly for use therein.
(b) The Selling Stockholder will indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by such Selling Stockholder expressly for use therein;
and will reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or defending any
such action or claim as such expenses are incurred; provided, however, that the
Selling Stockholder shall not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary
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<PAGE> 17
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through Goldman, Sachs & Co.
expressly for use therein; and provided, further, that the liability of the
Selling Shareholder under this Section 8(b) shall be limited to an amount equal
to the initial public offering price per Share set forth on the cover page of
the Prospectus multiplied by the number of Shares sold by the Selling
Shareholder pursuant to this Agreement.
(c) Each Underwriter will indemnify and hold harmless the Company
and the Selling Stockholder against any losses, claims, damages or liabilities
to which the Company or the Selling Stockholder may become subject, under the
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon an untrue statement
or alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through Goldman, Sachs & Co.
expressly for use therein; and will reimburse the Company and the Selling
Stockholder for any legal or other expenses reasonably incurred by the Company
or the Selling Stockholder in connection with investigating or defending any
such action or claim as such expenses are incurred.
(d) Promptly after receipt by an indemnified party under subsection
(a), (b) or (c) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against
the indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the
indemnifying party), and, after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under such
subsection for any legal expenses of other counsel or any other expenses, in
each case subsequently incurred by such indemnified party, in connection with
the defense thereof other than reasonable costs of investigation. No
indemnifying party shall, without the written consent of the indemnified party,
effect the settlement or compromise of, or consent to the entry of any judgment
with respect to, any pending or threatened action or claim in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified party is an actual or potential party to such action or claim)
unless such settlement, compromise or judgment (i) includes an unconditional
release of the indemnified party from all liability arising out of such action
or claim and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of any indemnified party.
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Company and the Selling Stockholder on
the one hand and the
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<PAGE> 18
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under subsection (d) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and the Selling Stockholder on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Stockholder on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses)
received by the Company and the Selling Stockholder bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company or the Selling Stockholder on the one hand or the Underwriters on
the other and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company,
the Selling Stockholder and the Underwriters agree that it would not be just
and equitable if contributions pursuant to this subsection (e) were determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this subsection (e). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to
above in this subsection (e) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (e), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (e) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(f) The obligations of the Company and the Selling Stockholder under
this Section 8 shall be in addition to any liability which the Company and the
respective Selling Stockholder may otherwise have and shall extend, upon the
same terms and conditions, to each person, if any, who controls any Underwriter
within the meaning of the Act; and the obligations of the Underwriters under
this Section 8 shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each officer and director of the Company (including any person
who, with his or her consent, is named in the Registration Statement as about
to become a director of the Company) and to each person, if any, who controls
the Company or any Selling Stockholder within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to
purchase the Shares which it has agreed to purchase hereunder at a Time of
Delivery, you may in your discretion arrange for you or another party or other
parties to purchase such Shares on the terms contained herein. If within
thirty-six hours after such default by any Underwriter you do not arrange for
the purchase of such Shares, then the Company and the Selling Stockholders
shall be entitled to a further period of thirty-six hours within which to
procure another party or other parties satisfactory to you to purchase such
Shares on such terms. In the event that, within the respective prescribed
periods, you notify the Company that you have
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<PAGE> 19
so arranged for the purchase of such Shares, or the Company notifies you that
they have so arranged for the purchase of such Shares, you or the Company shall
have the right to postpone a Time of Delivery for a period of not more than
seven days, in order to effect whatever changes may thereby be made necessary
in the Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your opinion may thereby be
made necessary. The term "Underwriter" as used in this Agreement shall include
any person substituted under this Section with like effect as if such person
had originally been a party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you and the Company
as provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased does not exceed one-eleventh of the aggregate number of all
the Shares to be purchased at such Time of Delivery, then the Company shall
have the right to require each non-defaulting Underwriter to purchase the
number of Shares which such Underwriter agreed to purchase hereunder at such
Time of Delivery and, in addition, to require each non-defaulting Underwriter
to purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you and the Company
as provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased exceeds one-eleventh of the aggregate number of all of the
Shares to be purchased at such Time of Delivery, or if the Company shall not
exercise the right described in subsection (b) above to require non-defaulting
Underwriters to purchase Shares of a defaulting Underwriter or Underwriters,
then this Agreement (or, with respect to the Second Time of Delivery, the
obligations of the Underwriters to purchase and of the Company to sell the
Optional Shares) shall thereupon terminate, without liability on the part of
any non-defaulting Underwriter or the Company or the Selling Stockholders,
except for the expenses to be borne by the Company and the Selling Stockholders
and the Underwriters as provided in Section 6 hereof and the indemnity and
contribution agreements in Section 8 hereof; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations,
warranties and other statements of the Company, the Selling Stockholders and
the several Underwriters, as set forth in this Agreement or made by or on
behalf of them, respectively, pursuant to this Agreement, shall remain in full
force and effect, regardless of any investigation (or any statement as to the
results thereof) made by or on behalf of any Underwriter or any controlling
person of any Underwriter, or the Company, or any of the Selling Stockholders,
or any officer or director or controlling person of the Company, or any
controlling person of any Selling Stockholder, and shall survive delivery of
and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9
hereof, neither the Company nor the Selling Stockholder shall then be under any
liability to any Underwriter except as provided in Sections 6 and 8 hereof;
but, if for any other reason any Shares are not delivered by or on behalf of
the Company and the Selling Stockholder as provided herein, the Company and
the Selling Stockholder pro rata (based on the number of Shares to be sold by
the Company and such Selling Stockholder hereunder) will reimburse the
Underwriters through you for all out-of-pocket expenses approved in writing by
you, including fees and disbursements of counsel, reasonably incurred by the
Underwriters in making preparations for the purchase, sale and delivery of the
Shares not so delivered, but the Company and the Selling Stockholder shall then
be under no further liability to any Underwriter in respect of the Shares not
so delivered except as provided in Sections 6 and 8 hereof.
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<PAGE> 20
12. In all dealings hereunder, you shall act on behalf of each of
the Underwriters, and the parties hereto shall be entitled to act and rely upon
any statement, request, notice or agreement on behalf of any Underwriter made
or given by you by Goldman, Sachs & Co. on behalf of you as the
representatives; and in all dealings with any Selling Stockholder hereunder,
you and the Company shall be entitled to act and rely upon any statement,
request, notice or agreement on behalf of such Selling Stockholder made or
given by any or all of the Attorneys-in-Fact for such Selling Stockholder.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex
or facsimile transmission to you as the representatives in care of Goldman,
Sachs & Co., 85 Broad Street, New York, New York 10004, Attention: Registration
Department; if to any Selling Stockholder shall be delivered or sent by mail,
telex or facsimile transmission to counsel for such Selling Stockholder at its
address set forth in Schedule II hereto; and if to the Company shall be
delivered or sent by mail, telex or facsimile transmission to the address of
the Company set forth in the Registration Statement, Attention: Secretary;
provided, however, that any notice to an Underwriter pursuant to Section 8(c)
hereof shall be delivered or sent by mail, telex or facsimile transmission to
such Underwriter at its address set forth in its Underwriters' Questionnaire or
telex constituting such Questionnaire, which address will be supplied to the
Company or the Selling Stockholder by you on request. Any such statements,
requests, notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and the Selling Stockholder and, to
the extent provided in Sections 8 and 10 hereof, the officers and directors of
the Company and each person who controls the Company, any Selling Stockholder
or any Underwriter, and their respective heirs, executors, administrators,
successors and assigns, and no other person shall acquire or have any right
under or by virtue of this Agreement. No purchaser of any of the Shares from
any Underwriter shall be deemed a successor or assign by reason merely of such
purchase.
14. Time shall be of the essence of this Agreement. As used herein,
the term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please sign and
return to us ten counterparts hereof, and upon the acceptance hereof by you, on
behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement among each of the Underwriters, the
Company and the Selling Stockholder. It is understood that your acceptance of
this letter on behalf of each of the Underwriters is pursuant to the authority
set forth in a form of Agreement among Underwriters, the form of which shall be
submitted to the Company and the Selling Stockholders for examination, upon
request, but without warranty on your part as to the authority of the signers
thereof.
20
<PAGE> 21
Any person executing and delivering this Agreement as Attorney-in-Fact for
a Selling Stockholder represents by so doing that he has been duly appointed as
Attorney-in-Fact by such Selling Stockholder pursuant to a validly existing and
binding Power-of-Attorney which authorizes such Attorney-in-Fact to take such
action.
Very truly yours,
Group 1 Automotive, Inc.
By:
---------------------------------
Name:
Title:
W.C. Smith
By:
---------------------------------
Name:
Title:
As Attorney-in-Fact acting on
behalf of W.C. Smith
Accepted as of the date hereof:
Goldman, Sachs & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
NationsBanc Montgomery Securities, Inc.
By:
---------------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
21
<PAGE> 22
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF PURCHASED IF
FIRM SHARES MAXIMUM OPTION
UNDERWRITER TO BE PURCHASED EXERCISED
----------- --------------- ---------------
<S> <C> <C>
Goldman, Sachs & Co. . . . . . . . . . . . . . . . . . . . . . .
Merrill Lynch, Pierce, Fenner & Smith Incorporated . . . . . . .
NationsBanc Montgomery Securities, Inc. . . . . . . . . . . . . . _________ _________
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
============ =============
</TABLE>
22
<PAGE> 23
SCHEDULE II
<TABLE>
<CAPTION>
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF SOLD IF
SHARES MAXIMUM OPTION
TO BE SOLD EXERCISED
------------------- -----------------------
<S> <C> <C>
The Company. . . . . . . . . . . . . . . . . . . . . . . . . .
The Selling Stockholder: 4,428,136 720,000
W.C. Smith(a) . . . . . . . . . . . . . . . . . . . . . 371,864 --
--------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . 4,800,000 720,000
========= =======
</TABLE>
(a) This Selling Stockholder is represented by Vinson & Elkins, 1001 Fannin
Street, Houston, TX 77002 and has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT
LESS THAN TWO)], and each of them, as the Attorneys-in-Fact for such Selling
Stockholder.
23
<PAGE> 1
EXHIBIT 4.1
COMMON STOCK [LOGO] PAR VALUE $.01
NUMBER SHARES
1 GPI
INCORPORATED UNDER THIS CERTIFICATE IS TRANSFERABLE
THE LAWS OF THE IN NEW YORK, NY
STATE OF DELAWARE AND RIDGEFIELD PARK, NJ
CUSIP 398905 10 9
SEE REVERSE FOR CERTAIN DEFINITIONS
GROUP 1 AUTOMOTIVE, INC.
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK
of Group 1 Automotive, Inc. (hereinafter referred to as the "Corporation"),
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
Witness the seal of the Corporation and the signatures of its duly
authorized Officers.
Dated:
/s/ B.B. HOLLINGSWORTH, JR. COUNTERSIGNED AND REGISTERED:
CHAIRMAN PRESIDENT AND CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
CHIEF EXECUTIVE OFFICER TRANSFER AGENT AND REGISTRAR
[SEAL]
/s/ SCOTT L. THOMPSON BY
SENIOR VICE PRESIDENT, TREASURER AUTHORIZED SIGNATURE
AND CHIEF FINANCIAL OFFICER
<PAGE> 2
NON-NEGOTIABLE COMMEMORATIVE CERTIFICATE
GROUP 1 AUTOMOTIVE, INC.
The Corporation will furnish to the record holder of this certificate
without charge on written request to such corporation at its principal place of
business a full statement of the powers, designations, preferences and
relative, participating, optional or other special rights of each class of
stock or series thereof which such corporation is authorized to issue and the
qualifications, limitations or restrictions of such preferences and/or rights.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
TEN ENT - as tenants by the ------ --------
entireties (Cust) (Minor)
JT TEN - as joint tenants with under Uniform Gifts to
right of survivorship Minors
and not as tenants Act
in common ------------------
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, hereby sell, assign and transfer unto
--------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
----------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Shares
----------------------------------------------------------------------
of the Capital Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
-------------------------------------------------------------------
Attorney to transfer the said shares on the books of the within named
Corporation with full power of substitution in the premises.
Dated
---------------------------------
-------------------------------------------
NOTICE: (SIGNATURE)
THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR
WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
-------------------------------------------
(SIGNATURE)
THE SIGNATURE(S) SHOULD BE GURANTEED BY AN
"ELIGIBLE GURANTOR INSTITUTION" AS DEFINED
IN RULE 17 AD-16 UNDER THE SECURITIES AND
EXCHANGE ACT 103A, AS AMENDED.
Signature Guaranteed By:
--------------------------------------
<PAGE> 3
This certificate also evidences and entitles the holder hereof to
certain Rights as set forth in a Rights Agreement between Group 1 Automotive,
Inc. and ChaseMellon Shareholder Services, L.L.C., dated as of October 3, 1997
(the "Rights Agreement"), the terms of which are hereby incorporated herein by
reference and a copy of which is on file at the principal executive offices of
Group 1 Automotive, Inc. Under certain circumstances, as set forth in the
Rights Agreement, such Rights will be evidenced by seperate certificates and
will no longer be evidenced by this certificate. Group 1 Automotive, Inc. will
mail to the holder of this certificate a copy of the Rights Agreement without
charge after receipt of a written request therefor. As described in the Rights
Agreement, Rights issued to or acquired by any Acquiring Person or any
Affiliate or Associate thereof (each as defined in the Rights Agreement) shall,
under certain circumstances, become null and void.
<PAGE> 1
EXHIBIT 5.1
October 14, 1997
Group 1 Automotive, Inc.
950 Echo Lane, Suite 350
Houston, Texas 77024
Ladies and Gentlemen:
We are acting as counsel for Group 1 Automotive, Inc., a Delaware
corporation (the "Company") and W.C. Smith (the "Selling Stockholder"), in
connection with the proposed offer and sale by the Company and the Selling
Stockholder to the Underwriters (the "Underwriters"), pursuant to the
prospectus forming a part of a Registration Statement on Form S-1, File No.
333-29893, originally filed with the Securities and Exchange Commission (the
"S.E.C.") on June 24, 1997 (such Registration Statement, as amended at the
effective date thereof being referred to herein as the "Registration
Statement"), of an aggregate of 4,800,000 shares of Common Stock, par value
$.01 per share ("Common Stock"), of the Company, together with a maximum of
720,000 shares of Common Stock which may be sold to the Underwriters pursuant
to the over-allotment option provided in the Underwriting Agreement
(collectively, said shares of Common Stock are referred to herein as the
"Shares"). Capitalized terms used but not defined herein have the meanings set
forth in the Registration Statement.
We are rendering this opinion as of the time the Registration
Statement becomes effective in accordance with Section 8(a) of the Securities
Act.
In connection with the opinion expressed herein, we have examined,
among other things, the Restated Certificate of Incorporation and the Bylaws of
the Company, the records of corporate proceedings that have occurred prior to
the date hereof with respect to such offering, the Registration Statement and
the form of Underwriting Agreement to be executed among the Company and
Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
NationsBanc Montgomery Securities, Inc., as Representative of the several
Underwriters. We have also reviewed such questions of law as we have deemed
necessary or appropriate.
Based upon the foregoing, we are of the opinion that (i) the Shares
proposed to be sold by the Company to the Underwriters have been validly
authorized for issuance and, upon the issuance and delivery thereof in
accordance with the provisions of the Underwriting Agreement (assuming that it
is executed in the form reviewed by us) and as set forth in the Registration
Statement, will be validly issued, fully paid and nonassessable and (ii) the
Shares proposed to be sold by the Selling
<PAGE> 2
Group 1 Automotive, Inc.
Page 2
October 14, 1997
Stockholder to the Underwriters, when sold as described in the Registration
Statement, will be validly issued, fully paid and nonassessable.
This opinion is limited in all respects to the General Corporation Law
of the State of Delaware.
We hereby consent to the statements with respect to us under the
headings "Validity of Common Stock" and "Risk Factors -- No Agreement with
American Honda Motor Co., Inc." in the prospectus forming a part of the
Registration Statement and to the filing of this opinion as an exhibit to the
Registration Statement, but we do not thereby admit that we are within the
class of persons whose consent is required under the provisions of the
Securities Act of 1933, as amended, or the rules and regulations of the S.E.C.
issued thereunder.
Very truly yours,
/s/ Vinson & Elkins L.L.P.
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into between Group
1 Automotive, Inc. having offices at 950 Echo Lane, Suite 350, Houston, Texas
77024 ("Employer"), and B. B. Hollingsworth, Jr., an individual currently
residing at 5763 Indian Circle, Houston, Texas 77057 ("Employee"), to be
effective as of October __, 1997.
For and in consideration of the mutual promises, covenants, and
obligations contained herein, Employer and Employee agree as follows:
1. EMPLOYMENT AND DUTIES:
1.1. Employer agrees to employ Employee, and Employee agrees to be
employed by Employer, beginning October __, 1997 and continuing throughout the
Term (as defined below) of this Agreement, subject to the terms and conditions
of this Agreement.
1.2. Employee shall serve as "Chief Executive Officer" of Employer.
Employee agrees to serve in the assigned position and to perform diligently and
to the best of Employee's abilities the duties and services appertaining to
such position as determined by Employer, as well as such additional or
different duties and services appropriate to such position which Employee from
time to time may be reasonably directed to perform by Employer. Employee shall
at all times comply with and be subject to such policies and procedures as
Employer may establish from time to time.
1.3. Employee shall, during the period of Employee's employment by
Employer, devote Employee's full business time, energy, and best efforts to the
business and affairs of Employer. Employee may not engage, directly or
indirectly, in any other business, investment, or activity that interferes with
Employee's performance of Employee's duties hereunder, is contrary to the
interests of Employer or any of its subsidiaries or affiliates, or requires any
significant portion of Employee's business time; provided, however, that
Employee may engage in passive personal investments that do not conflict with
the business and affairs of the Employer or any of its subsidiaries or
affiliates or interfere with Employee's performance of his or her duties
hereunder.
1.4. Employee acknowledges and agrees that Employee owes a
fiduciary duty of loyalty, fidelity and allegiance to act at all times in the
best interests of Employer or any of its subsidiaries or affiliates and to do
no act which would injure the business, interests, or reputation of Employer or
any of its subsidiaries or affiliates. In keeping with these duties, Employee
shall make full disclosure to Employer of all business opportunities pertaining
to Employer's business and shall not appropriate for Employee's own benefit
business opportunities concerning the subject matter of the fiduciary
relationship.
1.5. It is agreed that any direct or indirect interest in,
connection with, or benefit from any outside activities, particularly
commercial activities, which interest might in any way adversely affect
Employer, or any of its affiliates, involves a possible conflict of interest.
In keeping with Employee's fiduciary duties to Employer, Employee agrees that
Employee shall not knowingly become involved in a conflict of interest with
Employer, or its affiliates, or upon discovery thereof, allow such a conflict
to continue. Moreover, Employee agrees that Employee shall disclose to
Employer's General Counsel
<PAGE> 2
(who shall be Employer's outside General Counsel unless Employer has employed
an inside General Counsel) any facts which might involve such a conflict of
interest that has not been approved by Employer's President. Employer and
Employee recognize that it is impossible to provide an exhaustive list of
actions or interests which constitute a "conflict of interest". Moreover,
Employer and Employee recognize there are many borderline situations. In some
instances, full disclosure of facts by Employee to Employer's General Counsel
may be all that is necessary to enable Employer or its subsidiaries or
affiliates to protect its interests. In others, if no improper motivation
appears to exist and the interests of Employer or its subsidiaries or
affiliates have not suffered, prompt elimination of the outside interest will
suffice. In still others, it may be necessary for Employer to terminate the
employment relationship. Employee agrees that Employer's determination as to
whether a conflict of interest exists shall be conclusive. Employer reserves
the right to take such action as, in its judgment, will end the conflict.
2. COMPENSATION AND BENEFITS:
2.1. Employee's initial base salary under this Agreement shall be
$360,000.00 per annum and shall be paid in semi-monthly installments in
accordance with Employer's standard payroll practice. Employee's base salary
may be increased from time to time by Employer and, after any such change,
Employee's new level of base salary shall be Employee's base salary for
purposes of this Agreement until the effective date of any subsequent change.
2.2 Employee's participation in bonus plans shall be governed by
the bonus and incentive plans adopted by the Board of Directors of Employer in
which Employee is a participant.
2.3. If Employee is granted stock options, Employee will enter into
a separate written stock option agreement pursuant to which Employee shall be
granted the option to acquire common stock of Employer subject to the terms and
conditions of Employer's 1996 Stock Incentive Plan and the stock option
agreement entered into thereunder. The number of shares, exercise price per
share and other terms of the options shall be as specified in such other
written agreement.
2.4. While employed by Employer, Employee shall be allowed to
participate, on the same basis generally as other employees of Employer, in all
general employee benefit plans and programs, including improvements or
modifications of the same, which on the effective date or thereafter are made
available by Employer to all or substantially all of Employer's employees. Such
benefits, plans, and programs may include, without limitation, medical, health,
and dental care, life insurance, disability protection, and pension plans.
Nothing in this Agreement is to be construed or interpreted to provide greater
rights, participation, coverage, or benefits under such benefit plans or
programs than provided to similarly situated employees pursuant to the terms
and conditions of such benefit plans and programs.
2.5. Employer shall not by reason of this Article 2 be obligated to
institute, maintain, or refrain from changing, amending, or discontinuing, any
such incentive compensation or employee benefit program or plan, so long as
such actions are similarly applicable to covered employees generally. Moreover,
unless specifically provided for in a written plan document adopted by the
Board of Directors of Employer, none of the benefits or arrangements described
in this Article 2 shall be
-2-
<PAGE> 3
secured or funded in any way, and each shall instead constitute an unfunded and
unsecured promise to pay money in the future exclusively from the general
assets of Employer and its subsidiaries and affiliates.
2.6. Employer may withhold from any compensation, benefits, or
amounts payable under this Agreement all federal, state, city, or other taxes
as may be required pursuant to any law or governmental regulation or ruling.
3. TERM OF THIS AGREEMENT, EFFECT OF EXPIRATION OF TERM, AND TERMINATION
PRIOR TO EXPIRATION OF TERM AND EFFECTS OF SUCH TERMINATION:
3.1. The term of this Agreement shall be for five (5) years from
October __, 1997 through October __, 2002. Should Employee remain employed by
Employer beyond the expiration of the Term, such employment shall convert to a
month-to-month relationship terminable at any time by either Employer or
Employee for any reason whatsoever, with or without cause, upon thirty days
notice. Upon such termination of the continued at-will employment relationship
by either Employer or Employee for any reason whatsoever, all future
compensation to which Employee is entitled and all future benefits for which
Employee is eligible shall cease and terminate. Employee shall be entitled to
pro rata salary through the date of such termination, but Employee shall not be
entitled to any bonus with respect to the operations of the Employer and its
subsidiaries and affiliates during the calendar year in which Employee's
employment with Employer is terminated. Upon termination of employment,
Employee shall repay to Employer all advances received by Employee from
Employer or any of its subsidiaries or affiliates, including all advances drawn
against any bonus.
3.2. Notwithstanding any other provisions of this Agreement,
Employer shall have the right to terminate Employee's employment under this
Agreement at any time for any of the following reasons:
(i) For "cause" upon the determination by Employer's Board of
Directors that "cause" exists for the termination of the
employment relationship. As used in this Section 3.2(i), the
term "cause" shall mean (a) Employee has engaged in gross
negligence, gross incompetence or willful misconduct in the
performance of, or Employee's willful refusal without proper
reason to perform, the duties and services required of
Employee pursuant to this Agreement; (b) Employee has been
convicted of a felony; or (c) Employee's material breach of
any material provision of this Agreement or corporate code or
policy. It is expressly acknowledged and agreed that the
decision as to whether "cause" exists for termination of the
employment relationship by Employer is delegated to
Employer's Board of Directors for determination. Employee, if
he so requests, after reasonable notice of such Board of
Directors meeting, shall be entitled to be heard before the
Board of Directors. If Employee disagrees with the decision
reached by Employer's Board of Directors, the dispute will be
limited to whether Employer's Board of Directors reached its
decision in good faith;
-3-
<PAGE> 4
(ii) for any other reason whatsoever, including termination
without cause, in the sole discretion of Employer's Board of
Directors;
(iii) upon Employee's death; or
(iv) upon Employee's becoming incapacitated by accident, sickness,
or other circumstance which in the reasonable opinion of a
qualified doctor approved by Employer's Board of Directors
renders him mentally or physically incapable of performing
the duties and services required of Employee, and which will
continue in the reasonable opinion of such doctor for a
period of not less than 180 days.
The termination of Employee's employment shall constitute a "Termination for
Cause" if made pursuant to Section 3.2(i); the effect of such termination is
specified in Section 3.4. The termination of Employee's employment shall
constitute an "Involuntary Termination" if made pursuant to Section 3.2(ii);
the effect of such termination is specified in Section 3.5. The effect of the
employment relationship being terminated pursuant to Section 3.2(iii) as a
result of Employee's death is specified in Section 3.7. The effect of the
employment relationship being terminated pursuant to Section 3.2(iv) as a
result of the Employee becoming incapacitated is specified in Section 3.8.
3.3. Notwithstanding any other provisions of this Agreement,
Employee shall have the right to terminate the employment relationship under
this Agreement at any time for any of the following reasons:
(i) a material breach by Employer of any material provision of
this Agreement, which remains uncorrected for 30 days
following written notice of such breach by Employee to
Employer's Board of Directors;
(ii) the dissolution of Employer; or
(iii) for any other reason whatsoever, in the sole discretion of
Employee.
The termination of Employee's employment by Employee shall constitute an
"Involuntary Termination" if made pursuant to Section 3.3(i) or 3.3(ii); the
effect of such termination is specified in Section 3.5. The termination of
Employee's employment by Employee shall constitute a "Voluntary Termination" if
made pursuant to Sections 3.3(iii); the effect of such termination is specified
in Section 3.4.
3.4. Upon a "Voluntary Termination" of the employment relationship
by Employee or a termination of the employment relationship for "Cause" by
Employer, all future compensation to which Employee is entitled and all future
benefits for which Employee is eligible shall cease and terminate as of the
date of termination. Employee shall be entitled to pro rata salary through the
date of such termination, but Employee shall not be entitled to any bonuses
with respect to the operations of the Employer and its subsidiaries and
affiliates during the calendar year in which Employee's employment with
Employer is terminated.
-4-
<PAGE> 5
3.5. Upon an Involuntary Termination of the employment relationship
by either Employer or Employee pursuant to Sections 3.2(ii) or 3.3(i), Employee
shall be entitled, in consideration of Employee's continuing obligations
hereunder after such termination (including, without limitation, Employee's
non-competition obligations), to receive the compensation specified in Section
2.1, payable bi-weekly, as if Employee's employment (which shall cease on the
date of such Involuntary Termination) had continued for the full Term of this
Agreement. Upon an Involuntary Termination of the employment relationship by
Employee pursuant to Sections 3.3(ii), Employee shall be entitled, in
consideration of Employee's continuing obligations hereunder after such
termination (including, without limitation, Employee's non-competition
obligations), to receive in a lump sum payment the compensation specified in
Section 2.1 as if Employee's employment (which shall cease on the date of such
Involuntary Termination) had continued for the full Term of this Agreement.
Employee shall not be under any duty or obligation to seek or accept other
employment following Involuntary Termination and the amounts due Employee
hereunder shall not be reduced or suspended if Employee accepts subsequent
employment. Employee's rights under this Section 3.5 are Employee's sole and
exclusive rights against Employer or its subsidiaries or affiliates, and
Employer's and its subsidiaries' and affiliates' sole and exclusive liability
to Employee under this Agreement, in contract, tort, or otherwise, for any
Involuntary Termination of the employment relationship.
3.6. Employee covenants not to sue or lodge any claim, demand or
cause of action against Employer based on Involuntary Termination for any
monies other than those specified in Section 3.5. If Employee breaches this
covenant, Employer, and its subsidiaries' and affiliates' shall be entitled to
recover from Employee all sums expended by Employer, and its subsidiaries and
affiliates (including costs and attorneys' fees) in connection with such suit,
claim, demand or cause of action. Employer and its subsidiaries and affiliates
shall not be entitled to offset any of the amounts specified in the immediately
preceding sentence against amounts otherwise owing by Employer and its
subsidiaries and affiliates to Employee prior to a final determination under
the terms of the arbitration provisions of this Agreement that Employee has
breached the covenant contained in this Section 3.6.
3.7. Upon termination of the employment relationship as a result of
Employee's death, Employee's heirs, administrators, or legatees shall be
entitled to Employee's pro rata salary through the date of such termination,
but Employee's heirs, administrators, or legatees shall not be entitled to any
individual bonuses with respect to the operations of the Employer and its
subsidiaries and affiliates during the calendar year in which Employee's
employment with Employer is terminated.
3.8. Upon termination of the employment relationship as a result of
Employee's incapacity, Employee shall be entitled to his pro rata salary
through the date of such termination, but Employee shall not be entitled to any
individual bonuses with respect to the operations of the Employer and its
subsidiaries and affiliates during the calendar year in which Employee's
employment with Employer is terminated.
3.9. In all cases, the compensation and benefits payable to
Employee under this Agreement upon termination of the employment relationship
shall be reduced and offset by any amounts to which Employee may otherwise be
entitled under any and all severance plans (excluding any pension, retirement
and profit sharing plans of Employer that may be in effect from time to time)
or policies of
-5-
<PAGE> 6
Employer or its subsidiaries or affiliates or any successor to all or a portion
of the business or assets of Employer.
3.10. Termination of the employment relationship shall not terminate
those obligations imposed by this Agreement which are continuing in nature,
including, without limitation, Employee's obligations of confidentiality,
non-competition and Employee's continuing obligations with respect to business
opportunities that had been entrusted to Employee by Employer during the
employment relationship.
3.11. This Agreement governs the rights and obligations of Employer
and Employee with respect to Employee's salary and other perquisites of
employment.
4. UNITED STATES FOREIGN CORRUPT PRACTICES ACT AND OTHER LAWS:
4.1. Employee shall at all times comply with United States laws
applicable to Employee's actions on behalf of Employer and its subsidiaries and
affiliates, including specifically, without limitation, the United States
Foreign Corrupt Practices Act, generally codified in 15 USC 78 (FCPA), as the
FCPA may hereafter be amended, and/or its successor statutes. If Employee
pleads guilty to or nolo contendre or admits civil or criminal liability under
the FCPA or other applicable United States law, or if a court finds that
Employee has personal civil or criminal liability under the FCPA or other
applicable United States law, or if a court finds that Employee committed an
action resulting in Employer or any of its subsidiaries having civil or
criminal liability or responsibility under the FCPA or other applicable United
States law, such action or finding shall constitute "cause" for termination
under this Agreement unless Employer's Board of Directors determines that the
actions found to be in violation of the FCPA or other applicable United States
law were taken in good faith and in compliance with all applicable policies of
Employer. Moreover, to the extent that Employer or any of its subsidiaries is
found or held responsible for any civil or criminal fines or sanctions of any
type under the FCPA or other applicable United States law or suffers other
damages as a result of Employee's actions, Employee shall be responsible for,
and shall reimburse and pay to such Employer an amount of money equal to, such
civil or criminal fines, sanctions or damages. The rights afforded Employer
under this provision are in addition to any and all rights and remedies
otherwise afforded by the law.
5. OWNERSHIP AND PROTECTION OF INFORMATION; COPYRIGHTS:
5.1. Employer owns certain confidential and proprietary information
and trade secrets to which Employee will be given access for the purpose of
carrying out his or her employment responsibilities hereunder. Furthermore,
Employer agrees to provide Employee with confidential and proprietary
information and trade secrets regarding the Employer and its subsidiaries and
affiliates, in order to assist Employee in satisfying his or her obligations
hereunder.
5.2 All information, ideas, concepts, improvements, discoveries,
and inventions, whether patentable or not, which are conceived, made, developed
or acquired by Employee, individually or in conjunction with others, during
Employee's employment by Employer (whether during business hours or otherwise
and whether on Employer's premises or otherwise) which relate to Employer's or
any of
-6-
<PAGE> 7
its subsidiaries' or affiliates' businesses, products or services (including,
without limitation, all such information relating to corporate opportunities,
research, financial and sales data, pricing and trading terms, evaluations,
opinions, interpretations, acquisition prospects, the identity of customers or
their requirements, the identity of key contacts within the customer's
organizations or within the organization of acquisition prospects, or marketing
and merchandising techniques, prospective names, and marks) shall be disclosed
to Employer and are and shall be the sole and exclusive property of Employer.
Upon termination of Employee's employment, for any reason, Employee promptly
shall deliver the same, and all copies thereof, to Employer.
5.3. Employee will not, at any time during or after his employment
by Employer, make any unauthorized disclosure of any confidential business
information or trade secrets of Employer or its subsidiaries or affiliates, or
make any use thereof, except in the carrying out of his employment
responsibilities hereunder. As a result of Employee's employment by Employer,
Employee may also from time to time have access to, or knowledge of,
confidential business information or trade secrets of third parties, such as
customers, suppliers, partners, joint venturers, and the like, of Employer and
its subsidiaries and affiliates. Employee also agrees to preserve and protect
the confidentiality of such third party confidential information and trade
secrets to the same extent, and on the same basis, as Employer's or any of its
subsidiaries' or affiliates' confidential business information and trade
secrets.
5.4. If, during Employee's employment by Employer, Employee creates
any original work of authorship fixed in any tangible medium of expression
which is the subject matter of copyright (such as videotapes, written
presentations on acquisitions, computer programs, E-mail, voice mail,
electronic databases, drawings, maps, architectural renditions, models,
manuals, brochures, or the like) relating to Employer's, or any of its
subsidiaries' or affiliates' businesses, products, or services, whether such
work is created solely by Employee or jointly with others (whether during
business hours or otherwise and whether on Employer's or any of its
subsidiaries' or affiliates' premises or otherwise), Employer shall be deemed
the author of such work if the work is prepared by Employee in the scope of his
or her employment; or, if the work is not prepared by Employee within the scope
of his or her employment but is specially ordered by Employer or any of its
subsidiaries or affiliates as a contribution to a collective work, as a part of
a motion picture or other audiovisual work, as a translation, as a
supplementary work, as a compilation, or as an instructional text, then the
work shall be considered to be work made for hire and Employer or any of its
subsidiaries or affiliates shall be the author of the work. If such work is
neither prepared by Employee within the scope of his or her employment nor a
work specially ordered that is deemed to be a work made for hire, then Employee
hereby agrees to assign, and by these presents does assign, to Employer all of
Employee's worldwide right, title, and interest in and to such work and all
rights of copyright therein.
5.5. Both during the period of Employee's employment by Employer
and thereafter, Employee shall assist Employer, or any of its subsidiaries or
affiliates and their nominees, at any time, in the protection of Employer's or
any of its subsidiaries' or affiliates' worldwide right, title, and interest in
and to information, ideas, concepts, improvements, discoveries, and inventions,
and its copyrighted works, including without limitation, the execution of all
formal assignment documents requested by Employer or any of its subsidiaries or
affiliates or their nominees and the execution of all lawful oaths and
applications for applications for patents and registration of copyright in the
United States and foreign countries.
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<PAGE> 8
6. POST-EMPLOYMENT NON-COMPETITION OBLIGATIONS:
6.1. As part of the consideration for the compensation and benefits to
be paid and extended to Employee hereunder, and as an additional incentive for
Employer to enter into this Agreement, Employer and Employee agree to the
non-competition provisions of this Article 6. Employee agrees that during the
period of Employee's non-competition obligations hereunder, Employee will not,
directly or indirectly for Employee or for others, in any geographic area or
market where Employer or any of its subsidiaries or affiliated companies are
conducting any business as of the date of termination of the employment
relationship or have during the previous twelve months conducted any business:
(i) engage in any business competitive with any line of business
conducted by Employer or any of its subsidiaries or
affiliates;
(ii) render advice or services to, or otherwise assist, any other
person, association, or entity who is engaged, directly or
indirectly, in any business competitive with any line of
business conducted by Employer or any of its subsidiaries or
affiliates;
(iii) encourage or induce any current or former employee of Employer
or any of its subsidiaries or affiliates to leave the
employment of Employer or any of its subsidiaries or
affiliates or proselytize, offer employment, retain, hire or
assist in the hiring of any such employee by any person,
association, or entity not affiliated with Employer or any of
its subsidiaries or affiliates; provided, however, that
nothing in this subsection (iii) shall prohibit Employee from
offering employment to any prior employee of Employer or any
of its subsidiaries or affiliates who was not employed by
Employer or any of its subsidiaries or affiliates at any time
in the twelve (12) months prior to the termination of
Employee's employment.
The non-competition obligations set forth in subsections (i) and (ii) of this
Section 6.1 shall apply during Employee's employment and for a period of three
(3) years after termination of employment. The obligations set forth in
subsection (iii) of this Section 6.1 with respect to employees shall apply
during Employee's employment and for a period of five (5) years after
termination of employment If Employer or any of its subsidiaries or affiliates
abandons a particular aspect of its business, that is, ceases such aspect of
its business with the intention to permanently refrain from such aspect of its
business, then this post-employment non-competition covenant shall not apply to
such former aspect of that business.
6.2. Employee understands that the foregoing restrictions may limit
his ability to engage in certain businesses anywhere in the world during the
period provided for above, but acknowledges that Employee will receive
sufficiently high remuneration and other benefits (e.g., the right to receive
compensation under Section 3.6 for the remainder of the Term upon Involuntary
Termination and access to certain confidential and proprietary information and
trade secrets) under this Agreement to
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<PAGE> 9
justify such restriction. Employee acknowledges that money damages would not be
sufficient remedy for any breach of this Article 6 by Employee, and Employer or
any of its subsidiaries or affiliates shall be entitled to enforce the
provisions of this Article 6 by terminating any payments then owing to Employee
under this Agreement and/or to specific performance and injunctive relief as
remedies for such breach or any threatened breach, without any requirement for
the securing or posting of any bond in connection with such remedies. Such
remedies shall not be deemed the exclusive remedies for a breach of this
Article 6, but shall be in addition to all remedies available at law or in
equity to Employer or any of its subsidiaries or affiliates, including, without
limitation, the recovery of damages from Employee and his agents involved in
such breach.
6.3. It is expressly understood that the restrictions contained in
this Article 6 are related to and result from the agreements of Employer and
Employee in Article 5 and agreed that Employer and Employee consider the
restrictions contained in this Article 6 to be reasonable and necessary to
protect the confidential and proprietary information and trade secrets of
Employer and its subsidiaries and affiliates. Nevertheless, if any of the
aforesaid restrictions are found by a court having jurisdiction to be
unreasonable, or overly broad as to geographic area or time, or otherwise
unenforceable, the parties intend for the restrictions therein set forth to be
modified by such courts so as to be reasonable and enforceable and, as so
modified by the court, to be fully enforced.
7. MISCELLANEOUS:
7.1. For purposes of this Agreement the terms "affiliates" or
"affiliated" means an entity who directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with
Employer.
7.2. Employee shall refrain, both during the employment
relationship and after the employment relationship terminates, from publishing
any oral or written statements about Employer or any of its subsidiaries' or
affiliates' directors, officers, employees, agents or representatives that are
slanderous, libelous, or defamatory; or that disclose private or confidential
information about Employer or any of its subsidiaries' or affiliates' business
affairs, officers, employees, agents, or representatives; or that constitute an
intrusion into the seclusion or private lives of Employer or any of its
subsidiaries' or affiliates' directors, officers, employees, agents, or
representatives; or that give rise to unreasonable publicity about the private
lives of Employer or any of its subsidiaries' or affiliates' officers,
employees, agents, or representatives; or that place Employer or its
subsidiaries' or affiliates' or its officers, employees, agents, or
representatives in a false light before the public; or that constitute a
misappropriation of the name or likeness Employer or any of its subsidiaries'
or affiliates' or its officers, employees, agents, or representatives. A
violation or threatened violation of this prohibition may be enjoined.
7.3. For purposes of this Agreement, notices and all other
communications provided for herein shall be in writing and shall be deemed to
have been duly given when personally delivered or when mailed by United States
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
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<PAGE> 10
If to Employer to:
Group 1 Automotive, Inc.
950 Echo Lane, Suite 350
Houston, TX 77024
Attn: Chief Executive Officer
with a copy to:
Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin Street
Houston, TX 77002-6760
Attn: John S. Watson
If to Employee, to the address shown on the first page hereof.
Either Employer or Employee may furnish a change of address to the other in
writing in accordance herewith, except that notices of changes of address shall
be effective only upon receipt.
7.4. This Agreement shall be governed in all respects by the laws
of the State of Texas, excluding any conflict-of-law rule or principle that
might refer the construction of the Agreement to the laws of another State or
country.
7.5. No failure by either party hereto at any time to give notice
of any breach by the other party of, or to require compliance with, any
condition or provision of this Agreement shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time.
7.6. It is a desire and intent of the parties that the terms,
provisions, covenants, and remedies contained in this Agreement shall be
enforceable to the fullest extent permitted by law. If any such term,
provision, covenant, or remedy of this Agreement or the application thereof to
any person, association, or entity or circumstances shall, to any extent, be
construed to be invalid or unenforceable in whole or in part, then such term,
provision, covenant, or remedy shall be construed in a manner so as to permit
its enforceability under the applicable law to the fullest extent permitted by
law. In any case, the remaining provisions of this Agreement or the application
thereof to any person, association, or entity or circumstances other than those
to which they have been held invalid or unenforceable, shall remain in full
force and effect.
7.7. Any and all claims, demands, cause of action, disputes,
controversies and other matters in question arising out of or relating to this
Agreement, any provision hereof, the alleged breach thereof, or in any way
relating to the subject matter of this Agreement, involving Employer, its
subsidiaries and affiliates and Employee (all of which are referred to herein
as "Claims"), even though some or all of such Claims allegedly are
extra-contractual in nature, whether such Claims sound in
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<PAGE> 11
contract, tort or otherwise, at law or in equity, under state or federal law,
whether provided by statute or the common law, for damages or any other relief,
including equitable relief and specific performance, shall be resolved and
decided by binding arbitration pursuant to the Federal Arbitration Act in
accordance with the Commercial Arbitration Rules then in effect with the
American Arbitration Association. In the arbitration proceeding the Employee
shall select one arbitrator, the Employer shall select one arbitrator and the
two arbitrators so selected shall select a third arbitrator. Should one party
fail to select an arbitrator within five days after notice of the appointment
of an arbitrator by the other party or should the two arbitrators selected by
the Employee and the Employer fail to select an arbitrator within ten days
after the date of the appointment of the last of such two arbitrators, any
person sitting as a Judge of the United States District Court of the Southern
District of Texas, Houston Division, upon application of the Employee or the
Employer, shall appoint an arbitrator to fill such space with the same force
and effect as though such arbitrator had been appointed in accordance with the
immediately preceding sentence of this Section 7.7. The decision of a majority
of the arbitrators shall be binding on the Employee, the Employer and its
subsidiaries and affiliates. The arbitration proceeding shall be conducted in
Houston, Texas. Judgment upon any award rendered in any such arbitration
proceeding may be entered by any federal or state court having jurisdiction.
This agreement to arbitrate shall be enforceable in either federal or
state court. The enforcement of this agreement to arbitrate and all procedural
aspects of this Agreement to arbitrate, including but not limited to, the
construction and interpretation of this agreement to arbitrate, the scope of
the arbitrable issues, allegations of waiver, delay or defenses to
arbitrability, and the rules governing the conduct of the arbitration, shall be
governed by and construed pursuant to the Federal Arbitration Act.
In deciding the substance of any such Claim, the Arbitrators shall
apply the substantive laws of the State of Texas; provided, however, that the
Arbitrators shall have no authority to award treble, exemplary or punitive type
damages under any circumstances regardless of whether such damages may be
available under Texas law, the parties hereby waiving their right, if any, to
recover treble, exemplary or punitive type damages in connection with any such
Claims.
7.8. This Agreement shall be binding upon and inure to the benefit
of Employer its subsidiaries and affiliates and any other person, association,
or entity which may hereafter acquire or succeed to all or a portion of the
business or assets of Employer by any means whether direct or indirect, by
purchase, merger, consolidation, or otherwise. Employee's rights and
obligations under this Agreement are personal and such rights, benefits, and
obligations of Employee shall not be voluntarily or involuntarily assigned,
alienated, or transferred, whether by operation of law or otherwise, by
Employee without the prior written consent of Employer.
7.9. Except as provided in (1) written company policies promulgated
by Employer dealing with issues such as securities trading, business ethics,
governmental affairs and political contributions, consulting fees, commissions
and other payments, compliance with law, investments and outside business
interests as officers and employees, reporting responsibilities, administrative
compliance, and the like, (2) the written benefits, plans, and programs
referenced in Sections 2.2, 2.3 and 2.4, or (3) any signed written agreements
contemporaneously or hereafter executed by Employer and Employee, this
Agreement constitutes the entire agreement of the parties with regard to such
subject matters, and
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<PAGE> 12
contains all of the covenants, promises, representations, warranties, and
agreements between the parties with respect to such subject matters and
replaces and merges previous agreements and discussions pertaining to the
employment relationship between Employer and Employee. Specifically, but not by
way of limitation, any other employment agreement or arrangement in existence
as of the date hereof between Employer or any of its subsidiaries or affiliates
and Employee is hereby canceled and Employee hereby irrevocably waives and
renounces all of Employee's rights and claims under any such agreement or
arrangement.
IN WITNESS WHEREOF, Employer and Employee have duly executed this
Agreement in multiple originals to be effective on the date first stated above.
GROUP 1 AUTOMOTIVE, INC.
By:
---------------------------------------
B. B. Hollingsworth, Jr.
Chief Executive Officer
------------------------------------------
Employee
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<PAGE> 1
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into between Group 1
Automotive, Inc. having offices at 950 Echo Lane, Suite 350, Houston, Texas
77024 ("Employer"), and Robert E. Howard II, an individual currently residing
at 1825 N. Coltrane, Edmond, Oklahoma 73034 ("Employee"), to be effective as of
October __, 1997.
For and in consideration of the mutual promises, covenants, and
obligations contained herein, Employer and Employee agree as follows:
1. EMPLOYMENT AND DUTIES:
1.1. Employer agrees to employ Employee, and Employee agrees to be
employed by Employer, beginning October __, 1997 and continuing throughout the
Term (as defined below) of this Agreement, subject to the terms and conditions
of this Agreement.
1.2. Employee shall serve as "President -- Howard Group" of Employer.
Employee agrees to serve in the assigned position and to perform diligently and
to the best of Employee's abilities the duties and services appertaining to
such position as determined by Employer, as well as such additional or
different duties and services appropriate to such position which Employee from
time to time may be reasonably directed to perform by Employer. Employee shall
at all times comply with and be subject to such policies and procedures as
Employer may establish from time to time.
1.3. Employee shall, during the period of Employee's employment by
Employer, devote Employee's full business time, energy, and best efforts to the
business and affairs of Employer. Employee may not engage, directly or
indirectly, in any other business, investment, or activity that interferes with
Employee's performance of Employee's duties hereunder, is contrary to the
interests of Employer or any of its subsidiaries or affiliates, or requires any
significant portion of Employee's business time; provided, however, that
Employee may engage in passive personal investments that do not conflict with
the business and affairs of the Employer or any of its subsidiaries or
affiliates or interfere with Employee's performance of his or her duties
hereunder.
1.4. Employee acknowledges and agrees that Employee owes a fiduciary
duty of loyalty, fidelity and allegiance to act at all times in the best
interests of Employer or any of its subsidiaries or affiliates and to do no act
which would injure the business, interests, or reputation of Employer or any of
its subsidiaries or affiliates. In keeping with these duties, Employee shall
make full disclosure to Employer of all business opportunities pertaining to
Employer's business and shall not appropriate for Employee's own benefit
business opportunities concerning the subject matter of the fiduciary
relationship.
<PAGE> 2
1.5. It is agreed that any direct or indirect interest in, connection
with, or benefit from any outside activities, particularly commercial
activities, which interest might in any way adversely affect Employer, or any
of its affiliates, involves a possible conflict of interest. In keeping with
Employee's fiduciary duties to Employer, Employee agrees that Employee shall
not knowingly become involved in a conflict of interest with Employer, or its
affiliates, or upon discovery thereof, allow such a conflict to continue.
Moreover, Employee agrees that Employee shall disclose to Employer's General
Counsel (who shall be Employer's outside General Counsel unless Employer has
employed an inside General Counsel) any facts which might involve such a
conflict of interest that has not been approved by Employer's President.
Employer and Employee recognize that it is impossible to provide an exhaustive
list of actions or interests which constitute a "conflict of interest".
Moreover, Employer and Employee recognize there are many borderline situations.
In some instances, full disclosure of facts by Employee to Employer's General
Counsel may be all that is necessary to enable Employer or its subsidiaries or
affiliates to protect its interests. In others, if no improper motivation
appears to exist and the interests of Employer or its subsidiaries or
affiliates have not suffered, prompt elimination of the outside interest will
suffice. In still others, it may be necessary for Employer to terminate the
employment relationship. Employee agrees that Employer's determination as to
whether a conflict of interest exists shall be conclusive. Employer reserves
the right to take such action as, in its judgment, will end the conflict.
2. COMPENSATION AND BENEFITS:
2.1. Employee's initial base salary under this Agreement shall be
$300,000.00 per annum and shall be paid in semi-monthly installments in
accordance with Employer's standard payroll practice. Employee's base salary
may be increased from time to time by Employer and, after any such change,
Employee's new level of base salary shall be Employee's base salary for
purposes of this Agreement until the effective date of any subsequent change.
2.2 Employee's participation in bonus plans shall be governed by the
bonus and incentive plans adopted by the Board of Directors of Employer in
which Employee is a participant.
2.3. If Employee is granted stock options, Employee will enter into a
separate written stock option agreement pursuant to which Employee shall be
granted the option to acquire common stock of Employer subject to the terms and
conditions of Employer's 1996 Stock Incentive Plan and the stock option
agreement entered into thereunder. The number of shares, exercise price per
share and other terms of the options shall be as specified in such other
written agreement.
2.4. While employed by Employer, Employee shall be allowed to
participate, on the same basis generally as other employees of Employer, in all
general employee benefit plans and programs, including improvements or
modifications of the same, which on the effective date or thereafter are made
available by Employer to all or substantially all of Employer's employees.
Such benefits, plans, and programs may include, without limitation, medical,
health, and dental care, life insurance, disability protection, and pension
plans. Nothing in this Agreement is to be construed or interpreted to provide
greater rights, participation, coverage, or benefits under such benefit plans
or programs
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<PAGE> 3
than provided to similarly situated employees pursuant to the terms and
conditions of such benefit plans and programs.
2.5. Employer shall not by reason of this Article 2 be obligated to
institute, maintain, or refrain from changing, amending, or discontinuing, any
such incentive compensation or employee benefit program or plan, so long as
such actions are similarly applicable to covered employees generally.
Moreover, unless specifically provided for in a written plan document adopted
by the Board of Directors of Employer, none of the benefits or arrangements
described in this Article 2 shall be secured or funded in any way, and each
shall instead constitute an unfunded and unsecured promise to pay money in the
future exclusively from the general assets of Employer and its subsidiaries and
affiliates.
2.6. Employer may withhold from any compensation, benefits, or amounts
payable under this Agreement all federal, state, city, or other taxes as may be
required pursuant to any law or governmental regulation or ruling.
3. TERM OF THIS AGREEMENT, EFFECT OF EXPIRATION OF TERM, AND TERMINATION
PRIOR TO EXPIRATION OF TERM AND EFFECTS OF SUCH TERMINATION:
3.1. The term of this Agreement shall be for five (5) years from
October __, 1997 through October __, 2002. Should Employee remain employed by
Employer beyond the expiration of the Term, such employment shall convert to a
month-to-month relationship terminable at any time by either Employer or
Employee for any reason whatsoever, with or without cause, upon thirty days
notice. Upon such termination of the continued at-will employment relationship
by either Employer or Employee for any reason whatsoever, all future
compensation to which Employee is entitled and all future benefits for which
Employee is eligible shall cease and terminate. Employee shall be entitled to
pro rata salary through the date of such termination, but Employee shall not be
entitled to any bonus with respect to the operations of the Employer and its
subsidiaries and affiliates during the calendar year in which Employee's
employment with Employer is terminated. Upon termination of employment,
Employee shall repay to Employer all advances received by Employee from
Employer or any of its subsidiaries or affiliates, including all advances drawn
against any bonus.
3.2. Notwithstanding any other provisions of this Agreement, Employer
shall have the right to terminate Employee's employment under this Agreement at
any time for any of the following reasons:
(i) For "cause" upon the determination by Employer's Board of
Directors that "cause" exists for the termination of the
employment relationship. As used in this Section 3.2(i), the
term "cause" shall mean (a) Employee has engaged in gross
negligence, gross incompetence or willful misconduct in the
performance of, or Employee's willful refusal without proper
reason to perform, the duties and services required of Employee
pursuant to this Agreement; (b) Employee has been convicted of a
felony; or (c) Employee's
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<PAGE> 4
material breach of any material provision of this Agreement or
corporate code or policy. It is expressly acknowledged and
agreed that the decision as to whether "cause" exists for
termination of the employment relationship by Employer is
delegated to Employer's Board of Directors for determination.
Employee, if he so requests, after reasonable notice of such
Board of Directors meeting, shall be entitled to be heard before
the Board of Directors. If Employee disagrees with the decision
reached by Employer's Board of Directors, the dispute will be
limited to whether Employer's Board of Directors reached its
decision in good faith;
(ii) for any other reason whatsoever, including termination without
cause, in the sole discretion of Employer's Board of Directors;
(iii) upon Employee's death; or
(iv) upon Employee's becoming incapacitated by accident, sickness, or
other circumstance which in the reasonable opinion of a qualified
doctor approved by Employer's Board of Directors renders him
mentally or physically incapable of performing the duties and
services required of Employee, and which will continue in the
reasonable opinion of such doctor for a period of not less than
180 days.
The termination of Employee's employment shall constitute a "Termination for
Cause" if made pursuant to Section 3.2(i); the effect of such termination is
specified in Section 3.4. The termination of Employee's employment shall
constitute an "Involuntary Termination" if made pursuant to Section 3.2(ii);
the effect of such termination is specified in Section 3.5. The effect of the
employment relationship being terminated pursuant to Section 3.2(iii) as a
result of Employee's death is specified in Section 3.7. The effect of the
employment relationship being terminated pursuant to Section 3.2(iv) as a
result of the Employee becoming incapacitated is specified in Section 3.8.
3.3. Notwithstanding any other provisions of this Agreement, Employee
shall have the right to terminate the employment relationship under this
Agreement at any time for any of the following reasons:
(i) a material breach by Employer of any material provision of this
Agreement, which remains uncorrected for 30 days following
written notice of such breach by Employee to Employer's Board of
Directors;
(ii) the dissolution of Employer; or
(iii) for any other reason whatsoever, in the sole discretion of
Employee.
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<PAGE> 5
The termination of Employee's employment by Employee shall constitute an
"Involuntary Termination" if made pursuant to Section 3.3(i) or 3.3(ii); the
effect of such termination is specified in Section 3.5. The termination of
Employee's employment by Employee shall constitute a "Voluntary Termination" if
made pursuant to Sections 3.3(iii); the effect of such termination is specified
in Section 3.4.
3.4. Upon a "Voluntary Termination" of the employment relationship by
Employee or a termination of the employment relationship for "Cause" by
Employer, all future compensation to which Employee is entitled and all future
benefits for which Employee is eligible shall cease and terminate as of the
date of termination. Employee shall be entitled to pro rata salary through the
date of such termination, but Employee shall not be entitled to any bonuses
with respect to the operations of the Employer and its subsidiaries and
affiliates during the calendar year in which Employee's employment with
Employer is terminated.
3.5. Upon an Involuntary Termination of the employment relationship by
either Employer or Employee pursuant to Sections 3.2(ii) or 3.3(i), Employee
shall be entitled, in consideration of Employee's continuing obligations
hereunder after such termination (including, without limitation, Employee's
non-competition obligations), to receive the compensation specified in Section
2.1, payable bi-weekly, as if Employee's employment (which shall cease on the
date of such Involuntary Termination) had continued for the full Term of this
Agreement. Upon an Involuntary Termination of the employment relationship by
Employee pursuant to Sections 3.3(ii), Employee shall be entitled, in
consideration of Employee's continuing obligations hereunder after such
termination (including, without limitation, Employee's non-competition
obligations), to receive in a lump sum payment the compensation specified in
Section 2.1 as if Employee's employment (which shall cease on the date of such
Involuntary Termination) had continued for the full Term of this Agreement.
Employee shall not be under any duty or obligation to seek or accept other
employment following Involuntary Termination and the amounts due Employee
hereunder shall not be reduced or suspended if Employee accepts subsequent
employment. Employee's rights under this Section 3.5 are Employee's sole and
exclusive rights against Employer or its subsidiaries or affiliates, and
Employer's and its subsidiaries' and affiliates' sole and exclusive liability
to Employee under this Agreement, in contract, tort, or otherwise, for any
Involuntary Termination of the employment relationship.
3.6. Employee covenants not to sue or lodge any claim, demand or cause
of action against Employer based on Involuntary Termination for any monies
other than those specified in Section 3.5. If Employee breaches this
covenant, Employer, and its subsidiaries' and affiliates' shall be entitled to
recover from Employee all sums expended by Employer, and its subsidiaries and
affiliates (including costs and attorneys' fees) in connection with such suit,
claim, demand or cause of action. Employer and its subsidiaries and affiliates
shall not be entitled to offset any of the amounts specified in the immediately
preceding sentence against amounts otherwise owing by Employer and its
subsidiaries and affiliates to Employee prior to a final determination under
the terms of the arbitration provisions of this Agreement that Employee has
breached the covenant contained in this Section 3.6.
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<PAGE> 6
3.7. Upon termination of the employment relationship as a result of
Employee's death, Employee's heirs, administrators, or legatees shall be
entitled to Employee's pro rata salary through the date of such termination,
but Employee's heirs, administrators, or legatees shall not be entitled to any
individual bonuses with respect to the operations of the Employer and its
subsidiaries and affiliates during the calendar year in which Employee's
employment with Employer is terminated.
3.8. Upon termination of the employment relationship as a result of
Employee's incapacity, Employee shall be entitled to his pro rata salary
through the date of such termination, but Employee shall not be entitled to any
individual bonuses with respect to the operations of the Employer and its
subsidiaries and affiliates during the calendar year in which Employee's
employment with Employer is terminated.
3.9. In all cases, the compensation and benefits payable to Employee
under this Agreement upon termination of the employment relationship shall be
reduced and offset by any amounts to which Employee may otherwise be entitled
under any and all severance plans (excluding any pension, retirement and profit
sharing plans of Employer that may be in effect from time to time) or policies
of Employer or its subsidiaries or affiliates or any successor to all or a
portion of the business or assets of Employer.
3.10. Termination of the employment relationship shall not terminate
those obligations imposed by this Agreement which are continuing in nature,
including, without limitation, Employee's obligations of confidentiality,
non-competition and Employee's continuing obligations with respect to business
opportunities that had been entrusted to Employee by Employer during the
employment relationship.
3.11. This Agreement governs the rights and obligations of Employer and
Employee with respect to Employee's salary and other perquisites of employment.
4. UNITED STATES FOREIGN CORRUPT PRACTICES ACT AND OTHER LAWS:
4.1. Employee shall at all times comply with United States laws
applicable to Employee's actions on behalf of Employer and its subsidiaries and
affiliates, including specifically, without limitation, the United States
Foreign Corrupt Practices Act, generally codified in 15 USC 78 (FCPA), as the
FCPA may hereafter be amended, and/or its successor statutes. If Employee
pleads guilty to or nolo contendre or admits civil or criminal liability under
the FCPA or other applicable United States law, or if a court finds that
Employee has personal civil or criminal liability under the FCPA or other
applicable United States law, or if a court finds that Employee committed an
action resulting in Employer or any of its subsidiaries having civil or
criminal liability or responsibility under the FCPA or other applicable United
States law, such action or finding shall constitute "cause" for termination
under this Agreement unless Employer's Board of Directors determines that the
actions found to be in violation of the FCPA or other applicable United States
law were taken in good faith and in compliance with all applicable policies of
Employer. Moreover, to the extent that Employer or any of its subsidiaries is
found or held responsible for any civil or criminal fines or
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<PAGE> 7
sanctions of any type under the FCPA or other applicable United States law or
suffers other damages as a result of Employee's actions, Employee shall be
responsible for, and shall reimburse and pay to such Employer an amount of
money equal to, such civil or criminal fines, sanctions or damages. The rights
afforded Employer under this provision are in addition to any and all rights
and remedies otherwise afforded by the law.
5. OWNERSHIP AND PROTECTION OF INFORMATION; COPYRIGHTS:
5.1. Employer owns certain confidential and proprietary information
and trade secrets to which Employee will be given access for the purpose of
carrying out his or her employment responsibilities hereunder. Furthermore,
Employer agrees to provide Employee with confidential and proprietary
information and trade secrets regarding the Employer and its subsidiaries and
affiliates, in order to assist Employee in satisfying his or her obligations
hereunder.
5.2 All information, ideas, concepts, improvements, discoveries, and
inventions, whether patentable or not, which are conceived, made, developed or
acquired by Employee, individually or in conjunction with others, during
Employee's employment by Employer (whether during business hours or otherwise
and whether on Employer's premises or otherwise) which relate to Employer's or
any of its subsidiaries' or affiliates' businesses, products or services
(including, without limitation, all such information relating to corporate
opportunities, research, financial and sales data, pricing and trading terms,
evaluations, opinions, interpretations, acquisition prospects, the identity of
customers or their requirements, the identity of key contacts within the
customer's organizations or within the organization of acquisition prospects,
or marketing and merchandising techniques, prospective names, and marks) shall
be disclosed to Employer and are and shall be the sole and exclusive property
of Employer. Upon termination of Employee's employment, for any reason,
Employee promptly shall deliver the same, and all copies thereof, to Employer.
5.3. Employee will not, at any time during or after his employment by
Employer, make any unauthorized disclosure of any confidential business
information or trade secrets of Employer or its subsidiaries or affiliates, or
make any use thereof, except in the carrying out of his employment
responsibilities hereunder. As a result of Employee's employment by Employer,
Employee may also from time to time have access to, or knowledge of,
confidential business information or trade secrets of third parties, such as
customers, suppliers, partners, joint venturers, and the like, of Employer and
its subsidiaries and affiliates. Employee also agrees to preserve and protect
the confidentiality of such third party confidential information and trade
secrets to the same extent, and on the same basis, as Employer's or any of its
subsidiaries' or affiliates' confidential business information and trade
secrets.
5.4. If, during Employee's employment by Employer, Employee creates
any original work of authorship fixed in any tangible medium of expression
which is the subject matter of copyright (such as videotapes, written
presentations on acquisitions, computer programs, E-mail, voice mail,
electronic databases, drawings, maps, architectural renditions, models,
manuals, brochures, or the like) relating to Employer's, or any of its
subsidiaries' or affiliates' businesses, products, or services,
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<PAGE> 8
whether such work is created solely by Employee or jointly with others (whether
during business hours or otherwise and whether on Employer's or any of its
subsidiaries' or affiliates' premises or otherwise), Employer shall be deemed
the author of such work if the work is prepared by Employee in the scope of his
or her employment; or, if the work is not prepared by Employee within the scope
of his or her employment but is specially ordered by Employer or any of its
subsidiaries or affiliates as a contribution to a collective work, as a part of
a motion picture or other audiovisual work, as a translation, as a
supplementary work, as a compilation, or as an instructional text, then the
work shall be considered to be work made for hire and Employer or any of its
subsidiaries or affiliates shall be the author of the work. If such work is
neither prepared by Employee within the scope of his or her employment nor a
work specially ordered that is deemed to be a work made for hire, then Employee
hereby agrees to assign, and by these presents does assign, to Employer all of
Employee's worldwide right, title, and interest in and to such work and all
rights of copyright therein.
5.5. Both during the period of Employee's employment by Employer and
thereafter, Employee shall assist Employer, or any of its subsidiaries or
affiliates and their nominees, at any time, in the protection of Employer's or
any of its subsidiaries' or affiliates' worldwide right, title, and interest in
and to information, ideas, concepts, improvements, discoveries, and inventions,
and its copyrighted works, including without limitation, the execution of all
formal assignment documents requested by Employer or any of its subsidiaries or
affiliates or their nominees and the execution of all lawful oaths and
applications for applications for patents and registration of copyright in the
United States and foreign countries.
6. POST-EMPLOYMENT NON-COMPETITION OBLIGATIONS:
6.1. As part of the consideration for the compensation and benefits to
be paid and extended to Employee hereunder, and as an additional incentive for
Employer to enter into this Agreement, Employer and Employee agree to the non-
competition provisions of this Article 6. Employee agrees that during the
period of Employee's non-competition obligations hereunder, Employee will not,
directly or indirectly for Employee or for others, in any geographic area or
market where Employer or any of its subsidiaries or affiliated companies are
conducting any business as of the date of termination of the employment
relationship or have during the previous twelve months conducted any business:
(i) engage in any business competitive with any line of business
conducted by Employer or any of its subsidiaries or affiliates;
(ii) render advice or services to, or otherwise assist, any other
person, association, or entity who is engaged, directly or
indirectly, in any business competitive with any line of business
conducted by Employer or any of its subsidiaries or affiliates;
(iii) encourage or induce any current or former employee of Employer or
any of its subsidiaries or affiliates to leave the employment of
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<PAGE> 9
Employer or any of its subsidiaries or affiliates or proselytize,
offer employment, retain, hire or assist in the hiring of any
such employee by any person, association, or entity not
affiliated with Employer or any of its subsidiaries or
affiliates; provided, however, that nothing in this subsection
(iii) shall prohibit Employee from offering employment to any
prior employee of Employer or any of its subsidiaries or
affiliates who was not employed by Employer or any of its
subsidiaries or affiliates at any time in the twelve (12) months
prior to the termination of Employee's employment.
The non-competition obligations set forth in subsections (i) and (ii) of this
Section 6.1 shall apply during Employee's employment and for a period of three
(3) years after termination of employment. The obligations set forth in
subsection (iii) of this Section 6.1 with respect to employees shall apply
during Employee's employment and for a period of five (5) years after
termination of employment If Employer or any of its subsidiaries or affiliates
abandons a particular aspect of its business, that is, ceases such aspect of
its business with the intention to permanently refrain from such aspect of its
business, then this post-employment non-competition covenant shall not apply to
such former aspect of that business.
6.2. Employee understands that the foregoing restrictions may limit
his ability to engage in certain businesses anywhere in the world during the
period provided for above, but acknowledges that Employee will receive
sufficiently high remuneration and other benefits (e.g., the right to receive
compensation under Section 3.6 for the remainder of the Term upon Involuntary
Termination and access to certain confidential and proprietary information and
trade secrets) under this Agreement to justify such restriction. Employee
acknowledges that money damages would not be sufficient remedy for any breach
of this Article 6 by Employee, and Employer or any of its subsidiaries or
affiliates shall be entitled to enforce the provisions of this Article 6 by
terminating any payments then owing to Employee under this Agreement and/or to
specific performance and injunctive relief as remedies for such breach or any
threatened breach, without any requirement for the securing or posting of any
bond in connection with such remedies. Such remedies shall not be deemed the
exclusive remedies for a breach of this Article 6, but shall be in addition to
all remedies available at law or in equity to Employer or any of its
subsidiaries or affiliates, including, without limitation, the recovery of
damages from Employee and his agents involved in such breach.
6.3. It is expressly understood that the restrictions contained in
this Article 6 are related to and result from the agreements of Employer and
Employee in Article 5 and agreed that Employer and Employee consider the
restrictions contained in this Article 6 to be reasonable and necessary to
protect the confidential and proprietary information and trade secrets of
Employer and its subsidiaries and affiliates. Nevertheless, if any of the
aforesaid restrictions are found by a court having jurisdiction to be
unreasonable, or overly broad as to geographic area or time, or otherwise
unenforceable, the parties intend for the restrictions therein set forth to be
modified by such courts so as to be reasonable and enforceable and, as so
modified by the court, to be fully enforced.
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<PAGE> 10
7. CONCERNING THE TULSA CHEVROLET DEALERSHIP:
If the shares of common stock of Employer placed in escrow in accordance
with the Stock Purchase Agreement (the "Stock Purchase Agreement") by and among
Employer, Howard Pontiac-GMC, Inc. and the stockholders of Howard Pontiac-GMC,
Inc. are released and distributed according to the formula described in Section
5.19 of the Stock Purchase Agreement, Employer shall release Employee from his
obligations under Section 1 and Section 6 of this Agreement to the extent
necessary to permit Employee to:
(i) Own and operate the Chevrolet dealership in Tulsa, Oklahoma
("Tulsa Chevrolet");
(ii) Own and operate the Honda and Saturn dealerships adjoining Tulsa
Chevrolet;
(iii) Expand the existing Tulsa Chevrolet facility ("Existing
Facility") or construct a replacement facility ("Replacement
Facility") on property within five miles of the Existing
Facility;
(iv) Acquire any other automobile franchise provided that such
acquired automobile franchise is moved into, or adjacent to, the
Existing Facility or the Replacement Facility; and
(v) Temporarily operate any acquired automobile franchise pending the
relocation of such acquired automobile franchise into, or
adjacent to, the Existing Facility or the Replacement Facility.
8. MISCELLANEOUS:
8.1. For purposes of this Agreement the terms "affiliates" or
"affiliated" means an entity who directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with
Employer.
8.2. Employee shall refrain, both during the employment relationship
and after the employment relationship terminates, from publishing any oral or
written statements about Employer or any of its subsidiaries' or affiliates'
directors, officers, employees, agents or representatives that are slanderous,
libelous, or defamatory; or that disclose private or confidential information
about Employer or any of its subsidiaries' or affiliates' business affairs,
officers, employees, agents, or representatives; or that constitute an
intrusion into the seclusion or private lives of Employer or any of its
subsidiaries' or affiliates' directors, officers, employees, agents, or
representatives; or that give rise to unreasonable publicity about the private
lives of Employer or any of its subsidiaries' or affiliates' officers,
employees, agents, or representatives; or that place Employer or its
subsidiaries'
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<PAGE> 11
or affiliates' or its officers, employees, agents, or representatives in a
false light before the public; or that constitute a misappropriation of the
name or likeness Employer or any of its subsidiaries' or affiliates' or its
officers, employees, agents, or representatives. A violation or threatened
violation of this prohibition may be enjoined.
8.3. For purposes of this Agreement, notices and all other
communications provided for herein shall be in writing and shall be deemed to
have been duly given when personally delivered or when mailed by United States
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to Employer to:
Group 1 Automotive, Inc.
950 Echo Lane, Suite 350
Houston, TX 77024
Attn: Chief Executive Officer
with a copy to:
Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin Street
Houston, TX 77002-6760
Attn: John S. Watson
If to Employee, to the address shown on the first page hereof.
with a copy to:
Randall K. Calvert
6520 N. Western, Suite 100
Oklahoma City, Oklahoma 73116
Either Employer or Employee may furnish a change of address to the other in
writing in accordance herewith, except that notices of changes of address shall
be effective only upon receipt.
8.4. This Agreement shall be governed in all respects by the laws of
the State of Oklahoma, excluding any conflict-of-law rule or principle that
might refer the construction of the Agreement to the laws of another State or
country.
8.5. No failure by either party hereto at any time to give notice of
any breach by the other party of, or to require compliance with, any condition
or provision of this Agreement shall be
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<PAGE> 12
deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time.
8.6. It is a desire and intent of the parties that the terms,
provisions, covenants, and remedies contained in this Agreement shall be
enforceable to the fullest extent permitted by law. If any such term,
provision, covenant, or remedy of this Agreement or the application thereof to
any person, association, or entity or circumstances shall, to any extent, be
construed to be invalid or unenforceable in whole or in part, then such term,
provision, covenant, or remedy shall be construed in a manner so as to permit
its enforceability under the applicable law to the fullest extent permitted by
law. In any case, the remaining provisions of this Agreement or the
application thereof to any person, association, or entity or circumstances
other than those to which they have been held invalid or unenforceable, shall
remain in full force and effect.
8.7. Any and all claims, demands, cause of action, disputes,
controversies and other matters in question arising out of or relating to this
Agreement, any provision hereof, the alleged breach thereof, or in any way
relating to the subject matter of this Agreement, involving Employer, its
subsidiaries and affiliates and Employee (all of which are referred to herein
as "Claims"), even though some or all of such Claims allegedly are extra-
contractual in nature, whether such Claims sound in contract, tort or
otherwise, at law or in equity, under state or federal law, whether provided by
statute or the common law, for damages or any other relief, including equitable
relief and specific performance, shall be resolved and decided by binding
arbitration pursuant to the Federal Arbitration Act in accordance with the
Commercial Arbitration Rules then in effect with the American Arbitration
Association. In the arbitration proceeding the Employee shall select one
arbitrator, the Employer shall select one arbitrator and the two arbitrators so
selected shall select a third arbitrator. Should one party fail to select an
arbitrator within five days after notice of the appointment of an arbitrator by
the other party or should the two arbitrators selected by the Employee and the
Employer fail to select an arbitrator within ten days after the date of the
appointment of the last of such two arbitrators, any person sitting as a Judge
of the United States District Court of the Western District of Oklahoma, upon
application of the Employee or the Employer, shall appoint an arbitrator to
fill such space with the same force and effect as though such arbitrator had
been appointed in accordance with the immediately preceding sentence of this
Section 7.7. The decision of a majority of the arbitrators shall be binding on
the Employee, the Employer and its subsidiaries and affiliates. The
arbitration proceeding shall be conducted in Oklahoma City, Oklahoma. Judgment
upon any award rendered in any such arbitration proceeding may be entered by
any federal or state court having jurisdiction.
This agreement to arbitrate shall be enforceable in either federal or
state court. The enforcement of this agreement to arbitrate and all procedural
aspects of this Agreement to arbitrate, including but not limited to, the
construction and interpretation of this agreement to arbitrate, the scope of
the arbitrable issues, allegations of waiver, delay or defenses to
arbitrability, and the rules governing the conduct of the arbitration, shall be
governed by and construed pursuant to the Federal Arbitration Act.
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<PAGE> 13
In deciding the substance of any such Claim, the Arbitrators shall apply
the substantive laws of the State of Oklahoma; provided, however, that the
Arbitrators shall have no authority to award treble, exemplary or punitive type
damages under any circumstances regardless of whether such damages may be
available under Oklahoma law, the parties hereby waiving their right, if any,
to recover treble, exemplary or punitive type damages in connection with any
such Claims.
8.8. This Agreement shall be binding upon and inure to the benefit of
Employer its subsidiaries and affiliates and any other person, association, or
entity which may hereafter acquire or succeed to all or a portion of the
business or assets of Employer by any means whether direct or indirect, by
purchase, merger, consolidation, or otherwise. Employee's rights and
obligations under this Agreement are personal and such rights, benefits, and
obligations of Employee shall not be voluntarily or involuntarily assigned,
alienated, or transferred, whether by operation of law or otherwise, by
Employee without the prior written consent of Employer.
8.9. Except as provided in (1) written company policies promulgated by
Employer dealing with issues such as securities trading, business ethics,
governmental affairs and political contributions, consulting fees, commissions
and other payments, compliance with law, investments and outside business
interests as officers and employees, reporting responsibilities, administrative
compliance, and the like, (2) the written benefits, plans, and programs
referenced in Sections 2.2, 2.3 and 2.4, or (3) any signed written agreements
contemporaneously or hereafter executed by Employer and Employee, this
Agreement constitutes the entire agreement of the parties with regard to such
subject matters, and contains all of the covenants, promises, representations,
warranties, and agreements between the parties with respect to such subject
matters and replaces and merges previous agreements and discussions pertaining
to the employment relationship between Employer and Employee. Specifically,
but not by way of limitation, any other employment agreement or arrangement in
existence as of the date hereof between Employer or any of its subsidiaries or
affiliates and Employee is hereby canceled and Employee hereby irrevocably
waives and renounces all of Employee's rights and claims under any such
agreement or arrangement.
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<PAGE> 14
IN WITNESS WHEREOF, Employer and Employee have duly executed this Agreement in
multiple originals to be effective on the date first stated above.
GROUP 1 AUTOMOTIVE, INC.
By:
------------------------------
B. B. Hollingsworth, Jr.
Chief Executive Officer
-----------------------------------
Employee
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<PAGE> 1
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into between Group
1 Automotive, Inc. having offices at 950 Echo Lane, Suite 350, Houston, Texas
77024 ("Employer"), and Sterling B. McCall, Jr., an individual currently
residing at 37 Saddlebrook, Houston, Texas 77024 ("Employee"), to be effective
as of October __, 1997.
For and in consideration of the mutual promises, covenants, and
obligations contained herein, Employer and Employee agree as follows:
1. EMPLOYMENT AND DUTIES:
1.1. Employer agrees to employ Employee, and Employee agrees to be
employed by Employer, beginning October __, 1997 and continuing throughout the
Term (as defined below) of this Agreement, subject to the terms and conditions
of this Agreement.
1.2. Employee shall serve as "President -- McCall Group" of
Employer. Employee agrees to serve in the assigned position and to perform
diligently and to the best of Employee's abilities the duties and services
appertaining to such position as determined by Employer, as well as such
additional or different duties and services appropriate to such position which
Employee from time to time may be reasonably directed to perform by Employer.
Employee shall at all times comply with and be subject to such policies and
procedures as Employer may establish from time to time.
1.3. Employee shall, during the period of Employee's employment by
Employer, devote Employee's full business time, energy, and best efforts to the
business and affairs of Employer. Employee may not engage, directly or
indirectly, in any other business, investment, or activity that interferes with
Employee's performance of Employee's duties hereunder, is contrary to the
interests of Employer or any of its subsidiaries or affiliates, or requires any
significant portion of Employee's business time; provided, however, that
Employee may engage in passive personal investments that do not conflict with
the business and affairs of the Employer or any of its subsidiaries or
affiliates or interfere with Employee's performance of his or her duties
hereunder.
1.4. Employee acknowledges and agrees that Employee owes a
fiduciary duty of loyalty, fidelity and allegiance to act at all times in the
best interests of Employer or any of its subsidiaries or affiliates and to do
no act which would injure the business, interests, or reputation of Employer or
any of its subsidiaries or affiliates. In keeping with these duties, Employee
shall make full disclosure to Employer of all business opportunities pertaining
to Employer's business and shall not appropriate for Employee's own benefit
business opportunities concerning the subject matter of the fiduciary
relationship.
1.5. It is agreed that any direct or indirect interest in,
connection with, or benefit from any outside activities, particularly
commercial activities, which interest might in any way adversely affect
Employer, or any of its affiliates, involves a possible conflict of interest.
In keeping with Employee's fiduciary duties to Employer, Employee agrees that
Employee shall not knowingly become involved in a conflict of interest with
Employer, or its affiliates, or upon discovery thereof, allow such a conflict
to continue. Moreover, Employee agrees that Employee shall disclose to
Employer's General Counsel (who shall be Employer's outside General Counsel
unless Employer has employed an inside General
<PAGE> 2
Counsel) any facts which might involve such a conflict of interest that has not
been approved by Employer's President. Employer and Employee recognize that it
is impossible to provide an exhaustive list of actions or interests which
constitute a "conflict of interest". Moreover, Employer and Employee recognize
there are many borderline situations. In some instances, full disclosure of
facts by Employee to Employer's General Counsel may be all that is necessary to
enable Employer or its subsidiaries or affiliates to protect its interests. In
others, if no improper motivation appears to exist and the interests of
Employer or its subsidiaries or affiliates have not suffered, prompt
elimination of the outside interest will suffice. In still others, it may be
necessary for Employer to terminate the employment relationship. Employee
agrees that Employer's determination as to whether a conflict of interest
exists shall be conclusive. Employer reserves the right to take such action
as, in its judgment, will end the conflict.
2. COMPENSATION AND BENEFITS:
2.1. Employee's initial base salary under this Agreement shall be
$300,000.00 per annum and shall be paid in semi-monthly installments in
accordance with Employer's standard payroll practice. Employee's base salary
may be increased from time to time by Employer and, after any such change,
Employee's new level of base salary shall be Employee's base salary for
purposes of this Agreement until the effective date of any subsequent change.
2.2 Employee's participation in bonus plans shall be governed by
the bonus and incentive plans adopted by the Board of Directors of Employer in
which Employee is a participant.
2.3. If Employee is granted stock options, Employee will enter into
a separate written stock option agreement pursuant to which Employee shall be
granted the option to acquire common stock of Employer subject to the terms and
conditions of Employer's 1996 Stock Incentive Plan and the stock option
agreement entered into thereunder. The number of shares, exercise price per
share and other terms of the options shall be as specified in such other
written agreement.
2.4. While employed by Employer, Employee shall be allowed to
participate, on the same basis generally as other employees of Employer, in all
general employee benefit plans and programs, including improvements or
modifications of the same, which on the effective date or thereafter are made
available by Employer to all or substantially all of Employer's employees.
Such benefits, plans, and programs may include, without limitation, medical,
health, and dental care, life insurance, disability protection, and pension
plans. Nothing in this Agreement is to be construed or interpreted to provide
greater rights, participation, coverage, or benefits under such benefit plans
or programs than provided to similarly situated employees pursuant to the terms
and conditions of such benefit plans and programs.
2.5. Employer shall not by reason of this Article 2 be obligated to
institute, maintain, or refrain from changing, amending, or discontinuing, any
such incentive compensation or employee benefit program or plan, so long as
such actions are similarly applicable to covered employees generally.
Moreover, unless specifically provided for in a written plan document adopted
by the Board of Directors of Employer, none of the benefits or arrangements
described in this Article 2 shall be secured or funded in any way, and each
shall instead constitute an unfunded and unsecured promise
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<PAGE> 3
to pay money in the future exclusively from the general assets of Employer and
its subsidiaries and affiliates.
