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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
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FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1998
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
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Commission File Number 2-97254-NY
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FIRSTAMERICA AUTOMOTIVE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 88-0206732
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
601 Brannan Street,
San Francisco, California 94107
(Address of principal executive offices) (Zip code)
(415) 284-0444
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant on February 28, 1999 was $1,915,470, based on the fair market
value of the Company's Common Stock as of that date as determined by the Board
of Directors. Shares of Common Stock held by each executive officer and director
and by each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
The number of shares of the registrant's Common Stock outstanding on
February 28, 1999, was as follows: 11,514,044 shares of Class A Common Stock,
par value $0.00001 per share, and 3,532,000 shares of Class B Common Stock, par
value $0.00001 per share.
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PART I
This Annual Report on Form 10-K contains forward-looking statements
that have been made pursuant to the provisions of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are based on
current expectations, estimates and projections about the automotive retailing
industry, management's beliefs, and certain assumptions made by our management.
Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates," variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and are subject to certain risks, uncertainties and
assumptions that are difficult to predict; therefore, actual results may differ
materially from those expressed or forecasted in any such forward-looking
statements. Such risks and uncertainties includes those set forth herein under
"Factors That May Affect Future Results" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Unless required by
law, we undertake no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
However, readers should carefully review the risk factors set forth in other
reports or documents we will file from time to time with the Securities and
Exchange Commission, particularly our Quarterly Reports on Form 10-Q and any
Current Reports on Form 8-K.
Item 1. Business
We are a leading automotive retailer and consolidator in the highly
fragmented automotive retailing industry. We currently operate in four major
metropolitan markets in California, and are focusing our consolidation strategy
in the western United States. Our source of revenues consists of all activities
typical of automotive dealerships. These consist of the sale and lease of new
and used vehicles, parts and service sales, collision repair service revenues,
financing fees, vehicle insurance commissions, document processing fees,
extended service warranty sales, and after-market product sales. As of December
31, 1998, we sold 12 domestic and foreign brands consisting of BMW, Buick,
Dodge, Honda, Isuzu, GMC, Lexus, Mitsubishi, Nissan, Pontiac, Toyota and
Volkswagen.
We believe California's strong demographics, including population and
income growth, provide significant opportunities for future expansion into
current and new markets within the state. California accounted for more than ten
percent of new vehicle registrations in the United States in 1997. In addition,
the metropolitan markets where we do business are projected to have population
growth of more than double the national average and personal income growth over
30% higher than the national average. Members of our executive management have
been operating dealerships in California for over 25 years, providing us with a
competitive advantage in these demographically favorable markets. We also intend
to opportunistically evaluate potential acquisitions in other areas in the
western United States, specifically in markets with demographics similar to
those of our current markets.
We are committed to delivering superior customer service. Our goal is
to build a long-term, lasting relationship with our customers which we believe
will enhance our brand and create significant repeat and referral business,
potentially in our higher margin products and services.
We have an innovative executive management team that has developed and
is executing several new initiatives to enhance our competitive position.
o We developed the "Auto Factory," an efficient inventory control
system that centralizes on a regional basis the procurement,
reconditioning, inventory management and wholesale disposal of used
vehicles. Auto Factory allows us to create significant economies of
scale and enhance control over used vehicles inventory.
Additionally, Auto Factory operates on a company-wide centralized
basis for large purchases of off-lease, rental and fleet vehicles
for sale to our dealerships and other wholesalers. In addition, Auto
Factory compliments our acquisition strategy by enabling us to
improve the inventory management process of our acquired dealerships
and provides competitive advantages over small dealers in the used
vehicle business.
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o We have been using the Internet for marketing and communications
since 1995 and we currently offer a full range of automobiles and
related products and services which may be purchased at our
dealerships over the Internet. We believe the California market is
particularly well suited to Internet sales initiatives. A portion of
our new vehicle sales in 1998 through our dealerships resulted from
leads generated through the Internet including our own Web site
(www.anyauto.com) and Web sites of third-party lead providers.
o We created a "Dealer Services" division to maximize cost savings by
centralizing and consolidating the purchasing power of our
dealerships for the procurement of finance and insurance, or F&I,
products, extended warranty service contracts and aftermarket
products marketed to our dealership customers.