2.6. Employer may withhold from any compensation, benefits, or
amounts payable under this Agreement all federal, state, city, or other taxes
as may be required pursuant to any law or governmental regulation or ruling.
3. TERM OF THIS AGREEMENT, EFFECT OF EXPIRATION OF TERM, AND TERMINATION
PRIOR TO EXPIRATION OF TERM AND EFFECTS OF SUCH TERMINATION:
3.1. The term of this Agreement shall be for five (5) years from
October __, 1997 through October __, 2002. Should Employee remain employed by
Employer beyond the expiration of the Term, such employment shall convert to a
month-to-month relationship terminable at any time by either Employer or
Employee for any reason whatsoever, with or without cause, upon thirty days
notice. Upon such termination of the continued at-will employment relationship
by either Employer or Employee for any reason whatsoever, all future
compensation to which Employee is entitled and all future benefits for which
Employee is eligible shall cease and terminate. Employee shall be entitled to
pro rata salary through the date of such termination, but Employee shall not be
entitled to any bonus with respect to the operations of the Employer and its
subsidiaries and affiliates during the calendar year in which Employee's
employment with Employer is terminated. Upon termination of employment,
Employee shall repay to Employer all advances received by Employee from
Employer or any of its subsidiaries or affiliates, including all advances drawn
against any bonus.
3.2. Notwithstanding any other provisions of this Agreement,
Employer shall have the right to terminate Employee's employment under this
Agreement at any time for any of the following reasons:
(i) For "cause" upon the determination by Employer's Board of
Directors that "cause" exists for the termination of the
employment relationship. As used in this Section 3.2(i), the
term "cause" shall mean (a) Employee has engaged in gross
negligence, gross incompetence or willful misconduct in the
performance of, or Employee's willful refusal without proper
reason to perform, the duties and services required of
Employee pursuant to this Agreement; (b) Employee has been
convicted of a felony; or (c) Employee's material breach of
any material provision of this Agreement or corporate code or
policy. It is expressly acknowledged and agreed that the
decision as to whether "cause" exists for termination of the
employment relationship by Employer is delegated to Employer's
Board of Directors for determination. Employee, if he so
requests, after reasonable notice of such Board of Directors
meeting, shall be entitled to be heard before the Board of
Directors. If Employee disagrees with the decision reached by
Employer's Board of Directors, the dispute will be limited to
whether Employer's Board of Directors reached its decision in
good faith;
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<PAGE> 4
(ii) for any other reason whatsoever, including termination without
cause, in the sole discretion of Employer's Board of
Directors;
(iii) upon Employee's death; or
(iv) upon Employee's becoming incapacitated by accident, sickness,
or other circumstance which in the reasonable opinion of a
qualified doctor approved by Employer's Board of Directors
renders him mentally or physically incapable of performing the
duties and services required of Employee, and which will
continue in the reasonable opinion of such doctor for a period
of not less than 180 days.
The termination of Employee's employment shall constitute a "Termination for
Cause" if made pursuant to Section 3.2(i); the effect of such termination is
specified in Section 3.4. The termination of Employee's employment shall
constitute an "Involuntary Termination" if made pursuant to Section 3.2(ii);
the effect of such termination is specified in Section 3.5. The effect of the
employment relationship being terminated pursuant to Section 3.2(iii) as a
result of Employee's death is specified in Section 3.7. The effect of the
employment relationship being terminated pursuant to Section 3.2(iv) as a
result of the Employee becoming incapacitated is specified in Section 3.8.
3.3. Notwithstanding any other provisions of this Agreement,
Employee shall have the right to terminate the employment relationship under
this Agreement at any time for any of the following reasons:
(i) a material breach by Employer of any material provision of
this Agreement, which remains uncorrected for 30 days
following written notice of such breach by Employee to
Employer's Board of Directors;
(ii) the dissolution of Employer; or
(iii) for any other reason whatsoever, in the sole discretion of
Employee.
The termination of Employee's employment by Employee shall constitute an
"Involuntary Termination" if made pursuant to Section 3.3(i) or 3.3(ii); the
effect of such termination is specified in Section 3.5. The termination of
Employee's employment by Employee shall constitute a "Voluntary Termination" if
made pursuant to Sections 3.3(iii); the effect of such termination is specified
in Section 3.4.
3.4. Upon a "Voluntary Termination" of the employment relationship
by Employee or a termination of the employment relationship for "Cause" by
Employer, all future compensation to which Employee is entitled and all future
benefits for which Employee is eligible shall cease and terminate as of the
date of termination. Employee shall be entitled to pro rata salary through the
date of such termination, but Employee shall not be entitled to any bonuses
with respect to the operations of the Employer and its subsidiaries and
affiliates during the calendar year in which Employee's employment with
Employer is terminated.
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<PAGE> 5
3.5. Upon an Involuntary Termination of the employment relationship
by either Employer or Employee pursuant to Sections 3.2(ii) or 3.3(i), Employee
shall be entitled, in consideration of Employee's continuing obligations
hereunder after such termination (including, without limitation, Employee's
non-competition obligations), to receive the compensation specified in Section
2.1, payable bi-weekly, as if Employee's employment (which shall cease on the
date of such Involuntary Termination) had continued for the full Term of this
Agreement. Upon an Involuntary Termination of the employment relationship by
Employee pursuant to Sections 3.3(ii), Employee shall be entitled, in
consideration of Employee's continuing obligations hereunder after such
termination (including, without limitation, Employee's non-competition
obligations), to receive in a lump sum payment the compensation specified in
Section 2.1 as if Employee's employment (which shall cease on the date of such
Involuntary Termination) had continued for the full Term of this Agreement.
Employee shall not be under any duty or obligation to seek or accept other
employment following Involuntary Termination and the amounts due Employee
hereunder shall not be reduced or suspended if Employee accepts subsequent
employment. Employee's rights under this Section 3.5 are Employee's sole and
exclusive rights against Employer or its subsidiaries or affiliates, and
Employer's and its subsidiaries' and affiliates' sole and exclusive liability
to Employee under this Agreement, in contract, tort, or otherwise, for any
Involuntary Termination of the employment relationship.
3.6. Employee covenants not to sue or lodge any claim, demand or
cause of action against Employer based on Involuntary Termination for any
monies other than those specified in Section 3.5. If Employee breaches this
covenant, Employer, and its subsidiaries' and affiliates' shall be entitled to
recover from Employee all sums expended by Employer, and its subsidiaries and
affiliates (including costs and attorneys' fees) in connection with such suit,
claim, demand or cause of action. Employer and its subsidiaries and affiliates
shall not be entitled to offset any of the amounts specified in the immediately
preceding sentence against amounts otherwise owing by Employer and its
subsidiaries and affiliates to Employee prior to a final determination under
the terms of the arbitration provisions of this Agreement that Employee has
breached the covenant contained in this Section 3.6.
3.7. Upon termination of the employment relationship as a result of
Employee's death, Employee's heirs, administrators, or legatees shall be
entitled to Employee's pro rata salary through the date of such termination,
but Employee's heirs, administrators, or legatees shall not be entitled to any
individual bonuses with respect to the operations of the Employer and its
subsidiaries and affiliates during the calendar year in which Employee's
employment with Employer is terminated.
3.8. Upon termination of the employment relationship as a result of
Employee's incapacity, Employee shall be entitled to his pro rata salary
through the date of such termination, but Employee shall not be entitled to any
individual bonuses with respect to the operations of the Employer and its
subsidiaries and affiliates during the calendar year in which Employee's
employment with Employer is terminated.
3.9. In all cases, the compensation and benefits payable to
Employee under this Agreement upon termination of the employment relationship
shall be reduced and offset by any amounts to which Employee may otherwise be
entitled under any and all severance plans (excluding any pension, retirement
and profit sharing plans of Employer that may be in effect from time to time)
or policies of
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Employer or its subsidiaries or affiliates or any successor to all or a portion
of the business or assets of Employer.
3.10. Termination of the employment relationship shall not terminate
those obligations imposed by this Agreement which are continuing in nature,
including, without limitation, Employee's obligations of confidentiality,
non-competition and Employee's continuing obligations with respect to business
opportunities that had been entrusted to Employee by Employer during the
employment relationship.
3.11. This Agreement governs the rights and obligations of Employer
and Employee with respect to Employee's salary and other perquisites of
employment.
4. UNITED STATES FOREIGN CORRUPT PRACTICES ACT AND OTHER LAWS:
4.1. Employee shall at all times comply with United States laws
applicable to Employee's actions on behalf of Employer and its subsidiaries and
affiliates, including specifically, without limitation, the United States
Foreign Corrupt Practices Act, generally codified in 15 USC 78 (FCPA), as the
FCPA may hereafter be amended, and/or its successor statutes. If Employee
pleads guilty to or nolo contendre or admits civil or criminal liability under
the FCPA or other applicable United States law, or if a court finds that
Employee has personal civil or criminal liability under the FCPA or other
applicable United States law, or if a court finds that Employee committed an
action resulting in Employer or any of its subsidiaries having civil or criminal
liability or responsibility under the FCPA or other applicable United States
law, such action or finding shall constitute "cause" for termination under this
Agreement unless Employer's Board of Directors determines that the actions
found to be in violation of the FCPA or other applicable United States law were
taken in good faith and in compliance with all applicable policies of Employer.
Moreover, to the extent that Employer or any of its subsidiaries is found or
held responsible for any civil or criminal fines or sanctions of any type under
the FCPA or other applicable United States law or suffers other damages as a
result of Employee's actions, Employee shall be responsible for, and shall
reimburse and pay to such Employer an amount of money equal to, such civil or
criminal fines, sanctions or damages. The rights afforded Employer under this
provision are in addition to any and all rights and remedies otherwise afforded
by the law.
5. OWNERSHIP AND PROTECTION OF INFORMATION; COPYRIGHTS:
5.1. Employer owns certain confidential and proprietary information
and trade secrets to which Employee will be given access for the purpose of
carrying out his or her employment responsibilities hereunder. Furthermore,
Employer agrees to provide Employee with confidential and proprietary
information and trade secrets regarding the Employer and its subsidiaries and
affiliates, in order to assist Employee in satisfying his or her obligations
hereunder.
5.2 All information, ideas, concepts, improvements, discoveries,
and inventions, whether patentable or not, which are conceived, made, developed
or acquired by Employee, individually or in conjunction with others, during
Employee's employment by Employer (whether during business hours or otherwise
and whether on Employer's premises or otherwise) which relate to Employer's or
any of
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its subsidiaries' or affiliates' businesses, products or services (including,
without limitation, all such information relating to corporate opportunities,
research, financial and sales data, pricing and trading terms, evaluations,
opinions, interpretations, acquisition prospects, the identity of customers or
their requirements, the identity of key contacts within the customer's
organizations or within the organization of acquisition prospects, or marketing
and merchandising techniques, prospective names, and marks) shall be disclosed
to Employer and are and shall be the sole and exclusive property of Employer.
Upon termination of Employee's employment, for any reason, Employee promptly
shall deliver the same, and all copies thereof, to Employer.
5.3. Employee will not, at any time during or after his employment
by Employer, make any unauthorized disclosure of any confidential business
information or trade secrets of Employer or its subsidiaries or affiliates, or
make any use thereof, except in the carrying out of his employment
responsibilities hereunder. As a result of Employee's employment by Employer,
Employee may also from time to time have access to, or knowledge of,
confidential business information or trade secrets of third parties, such as
customers, suppliers, partners, joint venturers, and the like, of Employer and
its subsidiaries and affiliates. Employee also agrees to preserve and protect
the confidentiality of such third party confidential information and trade
secrets to the same extent, and on the same basis, as Employer's or any of its
subsidiaries' or affiliates' confidential business information and trade
secrets.
5.4. If, during Employee's employment by Employer, Employee creates
any original work of authorship fixed in any tangible medium of expression
which is the subject matter of copyright (such as videotapes, written
presentations on acquisitions, computer programs, E-mail, voice mail,
electronic databases, drawings, maps, architectural renditions, models,
manuals, brochures, or the like) relating to Employer's, or any of its
subsidiaries' or affiliates' businesses, products, or services, whether such
work is created solely by Employee or jointly with others (whether during
business hours or otherwise and whether on Employer's or any of its
subsidiaries' or affiliates' premises or otherwise), Employer shall be deemed
the author of such work if the work is prepared by Employee in the scope of his
or her employment; or, if the work is not prepared by Employee within the scope
of his or her employment but is specially ordered by Employer or any of its
subsidiaries or affiliates as a contribution to a collective work, as a part of
a motion picture or other audiovisual work, as a translation, as a
supplementary work, as a compilation, or as an instructional text, then the
work shall be considered to be work made for hire and Employer or any of its
subsidiaries or affiliates shall be the author of the work. If such work is
neither prepared by Employee within the scope of his or her employment nor a
work specially ordered that is deemed to be a work made for hire, then Employee
hereby agrees to assign, and by these presents does assign, to Employer all of
Employee's worldwide right, title, and interest in and to such work and all
rights of copyright therein.
5.5. Both during the period of Employee's employment by Employer
and thereafter, Employee shall assist Employer, or any of its subsidiaries or
affiliates and their nominees, at any time, in the protection of Employer's or
any of its subsidiaries' or affiliates' worldwide right, title, and interest in
and to information, ideas, concepts, improvements, discoveries, and inventions,
and its copyrighted works, including without limitation, the execution of all
formal assignment documents requested by Employer or any of its subsidiaries or
affiliates or their nominees and the execution of all lawful oaths and
applications for applications for patents and registration of copyright in the
United States and foreign countries.
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<PAGE> 8
6. POST-EMPLOYMENT NON-COMPETITION OBLIGATIONS:
6.1. As part of the consideration for the compensation and benefits
to be paid and extended to Employee hereunder, and as an additional incentive
for Employer to enter into this Agreement, Employer and Employee agree to the
non-competition provisions of this Article 6. Employee agrees that during the
period of Employee's non-competition obligations hereunder, Employee will not,
directly or indirectly for Employee or for others, in any geographic area or
market where Employer or any of its subsidiaries or affiliated companies are
conducting any business as of the date of termination of the employment
relationship or have during the previous twelve months conducted any business:
(i) engage in any business competitive with any line of business
conducted by Employer or any of its subsidiaries or
affiliates;
(ii) render advice or services to, or otherwise assist, any other
person, association, or entity who is engaged, directly or
indirectly, in any business competitive with any line of
business conducted by Employer or any of its subsidiaries or
affiliates;
(iii) encourage or induce any current or former employee of Employer
or any of its subsidiaries or affiliates to leave the
employment of Employer or any of its subsidiaries or
affiliates or proselytize, offer employment, retain, hire or
assist in the hiring of any such employee by any person,
association, or entity not affiliated with Employer or any of
its subsidiaries or affiliates; provided, however, that
nothing in this subsection (iii) shall prohibit Employee from
offering employment to any prior employee of Employer or any
of its subsidiaries or affiliates who was not employed by
Employer or any of its subsidiaries or affiliates at any time
in the twelve (12) months prior to the termination of
Employee's employment.
The non-competition obligations set forth in subsections (i) and (ii) of this
Section 6.1 shall apply during Employee's employment and for a period of three
(3) years after termination of employment. The obligations set forth in
subsection (iii) of this Section 6.1 with respect to employees shall apply
during Employee's employment and for a period of five (5) years after
termination of employment If Employer or any of its subsidiaries or affiliates
abandons a particular aspect of its business, that is, ceases such aspect of
its business with the intention to permanently refrain from such aspect of its
business, then this post-employment non-competition covenant shall not apply to
such former aspect of that business.
6.2. Employee understands that the foregoing restrictions may limit
his ability to engage in certain businesses anywhere in the world during the
period provided for above, but acknowledges that Employee will receive
sufficiently high remuneration and other benefits (e.g., the right to receive
compensation under Section 3.6 for the remainder of the Term upon Involuntary
Termination and access to certain confidential and proprietary information and
trade secrets) under this Agreement to
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<PAGE> 9
justify such restriction. Employee acknowledges that money damages would not
be sufficient remedy for any breach of this Article 6 by Employee, and Employer
or any of its subsidiaries or affiliates shall be entitled to enforce the
provisions of this Article 6 by terminating any payments then owing to Employee
under this Agreement and/or to specific performance and injunctive relief as
remedies for such breach or any threatened breach, without any requirement for
the securing or posting of any bond in connection with such remedies. Such
remedies shall not be deemed the exclusive remedies for a breach of this
Article 6, but shall be in addition to all remedies available at law or in
equity to Employer or any of its subsidiaries or affiliates, including, without
limitation, the recovery of damages from Employee and his agents involved in
such breach.
6.3. It is expressly understood that the restrictions contained in
this Article 6 are related to and result from the agreements of Employer and
Employee in Article 5 and agreed that Employer and Employee consider the
restrictions contained in this Article 6 to be reasonable and necessary to
protect the confidential and proprietary information and trade secrets of
Employer and its subsidiaries and affiliates. Nevertheless, if any of the
aforesaid restrictions are found by a court having jurisdiction to be
unreasonable, or overly broad as to geographic area or time, or otherwise
unenforceable, the parties intend for the restrictions therein set forth to be
modified by such courts so as to be reasonable and enforceable and, as so
modified by the court, to be fully enforced.
7. MISCELLANEOUS:
7.1. For purposes of this Agreement the terms "affiliates" or
"affiliated" means an entity who directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with
Employer.
7.2. Employee shall refrain, both during the employment
relationship and after the employment relationship terminates, from publishing
any oral or written statements about Employer or any of its subsidiaries' or
affiliates' directors, officers, employees, agents or representatives that are
slanderous, libelous, or defamatory; or that disclose private or confidential
information about Employer or any of its subsidiaries' or affiliates' business
affairs, officers, employees, agents, or representatives; or that constitute an
intrusion into the seclusion or private lives of Employer or any of its
subsidiaries' or affiliates' directors, officers, employees, agents, or
representatives; or that give rise to unreasonable publicity about the private
lives of Employer or any of its subsidiaries' or affiliates' officers,
employees, agents, or representatives; or that place Employer or its
subsidiaries' or affiliates' or its officers, employees, agents, or
representatives in a false light before the public; or that constitute a
misappropriation of the name or likeness Employer or any of its subsidiaries'
or affiliates' or its officers, employees, agents, or representatives. A
violation or threatened violation of this prohibition may be enjoined.
7.3. For purposes of this Agreement, notices and all other
communications provided for herein shall be in writing and shall be deemed to
have been duly given when personally delivered or when mailed by United States
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
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<PAGE> 10
If to Employer to:
Group 1 Automotive, Inc.
950 Echo Lane, Suite 350
Houston, TX 77024
Attn: Chief Executive Officer
with a copy to:
Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin Street
Houston, TX 77002-6760
Attn: John S. Watson
If to Employee, to the address shown on the first page hereof.
with a copy to:
Robert D. Remy
Two Memorial City Plaza
820 Gessner, Suite 1360
Houston, Texas 77024
Either Employer or Employee may furnish a change of address to the other in
writing in accordance herewith, except that notices of changes of address shall
be effective only upon receipt.
7.4. This Agreement shall be governed in all respects by the laws
of the State of Texas, excluding any conflict-of-law rule or principle that
might refer the construction of the Agreement to the laws of another State or
country.
7.5. No failure by either party hereto at any time to give notice
of any breach by the other party of, or to require compliance with, any
condition or provision of this Agreement shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time.
7.6. It is a desire and intent of the parties that the terms,
provisions, covenants, and remedies contained in this Agreement shall be
enforceable to the fullest extent permitted by law. If any such term,
provision, covenant, or remedy of this Agreement or the application thereof to
any person, association, or entity or circumstances shall, to any extent, be
construed to be invalid or unenforceable in whole or in part, then such term,
provision, covenant, or remedy shall be construed in a manner so as to permit
its enforceability under the applicable law to the fullest extent permitted by
law. In any case, the remaining provisions of this Agreement or the
application thereof to any person, association,
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<PAGE> 11
or entity or circumstances other than those to which they have been held
invalid or unenforceable, shall remain in full force and effect.
7.7. Any and all claims, demands, cause of action, disputes,
controversies and other matters in question arising out of or relating to this
Agreement, any provision hereof, the alleged breach thereof, or in any way
relating to the subject matter of this Agreement, involving Employer, its
subsidiaries and affiliates and Employee (all of which are referred to herein
as "Claims"), even though some or all of such Claims allegedly are
extra-contractual in nature, whether such Claims sound in contract, tort or
otherwise, at law or in equity, under state or federal law, whether provided by
statute or the common law, for damages or any other relief, including equitable
relief and specific performance, shall be resolved and decided by binding
arbitration pursuant to the Federal Arbitration Act in accordance with the
Commercial Arbitration Rules then in effect with the American Arbitration
Association. In the arbitration proceeding the Employee shall select one
arbitrator, the Employer shall select one arbitrator and the two arbitrators so
selected shall select a third arbitrator. Should one party fail to select an
arbitrator within five days after notice of the appointment of an arbitrator by
the other party or should the two arbitrators selected by the Employee and the
Employer fail to select an arbitrator within ten days after the date of the
appointment of the last of such two arbitrators, any person sitting as a Judge
of the United States District Court of the Southern District of Texas, Houston
Division, upon application of the Employee or the Employer, shall appoint an
arbitrator to fill such space with the same force and effect as though such
arbitrator had been appointed in accordance with the immediately preceding
sentence of this Section 7.7. The decision of a majority of the arbitrators
shall be binding on the Employee, the Employer and its subsidiaries and
affiliates. The arbitration proceeding shall be conducted in Houston, Texas.
Judgment upon any award rendered in any such arbitration proceeding may be
entered by any federal or state court having jurisdiction.
This agreement to arbitrate shall be enforceable in either federal or
state court. The enforcement of this agreement to arbitrate and all procedural
aspects of this Agreement to arbitrate, including but not limited to, the
construction and interpretation of this agreement to arbitrate, the scope of
the arbitrable issues, allegations of waiver, delay or defenses to
arbitrability, and the rules governing the conduct of the arbitration, shall be
governed by and construed pursuant to the Federal Arbitration Act.
In deciding the substance of any such Claim, the Arbitrators shall
apply the substantive laws of the State of Texas; provided, however, that the
Arbitrators shall have no authority to award treble, exemplary or punitive type
damages under any circumstances regardless of whether such damages may be
available under Texas law, the parties hereby waiving their right, if any, to
recover treble, exemplary or punitive type damages in connection with any such
Claims.
7.8. This Agreement shall be binding upon and inure to the benefit
of Employer its subsidiaries and affiliates and any other person, association,
or entity which may hereafter acquire or succeed to all or a portion of the
business or assets of Employer by any means whether direct or indirect, by
purchase, merger, consolidation, or otherwise. Employee's rights and
obligations under this Agreement are personal and such rights, benefits, and
obligations of Employee shall not be voluntarily or involuntarily assigned,
alienated, or transferred, whether by operation of law or otherwise, by
Employee without the prior written consent of Employer.
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7.9. Except as provided in (1) written company policies promulgated
by Employer dealing with issues such as securities trading, business ethics,
governmental affairs and political contributions, consulting fees, commissions
and other payments, compliance with law, investments and outside business
interests as officers and employees, reporting responsibilities, administrative
compliance, and the like, (2) the written benefits, plans, and programs
referenced in Sections 2.2, 2.3 and 2.4, or (3) any signed written agreements
contemporaneously or hereafter executed by Employer and Employee, this
Agreement constitutes the entire agreement of the parties with regard to such
subject matters, and contains all of the covenants, promises, representations,
warranties, and agreements between the parties with respect to such subject
matters and replaces and merges previous agreements and discussions pertaining
to the employment relationship between Employer and Employee. Specifically,
but not by way of limitation, any other employment agreement or arrangement in
existence as of the date hereof between Employer or any of its subsidiaries or
affiliates and Employee is hereby canceled and Employee hereby irrevocably
waives and renounces all of Employee's rights and claims under any such
agreement or arrangement.
IN WITNESS WHEREOF, Employer and Employee have duly executed this
Agreement in multiple originals to be effective on the date first stated above.
GROUP 1 AUTOMOTIVE, INC.
By:
---------------------------------
B. B. Hollingsworth, Jr.
Chief Executive Officer
------------------------------------
Employee
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EXHIBIT 10.4
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into between Group
1 Automotive, Inc. having offices at 950 Echo Lane, Suite 350, Houston, Texas
77024 ("Employer"), and Charles M. Smith, an individual currently residing at
11145 N. Country Squire, Houston, Texas 77024 ("Employee"), to be effective as
of October __, 1997.
For and in consideration of the mutual promises, covenants, and
obligations contained herein, Employer and Employee agree as follows:
1. EMPLOYMENT AND DUTIES:
1.1. Employer agrees to employ Employee, and Employee agrees to be
employed by Employer, beginning October __, 1997 and continuing throughout the
Term (as defined below) of this Agreement, subject to the terms and conditions
of this Agreement.
1.2. Employee shall serve as "President -- Smith Group" of
Employer. Employee agrees to serve in the assigned position and to perform
diligently and to the best of Employee's abilities the duties and services
appertaining to such position as determined by Employer, as well as such
additional or different duties and services appropriate to such position which
Employee from time to time may be reasonably directed to perform by Employer.
Employee shall at all times comply with and be subject to such policies and
procedures as Employer may establish from time to time.
1.3. Except for Employee's performance of his duties relating to
the ownership and operation of Russell & Smith Ford, Inc. (also d/b/a Russell &
Smith Honda) and W. C. & M. Enterprises Incorporated (d/b/a Streater-Smith)
consistent with Employee's past conduct in performing such duties:
(i) Employee shall, during the period of Employee's employment by
Employer, devote Employee's full business time, energy, and
best efforts to the business and affairs of Employer; and
(ii) Employee may not engage, directly or indirectly, in any other
business, investment, or activity that interferes with
Employee's performance of Employee's duties hereunder, is
contrary to the interests of Employer or any of its
subsidiaries or affiliates, or requires any significant
portion of Employee's business time (provided, however, that
Employee may engage in passive personal investments that do
not conflict with the business and affairs of the Employer or
any of its subsidiaries or affiliates or interfere with
Employee's performance of his duties hereunder).
1.4. Employee acknowledges and agrees that Employee owes a
fiduciary duty of loyalty, fidelity and allegiance to act at all times in the
best interests of Employer or any of its subsidiaries or affiliates and to do
no act which would injure the business, interests, or reputation of Employer or
any of its subsidiaries or affiliates. In keeping with these duties, Employee
shall make full disclosure to Employer of all business opportunities pertaining
to Employer's business and shall not appropriate for Employee's own benefit
business opportunities concerning the subject matter of the fiduciary
relationship.
<PAGE> 2
1.5. It is agreed that any direct or indirect interest in,
connection with, or benefit from any outside activities, particularly
commercial activities, which interest might in any way adversely affect
Employer, or any of its affiliates, involves a possible conflict of interest.
In keeping with Employee's fiduciary duties to Employer, Employee agrees that
Employee shall not knowingly become involved in a conflict of interest with
Employer, or its affiliates, or upon discovery thereof, allow such a conflict
to continue. Moreover, Employee agrees that Employee shall disclose to
Employer's General Counsel (who shall be Employer's outside General Counsel
unless Employer has employed an inside General Counsel) any facts which might
involve such a conflict of interest that has not been approved by Employer's
President. Employer and Employee recognize that it is impossible to provide an
exhaustive list of actions or interests which constitute a "conflict of
interest". Moreover, Employer and Employee recognize there are many borderline
situations. In some instances, full disclosure of facts by Employee to
Employer's General Counsel may be all that is necessary to enable Employer or
its subsidiaries or affiliates to protect its interests. In others, if no
improper motivation appears to exist and the interests of Employer or its
subsidiaries or affiliates have not suffered, prompt elimination of the outside
interest will suffice. In still others, it may be necessary for Employer to
terminate the employment relationship. Employee agrees that Employer's
determination as to whether a conflict of interest exists shall be conclusive.
Employer reserves the right to take such action as, in its judgment, will end
the conflict. For the purposes of this Agreement, Employee's performance of
his duties relating to the ownership and operation of Russell & Smith Ford,
Inc. (also d/b/a Russell & Smith Honda) and W. C. & M. Enterprises Incorporated
(d/b/a Streater-Smith) consistent with Employee's past conduct in discharging
such duties shall not constitute a "conflict of interest."
2. COMPENSATION AND BENEFITS:
2.1. Employee's initial base salary under this Agreement shall be
$300,000.00 per annum and shall be paid in semi-monthly installments in
accordance with Employer's standard payroll practice. Employee's base salary
may be increased from time to time by Employer and, after any such change,
Employee's new level of base salary shall be Employee's base salary for
purposes of this Agreement until the effective date of any subsequent change.
2.2 Employee's participation in bonus plans shall be governed by
the bonus and incentive plans adopted by the Board of Directors of Employer in
which Employee is a participant.
2.3. If Employee is granted stock options, Employee will enter into
a separate written stock option agreement pursuant to which Employee shall be
granted the option to acquire common stock of Employer subject to the terms and
conditions of Employer's 1996 Stock Incentive Plan and the stock option
agreement entered into thereunder. The number of shares, exercise price per
share and other terms of the options shall be as specified in such other
written agreement.
2.4. While employed by Employer, Employee shall be allowed to
participate, on the same basis generally as other employees of Employer, in all
general employee benefit plans and programs, including improvements or
modifications of the same, which on the effective date or thereafter are made
available by Employer to all or substantially all of Employer's employees.
Such benefits, plans, and programs may include, without limitation, medical,
health, and dental care, life insurance,
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<PAGE> 3
disability protection, and pension plans. Nothing in this Agreement is to be
construed or interpreted to provide greater rights, participation, coverage, or
benefits under such benefit plans or programs than provided to similarly
situated employees pursuant to the terms and conditions of such benefit plans
and programs.
2.5. Employer shall not by reason of this Article 2 be obligated to
institute, maintain, or refrain from changing, amending, or discontinuing, any
such incentive compensation or employee benefit program or plan, so long as
such actions are similarly applicable to covered employees generally.
Moreover, unless specifically provided for in a written plan document adopted
by the Board of Directors of Employer, none of the benefits or arrangements
described in this Article 2 shall be secured or funded in any way, and each
shall instead constitute an unfunded and unsecured promise to pay money in the
future exclusively from the general assets of Employer and its subsidiaries and
affiliates.
2.6. Employer may withhold from any compensation, benefits, or
amounts payable under this Agreement all federal, state, city, or other taxes
as may be required pursuant to any law or governmental regulation or ruling.
3. TERM OF THIS AGREEMENT, EFFECT OF EXPIRATION OF TERM, AND TERMINATION
PRIOR TO EXPIRATION OF TERM AND EFFECTS OF SUCH TERMINATION:
3.1. The term of this Agreement shall be for five (5) years from
October __, 1997 through October __, 2002. Should Employee remain employed by
Employer beyond the expiration of the Term, such employment shall convert to a
month-to-month relationship terminable at any time by either Employer or
Employee for any reason whatsoever, with or without cause, upon thirty days
notice. Upon such termination of the continued at-will employment relationship
by either Employer or Employee for any reason whatsoever, all future
compensation to which Employee is entitled and all future benefits for which
Employee is eligible shall cease and terminate. Employee shall be entitled to
pro rata salary through the date of such termination, but Employee shall not be
entitled to any bonus with respect to the operations of the Employer and its
subsidiaries and affiliates during the calendar year in which Employee's
employment with Employer is terminated. Upon termination of employment,
Employee shall repay to Employer all advances received by Employee from
Employer or any of its subsidiaries or affiliates, including all advances drawn
against any bonus.
3.2. Notwithstanding any other provisions of this Agreement,
Employer shall have the right to terminate Employee's employment under this
Agreement at any time for any of the following reasons:
(i) For "cause" upon the determination by Employer's Board of
Directors that "cause" exists for the termination of the
employment relationship. As used in this Section 3.2(i), the
term "cause" shall mean (a) Employee has engaged in gross
negligence, gross incompetence or willful misconduct in the
performance of, or Employee's willful refusal without proper
reason to perform, the duties and services required of
Employee pursuant to this Agreement; (b) Employee has been
convicted of a felony; or (c) Employee's material breach of
any
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<PAGE> 4
material provision of this Agreement or corporate code or
policy. It is expressly acknowledged and agreed that the
decision as to whether "cause" exists for termination of the
employment relationship by Employer is delegated to Employer's
Board of Directors for determination. Employee, if he so
requests, after reasonable notice of such Board of Directors
meeting, shall be entitled to be heard before the Board of
Directors. If Employee disagrees with the decision reached by
Employer's Board of Directors, the dispute will be limited to
whether Employer's Board of Directors reached its decision in
good faith;
(ii) for any other reason whatsoever, including termination without
cause, in the sole discretion of Employer's Board of
Directors;
(iii) upon Employee's death; or
(iv) upon Employee's becoming incapacitated by accident, sickness,
or other circumstance which in the reasonable opinion of a
qualified doctor approved by Employer's Board of Directors
renders him mentally or physically incapable of performing the
duties and services required of Employee, and which will
continue in the reasonable opinion of such doctor for a period
of not less than 180 days.
The termination of Employee's employment shall constitute a "Termination for
Cause" if made pursuant to Section 3.2(i); the effect of such termination is
specified in Section 3.4. The termination of Employee's employment shall
constitute an "Involuntary Termination" if made pursuant to Section 3.2(ii);
the effect of such termination is specified in Section 3.5. The effect of the
employment relationship being terminated pursuant to Section 3.2(iii) as a
result of Employee's death is specified in Section 3.7. The effect of the
employment relationship being terminated pursuant to Section 3.2(iv) as a
result of the Employee becoming incapacitated is specified in Section 3.8.
3.3. Notwithstanding any other provisions of this Agreement,
Employee shall have the right to terminate the employment relationship under
this Agreement at any time for any of the following reasons:
(i) a material breach by Employer of any material provision of
this Agreement, which remains uncorrected for 30 days
following written notice of such breach by Employee to
Employer's Board of Directors;
(ii) the dissolution of Employer; or
(iii) for any other reason whatsoever, in the sole discretion of
Employee.
The termination of Employee's employment by Employee shall constitute an
"Involuntary Termination" if made pursuant to Section 3.3(i) or 3.3(ii); the
effect of such termination is specified in Section 3.5.
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The termination of Employee's employment by Employee shall constitute a
"Voluntary Termination" if made pursuant to Sections 3.3(iii); the effect of
such termination is specified in Section 3.4.
3.4. Upon a "Voluntary Termination" of the employment relationship
by Employee or a termination of the employment relationship for "Cause" by
Employer, all future compensation to which Employee is entitled and all future
benefits for which Employee is eligible shall cease and terminate as of the
date of termination. Employee shall be entitled to pro rata salary through the
date of such termination, but Employee shall not be entitled to any bonuses
with respect to the operations of the Employer and its subsidiaries and
affiliates during the calendar year in which Employee's employment with
Employer is terminated.
3.5. Upon an Involuntary Termination of the employment relationship
by either Employer or Employee pursuant to Sections 3.2(ii) or 3.3(i), Employee
shall be entitled, in consideration of Employee's continuing obligations
hereunder after such termination (including, without limitation, Employee's
non-competition obligations), to receive the compensation specified in Section
2.1, payable bi-weekly, as if Employee's employment (which shall cease on the
date of such Involuntary Termination) had continued for the full Term of this
Agreement. Upon an Involuntary Termination of the employment relationship by
Employee pursuant to Sections 3.3(ii), Employee shall be entitled, in
consideration of Employee's continuing obligations hereunder after such
termination (including, without limitation, Employee's non-competition
obligations), to receive in a lump sum payment the compensation specified in
Section 2.1 as if Employee's employment (which shall cease on the date of such
Involuntary Termination) had continued for the full Term of this Agreement.
Employee shall not be under any duty or obligation to seek or accept other
employment following Involuntary Termination and the amounts due Employee
hereunder shall not be reduced or suspended if Employee accepts subsequent
employment. Employee's rights under this Section 3.5 are Employee's sole and
exclusive rights against Employer or its subsidiaries or affiliates, and
Employer's and its subsidiaries' and affiliates' sole and exclusive liability
to Employee under this Agreement, in contract, tort, or otherwise, for any
Involuntary Termination of the employment relationship.
3.6. Employee covenants not to sue or lodge any claim, demand or
cause of action against Employer based on Involuntary Termination for any
monies other than those specified in Section 3.5. If Employee breaches this
covenant, Employer, and its subsidiaries' and affiliates' shall be entitled to
recover from Employee all sums expended by Employer, and its subsidiaries and
affiliates (including costs and attorneys' fees) in connection with such suit,
claim, demand or cause of action. Employer and its subsidiaries and affiliates
shall not be entitled to offset any of the amounts specified in the immediately
preceding sentence against amounts otherwise owing by Employer and its
subsidiaries and affiliates to Employee prior to a final determination under
the terms of the arbitration provisions of this Agreement that Employee has
breached the covenant contained in this Section 3.6.
3.7. Upon termination of the employment relationship as a result of
Employee's death, Employee's heirs, administrators, or legatees shall be
entitled to Employee's pro rata salary through the date of such termination,
but Employee's heirs, administrators, or legatees shall not be entitled to any
individual bonuses with respect to the operations of the Employer and its
subsidiaries and affiliates during the calendar year in which Employee's
employment with Employer is terminated.
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<PAGE> 6
3.8. Upon termination of the employment relationship as a result of
Employee's incapacity, Employee shall be entitled to his pro rata salary
through the date of such termination, but Employee shall not be entitled to any
individual bonuses with respect to the operations of the Employer and its
subsidiaries and affiliates during the calendar year in which Employee's
employment with Employer is terminated.
3.9. In all cases, the compensation and benefits payable to
Employee under this Agreement upon termination of the employment relationship
shall be reduced and offset by any amounts to which Employee may otherwise be
entitled under any and all severance plans (excluding any pension, retirement
and profit sharing plans of Employer that may be in effect from time to time)
or policies of Employer or its subsidiaries or affiliates or any successor to
all or a portion of the business or assets of Employer.
3.10. Termination of the employment relationship shall not terminate
those obligations imposed by this Agreement which are continuing in nature,
including, without limitation, Employee's obligations of confidentiality,
non-competition and Employee's continuing obligations with respect to business
opportunities that had been entrusted to Employee by Employer during the
employment relationship.
3.11. This Agreement governs the rights and obligations of Employer
and Employee with respect to Employee's salary and other perquisites of
employment.
4. UNITED STATES FOREIGN CORRUPT PRACTICES ACT AND OTHER LAWS:
4.1. Employee shall at all times comply with United States laws
applicable to Employee's actions on behalf of Employer and its subsidiaries and
affiliates, including specifically, without limitation, the United States
Foreign Corrupt Practices Act, generally codified in 15 USC 78 (FCPA), as the
FCPA may hereafter be amended, and/or its successor statutes. If Employee
pleads guilty to or nolo contendere or admits civil or criminal liability under
the FCPA or other applicable United States law, or if a court finds that
Employee has personal civil or criminal liability under the FCPA or other
applicable United States law, or if a court finds that Employee committed an
action resulting in Employer or any of its subsidiaries having civil or
criminal liability or responsibility under the FCPA or other applicable United
States law, such action or finding shall constitute "cause" for termination
under this Agreement unless Employer's Board of Directors determines that the
actions found to be in violation of the FCPA or other applicable United States
law were taken in good faith and in compliance with all applicable policies of
Employer. Moreover, to the extent that Employer or any of its subsidiaries is
found or held responsible for any civil or criminal fines or sanctions of any
type under the FCPA or other applicable United States law or suffers other
damages as a result of Employee's actions, Employee shall be responsible for,
and shall reimburse and pay to such Employer an amount of money equal to, such
civil or criminal fines, sanctions or damages. The rights afforded Employer
under this provision are in addition to any and all rights and remedies
otherwise afforded by the law.
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<PAGE> 7
5. OWNERSHIP AND PROTECTION OF INFORMATION; COPYRIGHTS:
5.1. Employer owns certain confidential and proprietary information
and trade secrets to which Employee will be given access for the purpose of
carrying out his employment responsibilities hereunder. Furthermore, Employer
agrees to provide Employee with confidential and proprietary information and
trade secrets regarding the Employer and its subsidiaries and affiliates, in
order to assist Employee in satisfying his obligations hereunder.
5.2 All information, ideas, concepts, improvements, discoveries,
and inventions, whether patentable or not, which are conceived, made, developed
or acquired by Employee, individually or in conjunction with others, during
Employee's employment by Employer (whether during business hours or otherwise
and whether on Employer's premises or otherwise) which relate to Employer's or
any of its subsidiaries' or affiliates' businesses, products or services
(including, without limitation, all such information relating to corporate
opportunities, research, financial and sales data, pricing and trading terms,
evaluations, opinions, interpretations, acquisition prospects, the identity of
customers or their requirements, the identity of key contacts within the
customer's organizations or within the organization of acquisition prospects,
or marketing and merchandising techniques, prospective names, and marks) shall
be disclosed to Employer and are and shall be the sole and exclusive property
of Employer. Upon termination of Employee's employment, for any reason,
Employee promptly shall deliver the same, and all copies thereof, to Employer.
5.3. Employee will not, at any time during or after his employment
by Employer, make any unauthorized disclosure of any confidential business
information or trade secrets of Employer or its subsidiaries or affiliates, or
make any use thereof, except in the carrying out of his employment
responsibilities hereunder. As a result of Employee's employment by Employer,
Employee may also from time to time have access to, or knowledge of,
confidential business information or trade secrets of third parties, such as
customers, suppliers, partners, joint venturers, and the like, of Employer and
its subsidiaries and affiliates. Employee also agrees to preserve and protect
the confidentiality of such third party confidential information and trade
secrets to the same extent, and on the same basis, as Employer's or any of its
subsidiaries' or affiliates' confidential business information and trade
secrets.
5.4. If, during Employee's employment by Employer, Employee creates
any original work of authorship fixed in any tangible medium of expression
which is the subject matter of copyright (such as videotapes, written
presentations on acquisitions, computer programs, E-mail, voice mail,
electronic databases, drawings, maps, architectural renditions, models,
manuals, brochures, or the like) relating to Employer's, or any of its
subsidiaries' or affiliates' businesses, products, or services, whether such
work is created solely by Employee or jointly with others (whether during
business hours or otherwise and whether on Employer's or any of its
subsidiaries' or affiliates' premises or otherwise), Employer shall be deemed
the author of such work if the work is prepared by Employee in the scope of his
employment; or, if the work is not prepared by Employee within the scope of his
employment but is specially ordered by Employer or any of its subsidiaries or
affiliates as a contribution to a collective work, as a part of a motion
picture or other audiovisual work, as a translation, as a supplementary work,
as a compilation, or as an instructional text, then the work shall be
considered to be work made for hire and Employer or any of its subsidiaries or
affiliates shall be the author of the work. If such work is neither prepared
by Employee within the scope of his employment nor a work specially
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<PAGE> 8
ordered that is deemed to be a work made for hire, then Employee hereby agrees
to assign, and by these presents does assign, to Employer all of Employee's
worldwide right, title, and interest in and to such work and all rights of
copyright therein.
5.5. Both during the period of Employee's employment by Employer
and thereafter, Employee shall assist Employer, or any of its subsidiaries or
affiliates and their nominees, at any time, in the protection of Employer's or
any of its subsidiaries' or affiliates' worldwide right, title, and interest in
and to information, ideas, concepts, improvements, discoveries, and inventions,
and its copyrighted works, including without limitation, the execution of all
formal assignment documents requested by Employer or any of its subsidiaries or
affiliates or their nominees and the execution of all lawful oaths and
applications for applications for patents and registration of copyright in the
United States and foreign countries.
6. POST-EMPLOYMENT NON-COMPETITION OBLIGATIONS:
6.1. As part of the consideration for the compensation and benefits
to be paid and extended to Employee hereunder, and as an additional incentive
for Employer to enter into this Agreement, Employer and Employee agree to the
non-competition provisions of this Article 6. Employee agrees that during the
period of Employee's non-competition obligations hereunder, Employee will not,
directly or indirectly for Employee or for others, in any geographic area or
market where Employer or any of its subsidiaries or affiliated companies are
conducting any business as of the date of termination of the employment
relationship or have during the previous twelve months conducted any business:
(i) engage in any business competitive with any line of business
conducted by Employer or any of its subsidiaries or
affiliates;
(ii) render advice or services to, or otherwise assist, any other
person, association, or entity who is engaged, directly or
indirectly, in any business competitive with any line of
business conducted by Employer or any of its subsidiaries or
affiliates;
(iii) encourage or induce any current or former employee of Employer
or any of its subsidiaries or affiliates to leave the
employment of Employer or any of its subsidiaries or
affiliates or proselytize, offer employment, retain, hire or
assist in the hiring of any such employee by any person,
association, or entity not affiliated with Employer or any of
its subsidiaries or affiliates; provided, however, that
nothing in this subsection (iii) shall prohibit Employee from
offering employment to any prior employee of Employer or any
of its subsidiaries or affiliates who was not employed by
Employer or any of its subsidiaries or affiliates at any time
in the twelve (12) months prior to the termination of
Employee's employment.
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<PAGE> 9
The non-competition obligations set forth in subsections (i) and (ii) of this
Section 6.1 shall apply during Employee's employment and for a period of three
(3) years after termination of employment. The obligations set forth in
subsection (iii) of this Section 6.1 with respect to employees shall apply
during Employee's employment and for a period of five (5) years after
termination of employment If Employer or any of its subsidiaries or affiliates
abandons a particular aspect of its business, that is, ceases such aspect of
its business with the intention to permanently refrain from such aspect of its
business, then this post-employment non-competition covenant shall not apply to
such former aspect of that business.
6.2. Employee understands that the foregoing restrictions may limit
his ability to engage in certain businesses anywhere in the world during the
period provided for above, but acknowledges that Employee will receive
sufficiently high remuneration and other benefits (e.g., the right to receive
compensation under Section 3.6 for the remainder of the Term upon Involuntary
Termination and access to certain confidential and proprietary information and
trade secrets) under this Agreement to justify such restriction. Employee
acknowledges that money damages would not be sufficient remedy for any breach
of this Article 6 by Employee, and Employer or any of its subsidiaries or
affiliates shall be entitled to enforce the provisions of this Article 6 by
terminating any payments then owing to Employee under this Agreement and/or to
specific performance and injunctive relief as remedies for such breach or any
threatened breach, without any requirement for the securing or posting of any
bond in connection with such remedies. Such remedies shall not be deemed the
exclusive remedies for a breach of this Article 6, but shall be in addition to
all remedies available at law or in equity to Employer or any of its
subsidiaries or affiliates, including, without limitation, the recovery of
damages from Employee and his agents involved in such breach.
6.3. It is expressly understood that the restrictions contained in
this Article 6 are related to and result from the agreements of Employer and
Employee in Article 5 and agreed that Employer and Employee consider the
restrictions contained in this Article 6 to be reasonable and necessary to
protect the confidential and proprietary information and trade secrets of
Employer and its subsidiaries and affiliates. Nevertheless, if any of the
aforesaid restrictions are found by a court having jurisdiction to be
unreasonable, or overly broad as to geographic area or time, or otherwise
unenforceable, the parties intend for the restrictions therein set forth to be
modified by such courts so as to be reasonable and enforceable and, as so
modified by the court, to be fully enforced.
6.4. Nothing in this Section 6 shall prohibit Employee from
performing his duties relating to the ownership and operation of Russell &
Smith Ford, Inc. (also d/b/a Russell & Smith Honda) and W. C. & M. Enterprises
Incorporated (d/b/a Streater-Smith) in a manner consistent with Employee's past
conduct in performing such duties.
7. MISCELLANEOUS:
7.1. For purposes of this Agreement the terms "affiliates" or
"affiliated" means an entity who directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with
Employer.
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<PAGE> 10
7.2. Employee shall refrain, both during the employment
relationship and after the employment relationship terminates, from publishing
any oral or written statements about Employer or any of its subsidiaries' or
affiliates' directors, officers, employees, agents or representatives that are
slanderous, libelous, or defamatory; or that disclose private or confidential
information about Employer or any of its subsidiaries' or affiliates' business
affairs, officers, employees, agents, or representatives; or that constitute an
intrusion into the seclusion or private lives of Employer or any of its
subsidiaries' or affiliates' directors, officers, employees, agents, or
representatives; or that give rise to unreasonable publicity about the private
lives of Employer or any of its subsidiaries' or affiliates' officers,
employees, agents, or representatives; or that place Employer or its
subsidiaries' or affiliates' or its officers, employees, agents, or
representatives in a false light before the public; or that constitute a
misappropriation of the name or likeness Employer or any of its subsidiaries'
or affiliates' or its officers, employees, agents, or representatives. A
violation or threatened violation of this prohibition may be enjoined.
7.3. For purposes of this Agreement, notices and all other
communications provided for herein shall be in writing and shall be deemed to
have been duly given when personally delivered or when mailed by United States
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to Employer to:
Group 1 Automotive, Inc.
950 Echo Lane, Suite 350
Houston, TX 77024
Attn: Chief Executive Officer
with a copy to:
Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin Street
Houston, TX 77002-6760
Attn: John S. Watson
If to Employee, to the address shown on the first page hereof.
Either Employer or Employee may furnish a change of address to the other in
writing in accordance herewith, except that notices of changes of address shall
be effective only upon receipt.
7.4. This Agreement shall be governed in all respects by the laws
of the State of Texas, excluding any conflict-of-law rule or principle that
might refer the construction of the Agreement to the laws of another State or
country.
7.5. No failure by either party hereto at any time to give notice
of any breach by the other party of, or to require compliance with, any
condition or provision of this Agreement shall be deemed
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<PAGE> 11
a waiver of similar or dissimilar provisions or conditions at the same or at
any prior or subsequent time.
7.6. It is a desire and intent of the parties that the terms,
provisions, covenants, and remedies contained in this Agreement shall be
enforceable to the fullest extent permitted by law. If any such term,
provision, covenant, or remedy of this Agreement or the application thereof to
any person, association, or entity or circumstances shall, to any extent, be
construed to be invalid or unenforceable in whole or in part, then such term,
provision, covenant, or remedy shall be construed in a manner so as to permit
its enforceability under the applicable law to the fullest extent permitted by
law. In any case, the remaining provisions of this Agreement or the
application thereof to any person, association, or entity or circumstances
other than those to which they have been held invalid or unenforceable, shall
remain in full force and effect.
7.7. Any and all claims, demands, cause of action, disputes,
controversies and other matters in question arising out of or relating to this
Agreement, any provision hereof, the alleged breach thereof, or in any way
relating to the subject matter of this Agreement, involving Employer, its
subsidiaries and affiliates and Employee (all of which are referred to herein
as "Claims"), even though some or all of such Claims allegedly are
extra-contractual in nature, whether such Claims sound in contract, tort or
otherwise, at law or in equity, under state or federal law, whether provided by
statute or the common law, for damages or any other relief, including equitable
relief and specific performance, shall be resolved and decided by binding
arbitration pursuant to the Federal Arbitration Act in accordance with the
Commercial Arbitration Rules then in effect with the American Arbitration
Association. In the arbitration proceeding the Employee shall select one
arbitrator, the Employer shall select one arbitrator and the two arbitrators so
selected shall select a third arbitrator. Should one party fail to select an
arbitrator within five days after notice of the appointment of an arbitrator by
the other party or should the two arbitrators selected by the Employee and the
Employer fail to select an arbitrator within ten days after the date of the
appointment of the last of such two arbitrators, any person sitting as a Judge
of the United States District Court of the Southern District of Texas, Houston
Division, upon application of the Employee or the Employer, shall appoint an
arbitrator to fill such space with the same force and effect as though such
arbitrator had been appointed in accordance with the immediately preceding
sentence of this Section 7.7. The decision of a majority of the arbitrators
shall be binding on the Employee, the Employer and its subsidiaries and
affiliates. The arbitration proceeding shall be conducted in Houston, Texas.
Judgment upon any award rendered in any such arbitration proceeding may be
entered by any federal or state court having jurisdiction.
This agreement to arbitrate shall be enforceable in either federal or
state court. The enforcement of this agreement to arbitrate and all procedural
aspects of this Agreement to arbitrate, including but not limited to, the
construction and interpretation of this agreement to arbitrate, the scope of
the arbitrable issues, allegations of waiver, delay or defenses to
arbitrability, and the rules governing the conduct of the arbitration, shall be
governed by and construed pursuant to the Federal Arbitration Act.
In deciding the substance of any such Claim, the Arbitrators shall
apply the substantive laws of the State of Texas; provided, however, that the
Arbitrators shall have no authority to award treble, exemplary or punitive type
damages under any circumstances regardless of whether such damages may
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<PAGE> 12
be available under Texas law, the parties hereby waiving their right, if any,
to recover treble, exemplary or punitive type damages in connection with any
such Claims.
7.8. This Agreement shall be binding upon and inure to the benefit
of Employer its subsidiaries and affiliates and any other person, association,
or entity which may hereafter acquire or succeed to all or a portion of the
business or assets of Employer by any means whether direct or indirect, by
purchase, merger, consolidation, or otherwise. Employee's rights and
obligations under this Agreement are personal and such rights, benefits, and
obligations of Employee shall not be voluntarily or involuntarily assigned,
alienated, or transferred, whether by operation of law or otherwise, by
Employee without the prior written consent of Employer.
7.9. Except as provided in (1) written company policies promulgated
by Employer dealing with issues such as securities trading, business ethics,
governmental affairs and political contributions, consulting fees, commissions
and other payments, compliance with law, investments and outside business
interests as officers and employees, reporting responsibilities, administrative
compliance, and the like, (2) the written benefits, plans, and programs
referenced in Sections 2.2, 2.3 and 2.4, or (3) any signed written agreements
contemporaneously or hereafter executed by Employer and Employee, this
Agreement constitutes the entire agreement of the parties with regard to such
subject matters, and contains all of the covenants, promises, representations,
warranties, and agreements between the parties with respect to such subject
matters and replaces and merges previous agreements and discussions pertaining
to the employment relationship between Employer and Employee. Specifically,
but not by way of limitation, any other employment agreement or arrangement in
existence as of the date hereof between Employer or any of its subsidiaries or
affiliates and Employee is hereby canceled and Employee hereby irrevocably
waives and renounces all of Employee's rights and claims under any such
agreement or arrangement.
IN WITNESS WHEREOF, Employer and Employee have duly executed this
Agreement in multiple originals to be effective on the date first stated above.
GROUP 1 AUTOMOTIVE, INC.
By:
-------------------------------
B. B. Hollingsworth, Jr.
Chief Executive Officer
----------------------------------
Employee
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<PAGE> 1
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into between Group
1 Automotive, Inc. having offices at 950 Echo Lane, Suite 350, Houston, Texas
77024 ("Employer"), and John T. Turner, an individual currently residing at
5405 Maryanna Drive, Austin, Texas 78746 ("Employee"), to be effective as of
October __, 1997.
For and in consideration of the mutual promises, covenants, and
obligations contained herein, Employer and Employee agree as follows:
1. EMPLOYMENT AND DUTIES:
1.1. Employer agrees to employ Employee, and Employee agrees to be
employed by Employer, beginning October __, 1997 and continuing throughout the
Term (as defined below) of this Agreement, subject to the terms and conditions
of this Agreement.
1.2. Employee shall serve as "Senior Vice President -- Corporate
Development" of Employer. Employee agrees to serve in the assigned position
and to perform diligently and to the best of Employee's abilities the duties
and services appertaining to such position as determined by Employer, as well
as such additional or different duties and services appropriate to such
position which Employee from time to time may be reasonably directed to perform
by Employer. Employee shall at all times comply with and be subject to such
policies and procedures as Employer may establish from time to time.
1.3. Employee shall, during the period of Employee's employment by
Employer, devote Employee's full business time, energy, and best efforts to the
business and affairs of Employer. Employee may not engage, directly or
indirectly, in any other business, investment, or activity that interferes with
Employee's performance of Employee's duties hereunder, is contrary to the
interests of Employer or any of its subsidiaries or affiliates, or requires any
significant portion of Employee's business time; provided, however, that
Employee may engage in passive personal investments that do not conflict with
the business and affairs of the Employer or any of its subsidiaries or
affiliates or interfere with Employee's performance of his or her duties
hereunder.
1.4. Employee acknowledges and agrees that Employee owes a
fiduciary duty of loyalty, fidelity and allegiance to act at all times in the
best interests of Employer or any of its subsidiaries or affiliates and to do
no act which would injure the business, interests, or reputation of Employer or
any of its subsidiaries or affiliates. In keeping with these duties, Employee
shall make full disclosure to Employer of all business opportunities pertaining
to Employer's business and shall not appropriate for Employee's own benefit
business opportunities concerning the subject matter of the fiduciary
relationship.
<PAGE> 2
1.5. It is agreed that any direct or indirect interest in,
connection with, or benefit from any outside activities, particularly
commercial activities, which interest might in any way adversely affect
Employer, or any of its affiliates, involves a possible conflict of interest.
In keeping with Employee's fiduciary duties to Employer, Employee agrees that
Employee shall not knowingly become involved in a conflict of interest with
Employer, or its affiliates, or upon discovery thereof, allow such a conflict
to continue. Moreover, Employee agrees that Employee shall disclose to
Employer's General Counsel (who shall be Employer's outside General Counsel
unless Employer has employed an inside General Counsel) any facts which might
involve such a conflict of interest that has not been approved by Employer's
President. Employer and Employee recognize that it is impossible to provide an
exhaustive list of actions or interests which constitute a "conflict of
interest". Moreover, Employer and Employee recognize there are many borderline
situations. In some instances, full disclosure of facts by Employee to
Employer's General Counsel may be all that is necessary to enable Employer or
its subsidiaries or affiliates to protect its interests. In others, if no
improper motivation appears to exist and the interests of Employer or its
subsidiaries or affiliates have not suffered, prompt elimination of the outside
interest will suffice. In still others, it may be necessary for Employer to
terminate the employment relationship. Employee agrees that Employer's
determination as to whether a conflict of interest exists shall be conclusive.
Employer reserves the right to take such action as, in its judgment, will end
the conflict.
2. COMPENSATION AND BENEFITS:
2.1. Employee's initial base salary under this Agreement shall be
$250,000.00 per annum and shall be paid in semi-monthly installments in
accordance with Employer's standard payroll practice. Employee's base salary
may be increased from time to time by Employer and, after any such change,
Employee's new level of base salary shall be Employee's base salary for
purposes of this Agreement until the effective date of any subsequent change.
2.2 Employee's participation in bonus plans shall be governed by
the bonus and incentive plans adopted by the Board of Directors of Employer in
which Employee is a participant.
2.3. If Employee is granted stock options, Employee will enter into
a separate written stock option agreement pursuant to which Employee shall be
granted the option to acquire common stock of Employer subject to the terms and
conditions of Employer's 1996 Stock Incentive Plan and the stock option
agreement entered into thereunder. The number of shares, exercise price per
share and other terms of the options shall be as specified in such other
written agreement.
2.4. While employed by Employer, Employee shall be allowed to
participate, on the same basis generally as other employees of Employer, in all
general employee benefit plans and programs, including improvements or
modifications of the same, which on the effective date or thereafter are made
available by Employer to all or substantially all of Employer's employees.
Such benefits, plans, and programs may include, without limitation, medical,
health, and dental care, life insurance, disability protection, and pension
plans. Nothing in this Agreement is to be construed or interpreted to provide
greater rights, participation, coverage, or benefits under such benefit plans
or programs than provided to similarly situated employees pursuant to the terms
and conditions of such benefit plans and programs.
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<PAGE> 3
2.5. Employer shall not by reason of this Article 2 be obligated to
institute, maintain, or refrain from changing, amending, or discontinuing, any
such incentive compensation or employee benefit program or plan, so long as
such actions are similarly applicable to covered employees generally.
Moreover, unless specifically provided for in a written plan document adopted
by the Board of Directors of Employer, none of the benefits or arrangements
described in this Article 2 shall be secured or funded in any way, and each
shall instead constitute an unfunded and unsecured promise to pay money in the
future exclusively from the general assets of Employer and its subsidiaries and
affiliates.
2.6. Employer may withhold from any compensation, benefits, or
amounts payable under this Agreement all federal, state, city, or other taxes
as may be required pursuant to any law or governmental regulation or ruling.
3. TERM OF THIS AGREEMENT, EFFECT OF EXPIRATION OF TERM, AND TERMINATION
PRIOR TO EXPIRATION OF TERM AND EFFECTS OF SUCH TERMINATION:
3.1. The term of this Agreement shall be for five (5) years from
October __, 1997 through October __, 2002. Should Employee remain employed by
Employer beyond the expiration of the Term, such employment shall convert to a
month-to-month relationship terminable at any time by either Employer or
Employee for any reason whatsoever, with or without cause, upon thirty days
notice. Upon such termination of the continued at-will employment relationship
by either Employer or Employee for any reason whatsoever, all future
compensation to which Employee is entitled and all future benefits for which
Employee is eligible shall cease and terminate. Employee shall be entitled to
pro rata salary through the date of such termination, but Employee shall not be
entitled to any bonus with respect to the operations of the Employer and its
subsidiaries and affiliates during the calendar year in which Employee's
employment with Employer is terminated. Upon termination of employment,
Employee shall repay to Employer all advances received by Employee from
Employer or any of its subsidiaries or affiliates, including all advances drawn
against any bonus.
3.2. Notwithstanding any other provisions of this Agreement,
Employer shall have the right to terminate Employee's employment under this
Agreement at any time for any of the following reasons:
(i) For "cause" upon the determination by Employer's Board of
Directors that "cause" exists for the termination of the
employment relationship. As used in this Section 3.2(i), the
term "cause" shall mean (a) Employee has engaged in gross
negligence, gross incompetence or willful misconduct in the
performance of, or Employee's willful refusal without proper
reason to perform, the duties and services required of
Employee pursuant to this Agreement; (b) Employee has been
convicted of a felony; or (c) Employee's material breach of
any material provision of this Agreement or corporate code or
policy. It is expressly acknowledged and agreed that the
decision as to whether "cause" exists for termination of the
employment relationship by Employer is delegated to Employer's
Board of Directors for determination. Employee, if he so
requests, after reasonable notice of such Board of Directors
meeting, shall be
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<PAGE> 4
entitled to be heard before the Board of Directors. If
Employee disagrees with the decision reached by Employer's
Board of Directors, the dispute will be limited to whether
Employer's Board of Directors reached its decision in good
faith;
(ii) for any other reason whatsoever, including termination without
cause, in the sole discretion of Employer's Board of
Directors;
(iii) upon Employee's death; or
(iv) upon Employee's becoming incapacitated by accident, sickness,
or other circumstance which in the reasonable opinion of a
qualified doctor approved by Employer's Board of Directors
renders him mentally or physically incapable of performing the
duties and services required of Employee, and which will
continue in the reasonable opinion of such doctor for a period
of not less than 180 days.
The termination of Employee's employment shall constitute a "Termination for
Cause" if made pursuant to Section 3.2(i); the effect of such termination is
specified in Section 3.4. The termination of Employee's employment shall
constitute an "Involuntary Termination" if made pursuant to Section 3.2(ii);
the effect of such termination is specified in Section 3.5. The effect of the
employment relationship being terminated pursuant to Section 3.2(iii) as a
result of Employee's death is specified in Section 3.7. The effect of the
employment relationship being terminated pursuant to Section 3.2(iv) as a
result of the Employee becoming incapacitated is specified in Section 3.8.
3.3. Notwithstanding any other provisions of this Agreement,
Employee shall have the right to terminate the employment relationship under
this Agreement at any time for any of the following reasons:
(i) a material breach by Employer of any material provision of
this Agreement, which remains uncorrected for 30 days
following written notice of such breach by Employee to
Employer's Board of Directors;
(ii) the dissolution of Employer; or
(iii) for any other reason whatsoever, in the sole discretion of
Employee.
The termination of Employee's employment by Employee shall constitute an
"Involuntary Termination" if made pursuant to Section 3.3(i) or 3.3(ii); the
effect of such termination is specified in Section 3.5. The termination of
Employee's employment by Employee shall constitute a "Voluntary Termination" if
made pursuant to Sections 3.3(iii); the effect of such termination is specified
in Section 3.4.
3.4. Upon a "Voluntary Termination" of the employment relationship
by Employee or a termination of the employment relationship for "Cause" by
Employer, all future compensation to which Employee is entitled and all future
benefits for which Employee is eligible shall cease and terminate
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<PAGE> 5
as of the date of termination. Employee shall be entitled to pro rata salary
through the date of such termination, but Employee shall not be entitled to any
bonuses with respect to the operations of the Employer and its subsidiaries and
affiliates during the calendar year in which Employee's employment with
Employer is terminated.
3.5. Upon an Involuntary Termination of the employment relationship
by either Employer or Employee pursuant to Sections 3.2(ii) or 3.3(i), Employee
shall be entitled, in consideration of Employee's continuing obligations
hereunder after such termination (including, without limitation, Employee's
non-competition obligations), to receive the compensation specified in Section
2.1, payable bi-weekly, as if Employee's employment (which shall cease on the
date of such Involuntary Termination) had continued for the full Term of this
Agreement. Upon an Involuntary Termination of the employment relationship by
Employee pursuant to Sections 3.3(ii), Employee shall be entitled, in
consideration of Employee's continuing obligations hereunder after such
termination (including, without limitation, Employee's non- competition
obligations), to receive in a lump sum payment the compensation specified in
Section 2.1 as if Employee's employment (which shall cease on the date of such
Involuntary Termination) had continued for the full Term of this Agreement.
Employee shall not be under any duty or obligation to seek or accept other
employment following Involuntary Termination and the amounts due Employee
hereunder shall not be reduced or suspended if Employee accepts subsequent
employment. Employee's rights under this Section 3.5 are Employee's sole and
exclusive rights against Employer or its subsidiaries or affiliates, and
Employer's and its subsidiaries' and affiliates' sole and exclusive liability
to Employee under this Agreement, in contract, tort, or otherwise, for any
Involuntary Termination of the employment relationship.
3.6. Employee covenants not to sue or lodge any claim, demand or
cause of action against Employer based on Involuntary Termination for any
monies other than those specified in Section 3.5. If Employee breaches this
covenant, Employer, and its subsidiaries' and affiliates' shall be entitled to
recover from Employee all sums expended by Employer, and its subsidiaries and
affiliates (including costs and attorneys' fees) in connection with such suit,
claim, demand or cause of action. Employer and its subsidiaries and affiliates
shall not be entitled to offset any of the amounts specified in the immediately
preceding sentence against amounts otherwise owing by Employer and its
subsidiaries and affiliates to Employee prior to a final determination under
the terms of the arbitration provisions of this Agreement that Employee has
breached the covenant contained in this Section 3.6.
3.7. Upon termination of the employment relationship as a result of
Employee's death, Employee's heirs, administrators, or legatees shall be
entitled to Employee's pro rata salary through the date of such termination,
but Employee's heirs, administrators, or legatees shall not be entitled to any
individual bonuses with respect to the operations of the Employer and its
subsidiaries and affiliates during the calendar year in which Employee's
employment with Employer is terminated.
3.8. Upon termination of the employment relationship as a result of
Employee's incapacity, Employee shall be entitled to his pro rata salary
through the date of such termination, but Employee shall not be entitled to any
individual bonuses with respect to the operations of the Employer and its
subsidiaries and affiliates during the calendar year in which Employee's
employment with Employer is terminated.
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<PAGE> 6
3.9. In all cases, the compensation and benefits payable to
Employee under this Agreement upon termination of the employment relationship
shall be reduced and offset by any amounts to which Employee may otherwise be
entitled under any and all severance plans (excluding any pension, retirement
and profit sharing plans of Employer that may be in effect from time to time)
or policies of Employer or its subsidiaries or affiliates or any successor to
all or a portion of the business or assets of Employer.
3.10. Termination of the employment relationship shall not terminate
those obligations imposed by this Agreement which are continuing in nature,
including, without limitation, Employee's obligations of confidentiality,
non-competition and Employee's continuing obligations with respect to business
opportunities that had been entrusted to Employee by Employer during the
employment relationship.
3.11. This Agreement governs the rights and obligations of Employer
and Employee with respect to Employee's salary and other perquisites of
employment.
4. UNITED STATES FOREIGN CORRUPT PRACTICES ACT AND OTHER LAWS:
4.1. Employee shall at all times comply with United States laws
applicable to Employee's actions on behalf of Employer and its subsidiaries and
affiliates, including specifically, without limitation, the United States
Foreign Corrupt Practices Act, generally codified in 15 USC 78 (FCPA), as the
FCPA may hereafter be amended, and/or its successor statutes. If Employee
pleads guilty to or nolo contendre or admits civil or criminal liability under
the FCPA or other applicable United States law, or if a court finds that
Employee has personal civil or criminal liability under the FCPA or other
applicable United States law, or if a court finds that Employee committed an
action resulting in Employer or any of its subsidiaries having civil or
criminal liability or responsibility under the FCPA or other applicable United
States law, such action or finding shall constitute "cause" for termination
under this Agreement unless Employer's Board of Directors determines that the
actions found to be in violation of the FCPA or other applicable United States
law were taken in good faith and in compliance with all applicable policies of
Employer. Moreover, to the extent that Employer or any of its subsidiaries is
found or held responsible for any civil or criminal fines or sanctions of any
type under the FCPA or other applicable United States law or suffers other
damages as a result of Employee's actions, Employee shall be responsible for,
and shall reimburse and pay to such Employer an amount of money equal to, such
civil or criminal fines, sanctions or damages. The rights afforded Employer
under this provision are in addition to any and all rights and remedies
otherwise afforded by the law.
5. OWNERSHIP AND PROTECTION OF INFORMATION; COPYRIGHTS:
5.1. Employer owns certain confidential and proprietary information
and trade secrets to which Employee will be given access for the purpose of
carrying out his or her employment responsibilities hereunder. Furthermore,
Employer agrees to provide Employee with confidential and proprietary
information and trade secrets regarding the Employer and its subsidiaries and
affiliates, in order to assist Employee in satisfying his or her obligations
hereunder.
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<PAGE> 7
5.2 All information, ideas, concepts, improvements, discoveries,
and inventions, whether patentable or not, which are conceived, made, developed
or acquired by Employee, individually or in conjunction with others, during
Employee's employment by Employer (whether during business hours or otherwise
and whether on Employer's premises or otherwise) which relate to Employer's or
any of its subsidiaries' or affiliates' businesses, products or services
(including, without limitation, all such information relating to corporate
opportunities, research, financial and sales data, pricing and trading terms,
evaluations, opinions, interpretations, acquisition prospects, the identity of
customers or their requirements, the identity of key contacts within the
customer's organizations or within the organization of acquisition prospects,
or marketing and merchandising techniques, prospective names, and marks) shall
be disclosed to Employer and are and shall be the sole and exclusive property
of Employer. Upon termination of Employee's employment, for any reason,
Employee promptly shall deliver the same, and all copies thereof, to Employer.
5.3. Employee will not, at any time during or after his employment
by Employer, make any unauthorized disclosure of any confidential business
information or trade secrets of Employer or its subsidiaries or affiliates, or
make any use thereof, except in the carrying out of his employment
responsibilities hereunder. As a result of Employee's employment by Employer,
Employee may also from time to time have access to, or knowledge of,
confidential business information or trade secrets of third parties, such as
customers, suppliers, partners, joint venturers, and the like, of Employer and
its subsidiaries and affiliates. Employee also agrees to preserve and protect
the confidentiality of such third party confidential information and trade
secrets to the same extent, and on the same basis, as Employer's or any of its
subsidiaries' or affiliates' confidential business information and trade
secrets.
5.4. If, during Employee's employment by Employer, Employee creates
any original work of authorship fixed in any tangible medium of expression
which is the subject matter of copyright (such as videotapes, written
presentations on acquisitions, computer programs, E-mail, voice mail,
electronic databases, drawings, maps, architectural renditions, models,
manuals, brochures, or the like) relating to Employer's, or any of its
subsidiaries' or affiliates' businesses, products, or services, whether such
work is created solely by Employee or jointly with others (whether during
business hours or otherwise and whether on Employer's or any of its
subsidiaries' or affiliates' premises or otherwise), Employer shall be deemed
the author of such work if the work is prepared by Employee in the scope of his
or her employment; or, if the work is not prepared by Employee within the scope
of his or her employment but is specially ordered by Employer or any of its
subsidiaries or affiliates as a contribution to a collective work, as a part of
a motion picture or other audiovisual work, as a translation, as a
supplementary work, as a compilation, or as an instructional text, then the
work shall be considered to be work made for hire and Employer or any of its
subsidiaries or affiliates shall be the author of the work. If such work is
neither prepared by Employee within the scope of his or her employment nor a
work specially ordered that is deemed to be a work made for hire, then Employee
hereby agrees to assign, and by these presents does assign, to Employer all of
Employee's worldwide right, title, and interest in and to such work and all
rights of copyright therein.
5.5. Both during the period of Employee's employment by Employer
and thereafter, Employee shall assist Employer, or any of its subsidiaries or
affiliates and their nominees, at any time, in the protection of Employer's or
any of its subsidiaries' or affiliates' worldwide right, title, and interest in
and to information, ideas, concepts, improvements, discoveries, and inventions,
and its
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<PAGE> 8
copyrighted works, including without limitation, the execution of all formal
assignment documents requested by Employer or any of its subsidiaries or
affiliates or their nominees and the execution of all lawful oaths and
applications for applications for patents and registration of copyright in the
United States and foreign countries.
6. POST-EMPLOYMENT NON-COMPETITION OBLIGATIONS:
6.1. As part of the consideration for the compensation and benefits
to be paid and extended to Employee hereunder, and as an additional incentive
for Employer to enter into this Agreement, Employer and Employee agree to the
non-competition provisions of this Article 6. Employee agrees that during the
period of Employee's non-competition obligations hereunder, Employee will not,
directly or indirectly for Employee or for others, in any geographic area or
market where Employer or any of its subsidiaries or affiliated companies are
conducting any business as of the date of termination of the employment
relationship or have during the previous twelve months conducted any business:
(i) engage in any business competitive with any line of business
conducted by Employer or any of its subsidiaries or
affiliates;
(ii) render advice or services to, or otherwise assist, any other
person, association, or entity who is engaged, directly or
indirectly, in any business competitive with any line of
business conducted by Employer or any of its subsidiaries or
affiliates;
(iii) encourage or induce any current or former employee of Employer
or any of its subsidiaries or affiliates to leave the
employment of Employer or any of its subsidiaries or
affiliates or proselytize, offer employment, retain, hire or
assist in the hiring of any such employee by any person,
association, or entity not affiliated with Employer or any of
its subsidiaries or affiliates; provided, however, that
nothing in this subsection (iii) shall prohibit Employee from
offering employment to any prior employee of Employer or any
of its subsidiaries or affiliates who was not employed by
Employer or any of its subsidiaries or affiliates at any time
in the twelve (12) months prior to the termination of
Employee's employment.
The non-competition obligations set forth in subsections (i) and (ii) of this
Section 6.1 shall apply during Employee's employment and for a period of three
(3) years after termination of employment. The obligations set forth in
subsection (iii) of this Section 6.1 with respect to employees shall apply
during Employee's employment and for a period of five (5) years after
termination of employment If Employer or any of its subsidiaries or affiliates
abandons a particular aspect of its business, that is, ceases such aspect of
its business with the intention to permanently refrain from such aspect of its
business, then this post-employment non-competition covenant shall not apply to
such former aspect of that business.
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<PAGE> 9
6.2. Employee understands that the foregoing restrictions may limit
his ability to engage in certain businesses anywhere in the world during the
period provided for above, but acknowledges that Employee will receive
sufficiently high remuneration and other benefits (e.g., the right to receive
compensation under Section 3.6 for the remainder of the Term upon Involuntary
Termination and access to certain confidential and proprietary information and
trade secrets) under this Agreement to justify such restriction. Employee
acknowledges that money damages would not be sufficient remedy for any breach
of this Article 6 by Employee, and Employer or any of its subsidiaries or
affiliates shall be entitled to enforce the provisions of this Article 6 by
terminating any payments then owing to Employee under this Agreement and/or to
specific performance and injunctive relief as remedies for such breach or any
threatened breach, without any requirement for the securing or posting of any
bond in connection with such remedies. Such remedies shall not be deemed the
exclusive remedies for a breach of this Article 6, but shall be in addition to
all remedies available at law or in equity to Employer or any of its
subsidiaries or affiliates, including, without limitation, the recovery of
damages from Employee and his agents involved in such breach.
6.3. It is expressly understood that the restrictions contained in
this Article 6 are related to and result from the agreements of Employer and
Employee in Article 5 and agreed that Employer and Employee consider the
restrictions contained in this Article 6 to be reasonable and necessary to
protect the confidential and proprietary information and trade secrets of
Employer and its subsidiaries and affiliates. Nevertheless, if any of the
aforesaid restrictions are found by a court having jurisdiction to be
unreasonable, or overly broad as to geographic area or time, or otherwise
unenforceable, the parties intend for the restrictions therein set forth to be
modified by such courts so as to be reasonable and enforceable and, as so
modified by the court, to be fully enforced.
7. MISCELLANEOUS:
7.1. For purposes of this Agreement the terms "affiliates" or
"affiliated" means an entity who directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with
Employer.
7.2. Employee shall refrain, both during the employment
relationship and after the employment relationship terminates, from publishing
any oral or written statements about Employer or any of its subsidiaries' or
affiliates' directors, officers, employees, agents or representatives that are
slanderous, libelous, or defamatory; or that disclose private or confidential
information about Employer or any of its subsidiaries' or affiliates' business
affairs, officers, employees, agents, or representatives; or that constitute an
intrusion into the seclusion or private lives of Employer or any of its
subsidiaries' or affiliates' directors, officers, employees, agents, or
representatives; or that give rise to unreasonable publicity about the private
lives of Employer or any of its subsidiaries' or affiliates' officers,
employees, agents, or representatives; or that place Employer or its
subsidiaries' or affiliates' or its officers, employees, agents, or
representatives in a false light before the public; or that constitute a
misappropriation of the name or likeness Employer or any of its subsidiaries'
or affiliates' or its officers, employees, agents, or representatives. A
violation or threatened violation of this prohibition may be enjoined.
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<PAGE> 10
7.3. For purposes of this Agreement, notices and all other
communications provided for herein shall be in writing and shall be deemed to
have been duly given when personally delivered or when mailed by United States
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to Employer to:
Group 1 Automotive, Inc.
950 Echo Lane, Suite 350
Houston, TX 77024
Attn: Chief Executive Officer
with a copy to:
Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin Street
Houston, TX 77002-6760
Attn: John S. Watson
If to Employee, to the address shown on the first page hereof.
Either Employer or Employee may furnish a change of address to the other in
writing in accordance herewith, except that notices of changes of address shall
be effective only upon receipt.
7.4. This Agreement shall be governed in all respects by the laws
of the State of Texas, excluding any conflict-of-law rule or principle that
might refer the construction of the Agreement to the laws of another State or
country.
7.5. No failure by either party hereto at any time to give notice
of any breach by the other party of, or to require compliance with, any
condition or provision of this Agreement shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time.
7.6. It is a desire and intent of the parties that the terms,
provisions, covenants, and remedies contained in this Agreement shall be
enforceable to the fullest extent permitted by law. If any such term,
provision, covenant, or remedy of this Agreement or the application thereof to
any person, association, or entity or circumstances shall, to any extent, be
construed to be invalid or unenforceable in whole or in part, then such term,
provision, covenant, or remedy shall be construed in a manner so as to permit
its enforceability under the applicable law to the fullest extent permitted by
law. In any case, the remaining provisions of this Agreement or the
application thereof to any person, association, or entity or circumstances
other than those to which they have been held invalid or unenforceable, shall
remain in full force and effect.
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<PAGE> 11
7.7. Any and all claims, demands, cause of action, disputes,
controversies and other matters in question arising out of or relating to this
Agreement, any provision hereof, the alleged breach thereof, or in any way
relating to the subject matter of this Agreement, involving Employer, its
subsidiaries and affiliates and Employee (all of which are referred to herein
as "Claims"), even though some or all of such Claims allegedly are
extra-contractual in nature, whether such Claims sound in contract, tort or
otherwise, at law or in equity, under state or federal law, whether provided by
statute or the common law, for damages or any other relief, including equitable
relief and specific performance, shall be resolved and decided by binding
arbitration pursuant to the Federal Arbitration Act in accordance with the
Commercial Arbitration Rules then in effect with the American Arbitration
Association. In the arbitration proceeding the Employee shall select one
arbitrator, the Employer shall select one arbitrator and the two arbitrators so
selected shall select a third arbitrator. Should one party fail to select an
arbitrator within five days after notice of the appointment of an arbitrator by
the other party or should the two arbitrators selected by the Employee and the
Employer fail to select an arbitrator within ten days after the date of the
appointment of the last of such two arbitrators, any person sitting as a Judge
of the United States District Court of the Southern District of Texas, Houston
Division, upon application of the Employee or the Employer, shall appoint an
arbitrator to fill such space with the same force and effect as though such
arbitrator had been appointed in accordance with the immediately preceding
sentence of this Section 7.7. The decision of a majority of the arbitrators
shall be binding on the Employee, the Employer and its subsidiaries and
affiliates. The arbitration proceeding shall be conducted in Houston, Texas.
Judgment upon any award rendered in any such arbitration proceeding may be
entered by any federal or state court having jurisdiction.
This agreement to arbitrate shall be enforceable in either federal or
state court. The enforcement of this agreement to arbitrate and all procedural
aspects of this Agreement to arbitrate, including but not limited to, the
construction and interpretation of this agreement to arbitrate, the scope of
the arbitrable issues, allegations of waiver, delay or defenses to
arbitrability, and the rules governing the conduct of the arbitration, shall be
governed by and construed pursuant to the Federal Arbitration Act.
In deciding the substance of any such Claim, the Arbitrators shall
apply the substantive laws of the State of Texas; provided, however, that the
Arbitrators shall have no authority to award treble, exemplary or punitive type
damages under any circumstances regardless of whether such damages may be
available under Texas law, the parties hereby waiving their right, if any, to
recover treble, exemplary or punitive type damages in connection with any such
Claims.
7.8. This Agreement shall be binding upon and inure to the benefit
of Employer its subsidiaries and affiliates and any other person, association,
or entity which may hereafter acquire or succeed to all or a portion of the
business or assets of Employer by any means whether direct or indirect, by
purchase, merger, consolidation, or otherwise. Employee's rights and
obligations under this Agreement are personal and such rights, benefits, and
obligations of Employee shall not be voluntarily or involuntarily assigned,
alienated, or transferred, whether by operation of law or otherwise, by
Employee without the prior written consent of Employer.
7.9. Except as provided in (1) written company policies promulgated
by Employer dealing with issues such as securities trading, business ethics,
governmental affairs and political contributions,
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<PAGE> 12
consulting fees, commissions and other payments, compliance with law,
investments and outside business interests as officers and employees, reporting
responsibilities, administrative compliance, and the like, (2) the written
benefits, plans, and programs referenced in Sections 2.2, 2.3 and 2.4, or (3)
any signed written agreements contemporaneously or hereafter executed by
Employer and Employee, this Agreement constitutes the entire agreement of the
parties with regard to such subject matters, and contains all of the covenants,
promises, representations, warranties, and agreements between the parties with
respect to such subject matters and replaces and merges previous agreements and
discussions pertaining to the employment relationship between Employer and
Employee. Specifically, but not by way of limitation, any other employment
agreement or arrangement in existence as of the date hereof between Employer or
any of its subsidiaries or affiliates and Employee is hereby canceled and
Employee hereby irrevocably waives and renounces all of Employee's rights and
claims under any such agreement or arrangement.
IN WITNESS WHEREOF, Employer and Employee have duly executed this
Agreement in multiple originals to be effective on the date first stated above.
GROUP 1 AUTOMOTIVE, INC.
By:
-------------------------------------
B. B. Hollingsworth, Jr.
Chief Executive Officer
----------------------------------------
Employee
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<PAGE> 1
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into between Group
1 Automotive, Inc. having offices at 950 Echo Lane, Suite 350, Houston, Texas
77024 ("Employer"), and Scott L. Thompson, an individual currently residing at
8610 Hawaii Lane, Jersey Village, Texas 77040 ("Employee"), to be effective as
of October __, 1997.
For and in consideration of the mutual promises, covenants, and
obligations contained herein, Employer and Employee agree as follows:
1. EMPLOYMENT AND DUTIES:
1.1. Employer agrees to employ Employee, and Employee agrees to be
employed by Employer, beginning October __, 1997 and continuing throughout the
Term (as defined below) of this Agreement, subject to the terms and conditions
of this Agreement.
1.2. Employee shall serve as "Senior Vice President -- Chief
Financial Officer" and "Treasurer" of Employer. Employee agrees to serve in
the assigned position and to perform diligently and to the best of Employee's
abilities the duties and services appertaining to such position as determined
by Employer, as well as such additional or different duties and services
appropriate to such position which Employee from time to time may be reasonably
directed to perform by Employer. Employee shall at all times comply with and
be subject to such policies and procedures as Employer may establish from time
to time.
1.3. Employee shall, during the period of Employee's employment by
Employer, devote Employee's full business time, energy, and best efforts to the
business and affairs of Employer. Employee may not engage, directly or
indirectly, in any other business, investment, or activity that interferes with
Employee's performance of Employee's duties hereunder, is contrary to the
interests of Employer or any of its subsidiaries or affiliates, or requires any
significant portion of Employee's business time; provided, however, that
Employee may engage in passive personal investments that do not conflict with
the business and affairs of the Employer or any of its subsidiaries or
affiliates or interfere with Employee's performance of his or her duties
hereunder.
1.4. Employee acknowledges and agrees that Employee owes a
fiduciary duty of loyalty, fidelity and allegiance to act at all times in the
best interests of Employer or any of its subsidiaries or affiliates and to do
no act which would injure the business, interests, or reputation of Employer or
any of its subsidiaries or affiliates. In keeping with these duties, Employee
shall make full disclosure to Employer of all business opportunities pertaining
to Employer's business and shall not appropriate for Employee's own benefit
business opportunities concerning the subject matter of the fiduciary
relationship.
<PAGE> 2
1.5. It is agreed that any direct or indirect interest in,
connection with, or benefit from any outside activities, particularly
commercial activities, which interest might in any way adversely affect
Employer, or any of its affiliates, involves a possible conflict of interest.
In keeping with Employee's fiduciary duties to Employer, Employee agrees that
Employee shall not knowingly become involved in a conflict of interest with
Employer, or its affiliates, or upon discovery thereof, allow such a conflict
to continue. Moreover, Employee agrees that Employee shall disclose to
Employer's General Counsel (who shall be Employer's outside General Counsel
unless Employer has employed an inside General Counsel) any facts which might
involve such a conflict of interest that has not been approved by Employer's
President. Employer and Employee recognize that it is impossible to provide an
exhaustive list of actions or interests which constitute a "conflict of
interest". Moreover, Employer and Employee recognize there are many borderline
situations. In some instances, full disclosure of facts by Employee to
Employer's General Counsel may be all that is necessary to enable Employer or
its subsidiaries or affiliates to protect its interests. In others, if no
improper motivation appears to exist and the interests of Employer or its
subsidiaries or affiliates have not suffered, prompt elimination of the outside
interest will suffice. In still others, it may be necessary for Employer to
terminate the employment relationship. Employee agrees that Employer's
determination as to whether a conflict of interest exists shall be conclusive.
Employer reserves the right to take such action as, in its judgment, will end
the conflict.
2. COMPENSATION AND BENEFITS:
2.1. Employee's initial base salary under this Agreement shall be
$180,000.00 per annum and shall be paid in semi-monthly installments in
accordance with Employer's standard payroll practice. Employee's base salary
may be increased from time to time by Employer and, after any such change,
Employee's new level of base salary shall be Employee's base salary for
purposes of this Agreement until the effective date of any subsequent change.
2.2 Employee's participation in bonus plans shall be governed by
the bonus and incentive plans adopted by the Board of Directors of Employer in
which Employee is a participant.
2.3. If Employee is granted stock options, Employee will enter into
a separate written stock option agreement pursuant to which Employee shall be
granted the option to acquire common stock of Employer subject to the terms and
conditions of Employer's 1996 Stock Incentive Plan and the stock option
agreement entered into thereunder. The number of shares, exercise price per
share and other terms of the options shall be as specified in such other
written agreement.
2.4. While employed by Employer, Employee shall be allowed to
participate, on the same basis generally as other employees of Employer, in all
general employee benefit plans and programs, including improvements or
modifications of the same, which on the effective date or thereafter are made
available by Employer to all or substantially all of Employer's employees.
Such benefits, plans, and programs may include, without limitation, medical,
health, and dental care, life insurance, disability protection, and pension
plans. Nothing in this Agreement is to be construed or interpreted to provide
greater rights, participation, coverage, or benefits under such benefit plans
or programs than provided to similarly situated employees pursuant to the terms
and conditions of such benefit plans and programs.
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<PAGE> 3
2.5. Employer shall not by reason of this Article 2 be obligated to
institute, maintain, or refrain from changing, amending, or discontinuing, any
such incentive compensation or employee benefit program or plan, so long as
such actions are similarly applicable to covered employees generally.
Moreover, unless specifically provided for in a written plan document adopted
by the Board of Directors of Employer, none of the benefits or arrangements
described in this Article 2 shall be secured or funded in any way, and each
shall instead constitute an unfunded and unsecured promise to pay money in the
future exclusively from the general assets of Employer and its subsidiaries and
affiliates.
2.6. Employer may withhold from any compensation, benefits, or
amounts payable under this Agreement all federal, state, city, or other taxes
as may be required pursuant to any law or governmental regulation or ruling.
3. TERM OF THIS AGREEMENT, EFFECT OF EXPIRATION OF TERM, AND TERMINATION
PRIOR TO EXPIRATION OF TERM AND EFFECTS OF SUCH TERMINATION:
3.1. The term of this Agreement shall be for five (5) years from
October __, 1997 through October __, 2002. Should Employee remain employed by
Employer beyond the expiration of the Term, such employment shall convert to a
month-to-month relationship terminable at any time by either Employer or
Employee for any reason whatsoever, with or without cause, upon thirty days
notice. Upon such termination of the continued at-will employment relationship
by either Employer or Employee for any reason whatsoever, all future
compensation to which Employee is entitled and all future benefits for which
Employee is eligible shall cease and terminate. Employee shall be entitled to
pro rata salary through the date of such termination, but Employee shall not be
entitled to any bonus with respect to the operations of the Employer and its
subsidiaries and affiliates during the calendar year in which Employee's
employment with Employer is terminated. Upon termination of employment,
Employee shall repay to Employer all advances received by Employee from
Employer or any of its subsidiaries or affiliates, including all advances drawn
against any bonus.
3.2. Notwithstanding any other provisions of this Agreement,
Employer shall have the right to terminate Employee's employment under this
Agreement at any time for any of the following reasons:
(i) For "cause" upon the determination by Employer's Board of
Directors that "cause" exists for the termination of the
employment relationship. As used in this Section 3.2(i), the
term "cause" shall mean (a) Employee has engaged in gross
negligence, gross incompetence or willful misconduct in the
performance of, or Employee's willful refusal without proper
reason to perform, the duties and services required of
Employee pursuant to this Agreement; (b) Employee has been
convicted of a felony; or (c) Employee's material breach of
any material provision of this Agreement or corporate code or
policy. It is expressly acknowledged and agreed that the
decision as to whether "cause" exists for termination of the
employment relationship by Employer is delegated to Employer's
Board of Directors for determination. Employee, if he so
requests, after reasonable notice of such Board of Directors
meeting, shall be
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<PAGE> 4
entitled to be heard before the Board of Directors. If
Employee disagrees with the decision reached by Employer's
Board of Directors, the dispute will be limited to whether
Employer's Board of Directors reached its decision in good
faith;
(ii) for any other reason whatsoever, including termination without
cause, in the sole discretion of Employer's Board of
Directors;
(iii) upon Employee's death; or
(iv) upon Employee's becoming incapacitated by accident, sickness,
or other circumstance which in the reasonable opinion of a
qualified doctor approved by Employer's Board of Directors
renders him mentally or physically incapable of performing the
duties and services required of Employee, and which will
continue in the reasonable opinion of such doctor for a period
of not less than 180 days.
The termination of Employee's employment shall constitute a "Termination for
Cause" if made pursuant to Section 3.2(i); the effect of such termination is
specified in Section 3.4. The termination of Employee's employment shall
constitute an "Involuntary Termination" if made pursuant to Section 3.2(ii);
the effect of such termination is specified in Section 3.5. The effect of the
employment relationship being terminated pursuant to Section 3.2(iii) as a
result of Employee's death is specified in Section 3.7. The effect of the
employment relationship being terminated pursuant to Section 3.2(iv) as a
result of the Employee becoming incapacitated is specified in Section 3.8.
3.3. Notwithstanding any other provisions of this Agreement,
Employee shall have the right to terminate the employment relationship under
this Agreement at any time for any of the following reasons:
(i) a material breach by Employer of any material provision of
this Agreement, which remains uncorrected for 30 days
following written notice of such breach by Employee to
Employer's Board of Directors;
(ii) the dissolution of Employer; or
(iii) for any other reason whatsoever, in the sole discretion of
Employee.
The termination of Employee's employment by Employee shall constitute an
"Involuntary Termination" if made pursuant to Section 3.3(i) or 3.3(ii); the
effect of such termination is specified in Section 3.5. The termination of
Employee's employment by Employee shall constitute a "Voluntary Termination" if
made pursuant to Sections 3.3(iii); the effect of such termination is specified
in Section 3.4.
3.4. Upon a "Voluntary Termination" of the employment relationship
by Employee or a termination of the employment relationship for "Cause" by
Employer, all future compensation to which Employee is entitled and all future
benefits for which Employee is eligible shall cease and terminate
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<PAGE> 5
as of the date of termination. Employee shall be entitled to pro rata salary
through the date of such termination, but Employee shall not be entitled to any
bonuses with respect to the operations of the Employer and its subsidiaries and
affiliates during the calendar year in which Employee's employment with
Employer is terminated.
3.5. Upon an Involuntary Termination of the employment relationship
by either Employer or Employee pursuant to Sections 3.2(ii) or 3.3(i), Employee
shall be entitled, in consideration of Employee's continuing obligations
hereunder after such termination (including, without limitation, Employee's
non-competition obligations), to receive the compensation specified in Section
2.1, payable bi-weekly, as if Employee's employment (which shall cease on the
date of such Involuntary Termination) had continued for the full Term of this
Agreement. Upon an Involuntary Termination of the employment relationship by
Employee pursuant to Sections 3.3(ii), Employee shall be entitled, in
consideration of Employee's continuing obligations hereunder after such
termination (including, without limitation, Employee's non-competition
obligations), to receive in a lump sum payment the compensation specified in
Section 2.1 as if Employee's employment (which shall cease on the date of such
Involuntary Termination) had continued for the full Term of this Agreement.
Employee shall not be under any duty or obligation to seek or accept other
employment following Involuntary Termination and the amounts due Employee
hereunder shall not be reduced or suspended if Employee accepts subsequent
employment. Employee's rights under this Section 3.5 are Employee's sole and
exclusive rights against Employer or its subsidiaries or affiliates, and
Employer's and its subsidiaries' and affiliates' sole and exclusive liability
to Employee under this Agreement, in contract, tort, or otherwise, for any
Involuntary Termination of the employment relationship.
3.6. Employee covenants not to sue or lodge any claim, demand or
cause of action against Employer based on Involuntary Termination for any
monies other than those specified in Section 3.5. If Employee breaches this
covenant, Employer, and its subsidiaries' and affiliates' shall be entitled to
recover from Employee all sums expended by Employer, and its subsidiaries and
affiliates (including costs and attorneys' fees) in connection with such suit,
claim, demand or cause of action. Employer and its subsidiaries and affiliates
shall not be entitled to offset any of the amounts specified in the immediately
preceding sentence against amounts otherwise owing by Employer and its
subsidiaries and affiliates to Employee prior to a final determination under
the terms of the arbitration provisions of this Agreement that Employee has
breached the covenant contained in this Section 3.6.
3.7. Upon termination of the employment relationship as a result of
Employee's death, Employee's heirs, administrators, or legatees shall be
entitled to Employee's pro rata salary through the date of such termination,
but Employee's heirs, administrators, or legatees shall not be entitled to any
individual bonuses with respect to the operations of the Employer and its
subsidiaries and affiliates during the calendar year in which Employee's
employment with Employer is terminated.
3.8. Upon termination of the employment relationship as a result of
Employee's incapacity, Employee shall be entitled to his pro rata salary
through the date of such termination, but Employee shall not be entitled to any
individual bonuses with respect to the operations of the Employer and its
subsidiaries and affiliates during the calendar year in which Employee's
employment with Employer is terminated.
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<PAGE> 6
3.9. In all cases, the compensation and benefits payable to
Employee under this Agreement upon termination of the employment relationship
shall be reduced and offset by any amounts to which Employee may otherwise be
entitled under any and all severance plans (excluding any pension, retirement
and profit sharing plans of Employer that may be in effect from time to time)
or policies of Employer or its subsidiaries or affiliates or any successor to
all or a portion of the business or assets of Employer.
3.10. Termination of the employment relationship shall not terminate
those obligations imposed by this Agreement which are continuing in nature,
including, without limitation, Employee's obligations of confidentiality,
non-competition and Employee's continuing obligations with respect to business
opportunities that had been entrusted to Employee by Employer during the
employment relationship.
3.11. This Agreement governs the rights and obligations of Employer
and Employee with respect to Employee's salary and other perquisites of
employment.
4. UNITED STATES FOREIGN CORRUPT PRACTICES ACT AND OTHER LAWS:
4.1. Employee shall at all times comply with United States laws
applicable to Employee's actions on behalf of Employer and its subsidiaries and
affiliates, including specifically, without limitation, the United States
Foreign Corrupt Practices Act, generally codified in 15 USC 78 (FCPA), as the
FCPA may hereafter be amended, and/or its successor statutes. If Employee
pleads guilty to or nolo contendre or admits civil or criminal liability under
the FCPA or other applicable United States law, or if a court finds that
Employee has personal civil or criminal liability under the FCPA or other
applicable United States law, or if a court finds that Employee committed an
action resulting in Employer or any of its subsidiaries having civil or
criminal liability or responsibility under the FCPA or other applicable United
States law, such action or finding shall constitute "cause" for termination
under this Agreement unless Employer's Board of Directors determines that the
actions found to be in violation of the FCPA or other applicable United States
law were taken in good faith and in compliance with all applicable policies of
Employer. Moreover, to the extent that Employer or any of its subsidiaries is
found or held responsible for any civil or criminal fines or sanctions of any
type under the FCPA or other applicable United States law or suffers other
damages as a result of Employee's actions, Employee shall be responsible for,
and shall reimburse and pay to such Employer an amount of money equal to, such
civil or criminal fines, sanctions or damages. The rights afforded Employer
under this provision are in addition to any and all rights and remedies
otherwise afforded by the law.
5. OWNERSHIP AND PROTECTION OF INFORMATION; COPYRIGHTS:
5.1. Employer owns certain confidential and proprietary information
and trade secrets to which Employee will be given access for the purpose of
carrying out his or her employment responsibilities hereunder. Furthermore,
Employer agrees to provide Employee with confidential and proprietary
information and trade secrets regarding the Employer and its subsidiaries and
affiliates, in order to assist Employee in satisfying his or her obligations
hereunder.
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<PAGE> 7
5.2 All information, ideas, concepts, improvements, discoveries,
and inventions, whether patentable or not, which are conceived, made, developed
or acquired by Employee, individually or in conjunction with others, during
Employee's employment by Employer (whether during business hours or otherwise
and whether on Employer's premises or otherwise) which relate to Employer's or
any of its subsidiaries' or affiliates' businesses, products or services
(including, without limitation, all such information relating to corporate
opportunities, research, financial and sales data, pricing and trading terms,
evaluations, opinions, interpretations, acquisition prospects, the identity of
customers or their requirements, the identity of key contacts within the
customer's organizations or within the organization of acquisition prospects,
or marketing and merchandising techniques, prospective names, and marks) shall
be disclosed to Employer and are and shall be the sole and exclusive property
of Employer. Upon termination of Employee's employment, for any reason,
Employee promptly shall deliver the same, and all copies thereof, to Employer.
5.3. Employee will not, at any time during or after his employment
by Employer, make any unauthorized disclosure of any confidential business
information or trade secrets of Employer or its subsidiaries or affiliates, or
make any use thereof, except in the carrying out of his employment
responsibilities hereunder. As a result of Employee's employment by Employer,
Employee may also from time to time have access to, or knowledge of,
confidential business information or trade secrets of third parties, such as
customers, suppliers, partners, joint venturers, and the like, of Employer and
its subsidiaries and affiliates. Employee also agrees to preserve and protect
the confidentiality of such third party confidential information and trade
secrets to the same extent, and on the same basis, as Employer's or any of its
subsidiaries' or affiliates' confidential business information and trade
secrets.
5.4. If, during Employee's employment by Employer, Employee creates
any original work of authorship fixed in any tangible medium of expression
which is the subject matter of copyright (such as videotapes, written
presentations on acquisitions, computer programs, E-mail, voice mail,
electronic databases, drawings, maps, architectural renditions, models,
manuals, brochures, or the like) relating to Employer's, or any of its
subsidiaries' or affiliates' businesses, products, or services, whether such
work is created solely by Employee or jointly with others (whether during
business hours or otherwise and whether on Employer's or any of its
subsidiaries' or affiliates' premises or otherwise), Employer shall be deemed
the author of such work if the work is prepared by Employee in the scope of his
or her employment; or, if the work is not prepared by Employee within the scope
of his or her employment but is specially ordered by Employer or any of its
subsidiaries or affiliates as a contribution to a collective work, as a part of
a motion picture or other audiovisual work, as a translation, as a
supplementary work, as a compilation, or as an instructional text, then the
work shall be considered to be work made for hire and Employer or any of its
subsidiaries or affiliates shall be the author of the work. If such work is
neither prepared by Employee within the scope of his or her employment nor a
work specially ordered that is deemed to be a work made for hire, then Employee
hereby agrees to assign, and by these presents does assign, to Employer all of
Employee's worldwide right, title, and interest in and to such work and all
rights of copyright therein.
5.5. Both during the period of Employee's employment by Employer
and thereafter, Employee shall assist Employer, or any of its subsidiaries or
affiliates and their nominees, at any time, in the protection of Employer's or
any of its subsidiaries' or affiliates' worldwide right, title, and interest in
and to information, ideas, concepts, improvements, discoveries, and inventions,
and its
-7-
<PAGE> 8
copyrighted works, including without limitation, the execution of all formal
assignment documents requested by Employer or any of its subsidiaries or
affiliates or their nominees and the execution of all lawful oaths and
applications for applications for patents and registration of copyright in the
United States and foreign countries.
6. POST-EMPLOYMENT NON-COMPETITION OBLIGATIONS:
6.1. As part of the consideration for the compensation and benefits
to be paid and extended to Employee hereunder, and as an additional incentive
for Employer to enter into this Agreement, Employer and Employee agree to the
non-competition provisions of this Article 6. Employee agrees that during the
period of Employee's non-competition obligations hereunder, Employee will not,
directly or indirectly for Employee or for others, in any geographic area or
market where Employer or any of its subsidiaries or affiliated companies are
conducting any business as of the date of termination of the employment
relationship or have during the previous twelve months conducted any business:
(i) engage in any business competitive with any line of business
conducted by Employer or any of its subsidiaries or
affiliates;
(ii) render advice or services to, or otherwise assist, any other
person, association, or entity who is engaged, directly or
indirectly, in any business competitive with any line of
business conducted by Employer or any of its subsidiaries or
affiliates;
(iii) encourage or induce any current or former employee of Employer
or any of its subsidiaries or affiliates to leave the
employment of Employer or any of its subsidiaries or
affiliates or proselytize, offer employment, retain, hire or
assist in the hiring of any such employee by any person,
association, or entity not affiliated with Employer or any of
its subsidiaries or affiliates; provided, however, that
nothing in this subsection (iii) shall prohibit Employee from
offering employment to any prior employee of Employer or any
of its subsidiaries or affiliates who was not employed by
Employer or any of its subsidiaries or affiliates at any time
in the twelve (12) months prior to the termination of
Employee's employment.
The non-competition obligations set forth in subsections (i) and (ii) of this
Section 6.1 shall apply during Employee's employment and for a period of three
(3) years after termination of employment. The obligations set forth in
subsection (iii) of this Section 6.1 with respect to employees shall apply
during Employee's employment and for a period of five (5) years after
termination of employment If Employer or any of its subsidiaries or affiliates
abandons a particular aspect of its business, that is, ceases such aspect of
its business with the intention to permanently refrain from such aspect of its
business, then this post-employment non-competition covenant shall not apply to
such former aspect of that business.
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<PAGE> 9
6.2. Employee understands that the foregoing restrictions may limit
his ability to engage in certain businesses anywhere in the world during the
period provided for above, but acknowledges that Employee will receive
sufficiently high remuneration and other benefits (e.g., the right to receive
compensation under Section 3.6 for the remainder of the Term upon Involuntary
Termination and access to certain confidential and proprietary information and
trade secrets) under this Agreement to justify such restriction. Employee
acknowledges that money damages would not be sufficient remedy for any breach
of this Article 6 by Employee, and Employer or any of its subsidiaries or
affiliates shall be entitled to enforce the provisions of this Article 6 by
terminating any payments then owing to Employee under this Agreement and/or to
specific performance and injunctive relief as remedies for such breach or any
threatened breach, without any requirement for the securing or posting of any
bond in connection with such remedies. Such remedies shall not be deemed the
exclusive remedies for a breach of this Article 6, but shall be in addition to
all remedies available at law or in equity to Employer or any of its
subsidiaries or affiliates, including, without limitation, the recovery of
damages from Employee and his agents involved in such breach.
6.3. It is expressly understood that the restrictions contained in
this Article 6 are related to and result from the agreements of Employer and
Employee in Article 5 and agreed that Employer and Employee consider the
restrictions contained in this Article 6 to be reasonable and necessary to
protect the confidential and proprietary information and trade secrets of
Employer and its subsidiaries and affiliates. Nevertheless, if any of the
aforesaid restrictions are found by a court having jurisdiction to be
unreasonable, or overly broad as to geographic area or time, or otherwise
unenforceable, the parties intend for the restrictions therein set forth to be
modified by such courts so as to be reasonable and enforceable and, as so
modified by the court, to be fully enforced.
7. MISCELLANEOUS:
7.1. For purposes of this Agreement the terms "affiliates" or
"affiliated" means an entity who directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with
Employer.
7.2. Employee shall refrain, both during the employment
relationship and after the employment relationship terminates, from publishing
any oral or written statements about Employer or any of its subsidiaries' or
affiliates' directors, officers, employees, agents or representatives that are
slanderous, libelous, or defamatory; or that disclose private or confidential
information about Employer or any of its subsidiaries' or affiliates' business
affairs, officers, employees, agents, or representatives; or that constitute an
intrusion into the seclusion or private lives of Employer or any of its
subsidiaries' or affiliates' directors, officers, employees, agents, or
representatives; or that give rise to unreasonable publicity about the private
lives of Employer or any of its subsidiaries' or affiliates' officers,
employees, agents, or representatives; or that place Employer or its
subsidiaries' or affiliates' or its officers, employees, agents, or
representatives in a false light before the public; or that constitute a
misappropriation of the name or likeness Employer or any of its subsidiaries'
or affiliates' or its officers, employees, agents, or representatives. A
violation or threatened violation of this prohibition may be enjoined.
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<PAGE> 10
7.3. For purposes of this Agreement, notices and all other
communications provided for herein shall be in writing and shall be deemed to
have been duly given when personally delivered or when mailed by United States
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to Employer to:
Group 1 Automotive, Inc.
950 Echo Lane, Suite 350
Houston, TX 77024
Attn: Chief Executive Officer
with a copy to:
Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin Street
Houston, TX 77002-6760
Attn: John S. Watson
If to Employee, to the address shown on the first page hereof.
Either Employer or Employee may furnish a change of address to the other in
writing in accordance herewith, except that notices of changes of address shall
be effective only upon receipt.
7.4. This Agreement shall be governed in all respects by the laws
of the State of Texas, excluding any conflict-of-law rule or principle that
might refer the construction of the Agreement to the laws of another State or
country.
7.5. No failure by either party hereto at any time to give notice
of any breach by the other party of, or to require compliance with, any
condition or provision of this Agreement shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time.
7.6. It is a desire and intent of the parties that the terms,
provisions, covenants, and remedies contained in this Agreement shall be
enforceable to the fullest extent permitted by law. If any such term,
provision, covenant, or remedy of this Agreement or the application thereof to
any person, association, or entity or circumstances shall, to any extent, be
construed to be invalid or unenforceable in whole or in part, then such term,
provision, covenant, or remedy shall be construed in a manner so as to permit
its enforceability under the applicable law to the fullest extent permitted by
law. In any case, the remaining provisions of this Agreement or the
application thereof to any person, association, or entity or circumstances
other than those to which they have been held invalid or unenforceable, shall
remain in full force and effect.
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<PAGE> 11
7.7. Any and all claims, demands, cause of action, disputes,
controversies and other matters in question arising out of or relating to this
Agreement, any provision hereof, the alleged breach thereof, or in any way
relating to the subject matter of this Agreement, involving Employer, its
subsidiaries and affiliates and Employee (all of which are referred to herein
as "Claims"), even though some or all of such Claims allegedly are
extra-contractual in nature, whether such Claims sound in contract, tort or
otherwise, at law or in equity, under state or federal law, whether provided by
statute or the common law, for damages or any other relief, including equitable
relief and specific performance, shall be resolved and decided by binding
arbitration pursuant to the Federal Arbitration Act in accordance with the
Commercial Arbitration Rules then in effect with the American Arbitration
Association. In the arbitration proceeding the Employee shall select one
arbitrator, the Employer shall select one arbitrator and the two arbitrators so
selected shall select a third arbitrator. Should one party fail to select an
arbitrator within five days after notice of the appointment of an arbitrator by
the other party or should the two arbitrators selected by the Employee and the
Employer fail to select an arbitrator within ten days after the date of the
appointment of the last of such two arbitrators, any person sitting as a Judge
of the United States District Court of the Southern District of Texas, Houston
Division, upon application of the Employee or the Employer, shall appoint an
arbitrator to fill such space with the same force and effect as though such
arbitrator had been appointed in accordance with the immediately preceding
sentence of this Section 7.7. The decision of a majority of the arbitrators
shall be binding on the Employee, the Employer and its subsidiaries and
affiliates. The arbitration proceeding shall be conducted in Houston, Texas.
Judgment upon any award rendered in any such arbitration proceeding may be
entered by any federal or state court having jurisdiction.
This agreement to arbitrate shall be enforceable in either federal or
state court. The enforcement of this agreement to arbitrate and all procedural
aspects of this Agreement to arbitrate, including but not limited to, the
construction and interpretation of this agreement to arbitrate, the scope of
the arbitrable issues, allegations of waiver, delay or defenses to
arbitrability, and the rules governing the conduct of the arbitration, shall be
governed by and construed pursuant to the Federal Arbitration Act.
In deciding the substance of any such Claim, the Arbitrators shall
apply the substantive laws of the State of Texas; provided, however, that the
Arbitrators shall have no authority to award treble, exemplary or punitive type
damages under any circumstances regardless of whether such damages may be
available under Texas law, the parties hereby waiving their right, if any, to
recover treble, exemplary or punitive type damages in connection with any such
Claims.
7.8. This Agreement shall be binding upon and inure to the benefit
of Employer its subsidiaries and affiliates and any other person, association,
or entity which may hereafter acquire or succeed to all or a portion of the
business or assets of Employer by any means whether direct or indirect, by
purchase, merger, consolidation, or otherwise. Employee's rights and
obligations under this Agreement are personal and such rights, benefits, and
obligations of Employee shall not be voluntarily or involuntarily assigned,
alienated, or transferred, whether by operation of law or otherwise, by
Employee without the prior written consent of Employer.
7.9. Except as provided in (1) written company policies promulgated
by Employer dealing with issues such as securities trading, business ethics,
governmental affairs and political contributions,
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<PAGE> 12
consulting fees, commissions and other payments, compliance with law,
investments and outside business interests as officers and employees, reporting
responsibilities, administrative compliance, and the like, (2) the written
benefits, plans, and programs referenced in Sections 2.2, 2.3 and 2.4, or (3)
any signed written agreements contemporaneously or hereafter executed by
Employer and Employee, this Agreement constitutes the entire agreement of the
parties with regard to such subject matters, and contains all of the covenants,
promises, representations, warranties, and agreements between the parties with
respect to such subject matters and replaces and merges previous agreements and
discussions pertaining to the employment relationship between Employer and
Employee. Specifically, but not by way of limitation, any other employment
agreement or arrangement in existence as of the date hereof between Employer or
any of its subsidiaries or affiliates and Employee is hereby canceled and
Employee hereby irrevocably waives and renounces all of Employee's rights and
claims under any such agreement or arrangement.
IN WITNESS WHEREOF, Employer and Employee have duly executed this
Agreement in multiple originals to be effective on the date first stated above.
GROUP 1 AUTOMOTIVE, INC.
By:
--------------------------------
B. B. Hollingsworth, Jr.
Chief Executive Officer
-----------------------------------
Employee
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<PAGE> 1
EXHIBIT 10.10
RIGHTS AGREEMENT
between
Group 1 Automotive, Inc.
and
ChaseMellon Shareholder Services, L.L.C.
as Rights Agent
Dated as of October 3, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Section 1. Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
-------------------
Section 2. Appointment of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
---------------------------
Section 3. Issue of Right Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
---------------------------
Section 4. Form of Right Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
--------------------------
Section 5. Execution, Authentication and Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
--------------------------------------
Section 6. Registration, Registration of Transfer and Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
---------------------------------------------------
Section 7. Mutilated, Destroyed, Lost and Stolen Right Certificates . . . . . . . . . . . . . . . . . . . . . . . . 16
--------------------------------------------------------
Section 8. Exercise of Rights; Purchase Price; Expiration Date of Rights . . . . . . . . . . . . . . . . . . . . . . 17
-------------------------------------------------------------
Section 9. Cancellation and Destruction of Right Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
--------------------------------------------------
Section 10. Reservation and Availability of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
--------------------------------------
Section 11. Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
-----------
Section 12. Adjustment of Purchase Price, Number of Shares or Number of Rights . . . . . . . . . . . . . . . . . . . 21
------------------------------------------------------------------
Section 13. Certificate of Adjusted Purchase Price or Number of Shares . . . . . . . . . . . . . . . . . . . . . . . 30
----------------------------------------------------------
Section 14. Consolidation, Merger or Sale or Transfer of Assets or Earning Power . . . . . . . . . . . . . . . . . . 31
--------------------------------------------------------------------
Section 15. Fractional Rights and Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
---------------------------------------
Section 16. Rights of Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
----------------
Section 17. Agreement of Right Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
--------------------------
Section 18. Right Certificate Holder Not Deemed a Stockholder . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
-------------------------------------------------
Section 19. Concerning the Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
---------------------------
Section 20. Duties of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
----------------------
Section 21. Merger or Consolidation or Change of Name of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . 40
---------------------------------------------------------
Section 22. Change of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
----------------------
Section 23. Issuance of New Right Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
----------------------------------
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
Section 24. Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
----------
Section 25. Mandatory Redemption and Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
---------------------------------
Section 26. Notice of Certain Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
------------------------
Section 27. Securities Laws Registrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
-----------------------------
Section 28. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
-------
Section 29. Supplements and Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
--------------------------
Section 30. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
----------
Section 31. Benefits of this Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
--------------------------
Section 32. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
------------
Section 33. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
-------------
Section 34. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
------------
Section 35. Descriptive Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
--------------------
</TABLE>
Exhibits
Exhibit A - Certificate of Designation of Preferred Shares
Exhibit B - Right Certificate
Exhibit C - Summary of Rights
-ii-
<PAGE> 4
RIGHTS AGREEMENT
This Rights Agreement, dated as of October 3, 1997, is between Group 1
Automotive, Inc., a Delaware corporation (the "Company"), and ChaseMellon
Shareholder Services, L.L.C., a national banking association, as Rights Agent.
WHEREAS, the Board of Directors of the Company, having determined its
actions to be in the interests of the Company, has authorized the creation of
Rights, has authorized and directed the issuance to the Holders of record of
Common Shares of the Company outstanding on the date (the "Effective Date") of
closing of the acquisition by the Company (the "Acquisitions") of Howard
Pontiac-GMC, Inc., Bob Howard Chevrolet, Inc., Bob Howard Automotive-H, Inc.
Bob Howard Motors, Inc., Bob Howard Dodge, Inc., Southwest Toyota, Inc., SMC
Luxury Cars, Inc., Mike Smith Autoplaza, Inc., Smith, Liu & Kutz, Inc.,
Courtesy Nissan, Inc., Smith, Liu & Corbin, Inc., Round Rock Nissan, Inc. and
Foyt Motors, Inc., immediately after the Acquisitions of one Right with respect
to each Common Share of the Company outstanding on the Effective Date and has
further authorized and directed the issuance of one Right with respect to each
Common Share that shall become outstanding between the Effective Date and the
earlier of the Distribution Date, the Redemption Date and the Final Expiration
Date; and
WHEREAS, the Board of Directors of the Company has authorized and
directed that the terms and conditions under which the Rights are to be
distributed, including without limitation those affecting the exercise thereof,
the securities or other property to be acquired thereby and the purchase price
to be paid therefor, shall be set forth in a written agreement between the
Company and a rights agent made for the benefit of the holders of the Rights to
the extent so provided therein.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
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<PAGE> 5
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms shall have the meanings indicated:
"Acquiring Person" shall mean any Person who or which,
together with all Affiliates and Associates of such Person, shall be
the Beneficial Owner of 20% or more of the Voting Shares of the
Company then outstanding, but shall not include (i) the Company, (ii)
any Subsidiary of the Company, (iii) any employee benefit plan of the
Company or of any Subsidiary of the Company or trustee or fiduciary
with respect to any such plan when acting in such capacity, (iv) any
trustee of or fiduciary with respect to any such plan when acting in
such capacity, or (v) any Grandfathered Stockholder. Notwithstanding
the foregoing, no Person shall become an "Acquiring Person" as the
result of an acquisition of Voting Shares by the Company which, by
reducing the number of shares outstanding, increases the proportionate
number of shares beneficially owned by such Person to 20% or more of
the Voting Shares of the Company then outstanding; provided, however,
that, if a Person shall become the Beneficial Owner of 20% or more of
the Voting Shares of the Company then outstanding by reason of share
purchases by the Company and shall, after such share purchases by the
Company and at a time when such Person is the Beneficial Owner of 20%
or more of the Voting Shares of the Company then outstanding, become
the Beneficial Owner of any additional Voting Shares of the Company,
then such Person shall be deemed to be an "Acquiring Person".
Notwithstanding the foregoing, if the Board of Directors of the
Company determines in good faith that a Person who would otherwise be
an "Acquiring Person", as defined pursuant to the foregoing provisions
of
-2-
<PAGE> 6
this paragraph (a), has become such inadvertently, and such Person
divests as promptly as practicable a sufficient number of Common
Shares so that such Person would no longer be an "Acquiring Person,"
as defined pursuant to the foregoing provisions of this paragraph (a),
then such Person shall not be deemed to be an "Acquiring Person" for
any purposes of this Agreement.
"Agreement" shall mean this Rights Agreement as hereafter
amended from time to time.
"Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Exchange Act as in effect on the date of this
Agreement.
A Person shall be deemed the "Beneficial Owner" of and shall
be deemed to "own beneficially" any securities which (without
duplication):
(i) such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly, within the
meaning of either Section 13 or 16 of the Exchange Act;
(ii) such Person or any of such Person's Affiliates or
Associates has (A) the right to acquire (whether such right is
exercisable immediately or only after the passage of time) pursuant to
any agreement, arrangement or understanding (other than customary
agreements with and between underwriters and selling group members
with respect to a bona fide public offering of securities), or upon
the exercise of conversion rights, exchange rights, rights (other than
these Rights), warrants or options, or otherwise; or (B) the right to
vote pursuant to any agreement, arrangement or understanding; or
(iii) are beneficially owned, directly or indirectly, by
any other Person with which such Person or any of such Person's
Affiliates or Associates has any agreement, arrangement or
understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide
public offering of securities) for the purpose of acquiring, holding,
voting or disposing of any securities of the Company; provided,
however, that, for purposes of each clause of this definition, a
Person shall not be deemed the Beneficial
-3-
<PAGE> 7
Owner of, or to own beneficially, securities tendered pursuant to a
tender or exchange offer made by or on behalf of such Person or any of
such Person's Affiliates or Associates until such tendered securities
are accepted for purchase or exchange; and provided, further, that,
for purposes of each clause of this definition, a Person shall not be
deemed the Beneficial Owner of, or to own beneficially, any security
as a result of any agreement, arrangement or understanding to vote
such security if such agreement, arrangement or understanding (1)
arises solely from a revocable proxy or consent given to such Person
in response to a public proxy or consent solicitation made pursuant
to, and in accordance with, the applicable rules and regulations
promulgated under the Exchange Act and (2) is not also then reportable
on Schedule 13D under the Exchange Act (or any comparable or successor
report) and provided, further, that notwithstanding anything to the
foregoing to the contrary, a Person engaged in the business of
underwriting securities shall not be deemed the "Beneficial Owner" of,
or to "own beneficially", any securities acquired in good faith in a
firm commitment underwriting until the expiration of 40 days after the
date of such acquisition.
Notwithstanding anything in this definition to the contrary,
the phrase "then outstanding", when used with reference to a Person's
Beneficial Ownership of securities of the Company (or to the number of
such securities "beneficially owned"), shall mean the number of such
securities then issued and outstanding together with the number of
such securities not then actually issued and outstanding which such
Person would be deemed to own beneficially hereunder.
"Business Day" shall mean any day other than a Saturday,
Sunday or a day on which banking institutions in the State of Texas or
the state wherein the principal office of the Rights Agent is located
are authorized or obligated by law or executive order to close.
-4-
<PAGE> 8
"Close of Business" on any given date shall mean 5:00 P.M.,
eastern time, on such date; provided, however, that if such date is
not a Business Day it shall mean 5:00 P.M., eastern time, on the next
succeeding Business Day.
"Closing Price", with respect to any security, shall mean the
last sale price, regular way, on a specific Trading Day or, in case no
such sale takes place on such Trading Day, the average of the closing
bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the New York Stock
Exchange or, if such security is not then listed or admitted to
trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which such
security is listed or admitted to trading or, if such security is not
then listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of
the high bid and low asked prices in the over-the-counter market, as
reported by the National Association of Securities Dealers, Inc.
Automated Quotations System or such other system then in use, or, if
on any such Trading Day such security is not quoted by any such
organization, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in such
security selected by the Board of Directors of the Company. If such
security is not publicly held or so listed or traded, "Closing Price"
shall mean the fair value per unit of such security as determined in
good faith by the Board of Directors of the Company, whose
determination shall be described and the Closing Price set forth in a
statement filed with the Rights Agent.
"Common Shares" when used with reference to the Company shall
mean shares of capital stock of the Company which have no preference
over any other class of stock with respect to dividends or assets,
which are not redeemable at the option of the Company and with
-5-
<PAGE> 9
respect to which no sinking, purchase or similar fund is provided and
shall initially mean the shares of Common Stock, par value $.01, of
the Company. "Common Shares" when used with reference to any Person
other than the Company shall, if used with reference to a corporation,
mean the capital stock (or equity interest) with the greatest voting
power of such other Person or, if such other Person is a Subsidiary of
another Person, the Person or Persons which ultimately control such
first-mentioned Person and, if used with reference to any other
Person, mean the equity interest in such Person (or, if the net worth
determined in accordance with generally accepted accounting principles
of another Person (other than an individual) which controls such
first-mentioned Person is greater than such first-mentioned Person,
then such other Person) with the greatest voting power or managerial
power with respect to the business and affairs of such Person.
"Company" shall mean Group 1 Automotive, Inc., a Delaware
corporation, and its successors.
"Company Order" means a written request or order signed in the
name of the Company by its Chairman of the Board, its President or a
Vice President, and by its Treasurer, an Assistant Treasurer, its
Secretary or an Assistant Secretary, and delivered to the Rights
Agent.
"Distribution Date" shall mean the earlier of (i) the tenth
Business Day after the Shares Acquisition Date or (ii) the tenth
Business Day (or such later date as may be determined by action of the
Board of Directors prior to such time as any Person becomes an
Acquiring Person) after the date of commencement by any Person (other
than the Company, any Subsidiary of the Company, any employee benefit
plan of the
-6-
<PAGE> 10
Company or of any Subsidiary of the Company, or any trustee of or
fiduciary with respect to any such plan when acting in such capacity)
of, or after the date of the first public announcement of the intent
of any Person (other than the Company, any Subsidiary of the Company,
any employee benefit plan of the Company or of any Subsidiary of the
Company, or any trustee of or fiduciary with respect to any such plan
when acting in such capacity) to commence, a tender or exchange offer
the consummation of which would result in any Person becoming the
Beneficial Owner of 20% or more of the then outstanding Voting Shares
of the Company; provided, however, that an occurrence described in
clause (ii) of this definition above shall not cause the occurrence of
the Distribution Date if the Board of Directors of the Company shall,
prior to such tenth Business Day (or such later date as described in
clause (ii) above), determine that such tender or exchange offer is
spurious, unless, thereafter, the Board of Directors of the Company
shall make a contrary determination, in which event the Distribution
Date shall occur on the later to occur of such tenth Business Day (or
such later date as described in clause (ii) above) and the date of
such latter determination.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and any successor statute thereto.
"Final Expiration Date" shall mean the Close of Business on
the tenth anniversary of the Effective Date.
"Grandfathered Stockholders" shall mean at any time Robert E.
Howard, II, provided, however, that Robert E. Howard, II shall not be
a Grandfathered Stockholder if he makes an acquisition of Common
Shares that would increase his percentage ownership of the outstanding
Common Shares immediately after consummation of the Company's initial
public offering (the "Offering"), before taking into account any
acquisitions of Common Shares by Robert E. Howard, II in the Offering,
by 2.0%.
"Person" shall mean any individual, firm, corporation,
partnership, limited partnership, limited liability company, trust or
other entity, and shall include any successor (by merger or otherwise)
of such entity.
-7-
<PAGE> 11
"Preferred Shares" shall mean shares of Series A Junior
Participating Preferred Stock, par value $.01 per share, of the
Company having the rights and preferences set forth in the form of
Certificate of Designation of Series A Junior Participating Preferred
Stock attached hereto as Exhibit A.
"Purchase Price" shall mean the initial price at which the
holder of a Right may, subject to the terms and conditions of this
Agreement, purchase one one-thousandth (1/1000) of a Preferred Share
(which initial price is set forth in Section 8(b) hereof), as such
price shall be adjusted pursuant to the terms of this Agreement.
"Redemption Date" shall mean the time at which the Rights are
redeemed pursuant to Section 24 herein or the time at which all of the
Rights are mandatorily redeemed and exchanged pursuant to Section 25
hereof.
"Redemption Price" shall have the meaning specified in Section
24(b) herein. "Right" shall mean one preferred share purchase
right which initially represents the right of the registered holder
thereof to purchase one one-thousandth (1/1000) of a Preferred Share
upon the terms and subject to the conditions herein set forth.
"Rights Agent" shall mean ChaseMellon Shareholder Services,
L.L.C., a national banking association, and any successor thereto
appointed in accordance with the terms hereof, in its capacity as
agent for the Company and the holders of the Rights pursuant to this
Agreement.
"Right Certificate" shall mean a certificate, in substantially
the form of Exhibit B attached to this Rights Agreement, evidencing
the Rights registered in the name of the holder thereof.
"Rights Register" and "Rights Registrar" shall have the
meanings specified in Section 6.
-8-
<PAGE> 12
"Shareholder Services" means the principal office of the
Rights Agent at which it administers shareholder services business,
which, in the case of ChaseMellon Shareholder Services, L.L.C. shall,
until hereafter changed, be its office at 2323 Bryan Street, Suite
2300, Dallas, Texas 75201.
"Shares Acquisition Date" shall mean the first date of public
announcement (which for purposes of this definition shall include
without limitation a report filed pursuant to Section 13(d) or Section
16(a) of the Exchange Act) by the Company or an Acquiring Person that
an Acquiring Person has become such.
"Subsidiary" of any Person shall mean any corporation or other
entity of which a majority of the outstanding capital stock or other
equity interests having ordinary voting power in the election of
directors or similar officials is owned, directly or indirectly, by
such Person.
"Summary of Rights" shall mean a Summary of Rights to Purchase
Preferred Shares in substantially the form attached as Exhibit C to
this Agreement.
"Trading Day" shall mean a day on which the principal national
securities exchange or the NASDAQ National Market on which any of the
Voting Shares of the Company are listed or admitted to trading is open
for the transaction of business or, if none of the Voting Shares of
the Company is listed or admitted to trading on any national stock
exchange or the NASDAQ National Market, a Business Day.
"Voting Shares" shall mean (i) the Common Shares of the
Company and (ii) any other shares of capital stock of the Company
entitled to vote generally in the election of directors or entitled to
vote together with the Common Shares in respect of any merger or
consolidation of the Company, any sale of all or substantially all of
the Company's assets or any liquidation, dissolution or winding up of
the Company. Whenever any provision of this Agreement requires a
determination of whether a number of Voting Shares comprising a
specified
-9-
<PAGE> 13
percentage of such Voting Shares is, was or will be beneficially owned
or has been voted, tendered, acquired, sold or otherwise disposed of
or a determination of whether a Person has offered or proposed to
acquire a number of Voting Shares comprising such specified
percentage, the number of Voting Shares comprising such specified
percentage of Voting Shares shall in every such case be deemed to be
the number of Voting Shares comprising the specified percentage of all
the Company's then outstanding Voting Shares.
"Wholly-Owned Subsidiary" of a Person shall mean any
corporation or other entity all the outstanding capital stock or other
equity interests of which having ordinary voting power in the election
of directors or similar officials (other than directors' qualifying
shares or similar interests) are owned, directly or indirectly, by
such Person.
Section 2. Appointment of Rights Agent. The Company hereby appoints
the Rights Agent to act as agent for the Company in accordance with the terms
and conditions hereof, and the Rights Agent hereby accepts such appointment.
The Company may from time to time appoint such co-Rights Agents as it may deem
necessary or desirable.
Section 3. Issue of Right Certificates. (a) From and after the
Effective Date until the Distribution Date, (i) outstanding Rights will be
evidenced (subject to the provisions of paragraph (b) of this Section 3) by the
certificates for outstanding Common Shares of the Company and not by separate
Right Certificates, and (ii) the right to receive Right Certificates will be
transferable only in connection with the transfer of Common Shares of the
Company. As soon as practicable after the Distribution Date, the Rights Agent
will send, by first-class, insured, postage-prepaid mail, to each record holder
of Common Shares of the Company as of the Close of Business on the Distribution
Date, at the address of such holder shown on the stock transfer records of the
Company, a Right Certificate evidencing one Right for each Common Share so
held. From and after the Distribution Date, the Rights will be evidenced
solely by such Right Certificates.
-10-
<PAGE> 14
(b) On the Effective Date, or as soon thereafter as
practicable, the Company will send a copy of a Summary of Rights, by
first-class, postage-prepaid mail, to each record holder of Common Shares of
the Company as of the Close of Business on the Effective Date, at the address
of such holder shown on the stock transfer records of the Company. With
respect to Common Shares outstanding on the Effective Date, the certificates
evidencing such Common Shares shall, together with copies of such Summary of
Rights, thereafter also evidence the outstanding Rights (as such Rights may be
amended or supplemented) distributed with respect thereto until the earlier of
the Distribution Date or the date of surrender thereof to the Company's
transfer agent for registration of transfer or exchange of Common Shares.
Until the Distribution Date (or, if earlier, the Redemption Date or Final
Expiration Date), the surrender for registration of transfer or exchange of any
certificate for Common Shares outstanding as of the Close of Business on the
Effective Date, with or without a copy of the Summary of Rights attached
thereto, shall also constitute the surrender for registration of transfer or
exchange of the outstanding Rights associated with the Common Shares
represented thereby.
(c) The Company agrees that, at any time after the
Effective Date and prior to the Distribution Date (or, if earlier, the
Redemption Date or Final Expiration Date) at which it issues any of its Common
Shares upon original issue or out of treasury, it will concurrently distribute
to the holder of such Common Shares one Right for each such Common Share, which
Right shall be subject to the terms and provisions of this Agreement and will
evidence the right to purchase the same number of one one-thousandths (1/1000)
of a Preferred Share at the same Purchase Price as the Rights then outstanding.
(d) Certificates for Common Shares issued after the
Effective Date but prior to the earliest of the Distribution Date, the
Redemption Date and the Final Expiration Date, whether upon registration of
transfer or exchange of Common Shares outstanding on the Effective Date or upon
-11-
<PAGE> 15
original issue or out of treasury thereafter, shall have impressed on, printed
on, written on or otherwise affixed to them the following legend:
This certificate also evidences and entitles the holder hereof
to certain Rights as set forth in a Rights Agreement between Group 1
Automotive, Inc. and ChaseMellon Shareholder Services, L.L.C., dated
as of October 3, 1997 (the "Rights Agreement"), the terms of which are
hereby incorporated herein by reference and a copy of which is on file
at the principal executive offices of Group 1 Automotive, Inc. Under
certain circumstances, as set forth in the Rights Agreement, such
Rights will be evidenced by separate certificates and will no longer
be evidenced by this certificate. Group 1 Automotive, Inc. will mail
to the holder of this certificate a copy of the Rights Agreement
without charge after receipt of a written request therefor. As
described in the Rights Agreement, Rights issued to or acquired by any
Acquiring Person or any Affiliate or Associate thereof (each as
defined in the Rights Agreement) shall, under certain circumstances,
become null and void.
With respect to certificates containing the foregoing legend, until the
Distribution Date, outstanding Rights associated with the Common Shares
represented by such certificates shall be evidenced by such certificates alone,
and the surrender of any such certificate for registration of transfer or
exchange of the Common Shares evidenced thereby shall also constitute surrender
for registration of transfer or exchange of outstanding Rights (as such Rights
may be amended or supplemented) associated with the Common Shares represented
thereby.
(e) If the Company purchases or acquires any of its Common Shares
after the Effective Date, but prior to the Distribution Date, any Rights
associated with such Common Shares shall be deemed cancelled and retired so
that the Company shall not be entitled to exercise any Rights associated with
the Common Shares which are no longer outstanding.
Section 4. Form of Right Certificates. The form of Right
Certificates (and the forms of election to purchase Preferred Shares (or other
securities) and of assignment to be printed on the reverse thereof) shall in
form and substance be substantially the same as Exhibit B hereto and may have
such marks of identification or designation and such legends, summaries or
endorsements printed thereon as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, as may be required to
comply with any applicable law or with any rule or regulation made
-12-
<PAGE> 16
pursuant thereto or with any rule or regulation of any stock exchange on which
the Rights may from time to time be listed or as may be necessary to conform to
usage. Subject to the provisions of Section 23 hereof, the Right Certificates,
whenever issued, shall be dated as of the date of authentication thereof, but,
regardless of any adjustments of the Purchase Price or the number of Preferred
Shares (or other securities) as to which a Right is exercisable (whether
pursuant to this Agreement or any future amendments or supplements to this
Agreement), or both, occurring after the Effective Date and prior to the date
of such authentication, such Right Certificates may, on their face, without
invalidating or otherwise affecting any such adjustment, expressly entitle the
holders thereof to purchase such number of Preferred Shares at the Purchase
Price per one one-thousandth (1/1000) of a Preferred Share as to which a Right
would be exercisable if the Distribution Date were the Effective Date; no
adjustment of the Purchase Price or the number of Preferred Shares (or other
securities) as to which a Right is exercisable, or both, effected subsequent to
the date of authentication of any Right Certificate shall be invalidated or
otherwise affected by the fact that such adjustment is not expressly reflected
on the face or in the provisions of such Right Certificate.
Pending the preparation of definitive Right Certificates, the Company
may execute, and upon Company Order the Rights Agent shall authenticate and
send, by first-class, insured, postage-prepaid mail, to each record holder of
Common Shares of the Company as of the Close of Business on the Distribution
Date, temporary Right Certificates which are printed, lithographed,
typewritten, mimeographed or otherwise produced substantially of the tenor of
the definitive Right Certificates in lieu of which they are issued and with
such appropriate insertions, omissions, substitutions and other variations as
the officers executing such Right Certificates may determine, as evidenced by
their execution of such Right Certificates.
If temporary Right Certificates are issued, the Company will cause
definitive Right Certificates to be prepared without unreasonable delay. After
the preparation of definitive Right Certificates, the
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<PAGE> 17
temporary Right Certificates shall be exchangeable for definitive Right
Certificates, upon surrender of the temporary Right Certificates at the
Shareholder Services Office of the Rights Agent, without charge to the holder.
Upon surrender for cancellation of any one or more temporary Right
Certificates, the Company shall execute and the Rights Agent shall authenticate
and deliver in exchange therefor one or more definitive Right Certificates,
evidencing a like number of Rights. Until so exchanged, the temporary Right
Certificates shall in all respects be entitled to the same benefits under this
Agreement as definitive Right Certificates.
Section 5. Execution, Authentication and Delivery. The Right
Certificates shall be executed on behalf of the Company by its Chairman of the
Board, its President or one of its Vice Presidents, attested by its Secretary
or one of its Assistant Secretaries. The signature of any of these officers on
the Right Certificates may be manual or facsimile.
Right Certificates bearing the manual or facsimile signatures of
individuals who were at any time the proper officers of the Company shall bind
the Company, notwithstanding that such individuals or any of them have ceased
to hold such offices prior to the authentication and delivery of such Right
Certificates or did not hold such offices at the date of authentication of such
Right Certificates. At any time and from time to time after the execution and
delivery of this Agreement and prior to the Distribution Date, the Company may
deliver Right Certificates executed by the Company to the Rights Agent for
authentication, together with a Company Order for the authentication and
delivery of such Right Certificates; and the Rights Agent in accordance with
such Company Order shall authenticate and deliver such Right Certificates as in
this Agreement provided and not otherwise.
No Right Certificate shall be entitled to any benefit under this
Agreement or be valid or obligatory for any purpose unless there appears on
such Right Certificate a certificate of authentication substantially in the
form provided for herein executed by the Rights Agent by manual signature, and
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<PAGE> 18
such certificate upon any Right Certificate shall be conclusive evidence, and
the only evidence, that such Right Certificate has been duly authenticated and
delivered hereunder.
Section 6. Registration, Registration of Transfer and Exchange. From
and after the Distribution Date and prior to the earlier of the Redemption Date
and the Final Expiration Date, the Company shall cause to be kept at the
Shareholder Services Office of the Rights Agent a Rights Register (a "Rights
Register") in which, subject to such reasonable regulations as it may
prescribe, the Company shall provide for the registration of Right Certificates
and of transfers of Rights. The Rights Agent is hereby appointed the registrar
and transfer agent (the "Rights Registrar") for the purpose of registering
Right Certificates and transfers of Rights as herein provided and the Rights
Agent agrees to maintain such Rights Register in accordance with such
regulations so long as it continues to be designated as Rights Registrar
hereunder.
Upon surrender to the Rights Agent for registration of transfer of any
Right Certificate, the Company shall execute, and the Rights Agent shall
authenticate and deliver, in the name of the designated transferee or
transferees, one or more new Right Certificates evidencing a like number of
Rights.
At the option of the holder, Right Certificates may be exchanged for
other Right Certificates upon surrender of the Right Certificates to be
exchanged to the Rights Agent. Whenever any Right Certificates are so
surrendered for exchange, the Company shall execute, and the Rights Agent shall
authenticate and deliver, the Right Certificates which the holder making the
exchange is entitled to receive.
All Right Certificates issued upon any registration of transfer or
exchange of Right Certificates shall be the valid obligations of the Company,
evidencing the same Rights, and entitled to the same benefits under this
Agreement, as the Right Certificates surrendered upon such registration of
transfer or exchange.
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<PAGE> 19
Every Right Certificate presented or surrendered for registration of
transfer or exchange shall (if so required by the Company or the Rights Agent)
be duly endorsed, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Rights Registrar duly executed, by the
holder thereof or his attorney duly authorized in writing.
No service charge shall be made for any registration of transfer or
exchange of Right Certificates, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer or exchange of Right Certificates,
other than exchanges not involving any transfer.
The provisions of this Section 6 shall be subject to the provisions of
Section 15.
Section 7. Mutilated, Destroyed, Lost and Stolen Right Certificates.
If any mutilated Right Certificate is surrendered to the Rights Agent, the
Company shall execute and the Rights Agent shall authenticate and deliver in
exchange therefor a new Right Certificate of like tenor, for a like number of
Rights and bearing a registration number not contemporaneously outstanding.
If there shall be delivered to the Company and the Rights Agent (i)
evidence to their satisfaction of the destruction, loss or theft of a Right
Certificate and (ii) such security or indemnity, if any, as may be required by
them to save each of them and any agent of either of them harmless, then, in
the absence of notice to the Company or the Rights Agent that such Right
Certificate has been acquired by a bona fide purchaser, the Company shall
execute and upon its request the Rights Agent shall authenticate and deliver,
in lieu of any such destroyed, lost or stolen Right Certificate, a new Right
Certificate of like tenor, for a like number of Rights and bearing a
registration number not contemporaneously outstanding.
Upon the issuance of any new Right Certificate under this Section, the
Company may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed
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<PAGE> 20
in relation thereto and any other expenses (including the fees and expenses of
the Rights Agent) connected therewith.
Every new Right Certificate issued pursuant to this Section in lieu of
any destroyed, lost or stolen Right Certificate shall constitute an additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Right Certificate shall be at any time enforceable by anyone, and shall
be entitled to all the benefits of this Agreement equally and proportionately
with any and all other Right Certificates duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Right
Certificates.
Section 8. Exercise of Rights; Purchase Price; Expiration Date of
Rights. (a) The registered holder of any Right Certificate may exercise the
Rights evidenced thereby (except as otherwise provided herein) in whole or in
part at any time after the Distribution Date upon surrender of the Right
Certificate, with the form of election to purchase on the reverse side thereof
duly executed, to the Rights Agent at its Shareholder Services Office, together
with payment of the Purchase Price for each one one-thousandth (1/1000) of a
Preferred Share (or other securities) as to which the Rights are exercised, at
or prior to the earliest of (i) the Close of Business on the Final Expiration
Date, (ii) the time of redemption on the Redemption Date or (iii) the time at
which such Rights are mandatorily redeemed and exchanged as provided in Section
25 hereof.
(b) The Purchase Price for each one one-thousandth
(1/1000) of a Preferred Share pursuant to the exercise of a Right shall
initially be $65, shall be subject to adjustment from time to time as provided
in Sections 12 and 14 hereof and shall be payable in lawful money of the United
States of America in accordance with paragraph (c) below.
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<PAGE> 21
(c) Upon receipt of a Right Certificate representing
exercisable Rights, with the form of election to purchase duly executed,
accompanied by payment of the Purchase Price for the securities to be purchased
and an amount equal to any applicable transfer tax required to be paid by the
holder of such Right Certificate in accordance with Section 10 in cash, or by
certified check or cashier's check payable to the order of the Company, the
Rights Agent shall thereupon promptly (i) (A) requisition from any transfer
agent of the Preferred Shares (or other securities) certificates for such
number of one one-thousandths of a Preferred Share (or other securities) as are
to be purchased and registered in such name or names as may be designated by
the registered holder of such Right Certificate or, if appropriate, in the name
of a depositary agent or its nominee, and the Company hereby irrevocably
authorizes its transfer agent to comply with all such requests, and (B)
requisition from a depositary agent appointed by the Company, if any,
depositary receipts representing such number of one one-thousandths of a
Preferred Share as are to be purchased and registered in such name or names as
may be designated by such holder (in which case certificates for the Preferred
Shares represented by such receipts shall be deposited by the transfer agent
with such depositary agent), and the Company hereby directs such depositary
agent to comply with all such requests, (ii) when appropriate, requisition from
the Company the amount of cash to be paid in lieu of issuance of fractional
shares in accordance with Section 15, (iii) promptly after receipt of such
certificates or depositary receipts registered in such name or names as may be
designated by such holder, cause the same to be delivered to or upon the order
of the registered holder of such Right Certificate and (iv) when appropriate,
after receipt, promptly deliver such cash to or upon the order of such holder.
(d) If the registered holder of the Right Certificate
shall exercise less than all the Rights evidenced thereby, a new Right
Certificate evidencing Rights equal to the Rights remaining unexercised shall
be issued by the Rights Agent to the registered holder of such Right
Certificate or to his duly authorized assigns, subject to the provisions of
Section 15 hereof.
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<PAGE> 22
Section 9. Cancellation and Destruction of Right Certificates. All
Right Certificates surrendered for the purpose of exercise, transfer or
exchange shall, if surrendered to the Company or to any of its other agents, be
delivered to the Rights Agent for such purpose and for cancellation or, if
surrendered to the Rights Agent for such purpose, shall be cancelled by it. No
Right Certificates shall be authenticated in lieu of or in exchange for any
Right Certificates cancelled as provided in this Section except as expressly
permitted by any of the provisions of this Agreement. The Company shall
deliver to the Rights Agent for cancellation, and the Rights Agent shall so
cancel, any other Right Certificate purchased or acquired by the Company. The
Rights Agent shall deliver all cancelled Right Certificates to the Company, or
shall, pursuant to a Company Order, destroy such cancelled Right Certificates
and in such case shall deliver a certificate of destruction thereof to the
Company.
Section 10. Reservation and Availability of Shares. The Company
covenants and agrees that it will cause to be reserved and kept available out
of its authorized and unissued Preferred Shares or any Preferred Shares held in
its treasury, the number of Preferred Shares that will be sufficient to permit
the exercise in full of all outstanding Rights in accordance with Section 8;
provided, however, that the Company will not be required to reserve and keep
available Common Shares or Preferred Shares sufficient to permit the exercise
in full of all outstanding Rights pursuant to the adjustments set forth in
Section 12(a)(ii) or Section 14 until such time as the Rights become
exercisable pursuant to such adjustments.
The Company covenants and agrees that it will take all such action as
may be necessary to ensure that all Preferred Shares or Common Shares of the
Company issued upon exercise of Rights shall (subject to payment of the
Purchase Price) be duly authorized, validly issued, fully paid and
nonassessable.
The Company further covenants and agrees that it will pay when due and
payable any and all federal and state transfer taxes and charges which may be
payable in respect of the issuance or delivery
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<PAGE> 23
of the Right Certificates or of any Preferred Shares (or depository receipts
therefor) or Common Shares of the Company upon the exercise of Rights. The
Company shall not, however, be required to pay any transfer tax which may be
payable in respect of any transfer or delivery of Right Certificates to a
Person other than, or in respect of the issuance or delivery of certificates or
depositary receipts for the Preferred Shares or Common Shares of the Company
upon exercise of Rights evidenced by Right Certificates in a name other than
that of, the registered holder of the Right Certificate evidencing Rights
surrendered for transfer or exercise or to issue or deliver any certificates or
depositary receipts for Preferred Shares or Common Shares of the Company upon
the exercise of any Rights until any such tax shall have been paid (any such
tax being payable by the holder of such Right Certificate at the time of
surrender thereof) or until it has been established to the Company's
satisfaction that no such tax is due.
Section 11. Record Date. Each Person in whose name any certificate
for Preferred Shares or Common Shares of the Company is issued upon the
exercise of, or upon mandatory redemption and exchange of, Rights shall for all
purposes be deemed to have become the holder of record of the Preferred Shares
or Common Shares represented thereby on, and such certificate shall be dated,
(i) in the case of the exercise of Rights, the date upon which the Right
Certificate evidencing such Rights was duly surrendered and payment of the
Purchase Price (and any applicable transfer taxes) was made, or (ii) in the
case of the mandatory redemption and exchange of Rights, the date of such
mandatory redemption and exchange; provided, however, that, if the date of such
surrender and payment or mandatory redemption and exchange is a date upon which
the transfer books of the Company for its Preferred Shares or Common Shares, as
the case may be, are closed, such Person shall be deemed to have become the
record holder of such shares on, and such certificate shall be dated, the next
succeeding Business Day on which such transfer books of the Company are open.
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<PAGE> 24
Section 12. Adjustment of Purchase Price, Number of Shares or Number
of Rights. The Purchase Price, the number and kind of shares of capital stock
of the Company covered by each Right and the number of Rights outstanding are
subject to adjustment from time to time as provided in this Section 12.
(a) (i) If the Company shall at any time (A) declare a
dividend on the Preferred Shares payable in Preferred Shares, (B) subdivide the
outstanding Preferred Shares, (C) combine the outstanding Preferred Shares into
a smaller number of Preferred Shares or (D) issue any shares of its capital
stock in a reclassification of the Preferred Shares (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation), except as otherwise
provided in this Section 12(a), the Purchase Price in effect at the time of the
record date for such dividend or of the effective date of such subdivision,
combination or reclassification, and the number and kind of shares of capital
stock issuable on such date, shall be proportionately adjusted so that the
holder of any Right exercised thereafter shall be entitled to receive, upon
payment of the Purchase Price for the number of one one-thousandths of a
Preferred Share for which a Right was exercisable immediately prior to such
date, the aggregate number and kind of shares of capital stock which, if such
Right had been duly exercised immediately prior to such date (at a time when
the Preferred Shares transfer books of the Company were open), such holder
would have acquired upon such exercise and been entitled to receive upon
payment or effectuation of such dividend, subdivision, combination or
reclassification; provided, however, that in no event shall the consideration
to be paid upon the exercise of one Right be less than the aggregate par value
of the shares of capital stock of the Company issuable upon exercise of one
Right. If an event occurs which would require an adjustment under both Section
12(a)(i) and Section 12(a)(ii), the adjustment provided for in this Section
12(a)(i) shall be in addition to, and shall be made prior to, any adjustment
required pursuant to Section 12(a)(ii).
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<PAGE> 25
(ii) Subject to action of the Board of Directors of the
Company pursuant to Section 25 of this Agreement, if any Person shall become an
Acquiring Person, each holder of a Right shall thereafter have a right to
receive, upon exercise thereof at a price equal to the then current Purchase
Price multiplied by the number of one one-thousandths of a Preferred Share for
which a Right is then exercisable, in accordance with the terms of this
Agreement and in lieu of Preferred Shares, such number of Common Shares of the
Company as shall equal the result obtained by (x) multiplying the then current
Purchase Price by the number of one one-thousandths of a Preferred Share for
which a Right is then exercisable and dividing that product by (y) 50% of the
then current per share market price of the Company's Common Shares (determined
pursuant to Section 12(d)) on the date such Person became an Acquiring Person.
If any Person shall become an Acquiring Person and the Rights shall then be
outstanding, the Company shall not take any action which would eliminate or
diminish the benefits intended to be afforded by the Rights.
Notwithstanding any other provision of this Agreement, from and after
the time any Person shall become an Acquiring Person, any Rights that are or
were acquired or beneficially owned by any such Acquiring Person (or any
Associate or Affiliate of such Acquiring Person) shall be null and void and any
holder of such Rights shall thereafter have no right to exercise such Rights
under any provision of this Agreement. No Right Certificate shall be issued
pursuant to this Agreement that represents Rights beneficially owned by an
Acquiring Person whose Rights would be null and void pursuant to the preceding
sentence or by any Associate or Affiliate thereof; no Right Certificate shall
be issued at any time upon the transfer of any Rights to an Acquiring Person
whose Rights would be null and void pursuant to the preceding sentence or to
any Associate or Affiliate thereof or to any nominee (acting in its capacity as
such) of such Acquiring Person, Associate or Affiliate; and any Right
Certificate delivered to the Rights Agent for transfer to an Acquiring Person
whose Rights would be null and void
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<PAGE> 26
pursuant to the preceding sentence or to any Associate or Affiliate thereof or
to any nominee (acting in its capacity as such) of such Acquiring Person,
Associate or Affiliate shall be cancelled.
(iii) If on or after the Distribution Date there shall not be
sufficient Common Shares issued but not outstanding, or authorized but
unissued, to permit the exercise in full of all outstanding Rights in
accordance with the foregoing subparagraph (ii), the Company agrees to take all
such action as is within its power, including without limitation appropriate
action by its Board of Directors, as may be necessary to amend the Company's
charter to authorize additional Common Shares for issuance upon exercise of the
Rights. If, notwithstanding the foregoing, the stockholders shall not approve
an amendment to the Company's charter authorizing such additional Common
Shares, the adjustment prescribed in Section 12(a)(ii) shall not be made but,
in lieu thereof, each holder of a Right shall have the right to receive, upon
exercise thereof in accordance with the terms of this Agreement, such number of
one one-thousandths of Preferred Shares as shall equal the result obtained by
(x) multiplying the then current Purchase Price by the number of one
one-thousandths of a Preferred Share for which a Right is then exercisable and
dividing that product by (y) 50% of the then current per share market price of
one one-thousandth of a Preferred Share (determined pursuant to Section 12(d))
on the date such Person became an Acquiring Person.
(b) If the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Shares entitling them
(for a period expiring within 45 calendar days after such record date) to
subscribe for or purchase Preferred Shares (or shares having the same rights,
privileges and preferences as the Preferred Shares ("equivalent preferred
shares")) or securities convertible into or exchangeable for Preferred Shares
or equivalent preferred shares at a price per Preferred Share or equivalent
preferred share (together with any additional consideration required upon
conversion or exchange in the case of a security convertible into or
exchangeable for Preferred Shares or equivalent preferred shares), less than
the current per share market price of the Preferred Shares
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<PAGE> 27
(determined pursuant to Section 12(d) on such record date), the Purchase Price
to be in effect after such record date shall be determined by multiplying the
Purchase Price in effect immediately prior to such record date by a fraction,
the numerator of which shall be the number of Preferred Shares outstanding on
such record date plus the number of Preferred Shares which the aggregate
offering price of the total number of Preferred Shares and/or equivalent
preferred shares so to be offered (together with the aggregate of any
additional consideration required upon conversion or exchange in the case of
any convertible or exchangeable securities so to be offered) would purchase at
such current market price and the denominator of which shall be the number of
Preferred Shares outstanding on such record date plus the number of additional
Preferred Shares and/or equivalent preferred shares to be offered for
subscription or purchase (or into or for which the convertible or exchangeable
securities so to be offered are initially convertible or exchangeable);
provided, however, that in no event shall the consideration to be paid upon the
exercise of one Right be less than the aggregate par value of the shares of
capital stock of the Company issuable upon exercise of one Right. In case all
or part of such subscription or purchase price may be paid in a form other than
cash, the value of such consideration shall be as determined in good faith by
the Board of Directors of the Company, whose determination shall be described
in a statement filed with the Rights Agent. Preferred Shares owned by or held
for the account of the Company or any of its Subsidiaries shall not be deemed
outstanding for the purpose of any computation described in this Section 12(b).
The adjustment described in this Section 12(b) shall be made successively
whenever such a record date is fixed; and, if none of such rights, options or
warrants is so issued, the Purchase Price shall be adjusted to be the Purchase
Price which would then be in effect if such record date had not been fixed.
(c) If the Company shall fix a record date for the making of a
distribution to all holders of the Preferred Shares (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences of
indebtedness
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<PAGE> 28
or assets (other than a regular quarterly cash dividend or a dividend payable
in Preferred Shares) or subscription rights or warrants (excluding those
referred to in Section 12(b)), the Purchase Price to be in effect after such
record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the then current per share market price of the Preferred Shares
(determined pursuant to Section 12(d)) on such record date, less the fair
market value (as determined in good faith by the Board of Directors of the
Company, whose determination shall be described in a statement filed with the
Rights Agent) of the portion of the assets or evidences of indebtedness so to
be distributed or of such subscription rights or warrants applicable to one
Preferred Share and the denominator of which shall be such current per share
market price of the Preferred Shares; provided, however, that in no event shall
the consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company to be issued
upon the exercise of one Right. Such adjustments shall be made successively
whenever such a record date is fixed; and, if such distribution is not so made,
the Purchase Price shall again be adjusted to be the Purchase Price which would
then be in effect if such record date had not been fixed.
(d)(i) For the purpose of any computation hereunder, the "current per
share market price" of the Common Shares on any date shall be deemed to be the
average of the daily Closing Prices per share of such Common Shares for the 30
consecutive Trading Days immediately prior to such date; provided, however,
that, if the issuer of such Common Shares shall announce (A) a dividend or
distribution on such Common Shares payable in such Common Shares or securities
convertible into such Common Shares or (B) any subdivision, combination or
reclassification of such Common Shares, and the ex-dividend date for such
dividend or distribution, or the record date for such subdivision, combination
or reclassification, shall occur during such period of 30 Trading Days, then,
and in each such case,
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<PAGE> 29
the current per share market price of the Common Shares shall be appropriately
adjusted to reflect the current market price per Common Share equivalent.
(ii) For the purpose of any computation hereunder, the
"current per share market price" of the Preferred Shares shall be determined in
the same manner as set forth above for Common Shares in paragraph (i) of this
Section 12(d). If the current per share market price of the Preferred Shares
cannot be determined in the manner provided above, the "current per share
market price" of the Preferred Shares shall be conclusively deemed to be the
current per share market price of the Common Shares (determined in the manner
provided above) multiplied by one thousand.
(e) No adjustment in the Purchase Price shall be required unless
such adjustment would require an increase or decrease of at least 1% in the
Purchase Price; provided; however, that any adjustments which by reason of this
Section 12(e) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this Section
12 shall be made to the nearest cent or to the nearest ten-thousandth of a
Common Share or other share or one ten-millionth of a Preferred Share, as the
case may be, and references herein to the "number of one one-thousandths of a
Preferred Share" (or similar phrases) shall be construed to include fractions
of one one-thousandth of a Preferred Share. Notwithstanding the first sentence
of this Section 12(e), any adjustment required by this Section 12 shall be made
no later than the earlier of (i) three years from the date of the transaction
which requires such adjustment or (ii) the thirtieth day preceding the Final
Expiration Date.
(f) If as a result of an adjustment made pursuant to Section
12(a), the holder of any Right thereafter exercised shall become entitled to
receive any shares of capital stock of the Company other than Preferred Shares,
thereafter the number of such other shares so receivable upon exercise of any
Right shall be subject to adjustment from time to time in a manner and on terms
as nearly equivalent as practicable to the provisions with respect to the
shares contained in this Section 12 and the provisions
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<PAGE> 30
of this Agreement, including without limitation Sections 8, 10, 11 and 14, with
respect to the Preferred Shares shall apply on like terms to any such other
shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall, whether or not the Right
Certificate evidencing such Rights reflects such adjusted Purchase Price,
evidence the right to purchase, at the adjusted Purchase Price, the number of
one one-thousandths of a Preferred Share purchasable from time to time
hereunder upon exercise of the Rights, all subject to further adjustment as
provided herein.
(h) Unless the Company shall have exercised its election as
provided in Section 12(i), upon each adjustment of the Purchase Price pursuant
to Section 12(b) or 12(c), each Right outstanding immediately prior to the
making of such adjustment shall thereafter evidence the right to purchase, at
the adjusted Purchase Price per one one-thousandth of a Preferred Share, that
number of one one-thousandths of a Preferred Share obtained by (i) multiplying
(x) the number of one-thousandths of a share covered by a Right immediately
prior to this adjustment by (y) the Purchase Price in effect immediately prior
to such adjustment of the Purchase Price and (ii) dividing the product so
obtained by the Purchase Price in effect immediately after such adjustment of
the Purchase Price.
(i) The Company may elect on or after the date of any adjustment
of the Purchase Price to adjust the number of Rights outstanding in lieu of any
adjustment in the number of one one-thousandths of a Preferred Share
purchasable upon the exercise of a Right. Each Right outstanding after such
adjustment of the number of Rights shall be exercisable for the number of one
one-thousandths of a Preferred Share for which a Right was exercisable
immediately prior to such adjustment of the Purchase Price. Each Right held of
record prior to such adjustment of the number of Rights shall become that
number of Rights (calculated to the nearest one ten-thousandth) obtained by
dividing the Purchase Price in effect immediately prior to adjustment of the
Purchase Price by the Purchase Price in effect immediately after adjustment of
the Purchase Price. The Company shall make
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<PAGE> 31
a public announcement of its election to adjust the number of Rights,
indicating the record date for the adjustment, and, if known at the time, the
amount of the adjustment to be made. This record date may be the date on which
the Purchase Price is adjusted or any day thereafter, but, if the Right
Certificates have been issued, shall be at least 10 days later than the date of
the public announcement. Until such record date, however, any adjustment in
the number of one one-thousandths of a Preferred Share for which a Right shall
be exercisable made as required by this Agreement shall remain in effect. If
Right Certificates have been issued, upon each adjustment of the number of
Rights pursuant to this Section 12(i), the Company shall, as promptly as
practicable, cause to be distributed to holders of record of Right Certificates
on such record date Right Certificates evidencing, subject to Section 15
hereof, the additional Rights to which such holders shall be entitled as a
result of such adjustment, or, at the option of the Company, shall cause to be
distributed to such holders of record in substitution and replacement for the
Right Certificates held by such holders prior to the date of adjustment, and
upon surrender thereof, if required by the Company, new Right Certificates
evidencing all the Rights to which such holders shall be entitled after such
adjustment. Right Certificates so to be distributed shall be issued, executed
and authenticated in the manner provided for herein and shall be registered in
the names of the holders of record of Right Certificates on the record date
specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price
or the number of one one-thousandths of a Preferred Share issuable upon the
exercise of the Rights, the Right Certificates theretofore and thereafter
issued may continue to express the Purchase Price and the number of one
one-thousandths of a Preferred Share which were expressed in the initial Right
Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment
reducing the Purchase Price below one one-thousandth of the amount of
consideration per Preferred Share determined by the Board
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<PAGE> 32
of Directors of the Company to be capital, or below one one-thousandth of the
par value, if any, per Preferred Share issuable upon exercise of the Rights,
the Company agrees to take such corporate action as is within its power,
including without limitation appropriate action by its Board of Directors, and
which is, in the opinion of its counsel, necessary in order that the Company
may validly and legally issue fully paid and nonassessable one one-thousandths
of Preferred Shares at such adjusted Purchase Price.
(l) In any case in which this Section 12 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuance to the holder of any Right exercised after such record date
of the Preferred Shares or other capital stock or securities of the Company, if
any, issuable upon such exercise over and above the Preferred Shares or other
capital stock or securities of the Company, if any, issuable upon such exercise
on the basis of the Purchase Price in effect prior to such adjustment;
provided, however, that the Company shall deliver to such holder a due bill or
other appropriate instrument evidencing such holder's right to receive such
additional securities upon the occurrence of the event requiring such
adjustment.
(m) Anything in this Section 12 to the contrary notwithstanding,
the Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 12, as and to
the extent that it in its sole discretion shall determine to be advisable in
order that any combination or subdivision of the Preferred Shares, issuance
wholly for cash of any of the Preferred Shares at less than the current market
price, issuance wholly for cash of Preferred Shares or securities which by
their terms are convertible into or exchangeable for Preferred Shares,
dividends on Preferred Shares payable in Preferred Shares or issuance of
rights, options or warrants referred to in subsection (b) of this Section 12,
hereafter effected by the Company to holders of its Preferred Shares shall not
be taxable to such shareholders.