We operate using a flexible corporate infrastructure to support our
growth. The structure strives to maintain a decentralized operational approach
that strikes a balance between entrepreneurship at the dealership level and
well-managed, efficient, centralized executive and administrative operations
at the corporate level that seeks the implementation of best practices
throughout our system.
Company Strengths
Focused Acquisition Strategy
We have a focused acquisition strategy designed to maximize our overall
objectives. We apply a systematic approach to all of our acquisitions in which
we analyze numerous factors including:
o Operational and cultural fit with our organization;
o Reputation and experience of existing management;
o Opportunity to expand market share and optimize product mix;
o Return on investment and earnings per share;
o Manufacturer relationship and support of acquisitions; and
o Quality of location and facilities.
We focus on making acquisitions in contiguous markets to maximize our
corporate infrastructure and existing presence in a particular region. We
utilize a "platform" and "tuck-in" acquisition strategy as an effective means to
achieve profitable, controlled growth.
o "Platform" acquisition targets are generally established,
profitable, well managed multiple franchise dealerships located in
metropolitan or high-growth suburban markets. We believe that by
acquiring and integrating platforms with existing quality
management, we will be able to effectively operate the dealerships
with a management team that understands the local market.
o "Tuck-in" acquisition targets are typically single franchise
dealerships that will allow us to take advantage of the buying power
of our dealerships in a region and provide greater breadth of
products and services in our markets. We believe "tuck-ins" enable
us to obtain cost efficiencies on a regional level in areas like
facility and personnel utilization, vendor consolidation and
advertising.
While we only consider acquisitions of profitable platforms, we have
and will continue to consider the acquisition of single dealerships that may not
be operating at optimal performance levels, but which we believe represent
strong opportunities for enhanced performance when managed by us or provide
greater breadth in our product offerings. Where we have identified an adjacent
market with operating potential, but no available or appropriate platforms, we
may selectively acquire one or more smaller dealerships and develop our own
platform.
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Extensive Experience and Ability to Integrate and Improve Acquisitions
Our senior management has substantial experience in successfully
integrating and improving businesses they have acquired, collectively having
acquired and integrated more than 52 dealerships during their careers. The
reputation and experience of our senior management team in the automobile
industry and our proven ability to add value to platforms and dealerships that
we acquire make us attractive to potential sellers who may want to obtain equity
consideration or continue operating the dealerships.
A Leader in the California Market
We currently operate all of our dealerships in California, which has
extremely strong demographics. The following are characteristics of this
favorable market:
o In 1998, over 33.5 million people lived in California, representing
over 12.4% of the U.S. population. California's population is
concentrated in several large metropolitan regions. Approximately 26
million, or 77.4% of the total California population, reside in the
Los Angeles, San Diego and San Francisco Bay areas, the same regions
where we currently operate dealerships. Between 1990 and 1998,
California's population grew by 12.7% compared to the nation's
overall population growth of 8.6%.
o As a result of the population density and growth rate, California
accounts for over 10% of the nation's vehicle registrations.
o From 1995 through 1998, California personal income increased by 3.9%
per year compared to the national average of 3.1%. Despite the poor
economic conditions of many of California's Asian trading partners,
personal income grew at 4.2% per year for the same period in the San
Francisco Bay area and San Diego.
o The general health of the California economy may be attributed to
the state's diverse economy as several industries have driven growth
over the last five years. The technology, biotechnology,
agriculture, tourism, and entertainment industries are concentrated
in California and have fueled the economy's robust growth over the
last five years.
It is our intention to grow within our existing and in new metropolitan
markets in California and in other areas in the western United States which are
exhibiting similar favorable demographic trends. Targeted markets include Las
Vegas, Reno, Phoenix, Seattle, Portland, and other urban centers in the western
United States.
Used Vehicle Inventory Management
In an effort to increase the profitability and efficiency of our used
vehicle business, we developed and instituted our Auto Factory concept. Auto
Factory is a system focused on building and maintaining an efficient inventory
control system by centralizing on a regional basis the procurement,
reconditioning, inventory management and wholesale sales of used vehicles. Auto
Factory is managed by an individual who has over 22 years of relevant experience
in running such an operation. We believe the Auto Factory operations create
significant economies of scale and enhance control over used vehicle inventory.