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(n) If at any time prior to the Distribution Date, the Company
shall (i) declare or pay any dividend on the Common Shares payable in Common
Shares or (ii) effect a subdivision or combination of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares)
into a greater or lesser number of Common Shares, then in any such case (i) the
Purchase Price in effect at the time of the record date for such dividend or of
the effective date of such subdivision or combination shall be adjusted by
multiplying such Purchase Price by a fraction, the numerator of which is the
number of Common Shares outstanding immediately before such event and the
denominator of which is the number of Common Shares outstanding immediately
after such event, and (ii) the number of Rights outstanding immediately after
such event shall be adjusted, either through cancellation of outstanding Rights
or through distribution of additional Rights (but without duplication of the
Company's obligations under Section 3(c)), so that the certificate evidencing
each Common Share outstanding immediately after such event shall also evidence
the associated Right to purchase the same number of one one-thousandths of a
Preferred Share as to which a Right would have entitled the holder thereof to
purchase immediately prior to such event. The adjustment provided for in this
Section 12(n) shall be made successively whenever such a dividend is declared
or paid or such a subdivision or combination is effected. If an event occurs
which would require an adjustment under Section 12(a)(ii) and this Section
12(n), the adjustments provided for in this Section 12(n) shall be in addition
and prior to any adjustment required pursuant to Section 12(a)(ii).
Section 13. Certificate of Adjusted Purchase Price or Number of
Shares. Whenever an adjustment is made as provided in Section 12 or 14 hereof,
the Company shall (a) promptly prepare a certificate setting forth such
adjustment, and a brief statement of the facts accounting for such adjustment,
(b) promptly file with the Rights Agent and with each transfer agent for the
Common Shares of the Company and the Preferred Shares a copy of such
certificate and (c) mail a brief summary thereof to each holder of record of a
Right Certificate in accordance with Section 28 hereof.
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Section 14. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power. If, directly or indirectly, (a) the Company shall consolidate
with, or merge with and into, any other Person, (b) any Person shall merge with
and into the Company and the Company shall be the continuing or surviving
corporation of such merger and, in connection with any such merger, all or part
of the Common Shares of the Company shall be changed into or exchanged for
stock or other securities of any other Person (or the Company) or cash or any
other property, or (c) the Company shall sell or otherwise transfer (or one or
more of its Subsidiaries shall sell or otherwise transfer), in one or a series
of two or more transactions, assets of the Company or its Subsidiaries which
constitute more than 50% of the assets or which produce more than 50% of the
earning power of the Company and its Subsidiaries (taken as a whole) to any
Person or any Affiliate or Associate of such Person other than the Company or
one or more of its Wholly-Owned Subsidiaries, then, and in each such case, the
Company agrees that, as a condition to engaging in any such transaction, it
will make or cause to be made proper provision so that (i) each holder of a
Right (except as otherwise provided herein) shall thereafter have the right to
receive, upon the exercise thereof in accordance with the terms of this
Agreement and in lieu of Preferred Shares, such number of Common Shares of such
other Person (including the Company as successor thereto or as the surviving
corporation) or, if such other Person is a Subsidiary of another Person, of the
Person or Persons (other than individuals) which ultimately control such
first-mentioned Person, as shall be equal to the result obtained by (X)
multiplying the then current Purchase Price by the number of one
one-thousandths of a Preferred Share for which a Right is then exercisable
(without taking into account any adjustment previously made pursuant to Section
12(a)(ii)) and dividing that product by (Y) 50% of the current per share market
price of the Common Shares of such other Person (determined pursuant to Section
12(d)) on the date of consummation of such consolidation, merger, sale or
transfer; (ii) the issuer of such Common Shares shall thereafter be liable for,
and shall assume, by virtue of such consolidation, merger, sale or
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transfer, all the obligations and duties of the Company pursuant to this
Agreement; (iii) the term "Company", as used herein, shall thereafter be deemed
to refer to such issuer; and (iv) such issuer shall take such steps (including
without limitation the reservation of a sufficient number of shares of its
Common Shares in accordance with Section 10) in connection with such
consummation as may be necessary to assure that the provisions hereof shall
thereafter be applicable, as nearly as reasonably may be, in relation to the
Common Shares thereafter deliverable upon the exercise of the Rights. The
Company shall not enter into any transaction of the kind referred to in this
Section 14 if at the time of such transaction there are outstanding any rights,
warrants, instruments or securities or any agreement or arrangements which, as
a result of the consummation of such transaction, would substantially diminish
or otherwise eliminate the benefits intended to be afforded by the Rights. The
Company shall not consummate any such consolidation, merger, sale or transfer
unless prior thereto the Company and such issuer shall have executed and
delivered to the Rights Agent an agreement supplemental to this Agreement
complying with the provisions of this Section 14. The provisions of this
Section 14 shall similarly apply to successive mergers or consolidations or
sales or other transfers. For the purposes of this Section 14, 50% of the
assets of the Company and its Subsidiaries shall be determined by reference to
the book value of such assets as set forth in the most recent consolidated
balance sheet of the Company and its Subsidiaries (which need not be audited)
and 50% of the earning power of the Company and its Subsidiaries shall be
determined by reference to the mathematical average of the operating income
resulting from the operations of the Company and its Subsidiaries for the two
most recent full fiscal years as set forth in the consolidated and
consolidating financial statements of the Company and its Subsidiaries for such
years; provided, however, that, if the Company has, during such period, engaged
in one or more transactions to which purchase accounting is applicable, such
determination shall be made by reference to the pro forma operating income of
the Company and its
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Subsidiaries giving effect to such transactions as if they had occurred at the
commencement of such two-year period.
Section 15. Fractional Rights and Fractional Shares. (a) The Company
shall not be required to issue or distribute Right Certificates which evidence
fractional Rights. If, on the Distribution Date or thereafter, as a result of
any adjustment effected pursuant to Section 12(i) or otherwise hereunder, a
Person would otherwise be entitled to receive a Right Certificate evidencing a
fractional Right, the Company shall, in lieu thereof, pay or cause to be paid
to such Person an amount in cash equal to the same fraction of the current
market value of a whole Right. For the purpose of this Section 15(a), the
current market value of a whole Right shall be the Closing Price of the Rights
for the Trading Day immediately prior to the date on which such fractional
Rights would have been otherwise issuable.
(b) The Company shall not be required to issue fractions of
Preferred Shares (other than fractions which are integral multiples of one
one-thousandth of a Preferred Share) upon exercise of the Rights or to
distribute certificates which evidence fractional Preferred Shares (other than
fractions which are integral multiples of one one-thousandth of a Preferred
Share). Fractions of Preferred Shares in integral multiples of one
one-thousandth of a Preferred Share may, at the election of the Company, be
evidenced by depositary receipts, pursuant to an appropriate agreement between
the Company and a depositary selected by it, provided that such agreement shall
provide that the holders of such depositary receipts shall have all the rights,
privileges and preferences to which they are entitled as beneficial owners of
the Preferred Shares. If, on the Distribution Date or thereafter, as a result
of any adjustment effected hereunder in the number of one one-thousandths of a
Preferred Share as to which a Right has become exercisable, a Person would
otherwise be entitled to receive a fractional Preferred Share that is not an
integral multiple of one one-thousandth of a Preferred Share, the Company
shall, in lieu thereof, pay to such Person at the time such Right is exercised
as herein provided an amount in cash equal to the same fraction (which is not
an integral multiple of one
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one-thousandth of a Preferred Share) of the current market value of one
Preferred Share. For purposes of this Section 15(b), the current market value
of a Preferred Share shall be the Closing Price of a Preferred Share for the
Trading Day immediately prior to the date of such exercise.
(c) Should any adjustment contemplated by Section 12(a)(ii) or any
mandatory redemption and exchange contemplated by Section 25 occur, the Company
shall not be required to issue fractions of Common Shares upon exercise of the
Rights or to distribute certificates which evidence fractional Common Shares.
If after any such adjustment or mandatory redemption and exchange, a Person
would otherwise be entitled to receive a fractional Common Share of the Company
upon exercise of any Right Certificate or upon mandatory redemption and
exchange as contemplated by Section 25, the Company shall, in lieu thereof, pay
to such Person at the time such Right is exercised as herein provided or upon
such mandatory redemption and exchange an amount in cash equal to the same
fraction of the current market value of one Common Share. For purposes of this
Section 15(c), the current market value of a Common Share shall be the Closing
Price of a Common Share for the Trading Day immediately prior to the date of
such exercise or the date of such mandatory redemption and exchange.
(d) The holder of a Right by the acceptance thereof expressly
waives his right to receive any fractional Rights or any fractional shares upon
exercise or mandatory redemption and exchange of a Right (except as provided
above).
Section 16. Rights of Action. (a) All rights of action in respect of
the obligations and duties owed to the holders of the Rights under this
Agreement are vested in the registered holders of the Rights; and, without the
consent of the Rights Agent or of the holder of any other Rights, any
registered holder of any Rights may, in his own behalf and for his own benefit,
enforce, and may institute and maintain any suit, action or proceeding,
judicial or otherwise, against the Company to enforce, or otherwise to act in
respect of, such holder's right to exercise such Rights in the manner provided
in the Right Certificate evidencing such Rights and in this Agreement. Without
limiting the
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foregoing or any remedies available to the holders of Rights, it is
specifically acknowledged that the holders of Rights would not have an adequate
remedy at law for any breach of this Agreement and will be entitled to specific
performance of the obligations under, and injunctive relief against actual or
threatened violations of, the obligations of any Person subject to this
Agreement.
(b) No right or remedy herein conferred upon or reserved to the
registered holder of Rights is intended to be exclusive of any other right or
remedy, and every right and remedy shall, to the extent permitted by law, be
cumulative and in addition to every other right and remedy given hereunder or
now or hereafter existing at law or in equity or otherwise. The assertion or
employment of any right or remedy, whether hereunder or otherwise, shall not
prevent the concurrent assertion or employment of any other appropriate right
or remedy.
(c) No delay or omission of any registered holder of Rights to
exercise any right or remedy accruing hereunder shall impair any such right or
remedy or constitute a waiver of any default hereunder or an acquiescence
therein. Every right and remedy given hereunder or by law to such holders may
be exercised from time to time, and as often as may be deemed expedient, by
such holders.
Section 17. Agreement of Right Holders. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of the Common Shares
of the Company;
(b) after the Distribution Date, the Right Certificates
are transferable only on the registry books of the Rights Agent if
surrendered at the Shareholder Services Office of the Rights Agent
duly endorsed or accompanied by a proper instrument of transfer; and
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(c) the Company and the Rights Agent may deem and treat
the person in whose name the Right Certificate (or, prior to the
Distribution Date, the associated Common Shares certificate) is
registered as the absolute owner thereof and of the Rights evidenced
thereby (notwithstanding any notations of ownership or writing on the
Right Certificates or the associated Common Shares certificate made by
anyone other than the Company or the Rights Agent) for all purposes,
and neither the Company nor the Rights Agent shall be affected by any
notice to the contrary.
Section 18. Right Certificate Holder Not Deemed a Stockholder. No
holder, as such, of any Right (whether or not then evidenced by a Right
Certificate) shall be entitled to vote, receive dividends or be deemed for any
purpose the holder of Preferred Shares, Common Shares of the Company or any
other securities of the Company which may at any time be issuable on the
exercise (or mandatory redemption and exchange) of the Rights represented
thereby, nor shall anything contained herein or in any Right Certificate be
construed to confer upon any such holder, as such, any of the rights of a
stockholder of the Company, including without limitation any right to vote for
the election of directors or upon any matter submitted to stockholders at any
meeting thereof, to give or withhold consent to any corporate action, to
receive notice of meetings or other actions affecting stockholders (except as
provided in Section 26) or to receive dividends or subscription rights until
the Right or Rights evidenced by such Right Certificate shall have been
exercised (or mandatorily redeemed and exchanged) in accordance with the
provisions hereof.
Section 19. Concerning the Rights Agent. The Company agrees to pay
to the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and other disbursements incurred in the
administration and execution of this Agreement and the exercise and performance
of its duties hereunder. The Company also agrees to indemnify the Rights Agent
for, and to hold it harmless
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against, any loss, liability or expense, incurred without negligence, bad faith
or willful misconduct on the part of the Rights Agent, for anything done or
omitted by the Rights Agent in connection with the acceptance and
administration of this Agreement, including the costs and expenses of defending
against any claim of liability in the premises.
The Rights Agent shall be protected and shall incur no liability for,
or in respect of any action taken, suffered or omitted by it in connection
with, its administration of this Agreement in reliance upon any Right
Certificate or certificate for Preferred Shares, Common Shares of the Company
or other securities of the Company, Company Order, instrument of assignment or
transfer, power of attorney, endorsement, affidavit, letter, notice, direction,
consent, certificate, statement, or other paper or document believed by it to
be genuine and to be executed and, where necessary, verified or acknowledged,
by the proper person or persons, or otherwise upon the advice of its counsel as
set forth in Section 20 hereof.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Right Certificates,
by their acceptance thereof, shall be bound.
(a) The Rights Agent may consult with legal counsel (who may be
legal counsel for the Company), and the opinion of such counsel shall be full
and complete authorization and protection to the Rights Agent as to any action
taken or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement
the Rights Agent shall deem it necessary or desirable that any fact or matter
be proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by any one of the Chairman of the Board,
the President, any Vice President, the
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Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary of
the Company and delivered to the Rights Agent; and such certificate shall be
full authorization to the Rights Agent for any action taken or suffered in good
faith by it under the provisions of this Agreement in reliance upon such
certificate.
(c) The Rights Agent shall be liable hereunder to the Company or
any other Person only for its own negligence, bad faith or willful misconduct.
Anything in this Agreement to the contrary notwithstanding, in no event shall
the Rights Agent be liable for special, indirect or consequential loss or
damage of any kind whatsoever (including, but not limited to, lost profits),
even if the Rights Agent has been advised of the likelihood of such loss or
damage and regardless of the form of action.
(d) The Rights Agent shall not be liable for or by reason of any
of the statements of fact or recitals contained in this Agreement or in the
Right Certificates (except its authentication thereof) or be required to verify
the same, but all such statements and recitals are and shall be deemed to have
been made by the Company only.
(e) The Rights Agent shall not have any responsibility with
respect to the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Rights Agent) or with respect to the
validity or execution of any Right Certificate (except its authentication
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Right Certificate;
nor shall it be responsible for any change in the exercisability of the Rights
(including the Rights becoming void pursuant to Section 12(a)(ii) hereof) or
any adjustment in the terms of the Rights (including the manner, method or
amount thereof) provided for in Sections 3, 12, 14, 24 and 25, or the
ascertainment of the existence of facts that would require any such change or
adjustment (except with respect to the exercise of Rights evidenced by Right
Certificates after actual notice that such change or adjustment is required);
nor shall it by any act hereunder be deemed to make any representation or
warranty as to the authorization or reservation of
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any Preferred Shares or Common Shares to be issued pursuant to this Agreement
or any Right Certificate or as to whether any Preferred Shares or Common Shares
will, when issued, be duly authorized, validly issued, fully paid and
nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge
and deliver or cause to be performed, executed, acknowledged and delivered all
such further and other acts, instruments and assurances as may reasonably be
required by the Rights Agent for the carrying out or performing by the Rights
Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
one of the Chairman of the Board, the President, any Vice President, the
Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary of
the Company, and to apply to such officers for advice or instructions in
connection with its duties, and it shall not be liable for any action taken or
suffered to be taken by it in good faith in accordance with instructions of any
such officer.
(h) The Rights Agent and any shareholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were not
Rights Agent under this Agreement. Nothing herein shall preclude the Rights
Agent from acting in any other capacity for the Company.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable
or accountable for any act, default, neglect or misconduct of any such
attorneys or agents or for any loss of the Company resulting from any such act,
default, neglect or misconduct provided reasonable care was exercised in the
selection and continued employment thereof.
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Section 21. Merger or Consolidation or Change of Name of Rights
Agent. Any corporation into which the Rights Agent or any successor Rights
Agent may be merged or with which it may be consolidated, or any corporation
resulting from any merger or consolidation to which the Rights Agent or any
successor Rights Agent shall be a party, or any corporation succeeding to the
corporate trust business or shareholder services business of the Rights Agent
or any successor Rights Agent, shall be the successor to the Rights Agent under
this Agreement without the execution or filing of any paper or any further act
on the part of any of the parties hereto, provided that such corporation would
be eligible for appointment as a successor Rights Agent under the provisions of
Section 22. If at the time such successor Rights Agent shall succeed to the
agency created by this Agreement any of the Right Certificates shall have been
authenticated but not delivered, any such successor Rights Agent may adopt the
authentication of the predecessor Rights Agent and deliver such Right
Certificates so authenticated, and, if at that time any of the Right
Certificates shall not have been authenticated, any successor Rights Agent may
authenticate such Right Certificates either in the name of the predecessor
Rights Agent or in the name of the successor Rights Agent; and in all such
cases such Right Certificates shall have the full force provided in the Right
Certificates and in this Agreement. If at any time the name of the
Rights Agent shall be changed and at such time any of the Right Certificates
shall have been authenticated but not delivered, the Rights Agent may adopt the
authentication under its prior name and deliver Right Certificates so
authenticated; and, in case at that time any of the Right Certificates shall
not have been authenticated, the Rights Agent may authenticate such Right
Certificates either in its prior name or in its changed name; and in all such
cases such Right Certificates shall have the full force provided in the Right
Certificates and in this Agreement.
Section 22. Change of Rights Agent. The Rights Agent or any
successor Rights Agent may resign and be discharged from its duties under this
Agreement upon 30 days' notice in writing mailed to the Company and to each
transfer agent for the Common Shares of the Company and the Preferred
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Shares by registered or certified mail, and to the holders of the Right
Certificates by first-class mail. The Company may remove the Rights Agent or
any successor Rights Agent upon 30 days' notice in writing, mailed to the
Rights Agent or successor Rights Agent, as the case may be, and to each
transfer agent for the Common Shares of the Company and the Preferred Shares by
registered or certified mail, and to the holders of the Right Certificates by
first-class mail. If the Rights Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Rights Agent. If the Company shall fail to make such appointment within a
period of 30 days after giving notice of such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the registered holder of a Right Certificate
(or, prior to the Distribution Date, of Common Shares), then any registered
holder of a Right Certificate (or, prior to the Distribution Date, of Common
Shares) may apply to any court of competent jurisdiction for the appointment of
a new Rights Agent. Any successor Rights Agent, whether appointed by the
Company or by such a court, shall be either (A) a corporation organized and
doing business under the laws of the United States or of any state of the
United States, which is authorized under such laws to exercise corporate trust
or shareholder services powers and is subject to supervision or examination by
federal or state authority and which has at the time of its appointment as
Rights Agent a combined capital and surplus of at least $50 million or (B) an
affiliate of such a corporation. After appointment, the successor Rights Agent
shall be vested with the same powers, rights, duties and responsibilities as if
it had been originally named as Rights Agent without further act or deed; but
the predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver
any further assurance, conveyance, act or deed necessary for the purpose. Not
later than the effective date of any such appointment, the Company shall file
notice thereof in writing with the predecessor Rights Agent and each transfer
agent for the Common Shares of the Company and the Preferred Shares, and mail a
notice thereof in writing to the
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registered holders of the Right Certificates. Failure to give any notice
provided for in this Section 22, however, or any defect therein, shall not
affect the legality or validity of the resignation or removal of the Rights
Agent or the appointment of the successor Rights Agent, as the case may be.
Section 23. Issuance of New Right Certificates. Notwithstanding any
of the provisions of this Agreement or of the Rights to the contrary, the
Company may, at its option, issue new Rights Certificates evidencing Rights in
such form as may be approved by its Board of Directors to reflect any
adjustment or change in the Purchase Price per share and the number or kind or
class of shares or other securities purchasable under the Right Certificates
made in accordance with the provisions of this Agreement.
Section 24. Redemption. (a) The Rights may be redeemed by action of
the Board of Directors of the Company pursuant to paragraph (b) of this Section
24, or may be redeemed and exchanged by action of the Board of Directors of the
Company pursuant to Section 25 herein, but shall not be redeemed in any other
manner.
(b) The Board of Directors of the Company may, at its option, at
any time prior to the time any Person becomes an Acquiring Person redeem all
but not less than all the then outstanding Rights at a redemption price of one
cent ($0.01) per Right then outstanding, appropriately adjusted to reflect any
adjustment in the number of Rights outstanding pursuant to Section 12(i) herein
(such redemption price being hereinafter referred to as the "Redemption
Price"). Any such redemption of the Rights by the Board of Directors may be
made effective at such time, on such basis and with such conditions as the
Board of Directors in its sole discretion may establish.
(c) The right of the registered holders of Right Certificates to
exercise the Rights evidenced thereby or, if the Distribution Date has not
theretofore occurred, the inchoate right of the registered holders of Rights to
exercise the same shall, without notice to such holders or to the Rights Agent
and without further action, terminate and be of no further force or effect
effective as of the time of adoption
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by the Board of Directors of the Company of a resolution authorizing and
directing the redemption of the Rights pursuant to paragraph (b) of this
Section 24 (or, alternatively, if the Board of Directors qualified such action
as to time, basis or conditions, then at such time, on such basis and with such
conditions as the Board of Directors may have established pursuant to such
paragraph (b)); thereafter, the only right of the holders of Rights shall be to
receive the Redemption Price. The Company shall promptly give public notice of
any redemption resolution pursuant to paragraph (b) of this Section 24;
provided, however, that the failure to give, or any defect in, any such notice
shall not affect the validity of such redemption. Within 10 days after the
adoption of any redemption resolution pursuant to paragraph (b) of this Section
24, the Company shall give notice of such redemption to the holders of the then
outstanding Rights by mailing such notice to all such holders at their last
addresses as they appear upon the registry books of the Rights Agent or, prior
to the Distribution Date, on the registry books of the transfer agents for the
Common Shares. Any notice which is mailed in the manner herein provided shall
be deemed given, whether or not the holder receives the notice. Each such
notice of redemption shall state the method by which the payment of the
Redemption Price will be made.
(d) Neither the Company nor any of its Affiliates or Associates
may acquire (other than, in the case of such Affiliates and Associates, in
their capacity as holders of Common Shares of the Company), redeem or purchase
for value any Rights at any time in any manner other than as specifically set
forth in this Section 24 or in Section 25 herein, and other than in connection
with the purchase of Common Shares prior to the Distribution Date.
Section 25. Mandatory Redemption and Exchange. (a) The Board of
Directors of the Company may, at its option, at any time after any Person
becomes an Acquiring Person, issue Common Shares of the Company in mandatory
redemption of, and in exchange for, all or part of the then outstanding and
exercisable Rights (which shall not include Rights that have become null and
void pursuant to the provisions of Section 12(a)(ii) hereof) at an exchange
ratio of one Common Share for
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each Right, appropriately adjusted to reflect any stock split, stock dividend
or similar transaction occurring after the date hereof. Notwithstanding the
foregoing, the Board of Directors shall not be empowered to effect such
redemption and exchange at any time after any Person (other than the Company,
any Subsidiary of the Company, any employee benefit plan of the Company or of
any such Subsidiary, or any trustee of or fiduciary with respect to any such
plan when acting in such capacity), together with all Affiliates and Associates
of such Person, becomes the Beneficial Owner of 50% or more of the Voting
Shares then outstanding.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the mandatory redemption and exchange of any Rights pursuant
to subsection (a) of this Section 25 and without any further action and without
any notice, the right to exercise such Rights shall terminate and the only
right thereafter of a holder of such Rights shall be to receive such number of
Common Shares as is provided in paragraph (a) of this Section 25. The Company
shall promptly give public notice of any such redemption and exchange;
provided, however, that the failure to give, or any defect in, such notice
shall not affect the validity of such redemption and exchange. The Company
promptly shall mail a notice of any such redemption and exchange to all the
holders of such Rights at their last addresses as they appear upon the registry
books of the Rights Agent. Any notice which is mailed in the manner herein
provided shall be deemed given, whether or not the holder receives the notice.
Each such notice of mandatory redemption and exchange shall state the method by
which the redemption and exchange of the Common Shares for Rights will be
effected and, in the event of any partial redemption and exchange, the number
of Rights which will be redeemed and exchanged. Any partial redemption and
exchange shall be effected pro rata based on the number of Rights (other than
Rights which have become null and void pursuant to the provisions of Section
12(a)(ii) hereof) held by each holder of Rights.
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(c) In any mandatory redemption and exchange pursuant to this
Section 25, the Company, at its option, may substitute Preferred Shares (or
equivalent preferred shares, as such term is defined in Section 12(b) hereof)
for Common Shares, at the initial rate of one one-thousandth of a Preferred
Share (or equivalent preferred share) for each Common Share, as appropriately
adjusted.
Section 26. Notice of Certain Events. If the Company shall, on or
after the Distribution Date, propose (a) to pay any dividend or other
distribution payable in stock of any class of the Company or any Subsidiary of
the Company to the holders of its Preferred Shares, (b) to distribute to the
holders of its Preferred Shares rights or warrants to subscribe for or to
purchase any additional Preferred Shares or shares of stock of any class or any
other securities, rights or options, (c) to make any other distribution to the
holders of its Preferred Shares (other than a regular quarterly cash dividend),
(d) to effect any reclassification of its Preferred Shares (other than a
reclassification involving only the subdivision of outstanding Preferred
Shares), (e) to effect any consolidation or merger into or with, or to effect
any sale or other transfer (or to permit one or more of its Subsidiaries to
effect any sale or other transfer), in one or more transactions, of more than
50% of the assets or earning power of the Company and its Subsidiaries
(determined as provided in Section 14 herein) to, any other Person (other than
the Company or a Wholly-Owned Subsidiary or Wholly-Owned Subsidiaries), (f) to
effect the liquidation, dissolution or winding up of the Company or (g) if the
Rights have theretofore become exercisable with respect to Common Shares
pursuant to Section 12(a)(ii) herein, to declare or pay any dividend or other
distribution on the Common Shares payable in Common Shares or in stock of any
other class of the Company or any Subsidiary of the Company or to effect a
subdivision or combination of the Common Shares (by reclassification or
otherwise than by payment of dividends in Common Shares) then, in each such
case, the Company shall give to each holder of a Right Certificate, in
accordance with Section 28 hereof, notice of such proposed action, which shall
specify the date of authorization by the Board of Directors of the Company of,
and record date for, such stock dividend
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<PAGE> 49
or such distribution of rights or warrants or the date on which such
reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution, winding up, subdivision or combination is to take place and the
date of participation therein by the holders of the Common Shares of the
Company or the Preferred Shares, or both, if any such date is to be fixed.
Such notice shall be so given in the case of any action covered by clause (a),
(b) or (g) above at least 20 days prior to the record date for determining
holders of the Preferred Shares or of the Common Shares of the Company, as the
case may be, for purposes of such action, and in the case of any such other
action, at least 20 days prior to the date of the taking of such proposed
action or the date of participation therein by the holders of the Preferred
Shares or Common Shares of the Company, as the case may be, whichever shall be
the earlier.
If any of the events set forth in Section 12(a)(ii) of this Agreement
shall occur, then, in any such case, the Company shall as soon as practicable
thereafter give to each holder of a Right Certificate, in accordance with
Section 28 hereof, a notice of the occurrence of such event, which shall
specify the event and the consequences of the event to holders of Rights under
Section 12(a)(ii) hereof.
Section 27. Securities Laws Registrations. To the extent legally
required, the Company agrees that it will prepare and file, no later than the
Distribution Date, and will use its best efforts to cause to be declared
effective, a registration statement under the Securities Act of 1933, as
amended, registering the offering, sale and delivery of the Preferred Shares
issuable upon exercise of the Rights, and the Company will, thereafter, use its
best efforts to maintain such registration statement (or another) continuously
in effect so long as any Rights remain outstanding and exercisable with respect
to Preferred Shares. Should the Rights become exercisable with respect to
securities of the Company or one of its Subsidiaries other than Preferred
Shares, the Company agrees that it will, to the extent legally required,
promptly thereafter prepare and file, or cause to be prepared and filed, and
will use its best efforts to cause to be declared effective, a registration
statement under such Act registering the
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<PAGE> 50
offering, sale and delivery of such other securities and the Company will,
thereafter, use its best efforts to maintain such registration statement (or
another) continuously in effect so long as any outstanding Rights are
exercisable with respect to such securities. The Company further agrees to use
its best efforts, from and after the Distribution Date, to qualify or register
for sale the Preferred Shares or other securities of the Company or one of its
Subsidiaries issuable upon exercise of the Rights under the securities or "blue
sky" laws (to the extent legally required thereunder) of all jurisdictions in
which registered holders of Right Certificates reside determined by reference
to the Rights Register.
Section 28. Notices. Notices or demands authorized by this Agreement
to be given or made by the Rights Agent or by the holder of any Right
Certificate to or on the Company shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed (until another address is filed in
writing with the Rights Agent) as follows:
Group 1 Automotive, Inc.
950 Echo Lane, Suite 350
Houston, Texas 77024
Attention: Secretary
Subject to the provisions of Section 22 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Right Certificate to or on the Rights Agent shall be sufficiently given or made
if sent by first-class mail, postage prepaid, addressed (until another address
is filed in writing with the Company) as follows:
ChaseMellon Shareholder Services, L.L.C.
2323 Bryan Street, Suite 2300
Dallas, Texas 75201
Attention: Shareholder Services Division
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the Rights
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<PAGE> 51
Register of the Company or, prior to the Distribution Date, on the stock
transfer records for the Common Shares of the Company.
Section 29. Supplements and Amendments. The Company may from time to
time supplement or amend this Agreement (which supplement or amendment shall be
evidenced by a writing signed by the Company and the Rights Agent) without the
approval of any holders of Right Certificates in order to cure any ambiguity,
to correct or supplement any provision contained herein which may be defective
or inconsistent with any other provisions herein, to make any other provisions
in regard to matters or questions arising hereunder, or to add, delete, modify
or otherwise amend any provision, which the Company may deem necessary or
desirable, including without limitation extending the Final Expiration Date
and, provided that at the time of such amendment or supplement the Distribution
Date has not occurred, the period during which the Rights may be redeemed;
provided, however, that, from and after such time as any Person becomes an
Acquiring Person, any such amendment or supplement shall not materially and
adversely affect the interests of the holders of Right Certificates. Without
limiting the foregoing, the Board of Directors of the Company may by resolution
adopted at any time prior to such time as any Person becomes an Acquiring
Person amend this Agreement to lower the thresholds set forth in the
definitions of Acquiring Person and Distribution Date herein from 20% to a
percentage not less than the greater of (i) the sum of .001% and the largest
percentage of the outstanding Voting Shares then known to the Company to be
beneficially owned by any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or of any Subsidiary of the
Company, or any trustee of or fiduciary with respect to any such plan when
acting in such capacity), and (ii) 10%.
Section 30. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
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<PAGE> 52
Section 31. Benefits of this Agreement. Nothing in this Agreement
shall be construed to give to any Person other than the Company, the Rights
Agent and the registered holders of the Rights (and, prior to the Distribution
Date, the Common Shares) any legal or equitable right, remedy or claim under
this Agreement; but this Agreement shall be for the sole and exclusive benefit
of the Company, the Rights Agent and the registered holders of the Rights (and,
prior to the Distribution Date, the Common Shares).
Section 32. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
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.
SECTION 33. GOVERNING LAW. THIS AGREEMENT AND EACH RIGHT CERTIFICATE
(AND, PRIOR TO THE DISTRIBUTION DATE, THE RIGHTS REPRESENTED BY CERTIFICATES
FOR COMMON SHARES) ISSUED HEREUNDER SHALL BE DEEMED TO BE A CONTRACT MADE UNDER
THE LAWS OF THE STATE OF DELAWARE AND FOR ALL PURPOSES SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF SUCH STATE APPLICABLE TO CONTRACTS TO
BE MADE AND PERFORMED ENTIRELY WITHIN SUCH STATE.
Section 34. Counterparts. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 35. Descriptive Headings. Descriptive headings of the
several Sections of this Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
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<PAGE> 53
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and attested, all as of the day and year first above written.
GROUP 1 AUTOMOTIVE, INC.
Attest:
By /s/ John S. Watson By /s/ B. B. Hollingsworth, Jr.
------------------------------------ -----------------------------------
Name: John S. Watson Name: B. B. Hollingsworth, Jr.
Title: Secretary Title: Chairman, President and
Officer Chief Executive Officer
ChaseMellon Shareholder Services, L.L.C.
As Rights Agent
Attest:
By /s/ Margaret W. Smith By /s/ Barbara J. Robbins
------------------------------------ -----------------------------------
Name: Margaret W. Smith Name: Barbara J. Robbins
Title: Authorized Officer Title: Authorized Officer
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<PAGE> 1
EXHIBIT 10.11
GROUP 1 AUTOMOTIVE, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
1. PURPOSE. The GROUP 1 AUTOMOTIVE, INC. 1998 EMPLOYEE STOCK
PURCHASE PLAN (the "Plan") is intended to provide an incentive for employees of
GROUP 1 AUTOMOTIVE, INC. (the "Company") and certain of its subsidiaries to
acquire or increase a proprietary interest in the Company through the purchase
of shares of the Company's common stock. The Plan is intended to qualify as an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code
of 1986, as amended (the "Code"). The provisions of the Plan shall be
construed in a manner consistent with the requirements of that section of the
Code.
2. DEFINITIONS. Where the following words and phrases are used
in the Plan, they shall have the respective meanings set forth below, unless
the context clearly indicates to the contrary:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as
amended.
(c) "Committee" means a committee appointed from time to
time by the Board to administer the Plan as provided in paragraph 3.
(d) "Company" means Group 1 Automotive, Inc., a Delaware
corporation.
(e) "Date of Exercise" means the last day of each Option
Period.
(f) "Date of Grant" means January 1, 1998, and,
thereafter, the first day of each successive April, July, October, and
January.
(g) "Eligible Compensation" means regular straight-time
earnings or base salary, except that such term shall not include
payments for overtime, incentive compensation, bonuses and other
special payments.
(h) "Exchange Act" means the Securities Exchange Act of
1934, as amended.
(i) "Option Period" means the three month period
beginning on each Date of Grant.
(j) "Option Price" shall have the meaning assigned to
such term in paragraph 8(b).
(k) "Participating Company" means any present or future
parent or subsidiary corporation of the Company that participates in
the Plan pursuant to paragraph 4.
<PAGE> 2
(l) "Plan" means this Group 1 Automotive, Inc. 1998
Employee Stock Purchase Plan, as amended from time to time.
(m) "Restriction Period" means the period of time during
which shares of Stock acquired by a participant in the Plan may not be
sold, assigned, pledged, exchanged, hypothecated or otherwise
transferred, encumbered or disposed of by such participant as provided
in paragraph 8(d).
(n) "Stock" means the shares of the Company's common
stock, par value $.01 per share.
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by
the Committee, the members of which shall be appointed from time to time by the
Board. Each member of the Committee shall serve for a term commencing on a
date specified by the Board and continuing until he dies, resigns, or is
removed from office by the Board. Subject to the provisions of the Plan, the
Committee shall interpret the Plan and all options granted under the Plan, make
such rules as it deems necessary for the proper administration of the Plan, and
make all other determinations necessary or advisable for the administration of
the Plan. In addition, the Committee shall correct any defect or supply any
omission or reconcile any inconsistency in the Plan, or in any option granted
under the Plan, in the manner and to the extent that the Committee deems
desirable to carry the Plan or any option into effect. The Committee shall, in
its sole discretion, make such decisions or determinations and take such
actions, and all such decisions, determinations and actions taken or made by
the Committee pursuant to this and the other paragraphs of the Plan shall be
conclusive on all parties. The Committee shall not be liable for any decision,
determination or action taken in good faith in connection with the
administration of the Plan. The Committee shall have the authority to delegate
routine day-to-day administration of the Plan to such officers and employees of
the Company as the Committee deems appropriate.
4. PARTICIPATING COMPANIES. The Committee may designate any
present or future parent or subsidiary corporation of the Company that is
eligible by law to participate in the Plan as a Participating Company by
written instrument delivered to the designated Participating Company. Such
written instrument shall specify the effective date of such designation and
shall become, as to such designated Participating Company and persons in its
employment, a part of the Plan. The terms of the Plan may be modified as
applied to the Participating Company only to the extent permitted under Section
423 of the Code. Transfer of employment among the Company and Participating
Companies (and among any other parent or subsidiary corporation of the Company)
shall not be considered a termination of employment hereunder. Any
Participating Company may, by appropriate action of its Board of Directors,
terminate its participation in the Plan. Moreover, the Committee may, in its
discretion, terminate a Participating Company's Plan participation at any time.
5. ELIGIBILITY. Subject to the provisions hereof, all employees
of the Company and the Participating Companies who are employed by the Company
or any Participating Company as of a Date of Grant shall be eligible to
participate in the Plan; provided, however, that no option shall be granted to
an employee if such employee, immediately after the option is granted, owns
stock possessing five percent or more of the total combined voting power or
value of all classes of stock
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<PAGE> 3
of the Company or of its parent or subsidiary corporations (within the meaning
of Sections 423(b)(3) and 424(d) of the Code).
6. STOCK SUBJECT TO THE PLAN. Subject to the provisions of
paragraph 13, the aggregate number of shares which may be sold pursuant to
options granted under the Plan shall not exceed 200,000 shares of the
authorized Stock, which shares may be unissued shares or reacquired shares,
including shares bought on the market or otherwise for purposes of the Plan.
Should any option granted under the Plan expire or terminate prior to its
exercise in full, the shares theretofore subject to such option may again be
subject to an option granted under the Plan. Any shares that are not subject
to outstanding options upon the termination of the Plan shall cease to be
subject to the Plan.
7. GRANT OF OPTIONS.
(a) IN GENERAL. Following the effective date of the Plan
and continuing while the Plan remains in force, the Company shall offer options
under the Plan to purchase shares of Stock to all eligible employees who elect
to participate in the Plan. Except as otherwise determined by the Committee,
these options shall be granted on each Date of Grant. Except as provided in
paragraph 13, the term of each option shall be for three months, which shall
begin on a Date of Grant and end on the last day of such three-month period.
Subject to subparagraph 7(d), the number of shares of Stock subject to an
option for a participant shall be equal to the quotient of (i) the aggregate
payroll deductions withheld on behalf of such participant during the Option
Period in accordance with subparagraph 7(b), divided by (ii) the Option Price
of the Stock applicable to the Option Period, including fractions; provided,
however, that the maximum number of shares of Stock that may be subject to any
option for a participant may not exceed 3,000 (subject to adjustment as
provided in paragraph 13).
(b) ELECTION TO PARTICIPATE; PAYROLL DEDUCTION
AUTHORIZATION. An eligible employee may participate in the Plan only by means
of payroll deduction. Except as provided in subparagraph 7(f), each eligible
employee who elects to participate in the Plan shall deliver to the Company,
within the time period prescribed by the Committee, a written payroll deduction
authorization in a form prepared by the Company whereby he gives notice of his
election to participate in the Plan as of the next following Date of Grant, and
whereby he designates an integral percentage of his Eligible Compensation to be
deducted from his compensation for each pay period and paid into the Plan for
his account. The designated percentage may not be less than 1% nor exceed 10%.
(c) CHANGES IN PAYROLL AUTHORIZATION. The payroll
deduction authorization referred to in subparagraph 7(b) may not be changed
during the Option Period. However, a participant may withdraw from the Plan as
provided in paragraph 9.
(d) $25,000 LIMITATION. No employee shall be granted an
option under the Plan which permits his rights to purchase Stock under the Plan
and under all other employee stock purchase plans of the Company and its parent
and subsidiary corporations to accrue at a rate which exceeds $25,000 of fair
market value of Stock (determined at the time such option is granted) for each
calendar year in which such option is outstanding at any time (within the
meaning of Section
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<PAGE> 4
423(b)(8) of the Code). Any payroll deductions in excess of the amount
specified in the foregoing sentence shall be returned to the participant as
soon as administratively feasible after the next following Date of Exercise.
(e) LEAVES OF ABSENCE. During a paid leave of absence
approved by the Company and meeting the requirements of Treasury Regulation
Section 1.421-7(h)(2), a participant's elected payroll deductions shall
continue. A participant may not contribute to the Plan during an unpaid leave
of absence. If a participant takes an unpaid leave of absence that is approved
by the Company and meets the requirements of Treasury Regulation Section
1.421-7(h)(2), then such participant's payroll deductions for such Option
Period that were made prior to such leave may remain in the Plan and be used to
purchase Stock under the Plan on the Date of Exercise relating to such Option
Period. If a participant takes a leave of absence that is not described in the
first or third sentence of this subparagraph 7(e), then he shall be considered
to have withdrawn from the Plan pursuant to the provisions of paragraph 9
hereof. Further, notwithstanding the preceding provisions of this subparagraph
7(e), if a participant takes a leave of absence that is described in the first
or third sentence of this subparagraph 7(e) and such leave of absence exceeds
90 days, then he shall be considered to have withdrawn from the Plan pursuant
to the provisions of paragraph 9 hereof on the 91st day of such leave of
absence.
(f) CONTINUING ELECTION. Subject to the limitation set
forth in subparagraph 7(d), a participant (i) who has elected to participate in
the Plan pursuant to subparagraph 7(b) as of a Date of Grant and (ii) who takes
no action to change or revoke such election as of the next following Date of
Grant and/or as of any subsequent Date of Grant prior to any such respective
Date of Grant shall be deemed to have made the same election, including the
same attendant payroll deduction authorization, for such next following and/or
subsequent Date(s) of Grant as was in effect immediately prior to such
respective Date of Grant. Payroll deductions that are limited by subparagraph
7(d) shall recommence at the rate provided in such participant's payroll
deduction authorization at the beginning of the first Option Period that is
scheduled to end in the following calendar year, unless the participant changes
the amount of his payroll deduction authorization pursuant to paragraph 7,
withdraws from the Plan as provided in paragraph 9, or is terminated from
participation in the Plan as provided in paragraph 10.
8. EXERCISE OF OPTIONS.
(a) GENERAL STATEMENT. Subject to the limitation set
forth in subparagraph 7(d), each participant in the Plan automatically and
without any act on his part shall be deemed to have exercised his option on
each Date of Exercise to the extent of his unused payroll deductions under the
Plan and to the extent the issuance of Stock to such participant upon such
exercise is lawful.
(b) "OPTION PRICE" DEFINED. The term "Option Price"
shall mean the per share price of Stock to be paid by each participant on each
exercise of his option, which price shall be equal to 85% of the fair market
value of the Stock on the Date of Exercise or on the Date of Grant, whichever
amount is less. For all purposes under the Plan, the fair market value of a
share of Stock on a particular date shall be equal to the closing price of the
Stock on the New York Stock Exchange,
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<PAGE> 5
Inc. on that date (or, if no shares of Stock have been traded on that date, on
the next regular business date on which shares of the Stock are so traded).
(c) DELIVERY OF SHARE CERTIFICATES. As soon as
practicable after each Date of Exercise, the Company shall deliver to a
custodian selected by the Committee one or more certificates representing (or
shall otherwise cause to be credited to the account of such custodian) the
total number of whole shares of Stock respecting options exercised on such Date
of Exercise in the aggregate (for both whole and fractional shares) of all of
the participating employees hereunder. Any remaining amount representing a
fractional share shall not be certificated (or otherwise so credited) and such
remaining amount shall be paid in cash to the custodian. Such custodian shall
keep accurate records of the beneficial interests of each participating
employee in such shares by means of participant accounts under the Plan, and
shall provide each eligible employee with quarterly or such other periodic
statements with respect thereto as may be directed by the Committee. If the
Company is required to obtain from any U.S. commission or agency authority to
issue any such shares, the Company shall seek to obtain such authority.
Inability of the Company to obtain from any commission or agency (whether U.S.
or foreign) authority which counsel for the Company deems necessary for the
lawful issuance of any such shares shall relieve the Company from liability to
any participant in the Plan except to return to him the amount of his payroll
deductions under the Plan which would have otherwise been used upon exercise of
the relevant option.
(d) RESTRICTIONS ON TRANSFER. The Committee may from time to time
specify with respect to a particular grant of options the Restriction Period
that shall apply to the shares of Stock acquired pursuant to such options.
Unless otherwise specified by the Committee, the Restriction Period applicable
to shares of Stock acquired under the Plan shall be a period of six months
after the Date of Exercise of the options pursuant to which such shares were
acquired. Except as hereinafter provided, during the Restriction Period
applicable to shares of Stock acquired under the Plan, such shares may not be
sold, assigned, pledged, exchanged, hypothecated or otherwise transferred,
encumbered or disposed of by the participant who has purchased such shares;
provided, however, that such restriction shall not apply to the transfer,
exchange or conversion of such shares of Stock pursuant to a merger,
consolidation or other plan of reorganization of the Company, but the stock,
securities or other property (other than cash) received upon any such transfer,
exchange or conversion shall also become subject to the same transfer
restrictions applicable to the original shares of Stock, and shall be held by
the custodian, pursuant to the provisions hereof. Upon the expiration of such
Restriction Period, the transfer restrictions set forth in this subparagraph
8(d) shall cease to apply and the optionee may, pursuant to procedures
established by the Committee and the custodian, direct the sale or distribution
of some or all of the whole shares of Stock in his Company stock account that
are not then subject to transfer restrictions and, in the event of a sale,
request payment of the net proceeds from such sale. Further, upon the
termination of the participant's employment with the Company and its parent or
subsidiary corporations for any reason whatsoever, the transfer restrictions
set forth in this subparagraph 8(d) shall cease to apply and the custodian
shall, upon the request of such participant, deliver to such participant a
certificate issued in his name representing (or otherwise credit to an account
of such participant) the aggregate whole number of shares of Stock in his
Company stock account under the Plan. At the time of distribution of such
shares, any fractional share in such Company stock account shall be converted
to cash based on the fair market value of the Stock on the date of distribution
and such cash shall be paid to the
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<PAGE> 6
participant. The Committee may cause the Stock issued in connection with the
exercise of options under the Plan to bear such legends or other appropriate
restrictions, and the Committee may take such other actions, as it deems
appropriate in order to reflect the transfer restrictions set forth in this
subparagraph 8(d) and to assure compliance with applicable laws.
9. WITHDRAWAL FROM THE PLAN.
(a) GENERAL STATEMENT. Any participant may withdraw in
whole from the Plan at any time prior to the Date of Exercise relating to a
particular Option Period. Partial withdrawals shall not be permitted. A
participant who wishes to withdraw from the Plan must timely deliver to the
Company a notice of withdrawal in a form prepared by the Company. The Company,
promptly following the time when the notice of withdrawal is delivered, shall
refund to the participant the amount of his payroll deductions under the Plan
which have not yet been otherwise returned to him or used upon exercise of
options; and thereupon, automatically and without any further act on his part,
his payroll deduction authorization and his interest in unexercised options
under the Plan shall terminate.
(b) ELIGIBILITY FOLLOWING WITHDRAWAL. A participant who
withdraws from the Plan shall be eligible to participate again in the Plan upon
expiration of the Option Period during which he withdrew (provided that he is
otherwise eligible to participate in the Plan at such time).
10. TERMINATION OF EMPLOYMENT.
(a) GENERAL STATEMENT. Except as provided in
subparagraph 10(b), if the employment of a participant terminates for any
reason whatsoever, then his participation in the Plan automatically and without
any act on his part shall terminate as of the date of the termination of his
employment. The Company shall promptly refund to him the amount of his payroll
deductions under the Plan which have not yet been otherwise returned to him or
used upon exercise of options, and thereupon his interest in unexercised
options under the Plan shall terminate.
(b) TERMINATION BY RETIREMENT, DEATH OR DISABILITY. If
the employment of a participant terminates after such participant has attained
age 65 or due to such participant's death or permanent and total disability
(within the meaning of Section 22(e)(3) of the Code), then such participant, or
such participant's personal representative, as applicable, shall have the right
to elect either to:
(1) withdraw all of such participant's
accumulated unused payroll deductions under the Plan; or
(2) exercise such participant's option for the
purchase of Stock on the last day of the Option Period during which
termination of employment occurs for the purchase of the number of
full shares of Stock which the accumulated payroll deductions at the
date of such participant's termination of employment will purchase at
the applicable Option Price (subject to subparagraph 7(d)), with any
excess payroll deduction amounts to be returned to such participant or
such personal representative.
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<PAGE> 7
The participant or, if applicable, such personal representative, must make such
election by giving written notice to the Committee at such time and in such
manner as the Committee prescribes. In the event that no such written notice
of election is timely received by the Committee, the participant or personal
representative will automatically be deemed to have elected as set forth in
clause (2) above, and promptly after the exercise so described in clause (2)
above, all shares of Stock in such participant's account under the Plan shall
be distributed to the participant or such personal representative.
11. RESTRICTION UPON ASSIGNMENT OF OPTION. An option granted
under the Plan shall not be transferable otherwise than by will or the laws of
descent and distribution. Each option shall be exercisable, during his
lifetime, only by the employee to whom granted. The Company shall not
recognize and shall be under no duty to recognize any assignment or purported
assignment by an employee of his option or of any rights under his option or
under the Plan.
12. NO RIGHTS OF STOCKHOLDER UNTIL EXERCISE OF OPTION. With
respect to shares of Stock subject to an option, an optionee shall not be
deemed to be a stockholder, and he shall not have any of the rights or
privileges of a stockholder, until such option has been exercised. With
respect to an individual's Stock held by the custodian pursuant to subparagraph
8(d), the custodian shall, as soon as practicable, pay the individual any cash
dividends attributable thereto and shall, in accordance with procedures adopted
by the custodian, facilitate the individual's voting rights attributable
thereto.
13. CHANGES IN STOCK; ADJUSTMENTS. Whenever any change is made in
the Stock, by reason of a stock dividend or by reason of subdivision, stock
split, reverse stock split, recapitalization, reorganization, combination,
reclassification of shares or other similar change, appropriate action will be
taken by the Committee to adjust accordingly the number of shares subject to
the Plan, the maximum number of shares that may be subject to any option, and
the number and Option Price of shares subject to options outstanding under the
Plan.
If the Company shall not be the surviving corporation in any merger or
consolidation (or survives only as a subsidiary of another entity), or if the
Company is to be dissolved or liquidated, then, unless a surviving corporation
assumes or substitutes new options (within the meaning of Section 424(a) of the
Code) for all options then outstanding, (i) the Date of Exercise for all
options then outstanding shall be accelerated to a date fixed by the Committee
prior to the effective date of such merger or consolidation or such dissolution
or liquidation and (ii) upon such effective date any unexercised options shall
expire and the Company promptly shall refund to each participant the amount of
such participant's payroll deductions under the Plan which have not yet been
otherwise returned to him or used upon exercise of options.
14. USE OF FUNDS; NO INTEREST PAID. All funds received or held by
the Company under the Plan shall be included in the general funds of the
Company free of any trust or other restriction, and may be used for any
corporate purpose. No interest shall be paid to any participant.
15. TERM OF THE PLAN. The Plan shall be effective upon the date
of its adoption by the Board, provided the Plan is approved by the stockholders
of the Company within 12 months thereafter. Notwithstanding any provision in
the Plan, no option granted under the Plan shall be
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<PAGE> 8
exercisable prior to such stockholder approval, and, if the stockholders of the
Company do not approve the Plan by the Date of Exercise of the first option
granted hereunder, then the Plan shall automatically terminate, no options may
be exercised hereunder, and the Company promptly shall refund to each
participant the amount of such participant's payroll deductions under the Plan;
and thereupon, automatically and without any further act on his part, his
payroll deduction authorization and his interest in unexercised options under
the Plan shall terminate. Except with respect to options then outstanding, if
not sooner terminated under the provisions of paragraph 16, the Plan shall
terminate upon and no further payroll deductions shall be made and no further
options shall be granted after June 30, 2007.
16. AMENDMENT OR TERMINATION OF THE PLAN. The Board in its
discretion may terminate the Plan at any time with respect to any Stock for
which options have not theretofore been granted. The Board and the Committee
shall each have the right to alter or amend the Plan or any part thereof from
time to time; provided, however, that no change in any option theretofore
granted may be made that would impair the rights of the optionee without the
consent of such optionee.
17. SECURITIES LAWS. The Company shall not be obligated to issue
any Stock pursuant to any option granted under the Plan at any time when the
offer, issuance or sale of shares covered by such option has not been
registered under the Securities Act of 1933, as amended, or does not comply
with such other state, federal or foreign laws, rules or regulations, or the
requirements of any stock exchange upon which the Stock may then be listed, as
the Company or the Committee deems applicable and, in the opinion of legal
counsel for the Company, there is no exemption from the requirements of such
laws, rules, regulations or requirements available for the offer, issuance and
sale of such shares. Further, all Stock acquired pursuant to the Plan shall be
subject to the Company's policies concerning compliance with securities laws
and regulations, as such policies may be amended from time to time. The terms
and conditions of options granted hereunder to, and the purchase of shares by,
persons subject to Section 16 of the Exchange Act shall comply with any
applicable provisions of Rule 16b-3. As to such persons, the Plan shall be
deemed to contain, and such options shall contain, and the shares issued upon
exercise thereof shall be subject to, such additional conditions and
restrictions as may be required from time to time by Rule 16b-3 to qualify for
the maximum exemption from Section 16 of the Exchange Act with respect to Plan
transactions.
18. NO RESTRICTION ON CORPORATE ACTION. Nothing contained in the
Plan shall be construed to prevent the Company or any subsidiary from taking
any corporate action that is deemed by the Company or such subsidiary to be
appropriate or in its best interest, whether or not such action would have an
adverse effect on the Plan or any option granted under the Plan. No employee,
beneficiary or other person shall have any claim against the Company or any
subsidiary as a result of any such action.
19. MISCELLANEOUS PROVISIONS.
(a) PARENT AND SUBSIDIARY CORPORATIONS. For all purposes
of the Plan, a corporation shall be considered to be a parent or subsidiary
corporation of the Company only if such corporation is a parent or subsidiary
corporation of the Company within the meaning of Sections 424(e) and (f) of the
Code.
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<PAGE> 9
(b) NUMBER AND GENDER. Wherever appropriate herein,
words used in the singular shall be considered to include the plural and words
used in the plural shall be considered to include the singular. The masculine
gender, where appearing in the Plan, shall be deemed to include the feminine
gender.
(c) HEADINGS. The headings and subheadings in the Plan
are included solely for convenience, and if there is any conflict between such
headings or subheadings and the text of the Plan, the text shall control.
(d) NOT A CONTRACT OF EMPLOYMENT. The adoption and
maintenance of the Plan shall not be deemed to be a contract between the
Company or any Participating Company and any person or to be consideration for
the employment of any person. Participation in the Plan at any given time
shall not be deemed to create the right to participate in the Plan, or any
other arrangement permitting an employee of the Company or any Participating
Company to purchase Stock at a discount, in the future. The rights and
obligations under any participant's terms of employment with the Company or any
Participating Company shall not be affected by participation in the Plan.
Nothing herein contained shall be deemed to give any person the right to be
retained in the employ of the Company or any Participating Company or to
restrict the right of the Company or any Participating Company to discharge any
person at any time, nor shall the Plan be deemed to give the Company or any
Participating Company the right to require any person to remain in the employ
of the Company or such Participating Company or to restrict any person's right
to terminate his employment at any time. The Plan shall not afford any
participant any additional right to compensation as a result of the termination
of such participant's employment for any reason whatsoever.
(e) COMPLIANCE WITH APPLICABLE LAWS. The Company's
obligation to offer, issue, sell or deliver Stock under the Plan is at all
times subject to all approvals of and compliance with any governmental
authorities (whether domestic or foreign) required in connection with the
authorization, offer, issuance, sale or delivery of Stock as well as all
federal, state, local and foreign laws. Without limiting the scope of the
preceding sentence, and notwithstanding any other provision in the Plan, the
Company shall not be obligated to grant options or to offer, issue, sell or
deliver Stock under the Plan to any employee who is a citizen or resident of a
jurisdiction the laws of which, for reasons of its public policy, prohibit the
Company from taking any such action with respect to such employee.
(f) SEVERABILITY. If any provision of the Plan shall be
held illegal or invalid for any reason, said illegality or invalidity shall not
affect the remaining provisions hereof; instead, each provision shall be fully
severable and the Plan shall be construed and enforced as if said illegal or
invalid provision had never been included herein.
(g) GOVERNING LAW. All provisions of the Plan shall be
construed in accordance with the laws of Texas except to the extent preempted
by federal law.
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<PAGE> 1
EXHIBIT 10.12
AGREEMENT BETWEEN
TOYOTA MOTOR SALES, U.S.A., INC.
AND
GROUP 1 AUTOMOTIVE, INC.
Agreement, dated _____________,1997, entered between Group Automotive, Inc., a
Delaware corporation, with its principal place of business at 950 Echo Lane,
Houston, TX 77024, ("Group 1") and Toyota Motor Sales, U.S.A., Inc. ("TMS"), a
California corporation, with its principal place of business at 19001 South
Western Avenue, Torrance, CA, 90509.
WHEREAS, Group 1 is currently the owner, directly or through its Affiliates (as
defined in Paragraph 1 below) of three (3) Toyota and one (1) Lexus automobile
dealerships; and
WHEREAS, Group 1 may wish to acquire, directly or through an Affiliate,
additional Toyota and Lexus dealerships; and
WHEREAS, Group 1 wants to issue stock in a public offering of securities
anticipated to be traded on the New York Stock Exchange; and
WHEREAS, TMS has advised Group 1 of TMS' policy limiting the number of commonly
owned or controlled, directly or through an Affiliate (as defined below),
dealerships by a single entity, which is currently as follows:
A. TOYOTA
A single entity shall not hold an ownership interest, directly
or through an Affiliate, in more than: (a) the greater of one
(1) dealership or 20% of the Toyota dealer count in a "Metro"
market ("Metro" markets are multiple Toyota dealership markets
as defined by TMS); (b) the lesser of five (5) dealerships or
5% of the Toyota dealerships in any Toyota Region ("Toyota
Region" currently includes nine TMS Regions, Central Atlantic
Toyota, Southeast Toyota, and Gulf States Toyota); and (c)
seven (7) Toyota dealerships nationally.
LEXUS
A single entity shall not hold an ownership interest, directly
or through an Affiliate, in more than: (a) two (2) Lexus
dealerships in any Area ("Area" currently includes Eastern,
Southern, Central and Western); and (b) three (3) Lexus
dealerships nationally.
"Affiliate" of, or a person or entity "affiliated" with, a specified
person or entity, means a person or entity that directly or
indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, the person or entity
specified. For the purpose of this definition, the term "control"
(including the terms "controlling," "controlled by" and "under common
control with" means the possession, directly or indirectly, or the
power to direct or cause the direction of the management and policies
of a person or entity, whether through the ownership of securities, by
contract or otherwise.
<PAGE> 2
B. In order for an entity to acquire additional Toyota or Lexus
dealerships, within the limits of this Agreement, each Toyota or Lexus
dealership which it owns, directly or through an Affiliate, must: a)
be in full compliance with all of the terms of its Dealer Agreement;
b) meet all of the applicable Toyota or Lexus Market Representation
policies and standards; and c) meet applicable performance criteria
for the most recent twelve (12) month period.
C. In order to allow TMS sufficient time to evaluate performance at its
existing dealerships, an entity may not acquire any additional Toyota
or Lexus dealership within nine (9) months of its prior acquisition of
a similar make dealership.
D. If the purchase of any Toyota or Lexus dealership would result in
exceeding the limits set forth in Paragraph 1 above, TMS will reject a
dealer's application for approval of the ownership transfer until such
time as the dealer shall divest itself of the appropriate number of
dealerships to bring it into compliance with the requirements of this
Agreement.
WHEREAS, Group 1 and TMS are willing to resolve these issues in accordance with
the terms set forth herein,
NOW THEREFORE, Group 1 and TMS agree as follows:
CHANGE IN OWNERSHIP OF GROUP 1
1. TMS shall have the right to approve any ownership or voting rights of
Group 1 of twenty percent (20%) or greater by any individual or
entity; PROVIDED HOWEVER, that if TMS reasonably determines that such
individual or entity is unqualified to own a Toyota or Lexus
dealership, or has interests incompatible with TMS, and such transfer
is effected, Group 1 must, within ninety (90) days from the date of
notification by TMS of its determination, either: a) transfer the
assets of its Toyota and Lexus dealerships to a third party acceptable
to TMS; b) voluntarily terminate its Toyota and Lexus Dealership
Agreements; or c) demonstrate that such individual or entity in fact
owns less that 20% of the outstanding shares of Group 1, or does not
have 20% of the voting rights in Group 1.
OWNERSHIP OF CONTIGUOUS DEALERSHIPS
2. Group 1 shall not own contiguous dealerships (as that term is defined
in the applicable Toyota or Lexus Dealer Agreement or policy) with
common boundaries.
SEPARATE LEGAL ENTITIES FOR EACH TOYOTA AND LEXUS DEALERSHIP
3. Group 1 shall create separate legal entities for each Toyota and Lexus
dealership which it owns, directly or through an Affiliate, shall
obtain a separate motor vehicle license for each dealership, and shall
maintain separate financial statements for each such dealership.
Consistent with TMS policy, the name "Toyota" or "Lexus," as
applicable shall appear in the d/b/a of each dealership.
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<PAGE> 3
FACILITY STANDARDS
4. In no instance shall a Toyota or Lexus dealership or any department(s)
thereof be dualled with any other brand without TMS' prior written
approval.
GENERAL MANAGERS
5. Each Toyota and Lexus dealership owned or controlled by Group 1 shall
have a qualified, approved (subject to the exception noted in
Paragraph 6 below) General Manager. Each General Manager shall work
at the Toyota or Lexus dealership premises, shall devote all of
his/her efforts to the management of the dealership and shall have no
other business interests or management responsibilities.
APPROVAL OF THE GENERAL MANAGER
6. Whenever Group 1 nominates a new General Manager candidate for a
Toyota or Lexus dealership, TMS shall have the right to withhold a
decision concerning approval or rejection of the candidate for a
period of up to one year, at its sole discretion; PROVIDED, HOWEVER,
that the candidate may operate in the capacity of General Manager
until TMS has approved or rejected him/her.
LIMITATIONS ON THE AUTHORITY OF THE GENERAL MANAGER
7. Group 1 shall advise TMS of the limitations, by category and, where
applicable, by specific action, on the authority of the General
Manager regarding the operation of the dealership, and shall provide
the name of the individual at Group 1 who has such authority with
respect to each listed category or specific action, in accordance with
Paragraph 8 below.
IDENTIFICATION OF GROUP 1 CONTACT OFFICIAL
8. Group 1 shall identify, in each Toyota and Lexus Dealer Agreement, the
Group 1 executive (other than the General Manager of the dealership)
who will respond directly to any Toyota or Lexus concerns regarding
the operation or performance of the dealership, which executive will
have full authority, in accordance with Group 1 management policies,
to resolve issues raised by TMS in connection with the operation of
the dealership.
SELLING TOYOTA AND LEXUS PRODUCTS
9. Group 1 shall make available to the customers at its Toyota and Lexus
dealerships, all Toyota products, including vehicles, Genuine Parts
and Accessories, retail financing (whether for purchases or leases)
and extended service contracts.
REPRESENTATION ON TOYOTA AND LEXUS DEALER ORGANIZATIONS
10. No more than one representative each from the Toyota, and, separately,
Lexus, dealerships owned, directly or through an Affiliate, by Group
1, may serve on the National Dealer
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<PAGE> 4
Council or any future Toyota or Lexus national board(s) which may be
established, and no more than one representative each may serve on
either a Regional or Area Dealer Council, or Toyota or Lexus Dealer
Association Board of Directors.
DEALERSHIP PERSONNEL TRAINING
11. Group 1 shall not substitute training courses or certification
programs of its own for those provided or sponsored by TMS without the
prior approval of TMS.
PUBLIC OFFERING OF SECURITIES BY GROUP 1
12. TMS shall not object to a public offering of securities by Group 1 so
long as the limitations on ownership of voting control of Group 1
contained in this agreement are not exceeded or breached in any way.
In addition, TMS hereby approves the increase to 100% in equity
interest in each Toyota and Lexus dealership in which subsidiaries of
Group 1 now have a majority equity interest.
FINANCIAL DISCLOSURES
13. Group 1 shall provide TMS with copies of all information and materials
filed with the Securities Exchange Commission, including, but not
limited to, quarterly and annual financial statement filings,
prospectuses and other materials related to Group 1.
PROSPECTUS DISCLAIMER AND INDEMNIFICATION AND HOLD HARMLESS AGREEMENT
14. Group 1 shall place in its registration statement and its prospectus,
as well as in any other document offering shares in Group 1 to public
or private investors, the following disclaimer:
No Manufacturer (as defined in this Prospectus) has been
involved, directly or indirectly, in the preparation of this
Prospectus or in the Offering being made hereby. No
Manufacturer has made any statements or representations in
connection with the Offering or has provided any information
or materials that were used in connection with the Offering,
and no Manufacturer has any responsibility for the accuracy or
completeness of this Prospectus.
Group 1 shall indemnify and hold harmless TMS pursuant to the terms of the
Indemnification and Hold Harmless Agreement set forth in Attachment 1 to this
Agreement.
SOLE AGREEMENT OF THE PARTIES
15. There are no prior agreements or understandings, either oral or
written, between the Parties affecting this Agreement, except as
otherwise specified or referred to in this Agreement. No change or
addition to, or deletion of any portion of this Agreement shall be
valid or binding upon the parties hereto unless approved in writing
signed by an officer of each of the parties hereto.
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<PAGE> 5
SEVERABILITY
16. If any provision of this Agreement should be held invalid or
unenforceable for any reason whatsoever, or conflicts with any
applicable law, this Agreement will be considered divisible as to such
provision(s), and such provision(s) will be deemed amended to comply
with such law, or if it (they) cannot be so amended without materially
affecting the tenor of the Agreement, then it (they) will be deemed
deleted from this Agreement in such jurisdiction, and in either case,
the remainder of the Agreement will be valid and binding.
NO IMPLIED WAIVERS
17. The failure of either party at any time to require performance by the
other party of any provision herein shall in no way affect the right
of such party to require such performance an any time thereafter, nor
shall any waiver by any party of a breach of any provision herein
constitute a waiver of any succeeding breach of the same or any other
provision, nor constitute a waiver of the provision itself.
TMS POLICIES
18. This Agreement refers to certain policies and standards. Group 1
acknowledges that these policies and standards are prepared by TMS in
its sole discretion based upon TMS' evaluation of the marketplace.
TMS may reasonably amend its policies and standards from time to time.
APPLICABLE LAW
19. This Agreement shall be governed by and construed according to the
laws of California.
BENEFIT
20. This Agreement is entered into by and between TMS and Group 1 for
their sole and mutual benefit. Neither this Agreement nor any
specific provision contained in it is intended or shall be construed
to be for the benefit of any third party.
NOTICE TO THE PARTIES
21. Any notices permitted or required under the terms of this Agreement
shall be directed to the following respective addresses of the
parties, or if either of the parties shall have specified another
address by notice in writing to the other party, then to the address
last specified:
TOYOTA MOTOR SALES, U.S.A., INC.
19001 South Western Avenue
Torrance, California 90509
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<PAGE> 6
GROUP 1 AUTOMOTIVE, INC.
950 Echo Lane
Houston, TX 77024
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
GROUP 1 AUTOMOTIVE INC.
BY:
------------------------------
ITS:
------------------------------
TOYOTA MOTOR SALES, U.S.A., INC.
BY:
------------------------------
ITS:
------------------------------
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<PAGE> 7
ATTACHMENT I
INDEMNIFICATION AGREEMENT
INDEMNIFICATION AGREEMENT, made this _____ day of, ____________ 1997 between
Group 1 Automotive, Inc., a Delaware corporation ("Group 1") the address of
which is 950 Echo Lane, Suite 350, Houston, Texas 77024 and Toyota Motor Sales,
U.S.A., Inc., a California corporation the address of which is 19001 S. Western
Avenue, Torrance, CA 90509 ("TMS").
WITNESSETH
WHEREAS, Group 1 has been formed to own subsidiary corporations which
will own and operate automobile dealerships; and
WHEREAS, Group 1 intends to publicly offer and sell shares of stock
("Group 1 Stock") in a public offering pursuant to the Securities Act of 1933
(the "Act");
WHEREAS, TMS has consented to the offer and sale of such Group 1 Stock
to the public; and
WHEREAS, in recognition of TMS' demand for complete protection against
liability and threats of legal action and in order to obtain TMS' consent to
the offer and sale of such shares, Group 1 wishes to provide in this Agreement
for the indemnification of TMS as set forth herein.
NOW, THEREFORE, in consideration of the mutual promises made herein
and for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereby agree as follows:
1. INDEMNITY OF TMS
Group 1 hereby agrees to indemnify and hold harmless TMS and its
affiliates from and against any and all losses, liabilities, judgments, amounts
paid in settlement, claims, damages and expenses whatsoever (collectively a
"Claim"), including, but not limited to, any and all expenses whatsoever
incurred investigating, preparing or defending against any litigation,
commenced or threatened, to which TMS may become subject under the Act, the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
securities laws of any state (the "Blue Sky Laws"), any other statute or at
common law or otherwise under the laws of any foreign country, arising in
connection with the sale of the Group 1 stock. In addition, Group 1 hereby
agrees to indemnify and hold harmless TMS from any and all claims of the
shareholders of Group 1 with respect to the sale of the Group 1 Stock. If it
is ultimately determined, based upon a final decision of a court, arbitrator or
other authorized panel or a settlement entered into by the parties to the
dispute and consented to by TMS that TMS was liable for such Claim in whole or
in part, the indemnification set forth herein shall be of no force or effect,
and TMS shall immediately reimburse Group 1 for any expenses advanced by Group
1 pursuant to this Agreement. Group 1 shall reimburse TMS for expenses
incurred by TMS which are covered by the indemnification provisions of this
Agreement within
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<PAGE> 8
thirty (30) days after receipt by Group 1 of the written request for
reimbursement (which shall include detailed information with respect to such
expenses) by TMS.
2. NOTIFICATION AND DEFENSE OF CLAIM
(a) If any litigation is commenced against TMS in respect
of which indemnity may be sought pursuant to this Agreement, TMS shall promptly
notify Group 1 in writing of the commencement of any such litigation.
(b) If any litigation referred to in paragraph (a) above
is brought against TMS and it gives notice to Group 1 of the commencement of
such litigation, Group 1 will be entitled to participate in such litigation,
and, to the extent that it wishes (unless (i) Group 1 is also a party to such
proceeding and TMS determines in good faith that joint representation would be
inappropriate, or (ii) Group 1 fails to provide reasonable assurance to TMS of
its financial capacity to defend such proceeding and provide indemnification
with respect to such litigation), to assume the defense of such litigation with
counsel reasonably satisfactory to TMS and, after notice from Group 1 to TMS of
its election to assume the defense of such litigation, Group 1 will not, as
long as it diligently conducts such defense, be liable to TMS under this
Agreement for any fees of other counsel or any expenses with respect to the
defense of such litigation, in each case subsequently incurred by TMS in
connection with the defense of such litigation.
(c) Group 1 agrees promptly to notify TMS of the
commencement of any litigation against Group 1 in connection with the issue and
sale of the Group 1 Stock. Group 1 and TMS agree to cooperate with each other
in the defense of any litigation.
(d) TMS shall not, except with Group 1 prior written
consent, consent to entry of any judgment or enter into any settlement which
does not include as an unconditional term thereof the giving by the claimant or
the plaintiff to TMS of a release from all liability in respect to such
litigation.
3. ENFORCEMENT
(a) Group 1 expressly confirms and agrees that it has
entered into this Agreement and assumes the obligations imposed on it in order
to induce TMS to consent to the offer and sale of the Group 1 Stock and
acknowledges that TMS is relying upon this Agreement to grant such consent.
(b) In the event TMS is required to bring any action to
enforce rights or to collect moneys due under this Agreement and is successful
in such action, Group 1 shall reimburse TMS for all of TMS' reasonable fees and
expenses in bringing and pursuing such action.
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<PAGE> 9
4. SUBROGATION
(a) In the event of payment under this Agreement, Group 1
shall be subrogated to the extent of such payment to all of the rights of
recovery of TMS, which shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such document necessary to enable Group 1 effectively to bring suit to
enforce such rights.
(b) Group 1 shall not be liable under this Agreement to
make any payment in connection with any claim or litigation made against TMS to
the extent TMS has otherwise actually received payment (under any insurance
policy or otherwise) of the amounts otherwise indemnifiable hereunder.
5. MISCELLANEOUS
(a) This Agreement shall be interpreted and construed in
accordance with the laws of the State of California, without giving effect to
the conflict of law rules.
(b) This Agreement shall be binding upon and inure to the
benefit of Group 1, TMS and their respective legal representatives, successors
and assigns.
(c) No amendment, modification or termination of this
Agreement shall be effective unless in writing and signed by both parties
hereto.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date first above written.
TOYOTA MOTOR SALES, U.S.A., INC.
By:
------------------------------
GROUP 1 AUTOMOTIVE, INC.
By:
------------------------------
B.B. Hollingsworth, Jr.
President
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<PAGE> 1
EXHIBIT 10.13
SUPPLEMENTAL AGREEMENT TO
GENERAL MOTORS CORPORATION
DEALER SALES AND SERVICE AGREEMENT
This Supplemental Agreement to General Motors Corporation Dealer Sales and
Service Agreement is entered into between Group 1 Automotive, Inc. and General
Motors Corporation.
WHEREAS Group 1 Automotive, Inc. is interested in acquiring ownership of one or
more GM Dealerships in selected areas of the United States;
WHEREAS, the parties desire to enter into a positive and productive business
relationship which will accomplish our mutual goals and promote sales of GM
products consistent with GM's Brand strategy for its products and focus on a
total customer enthusiasm;
WHEREAS, the organization and ownership structure of Group 1 Automotive, Inc.
and its retail operating systems are such that the terms of the Dealer
Agreement are not wholly adequate to address the legitimate business needs and
concerns of Group 1 Automotive, Inc. and GM;
NOW, THEREFORE, the parties agree as follows:
1. Purpose of Agreement
1.1 Purpose of Agreement. The parties acknowledge that Group 1
Automotive, Inc. desires to purchase the stock or assets of
one or more current GM Dealerships and to be appointed as the
replacement Dealer by the appropriate Divisions. The parties
further acknowledge that the ownership arrangements of Group 1
Automotive, Inc. and the operating processes and procedures of
Group 1 Automotive, Inc. require that the parties supplement
the standard terms and provisions of the Dealer Agreement to
assure that the legitimate business needs of GM in regard to
the representation of its products are satisfied. The parties
have agreed to enter into this Agreement for that purpose.
This agreement shall not apply in any respect to Saturn
Dealers or dealerships.
1.2 Definitions. For purposes of this Agreement, the following
terms shall have the meaning indicated:
1.2.1 "Agreement" means this Supplemental Agreement to
General Motors Corporation Dealer Sales and Service
Agreement.
1.2.2 "Group 1 Automotive" or "Group 1" means Group 1
Automotive, Inc.
1.2.3 "Dealer Agreement" means a General Motors Corporation
Dealer Sales and Service Agreement, a copy of which
is attached hereto as Exhibit A and is incorporated
herein by reference. It also includes any
superseding Dealer Agreements.
<PAGE> 2
1.2.4 "Dealer Company" or "Dealer" means the business
entity owned or controlled by Group 1 Automotive,
Inc. that is a party to a Dealer Agreement and is
defined as the "Dealer" for purposes of the Dealer
Agreement.
1.2.5 "Division" or "Divisions" means one or more of the
marketing divisions of GM; Chevrolet, Pontiac-GMC,
Oldsmobile, Buick, Cadillac.
1.2.6 "GM" means General Motors Corporation.
1.2.7 "GM Dealerships" means a specific, physical location
from which Dealership Operations are conducted by a
Dealer pursuant to the terms of one or more Dealer
Agreements. It does not include Saturn Dealerships.
1.2.8 "Voting stock" means any stock of Group 1 Automotive,
Inc. that has voting rights as well as any debt or
equity security of Group 1 Automotive, Inc. that is
convertible into stock of Group 1 Automotive, Inc.
that has voting rights.
2. Group 1 Automotive, Inc. Ownership
2.1 Ownership Structure.
Each Dealer will be a separate company, distinct from Group 1
Automotive, Inc. in the form of either a corporation,
partnership or other business enterprise form acceptable to
GM, which is capitalized in accordance with the "GM Owned
Working Capital Agreement". Each of the Dealer companies will
be owned by Group 1 Automotive, Inc. or may have minority
interests held by employees of that Dealer Company subject to
GM approval.
2.2 Group 1 Automotive, Inc. hereby warrants that the
representations and assurances contained in this Agreement are
within its authority to make and do not contravene any
directive, policy or procedure of Group 1 Automotive, Inc..
2.3 Change in Ownership. Any material change in ownership of any
Dealer company and any material change in Group 1 Automotive,
Inc. or any event described in section 2.4.2(b) shall be
considered a change in ownership of the Dealer Company under
the terms of the dealer agreements and all applicable terms of
the Dealer Agreement as supplemented by this Agreement will
apply to any such change.
2.4 Acquisition of Ownership Interest by Third Party. Given the
ultimate control Group 1 Automotive, Inc., will have over the
Dealer Companies, and the Divisions' strong interest in
assuring that those who own and control their Dealers have
interests consistent with those of the Divisions Group 1
Automotive, Inc. agrees to the following:
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<PAGE> 3
2.4.1 Group 1 Automotive, Inc. will deliver to GM copies of
all Schedules 13D and 13G, and all amendments thereto
and terminations thereof, received by Group 1
Automotive, Inc., within five (5) days of receipt of
such Schedules. If Group 1 Automotive Inc. is aware
of any ownership of its stock that should have been
reported to it on Schedule 13D but that is not
reported in a timely manner, it will promptly give GM
written notice of such ownership, with any relevant
information about the owner that Group 1 Automotive,
Inc. possesses.
2.4.2 If Group 1 Automotive, Inc. through its Board of
Directors or through shareholder action proposes or
if any person, entity or group sends Group 1
Automotive, Inc. a schedule 13D, or any amendment
thereto, disclosing (a) a binding agreement to acquire
or the acquisition of aggregate ownership of more
than twenty percent (20%) of the voting stock of
Group 1 Automotive, Inc. and (b) Group 1 Automotive,
Inc. through its Board of Directors or through
shareholder action proposes or if any plans or
proposals which relate to or would result in the
following: (i) the acquisition by any person of more
than 20% of the voting stock of Group 1 Automotive,
Inc. other than for the purposes of ordinary passive
investment (ii) an extraordinary corporate
transaction, such as a material merger,
reorganization or liquidation, involving Group 1
Automotive, Inc. or a sale or transfer of a material
amount of assets of Group 1 Automotive, Inc. and its
subsidiaries; or (iii) any change which together with
any changes made to the Board of Directors within the
preceding year, would result in a change in control
of the then current board of directors of Group 1
Automotive, Inc. or (iv) in the case of an entity
that produces or controls or is controlled by or is
under common control with an entity that either
produces motor vehicles or is a motor vehicle
franchisor, the acquisition by any such person entity
or group of more than 20% of the voting stock of
Group 1 Automotive, Inc. and any proposal by any such
person, entity or group through the Group 1
Automotive, Inc. Board of Directors or shareholders
action to change the board of directors of Group 1
Automotive, Inc., then if such actions in GM's
business judgment could have a material or adverse
effect on its image or reputation in the GM
dealerships or be materially incompatible with GM's
interest (and upon notice of GM's reasons for such
judgment), Group 1 Automotive, Inc. agree that it
will take one of the remedial actions set forth in
Section 2.4.3 below within ninety (90) days of
receiving such Schedule 13D or such amendment.
2.4.3 If Group 1 Automotive, Inc. is obligated under
Section 2.4.2 above to take remedial action, it will
(a) transfer to GM or its designee, and GM or its
designee will acquire the assets, properties or
business associated with any Dealer Company at fair
market value as determined in accordance with Exhibit
B, or (b) provide evidence to the Divisions that such
person entity or group no longer has such threshold
level of ownership interest in Group 1 Automotive,
Inc. or that the actions described in Section
2.4.2(b) will not occur.
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<PAGE> 4
2.4.4 Should Group 1 Automotive, Inc. or Dealer company
enter into an agreement to transfer the assets of a
Dealer company to a third party, the right of first
refusal described in Article 12.3 of the Dealer
Agreement shall apply to any such transfer.
2.4.5 Group 1 Automotive, Inc. will describe such
provisions of this Section in any prospectus it
delivers in connection with the offer or sale of its
stock as may be required by any applicable laws or
regulations.
2.5 Officers and Key Management. Group 1 Automotive, Inc. agrees
to provide to GM a list of the key management of Group 1
Automotive, Inc. and their responsibilities in regard to the
control and management of Group 1 Automotive, Inc. and each
Dealer Company. Each Dealer Company shall agree to propose to
GM any material changes in the key management of the Dealer
Company or their responsibilities. Such proposal should be
provided to GM in writing prior to such change to the extent
practicable and shall include sufficient information to permit
GM to evaluate the proposed change consistent with normal
policies and procedures. Group 1 Automotive, Inc. will notify
GM in writing of any material change in the key management of
Group 1 Automotive, Inc. or their responsibilities. For
purposes of this Agreement, the term "key management" shall
mean CEO, President and Vice Presidents with respect to each
dealer company and executive officers with respect to Group 1
Automotive, Inc..
3. Group 1 Automotive, Inc. Operating Policies and Procedures
3.1 GM Brand Strategy. Group 1 Automotive, Inc. acknowledges that
GM has a Brand Strategy and has invested significant capital
in the development of corporate, divisional and brand image.
Relevant information regarding this strategy has been shared
with Group 1 Automotive, Inc.. Group 1 Automotive, Inc. agrees
to accommodate GM's Brand Strategy in its GM Dealerships
Operations. Group 1 Automotive, Inc. will incorporate in each
of its GM Dealerships the following as a minimum in support of
the GM Brand Strategy:
3.1.1 GM has developed retail and service operating
standards for each of its Divisions. At each of its
GM Dealerships, Group 1 Automotive, Inc. will
implement and use those divisional standards, or
higher standards which it may develop, subject to
GM's approval.