Additionally, Auto Factory operates on a company-wide centralized basis for
large purchases of offlease, rental and fleet vehicles for sale to our
dealerships and other wholesalers. In addition, Auto Factory compliments our
acquisition strategy by enabling us to improve the inventory management process
of our acquired dealerships and provides competitive advantages over small
dealers in the used vehicle business. Some of the benefits provided by Auto
Factory include:
o Auto Factory operates on a company-wide centralized basis for large
purchases of off-lease rental and fleet vehicles for sale to our
dealerships and other vehicle wholesalers.
o Auto Factory acts as its own internal auction house on a company-
wide basis, maximizing our profit on used vehicle sales and
providing for inventories that meet rapidly changing consumer market
trends. As a result of setting up our internal auctions, our gross
margin for sales of used cars at the wholesale level increased to
5.1% in 1998 from 0.4% in 1997.
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o Auto Factory operates a system of regional reconditioning centers
designed to reduce reconditioning costs, efficiently distribute
reconditioning work among our dealerships and maintain quality
control over reconditioning so that we can profitably sell branded
warranties with our used cars.
o Auto Factory manages the market-driven redistribution of used
vehicles among our dealerships on a regional basis.
o The results of Auto Factory's purchasing and sales activities are
shared with all of our dealerships to provide timely and accurate
used car inventory and trade-in valuation information.
In addition, we have implemented "best practices" policies focused on
monitoring our used vehicle inventory levels. We believe that focusing on
inventory turnover helps us to efficiently manage our cost of capital and
produce consistent margins.
Centralized Corporate Infrastructure with Decentralized Operations
We have developed an infrastructure that centralizes executive
management functions while maintaining an entrepreneurial spirit at the
dealership level. Our dealerships manage their operations on a decentralized
basis within the broad parameters set by management so that they can provide
superior customer service and a region-specific responsiveness to the market.
Local in-depth knowledge of customers' needs and preferences is important in
maximizing market penetration.
Superior Customer Service
We provide high levels of customer service. Our service departments
seek to provide our customers with a professional and reliable service
experience. Our sales department focuses on providing customers with an
unpressured, informative shopping experience while interactively helping
identify their personal objectives and constraints. Among the innovations to
enhance customer service that we have incorporated in selected dealerships are
child play areas, coffee bars and information kiosks. The dealerships regard
service and repair activities as an integral part of their overall approach to
customer service, which provides an opportunity to form ongoing relationships
with the dealerships' customers and deepen customer loyalty. Our goal is to
build a long-term, lasting relationship with our customers that we believe will
enhance our brand and create significant repeat and referral business,
potentially in our higher margin products and services.
Beyond establishing strong consumer loyalty, this focus on customer
satisfaction engenders good relations with manufacturers. Manufacturers
generally measure consumer satisfaction, which is based on a survey given to new
vehicle buyers. Some manufacturers offer specific performance incentives, on a
per vehicle basis, if certain consumer satisfaction levels are achieved by a
dealer. Manufacturers can withhold approval of acquisitions if a dealer fails to
maintain a minimum consumer satisfaction score. We have never been denied
manufacturer approval of acquisitions based on consumer satisfaction scores. To
keep management focused on customer satisfaction, we include consumer
satisfaction results as a component of our incentive compensation program.
We have received a number of dealer quality and customer satisfaction
awards from various manufacturers. These awards represent the manufacturers'
highest recognition for dealer excellence as measured by high service and sales
consumer satisfaction scores combined with exceptional operational and sales
performance. The following are our awards for 1998:
o Lexus of Serramonte Lexus Elite Award
o Serramonte Dodge Chrysler's Five-Star Certification
o Melody Toyota Toyota President's Award
o Concord Honda Honda President's Award
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Experienced Management Team
We are very focused on identifying, recruiting and retaining highly
skilled and experienced individuals at every level of our organization. We
obtain a large number of skilled and experienced employees from the management
of profitable platforms that we have acquired. We believe that this strategy
provides substantial depth of management in our organization. Three members of
our current executive management team, which consists of Chairman Donald V.
Strough, Chief Executive Officer and President Thomas A. Price and Chief
Operating Officer Charles R. Oglesby has, on average, 32 years of experience in
the automotive industry. During the course of their individual careers, Messrs.