3.1.2 Dealer marketing associations for each of the
Divisions are an integral part of GM's Brand
Strategy. Group 1 Automotive, Inc. and enhance GM
and Divisional brand and marketing practices and
goals. Group 1 Automotive, Inc. agrees and each
Dealer Company shall agree that the Dealer Company
will participate in the appropriate dealer marketing
association or group as provided in Section 11.
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<PAGE> 5
3.1.3 Group 1 Automotive, Inc. will not, and will not
permit any Dealer Company to jointly advertise or
market any of their non-GM automotive operations in
conjunction with its approved GM Dealership
Operations (it being understood that the advertising
example attached hereto as Exhibit C will be
permissible).
4. Acquisition of GM Dealerships
4.1 In consideration for the representations, covenants and
commitments contained herein, and assuming compliance with the
normal requirements of General Motors regarding transfer of
assets and appointment as a dealer, General Motors will permit
the acquisition of up to ten (10) General Motors Dealerships
during the period commencing from the date of this Agreement
and ending 24 months thereafter. If GM requests Group 1
Automotive, Inc. to consider purchasing certain GM
dealerships, such dealerships are to be included in the number
of acquisitions. If there is a material dispute between any
GM affiliate and Group 1 Automotive, Inc., then GM may elect
not to approve any public companies dealerships until the
dispute is resolved (even if the preapproved number has not
been met).
4.2 Following the 24 month period, each Dealer company in which
Group 1 Automotive, Inc. has an investment must be in
compliance with the terms of the General Motors Policies for
Changes in GM Dealership Ownership/management bulletin of
September 19, 1994 (a copy of which has already been provided)
including any revisions or replacements of that bulletin, in
order to be approved for additional acquisitions of General
Motors Dealerships.
4.3 Multiple Dealer Policy. Group 1 Automotive, Inc. recognizes
that customers benefit from competition in the market place
and agree that any proposal to acquire additional GM
dealerships shall be subject to the terms of General Motors
Multiple Dealer Investor/Multiple Dealer Operator policies as
set forth in NAO Bulletin 94-11, including any revisions of
replacements to the bulletin.
4.4 Limitation in Multiple Dealer Area. GM and Group 1
Automotive, Inc. agree that Group 1 Automotive, Inc. will not
attempt to acquire more than 50% of the GM dealerships, by
franchise line in a GM defined Multiple Dealer area. GM will
provide upon Group 1 Automotive, Inc. request the number of GM
dealerships, by line, in the Multiple Dealer area and the
maximum number of dealerships Group 1 Automotive, Inc. and may
acquire in that Multiple Dealer Area.
4.5 Evaluation of Operations. GM will conduct semiannual
evaluation meetings with the management of Group 1 Automotive,
Inc. and the Dealer Operators of each GM Dealer Company to
review the performance of each GM Dealer Company. In the
event GM advises Group 1 Automotive, Inc. for any two
consecutive evaluation periods that the performance of a GM
dealership is not meeting the sales volume, Customer
Satisfaction and Branding requirements of GM, GM will have the
right to demand a change in the management of the dealer
company not meeting those
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<PAGE> 6
requirements. Group 1 Automotive, Inc. will make the
management changes at any deficient dealership within not more
than six (6) months after notice of the deficiencies.
5. Dealership Operations
5.1 Dealership Operations. Each Dealer Company shall be a
distinct and complete business entity which shall include
complete Dealership Operations as that term is defined in the
Dealer Agreement including, but not limited to, sales,
service, parts, and used car operations. This requirement
will not preclude certain centralized functions provided that
they are consistent with GM's Channel Strategy, and that such
centralized functions are reviewed with and approved by GM,
which approval shall not be unreasonably withheld. However,
no sales, service or parts operations may be combined with any
non-GM representation and all GM Dealerships will have
reasonable used or car operations.
5.2 GM Channel Strategy. Group 1 Automotive, Inc. further
stipulates and agrees that if Group 1 Automotive, Inc., GM,
and the public are to realize the potential benefits that
Group 1 Automotive, Inc. represents to be the result of the
acquisitions proposed by Group 1 Automotive, Inc., then an
integral component of the participation by Group 1 Automotive,
Inc. and Dealer Company is their agreement that all GM
Dealerships shall fully comply with General Motors Channel
Strategy including proper divisional representation alignment
and facilities that are properly located and that are in
compliance with appropriate divisional image programs. The
Channel Strategy is set forth in a memorandum dated October 5,
1995, from Ronald L. Zarrella to all GM dealers, and in the
written statement of the strategy as it relates to each of
Dealer Company, copies of which will be provided to Group 1
Automotive, Inc. and each Dealer Company Group, 1 Automotive,
Inc. agrees and each Dealer Company shall agree that within 12
months of the acquisition of any GM Dealership that is not
consistent with the Channel Strategy, Group 1 Automotive, Inc.
and Dealer Company will have complied with the Channel
Strategy for that location. Notwithstanding the above, GM
will consider reasonable requests from Group 1 Automotive,
Inc. for an extension if Group 1 Automotive, Inc. is making
reasonable progress and is unable to comply with the Channel
Strategy for reasons beyond Group 1 Automotive, Inc. control.
If Group 1 Automotive, Inc. and Dealer Company fail to do so
within the time provided, then Group 1 Automotive, Inc. will
cause Dealer Company and Dealer Company will agree to
terminate the representation of such products as reasonably
required by GM to comply with the Channel Strategy. If such
Termination is required, GM will compensate Group 1
Automotive, Inc. the sum of $1,000 for each unit of GM retail
planning guide for each Dealer Agreement so terminated.
5.3 Exclusive Representation. Group I Automotive, Inc. agrees and
each Dealer Company shall agree that all GM Dealerships shall
be used solely for the exclusive representation of GM products
and related services and in no event shall be used for the
display, sale or promotion or warranty service of any new
vehicle other than those
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<PAGE> 7
of General Motors Corporation (provided that if Group 1
Automotive, Inc. acquires a GM Dealership having a sales and
service agreement with a competitive automobile manufacturer
of importer and related sales and service operations at the
same facility, at GM's request Group 1 Automotive, Inc. shall
cause the competitive sales and service operations to be
relocated within one year of acquisition, Group 1 Automotive,
Inc. agrees and each Dealer Company shall agree that should a
Dealer Company cease to provide exclusive representation of GM
products, based on the proper franchise alignment as
determined by the Channel Strategy, then that shall constitute
good cause in and of itself for the termination of the Dealer
Agreement then in effect with such Dealer Company and Group 1
Automotive, Inc. shall cause Dealer Company to and Dealer
Company shall voluntarily terminate the Dealer Agreements then
in effect.
5.4 Image Compliance. Any Dealer Company acquired by Group 1
Automotive, Inc. shall be brought into compliance with
applicable Divisional facility image requirements. Any new
construction or significant interior or exterior remodeling of
any GM Dealerships shall incorporate the appropriate
divisional image program and shall be subject to approval by
the appropriate Division before such construction is
undertaken.
5.5 Corporate Name and Tradenames. Both the corporate name and
any tradename or d/b/a of each Dealer Company must include the
names of those GM Divisions represented by such Dealer
Company.
5.6 Dealer Company Advertising. Group 1 Automotive, Inc. agrees
that the advertising of each of the Dealer companies will
maintain and support the GM brand strategy. Newspaper, radio,
television and any other form of advertising will not combine
GM brands or non GM brands, unless GM has approved combined
operations and will clearly identify each GM dealership as a
separate entity at its approved location (it being understood
that the advertising example attached hereto as Exhibit C will
be permissible).
6. Dealer Operator
6.1 Appointment of Dealer Operator. For purposes of the Dealer
Agreement, including Paragraph Third and Article 2 and for
each GM Dealership, Group 1 Automotive, Inc. shall appoint an
individual who shall act as Executive Manager of that GM
Dealership only and who shall be considered as Dealer Operator
for purposes of the Dealer Agreement. The Divisions will rely
upon the personal qualifications and management skills of
Dealer Operator. Group 1 Automotive, Inc. hereby represents
that Dealer Operator will have complete managerial authority
to make all decisions, and enter into any and all necessary
business commitments required in the normal course of
conducting Dealership Operations on behalf of Dealer Company
and may take all actions normally required of a Dealer
Operator pursuant to Paragraph Third and Article 2 of the
Dealer Agreement. Group 1 Automotive, Inc will not revoke,
modify or amend such authority without the prior written
approval of the applicable
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<PAGE> 8
Division (except as provided in Section 6.3 below). Because
of the unique structure of Group 1 Automotive, Inc., the 15%
ownership requirement contained in Article 2 of the Dealer
Agreement shall not apply to Dealer Operator.
6.2 Removal of Dealer Operator. Except as provided in Section 6.3
below, the removal or withdrawal of Dealer Operator without
Divisions' prior written consent shall constitute grounds for
termination of the Dealer Agreements. However, the Divisions
recognize that employment responsibilities of the Dealer
Operator with Dealer Company may change, making it impractical
for the Dealer Operator to continue to fulfill his/her
responsibilities as Dealer Operator. In that case, or in the
event Dealer Operator leaves the employ of the Dealer Company,
Dealer Company shall have the opportunity to propose a
replacement Dealer Operator. The Divisions will not
unreasonably withhold approval of any such proposal, provided
the proposed replacement has the skills and qualifications to
act as Dealer Operator pursuant to the standard policies and
procedures of GM.
6.3 Replacement Dealer Operator. Dealer Company shall make every
effort to obtain the consent of the Divisions to a proposed
replacement Dealer Operator prior to the removal or withdrawal
of the approved Dealer Operator. If that is not practical,
Dealer Company shall notify Division in writing within 10 days
following the removal or withdrawal of the approved Dealer
Operator. Within 30 days of that removal or withdrawal,
Dealer Company will submit to Division a plan and appropriate
applications to replace Dealer Operator with a qualified
replacement acceptable to Divisions. The replacement Dealer
Operator must assume his/her responsibilities no later than 90
days following the withdrawal of the approved Dealer Operator.
Republic shall be permitted to appoint a temporary general
manager to manage the GM Dealership during the interim period
while the Dealer Operator is being replaced.
7. Dispute Resolution. Group 1 Automotive, Inc. agrees not to join any
legal or administrative action a seller of a General Motors dealership
may take against General Motors in the event General Motors declines
to approve a proposed transfer to Group 1 Automotive, Inc. Group 1
Automotive, Inc. and GM stipulate and agree and each Dealer Company
shall stipulate and agree that the dispute resolution process attached
hereto as Exhibit D, or any replacement process offered to all GM
Dealers, shall be the exclusive source of resolution of any dispute
regarding the Dealer Agreements and this agreement including, but not
limited to, involuntary termination of the Dealer Agreements and/or
approval of Group 1 Automotive, Inc. for additional investment in or
ownership of GM Dealerships. The parties further agree that the
Chevrolet dealer dispute resolution process will be used for the
resolution of the matter, regardless of the GM Division involved.
8. Right to Purchase or Lease. In the event of any termination of the
Dealer Agreement or any transaction or event that would, in effect,
discontinue Dealership Operations from that GM Dealership, or a
transfer of assets, properties or business to GM or a GM designee
pursuant to Section 2.4.3, Group 1 Automotive, Inc. agrees and each
Dealer Company shall agree to provide GM with: (a) the right to
purchase the dealership assets, properties or business for
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<PAGE> 9
fair market value based on automotive use through the process attached
hereto as Exhibit B, and (b) an assignment of any existing lease or
lease options that are available, subject in each case to any legal or
contractual obligations existing at such time, provided, however, that
Group 1 Automotive, Inc. shall assure GM or its delegate of quite
possession of the dealership facilities for a period of not less than
five years if this right is exercised with respect to such facilities
within ten years of the execution of this Agreement. If, however,
Group 1 Automotive, Inc. enters into a financing arrangement with
respect to such facilities then such assurance of quite possession
would be subordinated to the interests of any lender in connection
with any default by Group 1 Automotive, Inc. under the terms of the
financing arrangement other than a default due to the discontinuance
of dealership operations from such facilities. The Parties agree that
GM may exercise its rights under this Section 8 with respect to some
or all of the dealership facilities to which it may apply at any given
time, and that failure to exercise such rights as to one facility
shall not affect GM's rights as to other facilities.
9. Electronic Funds Transfer. Group 1 Automotive, Inc. agrees that each
Dealer Company will use Electronic Funds Transfer (EFT) for settlement
of the dealership obligations to GM and that GM will have right of
offset for any unpaid debit balances for any Dealer Company at the
time the indebtedness is due and will have the right to collect those
amounts from the account for any other Dealer Company.
10. Compliance with Policies and Procedures. Each Dealer Company must
comply with all terms of the Dealer Agreement and all GM policies
applicable to Dealer Company's Dealership Operations. Those
procedures include policies precluding joint advertising and
prohibiting sales of GM auction vehicles from other than the
purchasing GM Dealership. Except as specifically provided herein, all
Dealership Operations shall be conducted consistent with requirements
for other GM dealerships.
11. Membership in Dealer Marketing Group. Each Dealer Company will join
its respective dealer marketing group and area marketing group
including membership financial support and will participate as a
regular member in meetings and marketing activities.
12. Capital Standards. Group 1 Automotive, Inc. agrees and Dealer Company
shall agree that Dealer Company shall maintain, at all times,
sufficient working capital to meet or exceed the minimum net working
capital standards for the Dealer Company as determined from time to
time by GM consistent with its normal practices and procedures. Group
1 Automotive, Inc. and Dealer Company shall provide such documentation
as reasonably requested by GM to assure compliance with that
requirement. Group 1 Automotive, Inc. shall submit an annual
consolidated balance sheet for the combined GM Dealership operations
of Group 1 Automotive, Inc.
13. Discontinuance of Representation. In the event that Group 1
Automotive, Inc. determines, voluntarily or otherwise to discontinue
representation in any given Multiple Dealer Area, Group 1 Automotive,
Inc. shall grant the right to GM to acquire at fair market value as
determined in accordance with Exhibit B the right to representation of
the Divisions previously represented by any Dealer Company in that
Multiple Dealer Area. GM shall also
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<PAGE> 10
have the option to acquire the fixed assets and/or the Dealership
Facilities in that Multiple Dealer Area. The terms and conditions for
the exercise of such rights shall be set forth in appropriate and
customary documents. Group 1 Automotive, Inc. has received GM's
standard option agreements modified for this Agreement.
14. Supplement to Dealer Agreement. The parties agree that each Dealer
Company shall be required to execute an addendum to the Dealer
Agreements binding the Dealer Company to the applicable portions of
this Agreement. For each Dealer Company, this Agreement shall
supplement the terms of the Dealer Agreements in accordance with
Article 17.11 of the Dealer Agreements.
15. Further Modifications. In the event that the policies of GM with
regard to Dealerships owned or controlled in whole or in part by
public shareholders should be modified, the parties agree to review
such modifications to determine whether modification to this Agreement
is appropriate.
16. No Third Party Rights. Nothing in this Agreement or the Dealer
Agreement shall be construed to confer any rights upon any person not
a party hereto or thereto, nor shall it create in any party an
interest as a third party beneficiary of this Agreement or the Dealer
Agreement. Group 1 Automotive, Inc. and Dealer Company hereby agree
to indemnify and hold harmless GM, its directors, officers, employees,
subsidiaries, agents and representatives from and against all claims,
actions, damages, expenses, costs and liability, including attorneys
fees, arising from or in connection with any action by a thirty-party
in its capacity as a stockholder of Group 1 Automotive, Inc. relating
to this Agreement other than through a derivative stockholder suit
authorized by the Board of Group 1 Automotive, Inc., provided that
Group 1 Automotive, Inc. shall have the right to assume the defense
and control any such actions or suits and that GM shall not settle any
such actions or suits without Group 1 Automotive, Inc. consent (such
consent not to be unreasonably withheld). Notwithstanding the above,
GM may choose, at its own expense, to manage and control its own
defense in any such action.
17. Modification of Dealer Agreement. This Agreement is intended to
modify and adapt certain provisions of the Dealer Agreement and is
intended to be incorporated as part of the Dealer Agreement for each
Dealer Company. In the event that any provisions of this Agreement
are in conflict with other provisions of the standard Dealer
Agreement, the provisions contained in this Agreement shall govern.
Except as expressly provided in this Agreement the terms of the Dealer
Agreements remain unchanged and apply herein.
18. Confidentiality. Each party agrees not to disclose the content of
this Agreement to non-affiliated entities and to treat the Agreement
with the same degree of confidentiality as it treats its own
confidential documents of the same nature, except as expressly
provided by Article 2.3.5 of this Agreement or unless authorized by
the other party, required by law, pertinent to judicial or
administrative proceedings or to proceedings under the Dispute
Resolution Process.
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<PAGE> 11
19. Duration of Agreement. This Agreement remains in effect so long as
Group 1 Automotive, Inc. or any successor thereto, directly or
indirectly holds or has an agreement to hold an ownership interest in
any GM Dealer Company.
IN WITNESS WHEREOF, the parties have executed this Agreement this
_____ day of ________________, 1997.
GROUP 1 AUTOMOTIVE, INC. GENERAL MOTORS CORPORATION
By: By:
- -------------------------------- -----------------------------------------
B.B. Hollingsworth, Jr. E. K. Roggenkamp, III
Chairman, President and General Manager
Chief Executive Officer North American Operations
Dealer Network Investment and Development
rosie.wpd
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<PAGE> 1
EXHIBIT 10.14
NISSAN
NISSAN MOTOR CORPORATION U.S.A
December 11, 1996
Mr. Charles M. Smith
Acura Southwest
10455 Southwest Fwy.
Houston, TX 77074-1101
Dear Mr. Smith:
You have requested that Nissan Motor Corporation in U.S.A. ("Nissan")
consent to a re-structuring of your dealerships wherein the Sterling Automotive
Group, Inc. ("Sterling"), which will become a publicly held corporation,
acquires all of the stock of Round Rock Nissan, Inc.; Town North Nissan, Inc.;
and Courtesy Nissan, Inc., ("Dealer").
This is to advise you that Nissan has approved the proposed restructuring and
transfer in principle, SUBJECT TO THE EXECUTION BY DEALER AND YOU OF A TERM
AGREEMENT ("AGREEMENT") AND INDEMNIFICATION AGREEMENT IN A FORM ACCEPTABLE TO
NISSAN CONTAINING CERTAIN TERMS AND CONDITIONS INCLUDING, BUT NOT LIMITED TO
THE FOLLOWING:
1. Sterling will at all times own 100% of the stock of Dealer;
2. Dealer will be maintained as a separate corporate entity;
3. The officers of Dealer will be Charles M. Smith ("Smith" or "you"),
Sterling B. McCall, Jr., and James M. Kline;
4. Smith agrees that any transfer of his ownership interest in Sterling,
or other action (such as dilution due to subsequent acquisitions)
which would significantly decrease his overall ownership in Sterling
requires the prior written consent of Nissan, which will not be
unreasonably withheld. Accordingly, any change in the ownership of
one or more key directors which would result in an ownership interest
less than 20% without consent from Nissan will be void and grounds for
termination of the Agreement;
5. Nissan will have no obligation to transact business with any person
who is not named either as a Dealer Principal or Executive Manager of
Dealer in the Agreement;
6. Restrictions in the Registration Statement providing that in the event
that anyone acquires, after the date of the initial public offering,
an ownership interest in Sterling greater than 20% and Nissan
determines that said interest is adverse to Nissan, the Agreement
shall be terminated. This provision would not, however, prevent
Sterling from re-applying for the dealership based on the new
ownership structure;
7. Smith, Ronald Kutz, Catherine Andrus, and Randy Ross will devote 100%
of their time to the affairs of Dealer;
<PAGE> 2
Mr. Charles M. Smith
December 11, 1996
Page 2
8. The Board of Directors of Sterling will delegate the management of the
dealership operations to the Dealer Principal and the Executive
Manager and the Dealer Principal and Executive Manager will have full
and complete control over the Dealership Operations;
9. The Executive Manager will be physically present at the dealership on
a full-time basis and have a substantial portion of their compensation
tied to Dealer's overall performance;
10. Any change in the Dealer Principal or Executive Manager of Dealer, or
the CEO, Chairman or equivalent officer of Sterling, from that
specified in the Agreement requires the prior written consent of
Nissan and any change in the management of Dealer or the CEO, Chairman
or equivalent officer of Sterling without such consent is void and
grounds for termination.
11. Site Control rights, including the Right of First Refusal on sale of
dealership assets in the event of a transfer by dealer or a change in
control of Sterling as referred to in paragraphs 4 and 6 above, Right
of First Refusal on the sale or lease of the dealership property and
Exclusivity;
12. Dealer must achieve at least regional average sales penetration and
CSI within six months of the date of the Agreement and maintain at
least regional average sales penetration and CSI at all times
thereafter. Sterling will not be considered for additional
dealerships until it is in compliance with this provision; and
13. Smith, Sterling B. McCall, Jr., and James M. Kline will hold harmless
and indemnify Nissan from and against all losses, liabilities, claims,
etc., relating to the public offering.
Additionally, receipt of outstanding documentation and any additional
documentation as requested may be necessary in order to complete processing to
this receipt.
Very Truly Yours,
NISSAN MOTOR CORPORATION U.S.A
J.C. Fassino
Regional Vice President
South Central Region
<PAGE> 1
EXHIBIT 10.15
September 29, 1997
Mr. Charles S. Smith
Acura Southwest
10455 Southwest Freeway
Houston, TX 77074-1101
Dear Mr. Smith:
By letter dated December 11, 1996 (the "Approval Letter") Nissan advised you
that Nissan would approve the proposed restructuring of your dealership wherein
Group 1 Automotive, Inc. ("Group 1"), which become a publicly held corporation,
acquires all of the stock of Round Rock Nissan, Inc., Town North Nissan, Inc.
and Courtesy Nissan, Inc. (collectively referred to as "Dealer"), subject to
certain terms and conditions, including those set forth therein. This letter
will confirm our recent discussions in which Nissan has agreed to modify
certain of the terms and conditions for approval previously communicated to you
as follows:
1. All references to Sterling Automotive Group, Inc. shall mean
Group 1.
2. Paragraph 3 of the Approval Letter shall be amended to read in
its entirety as follows:
"Charles M. Smith ("Smith") will be an officer of
Dealer."
3. Paragraph 4 of the Approval Letter shall be amended to read in
its entirety as follows:
"Smith agrees that for a period of five years after
the execution of the Nissan Dealer Sales and Service
Agreements for the Dealers referenced above, which
Nissan and Smith agree to use their best efforts to
execute as soon as reasonably practicable, any
transfer of his stock ownership in Group 1 which
would decrease his stock ownership in Group 1, which
will be 679,000 shares upon completion of the Group 1
acquisitions, to less than 169,750 shares, requires
the prior written consent of Nissan."
4. Paragraph 6 of the Approval Letter shall be amended to read in
its entirety as follows:
"Nissan shall have the right to approve any ownership
or voting rights of Group 1 of twenty percent (20%)
or greater by any individual or entity; PROVIDED
HOWEVER, that if Nissan determines that such
individual or entity is unqualified to own a Nissan
dealership, or has interests incomparable with
Nissan, and such transfer is effected, Group 1 must,
within ninety (90) days from the date of notification
by Nissan of its determination, either; (a) transfer
the assets of its Nissan dealerships to a third
party acceptable to Nissan; or (b) voluntarily
terminate its Nissan dealership agreements; or (c)
<PAGE> 2
demonstrate that such individual or entity in fact
owns less than 20% of the outstanding shares of Group
1."
5. Paragraph 10 of the Approval Letter shall be amended to read
in its entirety as follows:
"Any change in the Dealer Principal or Executive
Manager of Dealer from that specified in the
Agreement requires the prior written consent of
Nissan, which shall not be unreasonably withheld,
recognizing that some time may be required to find a
replacement in the event of death, incapacity or
termination and termination may require prompt
action, and any change in the management of Dealer
without such consent is void and grounds for
termination."
6. Paragraph 11 of the Approval Letter shall be amended to read
in its entirety as follows:
"Site Control rights, including the Right of First
Refusal on sale of dealership assets in the event of
a transfer by dealer or a change of control Group 1
as referred to in paragraph 6 above, Right of First
Refusal on the sale or lease of the dealership
property and Exclusivity."
7. Paragraph 13 of the Approval Letter shall be amended to read
in its entirety as follows:
"Group 1 and Smith (in Smith's case up to a maximum
of $350,000, and only in the event Group 1 is unable
to satisfy its obligation) will hold harmless and
indemnity Nissan from and against all losses,
liabilities and claims relating to the public
offering."
Aside from the above modifications, the other terms and conditions for
approval of your proposed restructuring remain as set forth in the Approval
Letter.
Very truly yours,
NISSAN MOTORS CORPORATION U.S.A.
J.C. Fassino
Regional Vice President
South Central Region
<PAGE> 1
EXHIBIT 10.16
Supplemental Terms and Conditions
This Agreement is made this 4th day of September, 1997 by and
between Ford Motor the Company, a Delaware corporation with its principal place
of business at The American Road, Dearborn, Michigan (hereinafter called
"Ford"), and Group 1 Automotive, Inc., a Delaware corporation with its
principal place of business at 950 Echo Lane, Suite 350, Houston, Texas 77024
(hereinafter called the "the Company").
AGREEMENT
1. Definitions. For purposes hereof, the following definitions
shall apply
a. "Agreement" shall mean the Ford, Lincoln or Mercury Sales and
Service Agreement.
b. "General Manager" shall mean the person designated by the
Company pursuant to paragraph F (ii) of the Agreement with full day to day
management authority and approved by Ford in writing.
c. "Securities Act" shall mean the Securities Act of 1933, as
amended.
d. "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
e. "SEC" shall mean the Securities and Exchange Commission.
f. "Dealership" shall mean each Ford, Mercury or Lincoln
authorized dealership owned or controlled directly or indirectly by the
Company.
g. "Delegation Certificate" shall be the instrument executed by
an authorized officer of the Company granting full day to day operational and
management control of the Dealership to the General Manager.
h. "CSI" shall mean the Customer Satisfaction Index used by Ford
to measure customer satisfaction in terms of the selling process as well as
after sales service, as such may be modified from time to time by Ford.
i. "Supplemental Terms" shall mean these Supplemental Terms and
Conditions.
2. Scope. The Company has indicated that it will seek to acquire
or to apply for Ford, Mercury and Lincoln authorized dealerships. In order to
simplify future discussions and to avoid any misunderstanding, these
Supplemental Terms are intended to apply to those situations where Ford is
willing to approve the Company (or its designated wholly owned or controlled
direct or indirect subsidiary) as the purchaser of the capital stock or assets
of a Ford, Mercury or Lincoln authorized dealership or where it is willing to
enter into an Agreement with the Company with respect to a new dealership
location. In each situation where Ford is willing to enter into an Agreement,
the Company
<PAGE> 2
2
will cause the Dealership to execute an Agreement and will cause such
Dealership to be bound by these Supplemental Terms.
3. Sole Ownership. To maintain financial and operational autonomy
and accountability, each Dealership will be a separate corporation with the
Ford, Mercury and/or Lincoln dealership operation being its sole business
unless otherwise agreed in writing by Ford; provided, however, that if, at the
time of acquisition of any Dealership, such Dealership is not a separate
corporation, the Company will use reasonable efforts to cause the Dealership to
be held as a separate corporation as soon as practicable. The Company shall
furnish to Ford a copy of the certificate of incorporation and bylaws of each
Dealership. As is required of all Ford authorized dealerships, each Dealership
shall submit monthly financial and operating performance data to Ford.
4. Capitalization. Each Dealership will be separately and fully
capitalized to ensure the maintenance of net cash, working capital and
operating investment in accordance with Ford guidelines. Other than through
dividends permitted by the law of the state of incorporation of each
Dealership, the effect of which shall not impair the ability of the Dealership,
to meet the above mentioned Ford capitalization guidelines, or through
arms-length transactions, all cash and other assets generated by each
Dealership will remain within the Dealership and none of the assets of any
Dealership owned or controlled by the Company shall be used directly or
indirectly to secure the debt or liability of the Company or any other
Dealership or other business owned or controlled by the Company.
5. General Manager. The Company shall delegate in writing the
complete day to day management control of each Dealership to the General
Manager of such Dealership whose appointment shall be subject to Ford's prior
written approval which shall not be unreasonably withheld. The General Manager
shall be designated in paragraph F (ii) of the Agreement and shall have full
managerial authority and accountability for operating the Dealership in
accordance with the terms of the Agreement and the Supplemental Terms. Each
person nominated by the Company as a General Manager must have substantial,
successful retail automotive experience and must meet Ford's high standards for
moral and ethical behavior. Upon the appointment of a General Manager, a copy
of the Delegation Certificate shall be submitted to Ford. All proposed changes
to the Delegation Certificate shall be in writing, submitted to Ford and
subject to Ford's prior written approval. The Company will notify Ford and
obtain Ford's prior written approval of any proposed change to the General
Manager, such approval not to be unreasonably withheld. The Company shall have
the right to appoint an interim General Manager as a temporary replacement for
any General Manager who is terminated for cause or who voluntarily resigns, in
each case without the prior written approval of Ford. In the event that an
interim General Manager is appointed, the Company shall work with Ford to
appoint a permanent General Manager within 90 days after the appointment of the
interim General Manager. In addition to meeting the criteria Ford customarily
applies to new dealer candidates, the General Manager will be assigned to the
Dealership for a sufficient time (being a minimum of 3 years unless otherwise
agreed by Ford in writing) to allow the General Manager to develop and maintain
ties to the local community evidenced by involvement in community civic and
<PAGE> 3
3
charitable organizations. The General Manager must reside in the Dealer
Locality as required by the Agreement.
6. Compensation Plans. The Company will cause each Dealership to
provide to its General Manager and other key employees of the Dealership, as
deemed appropriate, as part of their compensation, incentive programs that will
provide specific financial rewards to the General Manager and such other
employees that are payable to them at least annually and are based upon the
achievement and maintenance by the Dealership of the long term and short term
operating performance objectives described in paragraph 7 hereof.
7. Performance Criteria. Should any Dealership fail to meet
reasonable performance criteria established by Ford relating to such matters as
sales performance, CSI and such other performance criteria that Ford may
reasonably apply to all its authorized dealers, Ford will have the right to
implement the following procedure. Ford shall notify the Company and the
General Manager in writing of such failure and shall grant the Company and the
General Manager 90 days to either cure the failure in total or, with respect to
sales performance and CSI only, to present to Ford evidence of progress to cure
the failure indicating in Ford's reasonable judgment that the failure will be
cured within one year of Ford's notice. Should the failure not be cured within
the above period, persons delegated with authority from the Company immediately
shall meet with authorized personnel from Ford to arrange for the orderly and
expeditious replacement of the General Manager. Should agreement not be reached
upon the identity of an appropriate replacement General Manger within 90 days
of the end of the cure period, Ford may terminate the Agreement with immediate
effect. Requirements that each Dealership consistently meet or exceed Ford's
regional average retail car and truck market share and comparable dealer group
average customer satisfaction ratings, as measured by CSI or other criteria
established by Ford, shall be considered reasonable performance requirements.
Ford will not unreasonably withhold its consent to the appointment of an
appropriate replacement General Manger.
8. Additional Appointments. Should any Dealership fail to
maintain for any 12 month period the level of CSI at substantially the same
level that was reported for such Dealership as of the date of its acquisition
by the Company, the Company shall not seek or apply for another Ford authorized
dealership until such time as such level of CSI is restored to Ford's
reasonable satisfaction. Ford will provide each Dealership a report monthly,
summarizing its CSI performance for the preceding month and for the calendar
year to date. Unless otherwise agreed by Ford in writing, the Company shall not
seek or apply for a Ford authorized dealership if, once owning such dealership,
the Company would own or control, directly or indirectly, the greater of (a) 15
Ford and 15 Lincoln Mercury Dealerships or (b) that number of Ford authorized
dealerships with total retail sales of new vehicles in the immediately
preceding calendar year of more than 5% of the total Ford and Lincoln Mercury
branded vehicles sold at retail in the United States; provided, however, that
in no event shall the Company seek or apply for a Ford authorized dealership in
any market area, as defined from time to time by Ford for its dealership
network, that would result in the Company owning or
<PAGE> 4
4
controlling, directly or indirectly, more than one Ford authorized dealership
in those market areas having 2 or less Ford authorized dealerships in them, or
in the Company owning or controlling, directly or indirectly, more than 33% of
the Ford authorized dealerships in market areas, as defined from time to time
by Ford for its dealership network, having more than 3 authorized Ford
dealerships in them, it being understood that this proviso is intended to apply
separately to Ford and to Lincoln Mercury dealerships. Should the above
limitations be exceeded and, notwithstanding the above limitations, the Company
seek Ford's approval to acquire an additional authorized dealership, Ford's
refusal to approve such an acquisition shall be deemed to be a reasonable
action by Ford.
9. Major Changes. The Company shall submit to Ford copies of all
effective registration statements and final reports, proxies and information
statements it files with the SEC pursuant to the Securities Act or the Exchange
Act within five (5) business days of filing with the SEC. The Company, shall
submit to Ford all filings submitted to the SEC by third parties that are
required to disclose significant holdings or substantial acquisitions of, or
changes in, the ownership of the voting securities (or other securities
convertible into voting securities) of the Company including, without
limitation, Schedules 13D or 13G. Should any SEC filing disclose that (a) a
person, entity or group has a binding agreement to acquire, or has acquired,
voting securities (or other securities convertible into voting securities) of
the Company that would place 50% or more of the voting securities (or other
securities convertible into voting securities) of the Company into the hands of
such person, entity or group, or (b) a person or entity that owns or controls
fifty percent (50%) of the voting securities (or other securities convertible
into voting securities) of the Company intends or may intend to acquire
additional voting securities (or other securities convertible into voting
securities) of the Company, or (c) an extraordinary corporate transaction, such
as a merger, reorganization or liquidation, involving the Company or any of its
subsidiaries is planned or anticipated or (d) a sale or transfer of a material
amount of assets of the Company, or any of its subsidiaries, is planned or
anticipated, or (e) a change has been made or is planned to be made in the
Board of Directors or management of the Company or (f) any other material
change in the Company's business or corporate structure or (g) any action
similar to those noted above, the Company shall provide 30 days prior written
notice to Ford describing the matter disclosed in such filing in detail. If any
such action is believed by Ford in its reasonable judgment to have a material
and adverse effect on its reputation in the market place with respect to an
action described in (e), (f), or (g) or with respect to the other actions
should Ford reasonably conclude that such action will not be compatible with
the interests of Ford, the Company agrees that within 90 days of Ford's notice
thereof, the Company shall sell or cause to be sold one or more of the
Dealerships, as specified in the notice, to Ford or its designee at fair market
value, determined in accordance with Attachment A or resign the Agreements, or
provide evidence to Ford that the proposed action which gave rise to the
issuance of Ford's notice will not take place. Should the Company enter into an
agreement to transfer the assets or capital stock of any Dealership to a third
party, Ford's right of first refusal provided in paragraph 24(b) of the
Agreement shall apply.
10. Exclusive Dealership Facilities. Each Dealership shall operate
as an exclusive fully dedicated Ford, Mercury and/or Lincoln dealership, as the
case may be, and the Company will not accept a sales and service agreement with
any other automobile manufacturer or importer or allow the merchandising,
display, sale or service of new vehicles other than Ford, Mercury or Lincoln
vehicles at the facilities and locations approved by Ford and used by any
Dealership for the conduct
<PAGE> 5
5
of its business ("Ford Approved Facilities"). Unless otherwise agreed in
writing, should the Company acquire a Dealership having a sales and service
agreement with a competitive automobile manufacturer or importer and related
sales and service operations at the Ford Approved Facilities, it shall cause
the Dealership to relocate such competitive sales and service operations from
the Ford Approved Facilities within one year of acquisition; provided, however,
that Ford shall grant the Company additional time to effect such relocation if
Ford believes the Company is making reasonable progress in so doing. No
Dealership will merchandise, display or sell new Ford, Mercury or Lincoln
vehicles at any unauthorized location including those owned or controlled by
the Company. In conducting its advertising programs each Dealership shall
portray the products it is authorized to sell and service under the Agreement
in a distinctive manner taking care not to mingle such advertising with
advertising of competitive make new vehicles or used vehicles.
11. Advertising. The Company recognizes the benefit of local
cooperative advertising and has indicated that it will cause each Dealership to
become a fully participating member of the local Ford, Lincoln or Mercury
dealer advertising group (FDAF/LMDA).
12. Auctions. Used vehicle purchases from Ford sponsored auctions
will be governed by a separate "Sponsored Auction Agreement" which will be
executed by each Dealership.
13. Dealership Name. The trade name and corporate name of each
Dealership will be subject to Ford's approval and will not include any
reference to any non-Ford, Mercury or Lincoln make vehicle.
14. Site Control. Any existing agreement covering a Dealership or
its assets relating to site control will be assumed by the Company and shall
remain in full force and effect.
15. Dispute Settlement. Any dispute concerning the Agreement or
the Supplemental Terms shall be resolved Using the arbitration plan described
in paragraph 18 of the Agreement; provided, however, that notwithstanding
anything in the Agreement to the contrary, the use of such Plan shall be
mandatory and not optional and; provided, further, that no dispute need be
brought before the Ford Dealer Policy Board.
16. Agreement and Supplemental Terms. The Company confirms that
the provisions of these Supplemental Terms are material to its relationship
with Ford and that a failure by the Company to fully comply with any material
term hereof, after having been given a reasonable opportunity to cure such
failure, will constitute good and just cause for Ford, in its discretion, to
terminate the Agreement and these Supplemental Terms with immediate effect.
17. Binding Effect. These Supplemental Terms are intended to
modify certain provisions of the Agreement and to be incorporated as a part of
the Agreement. Should there be an inconsistency between the terms of these
Supplemental Terms and any provision of the Agreement, the terms of these
Supplemental Terms shall apply.
<PAGE> 6
6
18. Parent-Subsidiary. The Company shall cause each Dealership to
carry out the actions and to assume the responsibilities provided herein.
IN WITNESS WHEREOF, the Company and Ford, through their authorized
officers, have set there hands on the day and year above written.
Ford Motor Company Group 1 Automotive, Inc.
By: /s/ FORD MOTOR COMPANY By: /s/ B.B. HOLLINGSWORTH, JR.
------------------------ -------------------------------
B.B. Hollingsworth, Jr.
Its:
-----------------------
<PAGE> 1
EXHIBIT 10.17
TOYOTA DEALER AGREEMENT
This is an Agreement between Gulf States Toyota, Inc. (DISTRIBUTOR), and
Southwest Toyota, Inc. (DEALER), a(n) [ ] individual, [ ] partnership, [x]
corporation. If a corporation, DEALER is duly incorporated in the State of
Texas and doing business as Sterling McCall Toyota.
PURPOSES AND OBJECTIVES OF THIS AGREEMENT
DISTRIBUTOR sells Toyota Products which are manufactured or approved
by Toyota Motor Corporation (FACTORY) and imported and/or sold to DISTRIBUTOR
by Toyota Motor Sales, U.S.A., Inc. (IMPORTER). It is of vital importance to
DISTRIBUTOR that Toyota Products are sold and serviced in a manner which
promotes consumer confidence and satisfaction and leads to increased product
acceptance. Accordingly, DISTRIBUTOR has established a network of authorized
Toyota dealers, operating at approved locations and pursuant to certain
standards, to sell and service Toyota Products. DEALER desires to become one
of DISTRIBUTOR's authorized dealers. Based upon the representations and
promises of DEALER, set forth herein, DISTRIBUTOR agrees to appoint DEALER as
an authorized Toyota dealer and welcomes DEALER to DISTRIBUTOR's network of
authorized dealers of Toyota Products.
This Agreement sets forth the rights and responsibilities of DISTRIBUTOR as
seller and DEALER as buyer of Toyota Products. DISTRIBUTOR enters into this
Agreement in reliance upon DEALER's integrity, ability, assurance of personal
services, expressed intention to deal fairly with the consuming public and with
DISTRIBUTOR, and promise to adhere to the terms and conditions herein.
Likewise, DEALER enters into this Agreement in reliance upon DISTRIBUTORS's
promise to adhere to the terms and conditions herein. DISTRIBUTOR and DEALER
shall refrain from conduct which may be detrimental to or adversely reflect
upon the reputation of the FACTORY, IMPORTER, DISTRIBUTOR, DEALER or Toyota
Products in general. The parties acknowledge that the success of the
relationship between DISTRIBUTOR and DEALER depends upon the mutual
understanding and cooperation of both DISTRIBUTOR and DEALER.
Dealer Code 42073
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<PAGE> 2
I. RIGHTS GRANTED TO THE DEALER
Subject to the terms of this Agreement, DISTRIBUTOR hereby grants
DEALER the nonexclusive right:
A. To buy and resell the Toyota Products identified in the Toyota
Product Addendum hereto which may be periodically revised by
IMPORTER;
B. To identify itself as an authorized Toyota dealer utilizing
approved signage at the location(s) approved herein;
C. To use the name Toyota and the Toyota Marks in the
advertising, promotion, sale and servicing of Toyota Products
in the manner herein provided.
DISTRIBUTOR reserves the unrestricted right to sell Toyota Products
and to grant the privilege of using the name Toyota or the Toyota
Marks to other dealers or entities, wherever they may be located.
II. RESPONSIBILITIES ACCEPTED BY THE DEALER
DEALER accepts its appointment as an authorized Toyota dealer and
agrees to:
A. Sell and promote Toyota Products subject to the terms and
conditions of this Agreement;
B. Service Toyota Products subject to the terms and conditions of
this Agreement;
C. Establish and maintain satisfactory dealership facilities at
the location(s) set forth herein; and
D. Make all payments to DISTRIBUTOR when due.
III. TERM OF AGREEMENT
This Agreement is effective this 5th day of April, 1993, and shall
continue for a period of six (6) years, and shall expire on April 4,
1999 unless ended earlier by mutual agreement or terminated as
provided herein. This Agreement may not be continued beyond its
expiration date except by written consent of DISTRIBUTOR and IMPORTER.
IV. OWNERSHIP OF DEALERSHIP
This Agreement is a personal service Agreement and has been entered
into by DISTRIBUTOR in reliance upon and in consideration of DEALER's
representation that only the following named persons are the Owners of
DEALER, that such persons will serve in the capacities indicated, and
that such persons are committed to achieving the purposes, goals and
commitments of this Agreement:
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<PAGE> 3
<TABLE>
<CAPTION>
OWNERS' TITLE PERCENT OF
NAMES OWNERSHIP
- --------------- ------------------------- ----------
<S> <C> <C>
Sterling McCall President/General Manager 100%
- --------------- ------------------------- ----------
- --------------- ------------------------- ----------
- --------------- ------------------------- ----------
- --------------- ------------------------- ----------
- --------------- ------------------------- ----------
- --------------- ------------------------- ----------
</TABLE>
V. MANAGEMENT OF DEALERSHIP
DISTRIBUTOR and DEALER agree that the retention of qualified
management is of critical importance to satisfy the commitments made
by DEALER in this Agreement. DISTRIBUTOR, therefore, enters into this
Agreement in reliance upon DEALER's representation that Sterling
McCall, and no other person, will exercise the function of General
Manager, be in complete charge of DEALER's operations, and will have
authority to make all decisions on behalf of DEALER with respect to
DEALER's operations. DEALER further agrees that the General Manager
shall devote his or her full efforts to DEALER's operations.
VI. CHANGE IN MANAGEMENT OR OWNERSHIP
This is a personal service contract. DISTRIBUTOR has entered into
this Agreement because DEALER has represented to DISTRIBUTOR that the
Owners and General Manager of DEALER identified herein possess the
personal qualifications, skill and commitment necessary to ensure that
DEALER will promote, sell and service Toyota Products in the most
effective manner, enhance the Toyota image and increase market
acceptance of Toyota Products. Because DISTRIBUTOR has entered into
this Agreement in reliance upon these representations and DEALER's
assurances of the active involvement of such persons in DEALER
operations, any change in ownership, no matter what the share or
relationship between parties, or any changes in General Manager from
the person specified herein, requires the prior written consent of
DISTRIBUTOR, which DISTRIBUTOR shall not unreasonably withhold.
DEALER agrees that factors which would make DISTRIBUTOR's withholding
of consent reasonable would include, without limitation, the failure
of a new Owner or General Manager to meet DISTRIBUTOR'S standards with
regard to financial capability, experience and success in the
automobile dealership business.
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<PAGE> 4
VII. APPROVED DEALER LOCATIONS
In order that DISTRIBUTOR may establish and maintain an effective
network of authorized Toyota dealers, DEALER agrees that it shall
conduct its Toyota operation only and exclusively in facilities and at
locations herein designated and approved by DISTRIBUTOR. DISTRIBUTOR
hereby designates and approves the following facilities as the
exclusive location(s) for the sale and servicing of Toyota Products
and the display of Toyota Marks:
New Vehicle Sales and Showroom Used Vehicle
Display and Sales
9400 Southwest Freeway 9400 Southwest Freeway
Houston, Texas 77057 Houston, Texas 77057
Sales and General Office Body and Paint
9400 Southwest Freeway
Houston, Texas 77057
Parts Service
9400 Southwest Freeway 9400 Southwest Freeway
Houston, Texas 77057 Houston, Texas 77057
Other Facilities
DEALER may not, either directly or indirectly, display Toyota Marks or
establish or conduct any dealership operations contemplated by this
Agreement, including the display, sale and servicing of Toyota
Products, at any location or facility other than those approved herein
without the prior written consent of DISTRIBUTOR. DEALER may not
modify or change the usage or function of any location or facility
approved herein or otherwise utilize such locations or facilities for
any functions other than the approved function(s) without the prior
written consent of DISTRIBUTOR.
VIII. PRIMARY MARKET AREA
DISTRIBUTOR will assign DEALER a geographic area called a Primary
Market Area ("PMA"). The PMA is used by DISTRIBUTOR to evaluate
DEALER's performance of its obligations, among other things. DEALER
agrees that it has no exclusive right to any such PMA. DISTRIBUTOR
may add new dealers, relocate dealers, or adjust DEALER's PMA as it
reasonably determines is necessary. DEALER's PMA is set forth on the
PMA Addendum hereto.
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<PAGE> 5
Nothing contained in this Agreement, with the exception of Section
XIV(B), shall limit or be construed to limit the geographical area in
which, or the persons to whom, DEALER may sell or promote the sale of
Toyota products.
IX. STANDARD PROVISIONS
The "Toyota Dealer Agreement Standard Provisions" are incorporated
herein and made part of this Agreement as if fully set forth herein.
X. ADDITIONAL PROVISIONS
In consideration of DISTRIBUTOR's agreement to appoint DEALER as an
authorized Toyota dealer, DEALER further agrees:
Dealer Initials:________
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<PAGE> 6
XI. EXECUTION OF AGREEMENT
Notwithstanding any other provision herein, the parties to this
Agreement, DISTRIBUTOR and DEALER, agree that this Agreement shall be
valid and binding only if it is signed:
A. On behalf of DEALER by a duly authorized person;
B. On behalf of DISTRIBUTOR by the President and/or an authorized
General Manager, if any, of DISTRIBUTOR; and
C. On behalf of IMPORTER, solely in connection with its limited
undertaking herein, by President of IMPORTER.
XII. CERTIFICATION
By their signatures hereto, the parties agree that they have read and
understand this Agreement, including the Standard Provisions
incorporated herein, are committed to its purposes and objectives and
agree to abide by all of its terms and conditions.
Southwest Toyota, Inc. d/b/a Sterling McCall Toyota DEALER
- --------------------------------------------------------------------------------
(Dealer Entity Name)
Date: By: /s/ Sterling B. McCall, Jr.
-------- ---------------------------------------- --------------------
Signature Title
Date: By:
-------- ---------------------------------------- --------------------
Signature Title
Date: By:
-------- ---------------------------------------- --------------------
Signature Title
Gulf States Toyota, Inc. DISTRIBUTOR
- --------------------------------------------------------------------------------
(Distributor Name)
Group Vice President
Date: 2/9/93 By: /s/ J.S. Bishop Sales & Marketing
-------- ---------------------------------------- --------------------
Signature J.S. Bishop Title
Date: By:
-------- ---------------------------------------- --------------------
Signature Title
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<PAGE> 7
Undertaking by IMPORTER: In the event of termination of this
Agreement by virtue of termination or expiration of DISTRIBUTOR's
contract with IMPORTER, IMPORTER, through its designee, will offer
DEALER a new agreement of no less than one year's duration and
containing the terms of the Toyota Dealer Agreement then prescribed by
IMPORTER.
TOYOTA MOTOR SALES, U.S.A., INC.
Date: APR 5 1993 By: /s/ Shinji Sakai President
---------- -------------------------------------- --------------------
Title
-7-
<PAGE> 8
TOYOTA DEALER AGREEMENT
STANDARD PROVISIONS
The following Standard Provisions are expressly incorporated in and made a part
of the Toyota Dealer Agreement.
XIII. ACQUISITION, DELIVERY AND INVENTORY OF TOYOTA PRODUCTS
A. ACQUISITION OF TOYOTA PRODUCTS
DEALER shall have the right to purchase Toyota Products from
DISTRIBUTOR in accordance with the provisions set forth herein
and such other requirements as may be established from time to
time by DISTRIBUTOR.
B. AVAILABILITY AND ALLOCATION OF PRODUCT
DISTRIBUTOR agrees to use its best efforts to provide Toyota
Products to DEALER in such quantities and types as may be
required by DEALER to fulfill its obligations with respect to
the sale and servicing of Toyota Products under this
Agreement, subject to available supply from IMPORTER,
DISTRIBUTOR's requirements, and any change or discontinuance
with respect to any Toyota Product. DISTRIBUTOR will endeavor
to allocate Toyota Products among its dealers in a fair and
equitable manner, which it shall determine in its sole
discretion. DISTRIBUTOR agrees to provide DEALER with an
explanation of the method used to distribute such products
and, upon written request, will advise DEALER of DISTRIBUTOR's
total wholesale sales of new motor vehicles, by series, in
DISTRIBUTOR's area and to DEALER individually, for a
reasonable time frame.
C. PRICES AND TERMS OF SALE
DISTRIBUTOR shall have the right to establish and revise
prices and other terms for the sale of Toyota Products to
DEALER. Ownership and title of Toyota Products sold by
DISTRIBUTOR to DEALER shall pass upon payment therefor by
DEALER to DISTRIBUTOR and DEALER shall have no ownership
interest in such Products until such payment is received.
Risk of loss for Toyota Products sold by DISTRIBUTOR to DEALER
shall pass upon delivery of such Products to DEALER. Revised
prices and terms shall apply to any Toyota Products not
invoiced to DEALER by DISTRIBUTOR at the time the notice of
such change is given to DEALER (in the case of Toyota Motor
Vehicles), or upon issuance of a new or modified Parts Price
List or through change notices, letters, bulletins, or
revision sheets (in the case of parts, options and
accessories), or at such other times as may be designated in
writing by DISTRIBUTOR.
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<PAGE> 9
Payment for all Toyota Products shall be made when billed,
unless other terms are established by DISTRIBUTOR in writing.
D. MODE, PLACE AND CHARGES FOR DELIVERY OF PRODUCTS
DISTRIBUTOR shall designate the distribution points and the
mode of transportation and shall select carrier(s) for the
transportation of Toyota Products to DEALER. DEALER shall pay
DISTRIBUTOR such charges as DISTRIBUTOR in its sole discretion
establishes for such transportation services.
E. INVENTORY DAMAGE CLAIMS AND LIABILITY
DEALER shall promptly notify DISTRIBUTOR of any damage
occurring during transit and shall, if so directed by
DISTRIBUTOR, file claims on DISTRIBUTOR's behalf against
transportation carrier for damage. DEALER agrees to assist
DISTRIBUTOR in obtaining recovery against any transportation
carrier or insurer for loss or damage to Toyota Products
shipped hereunder.
To the extent required by law, DEALER shall notify the
purchaser of a vehicle of any damage sustained by such vehicle
prior to sale. DEALER shall indemnify and hold DISTRIBUTOR
harmless from any liability resulting from DEALER's failure to
so notify such purchasers.
F. DELAY OR FAILURE OF DELIVERY
DISTRIBUTOR shall not be liable for delay or failure to
deliver Toyota Products which it has previously agreed to
deliver, where such delay or failure to deliver is the result
of any event beyond the control of DISTRIBUTOR, IMPORTER or
FACTORY, including but not limited to fire, floods, storms or
other acts of God, any law or regulation of any governmental
entity, foreign or civil wars, riots, interruptions of
navigation, shipwrecks, strikes, lockouts or other labor
troubles, embargoes, blockades, or delay or failure of FACTORY
to deliver Toyota Products.
G. DIVERSION CHARGES
If after delivery DEALER fails or refuses to accept Toyota
Products that it has agreed to purchase, DEALER shall pay all
charges incurred by DISTRIBUTOR as a result of such refusal.
Such charges shall not exceed the charge of returning any such
product to the point of original shipment by DISTRIBUTOR plus
all charges for demurrage, storage or other charges related to
such refusal.
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<PAGE> 10
DEALER also agrees to assume responsibility for, and shall pay
any and all reasonable charges for, demurrage, storage or
other charges accruing after arrival of shipment at the point
of original shipment.
H. CHANGES OF DESIGN, OPTIONS OR SPECIFICATIONS
DISTRIBUTOR, IMPORTER or FACTORY may change the design or
specifications of any Toyota Product or the options in any
Toyota Product and shall be under no obligation to provide
notice of same or to make any similar change upon any product
previously purchased by or shipped to DEALER. No change shall
be considered a model year change unless so specified by
DISTRIBUTOR.
I. DISCONTINUANCE OF MANUFACTURE OR IMPORTATION
FACTORY, IMPORTER and/or DISTRIBUTOR may discontinue the
manufacture, importation or distribution of all or part of any
Toyota Product, whether motor vehicle, parts, options, or
accessories, including any model, series, or body style of any
Toyota Motor Vehicle at any time without any obligation or
liability to DEALER by reason thereof.
J. MINIMUM VEHICLE INVENTORIES
Subject to the ability of DISTRIBUTOR to supply Toyota Motor
Vehicles to DEALER, DEALER agrees that it shall, at all times,
maintain at least the minimum inventory of Toyota Motor
Vehicles as may be established by DISTRIBUTOR from time to
time. DEALER also agrees that it shall ha~e available at all
times, for purposes of display and demonstration, the number
of Toyota Motor Vehicles of the most current models as may be
established by DISTRIBUTOR from time to time, and shall, at
all times, maintain such Motor Vehicles in showroom ready
condition.
K. PRODUCT MODIFICATIONS
DEALER agrees that it will not make any modifications to
Toyota Products that may impair or adversely affect a
vehicle's safety, emissions or structural integrity.
XIV. DEALER MARKETING OF TOYOTA PRODUCTS
A. DEALER'S SALES RESPONSIBILITIES
DEALER recognizes that customer satisfaction and the
successful promotion and sale of Toyota Products are
significantly dependent on DEALER's advertising and sales
promotion activities. DEALER shall actively and effectively
promote, through DEALER's own advertising and sales promotion
activities, the purchase of Toyota Products by customers.
Therefore, DEALER at all times shall:
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<PAGE> 11
1. Actively and effectively advertise, merchandise,
promote and sell Toyota Products;
2. Maintain an adequate, stable and trained sales
organization, and, to that end, make all reasonable
efforts to ensure that its sales personnel attend all
sales training courses prescribed by DISTRIBUTOR at
DEALER's expense;
3. Maintain high standards of ethics in advertising,
promoting and selling Toyota Products and avoid
engaging in any misrepresentation or unfair or
deceptive practices; and
4. Accurately represent to customers the total selling
price of Toyota Products. DEALER agrees to explain to
customers of Toyota Products the items that make up
the total selling price and to give the customers
itemized statements and all other information
required by law. DEALER understands and hereby
acknowledges that it may sell Toyota Products at
whatever price DEALER desires.
B. EXPORT PROHIBITION
DEALER is authorized to sell Toyota Motor Vehicles only to
customers located in the continental United States. DEALER
agrees that it will not sell Toyota Motor Vehicles for resale
or use outside the continental United States. DEALER agrees
to abide by any export policy established by DISTRIBUTOR.
C. USED VEHICLES
DEALER agrees to display, promote and sell used vehicles at
the Approved Location. DEALER shall maintain for resale an
inventory of used vehicles.
D. ASSISTANCE PROVIDED BY DISTRIBUTOR
1. SALES TRAINING ASSISTANCE
To assist DEALER in the fulfillment of its sales
responsibilities under this Agreement, DISTRIBUTOR
agrees to offer general and specialized sales
management and sales training programs for the
benefit and use of DEALER's sales organization. When
requested by DISTRIBUTOR, DEALER's personnel shall
participate in such programs at DEALER's expense.
2. SALES PROMOTION ASSISTANCE
In order that authorized Toyota dealers may be
assured of the benefits of comprehensive advertising
and promotion of Toyota Products, DISTRIBUTOR agrees
to establish and maintain general advertising and
promotion programs and will from time to time make
sales promotion and
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campaign materials available to DEALER to promote the
sales of such Toyota Products at a reasonable charge
where applicable.
3. FIELD SALES PERSONNEL ASSISTANCE
To assist DEALER in handling its sales
responsibilities under is Agreement, DISTRIBUTOR
agrees to provide trained field sales personnel to
advise and counsel DEALER on sales-related subjects,
including merchandising, training and sales
management.
XV. DEALER SERVICE OBLIGATIONS
A. CUSTOMER SERVICE STANDARDS
DEALER and DISTRIBUTOR agree that the success and future
growth of DISTRIBUTOR and DEALER are substantially dependent
upon the customer's ability to obtain high-quality vehicle
servicing. Therefore, DEALER agrees to:
1. Take all reasonable steps to provide service of the
highest quality for all Toyota Motor Vehicles,
regardless of where purchased and whether or not
under warranty;
2. Ensure that the customer is advised of the necessary
repairs and that his or her consent is obtained prior
to the initiation of any repairs;
3. Ensure that problems on Toyota Motor Vehicles are
accurately diagnosed and repairs are promptly and
professionally performed; and
4. Ensure that the customer is treated courteously and
fairly at all times.
B. NEW MOTOR VEHICLE PRE-DELIVERY SERVICE
DEALER agrees that prior to delivery of a new Toyota Motor
Vehicle to a customer it shall perform, as directed by
DISTRIBUTOR, pre-delivery service on each Toyota Motor Vehicle
in accordance with Toyota standards. DISTRIBUTOR shall pay
DEALER for such pre-delivery service according to such
directives and the applicable provisions of the Toyota
Warranty Policy and Procedures Manual.
C. WARRANTY AND POLICY SERVICE
DEALER acknowledges that the only warranties of DISTRIBUTOR or
FACTORY applicable to Toyota Products shall be the New Vehicle
Limited Warranty or such other written warranties that may be
expressly furnished or sold by DISTRIBUTOR or FACTORY. Except
for its limited liability under such written warranty or
warranties, DISTRIBUTOR and FACTORY do not assume any other
warranty obligation or liability. DEALER is not authorized to
assume any additional warranty
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obligations or liabilities on behalf of DISTRIBUTOR, IMPORTER
or FACTORY. Any such additional obligations assumed by DEALER
shall be the sole responsibility of DEALER. Any extended
service contract sold by IMPORTER, DISTRIBUTOR or
Toyota-affiliated entity shall be governed by its own terms.
DEALER shall perform warranty service specified by DISTRIBUTOR
in accordance with the Toyota Warranty Policy and Procedures
Manual. DISTRIBUTOR agrees to compensate DEALER for all
warranty work, including labor, diagnosis and Genuine Toyota
Parts and Accessories, in accordance with procedures and at
rates to be announced from time to time by DISTRIBUTOR.
Unless otherwise approved in writing in advance by
DISTRIBUTOR, DEALER shall use only Genuine Toyota Parts and
Accessories when performing Toyota warranty repairs. Warranty
service is provided for the benefit of customers and DEALER
agrees that the customer shall not be obligated to pay any
charges for warranty work or any other services for which
DEALER is reimbursed or paid by DISTRIBUTOR.
D. USE OF PARTS AND ACCESSORIES IN NON-WARRANTY SERVICING
Subject to the provisions set forth below, DEALER has the
right to sell, install or use, for making non-warranty
repairs, products that are not Genuine Toyota Parts or
Accessories.
DEALER acknowledges, however, that its customers expect that
any parts or accessories that DEALER sells, installs or uses
in the sale, repair or servicing of Toyota Motor Vehicles are,
or meet the high quality standards of, Genuine Toyota Parts or
Accessories. DEALER agrees that in sales, repairs or
servicing where DEALER does not use Genuine Toyota Parts or
Accessories, DEALER will only utilize such other parts or
accessories that will not adversely affect the mechanical
operation of the Toyota Motor Vehicle being sold, repaired or
serviced, and that are equivalent in quality and design to
Genuine Toyota Parts or Accessories.
E. WARRANTY DISCLOSURES AS TO NON-GENUINE PARTS AND ACCESSORIES
In order to avoid confusion and to minimize potential customer
dissatisfaction, in any instance where DEALER sells, installs
or uses other than Genuine Toyota Parts or Accessories, DEALER
shall disclose such fact to the customer and shall advise the
customer that these items are not included in warranties
furnished by DISTRIBUTOR. Such disclosure shall be written,
conspicuous and stated on the customer's copy of the service
or repair order or sale document. In addition, DEALER will
clearly explain to the customer the extent of any warranty
covering the parts or accessories involved and will deliver a
copy of the Warranty to the customer.
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F. SERVICE CAMPAIGN INSPECTIONS AND CORRECTIONS
DEALER agrees to perform service campaign inspections and/or
corrections for owners or users of all Toyota Products that
qualify for such inspections and/or corrections. DEALER
further agrees to comply with all DISTRIBUTOR's directives and
with the applicable procedures in the Toyota Warranty Policy
and Procedures Manual relating to those inspections and/or
corrections. DISTRIBUTOR agrees to reimburse DEALER for all
replacement parts and/or other materials required and used in
connection with such work and for labor according to such
directives and the applicable provisions of the Toyota
Warranty Policy and Procedures Manual.
G. COMPLIANCE WITH SAFETY AND EMISSION CONTROL REQUIREMENTS
DEALER agrees to comply and operate consistently with all
applicable provisions of the National Traffic and Motor
Vehicle Safety Act of 1966 and the Federal Clean Air Act, as
amended, including applicable rules and regulations issued
from time to time thereunder, and all other applicable
federal, state and local motor vehicle safety and emission
control statutes, rules and regulations.
In the event that the laws of the state in which DEALER is
located require motor vehicle dealers or distributors to
install in new or used motor vehicles, prior to their retail
sale, any safety devices or other equipment not installed or
supplied as standard equipment by FACTORY, then DEALER, prior
to the sale of any Toyota Motor Vehicle on which such
installations are required, shall properly install such
devices or equipment on such Toyota Motor Vehicles.
DISTRIBUTOR agrees to reimburse DEALER for all parts and/or
other materials required and used in connection with such work
and for labor according to the applicable provisions of the
Toyota Warranty Policy and Procedures Manual. DEALER shall
comply with state and local laws pertaining to the
installation and reporting of such equipment.
In the interest of motor vehicle safety and emission control,
DISTRIBUTOR and DEALER agree to provide to each other such
information and assistance as may reasonably be requested by
the other in connection with the performance of obligations
imposed on either party by the National Traffic and Motor
Vehicle Safety Act of 1966 and the Federal Clean Air Act, as
amended, and their rules and regulations, and all other
applicable federal, state and local motor vehicle safety and
emissions control statutes, rules and regulations.
H. COMPLIANCE WITH CONSUMER PROTECTION STATUTES, RULES AND
REGULATIONS
Because certain customer complaints may impose liability upon
DISTRIBUTOR under various repair or replace laws or other
consumer protection laws and regulations, DEALER agrees to
provide prompt notice to DISTRIBUTOR of such complaints and
take such other steps as DISTRIBUTOR may reasonably require.
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<PAGE> 15
DEALER will do nothing to affect adversely DISTRIBUTOR's
rights under such laws and regulations. Subject to any law or
any regulation to the contrary, DEALER shall be liable to
DISTRIBUTOR for any refunds or vehicle replacements provided
to customer where DISTRIBUTOR reasonably establishes that
DEALER failed to carry out vehicle repairs in accordance with
DISTRIBUTOR's written published policies and procedures or its
express oral instructions subsequently confirmed in writing.
DEALER also agrees to provide applicable required customer
notifications and disclosures as prescribed by repair or
replacement laws or other consumer laws or regulations.
XVI. SERVICE AND PARTS OPERATIONS
A. ORGANIZATION AND STANDARDS
DEALER agrees to organize and maintain an adequate, stable and
trained service and parts organization of the highest quality,
including a qualified Service Manager and a qualified Parts
Manager, and a number of competent customer relations, service
and parts personnel sufficient to meet the needs of the
marketplace in the reasonable opinion of DISTRIBUTOR.
DEALER's personnel will meet the educational, management and
technical training standards established by DISTRIBUTOR.
B. SERVICE EQUIPMENT AND SPECIAL TOOLS
DEALER agrees to acquire and properly maintain adequate
service equipment and such special service tools and
instruments as are specified by DISTRIBUTOR.
C. PARTS INVENTORY
DEALER and DISTRIBUTOR recognize that the owners and users of
Toyota Motor Vehicles may reasonably expect that DEALER will
have Genuine Toyota Parts or Accessories immediately available
for purchase or installation. DEALER, therefore, agrees to
carry in stock at all times during the term of this Agreement
an adequate inventory of Genuine Toyota Parts or Accessories,
as listed in DISTRIBUTOR's current inventory guide, to enable
DEALER to meet its customers' needs and to fulfill its service
responsibilities under this Agreement.
D. ASSISTANCE PROVIDED BY DISTRIBUTOR
1. SERVICE TRAINING ASSISTANCE
To assist DEALER in fulfilling its service and parts
responsibilities under this Agreement, DISTRIBUTOR
agrees to offer general and specialized service and
parts training programs for the benefit and use of
DEALER's service and parts organizations. When
requested by DISTRIBUTOR, DEALER's personnel shall
participate in such programs at DEALER's expense.
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<PAGE> 16
2. MANUALS AND MATERIALS
DISTRIBUTOR agrees to make available to DEALER, at
DEALER's expense, copies of such dealer manuals,
catalogs, bulletins, publications and technical data
as DISTRIBUTOR shall deem to be necessary for the
needs of DEALER's service and parts organization.
DEALER shall be responsible for keeping such manuals,
publications and data current and available for
consultation by its employees.
3. FIELD PERSONNEL ASSISTANCE
To assist DEALER in handling its parts and service
responsibilities under this Agreement, DISTRIBUTOR
agrees to make available qualified field parts and
service personnel who will, from time to time, advise
and counsel DEALER on parts and service-related
subjects, including parts and service policies,
product quality, technical adjustments, repair and
replacement of product components, customer
relations, warranty administration, service and parts
merchandising, and personnel/management training.
XVII. CUSTOMER SATISFACTION RESPONSIBILITIES
A goal of DISTRIBUTOR and DEALER is to be recognized as marketing the
finest products and providing the best service in the automobile
industry. The Toyota name should be synonymous with the highest level
of customer satisfaction. DEALER will take all reasonable steps to
ensure that each customer is completely satisfied with his or her
Toyota Products and the services and practices of DEALER.
Whenever requested by DISTRIBUTOR, DEALER shall:
A. Designate an employee responsible for customer satisfaction
commensurate with the needs of the marketplace; and
B. Provide a detailed written plan of DEALER's customer
satisfaction program to DISTRIBUTOR and implement such program
on a continuous basis. This plan shall include an ongoing
system for:
1. Emphasizing customer satisfaction to all DEALER's
employees;
2. Training DEALER's employees, including participation
in DISTRIBUTOR's customer satisfaction training at
DEALER's expense; and
3. Responding immediately to, and resolving promptly,
requests for customer assistance, and conveying to
customers that DEALER is committed to the highest
possible level of customer satisfaction.
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XVIII. DEALERSHIP FACILITIES AND IDENTIFICATION
A. FACILITIES
1. In order for DISTRIBUTOR to establish an effective
network of authorized Toyota dealers, DEALER shall
provide, and at all times maintain, attractive
dealership facilities at the Approved Location(s)
that satisfy the image, size, layout, interior
design, color, equipment, identification and other
factors established by DISTRIBUTOR. DEALER shall
meet the minimum facility standards and policies
established by DISTRIBUTOR which can be amended from
time to time.
2. To assist DEALER in planning, building, or remodeling
dealership facilities, DISTRIBUTOR will provide
DEALER, upon request, a Toyota Dealer Facility
Planner and will assist in identifying sources from
which DEALER may purchase architectural materials and
furnishings that meet Toyota standards and
guidelines. In addition, representatives of
DISTRIBUTOR will be available to DEALER from time to
time to counsel and advise DEALER in connection with
DEALER's planning and equipping the dealership
premises.
B. DEALER'S OPERATING HOURS
DEALER agrees to keep all of its dealership operations open
for business during all days and hours that are customary and
lawful for such operations in the community or locality in
which DEALER is located and in accordance with industry
standards. The dealership shall not be considered open unless
all sales, service and parts operations are open to the public
and dealership personnel are present to assist customers.
C. SIGNS
Subject to applicable governmental ordinances, regulations,
and statutes, DEALER agrees to comply with IMPORTER's signage
program and to display only standard authorized signage which
conforms to the approved corporate identification program.
D. USE OF TOYOTA MARKS
1. USE BY DEALER
DISTRIBUTOR grants to DEALER the non-exclusive
privilege of displaying or otherwise using authorized
Toyota Marks as specified in the Toyota Brand Graphic
Standards Manual at the Approved Location(s) in
connection with the selling or servicing of Toyota
Products.
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<PAGE> 18
DEALER further agrees that it promptly shall
discontinue the display and use of any Toyota Marks,
or shall change the manner in which any Toyota Marks
are displayed and used, when for any reason it is
requested to do so by DISTRIBUTOR. DEALER may use
the Toyota Marks as specified in the Toyota Brand
Graphic Standards Manual only at Approved Location(s)
and for such purposes as are specified in this
Agreement. DEALER agrees that such Toyota Marks may
be used as part of the name under which DEALER's
business is conducted only with the prior written
approval of DISTRIBUTOR.
DEALER shall discontinue any advertising that
DISTRIBUTOR may find to be injurious to DISTRIBUTOR's
business or reputation or the Toyota Marks.
2. DISCONTINUANCE OF USE
Upon termination, non-renewal, or expiration of this
Agreement, DEALER agrees that it shall immediately:
a. Discontinue the use of Toyota Marks, or any
semblance of same, including without
limitation, the use of all stationery,
telephone directory listing, and other
printed material referring in any way to
Toyota or bearing any Toyota Mark,
b. Discontinue the use of the Toyota Marks, or
any semblance of same, as part of its
business or corporate name, and file a change
or discontinuance of such name with
appropriate authorities;
c. Remove all product signs bearing Toyota
Marks. Product signs owned by DEALER shall
be removed and disposed of at DEALER's sole
cost and expense. Product signs leased to
DEALER by or through IMPORTER or its
representative shall be removed from DEALER's
premises at IMPORTER's sole cost and expense.
DEALER hereby grants permission for
DISTRIBUTOR to enter upon DEALER's premises
to remove signs leased to DEALER by IMPORTER;
d. Cease representing itself as an authorized
Toyota Dealer; and
e. Refrain from any action, including without
limitation, any advertisement, statement or
implication that it is authorized to sell or
distribute Toyota Products.
In the event DEALER fails to comply promptly with the
terms and conditions of this Section, DISTRIBUTOR
shall have the right to enter upon DEALER's premises
and remove, without notice or liability, all such
product signs and identification bearing the Toyota
Marks. DEALER agrees that it shall
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reimburse DISTRIBUTOR for any costs and expenses
incurred in the removal of signs owned by DEALER
bearing the Toyota Marks, including reasonable
attorney fees.
XIX. EVALUATION OF DEALER'S PERFORMANCE
DEALER acknowledges the importance of its overall performance in
relation to the purposes and objectives of this Agreement.
DISTRIBUTOR will periodically evaluate DEALER's performance of its
responsibilities in the areas of sales, service and parts, facilities
and customer satisfaction, based upon such reasonable criteria as
DISTRIBUTOR my establish from time to time, DISTRIBUTOR agrees to
review all such evaluations with DEALER and will provide DEALER a copy
thereof. Where performance is below acceptable standards of
DISTRIBUTOR, DEALER agrees to take prompt action to improve its
performance and, if requested by DISTRIBUTOR, to notify DISTRIBUTOR in
writing of its detailed plans and timetables for accomplishing those
improvements.
A. SALES PERFORMANCE EVALUATION
Pursuant to Section XIV herein, DISTRIBUTOR will evaluate
DEALER's sales performance under criteria established by
DISTRIBUTOR, which may include, but is not limited to, the
achievement of reasonable sales objectives as DISTRIBUTOR may
establish; comparisons of DEALER's sales and/or registrations
to those of comparable Toyota dealers and other line makes
within DEALER's Primary Market Area or such area(s) which
DISTRIBUTOR believes is a reasonable basis for comparison;
sales performance trends over a reasonable period of time; and
the manner in which DEALER has conducted its sales and
marketing operations.
B. SERVICE PERFORMANCE EVALUATION
Pursuant to Sections XV and XVI herein, DISTRIBUTOR will
evaluate DEALER's service performance in such areas as,
without limitation, warranty management, compliance with the
Toyota Warranty Policy and Procedures Manual, service
management, service operating procedures, service staffing and
training, administration, service facilities and equipment,
new vehicle pre-delivery service, customer handling and
customer retention.
C. PARTS PERFORMANCE EVALUATION
Pursuant to Section XVI herein, DISTRIBUTOR will evaluate
DEALER's parts performance in such areas as, without
limitation, general parts management, parts operating
procedures, parts staffing and training, parts facilities,
parts inventory management, parts sales, accessory sales,
parts merchandising and parts availability to customers.
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D. CUSTOMER SATISFACTION PERFORMANCE EVALUATION
Pursuant to Section XVII, herein, DISTRIBUTOR will evaluate
DEALER's performance of its responsibilities in the area of
customer satisfaction based on the following considerations:
1. DISTRIBUTOR will provide DEALER with customer
satisfaction reports or such other equivalent data as
will permit DEALER to assess its performance and
maintain the highest level of customer satisfaction.
DEALER agrees to review with its employees on a
regular basis the results of the customer
satisfaction reports or other data it receives.
2. DEALER agrees to develop, implement and review with
DISTRIBUTOR specific action plans for improving
results in the event that DEALER is below the average
customer satisfaction levels for other Toyota dealers
in such areas that DISTRIBUTOR believes are a
reasonable basis for comparison. DEALER shall
respond on a timely basis to requests from
DISTRIBUTOR to take action on unsatisfactory customer
satisfaction matters and to commit necessary
resources to remedy deficiencies reasonably specified
by DISTRIBUTOR, and DEALER shall remedy those
deficiencies. DISTRIBUTOR reserves the right to
establish reasonable, uniform criteria to be used to
evaluate DEALER.
E. DEALERSHIP FACILITIES EVALUATION
Pursuant to Section XVIII, herein, DISTRIBUTOR will evaluate
DEALER's performance of its responsibilities in the area of
dealership facilities.
XX. CAPITAL, CREDIT, RECORDS AND UNIFORM SYSTEMS
A. NET WORKING CAPITAL
The amount and structure of the net working capital required
to properly conduct the business of DEALER depends upon many
factors, including the nature, size and volume of DEALER's
vehicle sales, service and parts operations. Therefore,
DEALER agrees to establish and maintain actual net working
capital in an amount not less than the minimum net working
capital specified in a separate Minimum Net Working Capital
Agreement executed by DEALER and DISTRIBUTOR concurrently with
this Agreement. If, either because of changed conditions or
because DISTRIBUTOR adopts a new net working capital formula,
DISTRIBUTOR shall have the right to revise DEALER's minimum
net working capital requirement to be used in DEALER's
operation. If so revised, DEALER agrees to enter into the
revised Minimum Net Working Capital Agreement and to meet the
new standard within a reasonable period of time as established
by DISTRIBUTOR.
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B. FLOORING LINE
DEALER recognizes that its ability to fulfill its obligations
under this Agreement is dependent upon its maintenance of
flooring which is sufficient to sustain its ongoing
operations. DEALER agrees to obtain and maintain at all times
a confirmed and adequate flooring line with a bank or
financial institution or other method of financing acceptable
to DISTRIBUTOR to enable DEALER to perform its obligations
pursuant to this Agreement. Subject to the foregoing
obligations, DEALER is free to do its financing business,
wholesale, retail or both, with whomever it chooses and to the
extent it desires.
C. PAYMENT TERMS AND SETTLEMENT OF ACCOUNTS
All monies or accounts due DEALER from DISTRIBUTOR will be
considered net of DEALER's obligations to DISTRIBUTOR on
DEALER's parts/open account. DISTRIBUTOR may deduct or offset
any amounts due or to become due from DEALER to DISTRIBUTOR,
or any amounts held by DISTRIBUTOR, from or against any sums
or accounts due or to become due from DISTRIBUTOR to DEALER.
Payments by DEALER to DISTRIBUTOR shall be made by electronic
bank draft or in any other manner prescribed by DISTRIBUTOR
and shall be applied against DEALER's indebtedness in
accordance with DISTRIBUTOR's policies and practices.
DISTRIBUTOR shall have the right to apply payments received
from DEALER to any amount owed to DISTRIBUTOR, in
DISTRIBUTOR's sole discretion. All obligations owed by DEALER
to DISTRIBUTOR shall be due and payable when billed, unless
other terms are established by DISTRIBUTOR in writing.
Under no circumstances will DISTRIBUTOR enter into a new
Agreement with a proposed transferee unless DEALER first makes
arrangements acceptable to DISTRIBUTOR to satisfy any
outstanding obligations to DISTRIBUTOR on DEALER's parts/open
account.
D. UNIFORM ACCOUNTING SYSTEM
DEALER agrees to maintain its financial books and records in
accordance with the Toyota Dealer Accounting Manual, as
amended from time to time by DISTRIBUTOR. In addition, DEALER
shall furnish to DISTRIBUTOR, who may also furnish it to
IMPORTER and FACTORY, complete and accurate financial and
operating information by the tenth (l0th) of each month in a
format prescribed by DISTRIBUTOR. This information shall
include, without limitation, a complete and accurate financial
and operating statement covering the preceding month and
calendar year-to-date operations, including any adjusted
year-end statements, showing the true condition of DEALER's
business. All such information shall be furnished by DEALER
to DISTRIBUTOR via DISTRIBUTOR's electronic communications
network and/or in hard copy and/or in any other manner
designated by DISTRIBUTOR.
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E. RECORDS MAINTENANCE
DEALER agrees to keep complete, accurate and current records
regarding its sale, lease and servicing of Toyota Products for
a minimum of five (5) years, regardless of any retention
period required by any governmental entity. DEALER shall
prepare, keep current and retain records in support of
requests for reimbursement for warranty and policy work
performed by DEALER in accordance with the IMPORTER's Toyota
Warranty Policy and Procedures Manual.
F. EXAMINATION OF DEALERSHIP ACCOUNTS AND RECORDS
DISTRIBUTOR, in its sole discretion, without notice and for
any reason whatsoever, shall have the right during regular
business hours to inspect DEALER's facilities and to examine,
audit and to reproduce all records, accounts and supporting
data relating to the operations of DEALER, including without
limitation, sales, sales reporting, service and repair of
Toyota Products by DEALER. If requested by DEALER,
DISTRIBUTOR agrees to review any report with DEALER and to
provide a copy of any report of the examination or audit of
DEALER.
G. TAXES
DEALER shall be responsible for and duly pay all taxes of any
kind, including, but not limited to, sales taxes, use taxes,
excise taxes and other governmental municipal charges imposed,
levied or based upon the sale of Toyota Products by DEALER,
and shall maintain accurate records of the same.
H. CONFIDENTIALITY
Except as provided in Sections XX(D) above and XXI(A), below,
DISTRIBUTOR agrees that it shall not provide any financial
information, documents or other information submitted to it by
DEALER to any third party, other than subsidiary and parent
corporations of DISTRIBUTOR, unless authorized by DEALER,
required by law, required to effectuate the terms and
conditions of this Agreement, or required to generate
composite or comparative data for analytical purposes.
DEALER agrees to keep confidential and not to disclose,
directly or indirectly, any information that DISTRIBUTOR
designates as confidential.
I. INFORMATION COMMUNICATION SYSTEMS
To facilitate the accurate and prompt reporting of such
relevant dealership operational and financial information as
DISTRIBUTOR may require, DEALER agrees to install and maintain
electronic communication processing facilities which are
compatible with and which will facilitate the transmission and
reception of such information on the electronic communications
network utilized by DISTRIBUTOR.
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J. SALES REPORTING
DEALER agrees to report accurately to DISTRIBUTOR, together
with such information as DISTRIBUTOR may reasonably require,
the delivery of each new motor vehicle to a purchaser by the
end of the day in which the vehicle is delivered to the
purchaser thereof; and to furnish DISTRIBUTOR with such other
reports in such form as DISTRIBUTOR may reasonably require
from time to time.
XXI. RIGHT OF FIRST REFUSAL OR OPTION TO PURCHASE
A. RIGHTS GRANTED
If a proposal to sell the dealership's assets or transfer its
ownership is submitted by DEALER to DISTRIBUTOR, or in the
event of the death of the majority Owner of DEALER,
DISTRIBUTOR has a right of first refusal or option to purchase
the dealership assets or stock, including any leasehold
interests or realty. DISTRIBUTOR's exercise of its right or
option under this Section supersedes any right or attempt by
DEALER to transfer its interest in, or ownership of, the
dealership. DISTRIBUTOR's right or option may be assigned by
it to any third party and DISTRIBUTOR hereby guarantees the
full payment to DEALER of the purchase price by such assignee.