Strough, Price and Oglesby have each owned and/or operated individual
dealerships. The fourth member of the executive management team, Chief Financial
Officer Debra Smithart, has been involved in 4 public offerings - 3 equity and
one in the debt market. In addition to our executive management team, we also
have two regional vice presidents who have, on average, 20 years of industry
experience. We believe that this first-hand operating experience of our
executive management and regional vice presidents will enable us to continue to
acquire and integrate dealerships into our organization quickly and effectively.
Business Strategy
Growth Through Acquisitions
We intend to capitalize on the continuing consolidation opportunities
within the highly fragmented over $600 billion automotive retailing industry. As
capital requirements to operate competitive dealerships continue to increase and
many owners who were granted franchises in the 1950s and 1960s approach
retirement age, many individual dealers are seeking exit opportunities. We
believe that the reputation of our management in our markets and our ability to
successfully acquire and integrate dealership operations make us well positioned
to continue to capitalize on the consolidation trend in the industry.
Maximize Corporate Operating Structure
We intend to improve the performance and profitability of acquired
dealerships by taking advantage of our corporate operating structure to
consolidate our purchasing power and reduce costs of operations. We believe
that, upon closing an acquisition, we can immediately improve earnings by
utilizing our management experience to effectively implement best practices,
including inventory management, and by eliminating duplicative functions and
services. We have been successful at enhancing the profitability of both
platform and tuck-in acquisitions.
Examples of these improvements include:
o Improved Terms on Bank and Floor Plan Financing. We have benefited
from significant cost savings by consolidating the purchasing power
of the dealerships in connection with financing our floor plan.
o Centralized Procurement of Products and Services. As we increase our
size, we are able to purchase various products and services at lower
costs. Through our "Dealer Services" operation, we offer a wide
range of financing and leasing alternatives for the purchase of
vehicles. As a result of increased size and scale, we have
negotiated increased commissions on the origination of customer
vehicle financing, which result in incremental F&I commissions.
Other examples of cost-savings opportunities include automotive
after-market products and extended vehicle warranty packages. An
example of cost savings includes a reduction in our insurance costs
by consolidating coverage providers.
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Take Advantage of Regional Presence
We believe there are significant opportunities to benefit from
concentrating our efforts in clustered, contiguous areas. We believe in sharing
resources and have implemented technology initiatives that allow us to
effectively cross-sell products and refer customers to some of our other
dealerships. Direct benefits of our regional focus include:
o Reduced Advertising Costs as a Percentage of Sales. As a result of
our larger regional size, we are able to reduce regional advertising
costs by creating multi-dealership advertisements and increasing our
buying power with advertising agencies and publications. We have
reduced our advertising costs from 1.24% of sales in 1997 to 1.16%
of sales in 1998.
o Personnel Utilization. As a result of our clustered dealerships
within a region, we are able to have dealership personnel perform
various administrative functions for a cluster of dealerships,
rather than at just one dealership. The result is to effectively
lower the administrative overhead attributable to each dealership.
o Regional Inventory Management. Regionally centralized procurement,
reconditioning, inventory management and wholesale disposal of used
vehicles through Auto Factory has allowed us to reduce our inventory
holding costs and losses on sales of used vehicle inventory that we
are unable to sell at the dealerships.
o Increase Brand Awareness. Our goal is for the FirstAmerica
Automotive name, logo, and Internet address to become symbols of
value, convenience, selection and outstanding customer service.
Expand High Margin Activities
We focus on expanding our higher margin businesses like used vehicles
sales, F&I maintenance and repairs, auto part sales and warranties.
o Used Vehicles. Retail used vehicle sales typically generate higher
gross margins than new vehicle sales because of limited
comparability among used vehicles and the somewhat subjective nature
of their valuation. We believe there are opportunities at acquired
dealerships to improve all aspects of the acquired dealership's used
vehicles operations including sales procedures and, through the Auto
Factory, used vehicle inventory control. In addition, only new car
franchises are able to sell used cars certified by the manufacturer
under newly introduced programs in which the manufacturer supports
specific high-quality used cars with extended warranties and
attractive financing options.
o Finance and Insurance. Each sale of a new or used vehicle provides
the opportunity for us to sell extended warranty service contracts
and after-market products as well as earn financing fees (F&I). We
believe there are opportunities at acquired dealerships to lower the
cost of the after-market products and extended warranty service
contracts from our economies of scale.
o Service and Parts. Each of our dealerships offers a fully
integrated service and parts department. The service and parts
business can be counter cyclical to vehicle sales to the extent
customers repair and service vehicles rather than replace them. We
believe there are opportunities to increase the number of service
customers we retain at acquired dealerships through improved
customer service. In addition, at certain dealerships we have
acquired, we have expanded service capacity through increased hours
of operations.
Capitalize on Market Trends
Part of our strategy is to maintain a competitive advantage by
identifying new trends in our industry and in our markets, and to adapt as
quickly as possible to these changes. We have created several initiatives to
capitalize on current market changes. Some of these include:
o Marketing Through the Internet. Partially due to the technologically
sophisticated markets in which we operate, a portion of our new
vehicle sales in 1998 through our dealerships resulted from leads
generated through the Internet. We have used our Web site
(www.anyauto.com) as a tool to sell our
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products and services since 1995 and we maintain exclusive
territories with leading referral services. Our Web site allows
customers to search our new and used car inventories for specific
vehicles and thereby "pre-shop" before arriving at the dealership.
o Proprietary Database Technology. We have developed a proprietary
database of customer information, which allows us to provide higher
levels of customer service and maximize our cross-selling
opportunities. When a customer interacts with any part of our
organization, we obtain the vehicle identification number and
driver's license number from the customer. We enter this data into
our computer system and a profile for the vehicle and the customer
is developed. We are then in a position to enhance service and
cross-sell to the customer. For example, by utilizing this data, we
can notify a customer when they are due for servicing, or when their
lease may be coming due and therefore the customer faces a decision
regarding a new vehicle lease or purchase.
o Focus on Luxury Brands. Several luxury manufacturers like BMW, Lexus
and Mercedes have recently adopted strategies designed to make their
products lines accessible to a broader range of consumers. Without
compromising quality, these manufacturers are producing products
that are priced competitively with non-luxury brands. This trend,
coupled with the relatively high income levels of our customer base,
has led us to focus on a goal of increasing our percentage of sales
of luxury brands to 25 to 30%. Our BMW and Lexus stores have
generated above average returns and growth over the last year. We
will continue to focus on luxury brands as long as these trends
continue.
Train, Develop and Motivate Employees
We believe that recruiting and retaining our employees is critical to
the success of our organization. We have invested substantial resources in
developing training programs at all levels of our organization to insure the
highest quality service to our customers. Our training is managed at a corporate
level to ensure consistency but is delivered at a local level to adapt to the
different needs of our customers in our different markets. We utilize outside
resources for training when it will be more effective. We believe that it is
critical to motivate management to achieve our overall objectives and we have
devised an incentive system that provides partial compensation in the form of
stock options through the department manager level at our dealerships. We
believe that providing shared ownership through equity participation through the
department manage level at our dealership will align our interests with those of
our investors.
Offer a Diverse Range of Automotive Products and Services
We offer a broad range of automotive products and services, including a
wide selection of new and used vehicles such as high-end, luxury and sport
utility vehicles, F&I, replacement parts and maintenance and repair programs. We
offer 12 brands ranging from economy to luxury brands. We also offer a variety
of used vehicles at a broad range of prices. We intend to continue to diversify
the brands of vehicles that we offer, with a special emphasis on increasing the
percentage of high-end and luxury vehicle sales. We intend to continue to
diversify as we believe that diversification helps minimize dependence on any
one manufacturer and limits our exposure to a potential downturn in any of one
of our brands or market segments.
Dealerships
After giving effect to our pending acquisitions, we will own 11
dealerships in the San Francisco Bay Area market, two dealerships in the San
Jose/Silicon Valley market, two dealerships in the Los Angeles market, and four
dealerships in the San Diego market.