DISTRIBUTOR may disclose the terms of any pending buy/sell
agreement and any other relevant dealership performance
information to any potential assignee. DISTRIBUTOR's rights
under this Section will be binding on and enforceable against
any successor in interest of DEALER or purchaser of DEALER's
assets or stock.
B. EXERCISE OF DISTRIBUTOR'S RIGHTS
DISTRIBUTOR shall have thirty (30) days from the following
events within which to exercise its right of first refusal or
option to purchase: (i) DISTRIBUTOR's receipt of all data
and documentation customarily required by it to evaluate a
proposed transfer of ownership; (ii) DISTRIBUTOR's receipt of
written notice from DEALER of the death of the majority Owner
of DEALER; or (iii) DISTRIBUTOR's disapproval of any
application submitted by an Owner's heirs pursuant to Section
XXII. DISTRIBUTOR's exercise of its right of first refusal
under this Section shall neither be dependent upon nor require
its prior consideration of or refusal to approve the proposed
buyer or transferee.
C. RIGHT OF FIRST REFUSAL
If DEALER has entered into a bona fide written agreement to
sell its dealership stock or assets, DISTRIBUTOR's right under
this Section is a right of first refusal, enabling DISTRIBUTOR
to assume the buyer's rights and obligations under such
agreement, and to terminate this Agreement and all rights
granted DEALER. Upon DISTRIBUTOR's request, DEALER agrees to
provide other documents relating to the proposed transfer and
any other information which DISTRIBUTOR deems
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appropriate, including, but not limited to, those reflecting
other agreements or understandings between the parties to the
buy/sell agreement. Refusal to provide such documentation or
to state in writing that no such documents exist shall create
the presumption that the buy/sell agreement is not a bona fide
agreement.
D. OPTION TO PURCHASE
In the event of the death of the majority Owner of DEALER or
if DEALER submits a proposal which DISTRIBUTOR reasonably
believes is not bona fide, DISTRIBUTOR has the option to
purchase the principal assets of DEALER utilized in the
dealership business, including real estate and leasehold
interests, and to cancel this Agreement and the rights granted
DEALER. The terms and conditions of the purchase of the
dealership assets will be determined by good faith
negotiations between the parties. If an agreement cannot be
reached, those terms will be exclusively determined by
arbitration in accordance with the commercial arbitration
rules of the American Arbitration Association. The site of
the arbitration shall be the office of the American
Arbitration Association in the locality of DISTRIBUTOR's
principal place of business.
E. DEALER'S OBLIGATIONS
Upon DISTRIBUTOR's exercise of its right or option and tender
of performance hereunder, DEALER shall forthwith transfer the
affected real property by warranty deed or its equivalent,
conveying marketable title free and clear of all liens,
claims, mortgages, encumbrances, interests and occupancies.
The warranty deed or its equivalent shall be in proper form
for recording, and DEALER shall deliver complete possession of
the property and deed at the time of closing. DEALER shall
also furnish to DISTRIBUTOR all copies of any easements,
licenses or other documents affecting the property or
dealership operations and shall assign any permits or licenses
that are necessary or desirable for the use of or appurtenant
to the property or the conduct of such dealership operations.
DEALER shall also forthwith execute and deliver to DISTRIBUTOR
instruments satisfactory to DISTRIBUTOR conveying title to all
affected personal property and leasehold interests involved in
the transfer or sale to DISTRIBUTOR. If any personal property
is subject to any lien or charge of any kind, DEALER agrees to
procure the discharge and satisfaction thereof prior to the
closing of sale of such property to DISTRIBUTOR.
F. NO APPLICABILITY TO NOMINATED SUCCESSOR
Section XXI shall not apply to any DEALER whose proposed
transfer of assets or ownership is to a candidate who is
currently approved by DISTRIBUTOR to be DEALER's nominated
successor pursuant to Section XXII(C).
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XXII. SUCCESSION RIGHTS UPON DEATH OR INCAPACITY
A. SUCCESSION TO OWNERSHIP AFTER DEATH OF OWNER
In the event that Owner dies and his or her interest in
Dealership passes directly to any person or persons ("Heirs")
who wish to succeed to Owner's interest, then Owner's legal
representative must notify DISTRIBUTOR within sixty (60) days
of the death of the Owner of such Heir's or Heirs' intent to
succeed Owner. The legal representative also must then
designate a proposed General Manager for DISTRIBUTOR approval.
The effect of such notice from Owner's legal representative
will be to suspend any notice of termination provided for in
Section XXIII(B)(4) issued hereunder.
Upon delivery of such notice, Owner's legal representative
shall immediately request any person(s) identified by it as
intending to succeed Owner and the designated candidate for
General Manager to submit an application and to provide all
personal and financial information that DISTRIBUTOR may
reasonably and customarily require in connection with its
review of such applications. All requested information must
be provided promptly to DISTRIBUTOR and in no case later than
thirty (30) days after receipt of such request from Owner's
legal representative. Upon the submission of all requested
information, DISTRIBUTOR agrees to review such application(s)
pursuant to the then current criteria generally applied by
DISTRIBUTOR in qualifying dealer Owners and/or General
Managers. DISTRIBUTOR shall either approve or disapprove the
application(s) within ninety (90) days of full compliance with
all DISTRIBUTOR's requests for information. If DISTRIBUTOR
approves the application(s), it shall offer to enter into a
new Toyota Dealer Agreement with Owner's Heir(s) in the form
then currently in use, subject to such additional conditions
and for such a term as DISTRIBUTOR deems appropriate.
In the event that DISTRIBUTOR does not approve the designated
Heir(s) or designated candidate for General Manager, or if the
Owner's legal representative withdraws his or her notice of
the Heir(s) intent to succeed as Owner(s), or if the legal
representative or any proposed owners or General Manager fails
to timely provide the required information, DISTRIBUTOR may
reinstate or issue a notice of termination. Nothing in this
Section shall constitute a waiver of DISTRIBUTOR's right under
Section XXI to exercise its right of first refusal or option
to purchase.
B. INCAPACITY OF OWNER
The parties agree that, as used herein, incapacity shall refer
to any physical or mental ailment that, in DISTRIBUTOR's
opinion, adversely affects Owner's ability to meet his other
obligations under this Agreement. DISTRIBUTOR may terminate
this Agreement when an incapacitated Owner also is the General
Manager identified herein.
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Prior to the effective date of any notice of termination, an
incapacitated Owner who is also the General Manager, or his or
her legal representative, may propose a new candidate for the
position of General Manager. Such proposal shall be in
writing and shall suspend any pending notice of termination
until DISTRIBUTOR advises DEALER of its approval or
disapproval of the new candidate. Upon receipt of such
notice, DISTRIBUTOR and DEALER shall follow the qualification
procedures set forth in subsection (A) above.
C. NOMINATION OF SUCCESSOR PRIOR TO DEATH OR INCAPACITY OF OWNER
An Owner owning a majority of DEALER's stock may nominate a
candidate to assume ownership and/or the position of General
Manager of the dealership upon his or her death or incapacity.
As soon as practicable after such nomination, DISTRIBUTOR will
request such personal and financial information from the
nominated Owner and/or General Manager candidate as it
reasonably and customarily may require in evaluating such
candidates. DISTRIBUTOR shall apply criteria then currently
used by DISTRIBUTOR in qualifying Owners and/or General
Managers of authorized dealers. Upon receipt of all requested
information, DISTRIBUTOR shall either approve or disapprove
such candidate. Approval by DISTRIBUTOR will not be
unreasonably withheld. In the event of the death or
incapacity of the nominating Owner, DISTRIBUTOR will enter
into a new Toyota Dealer Agreement with the approved nominee
of a length to be determined by DISTRIBUTOR. DISTRIBUTOR
agrees that DEALER may renominate the candidate after the
expiration of this Agreement, and DISTRIBUTOR will approve
such nomination provided: (1) DISTRIBUTOR and DEALER have
entered into a new Toyota Dealer Agreement; and (2) the
proposed candidate continues to comply with the then current
criteria used by DISTRIBUTOR in qualifying such candidates.
If DISTRIBUTOR does not initially qualify the candidate,
DISTRIBUTOR agrees to review the reason(s) for its decision
with Owner. Owner is free at any time to renew its
nomination. However, in such instances, the candidate must
again qualify pursuant to the then current criteria. Owner
may, by written notice, withdraw a nomination at any time,
even if DISTRIBUTOR has previously qualified said candidate.
XXIII. TERMINATION
A. VOLUNTARY TERMINATION BY DEALER
DEALER may voluntarily terminate this Agreement at any time by
written notice to DISTRIBUTOR. Termination shall be effective
thirty (30) days after receipt of the notice by DISTRIBUTOR,
unless otherwise mutually agreed in writing.
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B. TERMINATION FOR CAUSE
1. IMMEDIATE TERMINATION
DEALER and DISTRIBUTOR agree that the following
conduct is within DEALER's control and is so contrary
to the goals, purposes and objectives of this
Agreement as to warrant its immediate termination.
Accordingly, DEALER agrees that if it engages in any
of the following types of conduct, DISTRIBUTOR shall
have the right to terminate this Agreement
immediately:
a. If DEALER fails to conduct any customary
dealership operations for seven consecutive
business days during DEALER's customary
business hours, except in the event such
closure or cessation of operation is caused
by some physical event beyond the control of
DEALER, such as fires, floods, earthquakes,
or other acts of God;
b. If DEALER becomes insolvent, or files any
petition under bankruptcy law, or executes an
assignment for the benefit of creditors, or
appoints a receiver or trustee or another
officer having similar powers is appointed
for DEALER and is not removed within thirty
(30) days from his appointment thereto or
there is any levy under attachment or
execution or similar process which is not
vacated or removed by payment or bonding
within ten (10) days;
c. If DEALER, or any Owner or officer or parent
company of DEALER, is convicted of any
felony;
d. If DEALER or any Owner, officer or General
Manager of DEALER makes any material
misrepresentation to DISTRIBUTOR, including,
but not limited to, any misrepresentations
made by DEALER to DISTRIBUTOR in applying for
this Agreement or for approval as Owner or
General Manager of DEALER;
e. If DEALER fails to obtain or maintain any
license, permit or authorization necessary
for the conduct by DEALER of his or her
business pursuant to this Agreement, or such
license, permit or authorization is suspended
or revoked; or
f. If DEALER makes any attempted or actual sale,
transfer or assignment by DEALER of this
Agreement or any of the rights granted DEALER
hereunder, or upon any attempted or actual
transfer, assignment or delegation by DEALER
of any of the responsibilities assumed by it
under this Agreement without the prior
written approval of DISTRIBUTOR.
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2. TERMINATION UPON SIXTY DAYS NOTICE
The following conduct violates the terms and
conditions of this Agreement and, if DEALER engages
in such conduct, DISTRIBUTOR shall have the right to
terminate this Agreement upon sixty (60) days notice:
a. Appointment of a new General Manager without
the prior written approval of DISTRIBUTOR;
b. Conducting, directly or indirectly, any
Toyota dealership operation at any location
other than at the Approved Location(s);
c. Failure of DEALER to make any payments to
DISTRIBUTOR when due;
d. Failure of DEALER to establish or maintain
during the existence of this Agreement the
required net working capital or adequate
flooring line;
e. Any dispute, disagreement or controversy
among Owners, partners, managers, officers or
stockholders of DEALER that, in the
reasonable opinion of DISTRIBUTOR, adversely
affects the ownership, operation, management,
business, reputation or interests of DEALER
or DISTRIBUTOR;
f. Impairment of the reputation or financial
standing of DEALER, Owner, officer or parent
company subsequent to the execution of this
Agreement;
g. Refusal to permit DISTRIBUTOR to examine or
audit DEALER's accounting records as provided
herein upon receipt by DEALER from
DISTRIBUTOR of written notice requesting such
permission or information;
h. Failure of DEALER to furnish all required
sales or financial information and related
supporting information in a timely manner;
i. Any civil, criminal or administrative
liability found against DEALER or any Owner,
officer or parent company of DEALER for any
automotive-related matter which adversely
affects the ownership, operation, management,
reputation, business or interests of DEALER,
or impairs the goodwill associated with the
Toyota Marks; or
j. Breach or violation by DEALER of any other
term or provision of this Agreement.
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3. TERMINATION FOR FAILURE OF PERFORMANCE
If, upon evaluation of DEALER's performance pursuant
to Section XIX, herein, DISTRIBUTOR concludes that
DEALER has failed to perform adequately its sales,
service, parts or customer satisfaction
responsibilities or to provide adequate dealership
facilities, DISTRIBUTOR shall notify DEALER in
writing of such failure(s) and will endeavor to
review promptly with DEALER the nature and extent of
such failure(s), and will grant DEALER 180 days or
such other period as may be required by law to
correct such failure(s). If DEALER fails or refuses
to correct such failure(s) or has not made
substantial progress towards remedying such
failure(s) at the expiration of such period,
DISTRIBUTOR may terminate this Agreement upon sixty
(60) days notice or such other notice as may be
required by law. Section XXIII(B)(3) shall not be
applicable where DEALER has relocated without
DISTRIBUTOR's approval.
4. TERMINATION UPON DEATH OR INCAPACITY
DISTRIBUTOR may terminate this Agreement in the event
of the death of an Owner or upon the incapacity of
any Owner who is also the General Manager identified
herein, upon written notice to DEALER and/or such
Owner's legal representative. Termination upon
either of these events shall be effective ninety (90)
days from the date of such notice.
C. NOTICE OF TERMINATION
Any notice of termination under this Agreement shall be in
writing and shall be mailed to DEALER or its General Manager
at DEALER's Approved Location by certified mail, return
receipt requested, or shall be delivered in person to the
dealership. Such notice shall be effective upon the date of
receipt. DISTRIBUTOR need not state all grounds on which it
relies in its termination of DEALER, and shall have the right
to amend such notice as appropriate. DISTRIBUTOR's failure to
refer to any additional grounds for termination shall not
constitute a waiver of its right later to rely upon such
grounds.
D. CONTINUANCE OF BUSINESS RELATIONS
Upon receipt of any notice of termination or non-renewal,
DEALER agrees to conduct itself and its operation until the
effective date of termination or non-renewal in a manner that
will not injure the reputation or goodwill of the Toyota Marks
or DISTRIBUTOR.
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E. REPURCHASE PROVISIONS
1. DISTRIBUTOR'S OBLIGATIONS
Upon the expiration or termination of this Agreement
(other than pursuant to an approved agreement to sell
the dealership business or assets or to otherwise
transfer the ownership of DEALER), DISTRIBUTOR shall
repurchase from DEALER the following:
a. New, unused, never titled, unmodified,
undamaged, current model year Toyota Motor
Vehicles with less than 100 miles, then
unsold in DEALER's inventory. The prices of
such Motor Vehicles shall be the same as
those at which they were originally purchased
by DEALER, less all prior refunds or other
allowances made by DISTRIBUTOR to DEALER with
respect thereto.
b. New, unused and undamaged Toyota parts and
accessories, contained in the original
packaging, then unsold in DEALER's inventory
that are in good and saleable condition. The
prices for such parts and accessories shall
be the prices last established by DISTRIBUTOR
for the sale of identical parts or
accessories to dealers in the area in which
DEALER is located.
c. Special service tools recommended by
DISTRIBUTOR and then owned by DEALER and that
are especially designed for servicing Toyota
Motor Vehicles. The prices for such special
service tools will be the price paid by
DEALER less appropriate depreciation, or such
other price as the parties may negotiate.
d. Signs that DISTRIBUTOR has recommended for
identification of DEALER and are owned by
DEALER. The price of such signs shall be the
price paid by DEALER less appropriate
depreciation or such other price as the
parties may negotiate.
2. RESPONSIBILITIES OF DEALER
DISTRIBUTOR's obligations to repurchase the items set
forth in this Section are contingent upon DEALER
fulfilling the following obligations:
a. Within thirty (30) days after the date of
expiration or the effective date of
termination of this Agreement, DEALER shall
deliver or mail to DISTRIBUTOR a detailed
inventory of all items referred to in this
Section which it requests DISTRIBUTOR to
repurchase and shall certify that such list
is true and accurate.
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b. DEALER shall be entitled to request
repurchase of only those items which it
purchased from DISTRIBUTOR, unless
DISTRIBUTOR agrees otherwise.
c. Products and special service tools to be
repurchased by DISTRIBUTOR from DEALER shall
be delivered by DEALER to DISTRIBUTOR's place
of business at DEALER's expense.
d. DEALER will execute and deliver to
DISTRIBUTOR instruments satisfactory to
DISTRIBUTOR conveying good and marketable
title to the aforesaid items to DISTRIBUTOR.
If such items are subject to any lien or
charge of any kind, DEALER will procure the
discharge in satisfaction thereof prior to
their repurchase by DISTRIBUTOR.
e. DEALER will remove, at its own expense, all
signage bearing Toyota marks which it owns
from DEALER's Approved Location(s) before it
is eligible for payment for any repurchased
items pursuant to Section XXIII(E).
3. PAYMENT BY DISTRIBUTOR
DISTRIBUTOR will pay DEALER for such items as DEALER
may request be repurchased and that qualify hereunder
as soon as practicable upon DEALER's compliance with
the obligations set forth herein and upon computation
of any outstanding indebtedness of DEALER to
DISTRIBUTOR. DISTRIBUTOR shall have the right to
offset from any amounts due to DEALER hereunder the
total sum of DEALER's outstanding indebtedness to
DISTRIBUTOR.
If DEALER disagrees with DISTRIBUTOR's valuation of
any item herein, and DEALER and DISTRIBUTOR have not
resolved their disagreement within sixty (60) days of
the effective date of termination or expiration of
this Agreement, DISTRIBUTOR shall pay to DEALER the
amount to which it reasonably believes DEALER is
entitled. DEALER's exclusive remedy to recover any
additional sums that it believes is due under this
Section shall be by resort to any existing
Alternative Dispute Resolution program established by
DISTRIBUTOR that is binding on DISTRIBUTOR. If no
Alternative Dispute Resolution program is then
existing, DEALER's exclusive remedy shall be by
resort to arbitration in accordance with the
commercial arbitration rules of the American
Arbitration Association (AAA). The site of the
arbitration shall be the office of the AAA in the
locality of DISTRIBUTOR's principal place of
business.
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XXIV. MANAGEMENT OF DISPUTES
A. ALTERNATIVE DISPUTE RESOLUTION PROGRAMS
DISTRIBUTOR and DEALER acknowledge that disputes involving the
performance of this Agreement may from time to time arise that
cannot be resolved at the DISTRIBUTOR level. In order to
minimize the effects of such disputes on their business
relationship, the parties agree to participate in such
Alternative Dispute Resolution programs, including mediation,
as may be established by DISTRIBUTOR in its sole discretion.
It is expressly understood that, unless otherwise specified in
this Agreement, the results of any Alternative Dispute
Resolution program will not be binding upon DEALER, but shall
be binding upon DISTRIBUTOR. The parties' commitment to
support and participate in Alternative Dispute Resolution
programs specifically is not a waiver of DEALER's right to
later resort to litigation before any judicial or
administrative forum.
B. APPLICABLE LAW
This Agreement shall be governed by and construed according to
the laws of the state in which DEALER is located.
C. MUTUAL RELEASE
Each party hereby releases the other from any and all claims
and causes of action that it may have against the other for
money damages arising from any event occurring prior to the
date of execution of this Agreement, except for any accounts
payable by one party to the other as a result of the purchase
of any Toyota Products, audit adjustments or reimbursement for
any services. This release does not extend to claims which
either party does not know or reasonably suspect to exist in
its favor at the time of the execution of this Agreement.
XXV. DEFENSE AND INDEMNIFICATION
A. DEFENSE AND INDEMNIFICATION BY DISTRIBUTOR
DISTRIBUTOR agrees to assume the defense of DEALER and to
indemnify and hold harmless DEALER, expressly conditioned and
subject to all provisions of Section XXV(C), against loss in
any lawsuit or claim naming DEALER for bodily injury, property
damage or breach of warranty caused solely by an alleged
defect in design, manufacture or assembly of a Toyota Product
(except for tires not manufactured by FACTORY) sold by
DISTRIBUTOR to DEALER for resale that has not been altered,
converted or modified by or for DEALER, provided that the
alleged defect could not reasonably have been discovered by
DEALER during pre-delivery inspection or service or
installation of Toyota Products, less any offset.
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DISTRIBUTOR agrees to defend, to indemnify and hold harmless
DEALER for alleged misrepresentations, misleading statements,
unfair or deceptive trade practices of DISTRIBUTOR, IMPORTER or
FACTORY or any substantial damage to a Toyota Product purchased
by DEALER from DISTRIBUTOR which was improperly repaired by
DISTRIBUTOR unless DEALER has been notified of such damage in
writing prior to retail delivery of the affected Toyota
Product. Notwithstanding any provision of this Agreement,
DISTRIBUTOR shall not be required to defend, to indemnify or
hold harmless DEALER against loss resulting from any claim,
complaint, or action alleging DEALER misconduct, including but
not limited to, improper or unsatisfactory service or repair,
or misrepresentations, or any claim of DEALER's unfair or
deceptive trade practices or any claim of improper
environmental or work place practices or conditions.
B. DEFENSE AND INDEMNIFICATION BY DEALER
DEALER agrees to assume the defense of DISTRIBUTOR, IMPORTER
or FACTORY and to indemnify and hold them harmless, expressly
conditioned and subject to all provisions of Section XXV(C),
against loss in any lawsuit or claim naming DISTRIBUTOR,
IMPORTER or FACTORY, or their subsidiaries or affiliates, when
the claim or lawsuit directly or indirectly involves any
allegations of: (1) DEALER's alleged failure to comply, in
whole or in part, with any obligation assumed by DEALER
pursuant to this Agreement; or (2) DEALER's alleged negligent
or improper repairing or servicing or installation of a new or
used Toyota Motor Vehicle or Toyota Product, or any loss
related to other motor vehicles or equipment, other than
Toyota Motor Vehicles or Products, as may be sold, serviced,
repaired or installed by DEALER; or (3) DEALER's alleged
breach of any contract or warranty other than that provided by
DISTRIBUTOR, IMPORTER or FACTORY; or (4) DEALER's alleged
misleading statements, misrepresentations, or deceptive or
unfair trade practices; or (5) any modification, conversion or
alteration made by or for DEALER to a Toyota Product, except
those made pursuant to the express written approval and
instruction of DISTRIBUTOR, IMPORTER or FACTORY; or (6) any
and all claims arising out of or in any way connected to the
hiring, retention or termination of any person by DEALER,
including but not limited to, claims of employment
discrimination, age, race or sex discrimination or harassment,
wrongful discharge or termination, breach of the covenant of
good faith and fair dealing, breach of contract, interference
with contractual relations, intentional and/or negligent
infliction of emotional distress, defamation, negligent
hiring, violations of or non-compliance with the Occupational
Safety and Health Act, the Fair Labor Standards Act, or the
Employment Retirement Income and Security Act ("ERISA") or any
similar state or local laws.
C. CONDITIONAL DEFENSE AND/OR INDEMNIFICATION
The obligations of the DEALER, DISTRIBUTOR, IMPORTER or
FACTORY to defend, to indemnify and hold harmless are
expressly conditioned and subject to all of the following
terms:
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1. The party initially requesting defense and/or
indemnification shall make such request in writing
and deliver to the other party within twenty (20)
days of service of any legal process or within twenty
(20) days of discovery of facts giving rise to
indemnification, whichever is sooner.
2. The party requesting defense and/or indemnification
covenants, represents and warrants that it, its
agents or employees have not permitted a default
judgment to be entered and have not made any direct
or indirect admissions of liability, and are not
aware of any credible evidence to support any
independent claim of liability or lack of unity of
interest. Said party further agrees to cooperate
fully in the defense of such action as may be
reasonably required.
3. The party requested to defend and/or indemnify shall
have sixty (60) days from receipt of a request in
writing to conduct an investigation or otherwise
determine whether or not, or under what conditions,
it will agree to defend and/or indemnify.
4. During the pendency of a request for defense and/or
indemnification, and thereafter, the requesting party
shall have a continuing duty to avoid undue prejudice
to the other party and to mitigate damages. The
party requesting indemnification shall protect its
own interests until a decision has been made to
assume the defense and/or provide indemnification.
5. The party accepting the request for defense and/or
indemnification shall have the right to engage and
direct counsel of its own choosing and shall have the
obligation to reimburse the requesting party for all
reasonable costs and expenses, including reasonable
attorneys' fees, incurred prior to such assumption
except where the request is made under the
circumstances described in XXV(C)(6), and subject to
the provisions of XXV(C)(9).
6. If subsequent developments in a case, supported by
credible evidence, cause a party to reasonably
conclude that the allegations which initially
preclude a request or acceptance of a request for
defense and/or indemnification are meritless or no
longer at issue, then the request may be retendered.
7. No party shall be required to agree to such a
subsequent request or retender of defense and/or
indemnification where that party would be unduly
prejudiced by such delay. Initial acceptance by any
party of defense and/or indemnification is not a
waiver of the right to retender timely.
8. A party agreeing to defend and/or indemnify may make
its written agreement conditioned upon the continued
existence of the state of facts as then known as well
as such other reasonable conditions as may be
dictated by the particular allegations or claims.
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9. Any party withdrawing from its agreement to defend
and/or indemnify, shall give timely written notice
which shall be effective upon receipt. The
withdrawing party shall be responsible for all costs
and expenses of defense prior to receipt of notice of
withdrawal, except for those reasonable costs and
expenses, including reasonable attorneys' fees,
incurred solely for the benefit of the other party.
10. The defense, indemnification and hold harmless
obligations of this Agreement shall survive the
termination of this Agreement.
XXVI. GENERAL PROVISIONS
A. NOTICES
Except as otherwise specifically provided herein, any notice
required to be given by either party to the other shall be in
writing and delivered personally to the dealership or by
certified mail, return receipt requested, and shall be
effective on the date of receipt. Notices to DEALER shall be
directed to DEALER or its General Manager at DEALER's Approved
Location. Notices to DISTRIBUTOR shall be directed to the
General Manager of DISTRIBUTOR.
B. NO IMPLIED WAIVERS
The failure of either party at any time to require performance
by the other party of any provision herein shall in no way
affect the right of such party to require such performance at
any time thereafter, nor shall any waiver by any party of a
breach of any provision herein constitute a waiver of any
succeeding breach of the same or any other provision, nor
constitute a waiver of the provision itself.
Any continuation of business relations between the parties
following expiration of this Agreement shall not be deemed a
waiver of the expiration nor shall it imply that either party
has committed to continue to do business with the other at any
time in the future. Should this Agreement be renewed or any
other form of agreement be offered to DEALER, DISTRIBUTOR
reserves the right to offer an agreement of a length and upon
such additional terms and conditions as it deems reasonable.
C. SOLE AGREEMENT OF THE PARTIES
There are no prior agreements or understandings, either oral
or written, between the parties affecting this Agreement or
relating to the sale or service of Toyota Products, except as
otherwise specifically provided for or referred to in this
Agreement. DEALER acknowledges that no representations or
statements other than those expressly set forth herein were
made by DISTRIBUTOR or any officer, employee, agent or
representative thereof, or were relied upon by DEALER in
entering into this Agreement. This Agreement cancels and
supersedes all previous agreements between the parties
relating to the subject matters covered herein. No change or
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addition to, or deletion of, any portion of this Agreement
(except as provided in Section III) shall be valid or binding
upon the parties hereto unless the same is approved in writing
by an officer of each of the parties hereto.
D. DEALER NOT AN AGENT OR REPRESENTATIVE
DEALER is an independent business. This Agreement is not a
property right and does not constitute DEALER, Owners or
employees of DEALER as the agent or legal representatives of
DISTRIBUTOR for any purpose whatsoever. DEALER, Owners and
employees of DEALER or any other persons acting on behalf of
DEALER are not granted any express or implied right or
authority to assume or create any obligation on behalf of or
in the name of DISTRIBUTOR or to bind DISTRIBUTOR in any
manner whatsoever.
E. ASSIGNMENT OF RIGHTS OR DELEGATION OF DUTIES
This is a personal service agreement and may not be assigned
or sold in whole or in part, directly or indirectly,
voluntarily or by operation of law, without the prior written
approval of DISTRIBUTOR. Any attempted transfer, assignment
or sale without DISTRIBUTOR's prior written approval will be
void and not binding upon DISTRIBUTOR.
F. NO FRANCHISE FEE
DEALER warrants that it has paid no fee, nor has it provided
any goods or services in lieu of same, to DISTRIBUTOR or any
other party in consideration of entering into this Agreement.
The sole consideration for DISTRIBUTOR's entering into this
Agreement is DEALER's ability, integrity, assurance of
personal services and expressed intention to deal fairly and
equitably with DISTRIBUTOR and the public.
G. SEVERABILITY
If any provision of this Agreement should be held invalid or
unenforceable for any reason whatsoever, or conflicts with any
applicable law, this Agreement will be considered divisible as
to such provisions, and such provisions will be deemed amended
to comply with such law, or if it cannot be so amended without
materially affecting the tenor of the Agreement, then it will
be deemed deleted from this Agreement in such jurisdiction,
and in either case, the remainder of the Agreement will be
valid and binding.
H. NEW AND SUPERSEDING DEALER AGREEMENTS
In the event any new and superseding form of dealer Agreement
is offered by DISTRIBUTOR to authorized Toyota dealers
generally at any time prior to the expiration of the term of
this Agreement, DISTRIBUTOR may, by written notice to
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DEALER, replace this Agreement with a new agreement in a new
and superseding form for a term not less than the then
unexpired term of this Agreement.
I. BENEFIT
This Agreement is entered into by and between DISTRIBUTOR and
DEALER for their sole and mutual benefit. Neither this
Agreement nor any specific provision contained in it is
intended or shall be construed to be for the benefit of any
third party.
J. NO FIDUCIARY RELATIONSHIP
This Agreement shall not be construed to create a fiduciary
relationship between DEALER and DISTRIBUTOR.
K. NO JOINT EMPLOYMENT
DEALER acknowledges that it has assumed obligations under this
Agreement to use its best efforts to sell and service Toyota
Products, to increase the future growth in Toyota Product
sales through increased customer satisfaction and other
obligations related to the operation of the dealership and
recognizes the necessity to employ and train qualified
personnel to satisfy these commitments. To this end, DEALER
agrees to employ only qualified persons who will fulfill the
commitments made by DEALER to DISTRIBUTOR in this Agreement.
Notwithstanding the foregoing, DEALER retains the sole and
exclusive right to determine whom to hire and their
qualifications, to direct, control and supervise DEALER's
employees, and to establish all terms and conditions of
employment of DEALER's employees. All supervision, control
and direction of DEALER's employees shall be the sole and
exclusive responsibility of DEALER. DEALER shall at all times
remain the sole employer of persons employed by DEALER and, to
this end, DEALER and DISTRIBUTOR agree that no act or omission
of DEALER or DISTRIBUTOR shall be construed to make or render
them joint employer, co-employer or alter ego of each other.
L. CONSENT OF DISTRIBUTOR
Any time that this Agreement provides that DEALER must obtain
DISTRIBUTOR's consent to any proposed conduct or change,
DEALER must provide all information requested by DISTRIBUTOR
concerning the proposal, and DISTRIBUTOR shall have a
reasonable amount of time in which to evaluate the proposal.
M. DISTRIBUTOR'S POLICIES
This Agreement, from time to time, refers to certain policies
and standards. DEALER acknowledges that these policies and
standards are prepared by DISTRIBUTOR in its sole discretion
based upon DISTRIBUTOR's evaluation of the
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<PAGE> 38
marketplace. DISTRIBUTOR may reasonably amend its policies
and standards as the marketplace changes from time to time.
XXVII. DEFINITIONS
As used in this Agreement, the parties agree that the following terms
shall be defined as exclusively set forth below.
A. OWNER: The persons identified in Section IV hereof.
B. GENERAL MANAGER: The person identified in Section V hereof.
C. DEALER FACILITIES: The buildings, improvements, fixtures, and
equipment situated at the Approved Location(s).
D. APPROVED LOCATION(S): The location(s) and any facilities
thereon, designated in Section VII that DISTRIBUTOR has
approved for the dealership operation(s) specified therein.
E. TOYOTA MARKS: The various Toyota trademarks, service marks,
names, logos and designs that DEALER is authorized by
DISTRIBUTOR to use in the sale and servicing of Toyota
Products as specified in the current Toyota Brand Graphic
Standards Manual.
F. TOYOTA PRODUCTS: All Toyota Motor Vehicles, parts,
accessories and equipment which IMPORTER, in its sole
discretion, sells to DISTRIBUTOR for resale to authorized
Toyota dealers.
G. TOYOTA MOTOR VEHICLES: All motor vehicles identified in the
current Toyota Product Addendum that DISTRIBUTOR sells to
DEALER for resale.
H. GENUINE TOYOTA PARTS AND ACCESSORIES: All Toyota brand Parts
and Accessories manufactured by or on behalf of DISTRIBUTOR or
FACTORY, or other parts and accessories specifically approved
by FACTORY for use in servicing Toyota Motor Vehicles and sold
by DISTRIBUTOR to DEALER for resale.
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<PAGE> 39
TOYOTA PRODUCT ADDENDUM TO
TOYOTA DEALER AGREEMENT
Pursuant to Paragraph I(A) of the Toyota Dealer Agreement, DISTRIBUTOR hereby
grants DEALER the non-exclusive right to buy and resell the Toyota Products as
defined in the Toyota Dealer Agreement and identified below:
<TABLE>
<CAPTION>
(Internal combustion models only)
<S> <C>
Avalon Land Cruiser
Camry Previa
Celica RAV4
Corolla 4Runner
Paseo Tacoma Truck
Supra T100 Truck
Tercel
</TABLE>
and all parts, accessories and equipment for such vehicles.
This Toyota Product Addendum shall remain in effect unless and until superseded
by a new Toyota Product Addendum furnished DEALER by IMPORTER.
<PAGE> 40
PRIMARY MARKET AREA DEFINITION
ADDENDUM TO TOYOTA DEALER AGREEMENT
Pursuant to Section VIII of the Toyota Dealer Agreement, the following
documents provide a detailed definition of the Primary Market Area (PMA) that
is currently assigned to Southwest Toyota, Inc., dba Sterling McCall Toyota,
(DEALER).
If DEALER's PMA is modified by DISTRIBUTOR, DISTRIBUTOR will provide DEALER
with a revised Addendum which defines the structure of the modified PMA.
<PAGE> 1
EXHIBIT 10.18
LEXUS
DEALER AGREEMENT
<PAGE> 2
LEXUS DEALER AGREEMENT
AND
STANDARD PROVISIONS
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
I. TERM OF AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
II. OWNERSHIP AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
III. MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
IV. APPROVED DEALER LOCATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
V. CERTIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
VI. ACQUISITION, DELIVERY AND INVENTORY OF LEXUS PRODUCTS . . . . . . . . . . . . . . . . . . . . . . . . . . 1
A. APPOINTMENT OF DEALER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
B. AVAILABILITY AND ALLOCATION OF PRODUCT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
C. PRICES AND TERMS OF SALE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
D. MODE, PLACE AND CHARGES FOR DELIVERY OF PRODUCTS . . . . . . . . . . . . . . . . . . . . . . . . . . 2
E. DAMAGE CLAIMS AGAINST TRANSPORTATION CARRIERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
F. DELAY OR FAILURE OF DELIVERY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
G. DIVERSION CHARGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
H. CHANGES OF DESIGN, OPTIONS OR SPECIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
I. DISCONTINUANCE OF MANUFACTURE OR IMPORTATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
J. MINIMUM VEHICLE INVENTORIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
K. PRODUCT MODIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
VII. DEALER MARKETING OF LEXUS PRODUCTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
A. DEALER'S SALES RESPONSIBILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
B. EXPORT POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
C. LEXUS DEALER ASSOCIATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
D. USED VEHICLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
E. PRIMARY AREA OF RESPONSIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
F. EVALUATION OF DEALER'S SALES AND MARKETING PERFORMANCE . . . . . . . . . . . . . . . . . . . . . . . 5
III. DEALER SERVICE OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
A. CUSTOMER SERVICE STANDARDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
B. NEW MOTOR VEHICLE PRE-DELIVERY SERVICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
C. WARRANTY AND POLICY SERVICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C> <C>
IX. USE OF PARTS AND ACCESSORIES IN NON-WARRANTY SERVICE . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
A. WARRANTY DISCLOSURES AS TO NON-GENUINE PARTS AND ACCESSORIES . . . . . . . . . . . . . . . . . . . . 7
B. ROADSIDE ASSISTANCE PROGRAM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
C. SERVICE CAMPAIGN INSPECTIONS AND CORRECTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
D. COMPLIANCE WITH SAFETY AND EMISSION CONTROL REQUIREMENTS . . . . . . . . . . . . . . . . . . . . . . 8
E. COMPLIANCE WITH CONSUMER PROTECTION STATUTES, RULES AND REGULATIONS . . . . . . . . . . . . . . . . 8
X. SERVICE AND PARTS ORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
A. ORGANIZATION AND STANDARDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
B. SERVICE EQUIPMENT AND SPECIAL TOOLS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
C. PARTS STOCKING LEVEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
D. AFTER-HOURS DELIVERY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
E. ASSISTANCE PROVIDED BY DISTRIBUTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1. Service Manuals And Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2. Field Service Personnel Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
F. EVALUATION OF DEALER'S SERVICE AND PARTS
PERFORMANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
XI. CUSTOMER SATISFACTION RESPONSIBILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
A. DEALER'S CUSTOMER SATISFACTION OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1. DEALER's Customer Satisfaction Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2. Employee Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3. Customer Satisfaction Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4. Customer Assistance Response System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
B. EVALUATION OF DEALER'S CUSTOMER SATISFACTION PERFORMANCE . . . . . . . . . . . . . . . . . . . . . 11
XII. DEALERSHIP FACILITIES AND IDENTIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
A. FACILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
B. SERVICE RECEPTION AREA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
C. DEALER'S OPERATING HOURS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
D. SIGNS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
E. EVALUATION OF DEALERSHIP FACILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
F. USE OF LEXUS MARKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1. Use By Dealer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2. Discontinuance of Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C> <C>
XIII. CAPITAL, CREDIT, RECORDS AND UNIFORM SYSTEMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
A. NET WORKING CAPITAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
B. FLOORING AND LINES OF CREDIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
C. PAYMENT TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
D. UNIFORM ACCOUNTING SYSTEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
E. RECORDS MAINTENANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
F. EXAMINATION OF DEALERSHIP ACCOUNTS AND RECORDS . . . . . . . . . . . . . . . . . . . . . . . . . . 15
G. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
H. CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
I. DATA TRANSMISSION SYSTEMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
J. SALES REPORTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
XIV. TRANSFERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
A. SALE OF OWNERSHIP INTEREST IN DEALERSHIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
B. RIGHT OF FIRST REFUSAL OR OPTION TO PURCHASE . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
1. Rights Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2. Exercise of Distributor's Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3. Right of First Refusal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4. Option to Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5. Dealer's Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
XV. SUCCESSION RIGHTS UPON DEATH OR INCAPACITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
A. SUCCESSION TO OWNERSHIP AFTER DEATH OF OWNER . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
B. INCAPACITY OF OWNER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
C. NOMINATION OF SUCCESSOR PRIOR TO DEATH OR INCAPACITY OF OWNER . . . . . . . . . . . . . . . . . . 20
XVI. TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
A. VOLUNTARY TERMINATION BY DEALER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
B. TERMINATION FOR CAUSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
1. Immediate Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2. Termination Upon Sixty Days Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3. Termination for Failure of Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4. Termination Upon Death or Incapacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
C. NOTICE OF TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
D. CONTINUANCE OF BUSINESS RELATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
E. REPURCHASE PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
1. DISTRIBUTOR'S Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2. Responsibilities of DEALER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3. Payment by DISTRIBUTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
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<PAGE> 5
<TABLE>
<S> <C> <C>
XVII. MANAGEMENT OF DISPUTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
A. ALTERNATIVE DISPUTE RESOLUTION PROGRAMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
B. APPLICABLE LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
C. MUTUAL RELEASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
XVIII. DEFENSE AND INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
A. DEFENSE AND INDEMNIFICATION BY DISTRIBUTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
B. DEFENSE AND INDEMNIFICATION BY DEALER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
C. CONDITIONAL DEFENSE AND/OR INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
D. THE EFFECT OF SUBSEQUENT DEVELOPMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
E. TIME TO RESPOND AND RESPONSIBILITIES OF THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . 30
XIX. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
A. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
B. NO IMPLIED WAIVERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
C. SOLE AGREEMENT OF THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
D. DEALER NOT AN AGENT OR REPRESENTATIVE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
E. ASSIGNMENT OF RIGHTS OR DELEGATION OF DUTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
F. NO FRANCHISE FEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
G. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
H. NEW AND SUPERSEDING DEALER AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
I. BENEFIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
XX. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
A. DEALER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
B. OWNER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
C. GENERAL MANAGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
D. DEALER FACILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
E. APPROVED LOCATION(S) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
F. LEXUS MARKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
G. LEXUS MOTOR VEHICLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
H. GENUINE LEXUS PARTS AND ACCESSORIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
I. LEXUS PRODUCTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
XXI. ADDITIONAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
</TABLE>
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<PAGE> 6
LEXUS DEALER AGREEMENT
This is an Agreement between LEXUS, A Division of TOYOTA MOTOR SALES, U.S.A.,
INC., (LEXUS" or "DISTRIBUTOR") and SMC Luxury Cars, Inc. ("DEALER") a closely
held corporation, incorporated in the State of Texas and doing business as
Sterling McCall Lexus.
LEXUS GOALS AND COMMITMENT
LEXUS is committed to creating luxury automobiles which are and will be among
the finest ever built anywhere in the world. LEXUS is equally committed to
setting a new standard for extraordinary customer satisfaction throughout the
ownership cycle. To achieve this goal, LEXUS intends to maintain the finest
dealer network in the industry.
This Agreement embodies the LEXUS commitment to promote fairness within a
harmonious and mutually profitable business relationship between LEXUS and
DEALER. The ultimate goal shared by all parties to this Agreement is the
satisfaction of the LEXUS customer.
PURPOSES OF AGREEMENT
LEXUS is the exclusive distributor in the continental United States of LEXUS
Products which are manufactured or approved by TOYOTA MOTOR CORPORATION
("FACTORY"). The principal purposes of this Agreement are to set forth and
affirm the commitment of LEXUS and DEALER to the goals of LEXUS; authorize
DEALER to sell and service LEXUS Products; and identify the rights and
responsibilities of LEXUS and DEALER.
I. TERM OF AGREEMENT
This Agreement is effective on the date signed by LEXUS and shall
continue for a period of six years unless ended earlier by mutual
agreement or terminated as provided herein. This Agreement may
not be extended except by written consent of LEXUS. Any
continuation of business relations between the parties following
expiration of this Agreement shall be on a day-to-day basis and
subject to the provisions of this Agreement. Such a continuation
shall not be deemed a waiver of the right of termination nor shall
it imply that either party has committed to continue to do
business with the other at any time in the future.
Upon the expiration of this Agreement, DISTRIBUTOR shall have no
obligation to renew the Agreement or to extend DEALER a subsequent
Agreement. However, should this Agreement be renewed or any other
form of agreement be offered to DEALER, DISTRIBUTOR reserves the
right to offer an agreement of a term to be determined at
DISTRIBUTOR'S sole discretion.
<PAGE> 7
II. OWNERSHIP AND OFFICERS
This is a personal service Agreement and has been entered into by
LEXUS upon, and in consideration of, DEALER'S representation that
only the following named persons are the owners and officers of
DEALER, and that such persons are committed to achieving the
purposes, goals and commitments of this Agreement:
PERCENT OF
OWNERS NAMES ADDRESS OWNERSHIP
Sterling B. McCall, Jr. 9400 Southwest Freeway 100%
Houston, TX 77057
OFFICERS NAMES ADDRESS TITLE
Sterling B. McCall, Jr. 9400 Southwest Freeway President
Sterling B. McCall, III Houston, TX 77057 Secretary
III. MANAGEMENT
LEXUS and DEALER agree that qualified dealership management and
active, day-to-day owner involvement are critical to the
successful operation of DEALER. OWNERS agree, and LEXUS enters
into this Agreement on the condition that at least one OWNER will
be involved on a full-time basis in the day-to-day operations of
the dealership. If no OWNER is involved on a full-time basis in
DEALER's day-to-day operations, the General Manager named below
shall devote his or her personal services on a full-time basis to
the general management of the dealership.
DEALER appoints Sterling B. McCall, Jr. as General Manager. The
General Manager has full managerial authority to make all
operating decisions on behalf of DEALER. DEALER shall make no
change in the dealership's ownership or General Manager without
the prior written approval of LEXUS.
IV. APPROVED DEALER LOCATIONS
In order that DISTRIBUTOR may establish and maintain an effective
network of authorized LEXUS dealers, DEALER agrees that it shall
conduct its LEXUS operations only in facilities and at locations
herein designated and approved by DISTRIBUTOR. DISTRIBUTOR hereby
designates and approves the following facilities as the exclusive
location(s) for the sale and servicing of LEXUS Products and the
display of LEXUS Marks:
NEW VEHICLE SALES AND SHOWROOM USED VEHICLE DISPLAY AND SALES
10422 Southwest Freeway 10422 Southwest Freeway
Houston, TX 77074 Houston, TX 77074
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SALES AND GENERAL OFFICE BODY AND PAINT
10422 Southwest Freeway
Houston, TX 77074
PARTS AND SERVICE OTHER FACILITIES
10422 Southwest Freeway
Houston, TX 77074
DEALER shall not modify or change the designated usage or function
of any facility without the prior written consent of LEXUS.
V. CERTIFICATION
By their signatures hereto, the parties certify that they have
read and understood this Agreement, including the Standard
Provisions which are incorporated herein, and agree to abide and
be bound by all of its terms and conditions.
Sterling McCall Lexus , DEALER
-------------------------------
DBA
DATE: 6/27/95 By: /s/ Sterling B. McCall Pres.
----------- --------------------------------------- ----------
SIGNATURE TITLE
LEXUS, A Division of
TOYOTA MOTOR SALES, U.S.A., INC.
DATE: 8/21/95 By: /s/ Shinji Sakai Pres.
----------- --------------------------------------- ----------
SIGNATURE TITLE
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LOCATION AMENDMENT TO LEXUS DEALER AGREEMENT
Agreement by and between SMC Luxury Cars, Inc., d/b/a Sterling McCall Lexus ,
located at ---------------------------------------------------
(Dealer) McCall Lexus
10400 Southwest Freeway Houston, Texas
- --------------------------------------------------------------------------------
Address (City, State)
a (an) Corporation , hereinafter called DEALER,
------------------------------------------
(Individual / Partnership / Corporation)
and LEXUS, A Division of Toyota Motor Sales, U.S.A., Inc., hereinafter called
LEXUS.
In consideration of the mutual covenants of the parties hereto, and other good
and valuable consideration, DISTRIBUTOR and DEALER hereby agree that Paragraph
IV (Approved Dealer Locations) of the LEXUS Dealer Agreement entered into
between them on August 8, 1989, is hereby amended to read as follows:
IV. APPROVED DEALER LOCATIONS
In order that DISTRIBUTOR may establish and maintain an effective network of
authorized LEXUS dealers, DEALER agrees that it shall conduct its LEXUS
operations only in facilities and at locations herein designated and approved
by DISTRIBUTOR. DISTRIBUTOR hereby designates and approves the following
facilities as the exclusive location(s) for the-sale and servicing of LEXUS
Products and the display of LEXUS Marks:
NEW VEHICLE SALES AND SHOWROOM USED VEHICLE DISPLAY AND SALES
10422 Southwest Freeway 10422 Southwest Freeway
Houston, Texas 77074 Houston, Texas 77074
SALES AND GENERAL OFFICE BODY AND PAINT
10422 Southwest Freeway
Houston, Texas 77074
PARTS AND SERVICE OTHER FACILITIES
10422 Southwest Freeway
Houston, Texas 77074
DEALER shall not modify or change the designated usage or function of any
facility without prior written consent of LEXUS.
SMC Luxury Cars, Inc. , DEALER
------------------------------
(Dealer Entity Name)
DATE: By: /s/ Sterling B. McCall President
---------- --------------------------------------- ---------------
SIGNATURE TITLE
LEXUS, A Division of Toyota Motor Sales, U.S.A., Inc.
DATE: 5/21/90 By: /s/ Y. Togo President
----------- --------------------------------------- ----------
SIGNATURE TITLE
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LEXUS DEALER AGREEMENT
STANDARD PROVISIONS
The following Standard Provisions are expressly incorporated in and made a part
of the LEXUS Dealer Agreement.
VI. ACQUISITION, DELIVERY AND INVENTORY OF LEXUS PRODUCTS
A. APPOINTMENT OF DEALER
DISTRIBUTOR hereby appoints DEALER and grants unto it the
non-exclusive right to buy and resell the LEXUS Products
identified in the LEXUS Product Addendum. DEALER accepts
such appointment and understands that its appointment as a
DEALER does not grant it an exclusive right to sell LEXUS
Products in any specified geographical area.
DEALER shall have the right to purchase LEXUS Products from
DISTRIBUTOR in accordance with the provisions set forth
herein and such other requirements as may be established
from time to time by LEXUS.
B. AVAILABILITY AND ALLOCATION OF PRODUCT
DISTRIBUTOR will allocate LEXUS Products among its dealers
in a fair and equitable manner. DEALER acknowledges and
agrees that DISTRIBUTOR may consider, among other things,
DEALER'S service capacity, customer satisfaction
performance, sales performance, sales potential and
facilities in determining the quantity of Product to offer
to DEALER. DISTRIBUTOR will, upon DEALER'S request, explain
the considerations and method used to distribute LEXUS
Products to DEALER.
C. PRICES AND TERMS OF SALE
DISTRIBUTOR, from time to time, shall establish and revise
prices and other terms for the sale of LEXUS Products to
DEALER Revised prices, terms, or provisions shall apply to
any LEXUS Product not invoiced to DEALER by DISTRIBUTOR at
the time the notice of such change is given to DEALER (in
the case of LEXUS Motor Vehicles), or upon issuance of a new
or modified Parts Price List or through change notices,
letters, bulletins, or revision sheets (in the case of
parts, options and accessories), or at such other times as
may be designated in writing by DISTRIBUTOR.
<PAGE> 11
D. MODE, PLACE AND CHARGES FOR DELIVERY OF PRODUCTS
DISTRIBUTOR shall designate the distribution points and the
mode of transportation and shall select carrier(s) for the
delivery of LEXUS Products to DEALER. DEALER shall pay
DISTRIBUTOR such charges as DISTRIBUTOR in its sole
discretion establishes for such transportation services.
E. DAMAGE CLAIMS AGAINST TRANSPORTATION CARRIERS
DEALER shall promptly notify DISTRIBUTOR of any damage
occurring during transit and shall, if so directed by
DISTRIBUTOR, file claims against transportation carrier for
damage. DEALER agrees to assist DISTRIBUTOR in obtaining
recovery against any transportation carrier or insuree for
loss or damage to LEXUS Products shipped hereunder.
DISTRIBUTOR shall not be liable for loss or damage to LEXUS
Products sold hereunder occurring after delivery thereof to
premises of DEALER.
To the extent required by law, DEALER shall notify the
purchaser of a vehicle of any damage sustained by such
vehicle prior to sale. DEALER shall indemnify and hold
DISTRIBUTOR harmless from any liability resulting from
DEALER'S failure to so notify such purchasers.
F. DELAY OR FAILURE OF DELIVERY
DISTRIBUTOR shall not be liable for delay or failure to
deliver LEXUS Products which it has previously agreed to
deliver, where such delay or failure to deliver is the
result of any event beyond the control of DISTRIBUTOR,
including but not limited to any law or regulation of any
governmental entity, acts of God, foreign or civil wars,
riots, interruptions of navigation, shipwrecks, fires,
floods, storms, strikes, lockouts or other labor troubles,
embargoes, blockades, or delay or failure of FACTORY to
deliver LEXUS Products.
G. DIVERSION CHARGES
If after shipment DEALER fails or refuses to accept LEXUS
Products that it had agreed to purchase, DEALER shall pay
all charges incurred by DISTRIBUTOR as a result of such
diversion. Such charges shall not exceed the charge of
returning any such product to the point of original shipment
by DISTRIBUTOR plus all charges for demurrage, storage or
other charges related to such diversion.
DEALER also agrees to assume responsibility for, and shall
pay any and all reasonable charges for, demurrage, storage
or other charges accruing after arrival of shipment at the
diversion point established by DISTRIBUTOR.
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H. CHANGES OF DESIGN, OPTIONS OR SPECIFICATIONS
DISTRIBUTOR may change the design or specifications of any
LEXUS Product or the options in any LEXUS Product and shall
be under no obligation to provide notice of same or to make
any similar change upon any product previously purchased by
or shipped to DEALER. No change shall be considered a model
year change unless so specified by DISTRIBUTOR.
I. DISCONTINUANCE OF MANUFACTURE OR IMPORTATION
FACTORY and/or DISTRIBUTOR may discontinue the manufacture,
importation or distribution of all or part of any LEXUS
Product, whether motor vehicle, parts, options, or
accessories, including any model, series, or body style of
any LEXUS Motor Vehicle at any time without any obligation
or liability to DEALER by reason thereof.
J. MINIMUM VEHICLE INVENTORIES
DEALER agrees that it shall, at all times, maintain in
showroom ready condition at least the minimum inventory of
LEXUS Motor Vehicles as may be established by DISTRIBUTOR
from time to time.
K. PRODUCT MODIFICATIONS
DEALER agrees that it will not install after market
accessories or make any modifications to LEXUS vehicles that
may impair or adversely affect a vehicle's safety,
emissions, structural integrity or performance.
VII. DEALER MARKETING OF LEXUS PRODUCTS
A. DEALER'S SALES RESPONSIBILITIES
DEALER recognizes that customer satisfaction and the
successful promotion and sale of LEXUS Products are
significantly dependent on DEALER'S advertising and sales
promotion activities. Therefore, DEALER at all times shall:
1. Use its best efforts to promote, sell and service new
and used LEXUS Products;
2. Advertise and merchandise LEXUS Products and use
current LEXUS showroom displays;
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3. Ensure that its sales personnel meet the educational
and management standards established by DISTRIBUTOR and
have such personnel, as are appropriate, attend all
sales training courses prescribed by DISTRIBUTOR at
DEALER'S expense;
4. Maintain a high standard of ethics in advertising,
promoting and selling LEXUS Products and avoid engaging
in any misrepresentation or unfair or deceptive
practices. DEALER shall discontinue any advertising
that DISTRIBUTOR may find to be injurious to
DISTRIBUTOR'S business or reputation or to the LEXUS
Marks, or that are likely to be violative of applicable
laws or regulations;
5. Advertise in the local classified telephone directories
identifying itself as an authorized LEXUS DEALER Such
ad(s) shall properly display the LEXUS Marks; and
6. Accurately represent to customers the total selling
price of LEXUS Products. DEALER agrees to explain to
customers of LEXUS Products the items that make up the
total selling price and to give the customers itemized
invoices and all other information required by law.
DEALER understands and hereby acknowledges that it may
sell LEXUS Products at whatever price DEALER desires.
B. EXPORT POLICY
DEALER is authorized to sell LEXUS Motor Vehicles only to
customers located in the United States. DEALER agrees that
it will not sell LEXUS Motor Vehicles for resale or use
outside the United States. DEALER agrees to abide by any
export policy established by DISTRIBUTOR.
C. LEXUS DEALER ASSOCIATION
Except where prohibited by law, DEALER will participate in a
LEXUS Dealer Advertising Association. DEALER agrees to
cooperate in the establishment of such an association and to
fund its fair share of advertising and merchandising
programs undertaken by the association.
D. USED VEHICLES
DEALER agrees to display and sell used vehicles at the
Approved Location(s). DEALER shall maintain for resale an
adequate inventory of used vehicles.
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E. PRIMARY AREA OF RESPONSIBILITY
DISTRIBUTOR will assign DEALER a geographic area called a
Primary Market Area ("PMA"). DEALER'S PMA may be altered or
adjusted by DISTRIBUTOR at any time. The PMA is a tool used
by DISTRIBUTOR to evaluate DEALER'S performance of its
obligations. DEALER agrees that it has no right or interest
in any PMA that DISTRIBUTOR, in its sole discretion, may
designate. As permitted by local law, DISTRIBUTOR may add
new dealers to, or relocate dealers in or into the PMA
assigned to DEALER.
F. EVALUATION OF DEALER'S SALES AND MARKETING PERFORMANCE
DISTRIBUTOR periodically will evaluate DEALER'S sales and
marketing performance under this Agreement. DEALER'S
evaluation will be based on such reasonable criteria as
DISTRIBUTOR may establish including, without limitation,
comparisons of DEALER'S sales with those of other LEXUS
dealers. DISTRIBUTOR will review such evaluations with
DEALER and DEALER shall take prompt corrective action, if
required, to improve its performance.
VIII. DEALER SERVICE OBLIGATIONS
A. CUSTOMER SERVICE STANDARDS
DEALER and DISTRIBUTOR agree that the success and future
growth of the LEXUS franchise is substantially dependent
upon the customers' ability to obtain responsive,
high-quality vehicle servicing. Therefore, DEALER agrees
to:
1. Take all reasonable steps to provide service of the
highest quality for all LEXUS Motor Vehicles,
regardless of where purchased and whether or not under
warranty;
2. Ensure that the customer is advised of the necessary
repairs and his or her consent is obtained prior to the
initiation of any repairs;
3. Ensure that necessary repairs on LEXUS Motor Vehicles
are accurately diagnosed and professionally performed;
and
4. Assure that the customer is treated courteously and
fairly at all times.
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<PAGE> 15
B. NEW MOTOR VEHICLE PRE-DELIVERY SERVICE
DEALER agrees that, prior to delivery of a new LEXUS Motor
Vehicle to a customer, it shall perform, if directed by
DISTRIBUTOR, pre-delivery service on each LEXUS Motor
Vehicle in accordance with LEXUS standards. DISTRIBUTOR
shall reimburse DEALER for such pre-delivery service
according to such directives and the applicable provisions
of the LEXUS Warranty Policies and Procedures Manual.
C. WARRANTY AND POLICY SERVICE
DEALER acknowledges that the only warranties of DISTRIBUTOR
or FACTORY applicable to LEXUS Products shall be the New
Vehicle Limited Warranty or such other written warranties
that may be expressly furnished by DISTRIBUTOR or FACTORY.
Except for its limited liability under such written warranty
or warranties, DISTRIBUTOR and FACTORY do not assume any
other warranty, obligation or liability. DEALER is not
authorized to assume any additional warranty obligations or
liabilities on behalf of DISTRIBUTOR or FACTORY. Any such
additional obligations assumed by DEALER shall be the sole
responsibility of DEALER.
DEALER shall perform warranty and policy service specified
by DISTRIBUTOR, in accordance with the LEXUS Warranty
Policies and Procedures Manual. DISTRIBUTOR agrees to
compensate DEALER for all warranty and policy work,
including labor, diagnosis and Genuine LEXUS Parts and
Accessories, in accordance with procedures and at rates to
be announced from time to time by DISTRIBUTOR and in
accordance with applicable law. Unless otherwise approved
in advance by DISTRIBUTOR, DEALER shall use only Genuine
LEXUS Parts and Accessories when performing LEXUS warranty
repairs. Warranty and policy service is provided for the
benefit of customers and DEALER agrees that the customer
shall not be obligated to pay any charges for warranty or
policy work or any other services for which DEALER is
reimbursed by DISTRIBUTOR, except as required by law.
IX. USE OF PARTS AND ACCESSORIES IN NON-WARRANTY SERVICE
Subject to the provisions of Sections VI(k) and VIII(c), DEALER
has the right to sell, install or use for making non-warranty
repairs products that are not Genuine LEXUS Parts or Accessories.
DEALER acknowledges, however, that its customers expect that any
parts or accessories that DEALER sells, installs or uses in the
sale, repair or servicing of LEXUS vehicles are, or meet the high
quality standards of, Genuine LEXUS Parts or Accessories.
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<PAGE> 16
DEALER agrees that in sales, repairs or servicing where DEALER
does not use Genuine LEXUS Parts or Accessories, DEALER only will
utilize such other parts or accessories as:
1. Will not adversely affect the mechanical operation of the
LEXUS vehicle being sold, repaired or serviced; and
2. Are equivalent in quality and design to Genuine LEXUS Parts
or Accessories.
DEALER further agrees that it will not offer to sell any
parts or accessories that for reasons of quality or image
are reasonably objected to by LEXUS.
A. WARRANTY DISCLOSURES AS TO NON-GENUINE PARTS AND ACCESSORIES
In order to avoid confusion and to minimize potential
customer dissatisfaction, in any non-warranty instance where
DEALER sells, installs or uses non Genuine LEXUS Parts or
Accessories, DEALER shall disclose such fact to the customer
and shall advise the customer that the item is not included
in warranties furnished by DISTRIBUTOR or FACTORY. Such
disclosure shall be written, conspicuous and stated on the
customer's copy of the service or repair order or sale
document. In addition, DEALER will clearly explain to the
customer the extent of any warranty covering the parts or
accessories involved and will deliver a copy of the warranty
to the customer.
B. ROADSIDE ASSISTANCE PROGRAM
Dealer agrees to participate in the LEXUS Roadside
Assistance Program as specified by DISTRIBUTOR.
C. SERVICE CAMPAIGN INSPECTIONS AND CORRECTIONS
DEALER agrees to perform service campaign inspections and/or
corrections for owners or users of all LEXUS Products that
qualify for such inspections and/or corrections. DEALER
further agrees to comply with all DISTRIBUTOR'S directives
and with the applicable procedures in the LEXUS Warranty
Policies and Procedures Manual relating to those inspections
and/or corrections. DISTRIBUTOR agrees to reimburse DEALER
for all replacement parts and/or other materials required
and used in connection with such work and for labor
according to such directives and the applicable provisions
of the LEXUS Warranty Policies and Procedures Manual.
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D. COMPLIANCE WITH SAFETY AND EMISSION CONTROL REQUIREMENTS
DEALER agrees to comply and operate consistently with all
applicable provisions of the National Traffic and Motor
Vehicle Safety Act of 1966 and the Federal Clean Air Act, as
amended, including applicable rules and regulations issued
from time to time thereunder, and all other applicable
federal, state and local motor vehicle safety and emission
control statutes, rules and regulations.
In the event that the laws of the state in which DEALER is
located require motor vehicle dealers or distributors to
install in new or used motor vehicles, prior to their retail
sale, any safety devices or other equipment not installed or
supplied as standard equipment by FACTORY, then DEALER,
prior to the sale of any LEXUS Motor Vehicle on which such
installations are required, shall properly install such
devices or equipment on such LEXUS Motor Vehicles. DEALER
shall comply with state and local laws pertaining to the
installation and reporting of such equipment.
In the interest of motor vehicle safety and emission
control, DISTRIBUTOR and DEALER agree to provide to each
other such information and assistance as may reasonably be
requested by the other in connection with the performance of
obligations imposed on either party by the National Traffic
and Motor Vehicle Safety Act of 1966 and the Federal Clean
Air Act, as amended, and their rules and regulations, and
all other applicable federal, state and local motor vehicle
safety and emissions control statutes, rules and
regulations.
E. COMPLIANCE WITH CONSUMER PROTECTION STATUTES, RULES AND
REGULATIONS
Because certain customer complaints may impose liability
upon DISTRIBUTOR under various repair or replace laws or
other consumer protection laws and regulations, DEALER
agrees to provide prompt notice to DISTRIBUTOR of such
complaints and take such other steps as DISTRIBUTOR may
require. DEALER will do nothing to affect adversely
DISTRIBUTOR'S rights under such laws and regulations.
Subject to any law or any regulation to the contrary, DEALER
shall be liable to DISTRIBUTOR for any refunds or vehicle
replacements provided to customer where DISTRIBUTOR
reasonably establishes that DEALER failed to carry out
vehicle repairs in accordance with DISTRIBUTOR'S written
published policies and procedures or its express oral
instructions subsequently confirmed in writing. DEALER also
agrees to provide applicable required customer notifications
and disclosures as prescribed by repair or replacement laws
or other consumer laws or regulations.
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X. SERVICE AND PARTS ORGANIZATION
A. ORGANIZATION AND STANDARDS
DEALER agrees to organize and maintain a complete service
and parts organization of the highest quality, including a
qualified Service Manager, Parts Manager, Diagnostic
Specialists, Technicians and a sufficient complement of
qualified customer relations, service and parts personnel as
recommended in the LEXUS Dealer Facility Planner. DEALER'S
personnel will meet the educational, management and
technical training standards established by DISTRIBUTOR, and
will attend all service, parts and customer satisfaction
training courses prescribed by DISTRIBUTOR at DEALER'S
expense.
B. SERVICE EQUIPMENT AND SPECIAL TOOLS
DEALER agrees to acquire and properly maintain adequate
service equipment and such special service tools and
instruments as are specified by DISTRIBUTOR.
C. PARTS STOCKING LEVEL
DEALER agrees to maintain its parts stock at minimum
stocking levels established by DISTRIBUTOR. In
consideration for DEALER'S maintenance of the Dealer
Stocking Guide, DISTRIBUTOR grants DEALER a one hundred
percent (100%) obsolescence parts return policy. For
non-stocking guide parts, parts orders will accrue a five
percent (5%) obsolescence eligibility.
D. AFTER-HOURS DELIVERY
Dealer agrees to provide DISTRIBUTOR, upon request, access
to a secure area for after-hours parts or vehicle delivery.
E. ASSISTANCE PROVIDED BY DISTRIBUTOR
1. SERVICE MANUALS AND MATERIALS
DISTRIBUTOR agrees to make available to DEALER copies
of such service manuals and bulletins, publications and
technical data as DISTRIBUTOR shall deem to be
necessary for the needs of DEALER'S service and parts
organization. DEALER shall be responsible for keeping
such manuals, publications and data current and
available for consultation by its employees.
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2. FIELD SERVICE PERSONNEL ASSISTANCE
To assist DEALER in handling service responsibilities
under this Agreement, DISTRIBUTOR agrees to make
available qualified field service personnel who will,
from time to time, advise and counsel DEALER on
service-related subjects, including service policies,
product and technical adjustments, repair and
replacement of product components, customer relations,
warranty administration, service and parts
merchandising, and personnel management training.
F. EVALUATION OF DEALER'S SERVICE AND PARTS PERFORMANCE
DISTRIBUTOR will evaluate periodically DEALER'S: (i)
service performance in areas such as customer satisfaction,
warranty administration, service repairs, service
management, facilities, operating procedures, new vehicle
pre-delivery service; and (ii) parts operations, facilities,
tools and equipment. DISTRIBUTOR agrees to review such
evaluations with DEALER and DEALER agrees to take prompt
action to improve the service and parts performance to
satisfactory levels as DISTRIBUTOR may require. Such action
shall, if requested by DISTRIBUTOR, include an action plan
by DEALER for improvement of service and parts performance
within a specific time period approved by DISTRIBUTOR.
XI. CUSTOMER SATISFACTION RESPONSIBILITIES
A goal of DISTRIBUTOR and DEALER is to be recognized as marketing
the finest products and providing the best service in the
automobile industry. The LEXUS name should be synonymous with the
highest level of customer satisfaction.
A. DEALER'S CUSTOMER SATISFACTION OBLIGATIONS
DEALER will be responsible for satisfying LEXUS customers in
all matters except those that are directly related to
product design and manufacturing or are otherwise out of
DEALER'S control. DEALER will take all reasonable steps to
ensure that each customer is completely satisfied with his
or her LEXUS Products and the services and practices of
DEALER. DEALER will not engage in any practice or method of
operation if its nature or quality may impair the reputation
of LEXUS or LEXUS Products and it has been reasonably
objected to by DISTRIBUTOR.
1. DEALER'S CUSTOMER SATISFACTION PLAN
DEALER shall provide a detailed plan of DEALER'S
customer satisfaction program to DISTRIBUTOR and shall
implement such program on a continuous basis. This
plan shall include an ongoing system for emphasizing
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customer satisfaction to all DEALER'S employees, for
training DEALER employees and for conveying to
customers that DEALER is committed to the highest
possible level of customer satisfaction.
2. EMPLOYEE TRAINING
DEALER agrees to participate and to have its employees
participate in LEXUS customer satisfaction training as
required by DISTRIBUTOR, at DEALER'S expense.
3. CUSTOMER SATISFACTION MANAGER
If requested by DISTRIBUTOR, DEALER agrees to employ a
full-time Customer Satisfaction Manager with the
necessary authority to make all decisions regarding
customer satisfaction and to resolve all customer
problems.
4. CUSTOMER ASSISTANCE RESPONSE SYSTEM
DEALER agrees to implement a system, approved by
DISTRIBUTOR, that will respond immediately to requests
for customer assistance from DISTRIBUTOR.
B. EVALUATION OF DEALER'S CUSTOMER SATISFACTION PERFORMANCE
DISTRIBUTOR periodically will evaluate DEALER'S customer
satisfaction performance based on the following
considerations and efforts by DEALER.
1. DISTRIBUTOR will provide DEALER with Owner Satisfaction
Index ("OSI") reports or such other equivalent data as
will permit DEALER to assess its performance and
maintain the highest level of customer satisfaction.
DEALER agrees to review with its employees on a regular
basis the results of the customer satisfaction reports
or other data it receives.
2. DEALER agrees to develop and implement specific action
plans to improve results in the event that DEALER is
below the average for other LEXUS dealers. The plans
are to be reviewed with DISTRIBUTOR on a basis that
DISTRIBUTOR deems appropriate. DEALER will use its
best efforts to respond on a timely basis to requests
from DISTRIBUTOR to take action on unsatisfactory
customer satisfaction matters and to commit necessary
resources to remedy deficiencies reasonably specified
by DISTRIBUTOR.
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XII. DEALERSHIP FACILITIES AND IDENTIFICATION
A. FACILITIES
1. In order for DISTRIBUTOR to establish an effective
network of authorized LEXUS dealers, DEALER shall
provide, and at all times maintain, attractive
dealership facilities at the Approved Location(s) that
satisfy the image, size, layout, interior design,
color, equipment and identification required by
DISTRIBUTOR DEALER'S facility shall meet the minimum
facility standards established by LEXUS.
2. To assist DEALER in planning, building, remodeling, or
maintaining dealership facilities, DISTRIBUTOR will
provide DEALER a LEXUS Dealer Facility Planner and will
identify sources from which DEALER may purchase
facility consultation and planning services, and
architectural materials and furnishings that meet LEXUS
standards and guidelines. DISTRIBUTOR will also make
available to DEALER, upon request, sample copies of
building layout plans, facility planning
recommendations, and an applicable identification
program covering the placement, installation and
maintenance of required signs. In addition,
representatives of DISTRIBUTOR will be available to
DEALER from time to time to counsel and advise DEALER
and dealership personnel in connection with DEALER'S
planning and equipping the dealership premises.
B. SERVICE RECEPTION AREA
DEALER agrees to maintain a service reception area that
meets all requirements set forth in the LEXUS Dealer
Facility Planner, that is consistent with the LEXUS image
and that will promote a high level of customer satisfaction.
C. DEALER'S OPERATING HOURS
DEALER agrees to keep its dealership operations open for
business during all days and hours that are customary and
lawful for such operations in the community or locality in
which DEALER is located and in accordance with industry
standards.
D. SIGNS
Subject to applicable governmental statutes, ordinances and
regulations, DEALER agrees to erect, display and maintain,
at Approved Location(s) only and at DEALER'S sole expense,
such standard authorized product and service signs as
specified by DISTRIBUTOR.
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E. EVALUATION OF DEALERSHIP FACILITIES
DISTRIBUTOR periodically will evaluate DEALER'S facilities.
In making such evaluations, DISTRIBUTOR may consider, among
other things: the actual building and land provided by
DEALER for the performance of its responsibilities under
this Agreement; compliance with DISTRIBUTOR'S current
requirements for dealership operations; the appearance,
condition, layout and sign age of the dealership facilities;
and such other factors as in DISTRIBUTOR'S opinion may
relate to DEALER'S performance of its responsibilities under
this Agreement. DISTRIBUTOR will discuss such evaluations
with DEALER and DEALER shall take prompt action to comply
with DISTRIBUTOR'S recommendations and minimum facility
standards.
F. USE OF LEXUS MARKS
1. USE BY DEALER
DISTRIBUTOR grants to DEALER the non-exclusive
privilege of displaying or otherwise using authorized
LEXUS Marks as specified in the LEXUS Graphic Standards
Manual at the Approved Location(s) in connection with
the selling or servicing of LEXUS Products.
DEALER further agrees that it promptly shall
discontinue the display and use of any such LEXUS
Marks, and shall change the manner in which any LEXUS
Marks are displayed and used, when for any reason it is
requested to do so by DISTRIBUTOR. DEALER may use the
LEXUS Marks only at Approved Location(s) and for such
purposes as are specified in this Agreement. DEALER
agrees that such LEXUS Marks may be used as part of the
name under which DEALER'S business is conducted only
with the prior written approval of DISTRIBUTOR.
2. DISCONTINUANCE OF USE
Upon termination, non-renewal, or expiration of this
Agreement, DEALER agrees that it shall immediately:
a. Discontinue the use of the word LEXUS and the
LEXUS Marks, or any semblance of same,
including without limitation, the use of all
stationery, telephone directory listing, and
other printed material referring in any way
to LEXUS or bearing any LEXUS Mark;
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b. Discontinue the use of the word LEXUS or the
LEXUS Marks, or any semblance of same, as
part of its business or corporate name, and
file a change or discontinuance of such name
with appropriate authorities;
c. Remove all product signs bearing said word(s)
or LEXUS Marks at DEALER'S sole cost and
expense;
d. Cease representing itself as an authorized
LEXUS Dealer; and
e. Refrain from any action, including without
limitation, any advertising, stating or
implying that it is authorized to sell or
distribute LEXUS Products.
In the event DEALER fails to comply with the terms and
conditions of this Section, DISTRIBUTOR shall have the
right to enter upon DEALER'S premises and remove,
without liability, all such product signs and
identification bearing the word LEXUS or any LEXUS
Marks. DEALER agrees that it shall reimburse
DISTRIBUTOR for any costs and expenses incurred in such
removal, including reasonable attorney fees.
XIII. CAPITAL, CREDIT, RECORDS AND UNIFORM SYSTEMS
A. NET WORKING CAPITAL
DEALER agrees to establish and maintain actual net working
capital in an amount not less than the minimum net working
capital specified by DISTRIBUTOR. DISTRIBUTOR will have the
right to increase the minimum net working capital required,
and DEALER agrees promptly to establish and maintain the
increased amount.
B. FLOORING AND LINES OF CREDIT
DEALER agrees to obtain and maintain at all times a
confirmed and adequate flooring line with a bank or
financial institution or other method of financing
acceptable to DISTRIBUTOR to enable DEALER to perform its
obligations pursuant to this Agreement.
DISTRIBUTOR may increase the required amounts of flooring or
lines of credit, and DEALER agrees promptly to establish and
maintain the increased amount.
Subject to the foregoing obligations, DEALER is free to do
its financing business, wholesale, retail or both, with
whomever it chooses and to the extent it desires.
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C. PAYMENT TERMS
All monies or accounts due DEALER from DISTRIBUTOR will be
considered net of DEALER'S indebtedness to DISTRIBUTOR.
DISTRIBUTOR may deduct or offset any amounts due or to
become due from DEALER to DISTRIBUTOR, or any amounts held
by DISTRIBUTOR, from or against any sums or accounts due or
to become due from DISTRIBUTOR to DEALER. Any amounts owed
by DEALER to DISTRIBUTOR that are not paid when due shall
bear interest as established by DISTRIBUTOR and permitted by
law. Payments by DEALER to DISTRIBUTOR shall be made in
such a manner as prescribed by DISTRIBUTOR and shall be
applied against DEALER'S indebtedness in accordance with
DISTRIBUTOR'S policies and practices.
D. UNIFORM ACCOUNTING SYSTEM
DEALER agrees to maintain its financial books and records in
accordance with the LEXUS Accounting Manual, as amended from
time to time by DISTRIBUTOR. In addition, DEALER shall
furnish to DISTRIBUTOR complete and accurate financial or
operating information, including without limitation, a
financial and/or operating statement covering the current
month and calendar year-to-date operations and showing the
true and accurate condition of DEALER'S business. DEALER
shall promptly furnish to DISTRIBUTOR copies of any adjusted
financial and/or operating statements, including any and all
adjusted, year-end statements prepared for tax or any other
purposes. All such information shall be furnished by DEALER
to DISTRIBUTOR via DISTRIBUTOR'S electronic communications
network and in such a format and at such times as prescribed
by DISTRIBUTOR.
E. RECORDS MAINTENANCE
DEALER agrees to keep complete, accurate and current records
regarding its sale, leasing and servicing of LEXUS Products
for a minimum of five (5) years, exclusive of any retention
period required by any governmental entity. DEALER shall
prepare, keep current and retain records in support of
requests for reimbursement for warranty and policy work
performed by DEALER in accordance with the LEXUS Warranty
Policies and Procedures Manual.
F. EXAMINATION OF DEALERSHIP ACCOUNTS AND RECORDS
DISTRIBUTOR shall have the right at all reasonable times and
during regular business hours to inspect DEALER'S facilities
and to examine, audit and to reproduce all records, accounts
and supporting data relating to the operations of
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DEALER, including without limitation, sales reporting,
service and repair of LEXUS Products by DEALER.
G. TAXES
DEALER shall be responsible for and duly pay all sales
taxes, use taxes, excise taxes and other governmental or
municipal charges imposed, levied or based upon the purchase
or sale of LEXUS Products by DEALER, and shall maintain
accurate records of the same.
H. CONFIDENTIALITY
DISTRIBUTOR agrees that it shall not provide any financial
data or documents submitted to it by DEALER to any third
party unless authorized by DEALER, required by law, or
required to generate composite or comparative data for
analytical purposes.
DEALER agrees to keep confidential and not to disclose,
directly or indirectly, any information that DISTRIBUTOR
designates as confidential.
I. DATA TRANSMISSION SYSTEMS
DISTRIBUTOR has established a national, private, centralized
database of information about all LEXUS vehicles and
customers. In order to provide the highest level of service
and support and to facilitate accurate and timely reporting
of relevant DEALER operational and financial data, DEALER
shall provide information to DISTRIBUTOR as specified by
DISTRIBUTOR from time to time, including, but not limited
to, customer service, sales, parts inventory and accounting
information. All information shall be submitted by DEALER
via the LEXUS electronic communications network. DEALER
will acquire, install and maintain at its expense the
necessary equipment and systems compatible with the LEXUS
electronic communications network. DISTRIBUTOR will
recommend to DEALER an independent source for purchasing the
required equipment and systems. DEALER, however, may
purchase equipment from any source, provided the equipment
meets the LEXUS electronic communications network
specifications.
J. SALES REPORTING
DEALER agrees to accurately report to DISTRIBUTOR, with such
relevant information as DISTRIBUTOR may reasonably require,
the delivery of each new motor vehicle to a purchaser by the
end of the day in which the vehicle is delivered
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to the purchaser thereof, and to furnish DISTRIBUTOR with
such other reports as DISTRIBUTOR may reasonably require
from time to time.
XIV. TRANSFERS
A. SALE OF OWNERSHIP INTEREST IN DEALERSHIP
This is a personal services Agreement based upon the
personal skills, service, qualifications and commitment of
DEALER'S OWNERS and General Manager. For this reason, and
because DISTRIBUTOR has entered into this Agreement in
reliance upon DEALER'S, OWNERS' and General Manager's
qualifications, DEALER agrees to obtain DISTRIBUTOR'S prior
written approval of any proposed change in its ownership,
General Manager or any proposed disposition of DEALER'S
principal assets.
DISTRIBUTOR shall not be obligated to renew this Agreement
or to execute a new Agreement to a proposed transferee
unless DEALER first makes arrangements acceptable to
DISTRIBUTOR to satisfy any outstanding indebtedness to
DISTRIBUTOR.
B. RIGHT OF FIRST REFUSAL OR OPTION TO PURCHASE
1. RIGHTS GRANTED
If a proposal to sell the dealership's assets or
transfer its ownership is submitted by DEALER to
DISTRIBUTOR, or in the event of the death of the
majority owner of DEALER, DISTRIBUTOR has a right of
first refusal or option to purchase the dealership
assets or stock, including any leasehold interest or
realty DISTRIBUTOR'S exercise of its right or option
under this Section supersedes DEALER'S right to
transfer its interest in, or ownership of, the
dealership. DISTRIBUTOR'S right or option may be
assigned by it to any third party and DISTRIBUTOR
hereby guarantees the full payment to DEALER of the
purchase price by such assignee. DISTRIBUTOR may
disclose the terms of any pending buy/sell agreement
and any other relevant dealership performance
information to any potential assignee. DISTRIBUTOR'S
rights under this Section will be binding on and
enforceable against any assignee or successor in
interest of DEALER or purchaser of DEALER'S assets.
2. EXERCISE OF DISTRIBUTOR'S RIGHTS
DISTRIBUTOR shall have thirty (30) days from the
following events within which to exercise its option to
purchase or right of first refusal.
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<PAGE> 27
(i) DISTRIBUTOR'S receipt of all data and documentation
customarily required by it to evaluate a proposed
transfer of ownership; (ii) DISTRIBUTOR'S receipt of
notice from DEALER of the death of the majority owner
of DEALER; or (iii) DISTRIBUTOR'S disapproving of any
application submitted by an OWNER'S heirs pursuant to
Section XIV. DISTRIBUTOR'S exercise of its right of
first refusal under this Section neither shall be
dependent upon nor require its prior refusal to approve
the proposed transfer.