Since July 1997, we have grown significantly as a result of the
acquisition and integration of new vehicle dealerships and an increase in
revenues at our existing dealerships. The following table sets forth the name,
brands, year of acquisition and location of the dealerships acquired by or
awarded to us or our predecessors and the dealerships to be acquired by us
pursuant to our pending acquisitions:
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<TABLE>
<CAPTION>
Date Awarded or
Dealership / Company Brands Location Acquired
- ------------------------------------- ---------------------- ---------------------- -----------------
<S> <C> <C> <C>
Serramonte Auto Plaza Dodge Colma, CA Aug-93
Serramonte Auto Plaza Nissan Colma, CA Nov-84
Serramonte Auto Plaza Isuzu Colma, CA Feb-83
Serramonte Auto Plaza Mitsubishi Colma, CA May-96
Serramonte Pontiac-GMC Pontiac, GMC Colma, CA Dec-91
Lexus of Serramonte Lexus Colma, CA Jul-89
Marin Nissan Nissan San Rafael, CA Dec-96
Poway Dodge Dodge Poway, CA May-97
Poway Honda Honda Poway, CA May-97
Poway Toyota Toyota Poway, CA May-97
Concord Nissan Nissan Concord, CA Jul-97
Dublin Auto Center Dodge, Nissan, Dublin, CA Jul-97
Volkswagen
Stevens Creek Nissan Nissan Santa Clara, CA Jul-97
Capitol Nissan Nissan San Jose, CA Sep-97
Concord Honda Honda Concord, CA Oct-97
Melody Toyota Toyota San Bruno, CA Oct-95
Beverly Hills BMW BMW Beverly Hills, CA Apr-98
Honda of Serramonte Honda Colma, CA Jun-98
Concord Toyota Toyota Concord, CA Oct-98
Volkswagen of Woodland Hills Volkswagen Woodland Hills, CA Nov-98
Ritchey Fipp Poway Chevrolet Chevrolet Poway, CA Mar-99
First Dodge - Marin Dodge San Rafael, CA Apr-99 (1)
</TABLE>
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(1) Acquisition is pending; date shown is anticipated closing date.
Dealership Management
We use a flexible corporate infrastructure to support our growth. The
structure strives to maintain a decentralized operational approach that strikes
a balance between entrepreneurship at the dealership level and well-managed,
efficient, centralized executive and administrative operations at the corporate
level that seek the implementation of best practices throughout our system.
We organize operations of our dealerships geographically. Currently,
one of three regional vice presidents oversees each of the East San Francisco
Bay Area, West San Francisco Bay Area and Southern California. These regional
vice presidents report to our chief operating officer. Regional and single-point
general managers report to the regional vice presidents. The general managers of
our luxury dealerships report directly to our chief operating officer. Depending
on the size of the dealership and the proximity of clustered dealerships, a
group of two to five dealerships could be managed by a single regional general
manager with a general sales manager and a parts and service director reporting
directly to the regional general manager. The regional vice presidents and their
general managers report to senior management on a regular basis as to the
operating performance of the dealerships in their regions and prepare
comprehensive monthly financial and operating statements. Senior management
meets quarterly with operations management to evaluate operating performance, to
address changing customer preferences and operational concerns and to share best
practices.
A team of two senior managers compliment each general manager. These
senior managers aid in the operation of the dealerships. The general sales
manager is responsible for the operations, personnel, financial performance and
customer satisfaction performance of the new vehicle sales, used vehicle sales
and F&I departments. The parts and service director is primarily responsible for
the operations, personnel, financial and customer satisfaction performance of
the service, parts and collision repair departments.
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A human resources specialist and a financial controller supplement each
region. Additionally, at the corporate level there is a vice president of parts
and service who provides standardized policies and product selection,
procedures, performance measurement and benchmarking, and training programs to
the parts and service department personnel throughout the organization. The F&I
departments in our dealerships receive similar corporate oversight, training and
recruitment from our centralized dealer services division which is also
responsible for the selection, standardization and negotiation of all financing,
warranty and aftermarket products sold through the dealership F&I departments.
New Vehicle Sales
We currently represent 12 U.S., Asian and European brands of economy,
family, sports and luxury cars and light trucks and sport utility vehicles. We
believe that our brand, product and price diversity reduces the risk of changes
in customer preferences, product supply shortages and aging products. See
"Factors That May Affect Future Results -- Manufacturers exercise significant
control over our operations and we need them to operate our business."
The following table sets forth for the year ended December 31, 1998,
information relating to the brands of new vehicles sold at retail by us on a pro
forma basis assuming that all of our dealerships acquired in 1998 were acquired
on January 1, 1998.