3. RIGHT OF FIRST REFUSAL
If DEALER has entered into a bona fide written buy/sell
agreement for its dealership business or assets,
DISTRIBUTOR'S right under this Section is a right of
first refusal, enabling DISTRIBUTOR to assume the
buyer's rights and obligations under such buy/sell
agreement, and to cancel this Agreement and all rights
granted DEALER. Upon DISTRIBUTOR'S request, DEALER
agrees to provide other documents relating to the
proposed transfer and any other information which
DISTRIBUTOR deems appropriate, including, but not
limited to, those reflecting other agreements or
understandings between the parties to the buy/sell
agreement. Refusal to provide such documentation or to
state that no such documents exist shall create the
presumption that the buy/sell agreement is not a bona
fide agreement.
4. OPTION TO PURCHASE
In the event of the death of a majority OWNER or if
DEALER submits a proposal which DISTRIBUTOR determines
is not bona fide or in good faith, DISTRIBUTOR has the
option to purchase the principal assets of DEALER
utilizing the dealership business, including real
estate and leasehold interest, and to cancel this
Agreement and the rights granted DEALER. The purchase
price of the dealership assets will be determined by
good faith negotiations between the parties. If an
agreement cannot be reached, the purchase price will be
exclusively determined by binding arbitration in
accordance with the commercial arbitration rules of the
American Arbitration Association. The site of the
arbitration shall be the office of the American
Arbitration Association in the locality of
DISTRIBUTOR'S principal place of business.
5. DEALER'S OBLIGATIONS
Upon DISTRIBUTOR'S exercise of its right or option and
tender of performance under the buy/sell agreement or
upon whatever terms may be expressed in the buy/sell
agreement, DEALER shall forthwith transfer the affected
real property by warranty deed conveying marketable
title free and
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clear of all liens, claims, mortgages, encumbrances,
tenancies and occupancies. The warranty deed shall be
in proper form for recording, and DEALER shall deliver
complete possession of the property and deed at the
time of closing. DEALER shall also furnish to
DISTRIBUTOR all copies of any easements, licenses or
other documents affecting the property or dealership
operations and shall assign any permits or licenses
that are necessary or desirable for the use of or
appurtenant to the property or the conduct of such
dealer operations. DEALER also agrees to execute and
deliver to DISTRIBUTOR instruments satisfactory to
DISTRIBUTOR conveying title to all personal property,
including leasehold interests, involved in the transfer
or sale to DISTRIBUTOR. If any personal property is
subject to any lien or charge of any kind, DEALER
agrees to procure the discharge and satisfaction
thereof prior to the closing of sale of such property
to DISTRIBUTOR.
XV. SUCCESSION RIGHTS UPON DEATH OR INCAPACITY
A. SUCCESSION TO OWNERSHIP AFTER DEATH OF OWNER
In the event that OWNER dies and his or her interest in
Dealership passes directly to any person or persons
("Heirs") who wish to succeed to OWNER'S interest, then
OWNER'S legal representative must notify DISTRIBUTOR within
sixty (60) days of the death of the OWNER of such Heir's or
Heirs' intent to succeed OWNER. The legal representative
also must then designate a proposed General Manager for
DISTRIBUTOR approval. The effect of such notice from
OWNER'S legal representative will be to suspend any notice
of termination provided for in Section XVI(B)(4) issued
hereunder.
Upon delivery of such notice, OWNER'S legal representative
shall immediately request any person(s) identified by it as
intending to succeed OWNER and the designated candidate for
General Manager to submit an application and to provide all
personal and financial information that DISTRIBUTOR may
reasonably and customarily require in connection with its
review of such applications. All requested information must
be provided promptly to DISTRIBUTOR and in no case later
than thirty (30) days after receipt of such request from
OWNER'S legal representative. Upon the submission of all
requested information, DISTRIBUTOR agrees to review such
application(s) pursuant to the then current criteria
generally applied by DISTRIBUTOR in qualifying dealer OWNERS
and/or General Managers. DISTRIBUTOR shall either approve
or disapprove the application(s) within ninety (90) days of
full compliance with all DISTRIBUTOR'S requests for
information. If DISTRIBUTOR approves the application(s), it
shall offer to enter into a new LEXUS Dealer Agreement with
OWNER'S Heir(s) in the form then currently in use, subject
to such additional conditions and for such term as
DISTRIBUTOR deems appropriate.
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<PAGE> 29
In the event that DISTRIBUTOR does not approve the
designated Heir(s) or designated candidate for Manager, or
if the OWNER'S legal representative withdraws his or her
notice of the Heir(s) intent to succeed as OWNER(S) or if
the legal representative or any proposed OWNERS or General
Manager fails to timely provide the required information,
DISTRIBUTOR may reinstate or issue a notice of termination.
Nothing in this Section shall waive DISTRIBUTOR'S right to
exercise its Option to Purchase set forth in Section XIV
herein.
B. INCAPACITY OF OWNER
The parties agree that, as used herein, incapacity shall
refer to any physical or mental ailment that, in
DISTRIBUTOR'S opinion, adversely affects OWNER'S ability to
meet his or her obligations under this Agreement.
DISTRIBUTOR may terminate this Agreement when an
incapacitated OWNER also is the General Manager identified
herein.
Prior to the effective date of any notice of termination, an
incapacitated OWNER who is also the General Manager, or his
or her legal representative, may propose a new candidate for
the position of General Manager. Such proposal shall be in
writing and shall suspend any pending notice of termination
until DISTRIBUTOR advises DEALER of its approval or
disapproval of the new candidate. Upon receipt of such
notice, DISTRIBUTOR and DEALER shall follow the
qualification procedures set forth in subsection A above.
C. NOMINATION OF SUCCESSOR PRIOR TO DEATH OR INCAPACITY OF OWNER
An OWNER owning a majority of DEALER'S stock may nominate a
candidate to assume ownership and/or the position of General
Manager of the dealership upon his or her death or
incapacity.
As soon as practicable after such nomination, DISTRIBUTOR
will request such personal financial information from the
nominated OWNER and/or General Manager candidate as it
reasonably and customarily may require in evaluating such
candidates. DISTRIBUTOR shall apply criteria then currently
used by DISTRIBUTOR in qualifying OWNERS and/or General
Managers of authorized dealers. Upon receipt of all
requested information, DISTRIBUTOR shall either approve or
disapprove such candidate. If DISTRIBUTOR initially
approves the candidate, said approval shall remain in effect
for the duration of the current Agreement. DISTRIBUTOR
agrees that DEALER may renominate the candidate after the
expiration of this Agreement, and DISTRIBUTOR will approve
such nomination provided: (i) DISTRIBUTOR and DEALER have
entered into a new LEXUS Dealer Agreement; and (ii) the
proposed candidate continues to comply
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with the then current criteria used by DISTRIBUTOR in
qualifying such candidates. If DISTRIBUTOR does not
initially qualify the candidate, DISTRIBUTOR agrees to
review the reason(s) for its decision with OWNER. OWNER is
free at any time to renew its nomination. However, in such
instances, the candidate must again qualify pursuant to the
then current criteria. OWNER may, by written notice,
withdraw a nomination at any time, even if DISTRIBUTOR has
previously qualified said candidate.
XVI. TERMINATION
A. VOLUNTARY TERMINATION BY DEALER
DEALER may voluntarily terminate this Agreement at any time
by written notice to DISTRIBUTOR. Termination shall be
effective thirty (30) days after receipt of the notice by
DISTRIBUTOR, unless otherwise mutually agreed in writing.
B. TERMINATION FOR CAUSE
1. IMMEDIATE TERMINATION
DEALER and DISTRIBUTOR agree that the following conduct
is within DEALER'S control and is so contrary to the
goals, purposes and objectives of this Agreement as to
warrant its immediate termination. Accordingly, DEALER
agrees that if it engages in any of the following types
of conduct, DISTRIBUTOR shall have the right to
terminate this Agreement immediately:
a. If DEALER fails to conduct any customary
dealership operations for seven consecutive
business days, except in the event such
closure or cessation of operation is caused
by some physical event beyond the control of
the DEALER, such as strikes, civil war,
riots, fires, floods, earthquakes, or other
acts of God;
b. If DEALER becomes insolvent, or files any
petition under bankruptcy law, or executes an
assignment for the benefit of creditors, or
appoints a receiver or trustee or another
officer having similar powers is appointed
for DEALER and is not removed within thirty
(30) days from his appointment thereto or
there is any levy under attachment or
execution or similar process which is not
vacated or removed by payment or bonding
within ten (10) days;
c. If DEALER, or any OWNER or Officer of DEALER
is convicted of any felony;
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<PAGE> 31
d. If DEALER or any OWNER, Officer or General
Manager of Dealer makes any material
misrepresentation to DISTRIBUTOR; or
e. If DEALER fails to obtain or maintain any
license, permit or authorization necessary
for the conduct by DEALER of his or her
business pursuant to this Agreement, or such
license, permit or authorization is suspended
or revoked.
2. TERMINATION UPON SIXTY DAYS NOTICE
The following conduct violates the terms and conditions
of this Agreement and, if DEALER engages in such
conduct, DISTRIBUTOR shall have the right to terminate
this Agreement upon sixty (60) days notice:
a. Any attempted or actual sale, transfer or
assignment by DEALER of this Agreement or any
of the rights granted DEALER hereunder, or
any attempted or actual transfer, assignment
or delegation by DEALER of any of the
responsibilities assumed by it under this
Agreement without the prior written approval
of DISTRIBUTOR;
b. Any unreasonable removal of the General
Manager;
c. Appointment of a new General Manager without
the prior written approval of DISTRIBUTOR;
d. The conducting, directly or indirectly, of
any LEXUS dealer operation other than at the
Approved Location(s);
e. Failure of DEALER to pay DISTRIBUTOR for any
LEXUS Products;
f. Failure of DEALER to establish or maintain
during the existence of this Agreement the
required net working capital or adequate
flooring and lines of credit;
g. Any dispute, disagreement or controversy
among managers, officers or stockholders of
DEALER that, in the reasonable opinion of
DISTRIBUTOR, adversely affects the ownership,
operation, management, business, reputation
or interests of DEALER or DISTRIBUTOR;
h. Retention by DEALER of any General Manager,
who, in DISTRIBUTOR'S reasonable opinion, is
not competent or, if
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previously approved by DISTRIBUTOR, no longer
possesses the requisite qualifications for
the position, or who has acted in a manner
contrary to the continued best interest of
both DEALER all DISTRIBUTOR;
i. Impairment of the reputation or financial
standing of DEALER subsequent to the
execution of this Agreement;
j. Refusal to permit DISTRIBUTOR to examine or
audit DEALER'S accounting records as provided
herein upon receipt by DEALER from
DISTRIBUTOR of written notice requesting such
permission or information;
k. Failure of DEALER to timely furnish accurate
sales or financial information and related
supporting data;
l. Breach or violation by DEALER of any other
term or provision of this Agreement; or
m. Any civil or administrative liability found
against DEALER or any OWNER or Officer of
DEALER for any automotive-related matter
which in DISTRIBUTOR'S opinion tends to
seriously and adversely affect the ownership,
operation, management, reputation, business
or interests of DEALER, or to impair the
goodwill associated with the LEXUS Marks.
3. TERMINATION FOR FAILURE OF PERFORMANCE
If, upon evaluation of DEALER's performance pursuant to
paragraphs II(F)-X(F), XI(B) or XII(E) herein,
DISTRIBUTOR concludes that DEALER has failed to perform
adequately its sales, service or customer satisfaction
responsibilities or to provide adequate dealership
facilities, DISTRIBUTOR shall notify DEALER in writing
of such failure(s) and will endeavor to review promptly
with DEALER the nature and extent of such failure(s),
and will grant DEALER 180 days or such other period as
may be required by law to correct such failure(s). If
DEALER fails or refuses to correct such failure(s) or
has not made substantial progress towards remedying
such failure(s) at the expiration of such period,
DISTRIBUTOR may terminate this Agreement upon sixty
(60) days notice or such other notice as may be
required by law.
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<PAGE> 33
4. TERMINATION UPON DEATH OR INCAPACITY
Subject to certain exceptions identified in Section XV,
DISTRIBUTOR may terminate this Agreement in the event
of the death of an OWNER or upon the incapacity of any
OWNER who is also the General Manager identified
herein, upon written notice to DEALER and such OWNER'S
legal representative. Termination, upon either of
these events shall be effective ninety (90) days from
the date of such notice.
C. NOTICE OF TERMINATION
Any notice of termination under this Agreement shall be in
writing and shall be mailed to the person(s) designated to
receive such notice, via certified mail, or shall be
delivered in person. Such notice shall be effective upon
the date of receipt. DISTRIBUTOR shall state the grounds on
which it relies in its termination of DEALER, and shall have
the right to amend such notice as appropriate.
DISTRIBUTOR'S failure to refer to additional grounds for
termination shall not constitute a waiver of its right later
to rely upon such grounds.
D. CONTINUANCE OF BUSINESS RELATIONS
Upon receipt of any notice of termination or non-renewal,
DEALER agrees to conduct itself and its operation until the
effective date of termination or non- renewal in a manner
that will not injure the reputation or goodwill of the LEXUS
Marks or DISTRIBUTOR.
E. REPURCHASE PROVISIONS
1. DISTRIBUTOR'S OBLIGATIONS
Upon the expiration or termination of this Agreement,
DISTRIBUTOR shall have the right to cancel any and all
shipments of LEXUS Products scheduled for delivery to
DEALER, and DISTRIBUTOR shall repurchase from DEALER
the following:
a. New, unused, unmodified and undamaged LEXUS
Motor Vehicles then unsold in DEALER'S
inventory. The prices of such Motor Vehicles
shall be the same as those at which they were
originally purchased by DEALER, less all
prior refunds or other allowances made by
DISTRIBUTOR to DEALER with respect thereto.
b. New, unused and undamaged LEXUS parts and
accessories then unsold in DEALER'S inventory
that are in good and saleable
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condition. The prices for such parts and
accessories shall be the prices last
established by DISTRIBUTOR for the sale of
identical parts or accessories to dealers in
the area in which DEALER is located.
c. Special service tools recommended by
DISTRIBUTOR and then owned by DEALER and that
are especially designed for servicing LEXUS
Motor Vehicles. The prices for such special
service tools will be the price paid by
DEALER less appropriate depreciation, or such
other price as the parties may negotiate.
d. Signs that DISTRIBUTOR has recommended for
identification of DEALER. The price of such
signs shall be the price paid by DEALER less
appropriate depreciation or such other price
as the parties may negotiate.
2. RESPONSIBILITIES OF DEALER
DISTRIBUTOR'S obligations to repurchase the items set
forth in this Section are contingent upon DEALER
fulfilling the following obligations:
a. Within thirty (30) days after the date of
expiration or the effective date of
termination of this Agreement, DEALER shall
deliver or mail to DISTRIBUTOR a detailed
inventory of all items referred to in this
Section which it requests DISTRIBUTOR
repurchase and shall certify that such list
is true and accurate.
b. DEALER shall be entitled to request
repurchase of only those items which it
purchased from DISTRIBUTOR, unless
DISTRIBUTOR agrees otherwise.
c. Products and special service tools to be
repurchased by DISTRIBUTOR from DEALER shall
be delivered by DEALER to DISTRIBUTOR'S place
of business at DEALER'S expense. If DEALER
fails to do so, DISTRIBUTOR may transfer such
items and deduct the cost therefor from the
repurchase price.
d. DEALER will execute and deliver to
DISTRIBUTOR instruments satisfactory to
DISTRIBUTOR conveying good and marketable
title to the aforesaid items to DISTRIBUTOR.
If such items are subject to any lien or
charge of any kind, DEALER will procure the
discharge in satisfaction thereof prior to
their repurchase by DISTRIBUTOR.
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<PAGE> 35
DEALER will comply with the requirements of
any state or federal laws that relate to the
repurchase including bulk sales or transfer
laws.
e. DEALER will remove, at its own expense, all
signage from DEALER'S approved locations
including all LEXUS Marks before it is
eligible for payment hereunder.
3. PAYMENT BY DISTRIBUTOR
DISTRIBUTOR will pay DEALER for such items as DEALER
may request be repurchased and that qualify hereunder
as soon as practicable upon DEALER'S compliance with
the obligations set forth herein and upon computation
of any outstanding indebtedness of DEALER to
DISTRIBUTOR.
DISTRIBUTOR shall have the right to offset from any
amounts due to DEALER hereunder the total sum of
DEALER'S outstanding indebtedness to DISTRIBUTOR.
If DEALER disagrees with DISTRIBUTOR'S valuation of any
item herein, and DEALER and DISTRIBUTOR have not
resolved their disagreement within sixty (60) days of
the effective date of termination or expiration of this
Agreement, DISTRIBUTOR shall pay to DEALER the amount
to which it reasonably believes DEALER is entitled.
DEALER'S exclusive remedy to recover any additional
sums that it believes is due under this Section shall
be by resort to an Alternative Dispute Resolution
program, including arbitration, that is binding on both
parties.
XVII. MANAGEMENT OF DISPUTES
A. ALTERNATIVE DISPUTE RESOLUTION PROGRAMS
1. DISTRIBUTOR and DEALER acknowledge that disputes
involving the performance of this Agreement may from
time to time arise. In order to minimize the effects
of such disputes on their business relationship, the
parties agree to participate in such Alternative
Dispute Resolution programs as may be established by
DISTRIBUTOR.
2. Such Alternative Dispute Resolution programs may be
established to resolve disputes in matters including,
but not limited to, sales reporting and/or sales credit
disputes, product allocation disputes, DEALER liability
for repair/replace claims, warranty and service
campaign reimbursement, sales contests and
merchandising incentive programs, and accounts of debt
between the parties.
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<PAGE> 36
3. In all disputes between DEALER and DISTRIBUTOR, the
parties shall first resort to such Alternative Dispute
Resolution programs, including mediation, as may have
been established by DISTRIBUTOR.
4. It is expressly understood that, unless otherwise
specified in this Agreement, the results of any
Alternative Dispute Resolution program will not be
binding upon DEALER or DISTRIBUTOR.
5. The parties' commitment to support and participate in
non-binding Alternative Dispute Resolution programs
specifically is not a waiver of DEALER'S or
DISTRIBUTOR'S right to later resort to litigation
before any judicial or administrative forum.
B. APPLICABLE LAW
This Agreement shall be governed by and construed according
to the laws of the state in which DEALER is located.
C. MUTUAL RELEASE
Each party hereby releases the other from any and all claims
and causes of action that it may have against the other for
money damages arising from any event occurring prior to the
date of execution of this Agreement, except for any
accounts payable by one party to the other as a result of
the purchase of any LEXUS Products, audit adjustments or
reimbursement for any services. This release does not
extend to claims which either party does not know or
reasonably suspect to exist in its favor at the time of the
execution of this Agreement.
XVIII. DEFENSE AND INDEMNIFICATION
A. DEFENSE AND INDEMNIFICATION BY DISTRIBUTOR
DISTRIBUTOR agrees to assume the defense of DEALER and
to indemnify and hold DEALER harmless in any lawsuit
naming DEALER as a defendant and involving any LEXUS
Product when the lawsuit also involves allegations of:
1. Breach of warranty provided by DISTRIBUTOR,
bodily injury or property damage arising out
of an occurrence allegedly caused solely by a
defect or failure to warn of a defect in
design, manufacture or assembly of a LEXUS
Product (except for tires not manufactured by
FACTORY), provided that the defect could not
reasonably have been
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<PAGE> 37
discovered by DEALER during the pre-delivery
service of the LEXUS Product;
2. Any misrepresentation or misleading statement
or unfair or deceptive trade practice of
DISTRIBUTOR; or
3. Any damage to a LEXUS Product purchased by
DEALER from DISTRIBUTOR that was repaired by
DISTRIBUTOR and where DEALER had not been
notified of such damage in writing prior to
the delivery of the subject vehicle, part or
accessory to a retail Customer; and
Provided:
4. That DEALER delivers to DISTRIBUTOR, in a
manner to be designated by DISTRIBUTOR,
within twenty (20) days of the service of any
summons or complaint, copies of such
documents and requests in writing a defense
and/or indemnification therein (except as
provided in Paragraph (D) below;
5. That the complaint does not involve
allegations of DEALER misconduct, including
but not limited to, improper or
unsatisfactory service or repair,
misrepresentation, or any claim of DEALER'S
unfair or deceptive trade practice;
6. That the LEXUS Product which is the subject
of the lawsuit was not altered by or for
DEALER;
7. That DEALER agrees to cooperate fully in the
defense of such action as DISTRIBUTOR may
reasonably require; and
8. That DEALER agrees that DISTRIBUTOR may
offset any recovery on DEALER'S behalf
against any indemnification that may be
required hereunder.
B. DEFENSE AND INDEMNIFICATION BY DEALER
DEALER agrees to assume the defense of DISTRIBUTOR or
FACTORY and to indemnify and hold them harmless in any
lawsuit naming DISTRIBUTOR or FACTORY as a defendant when
the lawsuit involves allegations of:
1. DEALER'S alleged failure to comply, in whole or in
part, with any obligations assumed by DEALER pursuant
to this Agreement;
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<PAGE> 38
2. DEALER'S alleged negligent or improper repairing or
servicing of a new or used LEXUS Motor Vehicle or
equipment, or such other motor vehicles or equipment as
may be sold or serviced by DEALER;
3. DEALER'S alleged breach of any contract or warranty
other than that provided by DISTRIBUTOR or FACTORY;
4. DEALER'S alleged misleading statements,
misrepresentations, or deceptive or unfair trade
practices;
5. Any modification or alteration made by or on behalf of
DEALER to a LEXUS Product, except those made pursuant
to the express instruction or with the express approval
of DISTRIBUTOR; and
Provided:
6. That DISTRIBUTOR delivers to DEALER, within twenty (20)
days of the service of any summons or complaint, copies
of such documents, and requests in writing a defense
and/or indemnification therein (except as provided in
Paragraph (D) below);
7. That DISTRIBUTOR agrees to cooperate fully in the
defense of such action as DEALER may reasonably
require; and,
8. That the complaint does not involve allegations of
liability premised upon separate DISTRIBUTOR'S conduct
or omissions.
C. CONDITIONAL DEFENSE AND/OR INDEMNIFICATION
In agreeing to defend and/or indemnify each other, DEALER
and DISTRIBUTOR may make their agreement conditional on the
continued existence of the state of facts as then known to
such party and may provide for the withdrawal of such
defense and/or indemnification at such time as facts arise
which, if known at the time of the original request for a
defense and/or indemnification, would have caused either
DEALER or DISTRIBUTOR to refuse such request.
The party withdrawing from its agreement to defend and/or
indemnify shall give timely notice of its intent to
withdraw. Such notice shall be in writing and shall be
effective upon receipt. The withdrawing party shall be
responsible for all costs and expenses of defense up to the
date of receipt of its notice of withdrawal.
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<PAGE> 39
D. THE EFFECT OF SUBSEQUENT DEVELOPMENTS
In the event that subsequent developments in a case make
clear that the allegations which initially preclude a
request or an acceptance of a request for a defense and/or
indemnification are no longer at issue therein or are
without foundation, any party having a right to a defense
and/or indemnification hereunder may tender such request for
a defense and indemnification to the other party. Neither
DEALER nor DISTRIBUTOR shall be required to agree to such
subsequent request for a defense and/or indemnification
where that party would be unduly prejudiced by such delay.
E. TIME TO RESPOND AND RESPONSIBILITIES OF THE PARTIES
DEALER and DISTRIBUTOR shall have sixty (60) days from the
receipt of a request for a defense and/or indemnification to
conduct an investigation to determine whether or not, or
under what conditions, it may agree to defend and/or
indemnify pursuant to this Section.
If local rules require a response to the complaint in the
lawsuit prior to the time provided hereunder for a response
to such request, the requesting party shall take all steps
necessary, including obtaining counsel, to protect its own
interest in the lawsuit until DEALER or DISTRIBUTOR assumes
the requested defense and/or indemnification. In the event
that DEALER or DISTRIBUTOR agrees to assume the defense
and/or indemnification of a lawsuit, it shall have the right
to engage and direct counsel of its own choosing and, except
in cases where the request is made pursuant to Paragraph (D)
above, shall have the obligation to reimburse the requesting
party for all reasonable costs and expense, including actual
attorneys' fees, incurred prior to such assumption.
XIX. GENERAL PROVISIONS
A. NOTICES
Except as otherwise specifically provided herein, any notice
required to be given by either party to the other shall be
in writing and delivered personally or by certified mail,
return receipt requested, and shall be effective from the
date of mailing. Notices to DEALER shall be directed to
DEALER or its General Manager at DEALER'S Approved Location.
Notices to DISTRIBUTOR shall be directed to the General
Manager of DEALER'S LEXUS Area Office.
B. NO IMPLIED WAIVERS
The failure of either party at any time to require
performance by the other party of any provision herein shall
in no way affect the right of such
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<PAGE> 40
party to require such performance at any time thereafter,
nor shall any waiver by any party of a breach of any
provision herein constitute a waiver of any succeeding
breach of the same or any other provision, nor constitute a
waiver of the provision itself.
C. SOLE AGREEMENT OF THE PARTIES
There are no prior agreements or understandings, either oral
or written, between the parties affecting this Agreement or
relating to the sale or service of LEXUS Products, except as
otherwise specifically provided for or referred to in this
Agreement. DEALER acknowledges that no representations or
statements other than those expressly set forth therein were
made by DISTRIBUTOR or any officer, employee, agent or
representative thereof, or were relied upon by DEALER in
entering into this Agreement. This Agreement cancels and
supersedes all previous agreements between the parties
relating to the subject matters covered herein.
D. DEALER NOT AN AGENT OR REPRESENTATIVE
DEALER is an independent business. This Agreement is not a
property right and does not constitute DEALER the agent or
legal representative of DISTRIBUTOR or FACTORY for any
purpose whatsoever. DEALER is not granted any express or
implied right or authority to assume or create any
obligation on behalf of or in the name of DISTRIBUTOR or
FACTORY or to bind DISTRIBUTOR or FACTORY in any manner
whatsoever.
E. ASSIGNMENT OF RIGHTS OR DELEGATION OF DUTIES
This is a personal services agreement and may not be
assigned or sold in whole or in part, directly or
indirectly, voluntarily or by operation of law, without the
prior written approval of DISTRIBUTOR. Any attempted
transfer, assignment or sale without DISTRIBUTOR'S prior
written approval will be void and not binding upon
DISTRIBUTOR.
F. NO FRANCHISE FEE
DEALER warrants that it has paid no fee, nor has it provided
any goods or services in lieu of same, to DISTRIBUTOR in
consideration of entering into this Agreement. The sole
consideration for DISTRIBUTOR'S entering into this Agreement
is DEALER'S ability, integrity, assurance of personal
services and expressed intention to deal fairly and
equitably with DISTRIBUTOR and the public.
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<PAGE> 41
G. SEVERABILITY
If any provision of this Agreement should be held invalid or
unenforceable for any reason whatsoever, or conflicts with
any applicable law, this Agreement will be considered
divisible as to such provisions, and such provisions will be
deemed amended to comply with such law, or if it cannot be
so amended --without materially affecting the tenor of the
Agreement, then it will be deemed deleted from this
Agreement in such jurisdiction, and in either case, the
remainder of the initial Agreement will be valid and
binding.
H. NEW AND SUPERSEDING DEALER AGREEMENT
In the event any new and superseding form of dealer
agreement is offered by DISTRIBUTOR to authorized LEXUS
dealers generally at any time prior to the expiration of the
term of this Agreement, DISTRIBUTOR, may, by written notice
to DEALER, replace this Agreement with a new agreement in a
new and superseding form for a term not less than the then
unexpired term of this Agreement.
I. BENEFIT
This Agreement is entered into by and between DISTRIBUTOR
and DEALER for their sole and mutual benefit. Neither this
Agreement nor any specific provision contained in it is
intended or shall be construed to be for the benefit of any
third party.
XX. DEFINITIONS
As used in this Agreement, the parties agree that the following
terms shall be defined exclusively as set forth below.
A. DEALER: The entity that executes the Dealer Agreement and is
authorized by DISTRIBUTOR to sell and service LEXUS
Products.
B. OWNER: The persons identified in Section II hereof.
C. GENERAL MANAGER: The person identified in Section III
hereof.
D. DEALER FACILITIES: The buildings, improvements, fixtures,
and equipment situated at the Approved Location(s).
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<PAGE> 42
E. APPROVED LOCATION(S): The location(s) and any facilities
thereon, designated in SECTION IV that DISTRIBUTOR has
approved for the dealership operation(s) specified therein.
F. LEXUS MARKS: The various LEXUS trademarks, service marks,
names, logos and designs that DEALER is authorized by
DISTRIBUTOR to use in the sale and servicing of LEXUS
Products.
G. LEXUS MOTOR VEHICLES: All motor vehicles identified in the
current LEXUS Product Addendum that DISTRIBUTOR sells to
DEALER for resale.
H. GENUINE LEXUS PARTS AND ACCESSORIES: All LEXUS brand Parts
and Accessories manufactured by or on behalf of DISTRIBUTOR
or FACTORY, or other parts and accessories specifically
approved by FACTORY for use in servicing LEXUS Motor
Vehicles and sold by DISTRIBUTOR to DEALER for resale.
I. LEXUS PRODUCTS: All LEXUS Motor Vehicles, Parts and
Accessories that DISTRIBUTOR, in its sole discretion, sells
to DEALER for resale. The term "LEXUS PRODUCTS"
specifically excludes any motor vehicle, part or accessory
imported into the United States by any individual or company
other than DISTRIBUTOR.
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<PAGE> 1
EXHIBIT 10.19
Group 1 Automotive, Inc.
Senior Secured Credit Facility
Commitment Letter
September 22, 1997
Group 1 Automotive, Inc.
950 Echo Lane, Suite 348
Houston, Texas 77024
Attention: Mr. Scott Thompson
Ladies and Gentlemen:
You have advised Texas Commerce Bank National Association ("TCB") and Chase
Securities Inc. ("CSI") that Group 1 Automotive, Inc., a Delaware corporation,
and its wholly-owned subsidiaries (the "Co-Borrowers") intend to finance new
and program vehicle inventories and acquire auto dealerships. In that
connection, you have requested that CSI agree to structure, arrange and
syndicate a senior secured credit Facility in an aggregate amount of up to
$125,000,000 (the "Facility"), and that TCB commit to provide a portion of the
Facility and to serve as administrative agent for the Facility.
CSI is pleased to advise you that it is willing to act as exclusive advisor and
arranger for the Facility.
Furthermore, TCB is pleased to advise you of (a) its commitment to provide up
to $30,000,000 of the Facility, and (b) its agreement to use commercially
reasonable efforts to assemble a syndicate of financial institutions identified
by CSI and TCB in consultation with you, to provide the balance of the
necessary commitments for the Facility, in each case upon the terms and subject
to the conditions set forth or referred to in this commitment letter (this
"Commitment Letter") and in the Summary of Terms and Conditions attached hereto
as Exhibit A (the "Term Sheet"). It is a condition to TCB's commitment
hereunder that the portion of the Facility not being provided by TCB shall be
provided by the other Lenders referred to below.
It is agreed that TCB will act as the sole and exclusive Administrative Agent,
that CSI will act as the sole and exclusive advisor and arranger, and that
Comerica Bank ("Comerica") will act as Floor Plan Agent, for the Facility, and
each will, in such capacities, perform the duties and exercise the authority
customarily performed and exercised by it in such roles. You agree that no
other agents, co-agents or arrangers will be appointed, no other titles will be
awarded and no compensation (other than that expressly contemplated by the Term
Sheet and the Fee Letter referred to below) will be paid in connection with the
Facility unless you and we shall so agree.
<PAGE> 2
CSI intends to syndicate the Facility (including, in our discretion, all or
part of TCB's commitment hereunder) to a group of financial institutions
(together with TCB, the "Lenders") identified by us in consultation with you.
CSI intends to commence syndication efforts promptly upon the execution of this
Commitment Letter, and you agree actively to assist CSI in completing a
syndication satisfactory to it. Such assistance shall include (a) your using
commercially reasonable efforts to ensure that the syndication efforts benefit
materially from your existing lending relationships, (b) direct contact between
senior management and advisors of the Co-Borrowers and the proposed Lenders,
(c) assistance in the preparation of a Confidential Information Memorandum and
other marketing materials to be used in connection with the syndication and (d)
the hosting, with CSI, of one or more meetings for prospective Lenders.
CSI will manage all aspects of the syndication, including decisions as to the
selection of institutions to be approached and when they will be approached,
when their commitments will be accepted, which institutions will participate,
the allocations of the commitments among the Lenders and the amount and
distribution of fees among the Lenders. To assist CSI in its syndication
efforts, you agree promptly to prepare and provide to CSI and TCB all
information with respect to the Co-Borrowers, the floor plan finance program,
future acquisitions and the other transactions contemplated hereby and by the
Term Sheet and the Fee Letter referred to below, including all financial
information and projections (the "Projections"), as we may reasonably request
in connection with the arrangement and syndication of the Facility. You hereby
represent and covenant that (a) all information other than the Projections (the
"Information") that has been or will be made available to TCB or CSI by you or
any of your representatives is or will be, when furnished, complete and correct
in all material respects and does not or will not, when furnished, contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements contained therein not materially misleading in
light of the circumstances under which such statements are made and (b) the
Projections that have been or will be made available to TCB or CSI by you or
any of your representatives have been or will be prepared in good faith based
upon reasonable assumptions. You understand that in arranging and syndicating
the Facility we may use and rely on the Information and Projections without
independent verification thereof. You hereby acknowledge and consent that CSI
may share the Confidential Information Memorandum, the Information and any
other information or matters relating to the Co-Borrowers or the transactions
contemplated hereby with affiliates of CSI, including The Chase Manhattan Bank,
and TCB, and that such affiliates may likewise share information relating to
the Co-Borrowers or such transactions with CSI.
As consideration for TCB's commitment hereunder and CSI's agreement to perform
the services described herein, you agree to pay to TCB the nonrefundable fees
set forth in Annex I to the Term Sheet and in the Fee Letter dated hereof and
delivered herewith (the "Fee Letter").
TCB and CSI shall be entitled, with your consent (which shall not be
unreasonably withheld), to change the structure, terms or amount of, or to
eliminate, any of the Facility if TCB and CSI determine that such changes are
advisable in order to ensure a successful syndication or an optimal credit
structure and if the aggregate amount of the Facility shall remain unchanged.
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<PAGE> 3
TCB's commitment hereunder and CSI's agreement to perform the services
described herein are subject to (a) there not occurring or becoming known to us
any material adverse condition or material adverse change in or affecting the
business, operations, property, condition (financial or otherwise) or prospects
of the Co-Borrowers and its subsidiaries, taken as a whole, (b) our completion
of and satisfaction in all respects with a due diligence investigation of the
Co-Borrowers, (c) our not becoming aware after the date hereof of any
information or other matter affecting the Co-Borrowers or the transactions
contemplated hereby which is inconsistent in a material and adverse manner with
any such information or other matter disclosed to us prior to the date hereof,
(d) there not having occurred a material disruption of or material adverse
change in financial, banking or capital market conditions that, in our
judgment, could materially impair the syndication of the Facility, (e) our
satisfaction that prior to and during the syndication of the Facility there
shall be no competing offering, placement or arrangement of any debt securities
or bank financing by or on behalf of the Co-Borrowers or any affiliate thereof,
(f) the negotiation, execution and delivery on or before November 28, 1997 of
definitive documentation with respect to the Facility satisfactory to TCB and
its counsel and (g) the other conditions set forth or referred to in the Term
Sheet. The terms and conditions of TCB's commitment hereunder and of the
Facility are not limited to those set forth herein and in the Term Sheet. Those
matters that are not covered by the provisions hereof and of the Term Sheet are
subject to the approval and agreement of TCB, CSI and the Co-Borrowers.
You agree to indemnify and hold harmless TCB, CSI, their affiliates and their
respective officers, directors, employees, advisors, and agents (each, an
"Indemnified Person") from and against any and all losses, claims, damages and
liabilities to which any such Indemnified Person may become subject arising out
of or in connection with this Commitment Letter, the Facility, the use of the
proceeds thereof, or any related transaction or any claim, litigation,
investigation or proceeding relating to any of the foregoing, regardless of
whether any Indemnified Person is a party thereto, and to reimburse each
Indemnified Person upon demand for any legal or other expenses incurred in
connection with investigating or defending any of the foregoing, provided that
the foregoing indemnity will not, as to any Indemnified Person, apply to Losses
or related expenses to the extent they arise from the willful misconduct or
gross negligence of such Indemnified Person. YOU AGREE THAT THE INDEMNITY
CONTAINED IN THE PRECEDING SENTENCE EXTENDS TO AND IS INTENDED TO COVER LOSSES
AND RELATED EXPENSES ARISING OUT OF THE ORDINARY, SOLE OR CONTRIBUTORY
NEGLIGENCE OF AN INDEMNIFIED PERSON. In addition, you agree to reimburse TCB,
CSI and their affiliates on demand for all out-of-pocket expenses (including
due diligence expenses, syndication expenses, travel expenses, and reasonable
fees, charges and disbursements of counsel) incurred in connection with the
Facility and any related documentation (including this Commitment Letter, the
Term Sheet, the Fee Letter and the definitive financing documentation) or the
administration, amendment, modification or waiver thereof. No Indemnified
Person shall be liable for any indirect or consequential damages in connection
with its activities related to the Facility.
This Commitment Letter shall not be assignable by you without the prior written
consent of TCB and CSI (and any purported assignment without such consent shall
be null and void), is intended to be solely for the benefit of the parties
hereto and is not intended to confer any benefits upon, or create any rights in
favor of, any person other than the parties hereto. This Commitment Letter may
not be amended or waived except by an instrument in writing signed by you, TCB
and CSI. This Commitment Letter may be executed in any number of counterparts,
each of which shall be an
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<PAGE> 4
original, and all of which, when taken together, shall constitute one
agreement. Delivery of an executed signature page of this Commitment Letter by
facsimile transmission shall be effective as delivery of a manually executed
counterpart hereof. This Commitment Letter (together with the Term Sheet),
between you and TCB and the Fee Letter are the only agreements that have been
entered into among us with respect to the Facility and set forth the entire
understanding of the parties with respect thereto. THIS COMMITMENT LETTER SHALL
BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
TEXAS.
This Commitment Letter is delivered to you on the understanding that neither
this Commitment Letter, the Term Sheet or the Fee Letter nor any of their terms
or substance shall be disclosed, directly or indirectly, to any other person
except (a) to your officers, agents and advisors who are directly involved in
the consideration of this matter or (b) as may be compelled in a judicial or
administrative proceeding or as otherwise required by law (in which case you
agree to inform us promptly thereof), provided, that the foregoing restrictions
shall cease to apply (except in respect of the Fee Letter and its terms and
substance) after this Commitment Letter has been accepted by you.
The reimbursement, indemnification and confidentiality provisions contained
herein and in the Fee Letter shall remain in full force and effect regardless
of whether definitive financing documentation shall be executed and delivered
and notwithstanding the termination of this Commitment Letter or TCB's
commitment hereunder.
THIS COMMITMENT LETTER, THE ATTACHED TERM SHEET, THE FEE LETTER AND ALL
EXHIBITS, SCHEDULES AND OTHER ATTACHMENTS HERETO AND THERETO CONSTITUTE A "LOAN
AGREEMENT" FOR PURPOSES OF SECTION 26.02 OF THE TEXAS BUSINESS AND COMMERCE
CODE AND REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OR PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
If the foregoing correctly sets forth our agreement, please indicate your
acceptance of the terms hereof and of the Term Sheet and the Fee Letter by
returning to us executed counterparts hereof and of the Fee Letter not later
than 5:00 p.m., Houston, Texas time, on September 29, 1997. TCB's commitment
and CSI's agreements herein will expire at such time in the event TCB has not
received such executed counterparts in accordance with the immediately
preceding sentence.
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<PAGE> 5
TCB and CSI are pleased to have been given the opportunity to assist you in
connection with this important financing.
Very truly yours,
TEXAS COMMERCE BANK
NATIONAL ASSOCIATION
By: /s/ C.D. KARGES
----------------------------
Name:
Title:
CHASE SECURITIES INC.
By: /s/
----------------------------
Name:
Title:
Accepted and agreed to as of
the date first above written by:
GROUP 1 AUTOMOTIVE, INC.
By: /s/ SCOTT C. THOMPSON
----------------------------
Name:
Title:
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<PAGE> 6
EXHIBIT A - SUMMARY OF PRINCIPAL TERMS AND CONDITIONS
FACILITY: Up to $125,000,000 Revolving Credit Facility to be available
in two tranches, (i) $75,000,000 Floor Plan Tranche and (ii)
$50,000,000 Acquisition Tranche. In addition, a Swing Line
will be available to fund family activity under the Floor Plan
Tranche.
CO-BORROWERS: Group 1 Automotive, Inc. (the "Company") and its wholly-owned
subsidiaries.
ADMINISTRATIVE
AGENT: Texas Commerce Bank National Association ("TCB")
FLOOR PLAN
AGENT: Comerica Bank ("Comerica")
ARRANGER: Chase Securities Inc. ("CSI")
LENDERS: TCB, Comerica and a group of lenders acceptable to TCB,
Comerica, CSI and the Company.
PURPOSE: General corporate needs including acquisitions of auto
dealerships and to finance new and program vehicle
inventories.
MATURITY: Three years from the Closing Date, renewable annually.
SECURITY: The Facility will be secured by:
(i) a pledge of the stock of subsidiaries (as permitted
by manufacturers),
(ii) a first priority lien on all inventory, accounts
receivable, and machinery and equipment of the Floor
Plan Subsidiaries,
(iii) a second priority lien on all inventory, accounts
receivable, and machinery and equipment of all
subsidiaries other than those in (ii) above, and
(iv) a first priority mortgage on all current and future
unencumbered real estate (if any).
AVAILABILITY: Availability of the Facility shall be equal to the lesser of
(i) $125,000,000 or (ii) the sum of (x) the Floor Plan
Availability plus (y) the Acquisition Availability.
The Floor Plan Availability shall be an amount of up to
$75,000,000, governed as outlined under "Payments,
Curtailment" below.
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<PAGE> 7
The Acquisition Availability shall be equal to the lesser of:
(i) $50,000,000
or
(ii) an amount equal to the lesser of:
(x) 2.75 times the difference between Pro Forma
EBITDA of the Floor Plan Subsidiaries minus
Floor Plan Interest Expense of the Floor Plan
Subsidiaries
or
(y) the greater of:
(1) an amount equal to 1.50 times the
difference between Consolidated Pro
Forma EBITDA minus Floor Plan
Interest Expense
or
(2) 2.00 times the difference between
Pro Forma EBITDA of the Floor Plan
Subsidiaries minus Floor Plan
Interest Expense of the Floor Plan
Subsidiaries.
MANDATORY
PREPAYMENTS: The Co-Borrowers shall immediately prepay any outstandings
under the Facility to the extent that the usage under either
tranche exceeds the Availability of either tranche.
PAYMENTS,
CURTAILMENT: Advances are due the earlier to occur of (i) receipt of cash
or (ii) 10 days from the vehicle sale date. After 365 days,
the units will be curtailed at 2% per month for the next 12
months, with payment due in full by the 24th month.
Demonstrator and program car sublimits and curtailments to be
negotiated.
INTEREST RATE
OPTIONS: Floor Plan Tranche. At the option of the Borrower, (i)
Comerica's Prime Rate less 0.50% or (ii) LIBOR plus 150 basis
points.
Acquisition Tranche. The Company shall be entitled to select
between the following interest rate options for borrowings
under the Acquisition Tranche: Alternate Base Rate; or LIBOR
plus the Applicable Margin in accordance with the following
table.
<TABLE>
<CAPTION>
--------------------------------------------------
APPLICABLE MARGIN
-----------------------------
ALTERNATE BASE
RATE LIBOR LEVERAGE RATIO
--------------------------------------------------
<S> <C> <C>
125.0 bps 275.0 bps x > 1.75
75.0 bps 225.0 bps 1.25 < x < 1.75
25.0 bps 175.0 bps 1.00 < x < 1.25
0.0 bps 150.0 bps x < 1.00
--------------------------------------------------
</TABLE>
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<PAGE> 8
INTEREST PAYMENTS,
INTEREST PERIODS: Floor Plan Tranche.
LIBOR Loans: 1, 2, or 3 months
Comerica Prime Rate Loans: Daily
Interest on LIBOR Loans and advances will be
payable on the last day of each month, and
upon prepayment if permitted. Interest on
LIBOR and Comerica Prime Rate Loans and
advances will be on the basis of a 360-day
year (calculated on the basis of actual days
elapsed).
Acquisition Tranche.
LIBOR Loans: 1, 2, 3 or 6 months
Alternative Base Rate Loans: up to 90 days.
Interest on LIBOR loans and advances will be
payable on the last day of each Interest
Period (and at the end of each three months,
in the case of Interest Periods of longer
than three months), and upon prepayment if
permitted. In respect of LIBOR loans and
advances, interest shall be payable in
arrears on the basis of a 360-day year
(calculated on the basis of actual days
elapsed). Interest on Alternate Base Rate
loans will be payable quarterly in arrears,
and upon prepayment, on the basis of a
365/366-day year for loans when based on the
Prime Rate and a 360-day year for loans when
based on the Federal Funds Effective Rate (in
each case calculated on the basis of actual
days elapsed).
FUNDING: Floor Plan Tranche. Borrowings of (i) Comerica Prime
Rate Loans shall be in any amount and (ii) LIBOR
Loans shall be in minimum amounts and integral
multiples of $1,000,000.
Acquisition Tranche. Borrowings of (i) Alternate Base
Rate Loans shall be in minimum amounts and integral
multiples of $1,000,000 and (ii) LIBOR Loans shall be
in minimum amounts and integral multiples of
$1,000,000.
NOTIFICATION
SCHEDULE: The Company must provide notice prior to the proposed
date of borrowing, in accordance with the following
schedule:
LIBOR Rate Loans: 3 business days.
Alternate Base Rate Loans: 1 business day.
LETTERS OF CREDIT: Annual fees for Letters of Credit shall be equal to
the greater of $500 or the Applicable Margin for
Acquisition Tranche LIBOR Loans multiplied by the
amount of the Letter of Credit. TCB will receive a
fronting fee of 0.125%.
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<PAGE> 9
COMMITMENT FEES: The Commitment Fee, payable quarterly in arrears on
the average unused amount of the Revolver shall be 25
basis points.
ARRANGEMENT FEE: See Annex I.
AGENCY FEE: See Annex I.
FLOOR PLAN
SERVICING FEES: See Annex I.
PARTICIPATION
FEES: See Annex I.
COMMITMENT
REDUCTIONS: The Company may irrevocably reduce the Amount pro
rata across both tranches in integral multiples of
$5,000,000 at any time upon three days notice;
however, prepayments of LIBOR borrowings on any day
other than the last day of an interest period must be
accompanied by payment of all breakage costs and
funding losses, if any.
CONDITIONS
PRECEDENT TO
ALL LOANS: Conditions Precedent shall be usual and customary for
transactions of this nature including, but not
limited to, the following:
o Receipt of timely notice of borrowing.
o No event of default or unmatured event of
default.
o No Material Adverse Effect shall have
occurred. Material change in the insurance
coverage for the Company or the Guarantors.
o Representations and warranties shall be true
and correct before and after giving effect to
the Loan.
CONDITIONS
PRECEDENT TO
INITIAL LOAN: Conditions Precedent shall be usual and customary for
transactions of this nature including, but not
limited to, the following:
o Completion of an initial public offering with
net proceeds of no less than [to be
determined] and simultaneous acquisition of
the "Founding Companies."
o No change in the condition of the Company.
o Full disclosure and compliance with the
Company's S-1 filing.
o Documentation in form and substance
satisfactory to the Agent in its sole
discretion.
o Receipt of resolutions, certificates,
opinions, consents and approvals.
-4-
<PAGE> 10
REPRESENTATIONS &
WARRANTIES: Representations and warranties shall be usual and
customary for transactions of this nature including,
but not limited to, the following:
o Existence, authorization, no conflicts,
validity and binding effect
o Financial statements
o Taxes
o Liens
o No default
o Insurance
o Partnerships
o Regulation U
o ERISA Compliance
o Patents
o Full disclosure
o Investment Company Act, Public Utility
Holding Company Act
o Liabilities
o Litigation
o Forecasts
o Subsidiaries
AFFIRMATIVE
COVENANTS: Affirmative Covenants for the Company and its
subsidiaries include, but are not limited to, the
following:
(i) Maintenance of proper books of record and
account, and granting of access to the Agent
and the Lenders and their representatives to
visit and inspect the properties (including
but not limited to inventory and accounts
receivable), books and records of the
Borrower, maintain financial records in
accordance with GAAP;
(ii) Pay principal and interest when due;
(iii) Pay the legal fees of the Lenders for the
enforcement of the Company's obligations
under the Facility;
(iv) Maintenance of adequate insurance in amounts
and on terms usual and customary for
companies similarly engaged;
(v) Cause all material properties used or useful
in the Company's business to be maintained
and kept in good condition, repair and
working order and supplied with all necessary
equipment and cause to be made all reasonably
necessary repairs,
-5-
<PAGE> 11
renewals and replacements thereof, all as in
the reasonable judgment of the Company may be
reasonably necessary so that the business
carried on in connection therewith may be
properly conducted at all times;
(vi) Maintenance of corporate existence, rights,
and other material agreements, business
contracts, patents, trademarks, licenses,
etc.;
(vii) Payment of all taxes and other claims that
may become a lien on the properties of the
Company or a subsidiary, except where being
contested in good faith by appropriate
proceedings and subject to maintenance of
adequate reserves;
(viii) The Company and its subsidiaries shall remain
substantially in the same business in which
they are currently engaged;
(ix) Compliance in all material respects with all
laws and regulations (including ERISA and
environmental laws) and all material
contractual obligations;
(x) The Company shall deliver the following
financial statements: Annual audited
financial statements within 120 days after
the end of each fiscal year, accompanied by a
compliance certificate (with supporting
details) from the Borrower's chief executive
officer or chief financial officer and a
compliance letter from the Company's
independent Certified Public Accountant, and
quarterly unaudited financial statements
within 60 days after the end of each of its
first three fiscal quarters, together with a
compliance certificate (with supporting
details) from its chief executive officer or
chief financial officer. In each case, such
financial statements shall include the
balance sheet, income statement, and
statement of cash flows for the Borrower and
its subsidiaries consolidated in accordance
with GAAP. Audits shall be prepared by a
nationally known accounting firm;
(xi) The Company shall provide, promptly after the
filing, copies of the 10-K, 10-Q, and 8- K,
and all other such documents and information
as the Lenders shall reasonably request;
(xii) The Company shall deliver notice of certain
other events, including the occurrence or
existence of any default or event of default
under this or any other agreement (including
manufacturers sales and service agreements),
pending or threatened material litigation,
notice of any possible material
-6-
<PAGE> 12
violation of environmental, public health, or
welfare laws or regulations, certain matters
relating to employee benefit plans, the
filing of tax or other governmental liens,
filings under securities laws, accountants'
reports, the creation or acquisition of new
subsidiaries, and the incurrence of material
burdensome restrictions under contracts or
applicable law or certain other events (e.g.,
strikes, labor disputes, loss of use of
material patents, or trademarks) reasonably
expected to have a Material Adverse Effect on
the Borrower.
NEGATIVE
COVENANTS: The following negative covenants shall apply to the
Company and its subsidiaries:
(i) Minimum Net Worth - The Company will not
allow the Shareholders' Equity to be less
than equal to the sum of (x) 90% of post-IPO
net worth plus (y) 75% of Consolidated Net
Income (but only to the extent such amount is
positive) subsequent to the IPO plus (z) 100%
of the net proceeds from the sale of equity.
The Company will not allow Consolidated
Tangible Net Worth to be less than $25
million.
(ii) Restricted Payments and Investments - The
Company and its subsidiaries will not (i) pay
any cash dividends or make any other
distribution on any equity interest of the
Borrower, (ii) redeem, purchase or otherwise
acquire or retire any such equity interests;
or (iii) make investments other than
Permitted Investments, unless in each case
immediately after giving effect thereto, (a)
no Default or Event of Default has occurred
or would be created thereby and (b) the
aggregate of such payments and investments
would not exceed one-third of Consolidated
Net Income since December 31, 1997.
(iv) Fixed Charge Coverage - The Company shall
not permit the Fixed Charge Coverage Ratio to
be less than 1.25 of (x) Earnings Available
for Fixed Charges (calculated quarterly on a
rolling four quarter basis).
(v) Interest Coverage - The Company shall not
permit the Interest Coverage Ratio to be less
than 2.50 (calculated quarterly on a rolling
four quarter basis).
(vi) Leverage Ratio - The Company shall not
permit the Leverage Ratio to be greater than
2.0.
-7-
<PAGE> 13
(vii) Working Capital - The Company shall not
permit Working Capital to be less than [to be
determined].
(viii) Debt - Neither the Company nor any
subsidiary shall incur, or permit to exist
any Indebtedness except (i) permitted
existing Indebtedness disclosed at Closing;
(ii) Indebtedness outstanding under the
Facility; (iii) current liabilities incurred
in the ordinary course of business; (iv)
subordinated debt with terms acceptable to
the Agents and Lenders not to exceed $10
million; (v) purchase money debt not to
exceed $3 million; and (vi) pre-existing
debt of acquired entities which become
subsidiaries after closing provided that such
debt was not incurred in contemplation of
such acquisition. Notwithstanding the
foregoing, the Floor Plan Subsidiaries shall
not incur nor permit to exist any
Indebtedness except indebtedness incurred
under the Facility.
(ix) Liens - The Company will not, nor will it
permit its subsidiaries to, incur or permit
to exist liens on assets of the Company and
its subsidiaries, except (i) liens securing
the Facility; (ii) liens securing permitted
secured indebtedness; (iii) liens for taxes
not yet due and payable or being contested in
good faith by appropriate proceedings and
subject to maintenance of adequate reserves;
(iv) liens of landlords, warehousemen,
mechanics, materialmen, and similar liens
imposed by law and created in the ordinary
course of business or being contested in good
faith by appropriate proceedings and subject
to maintenance of adequate reserves; (v)
customary liens incurred or deposits made in
the ordinary course of business in connection
with worker's compensation, unemployment
insurance and other types of social security,
and to secure performance of tenders,
statutory obligations, surety and appeal
bonds, and similar obligations; and (vi)
zoning, easements, and restrictions on use of
real property which do not materially impair
the use of such property.
(x) Mergers, Consolidations - Neither the
Company nor its subsidiary shall merge or
consolidate unless the Company is the
surviving corporation.
(xi) Sale of Assets - The Company and its
subsidiaries will not sell, transfer, or
otherwise dispose of any assets of the
Company and its subsidiaries except: (i)
assets sold, transferred or otherwise
disposed of in the ordinary course of
business including obsolete assets and (ii)
other assets sold, transferred, terminated or
otherwise disposed of in any year as
-8-
<PAGE> 14
long as the proceeds realized from such sale,
transfer, termination or disposition in any
applicable year in excess of the greater of
10% of the tangible assets of the Company as
of the beginning of such year or $5
million[--] are either reinvested within one
year in similar assets or used to repay
senior Indebtedness of the Borrower.
(xii) Acquisitions - Neither the Company nor any
subsidiary shall make any acquisition wherein
the aggregate consideration in the form of
cash and assumed debt would exceed $25
million per year or $10 million per
occurrence without the prior approval of the
Majority Banks.
(xiii) Transactions with Affiliates - Restrictions
on transactions with affiliates except for
transactions on an arm's length basis.
(xiv) Capital Expenditures - The Company will not
permit capital expenditures in any 4-quarter
period to exceed $5 million.
EVENTS OF
DEFAULT: Events of Default shall include those provisions
usual and customary for such transactions including,
but not limited to, the following:
(i) Nonpayment of any principal amounts
of the loans when due; nonpayment of any
interest, fees, or other amounts within 5
days of the due date thereof;
(ii) Breach of any negative covenants or breach
of any notice requirement;
(iii) Breach of any other covenant or obligation
which remains uncured for 30 days after the
earlier of (x) the Company obtaining
knowledge thereof or (y) written notice
thereof having been given to the Borrower.
(iv) Any representation, warranty, or statement
shall be untrue or incorrect in any material
respect when made;
(v) Failure of the Company or a subsidiary to
make payments on any debt exceeding $1
million in the aggregate, or breach of any
covenant contained in any agreement relating
to such indebtedness causing or permitting
the acceleration of such indebtedness;
-9-
<PAGE> 15
(vi) The Company or any subsidiary shall file,
or shall have filed against it, bankruptcy or
other insolvency proceeding;
(vii) An involuntary bankruptcy or other similar
proceeding shall be commenced against the
Company or any subsidiary and such proceeding
or petition shall continue undismissed for
sixty days or an order or decree approving or
ordering any such action shall be entered;
(viii) Incurrence of any liability or potential
liability under any employee benefit plan
that would have a Material Adverse Effect on
the Company; or
(ix) Any judgment in excess of $5 million shall
be rendered against the Company or a
subsidiary which judgment stays in effect for
60 days without being stayed or deferred;
(x) Any loss or material change to agreements
between the Borrower and its major automotive
suppliers pertaining to the Company's rights
(ix) An event shall occur or condition exist
which results in a material adverse effect to
sell automobiles.
ASSIGNMENTS AND
PARTICIPATIONS: The Lenders shall be permitted to participate and
assign loans, notes and commitments. Assignments
will be subject to the payment of a service fee
payable by the assigning Lender to the Agent and
shall only be permitted with the prior written
consent of the Borrower, which shall not be
unreasonably withheld; provided however, each
assignment shall be in a minimum principal amount of
$5,000,000.
YIELD PROTECTION: Standard yield protection and indemnification,
including capital adequacy requirements, will be
incorporated into the Credit Agreement to
satisfactorily compensate the Lenders in the event
that any existing or future law, requirement,
guideline, or request of relevant authorities shall
increase costs, reduce payments or earnings, or
increase capital requirements.
INDEMNITIES: The Company will indemnify, defend and hold harmless
the Agent and Lenders and their respective
shareholders, directors, officers, counsels,
employees and agents from and against all costs,
liability and expense (including interest, penalties,
attorney's fees and amounts paid in settlement) to
which any of them may become subject arising out of
or based upon the Facility, including consequences of
their own negligence, whether by alleged or actual
negligence of the party to be indemnified or
otherwise, except and to
-10-
<PAGE> 16
the extent caused by the gross negligence or willful
misconduct of the party otherwise so indemnified.
EXPENSES: The Co-Borrowers will be liable for all reasonable
costs associated with the financing including, but
not limited to, legal and recording costs.
MAJORITY BANKS: Banks representing at least 66 2/3% of the
commitments.
GOVERNING LAW: State of Texas
-11-
<PAGE> 1
EXHIBIT 10.20
[MITSUBISHI MOTOR SALES OF AMERICA, INC. LETTERHEAD]
June 20, 1997
Mr. B. B. Hollingsworth, Jr.
Group 1 Automotive, Inc.
950 Echo Lane, Suite 348
Houston, Texas 77024
RE: Beneficial Ownership
Mike Smith Autoplaza, Inc. dba Mike Smith Mitsubishi
Dear Mr. Hollingsworth:
This letter confirms that the beneficial ownership in your MMSA Dealership
Corporation is as follows:
NAME VOTING STOCK
Group 1 Automotive, Inc. 100%
You have requested that MMSA make an exception to its policy that the
controlling ownership interest in an authorized MMSA Dealer Corporation be in
the name of a natural person and not a corporation.
This letter advises you that MMSA hereby approves the above-described ownership
of Mike Smith Autoplaza, Inc. dba Mike Smith Mitsubishi, conditioned on your
agreement that so long as you are doing business as an authorized MMSA dealer
to the extent that the Dealer Agreement refers to changes in the controlling
ownership interest (i) IT SHALL BE DEEMED TO REFER TO THE OWNERSHIP OF MIKE
SMITH AUTOPLAZA, INC. AS WELL AS THE OWNERSHIP OF ANY DIRECT OR INDIRECT PARENT
COMPANY OF MIKE SMITH AUTOPLAZA, INC. AND (ii) THE TERMS OF THE ATTACHED
APPENDIX SHALL DEFINE A CHANGE IN OWNERSHIP OF ANY PUBLICLY-TRADED PARENT
COMPANY OF MIKE SMITH AUTOPLAZA, INC.
<PAGE> 2
Mr. B. B. Hollingsworth, Jr.
June 20, 1997
Page 2
If all the above is agreeable to you, please indicate your acceptance thereof
by signing the enclosed duplicate originals of this letter in the space
provided below and returning the same to us, upon which the foregoing approval
shall become effective.
Very truly yours,
N. Kevin Ormes
Group Vice President
Sales & Marketing
NKO/ash
ACCEPTED AND AGREED TO:
ON BEHALF OF MIKE SMITH AUTOPLAZA, INC.
DBA MIKE SMITH MITSUBISHI
AND GROUP 1 AUTOMOTIVE, INC.
By:
-------------------------------
Title:
----------------------------
Date:
-----------------------------
<PAGE> 3
APPENDIX
CHANGE IN
MAJORITY OWNERSHIP OR CONTROL OF DEALER
The Dealer Sales and Service Agreement (the "Dealer Agreement")
between Mitsubishi Motor Sales of America, Inc. ("MMSA") and Mike Smith
Autoplaza, Inc. dba Mike Smith Mitsubishi (the "Dealer") prohibits a change of
majority ownership or control of the Dealer without the prior written approval
of MMSA, which approval will not be unreasonably withheld. The purpose of this
provision, together with the provision requiring MMSA approval for a change in
the Executive Managers of the Dealer, is to preserve the identity of the owners
and managers whose automotive industry experience, reputation and abilities
were the basis for MMSA's decision to award to the Dealer the Mitsubishi
automobile dealership. A failure to observe these provisions can result in
termination of the Dealer Agreement.
Some Mitsubishi Dealers, or one of their parent entities in a chain of
ownership, may consist of entities whose equity securities are, or will in the
future become, publicly traded. The purpose of this letter is to explain in
greater detail what constitutes a change of ownership or control of the Dealer
in that context.
For purposes of this letter, capitalized terms used herein without
definition shall have the meanings ascribed to them in the Dealer Agreement.
Additionally, the following definitions shall apply herein:
"Group" shall have the meaning contemplated in Section
13(d)(3) of the Securities Exchange Act of 1934, as amended.
"Majority Ownership" of a Dealer or other Person shall mean
beneficial ownership or control, directly or indirectly, of either (a)
a majority of the outstanding equity securities of such Dealer or
other Person entitled to vote generally in the election of directors,
trustees or members of any other governing body of such Dealer or
other Person or (b) equity securities of such Dealer or other Person
representing a majority of all outstanding votes entitled to be cast
in the election of directors, trustees or members of any other
governing body of such Dealer or other Person.
"Parent Company" shall mean a Person holding, directly or
indirectly, Majority Ownership of the Dealer.
"Person" shall mean to any individual, corporation,
partnership, trust, or other entity.
<PAGE> 4
Mr. B. B. Hollingsworth, Jr.
June 20, 1997
Page 2
For a Dealer whose equity securities are publicly traded, and for a
Dealer having one or more Parent Companies with publicly traded equity
securities, a change of majority ownership or control of such Dealer will be
deemed to have occurred upon the happening or existence of any of the following
events or circumstances:
(a) Any Person or Group acquires Majority Ownership of the Dealer
or a Parent Company thereof after the date hereof; or
(b) During any period of two consecutive years, individuals who at
the beginning of such period constituted the board of
directors of the Dealer or any Parent Company (together with
any new directors whose election or appointment by such board
of directors or whose nomination for election by the
stockholders of such Dealer or Parent Company was approved by
a vote of a majority of the directors then still in office who
were either directors at the beginning of such period or whose
election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the
board of directors of the Dealer or Parent Company then in
office.
Please acknowledge your understanding of and agreement with the
foregoing by executing a copy of this letter in the space provided below and
returning such copy to Kirk Taylor, Regional Market Representation Manager.
ACKNOWLEDGED AND AGREED TO:
SIGNATURE
By: Date:
-------------------------- ------------------------
ON BEHALF OF MIKE SMITH AUTOPLAZA, INC.
DBA MIKE SMITH MITSUBISHI
AND GROUP 1 AUTOMOTIVE, INC.
<PAGE> 1
EXHIBIT 10.21
SUPPLEMENTAL AGREEMENT TO
DEALER SALES AND SERVICE AGREEMENT
(PUBLICLY TRADED COMPANY)
THIS SUPPLEMENTAL AGREEMENT (this "Supplemental Agreement"), dated as
of September ___, 1997 is entered into among Foyt Motors, Inc. ("Dealer"),
Group 1 Automotive, Inc. ("Public Company") and American Isuzu Motors Inc.
("Distributor").
WHEREAS, Distributor and Dealer are parties to a Dealer Sales and
Service Agreement dated June 6, 1996 (the "Dealer Agreement") which authorizes
Dealer to conduct dealership operations from the Dealership Locations
identified in the Dealer Agreement;
WHEREAS, upon the consummation of an initial public offering by Public
Company, Dealer will become a wholly-owned subsidiary of Public Company (the
"Acquisition");
WHEREAS, in accordance with the Dealer Agreement, Dealer has requested
Distributor's consent to the Acquisition; and
WHEREAS, Distributor is willing to furnish its consent to the
Acquisition in consideration for, and in reliance upon, certain understandings,
assurances and representations which the parties wish to document.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties hereby agree as follows:
1. LIMITATIONS UPON CHANGE OF EXECUTIVE MANAGER
A. Designation of Executive Manager. As set forth in
Section 4 of the Dealer Agreement, Robert Struzynski shall be Executive Manager
of Dealer. Dealer agrees that Executive Manager shall have complete an
irrevocable authority to make all decisions, and enter into any and all
necessary business commitments, required in the normal course of conducting
dealership operations on behalf of Dealer. Dealer shall not revoke, modify or
otherwise impose limitations upon such authority without the prior written
consent of Distributor.
B. Change of Executive Manager. Without limiting the
restrictions set forth in the Dealer Agreement, the removal or withdrawal of
Executive Manager without Distributor's prior written consent shall constitute
grounds for termination of the Dealer Agreement, subject to applicable state
law.
2. LIMITATIONS UPON CHANGES IN OWNERSHIP
A. Change in Ownership. Dealer and Public Company
hereby represent and warrant that upon consummation of Public Company's initial
public offering, Dealer will be a wholly-owned subsidiary of Public Company.
Given the control of Public Company over Dealer,
<PAGE> 2
and Distributor's strong interest in assuring that those who own and control
Distributor's dealerships have interests consistent with those of Distributor,
Dealer and Public Company agree that (i) any change in the ownership of Dealer,
or (ii) the acquisition by any person, or any persons acting as a group, of
more than 20% of the issued and outstanding capital stock of Public Company,
shall be considered a change in ownership of Dealer under the terms of the
Dealer Agreement, and shall be subject to the provisions of the Dealer
Agreement and subparagraph B below.
B. Distributor's Rights Upon Change in Ownership.
Upon the occurrence of any event described in subparagraph A above, if
Distributor reasonably concludes that the transferee or acquiring person or
entity does not have interests compatible with those of Distributor or is
otherwise not qualified to have an ownership interest in the dealerships at the
Dealership Locations, then within 90 days of receipt of written notice from
Distributor, Dealer agrees to: (i) transfer the assets associated with Dealer
to a third party acceptable to the Distributor, (ii) voluntarily terminate the
Dealer Agreement, or (iii) provide evidence to Distributor that such person or
entity no longer has such an ownership interest in Dealer or Public Company.
In the event that Dealer enters into an agreement to transfer its assets to a
third party as set forth in (i) above, Distributor shall have a right of first
refusal to purchase such assets in accordance with the terms and procedures set
forth in subparagraph C below, and subject to the terms of applicable state
law. Dealer and Public Company agree that if an ownership interest is acquired
in Public Company by a person or entity which notifies Public Company via
Schedule 13D filed with the Securities and Exchange Commission, Dealer shall
advise Distributor in writing, and attach a copy of that Schedule.
C. Exercise of Right of First Refusal. Prior to
exercising its right of first refusal pursuant to subparagraph B above,
Distributor shall have a reasonable opportunity to inspect the assets,
including real estate, before making its decision. If Dealer has entered into
a bona fide written buy/sell agreement, the purchase price and other terms of
sale will be those set forth in such agreement and any related documents,
unless Dealer and Distributor agree to other terms. Upon Distributor's
request, Dealer agrees to provide all documents relating to the proposed
transfer. Dealer refuses to provide such documentation or states that such
documents do not exist, it will be presumed that the agreement is not bona
fide. In the absence of a bona fide written buy/sell agreement, the purchase
price of the dealership assets will be determined by good faith negotiations by
Dealer and Distributor. If agreement cannot be reached within a reasonable
time, the price and other terms of sale will be established by arbitration
according to the rules of the American Arbitration Association. Dealer agrees
to transfer the assets by Warranty Deed where possible, conveying marketable
title free and clear of liens and encumbrances. The Deed will be in proper
form for recording and Dealer will deliver complete possession of the assets
when the Deed is delivered. Dealer will also furnish copies of any easements,
licenses or other documents affecting the property and assign any permits or
licenses necessary for the conduct of Dealer's options. Distributor's rights
under this section may be assigned to any third party and in connection with
any such assignment, Distributor will guarantee full payment of the purchase
price by the assignee. Distributor's rights under this paragraph C shall be
subject to the terms of applicable state law.
3. LIMITATIONS UPON NUMBER AND LOCATIONS OF DEALERSHIPS
Public Company acknowledges that Distributor's consent is
required for the acquisition of each new Isuzu point and the Distributor's
consent to the number and locations of
-2-
<PAGE> 3
dealerships which may be owned by Public Company or any subsidiary of Public
Company will be given on a case by case basis. Dealer shall provide such
documentation as is reasonably requested by Distributor regarding the ownership
interests of all such persons and entities in Distributor's dealerships. In
the event that Dealer or Public Company shall acquire ownership or control of
more than one of Distributor's dealerships, then Dealer and/or Public Company
shall obtain separate motor vehicle licenses, and shall maintain separate
financial statements, for each dealership.
4. WORKING CAPITAL REQUIREMENTS
Dealer shall maintain, at all times, sufficient working
capital to meet or exceed the minimum net working capital standards for Dealer
as determined from time to time by Distributor consistent with its standard
policies. Dealer shall provide such documentation as is reasonably requested
by Distributor to assure compliance with this requirement. Public Company
agrees to submit an annual consolidated balance sheet for the combined
dealership operations of Public Company. Public Company agrees, upon
Distributor's request, to provide Distributor with copies of the materials
filed by Public Company with the Securities and Exchange Commission.
5. INDEMNITY
Public Company further agrees to indemnify and hold
Distributor harmless from and against any and all claims of the shareholders of
Public Company under applicable federal and state securities laws arising out
of the initial public offering of capital stock of the Public Company, and all
liabilities, losses, damages, costs and expenses incurred in connection
therewith, unless a final determination is made that Distributor was in fact
liable for such claims, liabilities, losses, damages, costs or expenses.
6. MISCELLANEOUS
A. Effect of Supplemental Agreement. The parties agree
that this Supplemental Agreement is intended to supplement the terms of the
Dealer Agreement and not to limit the rights and obligations of the parties
contained therein. This Supplemental Agreement is hereby incorporated into the
Dealer Agreement and made a part thereof. In the event that any of the
provisions of this Supplemental Agreement are in actual conflict with other
provisions of the Dealer Agreement, the provisions contained in this
Supplemental Agreement shall govern. In the event that the policies of
Distributor with regard to the issues addressed herein are hereinafter
modified, the parties agree to review such modifications to determine whether
modifications of this Supplemental Agreement are appropriate.
B. Construction. This Supplemental Agreement shall be
governed by and construed in accordance with the laws of the State of
California. The failure of either party to enforce any of the provisions of
this Supplemental Agreement or the failure to exercise any election provided
for herein shall in no way be considered to be a waiver of such provisions or
elections. All capitalized terms used herein and not defined herein shall have
the meanings set forth in the Dealer Agreement.
-3-
<PAGE> 4
C. Alternative Dispute Resolution. In the event of any
dispute between the parties regarding the Dealer Agreement or this Supplemental
Agreement, Dealer and Public Company agree to participate in any alternative
dispute resolution procedures specified in the standard policies of
Distributor. Upon final determination through such dispute resolution, each
party shall have recourse to a review de novo by the appropriate state court or
administrative agency consistent with the provisions of state law. The parties
agree that should a party making such appeal lose the issues presented on
appeal, then that party shall pay the reasonable expenses, including reasonable
attorneys' fees, of the other party for the defense of such de novo review.
D. No Third Party Beneficiaries. Nothing in this
Supplemental Agreement or the Dealer Agreement shall be construed to confer any
rights upon any person not a party hereto or thereto, nor shall it create in
any party an interest as a third party beneficiary of this Supplemental
Agreement or the Dealer Agreement.
E. Condition Precedent. Notwithstanding anything to the
contrary contained herein, the parties acknowledge that the provisions of this
Supplemental Agreement shall not be applicable until such time as Public
Company completes a public offering of its stock.
IN WITNESS WHEREOF, the parties have executed this Supplemental
Agreement effective as of the date set forth in the introductory paragraph
hereof.
AMERICAN ISUZU MOTORS, INC. FOYT MOTORS, INC.
By: /s/ J. T. MALONEY By:
-------------------------------- ---------------------------------
Name: J. T. Maloney Name:
------------------------------ -------------------------------
Title: Sr. V. P. and General Title:
----------------------------- ------------------------------
Manager Light Vehicles
GROUP 1 AUTOMOTIVE, INC.
By: /s/ F. R. TODARO
---------------------------------
Name: F. R. Todaro
-------------------------------
Title: VP Corporate Services
------------------------------
-4-
<PAGE> 1
EXHIBIT 10.22
STOCK PURCHASE AGREEMENT
AMONG
HOWARD PONTIAC-GMC, INC.,
BOB HOWARD AUTOMOTIVE-EAST, INC.
AND
THE STOCKHOLDER OF
BOB HOWARD AUTOMOTIVE-EAST, INC.
DATED AS OF
SEPTEMBER 12, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE I
THE ACQUISITION
<S> <C> <C>
1.1 The Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Transfer of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1 Corporate Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.3 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.4 Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.5 Absence of Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.6 Subsidiaries; Equity Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.7 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.8 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.9 Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.10 Certain Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.11 Contracts and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.12 Absence of Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.13 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.14 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.15 Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.16 Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.17 Employee Benefit Plans and Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.18 Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.19 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.20 Affiliate Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.21 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.22 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.23 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.24 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF
THE STOCKHOLDER
3.1 Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.2 Authorization of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.3 Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.4 Absence of Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF AUTOMALL
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4.1 Corporate Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.3 Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.4 Absence of Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE V
COVENANTS OF THE COMPANY AND
THE STOCKHOLDER
5.1 Acquisition Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.2 Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.3 Conduct of Business by the Company Pending the Acquisition . . . . . . . . . . . . . . . . . . . . . 13
5.4 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.5 Notification of Certain Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.6 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.7 Agreement to Defend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.8 Stockholder's Agreements Not to Sell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.9 Intellectual Property Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.10 Cooperating in connection with IPO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.11 Removal of Related Party Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.12 Termination of Related Party Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.13 Related Party Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.14 LIFO Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.15 Management Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.16 Consent of Chalmers-Ramsey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE VI
COVENANTS OF AUTOMALL
6.1 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.2 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.3 Agreement to Defend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.4 Removal of Personal Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE VII
CONDITIONS
7.1 Conditions Precedent to Obligation of Each Party to Effect the Acquisition . . . . . . . . . . . . . 17
7.2 Additional Conditions Precedent to Obligations of Automall . . . . . . . . . . . . . . . . . . . . . 17
7.3 Additional Conditions Precedent to Obligations of the Stockholder. . . . . . . . . . . . . . . . . 18
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ARTICLE VIII
EFFECTIVENESS OF REPRESENTATIONS,
WARRANTIES AND AGREEMENTS
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8.1 Effectiveness of representations, warranties and agreements . . . . . . . . . . . . . . . . . . . . 18
ARTICLE IX
MISCELLANEOUS
9.1 Disclosure Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
9.2 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
9.3 Automatic Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
9.4 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
9.5 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
9.6 Waiver and Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
9.7 Public Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
9.8 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
9.9 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
9.10 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
9.11 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
9.12 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
9.13 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
9.14 Entire Agreement; Third Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
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STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (this "Agreement"), dated as of the 12th
day of September, 1997, is among Howard Pontiac-GMC, Inc., an Oklahoma
corporation ("Automall"), Bob Howard Automotive-East, Inc., an Oklahoma
corporation (the "Company"), and Robert E. Howard II, the sole stockholder of
the Company (the "Stockholder").
PRELIMINARY STATEMENT
The parties to this Agreement have determined it is in their best
long-term interests to effect a business combination pursuant to which Automall
will acquire all of the issued and outstanding common stock, par value $1.00
per share, of the Company from the Stockholder (the "Acquisition");
The respective Boards of Directors of Automall and the Company have
approved this Agreement and the Acquisition pursuant to the terms and
conditions herein set forth.
The parties hereto desire to set forth certain representations,
warranties and covenants made by each to the other as an inducement to the
consummation of the Acquisition.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
representations, warranties and covenants herein contained, the parties hereto
hereby agree as follows:
ARTICLE I
THE ACQUISITION
1.1 The Acquisition. At the Closing (as defined below), the
Stockholder shall sell to Automall and Automall shall purchase from the
Stockholder that number of shares of the Class A common stock, par value $1.00
per share of the Company ("Company Class A Common Stock") as set forth opposite
his name in Schedule I hereto in exchange for one dollar ($1.00), and other
valuable consideration.
1.2 Closing Date. The closing of the transactions contemplated by
this Agreement (the "Closing") shall take place at the offices of Vinson &
Elkins L.L.P., 2300 First City Tower, Houston, Texas 77002, fourteen (14) days
following the satisfaction or waiver of the conditions set forth in Article VII
or at such other time and place and on such other date as Automall and the
Company shall agree; provided, that the conditions set forth in Article VII
shall have been satisfied or waived at or prior to such time. The date on which
the Closing occurs is herein referred to as the "Closing Date."
1.3 Transfer of Shares. At the Closing, and subject to the
satisfaction or waiver of the conditions set forth in Article VII, the
Stockholder will sell, transfer and deliver that number of shares of Company
Common Stock as set forth opposite his name in Schedule I hereto to Automall
(in proper form and duly endorsed for transfer).
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF
THE COMPANY AND THE STOCKHOLDER
The Company and the Stockholder hereby represent and warrant to
Automall as follows:
2.1 Corporate Organization. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation with all requisite corporate power and
authority to own or lease its properties and conduct its business as now owned,
leased or conducted and to execute, deliver and perform this Agreement and each
instrument required hereby to be executed and delivered by it at the Closing.
The disclosure letter delivered by the Company prior to the execution and
delivery of this Agreement (the "Company Disclosure Letter") includes true and
complete copies of the articles of incorporation and bylaws of the Company, as
amended and presently in effect.
2.2 Qualification. The Company is duly qualified to do business as
a foreign corporation and is in good standing in each jurisdiction in which the
nature of the business as now conducted or the character of the property owned
or leased by it makes such qualification necessary, except where the failure to
be so qualified or in good standing would not have a material adverse affect on
the business, assets, prospects or condition (financial or otherwise) of the
Company (a "Material Adverse Effect"). The Company Disclosure Letter sets forth
a list of the jurisdictions in which the Company is qualified to do business,
if any.
2.3 Authorization. The execution and delivery by the Company of
this Agreement, the performance of its obligations pursuant to this Agreement
and the execution, delivery and performance of each instrument required hereby
to be executed and delivered by the Company at the Closing have been duly and
validly authorized by all requisite corporate action on the part of the
Company. This Agreement has been, and each instrument required hereby to be
executed and delivered by the Company at the Closing will then be, duly
executed and delivered by it, and this Agreement constitutes, and, to the
extent it purports to obligate the Company, each such instrument will
constitute (assuming due authorization, execution and delivery by each other
party thereto), the legal, valid and binding obligation of the Company
enforceable against it in accordance with its terms.
2.4 Approvals. Except for applicable requirements, if any, of the
Oklahoma Motor Vehicle Commission, and except to the extent set forth in the
Company Disclosure Letter, no filing or registration with, and no consent,
approval, authorization, permit, certificate or order of any federal, state,
foreign or local court, tribunal or governmental agency or authority is
required by any applicable statute or other applicable law or by any applicable
judgment, order or decree or any applicable rule or regulation of any federal,
state, foreign or local court, tribunal or governmental agency or authority to
permit the Company to execute, deliver or perform this Agreement or any
instrument required hereby to be executed and delivered by it at the Closing.
2.5 Absence of Conflicts. Except to the extent set forth in the
Company Disclosure Letter, neither the execution and delivery by the Company of
this Agreement or any instrument required
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hereby to be executed and delivered by it at the Closing, nor the performance
by the Company of its obligations under this Agreement or any such instrument
will (assuming receipt of all consents, approvals, authorizations, permits,
certificates and orders disclosed as requisite in the Company Disclosure Letter
pursuant to Section 2.4) (a) violate or breach the terms of or cause a default
under (i) any applicable federal, state, foreign or local statute or other
applicable law, (ii) any applicable judgment, order or decree or any applicable
rule or regulation of any federal, state, foreign or local court, tribunal or
governmental agency or authority, (iii) any applicable permits received from
any federal, state, foreign or local governmental agency, (iv) the articles of
incorporation or bylaws of the Company, or (v) any contract or agreement to
which the Company is a party or by which it, or any of its properties, is
bound, or (b) result in the creation or imposition of any lien, claim or
encumbrance on any of the properties or assets of the Company, or (c) result in
the cancellation, forfeiture, revocation, suspension or adverse modification of
any existing consent, approval, authorization, license, permit, certificate or
order of any federal, state, foreign or local court, tribunal or governmental
agency or authority, or (d) with the passage of time or the giving of notice or
the taking of any action of any third party have any of the effects set forth
in clause (a), (b) or (c) of this Section, except, with respect to clauses (a),
(b), (c) or (d) of this Section, where such matter would not have a Material
Adverse Effect or a material adverse effect upon the ability of the Company to
consummate the transactions contemplated hereby.