These results may not be indicative of our results after the
acquisition of the dealerships by us:
<TABLE>
<CAPTION>
Number of New Vehicles
Brand Vehicles Percentage
----- -------- ----------
<S> <C> <C>
BMW 1,113 4.8
Buick 96 0.4
Dodge 3,284 14.3
GMC 164 0.7
Honda 4,018 17.5
Isuzu 303 1.3
Lexus 1,234 5.4
Mitsubishi 683 3.0
Nissan 5,694 24.8
Pontiac 152 0.7
Toyota 5,235 22.7
Volkswagen 1,005 4.4
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Total 22,981 100.0
</TABLE>
New vehicle retail sales include traditional new vehicle retail lease
transactions and lease-type transactions, both of which may be arranged by the
dealerships. New vehicle leases generally have short terms, which bring the
consumer back to the market sooner than if the purchase were debt financed. In
addition, leases provide our dealerships with a steady source of late-model,
off-lease vehicles for their used vehicle inventory. Generally, leased vehicles
remain under factory warranty for the term of the lease, which allows the
dealerships to provide repair service to the lessee throughout the lease term.
Our dealerships seek to provide customer-oriented service designed to
meet the needs of our customers and establish lasting relationships that will
result in repeat and referral business. For example, the dealerships strive to:
o employ more efficient selling approaches;
o utilize computer technology that decreases the time necessary to
purchase a vehicle;
o engage in extensive follow-up after a sale in order to develop long-
term relationships with customers; and
o extensively train their sales staff to be able to meet the needs of
each customer.
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The dealerships continually evaluate innovative ways to improve the
buying experience for their customers. We believe that our ability to share best
practices among our dealerships gives us an advantage over smaller dealerships.
Used Vehicle Sales
We sell a broad variety of makes and models of used cars, vans, trucks
and sport utility vehicles at each of our dealerships. Sales of used vehicles
have become an increasingly significant source of profit for the dealerships.
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. We intend to continue growing our used vehicle sales operations by
maintaining a high-quality inventory, providing competitive prices and extended
service contracts for our used vehicles and continuing to promote used vehicle
sales.
Vehicle customers can use our Web site at www.anyauto.com to
electronically search our used vehicle inventory by model, feature and price
requirements. The site displays a color picture of each vehicle and can also
generate a data sheet with price and other information, as well as a map of the
vehicle's location.
The following table sets forth information on our used vehicle sales:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------
1996 1997 1998
------------ ---------------- --------------
(dollars in thousands)
<S> <C> <C> <C>
Retail unit sales............................ 4,921 6,639 9,901
Retail sales revenue......................... $ 67,944 $ 90,436 $ 141,946
Retail gross profit.......................... $ 5,522 $ 8,841 $ 13,560
Retail gross margin.......................... 8.1% 9.8% 9.6%
Average gross profit per retail unit sold.... $ 1,122 $ 1,332 $ 1,370
Wholesale unit sales......................... 3,073 4,182 7,137
Wholesale sales revenue...................... $ 13,762 $ 21,180 $ 49,883
Wholesale gross profit....................... $ (5) $ 86 $ 2,517
Wholesale gross margin....................... 0.0% 0.4% 5.0%
Total unit sales............................. 7,994 10,821 17,038
Total revenue................................ $ 81,706 $111,616 $ 191,829
Total gross profit........................... $ 5,517 $ 8,927 $ 16,077
Total gross margin........................... 6.8% 8.0% 8.4%
</TABLE>
Profits from sales of used vehicles depend primarily on the
dealerships' ability to obtain a high-quality supply of used vehicles at the
right price and effectively manage that inventory. Our new vehicle operations
provide the 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.
We formed a subsidiary, FAA Auto Factory Inc., to regionalize the
procurement, reconditioning, inventory management and wholesale sales of used
vehicles. Auto Factory is managed by an individual who has over 22 years of
relevant operating experience in operating such an operation. The dealerships
supplement their used vehicle inventory with vehicles purchased by our regional
Auto Factory operation at "closed" auctions, that may be attended only by new
vehicle dealers and which offer off-lease, rental and fleet vehicles, and at
"open" auctions that offer repossessed vehicles and vehicles sold by other
dealers. Additionally, Auto Factory operates on a company-wide, centralized
basis for large purchases of off-lease, rental and fleet vehicles for sale to
our dealerships and other wholesalers as well as conducting a bi-weekly sealed
bid auction to dispose of customer trade-in vehicles in poor condition or
vehicles which remain unsold for a specified period of time. The results of Auto
Factory's purchasing and sales activities are shared with all of our dealerships
to provide timely and accurate used car inventory and trade-in valuation
information. This process allows Auto Factory to maximize our profits on used
vehicle sales and provide inventory to our dealerships on a cost effective basis
to meet current regional customer demand. Additionally, Auto Factory manages the
market-driven redistribution of used vehicles among our dealerships.