2.6 Subsidiaries; Equity Investments. The Company does not control
directly or indirectly, or have any direct or indirect equity participation in
any individual, firm corporation, partnership, limited partnership, limited
liability company, trust or other entity ("Person").
2.7 Capitalization.
(a) The authorized capital stock of the Company consists
of 10,000 shares of the Company Class A Common Stock, of which 750
shares are issued and outstanding, and 40,000 shares of Class B common
stock, par value $1.00 per share ("Company Class B Common Stock, and
together with the Company Class A Common Stock, the "Company Common
Stock"), of which no shares are issued and outstanding. No shares of
Company Common Stock are held in treasury. Each outstanding share of
the Company Common Stock has been duly authorized, is validly issued,
fully paid and nonassessable and was not issued in violation of any
preemptive rights of any stockholder. Set forth in the Company
Disclosure Letter are the names and addresses (as reflected in the
corporate records of the Company) of each record holder of the Company
Common Stock, together with the number of shares held by each such
Person.
(b) There is not outstanding any capital stock or other
security, including without limitation any option, warrant or right
granted by the Company, entitling the holder thereof to purchase or
otherwise acquire any shares of capital stock of the Company. Except
as disclosed in the Company Disclosure Letter, there are no contracts,
agreements, commitments or arrangements obligating the Company (i) to
issue, sell, pledge, dispose of or encumber any shares of, or any
options, warrants or rights of any kind to acquire, or any securities
that are convertible into or exercisable or exchangeable for, any
shares of, any class of capital stock of the Company or (ii) to
redeem, purchase or acquire or offer to acquire any shares of, or any
outstanding option, warrant or right to acquire, or any securities
that are convertible into or exercisable or exchangeable for, any
shares of, any class of capital stock of the Company.
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2.8 Financial Statements. Included in the Company Disclosure
Letter is a true and complete copy of the unaudited balance sheet of the
Company as of July 31, 1997 (the "Company Balance Sheet") prepared in
accordance with generally accepted accounting principles applied on a
consistent basis. The Company Balance Sheet does not omit to state any
liabilities, absolute or contingent, required to be stated therein in
accordance with generally accepted accounting principles applied on a
consistent basis. All accounts receivable of the Company reflected in the
Company Balance Sheet and as incurred since July 31, 1997 represent sales made
in the ordinary course of business, are collectible (net of any reserves for
doubtful accounts shown in the Company Balance Sheet) in the ordinary course of
business and, except as set forth in the Company Disclosure Letter, are not in
dispute or subject to counterclaim, set-off or renegotiation. The Company
Disclosure Letter contains an aged schedule of accounts receivable included in
the Company Balance Sheet.
2.9 Undisclosed Liabilities. Except as and to the extent of the
amounts specifically reflected or accrued for in the Company Balance Sheet or
as set forth in the Company Disclosure Letter, the Company does not have any
material liabilities or obligations of any nature whether absolute, accrued,
contingent or otherwise, and whether due or to become due. The reserves
reflected in the Company Balance Sheet are adequate, appropriate and reasonable
in accordance with generally accepted accounting principles applied on a
consistent basis.
2.10 Certain Agreements. Except as set forth in the Company
Disclosure Letter, neither the Company nor any of its officers or directors, is
a party to, or bound by, any contract, agreement or organizational document
which purports to restrict, by virtue of a noncompetition, territorial
exclusivity or other provision covering such subject matter purportedly
enforceable by a third party against the Company, or any of its officers or
directors, the scope of the business or operations of the Company or any of its
officers or directors, geographically or otherwise.
2.11 Contracts and Commitments. The Company Disclosure Letter
includes (i) a list of all contracts to which the Company is a party or by
which its property is bound that involve consideration or other expenditure in
excess of $50,000 or performance over a period of more than six months or that
is otherwise material to the business or operations of the Company ("Material
Contracts"); (ii) a list of all real or personal property leases to which the
Company is a party involving consideration or other expenditure in excess of
$50,000 over the term of the lease ("Material Leases"); (iii) a list of all
guarantees of, or agreements to indemnify or be contingently liable for, the
payment or performance by any Person to which the Company is a party
("Guarantees") and (iv) a list of all contracts or other formal or informal
understandings between the Company and any of its officers, directors,
employees, agents or stockholders or their affiliates ("Related Party
Agreements"). True and complete copies of each Material Contract, Material
Lease, Guarantee and Related Party Agreement have been furnished to Automall
and Group 1 Automotive, Inc., a Delaware corporation ("Group 1").
2.12 Absence of Changes. Except as set forth in the Company
Disclosure Letter, there has not been, since July 31, 1997, any material
adverse change with respect to the business, assets, prospects or condition
(financial or otherwise) of the Company. Except as set forth in the Company
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Disclosure Letter, since July 31, 1997, the Company has not engaged in any
transaction or conduct of any kind which would be proscribed by Section 5.3
herein after execution and delivery of this Agreement.
2.13 Tax Matters.
(a) Except as set forth in the Company Disclosure Letter
(and except for filings and payments of assessments the failure of
which to file or pay will not materially adversely affect the
Company), (i) all returns and reports ("Tax Returns") of or with
respect to any Tax (as defined below) which is required to be filed on
or before the Closing Date by or with respect to the Company have been
or will be duly and timely filed, (ii) all items of income, gain,
loss, deduction and credit or other items required to be included in
each such Tax Return have been or will be so included and all
information provided in each such Tax Return is true, correct and
complete, (iii) all Taxes which have become or will become due with
respect to the period covered by each such Tax Return have been or
will be timely paid in full, (iv) all withholding Tax requirements
imposed on or with respect to the Company have been or will be
satisfied in full, and (v) no penalty, interest or other charge is or
will become due with respect to the late filing of any such Tax Return
or late payment of any such Tax. For purposes of this Agreement,
"Taxes" shall mean all taxes, charges, imposts, tariffs, fees, levies
or other similar assessments or liabilities, including income taxes,
ad valorem taxes, excise taxes, withholding taxes, stamp taxes or
other taxes of or with respect to gross receipts, premiums, real
property, personal property, windfall profits, sales, use, transfers,
licensing, employment, payroll and franchises imposed by or under any
law; and such terms shall include any interest, fines, penalties,
assessments or additions to tax resulting from, attributable to or
incurred in connection with any such tax or any contest or dispute
thereof.
(b) The Company Disclosure Letter sets forth all periods
for which Tax Returns of the Company (i) have been audited by the
applicable governmental authorities or (ii) are no longer subject to
audit due to the expiration of the applicable statute of limitations.
(c) There is no claim against the Company for any Taxes,
and no assessment, deficiency or adjustment has been asserted or
proposed with respect to any Tax Return of or with respect to the
Company, other than those disclosed (and to which are attached true
and complete copies of all audit or similar reports) in the Company
Disclosure Letter.
(d) Except as set forth in the Company Disclosure Letter,
there is not in force any extension of time with respect to the due
date for the filing of any Tax Return of or with respect to the
Company or any waiver or agreement for any extension of time for the
assessment or payment of any Tax of or with respect to the Company.
(e) The total amounts set up as liabilities for current
and deferred Taxes in the Balance Sheet are sufficient to cover the
payment of all Taxes, whether or not assessed or disputed, which are,
or are hereafter found to be, or to have been, due by or with respect
to the Company up to and through the periods covered thereby.
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(f) All Tax allocation or sharing agreements affecting
the Company shall be terminated prior to the Closing Date and no
payments shall be due or will become due by the Company on or after
the Closing Date pursuant to any such agreement or arrangement.
(g) Except as set forth in the Company Disclosure Letter,
the Company will not be required to include any amount in income for
any taxable period beginning the Closing Date as a result of a change
in accounting method for any taxable period ending on or before the
Closing Date or pursuant to any agreement with any Tax authority with
respect to any such taxable period.
(h) The Company has not consented to have the provisions
of Section 341(f)(2) of the Code apply with respect to a sale of its
stock.
(i) From January 28, 1997 through the Closing Date, (a)
the Company continuously has been and will be an S Corporation within
the meaning of Section 1361 of the Code, and (b) each holder of the
Company stock has been an individual resident of the United States or
an estate or trust described in Section 1361(c)(2) of the Code that is
permitted to hold the stock of an S Corporation.
2.14 Litigation.
(a) Except as set forth in the Company Disclosure Letter,
there are no actions at law, suits in equity, investigations,
proceedings or claims pending or, to the knowledge of the Company,
threatened against or specifically affecting the Company before or by
any federal, state, foreign or local court, tribunal or governmental
agency or authority which if determined adversely to the Company would
have a Material Adverse Effect.
(b) Except as contemplated by this Agreement and except
to the extent set forth in the Company Disclosure Letter, the Company
has substantially performed all obligations required to be performed
by it to date and is not in default under, and, to the knowledge of
the Company, no event has occurred which, with the lapse of time or
action by a third party could result in a default under any contract
or other agreement to which the Company is a party or by which it or
any of its properties is bound or under any applicable judgment, order
or decree of any federal, state, foreign or local court, tribunal or
governmental agency or authority, other than such defaults that would
not, individually or in the aggregate, have a Material Adverse Effect.
2.15 Compliance with Law. Except as set forth in the Company
Disclosure Letter, the Company is in compliance with all applicable statutes
and other applicable laws and all applicable rules and regulations of all
federal, state, foreign and local governmental agencies and authorities, except
where the failure to be in compliance would not have a Material Adverse Effect.
2.16 Permits. Except as set forth in the Company Disclosure Letter,
the Company owns or holds all franchises, licenses, permits, consents,
approvals and authorizations of all governmental agencies and authorities,
federal, state, foreign and local, necessary for the conduct of its business,
except for those franchises, licenses, permits, consents, approvals and
authorizations which the
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failure to own or hold would not, in the aggregate, have a Material Adverse
Effect. Each franchise, license, permit, consent, approval and authorization so
owned or held is in full force and effect, and the Company is in compliance
with all of its obligations with respect thereto, except where the failure to
be in full force and effect or to be in compliance would not, in the aggregate,
have a Material Adverse Effect, and, to the knowledge of the Company, no event
has occurred which allows, or upon the giving of notice or the lapse of time or
otherwise would allow, revocation or termination of any franchise, license,
permit, consent, approval or authorization so owned or held.
2.17 Employee Benefit Plans and Policies.
(a) The Company Disclosure Letter provides a description
of each of the following which is sponsored, maintained or contributed
to by the Company for the benefit of its employees, or has been so
sponsored, maintained or contributed to within six years prior to the
Closing Date:
(i) each "employee benefit plan," as such term is
defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") ("Plan"); and
(ii) each personnel policy, stock option plan,
collective bargaining agreement, bonus plan or arrangement,
incentive award plan or arrangement, vacation policy,
severance pay plan, policy or agreement, deferred compensation
agreement or arrangement, executive compensation or
supplemental income arrangement, consulting agreement,
employment agreement and each other employee benefit plan,
agreement, arrangement, program, practice or understanding
that is not described in Section 2.17(a)(i) ("Benefit Program
or Agreement").
True and complete copies of each of the Plans, Benefit Programs or
Agreements, related trusts, if applicable, and all amendments thereto,
have been furnished to Automall.
(b) The Company does not contribute to or have an
obligation to contribute to, and has not at any time contributed to or
had an obligation to contribute to, a plan subject to Title IV of
ERISA, including, without limitation, a multiemployer plan within the
meaning of Section 3(37) of ERISA.
(c) Except as otherwise set forth in the Company
Disclosure Letter,
(i) Each Plan and each Benefit Program or
Agreement has been administered, maintained and operated in
accordance with the terms thereof and in compliance with its
governing documents and applicable law (including, where
applicable, ERISA and the Code);
(ii) There is no matter pending with respect to
any of the Plans before any governmental agency, and there are
no actions, suits or claims pending (other than routine claims
for benefits) or threatened against, or with respect to, any
of the Plans or Benefit Programs or Agreements or their
assets;
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(iii) No act, omission or transaction has occurred
which would result in imposition on the Company of (A) breach
of fiduciary duty liability damages under Section 409 of
ERISA, (B) a civil penalty assessed pursuant to subsections
(c), (i) or (l) of Section 502 of ERISA or (C) a tax imposed
pursuant to Chapter 43 of Subtitle D of the Code;
(iv) Each of the Plans intended to be qualified
under Section 401 of the Code satisfies the requirements of
such Section, has received a favorable determination letter
from the Internal Revenue Service regarding such qualified
status and has not, since receipt of the most recent favorable
determination letter, been amended or operated in a way which
would adversely affect such qualified status;
(v) As to any Plan intended to be qualified under
Section 401 of the Code, there has been no termination or
partial termination of the Plan within the meaning of Section
411(d)(3) of the Code; and
(vi) The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby
will not (A) require the Company to make a larger contribution
to, or pay greater benefits under, any Plan or Benefit Program
or Agreement than it otherwise would or (B) create or give
rise to any additional vested rights or service credits under
any Plan or Benefit Program or Agreement.
(d) There does not currently exist, and there has not at
any time existed, any corporation, trade, business or entity under
common control with the Company, within the meaning of Section 414(b),
(c), (m) or (o) of the Code or Section 4001 of ERISA.
(e) Termination of employment of any employee of the
Company after consummation of the transactions contemplated by this
Agreement would not result in payments under the Plans or Benefit
Programs or Agreements which, in the aggregate, would result in
imposition of the sanctions imposed under Sections 280G and 4999 of
the Code.
(f) Each Plan which is an "employee welfare benefit
plan", as such term is defined in Section 3(1) of ERISA, may be
unilaterally amended or terminated in its entirety without liability
except as to benefits accrued thereunder prior to such amendment or
termination.
(g) The Company Disclosure Letter sets forth by name and
job description of the employees of the Company as of the date of this
Agreement (the "Company Employees"). None of said employees are
subject to union or collective bargaining agreements. The Company has
not at any time had or been threatened with any work stoppages or
other labor disputes or controversies with respect to its employees.
2.18 Title. Except as set forth in the Company Disclosure Letter,
the Company has good and valid title to all properties and assets which it
purports to own, including without limitation the properties and assets which
are reflected in the Company Balance Sheet (other than those disposed of since
such date in the ordinary course of business) and good and valid leasehold
interests in all
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properties and assets which it purports to hold under lease, and each such
ownership or leasehold interest is free and clear of all liens, claims and
encumbrances other than as set forth in the applicable lease agreements and
those reflected in the Company Disclosure Letter.
2.19 Insurance. The Company Disclosure Letter identifies, by name
of underwriter, risk insured, amount insured, policy number and date of
issuance all policies of insurance owned by the Company as of the date hereof
or as to which the Company, as of the date hereof, is a beneficiary. All such
policies are currently in full force and effect.
2.20 Affiliate Interests. Except as set forth in the Company
Disclosure Letter, no employee, officer or director, or former employee,
officer or director of the Company has any interest in any property, tangible
or intangible, including without limitation, patents, trade secrets, other
confidential business information, trademarks, service marks or trade names,
used in or pertaining to the business of the Company, except for the normal
rights of employees and stockholders.
2.21 Environmental Matters. The Company is in compliance in all
material respects with all laws, rules, regulations, and other legal
requirements relating to the prevention of pollution and the protection of the
environment (collectively, "Environmental Laws"), and the Company possesses and
can transfer to Automall or an affiliate of Automall all permits, licenses, and
similar authorizations required under Environmental Laws for operation of its
business as currently conducted. Furthermore, there is no physical condition
existing on any property ever owned or operated by the Company nor are there
any physical conditions existing on any other property that may have been
affected by the Company's operations which could give rise to any material
remedial obligation under any Environmental Laws or which could result in any
material liability to any third party pursuant to any Environmental Laws.
2.22 Intellectual Property. Except as set forth in the Company
Disclosure Letter, the Company owns, or is licensed or otherwise has the right
to use all patents, trademarks, copyrights, and other proprietary rights
("Intellectual Property") that are material to the condition (financial or
otherwise) or conduct of the business and operations of the Company. To the
knowledge of the Company, (a) the use of the Intellectual Property by the
Company does not infringe on the rights of any Person, subject to such claims
and infringements as do not, in the aggregate, give rise to any liability on
the part of the Company which could have a Material Adverse Effect and (b) no
Person is infringing on any right of the Company with respect to any
Intellectual Property. No claims are pending or, to the knowledge of the
Company, threatened that the Company is infringing or otherwise adversely
affecting the rights of any Person with regard to any Intellectual Property.
All of the Intellectual Property that is owned by the Company is owned free and
clear of all encumbrances and was not misappropriated from any Person. All of
the Intellectual Property that is licensed by the Company is licensed pursuant
to valid and existing license agreements. The consummation of the transactions
contemplated by this Agreement will not result in the loss of any Intellectual
Property.
2.23 Bank Accounts. The Company Disclosure Letter includes the
names and locations of all banks in which the Company has an account or safe
deposit box and the names of all Persons authorized to draw thereon or to have
access thereto.
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<PAGE> 14
2.24 Disclosure. The Company has disclosed in writing, or pursuant
to this Agreement and the Company Disclosure Letter, all facts material to the
business, assets, prospects and condition (financial or otherwise) of the
Company. No representation or warranty to Automall by the Company contained in
this Agreement, and no statement contained in the Company Disclosure Letter,
any certificate, list or other writing furnished to Automall by the Company
pursuant to the provisions hereof or in connection with the transactions
contemplated hereby, contains any untrue statement of a material fact or omits
to state a material fact necessary in order to make the statements herein or
therein not misleading. All statements contained in this Agreement, the Company
Disclosure Letter, and any certificate, list, document or other writing
delivered pursuant hereto or in connection with the transactions contemplated
hereby shall be deemed a representation and warranty of the Company for all
purposes of this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF
THE STOCKHOLDER
The Stockholder hereby individually with respect to the shares of
Company Common Stock owned by such Stockholder, severally and not jointly,
represents and warrants to Automall that:
3.1 Capital Stock. Such Stockholder is the beneficial and record
owner of the number of shares of Company Common Stock as set forth in the
Company Disclosure Letter, free and clear of any lien, claim, pledge,
encumbrance or other adverse claim. Except for such shares of Company Common
Stock set forth in the Company Disclosure Letter and Schedule I hereto, such
Stockholder does not own, beneficially or of record, any capital stock or other
security, including without limitation any option, warrant or right entitling
the holder thereof to purchase or otherwise acquire any shares of capital stock
of the Company.
3.2 Authorization of Agreement.
(a) Such Stockholder has full legal right, power,
capacity and authority to execute, deliver and perform its obligations
pursuant to this Agreement and to execute, deliver and perform its
obligations under each instrument required hereby to be executed and
delivered by such Stockholder at the Closing.
(b) This Agreement has been, and each instrument required
hereby to be executed and delivered by such Stockholder at the Closing
will then be, duly executed and delivered by such Stockholder, and
this Agreement constitutes and, to the extent it purports to obligate
such Stockholder, each such instrument will constitute (assuming due
authorization, execution and delivery by each other party thereto),
the legal, valid and binding obligation of such Stockholder
enforceable against it in accordance with its terms.
3.3 Approvals. Except for applicable requirements, if any, of the
Oklahoma Used Motor Vehicle and Parts Commission and the Oklahoma Motor Vehicle
Commission, no filing or
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<PAGE> 15
registration with, and no consent, approval, authorization, permit, certificate
or order of any court, tribunal or governmental agency or authority, federal,
state, foreign or local, is required by any applicable statute or other
applicable law or by any applicable judgment, order or decree or any applicable
rule or regulation of any court, tribunal or governmental agency or authority,
federal, state, foreign or local, to permit such Stockholder to execute,
deliver or perform this Agreement or any instrument required hereby to be
executed and delivered by it at the Closing.
3.4 Absence of Conflicts. Except to the extent set forth in the
Company Disclosure Letter, neither the execution and delivery by such
Stockholder of this Agreement or any instrument required hereby to be executed
and delivered by it at the Closing, nor the performance by such Stockholder of
its obligations under this Agreement or any such instrument will (a) violate or
breach the terms of or cause a default under (i) any applicable statute or
other applicable law, federal, state, foreign or local, (ii) any applicable
judgment, order or decree or any applicable rule or regulation of any court,
tribunal or governmental agency or authority, federal, state, foreign or local,
(iii) the organizational documents of such Stockholder or (iv) any contract or
agreement to which such Stockholder is a party or by which it, or any of its
properties, is bound, or (b) result in the creation or imposition of any lien,
claim or encumbrance on any of the properties or assets of such Stockholder, or
(c) result in the cancellation, forfeiture, revocation, suspension or adverse
modification of any existing consent, approval, authorization, license, permit,
certificate or order of any court, tribunal or governmental agency or
authority, federal, state, foreign or local, or (d) with the passage of time or
the giving of notice or the taking of any action of any third party have any of
the effects set forth in clause (a), (b) or (c) of this Section, except, with
respect to clauses (a), (b), (c) or (d) of this Section, where such matter
would not have a Material Adverse Effect on the Company or the ability of the
Company or such Stockholder to consummate the transactions contemplated hereby.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF AUTOMALL
Automall hereby represents and warrants to the Company and the
Stockholder that:
4.1 Corporate Organization. Automall is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Oklahoma with all requisite corporate power and authority to execute, deliver
and perform this Agreement and each instrument required hereby to be executed
and delivered by it at the Closing.
4.2 Authorization. The execution and delivery by Automall of this
Agreement, the performance by Automall of its obligations pursuant to this
Agreement, and the execution, delivery and performance of each instrument
required hereby to be executed and delivered by Automall at the Closing have
been duly and validly authorized by all requisite corporate action on the part
of Automall. This Agreement has been, and each instrument required hereby to be
executed and delivered by Automall at or prior to the Closing will then be,
duly executed and delivered by Automall. This Agreement constitutes, and, to
the extent it purports to obligate Automall, each such
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<PAGE> 16
instrument will constitute (assuming due authorization, execution and delivery
by each other party thereto), the legal, valid and binding obligation of
Automall, enforceable against it in accordance with its terms.
4.3 Approvals. Except for applicable requirements, if any, of the
Oklahoma Used Motor Vehicle and Parts Commission and the Oklahoma Motor Vehicle
Commission, no filing or registration with, and no consent, approval,
authorization, permit, certificate or order of any court, tribunal or
government agency or authority, federal, state, foreign or local, is required
by any applicable statute or other applicable law or by any applicable
judgment, order or decree or any applicable rule or regulation of any court,
tribunal or governmental agency or authority, federal, state, foreign or local,
to permit Automall, to execute, deliver or consummate the transactions
contemplated by this Agreement or any instrument required hereby to be executed
and delivered by Automall at or prior to the Closing.
4.4 Absence of Conflicts. Neither the execution and delivery by
Automall of this Agreement or any instrument required hereby to be executed by
it at or prior to the Closing nor the performance by Automall of its
obligations under this Agreement or any such instrument will (a) violate or
breach the terms of or cause a default under (i) any applicable statute or
other applicable law, federal, state, foreign or local, (ii) any applicable
judgment, order or decree or any applicable rule or regulation of any court,
tribunal or governmental agency or authority, federal, state, foreign or local,
(iii) the organizational documents of Automall or (iv) any contract or
agreement to which Automall is a party or by which it or any of its property is
bound, or (b) result in the creation or imposition of any lien, claim or
encumbrance on any of the properties or assets of Automall or any of its
affiliates (other than any lien, claim or encumbrance created by the Company),
or (c) result in the cancellation, forfeiture, revocation, suspension or
adverse modification of any existing consent, approval, authorization, license,
permit certificate or order of any court, tribunal or governmental agency or
authority, federal, state, foreign or local or (d) with the passage of time or
the giving of notice or the taking of any action by any third party have any of
the effects set forth in clause (a), (b) or (c) of this Section, except, with
respect to clauses (a), (b), (c) or (d) of this Section, where such matter
would not have a material adverse effect on the business, assets, prospects or
condition (financial or otherwise) of Automall.
ARTICLE V
COVENANTS OF THE COMPANY AND
THE STOCKHOLDER
5.1 Acquisition Proposals. Prior to the Closing Date, neither the
Company, any of its officers, directors, employees or agents nor any
Stockholder shall agree to, solicit or encourage inquiries or proposals with
respect to, furnish any information relating to, or participate in any
negotiations or discussions concerning, any acquisition, business combination
or purchase of all or a substantial portion of the assets of, or a substantial
equity interest in, the Company, other than the transactions with Automall
contemplated by this Agreement.
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<PAGE> 17
5.2 Access. The Company shall afford Automall's officers,
employees, counsel, accountants and other authorized representatives access,
during normal business hours throughout the period prior to the Closing Date,
to all its properties, books, contracts, commitments and records and, during
such period, the Company shall furnish promptly to Automall any information
concerning its business, properties and personnel as Automall may reasonably
request; provided, however, that no investigation pursuant to this Section or
otherwise shall affect or be deemed to modify any representation or warranty
made by the Company or the Stockholder pursuant to this Agreement.
5.3 Conduct of Business by the Company Pending the Acquisition.
The Company and the Stockholder covenant and agree that, from the date of this
Agreement until the Closing Date, unless Automall and Group 1 shall otherwise
agree in writing or as otherwise expressly contemplated by this Agreement or as
disclosed in the Company Disclosure Letter:
(a) The business of the Company shall be conducted only
in, and the Company shall not take any action except in, the ordinary
course of business and consistent with past practice;
(b) The Company shall not directly or indirectly do any
of the following: (i) issue, sell, pledge, dispose of or encumber, (A)
any capital stock of the Company or (B) other than in the ordinary
course of business and consistent with past practice and not relating
to the borrowing of money, any assets of the Company, (ii) amend or
propose to amend the articles of incorporation or bylaws of the
Company, (iii) split, combine or reclassify any outstanding capital
stock, or declare, set aside or pay any dividend payable in cash,
stock, property or otherwise with respect to its capital stock whether
now or hereafter outstanding (except for the distribution to Howard of
the Company's net income from January 1, 1997 to the closing date of
the IPO (as defined herein)), (iv) redeem, purchase or acquire or
offer to acquire any of its capital stock, (v) incur any indebtedness
for borrowed money, or (vi) except in the ordinary course of business
and consistent with past practice, enter into any contract, agreement,
commitment or arrangement with respect to any of the matters set forth
in this Section 5.3(b);
(c) The Company shall use its best efforts (i) to
preserve intact the business organization of the Company, (ii) to
maintain in effect any franchises, authorizations or similar rights of
the Company, (iii) to keep available the services of its current
officers and key employees, (iv) to preserve the goodwill of those
having business relationships with it, (v) to maintain and keep its
properties in as good a repair and condition as presently exists,
except for deterioration due to ordinary wear and tear; and (vi) to
maintain in full force and effect insurance comparable in amount and
scope of coverage to that currently maintained by it;
(d) The Company shall not transfer, assign, sell or
otherwise dispose of any rights or privileges it currently possesses
pursuant to any written or oral contract to which it is a party;
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<PAGE> 18
(e) The Company shall not make or agree to make any
single capital expenditure or enter into any purchase commitments in
excess of $25,000;
(f) The Company shall perform its obligations under any
contracts and agreements to which it is a party or to which its assets
are subject, except for such obligations as the Company in good faith
may dispute;
(g) The Company shall not increase the salary, benefits,
stock options, bonus or other compensation of any officer, director or
employee of the Company; and shall not grant, to any individual,
severance or termination pay that exceeds the lesser of (i) such
individual's compensation for the calendar month immediately preceding
such individual's grant of severance or termination pay, or (ii)
$10,000;
(h) The Company shall not take any action that would, or
that reasonably could be expected to, result in any of the
representations and warranties set forth in this Agreement becoming
untrue or any of the conditions to the Acquisition set forth in
Article VII not being satisfied. The Company promptly shall advise
Automall orally and in writing of any change or event having, or
which, insofar as reasonably can be foreseen, would have, a Material
Adverse Effect; and
(i) The Company shall not (i) amend or terminate any Plan
or Benefit Program or Agreement except as may be required by
applicable law, (ii) increase or accelerate the payment or vesting of
the amounts payable under any Plan or Benefit Program or Agreement, or
(iii) adopt or enter into any personnel policy, stock option plan,
collective bargaining agreement, bonus plan or arrangement, incentive
award plan or arrangement, vacation policy, severance pay plan, policy
or agreement, deferred compensation agreement or arrangement,
executive compensation or supplemental income arrangement, consulting
agreement, employment agreement or any other employee benefit plan,
agreement, arrangement, program, practice or understanding (other than
the Plans and the Benefit Programs or Agreements).
5.4 Confidentiality. The Company and the Stockholder agree, and
the Company agrees to cause its officers, directors, employees, representatives
and consultants, to hold in confidence, and not to disclose to others for any
reason whatsoever, any non-public information received by them or their
representatives in connection with the transactions contemplated hereby except
(i) as required by law; (ii) for disclosure to officers, directors, employees
and representatives of the Company as necessary in connection with the
transactions contemplated hereby; and (iii) for information which becomes
publicly available other than through the actions of the Company or the
Stockholder. In the event the Acquisition is not consummated, the Company and
the Stockholder will return all non-public documents and other material
obtained from Automall or its representatives in connection with the
transactions contemplated hereby or certify to Automall that all such
information has been destroyed.
5.5 Notification of Certain Matters. The Company shall give prompt
notice to Automall, orally and in writing, of (i) the occurrence, or failure to
occur, of any event which occurrence or failure would be likely to cause any
representation or warranty contained in this Agreement to be
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<PAGE> 19
untrue or inaccurate at any time from the date hereof to the Closing or (ii)
any material failure of the Company, or any officer, director, employee or
agent thereof, or the Stockholder to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder.
5.6 Consents. Subject to the terms and conditions of this
Agreement, the Company shall (i) take all reasonable steps to obtain all
consents, waivers, approvals (including all applicable automobile manufacturers
approvals, and such approvals shall not contain any unreasonably burdensome
restrictions on the Company or Automall), authorizations and orders required in
connection with the authorization, execution and delivery of this Agreement and
the consummation of the Acquisition; and (ii) take, or cause to be taken, all
appropriate action, and do, or cause to be done, all things necessary or proper
to consummate and make effective as promptly as practicable the transactions
contemplated by this Agreement.
5.7 Agreement to Defend. In the event any claim, action, suit,
investigation or other proceeding by any governmental authority or other Person
or other legal or administrative proceeding is commenced that questions the
validity or legality of the transactions contemplated hereby or seeks damages
in connection therewith, whether before or after the Closing, the Company and
the Stockholder agree to cooperate and use reasonable efforts (such efforts
shall not include incurring costs to third parties) to defend against and
respond thereto.
5.8 Stockholder's Agreements Not to Sell. The Stockholder hereby
covenants and agrees not to sell, pledge, transfer or dispose of or encumber
any shares of Company Common Stock currently owned, either beneficially or of
record, by such Stockholder.
5.9 Intellectual Property Matters. The Company shall use its best
efforts to preserve its ownership rights to the Intellectual Property free and
clear of any liens, claims or encumbrances and shall use its best efforts to
assert, contest and prosecute any infringement of any issued foreign or
domestic patent, trademark, service mark, trade name or copyright that forms a
part of the Intellectual Property or any misappropriation or disclosure of any
trade secret, confidential information or know-how that forms a part of the
Intellectual Property.
5.10 Cooperating in connection with IPO. The Company and the
Stockholder will (a) provide Group 1 with all information concerning the
Company or the Stockholder which is reasonably requested by Group 1 from time
to time in connection with effecting Group 1's initial public offering of its
common stock (the "IPO") and (b) cooperate with Group 1 and their
representatives in the preparation of the Registration Statement on Form S-1
relating to the IPO (the "Registration Statement") (including the financial
statements therein) and in responding to comments of the staff of the
Securities and Exchange Commission, if any, with respect thereto. The Company
and the Stockholder agree promptly to (a) advise Group 1, if at any time during
the period in which a prospectus relating to the IPO is required to be
delivered under the Securities Act of 1933, as amended, any information
contained in the then current Registration Statement prospectus concerning the
Company or the Stockholder becomes incorrect or incomplete in any material
respect and (b) provide Group 1 with information needed to correct or complete
such information.
5.11 Removal of Related Party Guarantees. The Company and the
Stockholder agree to take, or cause to be taken, all appropriate action, and
do, or cause to be done, all things necessary,
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proper or advisable to terminate, waive or release all Company guarantees (such
guarantees shall be referred to herein as "Related Guarantees," as described in
the Company Disclosure Letter pursuant to Section 2.11 of this Agreement) of
indebtedness or other obligations of any of the Company's officers, directors,
shareholders or employees or their affiliates.
5.12 Termination of Related Party Agreements. The Company and the
Stockholder agree to take, or cause to be taken, all appropriate action, and
do, or cause to be done, all things necessary, proper or advisable to terminate
the Related Party Agreements on or prior to the Closing Date, except those
Related Party Agreements that are disclosed in the Company Disclosure Letter as
agreements that shall not be subject to this Section 5.12.
5.13 Related Party Agreements. The Company agrees, and the
Stockholder agrees to cause the Company, not to enter into any Related Party
Agreements or engage in any transactions with the Stockholder or his
affiliates; except for those Related Party Agreements or transactions with
affiliates that are disclosed in the Company Disclosure Letter as agreements or
transactions that shall not be subject to this Section 5.13.
5.14 LIFO Adjustment. The Company, and not the Stockholder, shall
be responsible for the payment of all costs and liabilities relating to any
LIFO adjustment caused by the termination of the Company's status as an S
corporation as a result of the transactions contemplated hereby.
5.15 Management Agreement. The Company and the Stockholder hereby
agree to enter into, on the date hereof, a management agreement by and among
the Company, the Stockholder and Automall (the "Management Agreement"). A copy
of the Management Agreement is attached hereto as Exhibit A. The Management
Agreement shall (i) become effective upon the closing of the IPO and (ii)
remain in effect until the earlier of the Closing Date or the termination of
this Agreement in accordance with Section 9.3 hereof.
5.16 Consent of Chalmers-Ramsey. The Company shall deliver to Group
1, within ten (10) business days of the date hereof, the written consent of
Chalmers-Ramsey Chevrolet-Geo, Inc., an Oklahoma corporation, to the Management
Agreement (as defined herein) and all transactions contemplated thereby.
ARTICLE VI
COVENANTS OF AUTOMALL
6.1 Confidentiality. Automall agrees, and Automall agrees to cause
its officers, directors, employees, representatives and consultants, to hold in
confidence all, and not to disclose to others for any reason whatsoever, any
non-public information received by it or its representatives in connection with
the transactions contemplated hereby except (i) as required by law; (ii) for
disclosure to officers, directors, employees and representatives of Automall as
necessary in connection with the transactions contemplated hereby or as
necessary to the operation of Automall's business; and (iii) for information
which becomes publicly available other than through the actions of Automall. In
the event the Acquisition is not consummated, Automall will return all
non-public
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documents and other material obtained from the Company or its representatives
in connection with the transactions contemplated hereby or certify to the
Company that all such information has been destroyed.
6.2 Consents. Subject to the terms and conditions of this
Agreement, Automall shall (i) obtain all consents, waivers, approvals,
authorizations and orders required in connection with the authorization,
execution and delivery of this Agreement and the consummation of the
Acquisition; and (ii) take, or cause to be taken, all appropriate action, and
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.
6.3 Agreement to Defend. In the event any claim, action, suit,
investigation or other proceeding by any governmental authority or other Person
or other legal or administrative proceeding is commenced that questions the
validity or legality of the transactions contemplated hereby or seeks damages
in connection therewith, whether before or after the Closing, Automall agrees
to cooperate and use reasonable efforts to defend against and respond thereto.
6.4 Removal of Personal Guarantees. Automall and Group 1 will use
commercially reasonable efforts to have all personal guarantees by any of the
Company's officers, directors, shareholders or employees of any obligation of
the Company terminated, waived or released.
ARTICLE VII
CONDITIONS
7.1 Conditions Precedent to Obligation of Each Party to Effect the
Acquisition. The respective obligations of each party to effect the Acquisition
shall be subject to the fulfillment of the following conditions:
(a) No order shall have been entered and remain in effect
in any action or proceeding before any federal, state, foreign or
local court or governmental agency or other federal, state, foreign or
local regulatory or administrative agency or commission that would
prevent or make illegal the consummation of the Acquisition;
(b) The closing date of the IPO shall have occurred; and
(c) The acquisition by Group 1 or any of its direct or
indirect wholly-owned subsidiaries of the Chevrolet-Geo dealership
assets described in that certain Buy-Sell Agreement dated January 28,
1997 among the Company, Chalmers-Ramsey and South Pointe Subaru, Inc.
shall have been completed, provided that such acquisition is approved
by General Motors Corporation, and provided further that no party
hereto may waive the condition set forth in this subparagraph (c) of
Section 7.1.
7.2 Additional Conditions Precedent to Obligations of Automall.
The obligation of Automall to effect the Acquisition is also subject to the
fulfillment of the following conditions:
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<PAGE> 22
(a) The representations and warranties of the Company and
the Stockholder contained in Article II and Article III, respectively,
shall be accurate as of the Closing Date as though such
representations and warranties had been made at and as of the Closing
Date; all of the terms, covenants and conditions of this Agreement to
be complied with and performed by the Company and the Stockholder on
or before the Closing Date shall have been duly complied with and
performed in all material respects, and a certificate to the foregoing
effect dated the Closing Date and signed by the chief executive
officer of the Company and the Stockholder shall have been delivered
to Automall;
(b) Automall shall have received evidence, satisfactory
to Automall, that all Related Party Agreements required to be
terminated shall have been terminated and all Related Guarantees shall
have been terminated, waived or released pursuant to Sections 5.11 and
5.12 hereto.
(c) Since the date of this Agreement, no material adverse
change in the business, operations or financial condition of the
Company shall have occurred, and the Company shall not have suffered
any damage, destruction or loss (whether or not covered by insurance)
materially adversely affecting the properties or business of the
Company, and Automall shall have received a certificate signed by the
chief executive officer of the Company dated the Closing Date to such
effect.
7.3 Additional Conditions Precedent to Obligations of the
Stockholder. The obligation of the Stockholder to effect the Acquisition is
also subject to the fulfillment of the following condition:
(a) The representations and warranties of Automall
contained in Article IV shall be accurate as of the Closing Date as
though such representations and warranties had been made at and as of
the Closing Date; all the terms, covenants and conditions of this
Agreement to be complied with and performed by Automall on or before
the Closing Date shall have been duly complied with and performed in
all material respects; and a certificate to the foregoing effect dated
the Closing Date and signed by the chief executive officer of Automall
shall have been delivered to the Company.
ARTICLE VIII
EFFECTIVENESS OF REPRESENTATIONS,
WARRANTIES AND AGREEMENTS
8.1 Effectiveness of representations, warranties and agreements.
(a) Except as set forth in Section 8.1(b) of this
Agreement, the representations, warranties and agreements of each
party hereto shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any other
party hereto, any Person controlling any such party or any of their
officers, directors, representatives or agents whether prior to or
after the execution of this Agreement.
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<PAGE> 23
(b) The representations, warranties and agreements in
this Agreement shall terminate at the Closing, except that the
agreements set forth in Sections 5.4, 5.7, 5.14, 5.15, 6.1, 6.3, 6.4,
and 9.5 shall survive the Closing.
(c) The parties hereto agree that the sole and exclusive
remedies for breaches of this Agreement, for negligence, negligent
misrepresentation or for any tort (except for any tort based on intent
to deceive) committed in connection with the transactions described
in, or contemplated by this Agreement are those set forth in this
Agreement, and that no claim may be made by any party hereto for any
matter in connection with the transactions described in, or
contemplated by, this Agreement unless specifically set forth in this
Agreement and then only pursuant to the terms of this Agreement.
ARTICLE IX
MISCELLANEOUS
9.1 Disclosure Letter. The Company Disclosure Letter, executed by
the Company as of the date hereof, and delivered to Automall on the date
hereof, contains all disclosure required to be made by the Company under the
various terms and provisions of this Agreement. Each item of disclosure set
forth in the Company Disclosure Letter specifically refers to the article and
section of the Agreement to which such disclosure responds, and shall not be
deemed to be disclosed with respect to any other article or section of the
Agreement. A substantially complete draft of the Company Disclosure Letter
shall have been delivered to Automall at least five business days prior to the
date of this Agreement.
9.2 Termination. This Agreement may be terminated and the
Acquisition and the other transactions contemplated herein may be abandoned at
any time prior to the Closing:
(a) by mutual consent of Automall and the Stockholder;
(b) by either Automall or the Company if a final,
unappealable order to restrain, enjoin or otherwise prevent, or
awarding substantial damages in connection with, a consummation of the
Acquisition or the other transactions contemplated hereby shall have
been entered;
(c) by Automall if (i) since the date of this Agreement
there has been a material adverse change in the business operations or
financial condition of the Company or (ii) there has been a material
breach of any representation or warranty set forth in this Agreement
by the Company which breach has not been cured within ten business
days following receipt by the Company of notice of such breach (or if
such breach cannot be cured within such time, reasonable efforts have
begun to cure such breach and such breach is then cured within 30 days
after notice); or
(d) by the Company if there has been a material breach of
any representation or warranty set forth in this Agreement by Automall
which breach has not been cured within
-19-
<PAGE> 24
ten business days following receipt by Automall of notice of such
breach (or if such breach cannot be cured within such time, reasonable
efforts have begun to cure such breach and such breach is then cured
within 30 days after notice).
9.3 Automatic Termination. This Agreement shall be terminated, and
no further action by either Automall or the Stockholder shall be necessary to
effect such termination, if the 592,303 shares of common stock of Group 1 held
in escrow pursuant to Sections 5.18 and 5.19 of that certain stock purchase
agreement (the "Automall Purchase Agreement") dated June 14, 1997 among Group
1, Automall and the stockholders of Automall are released and distributed in
accordance with Section 5.19 of the Automall Purchase Agreement.
9.4 Effect of Termination. In the event of any termination of this
Agreement pursuant to Section 9.2 or Section 9.3, the Company and Automall
shall have no obligation or liability to each other except that the provisions
of Sections 5.4, 6.1, 9.4 and 9.5 shall survive any such termination.
9.5 Expenses. Regardless of whether the Acquisition is
consummated, all costs and expenses in connection with this Agreement and the
transactions contemplated hereby incurred by Automall shall be paid by Automall
and all such costs and expenses incurred by the Company shall be paid by the
Company. The Company and Automall each represent and warrant to each other that
there is no broker or finder involved in the transactions contemplated hereby.
9.6 Waiver and Amendment. Any provision of this Agreement may be
waived at any time by the party that is, or whose stockholders are, entitled to
the benefits thereof. This Agreement may not be amended or supplemented at any
time, except by an instrument in writing signed on behalf of each party hereto,
only as may be permitted by applicable provisions of the Delaware General
Corporation Law. The waiver by any party hereto of any condition or of a breach
of another provision of this Agreement shall not operate or be construed as a
waiver of any other condition or subsequent breach. The waiver by any party
hereto of any of the conditions precedent to its obligations under this
Agreement shall not preclude it from seeking redress for breach of this
Agreement other than with respect to the condition so waived.
9.7 Public Statements. The Company, the Stockholder and Automall
agree to consult with each other prior to issuing any press release or
otherwise making any public statement with respect to the transactions
contemplated hereby, and shall not issue any such press release or make any
such public statement prior to such consultation, except as may be required by
law.
9.8 Assignment. This Agreement shall inure to the benefit of and
will be binding upon the parties hereto and their respective legal
representatives, successors and permitted assigns. This Agreement shall not be
assignable by the parties hereto without the written consent of the other
parties hereto.
9.9 Notices. All notices, requests, demands, claims and other
communications which are required to be or may be given under this Agreement
shall be in writing and shall be deemed to have been duly given if (i)
delivered in person or by courier, (ii) sent by telecopy or facsimile
transmission, answer back requested, or (iii) mailed, by registered or
certified mail, postage prepaid, return receipt requested, to the parties
hereto at the following addresses:
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<PAGE> 25
if to the Company: 13300 N. Broadway Extension
Oklahoma City, Oklahoma 73114
Telecopy: (405) 963-8851
Attention: Robert E. Howard II
with a copy to: 6520 N. Western, Suite 100
Oklahoma City, Oklahoma 73116
Telecopy: (405) 848-5052
Attention: Randall K. Calvert
if to the Stockholder: 13300 N. Broadway Extension
Oklahoma City, Oklahoma 73114
Telecopy: (405) 963-8851
Attention: Robert E. Howard II
if to Automall: 13300 N. Broadway Extension
Oklahoma City, Oklahoma 73114
Telecopy: (405) 963-8851
Attention: Robert E. Howard II
or to such other address as any party shall have furnished to the other by
notice given in accordance with this Section 9.9. Such notices shall be
effective, (i) if delivered in person or by courier, upon actual receipt by the
intended recipient, (ii) if sent by telecopy or facsimile transmission, when
the answer back is received, or (iii) if mailed, upon the earlier of five days
after deposit in the mail and the date of delivery as shown by the return
receipt therefor. Delivery to the Stockholder's representative, if any, of any
notice to the Stockholder hereunder shall constitute delivery to the
Stockholder and any notice given by such Stockholder's representative shall be
deemed to be notice given by the Stockholder.
Copies of all communications required to be made pursuant to this Agreement
shall be sent, in the same manner prescribed by this Section 9.9, to the
following:
Group 1 Automotive, Inc.
950 Echo Lane, Suite 350
Houston, Texas 77024
Telecopy: (713) 467-1513
Attention: B.B. Hollingsworth, Jr.
President and Chief Executive
Officer
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<PAGE> 26
and: Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin Street
Houston, Texas 77002-6760
Telecopy: (713) 615-5236
Attention: John S. Watson
9.10 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, excluding any
choice of law rules that may direct the application of the laws of another
jurisdiction.
9.11 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, the remainder of the terms, provision, covenants and
restrictions of this Agreement shall continue in full force and effect and
shall in no way be affected, impaired or invalidated unless such an
interpretation would materially alter the rights and privileges of any party
hereto or materially alter the terms of the transactions contemplated hereby.
9.12 Counterparts. This Agreement may be executed in counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same agreement.
9.13 Headings. The Section headings herein are for convenience only
and shall not affect the construction hereof.
9.14 Entire Agreement; Third Party Beneficiaries. This Agreement,
including the Exhibits hereto and the Company Disclosure Letter, constitutes
the entire agreement and supersedes all other prior agreements and
understandings, both oral and written, among the parties or any of them, with
respect to the subject matter hereof (except as contemplated otherwise by this
Agreement) and neither this nor any document delivered in connection with this
Agreement, confers upon any Person not a party hereto any rights or remedies
hereunder.
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<PAGE> 27
IN WITNESS WHEREOF, each of the parties has caused this Agreement to
be executed on its behalf by its officers thereunto duly authorized, all as of
the date first above written.
HOWARD PONTIAC-GMC, INC.
By: /s/ ROBERT E. HOWARD II
----------------------------------
Robert E. Howard II
President
BOB HOWARD AUTOMOTIVE-EAST, INC.
By: /s/ ROBERT E. HOWARD II
----------------------------------
Robert E. Howard II
Secretary
STOCKHOLDER:
/s/ ROBERT E. HOWARD II
-------------------------------------
Robert E. Howard II
-23-
<PAGE> 28
SCHEDULE I
<TABLE>
<CAPTION>
Shares of Company Class A
Stockholder Common Stock
- ----------- -------------------------
<S> <C>
Robert E. Howard II . . . . . . . . . . . . . 750
</TABLE>
-24-
<PAGE> 29
EXHIBIT A
MANAGEMENT AGREEMENT
MANAGEMENT AGREEMENT, dated as of September 12, 1997, by and among
HOWARD PONTIAC-GMC, INC. ("Automall"), BOB HOWARD AUTOMOTIVE-EAST, INC.
("East") and ROBERT E. HOWARD II ("Howard"), as sole stockholder of East.
PRELIMINARY STATEMENT
Automall, East and Howard have executed a Stock Purchase Agreement
(the "Stock Purchase Agreement") dated as of the date hereof, pursuant to which
Automall will acquire (the "Acquisition") all of the outstanding capital stock
of East. The consummation of the Acquisition is subject to the fulfillment of
certain conditions set forth in the Stock Purchase Agreement that have not yet
been fulfilled.
East and Chalmers-Ramsey Chevrolet-Geo, Inc., an Oklahoma corporation
("Chalmers-Ramsey"), have entered into a Management Agreement (the
"Chalmers-Ramsey Management Agreement") pursuant to which East has agreed to
provide Chalmers- Ramsey with management and consulting services in return for
all "profits or losses," as such are described in the Chalmers-Ramsey
Management Agreement ("Profits" and "Losses"), of Chalmers-Ramsey arising
during the term of the Chalmers-Ramsey Management Agreement.
East desires to engage Automall to provide East with management and
consulting services with respect to the operation of East's business, including
East's management of Chalmers-Ramsey under the Chalmers-Ramsey Management
Agreement, pending consummation of the Acquisition.
NOW, THEREFORE, in consideration of the foregoing and of the
representations, warranties and covenants herein contained, the parties hereto
hereby agree as follows:
1. Effective Date. The effective date (the "Effective Date") of this
Management Agreement shall be the closing date of the initial public
offering of common stock of Group 1 Automotive, Inc., a Delaware
corporation ("Group 1");
2. Term. The term (the "Term") of this Management Agreement shall be from
the Effective Date until the earlier of (i) the Closing Date of the
Stock Purchase Agreement, or (ii) the termination of the Stock
Purchase Agreement pursuant to Section 9.3 thereof.
3. Liabilities of East. East and Howard hereby represent that, as of the
date hereof, Howard is the sole creditor of East and that no other
person has any claim against the income, earnings or assets of East.
4. Duties and Obligations.
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<PAGE> 30
(a) East hereby engages Automall, and Automall hereby undertakes,
to provide management and consulting services with respect to
the operation of East's business;
(b) East hereby agrees to do, or cause to be done, all things
reasonably necessary to facilitate Automall's provision of
management and consulting services to East;
(c) East hereby agrees to pay to Automall, in consideration of the
management and consulting services provided to East in
accordance herewith, all of East's Profits and Losses earned
or incurred under the Chalmers-Ramsey Management Agreement,
less the monthly carrying costs actually incurred by Howard on
Howard's $2.5 million investment in East;
(d) The parties hereto agree that Profits payable to Automall
hereunder shall not be reduced, and Losses payable by Automall
hereunder shall not be increased, by any liabilities or
obligations of East to Howard or any third party, except as
provided in (c) above;
(e) East hereby agrees to calculate the Profits or Losses payable
to or by Automall hereunder as of the end of each calendar
month and to present Automall with such calculation, and the
information upon which such calculation was based, no later
than the fifteenth day of the succeeding month; and
(f) East hereby agrees to pay to Automall all monthly Profits, and
Automall hereby agrees to pay to East all monthly Losses, no
later than the tenth day following Automall's receipt of the
information required to be delivered under paragraph (d)
above.
5. Governing Law. This Management Agreement shall be governed by and
construed in accordance with the laws of the state of Oklahoma.
6. Amendment. This Management Agreement may not be amended by any oral
agreement or understanding but only by an amendment in writing
executed by the parties hereto.
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<PAGE> 31
IN WITNESS WHEREOF, each of the parties hereto has executed, or caused this
Management Agreement to be executed on its behalf by its duly authorized
officers, all as of the date first above written.
HOWARD PONTIAC-GMC, INC.
By: /s/ ROBERT E. HOWARD II
-----------------------------
Robert E. Howard II
President
BOB HOWARD AUTOMOTIVE-EAST, INC.
By: /s/ ROBERT E. HOWARD II
-----------------------------
Robert E. Howard II
President
STOCKHOLDER
/s/ ROBERT E. HOWARD II
--------------------------------
Robert E. Howard II
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<PAGE> 1
EXHIBIT 10.23
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into between Group
1 Automotive, Inc. having offices at 950 Echo Lane, Suite 350, Houston, Texas
77024 ("Employer"), and Kevin H. Whalen, an individual currently residing at
3423 Oakland Drive, Sugar Land, Texas 77479 ("Employee"), to be effective as of
October __, 1997.
For and in consideration of the mutual promises, covenants, and
obligations contained herein, Employer and Employee agree as follows:
1. EMPLOYMENT AND DUTIES:
1.1. Employer agrees to employ Employee, and Employee agrees to be
employed by Employer, beginning October __, 1997 and continuing throughout the
Term (as defined below) of this Agreement, subject to the terms and conditions
of this Agreement.
1.2. Employee shall serve as "Chief Operating Officer -- McCall
Group" of Employer. Employee agrees to serve in the assigned position and to
perform diligently and to the best of Employee's abilities the duties and
services appertaining to such position as determined by Employer, as well as
such additional or different duties and services appropriate to such position
which Employee from time to time may be reasonably directed to perform by
Employer. Employee shall at all times comply with and be subject to such
policies and procedures as Employer may establish from time to time.
1.3. Employee shall, during the period of Employee's employment by
Employer, devote Employee's full business time, energy, and best efforts to the
business and affairs of Employer. Employee may not engage, directly or
indirectly, in any other business, investment, or activity that interferes with
Employee's performance of Employee's duties hereunder, is contrary to the
interests of Employer or any of its subsidiaries or affiliates, or requires any
significant portion of Employee's business time; provided, however, that
Employee may engage in passive personal investments that do not conflict with
the business and affairs of the Employer or any of its subsidiaries or
affiliates or interfere with Employee's performance of his or her duties
hereunder.
1.4. Employee acknowledges and agrees that Employee owes a
fiduciary duty of loyalty, fidelity and allegiance to act at all times in the
best interests of Employer or any of its subsidiaries or affiliates and to do
no act which would injure the business, interests, or reputation of Employer or
any of its subsidiaries or affiliates. In keeping with these duties, Employee
shall make full disclosure to Employer of all business opportunities pertaining
to Employer's business and shall not appropriate for Employee's own benefit
business opportunities concerning the subject matter of the fiduciary
relationship.
1.5. It is agreed that any direct or indirect interest in,
connection with, or benefit from any outside activities, particularly
commercial activities, which interest might in any way adversely affect
Employer, or any of its affiliates, involves a possible conflict of interest.
In keeping with Employee's fiduciary duties to Employer, Employee agrees that
Employee shall not knowingly become involved in a conflict of interest with
Employer, or its affiliates, or upon discovery thereof, allow such a conflict
to continue. Moreover, Employee agrees that Employee shall disclose to
Employer's General Counsel
<PAGE> 2
(who shall be Employer's outside General Counsel unless Employer has employed
an inside General Counsel) any facts which might involve such a conflict of
interest that has not been approved by Employer's President. Employer and
Employee recognize that it is impossible to provide an exhaustive list of
actions or interests which constitute a "conflict of interest". Moreover,
Employer and Employee recognize there are many borderline situations. In some
instances, full disclosure of facts by Employee to Employer's General Counsel
may be all that is necessary to enable Employer or its subsidiaries or
affiliates to protect its interests. In others, if no improper motivation
appears to exist and the interests of Employer or its subsidiaries or
affiliates have not suffered, prompt elimination of the outside interest will
suffice. In still others, it may be necessary for Employer to terminate the
employment relationship. Employee agrees that Employer's determination as to
whether a conflict of interest exists shall be conclusive. Employer reserves
the right to take such action as, in its judgment, will end the conflict.
2. COMPENSATION AND BENEFITS:
2.1. Employee's initial base salary under this Agreement shall be
$300,000.00 per annum and shall be paid in semi-monthly installments in
accordance with Employer's standard payroll practice. Employee's base salary
may be increased from time to time by Employer and, after any such change,
Employee's new level of base salary shall be Employee's base salary for
purposes of this Agreement until the effective date of any subsequent change.
2.2 Employee's participation in bonus plans shall be governed by
the bonus and incentive plans adopted by the Board of Directors of Employer in
which Employee is a participant.
2.3. If Employee is granted stock options, Employee will enter into
a separate written stock option agreement pursuant to which Employee shall be
granted the option to acquire common stock of Employer subject to the terms and
conditions of Employer's 1996 Stock Incentive Plan and the stock option
agreement entered into thereunder. The number of shares, exercise price per
share and other terms of the options shall be as specified in such other
written agreement.
2.4. While employed by Employer, Employee shall be allowed to
participate, on the same basis generally as other employees of Employer, in all
general employee benefit plans and programs, including improvements or
modifications of the same, which on the effective date or thereafter are made
available by Employer to all or substantially all of Employer's employees.
Such benefits, plans, and programs may include, without limitation, medical,
health, and dental care, life insurance, disability protection, and pension
plans. Nothing in this Agreement is to be construed or interpreted to provide
greater rights, participation, coverage, or benefits under such benefit plans
or programs than provided to similarly situated employees pursuant to the terms
and conditions of such benefit plans and programs.
2.5. Employer shall not by reason of this Article 2 be obligated to
institute, maintain, or refrain from changing, amending, or discontinuing, any
such incentive compensation or employee benefit program or plan, so long as
such actions are similarly applicable to covered employees generally.
Moreover, unless specifically provided for in a written plan document adopted
by the Board of Directors of Employer, none of the benefits or arrangements
described in this Article 2 shall be
-2-
<PAGE> 3
secured or funded in any way, and each shall instead constitute an unfunded and
unsecured promise to pay money in the future exclusively from the general
assets of Employer and its subsidiaries and affiliates.
2.6. Employer may withhold from any compensation, benefits, or
amounts payable under this Agreement all federal, state, city, or other taxes
as may be required pursuant to any law or governmental regulation or ruling.
3. TERM OF THIS AGREEMENT, EFFECT OF EXPIRATION OF TERM, AND TERMINATION
PRIOR TO EXPIRATION OF TERM AND EFFECTS OF SUCH TERMINATION:
3.1. The term of this Agreement shall be for five (5) years from
October __, 1997 through October __, 2002. Should Employee remain employed by
Employer beyond the expiration of the Term, such employment shall convert to a
month-to-month relationship terminable at any time by either Employer or
Employee for any reason whatsoever, with or without cause, upon thirty days
notice. Upon such termination of the continued at-will employment relationship
by either Employer or Employee for any reason whatsoever, all future
compensation to which Employee is entitled and all future benefits for which
Employee is eligible shall cease and terminate. Employee shall be entitled to
pro rata salary through the date of such termination, but Employee shall not be
entitled to any bonus with respect to the operations of the Employer and its
subsidiaries and affiliates during the calendar year in which Employee's
employment with Employer is terminated. Upon termination of employment,
Employee shall repay to Employer all advances received by Employee from
Employer or any of its subsidiaries or affiliates, including all advances drawn
against any bonus.
3.2. Notwithstanding any other provisions of this Agreement,
Employer shall have the right to terminate Employee's employment under this
Agreement at any time for any of the following reasons:
(i) For "cause" upon the determination by Employer's Board of
Directors that "cause" exists for the termination of the
employment relationship. As used in this Section 3.2(i), the
term "cause" shall mean (a) Employee has engaged in gross
negligence, gross incompetence or willful misconduct in the
performance of, or Employee's willful refusal without proper
reason to perform, the duties and services required of
Employee pursuant to this Agreement; (b) Employee has been
convicted of a felony; or (c) Employee's material breach of
any material provision of this Agreement or corporate code or
policy. It is expressly acknowledged and agreed that the
decision as to whether "cause" exists for termination of the
employment relationship by Employer is delegated to Employer's
Board of Directors for determination. Employee, if he so
requests, after reasonable notice of such Board of Directors
meeting, shall be entitled to be heard before the Board of
Directors. If Employee disagrees with the decision reached by
Employer's Board of Directors, the dispute will be limited to
whether Employer's Board of Directors reached its decision in
good faith;
-3-
<PAGE> 4
(ii) for any other reason whatsoever, including termination without
cause, in the sole discretion of Employer's Board of
Directors;
(iii) upon Employee's death; or
(iv) upon Employee's becoming incapacitated by accident, sickness,
or other circumstance which in the reasonable opinion of a
qualified doctor approved by Employer's Board of Directors
renders him mentally or physically incapable of performing the
duties and services required of Employee, and which will
continue in the reasonable opinion of such doctor for a period
of not less than 180 days.
The termination of Employee's employment shall constitute a "Termination for
Cause" if made pursuant to Section 3.2(i); the effect of such termination is
specified in Section 3.4. The termination of Employee's employment shall
constitute an "Involuntary Termination" if made pursuant to Section 3.2(ii);
the effect of such termination is specified in Section 3.5. The effect of the
employment relationship being terminated pursuant to Section 3.2(iii) as a
result of Employee's death is specified in Section 3.7. The effect of the
employment relationship being terminated pursuant to Section 3.2(iv) as a
result of the Employee becoming incapacitated is specified in Section 3.8.
3.3. Notwithstanding any other provisions of this Agreement,
Employee shall have the right to terminate the employment relationship under
this Agreement at any time for any of the following reasons:
(i) a material breach by Employer of any material provision of
this Agreement, which remains uncorrected for 30 days
following written notice of such breach by Employee to
Employer's Board of Directors;
(ii) the dissolution of Employer; or
(iii) for any other reason whatsoever, in the sole discretion of
Employee.
The termination of Employee's employment by Employee shall constitute an
"Involuntary Termination" if made pursuant to Section 3.3(i) or 3.3(ii); the
effect of such termination is specified in Section 3.5. The termination of
Employee's employment by Employee shall constitute a "Voluntary Termination" if
made pursuant to Sections 3.3(iii); the effect of such termination is specified
in Section 3.4.
3.4. Upon a "Voluntary Termination" of the employment relationship
by Employee or a termination of the employment relationship for "Cause" by
Employer, all future compensation to which Employee is entitled and all future
benefits for which Employee is eligible shall cease and terminate as of the
date of termination. Employee shall be entitled to pro rata salary through the
date of such termination, but Employee shall not be entitled to any bonuses
with respect to the operations of the Employer and its subsidiaries and
affiliates during the calendar year in which Employee's employment with
Employer is terminated.
-4-
<PAGE> 5
3.5. Upon an Involuntary Termination of the employment relationship
by either Employer or Employee pursuant to Sections 3.2(ii) or 3.3(i), Employee
shall be entitled, in consideration of Employee's continuing obligations
hereunder after such termination (including, without limitation, Employee's
non-competition obligations), to receive the compensation specified in Section
2.1, payable bi-weekly, as if Employee's employment (which shall cease on the
date of such Involuntary Termination) had continued for the full Term of this
Agreement. Upon an Involuntary Termination of the employment relationship by
Employee pursuant to Sections 3.3(ii), Employee shall be entitled, in
consideration of Employee's continuing obligations hereunder after such
termination (including, without limitation, Employee's non-competition
obligations), to receive in a lump sum payment the compensation specified in
Section 2.1 as if Employee's employment (which shall cease on the date of such
Involuntary Termination) had continued for the full Term of this Agreement.
Employee shall not be under any duty or obligation to seek or accept other
employment following Involuntary Termination and the amounts due Employee
hereunder shall not be reduced or suspended if Employee accepts subsequent
employment. Employee's rights under this Section 3.5 are Employee's sole and
exclusive rights against Employer or its subsidiaries or affiliates, and
Employer's and its subsidiaries' and affiliates' sole and exclusive liability
to Employee under this Agreement, in contract, tort, or otherwise, for any
Involuntary Termination of the employment relationship.
3.6. Employee covenants not to sue or lodge any claim, demand or
cause of action against Employer based on Involuntary Termination for any
monies other than those specified in Section 3.5. If Employee breaches this
covenant, Employer, and its subsidiaries' and affiliates' shall be entitled to
recover from Employee all sums expended by Employer, and its subsidiaries and
affiliates (including costs and attorneys' fees) in connection with such suit,
claim, demand or cause of action. Employer and its subsidiaries and affiliates
shall not be entitled to offset any of the amounts specified in the immediately
preceding sentence against amounts otherwise owing by Employer and its
subsidiaries and affiliates to Employee prior to a final determination under
the terms of the arbitration provisions of this Agreement that Employee has
breached the covenant contained in this Section 3.6.
3.7. Upon termination of the employment relationship as a result of
Employee's death, Employee's heirs, administrators, or legatees shall be
entitled to Employee's pro rata salary through the date of such termination,
but Employee's heirs, administrators, or legatees shall not be entitled to any
individual bonuses with respect to the operations of the Employer and its
subsidiaries and affiliates during the calendar year in which Employee's
employment with Employer is terminated.
3.8. Upon termination of the employment relationship as a result of
Employee's incapacity, Employee shall be entitled to his pro rata salary
through the date of such termination, but Employee shall not be entitled to any
individual bonuses with respect to the operations of the Employer and its
subsidiaries and affiliates during the calendar year in which Employee's
employment with Employer is terminated.
3.9. In all cases, the compensation and benefits payable to
Employee under this Agreement upon termination of the employment relationship
shall be reduced and offset by any amounts to which Employee may otherwise be
entitled under any and all severance plans (excluding any pension, retirement
and profit sharing plans of Employer that may be in effect from time to time)
or policies of
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Employer or its subsidiaries or affiliates or any successor to all or a portion
of the business or assets of Employer.
3.10. Termination of the employment relationship shall not terminate
those obligations imposed by this Agreement which are continuing in nature,
including, without limitation, Employee's obligations of confidentiality,
non-competition and Employee's continuing obligations with respect to business
opportunities that had been entrusted to Employee by Employer during the
employment relationship.
3.11. This Agreement governs the rights and obligations of Employer
and Employee with respect to Employee's salary and other perquisites of
employment.
4. UNITED STATES FOREIGN CORRUPT PRACTICES ACT AND OTHER LAWS:
4.1. Employee shall at all times comply with United States laws
applicable to Employee's actions on behalf of Employer and its subsidiaries and
affiliates, including specifically, without limitation, the United States
Foreign Corrupt Practices Act, generally codified in 15 USC 78 (FCPA), as the
FCPA may hereafter be amended, and/or its successor statutes. If Employee
pleads guilty to or nolo contendre or admits civil or criminal liability under
the FCPA or other applicable United States law, or if a court finds that
Employee has personal civil or criminal liability under the FCPA or other
applicable United States law, or if a court finds that Employee committed an
action resulting in Employer or any of its subsidiaries having civil or
criminal liability or responsibility under the FCPA or other applicable United
States law, such action or finding shall constitute "cause" for termination
under this Agreement unless Employer's Board of Directors determines that the
actions found to be in violation of the FCPA or other applicable United States
law were taken in good faith and in compliance with all applicable policies of
Employer. Moreover, to the extent that Employer or any of its subsidiaries is
found or held responsible for any civil or criminal fines or sanctions of any
type under the FCPA or other applicable United States law or suffers other
damages as a result of Employee's actions, Employee shall be responsible for,
and shall reimburse and pay to such Employer an amount of money equal to, such
civil or criminal fines, sanctions or damages. The rights afforded Employer
under this provision are in addition to any and all rights and remedies
otherwise afforded by the law.
5. OWNERSHIP AND PROTECTION OF INFORMATION; COPYRIGHTS:
5.1. Employer owns certain confidential and proprietary information
and trade secrets to which Employee will be given access for the purpose of
carrying out his or her employment responsibilities hereunder. Furthermore,
Employer agrees to provide Employee with confidential and proprietary
information and trade secrets regarding the Employer and its subsidiaries and
affiliates, in order to assist Employee in satisfying his or her obligations
hereunder.
5.2 All information, ideas, concepts, improvements, discoveries,
and inventions, whether patentable or not, which are conceived, made, developed
or acquired by Employee, individually or in conjunction with others, during
Employee's employment by Employer (whether during business hours or otherwise
and whether on Employer's premises or otherwise) which relate to Employer's or
any of
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its subsidiaries' or affiliates' businesses, products or services (including,
without limitation, all such information relating to corporate opportunities,
research, financial and sales data, pricing and trading terms, evaluations,
opinions, interpretations, acquisition prospects, the identity of customers or
their requirements, the identity of key contacts within the customer's
organizations or within the organization of acquisition prospects, or marketing
and merchandising techniques, prospective names, and marks) shall be disclosed
to Employer and are and shall be the sole and exclusive property of Employer.
Upon termination of Employee's employment, for any reason, Employee promptly
shall deliver the same, and all copies thereof, to Employer.
5.3. Employee will not, at any time during or after his employment
by Employer, make any unauthorized disclosure of any confidential business
information or trade secrets of Employer or its subsidiaries or affiliates, or
make any use thereof, except in the carrying out of his employment
responsibilities hereunder. As a result of Employee's employment by Employer,
Employee may also from time to time have access to, or knowledge of,
confidential business information or trade secrets of third parties, such as
customers, suppliers, partners, joint venturers, and the like, of Employer and
its subsidiaries and affiliates. Employee also agrees to preserve and protect
the confidentiality of such third party confidential information and trade
secrets to the same extent, and on the same basis, as Employer's or any of its
subsidiaries' or affiliates' confidential business information and trade
secrets.
5.4. If, during Employee's employment by Employer, Employee creates
any original work of authorship fixed in any tangible medium of expression
which is the subject matter of copyright (such as videotapes, written
presentations on acquisitions, computer programs, E-mail, voice mail,
electronic databases, drawings, maps, architectural renditions, models,
manuals, brochures, or the like) relating to Employer's, or any of its
subsidiaries' or affiliates' businesses, products, or services, whether such
work is created solely by Employee or jointly with others (whether during
business hours or otherwise and whether on Employer's or any of its
subsidiaries' or affiliates' premises or otherwise), Employer shall be deemed
the author of such work if the work is prepared by Employee in the scope of his
or her employment; or, if the work is not prepared by Employee within the scope
of his or her employment but is specially ordered by Employer or any of its
subsidiaries or affiliates as a contribution to a collective work, as a part of
a motion picture or other audiovisual work, as a translation, as a
supplementary work, as a compilation, or as an instructional text, then the
work shall be considered to be work made for hire and Employer or any of its
subsidiaries or affiliates shall be the author of the work. If such work is
neither prepared by Employee within the scope of his or her employment nor a
work specially ordered that is deemed to be a work made for hire, then Employee
hereby agrees to assign, and by these presents does assign, to Employer all of
Employee's worldwide right, title, and interest in and to such work and all
rights of copyright therein.
5.5. Both during the period of Employee's employment by Employer
and thereafter, Employee shall assist Employer, or any of its subsidiaries or
affiliates and their nominees, at any time, in the protection of Employer's or
any of its subsidiaries' or affiliates' worldwide right, title, and interest in
and to information, ideas, concepts, improvements, discoveries, and inventions,
and its copyrighted works, including without limitation, the execution of all
formal assignment documents requested by Employer or any of its subsidiaries or
affiliates or their nominees and the execution of all lawful oaths and
applications for applications for patents and registration of copyright in the
United States and foreign countries.
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6. POST-EMPLOYMENT NON-COMPETITION OBLIGATIONS:
6.1. As part of the consideration for the compensation and benefits
to be paid and extended to Employee hereunder, and as an additional incentive
for Employer to enter into this Agreement, Employer and Employee agree to the
non-competition provisions of this Article 6. Employee agrees that during the
period of Employee's non-competition obligations hereunder, Employee will not,
directly or indirectly for Employee or for others, in any geographic area or
market where Employer or any of its subsidiaries or affiliated companies are
conducting any business as of the date of termination of the employment
relationship or have during the previous twelve months conducted any business:
(i) engage in any business competitive with any line of business
conducted by Employer or any of its subsidiaries or
affiliates;
(ii) render advice or services to, or otherwise assist, any other
person, association, or entity who is engaged, directly or
indirectly, in any business competitive with any line of
business conducted by Employer or any of its subsidiaries or
affiliates;
(iii) encourage or induce any current or former employee of Employer
or any of its subsidiaries or affiliates to leave the
employment of Employer or any of its subsidiaries or
affiliates or proselytize, offer employment, retain, hire or
assist in the hiring of any such employee by any person,
association, or entity not affiliated with Employer or any of
its subsidiaries or affiliates; provided, however, that
nothing in this subsection (iii) shall prohibit Employee from
offering employment to any prior employee of Employer or any
of its subsidiaries or affiliates who was not employed by
Employer or any of its subsidiaries or affiliates at any time
in the twelve (12) months prior to the termination of
Employee's employment.
The non-competition obligations set forth in subsections (i) and (ii) of this
Section 6.1 shall apply during Employee's employment and for a period of three
(3) years after termination of employment. The obligations set forth in
subsection (iii) of this Section 6.1 with respect to employees shall apply
during Employee's employment and for a period of five (5) years after
termination of employment If Employer or any of its subsidiaries or affiliates
abandons a particular aspect of its business, that is, ceases such aspect of
its business with the intention to permanently refrain from such aspect of its
business, then this post-employment non-competition covenant shall not apply to
such former aspect of that business.
6.2. Employee understands that the foregoing restrictions may limit
his ability to engage in certain businesses anywhere in the world during the
period provided for above, but acknowledges that Employee will receive
sufficiently high remuneration and other benefits (e.g., the right to receive
compensation under Section 3.6 for the remainder of the Term upon Involuntary
Termination and access to certain confidential and proprietary information and
trade secrets) under this Agreement to
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justify such restriction. Employee acknowledges that money damages would not
be sufficient remedy for any breach of this Article 6 by Employee, and Employer
or any of its subsidiaries or affiliates shall be entitled to enforce the
provisions of this Article 6 by terminating any payments then owing to Employee
under this Agreement and/or to specific performance and injunctive relief as
remedies for such breach or any threatened breach, without any requirement for
the securing or posting of any bond in connection with such remedies. Such
remedies shall not be deemed the exclusive remedies for a breach of this
Article 6, but shall be in addition to all remedies available at law or in
equity to Employer or any of its subsidiaries or affiliates, including, without
limitation, the recovery of damages from Employee and his agents involved in
such breach.
6.3. It is expressly understood that the restrictions contained in
this Article 6 are related to and result from the agreements of Employer and
Employee in Article 5 and agreed that Employer and Employee consider the
restrictions contained in this Article 6 to be reasonable and necessary to
protect the confidential and proprietary information and trade secrets of
Employer and its subsidiaries and affiliates. Nevertheless, if any of the
aforesaid restrictions are found by a court having jurisdiction to be
unreasonable, or overly broad as to geographic area or time, or otherwise
unenforceable, the parties intend for the restrictions therein set forth to be
modified by such courts so as to be reasonable and enforceable and, as so
modified by the court, to be fully enforced.
7. MISCELLANEOUS:
7.1. For purposes of this Agreement the terms "affiliates" or
"affiliated" means an entity who directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with
Employer.
7.2. Employee shall refrain, both during the employment
relationship and after the employment relationship terminates, from publishing
any oral or written statements about Employer or any of its subsidiaries' or
affiliates' directors, officers, employees, agents or representatives that are
slanderous, libelous, or defamatory; or that disclose private or confidential
information about Employer or any of its subsidiaries' or affiliates' business
affairs, officers, employees, agents, or representatives; or that constitute an
intrusion into the seclusion or private lives of Employer or any of its
subsidiaries' or affiliates' directors, officers, employees, agents, or
representatives; or that give rise to unreasonable publicity about the private
lives of Employer or any of its subsidiaries' or affiliates' officers,
employees, agents, or representatives; or that place Employer or its
subsidiaries' or affiliates' or its officers, employees, agents, or
representatives in a false light before the public; or that constitute a
misappropriation of the name or likeness Employer or any of its subsidiaries'
or affiliates' or its officers, employees, agents, or representatives. A
violation or threatened violation of this prohibition may be enjoined.
7.3. For purposes of this Agreement, notices and all other
communications provided for herein shall be in writing and shall be deemed to
have been duly given when personally delivered or when mailed by United States
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
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If to Employer to:
Group 1 Automotive, Inc.
950 Echo Lane, Suite 350
Houston, TX 77024
Attn: Chief Executive Officer
with a copy to:
Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin Street
Houston, TX 77002-6760
Attn: John S. Watson
If to Employee, to the address shown on the first page hereof.
with a copy to:
Robert D. Remy
Two Memorial City Plaza
820 Gessner, Suite 1360
Houston, Texas 77024
Either Employer or Employee may furnish a change of address to the other in
writing in accordance herewith, except that notices of changes of address shall
be effective only upon receipt.
7.4. This Agreement shall be governed in all respects by the laws
of the State of Texas, excluding any conflict-of-law rule or principle that
might refer the construction of the Agreement to the laws of another State or
country.
7.5. No failure by either party hereto at any time to give notice
of any breach by the other party of, or to require compliance with, any
condition or provision of this Agreement shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time.
7.6. It is a desire and intent of the parties that the terms,
provisions, covenants, and remedies contained in this Agreement shall be
enforceable to the fullest extent permitted by law. If any such term,
provision, covenant, or remedy of this Agreement or the application thereof to
any person, association, or entity or circumstances shall, to any extent, be
construed to be invalid or unenforceable in whole or in part, then such term,
provision, covenant, or remedy shall be construed in a manner so as to permit
its enforceability under the applicable law to the fullest extent permitted by
law. In any case, the remaining provisions of this Agreement or the
application thereof to any person, association,
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or entity or circumstances other than those to which they have been held
invalid or unenforceable, shall remain in full force and effect.
7.7. Any and all claims, demands, cause of action, disputes,
controversies and other matters in question arising out of or relating to this
Agreement, any provision hereof, the alleged breach thereof, or in any way
relating to the subject matter of this Agreement, involving Employer, its
subsidiaries and affiliates and Employee (all of which are referred to herein
as "Claims"), even though some or all of such Claims allegedly are
extra-contractual in nature, whether such Claims sound in contract, tort or
otherwise, at law or in equity, under state or federal law, whether provided by
statute or the common law, for damages or any other relief, including equitable
relief and specific performance, shall be resolved and decided by binding
arbitration pursuant to the Federal Arbitration Act in accordance with the
Commercial Arbitration Rules then in effect with the American Arbitration
Association. In the arbitration proceeding the Employee shall select one
arbitrator, the Employer shall select one arbitrator and the two arbitrators so
selected shall select a third arbitrator. Should one party fail to select an
arbitrator within five days after notice of the appointment of an arbitrator by
the other party or should the two arbitrators selected by the Employee and the
Employer fail to select an arbitrator within ten days after the date of the
appointment of the last of such two arbitrators, any person sitting as a Judge
of the United States District Court of the Southern District of Texas, Houston
Division, upon application of the Employee or the Employer, shall appoint an
arbitrator to fill such space with the same force and effect as though such
arbitrator had been appointed in accordance with the immediately preceding
sentence of this Section 7.7. The decision of a majority of the arbitrators
shall be binding on the Employee, the Employer and its subsidiaries and
affiliates. The arbitration proceeding shall be conducted in Houston, Texas.
Judgment upon any award rendered in any such arbitration proceeding may be
entered by any federal or state court having jurisdiction.
This agreement to arbitrate shall be enforceable in either federal or
state court. The enforcement of this agreement to arbitrate and all procedural
aspects of this Agreement to arbitrate, including but not limited to, the
construction and interpretation of this agreement to arbitrate, the scope of
the arbitrable issues, allegations of waiver, delay or defenses to
arbitrability, and the rules governing the conduct of the arbitration, shall be
governed by and construed pursuant to the Federal Arbitration Act.
In deciding the substance of any such Claim, the Arbitrators shall
apply the substantive laws of the State of Texas; provided, however, that the
Arbitrators shall have no authority to award treble, exemplary or punitive type
damages under any circumstances regardless of whether such damages may be
available under Texas law, the parties hereby waiving their right, if any, to
recover treble, exemplary or punitive type damages in connection with any such
Claims.
7.8. This Agreement shall be binding upon and inure to the benefit
of Employer its subsidiaries and affiliates and any other person, association,
or entity which may hereafter acquire or succeed to all or a portion of the
business or assets of Employer by any means whether direct or indirect, by
purchase, merger, consolidation, or otherwise. Employee's rights and
obligations under this Agreement are personal and such rights, benefits, and
obligations of Employee shall not be voluntarily or involuntarily assigned,
alienated, or transferred, whether by operation of law or otherwise, by
Employee without the prior written consent of Employer.
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7.9. Except as provided in (1) written company policies promulgated
by Employer dealing with issues such as securities trading, business ethics,
governmental affairs and political contributions, consulting fees, commissions
and other payments, compliance with law, investments and outside business
interests as officers and employees, reporting responsibilities, administrative
compliance, and the like, (2) the written benefits, plans, and programs
referenced in Sections 2.2, 2.3 and 2.4, or (3) any signed written agreements
contemporaneously or hereafter executed by Employer and Employee, this
Agreement constitutes the entire agreement of the parties with regard to such
subject matters, and contains all of the covenants, promises, representations,
warranties, and agreements between the parties with respect to such subject
matters and replaces and merges previous agreements and discussions pertaining
to the employment relationship between Employer and Employee. Specifically,
but not by way of limitation, any other employment agreement or arrangement in
existence as of the date hereof between Employer or any of its subsidiaries or
affiliates and Employee is hereby canceled and Employee hereby irrevocably
waives and renounces all of Employee's rights and claims under any such
agreement or arrangement.
IN WITNESS WHEREOF, Employer and Employee have duly executed this
Agreement in multiple originals to be effective on the date first stated above.
GROUP 1 AUTOMOTIVE, INC.
By:
------------------------------
B. B. Hollingsworth, Jr.
Chief Executive Officer
---------------------------------
Employee
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EXHIBIT 23.1
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
October 14, 1997
<PAGE> 1
EXHIBIT 23.3
[ABOWITZ, RHODES & DAHNKE, P.C. LETTERHEAD]
October 14, 1997
CONSENT OF SPECIAL LEGAL COUNSEL
We hereby consent to the use of our name in the Prospectus constituting a
part of this Registration Statement under the caption "Risk Factors -- No
Agreement with American Honda Motor Co., Inc.," as well as the reference to our
opinion dated September 30, 1997, and the opinions attributed to us under such
caption. In giving this consent, however, we do not hereby admit that we are
within the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder.
Very truly yours,
/s/ ABOWITZ, RHODES & DAHNKE, P.C.
ABOWITZ, RHODES & DAHNKE, P.C.