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We transport all used vehicles we acquire to one of our regional
reconditioning centers. At the reconditioning center, every vehicle must pass a
135-point reconditioning process in which certified technicians inspect, adjust,
clean, repaint, repair or replace mechanical, cosmetic and safety features of
the vehicle to meet our standards. Each vehicle is sold with a 60-day bumper-to-
bumper limited warranty, a 30-day exchange guarantee and 24-hour free roadside
assistance for one year.
We have taken several initiatives since August 1998 to enhance customer
confidence in our used vehicles, including offering extended warranties,
stocking higher-quality, late-model used cars and our branded "Pre-Owned, Pre-
Loved" certification program.
Service and Parts Sales
We provide service and parts at each of our factory-authorized
dealerships. In the second half of 1998, we opened our downtown San Francisco
multi-brand, full-service vehicle maintenance and repair center. This 36,000
square foot, 38 service bay facility utilizes state of the art information
management and automotive repair equipment. Our ability to service multiple
makes in one centralized location provides us an excellent recruitment and
training facility for technicians at the service center and for our dealerships.
We intend the service center to provide convenience to current sales customers
in the San Francisco Bay area, resulting in overall increased service retention.
We utilize a total of approximately 380 service bays at all of our locations to
provide both warranty and non-warranty services. Service and parts sales provide
higher gross margins than vehicle sales.
The following table sets forth information regarding our service and
parts sales:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1996 1997 1998
----------------- ----------------------- ---------------
(dollars in thousands)
<S> <C> <C> <C>
Sales ................................... $ 42,416 $ 58,707 $ 91,134
Gross profit............................. 16,966 26,512 41,711
Gross margin............................. 40.0% 45.2% 45.8%
</TABLE>
Our dealerships seek to retain each vehicle purchaser as a customer of
the dealership's parts and service departments. The dealerships have systems in
place that track their customers' maintenance records and notify owners of
vehicles purchased or serviced at the dealerships when their vehicles are due
for periodic services. The dealerships regard service and repair activities as
an integral part of their overall approach to customer service, which provides
an opportunity to foster ongoing relationships with the dealership's customers
and deepen customer loyalty.
Our dealerships' parts departments support their sales and service
departments. Each of the 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 and other dealerships. Currently, most of our
dealerships employ their own parts managers and independently control their
parts inventory and sales. Some contiguous dealerships share parts inventories
and personnel. Our dealerships that sell the same new vehicle makes have access
to each other's computerized inventories and frequently obtain unstocked parts
from our other dealerships.
Dealer Services
We have created a Dealer Services division to maximize cost savings by
centralizing and consolidating the purchasing power of all of our dealerships.
Specifically, this division standardizes and procures our finance, leasing and
insurance products, extended warranty service contracts and aftermarket products
marketed through the F&I
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departments of our dealerships to our customers. We believe providing these
higher contribution products in an efficient, high quality manner is an integral
component to attaining customer satisfaction.
In addition, Dealer Services develops standardized policies and
procedures for our administrative operations in our F&I departments. The
division also recruits and trains F&I personnel and monitors performance levels
of our dealerships and product lines.
Finance and Insurance
We offer our customers a wide range of financing and leasing
alternatives for the purchase of vehicles. In addition, as part of each sale, we
also offer customers warranty or extended service contracts.
We sell our vehicle financing contracts and leases to other parties,
instead of directly financing sales. This reduces our exposure to loss from
financing activities. We receive a fee from the lender for originating and sale
of the loan or lease but we are assessed a chargeback fee by the lender if a
loan is canceled, in most cases, within 90 days of making the loan. Early
cancellation can result from early repayment because of refinancing of the loan,
the sale or trade-in of the vehicle, or default on the loan. We establish an
allowance to absorb estimated chargebacks and refunds. F&I revenue is recorded
net of these chargebacks.
Sales and Marketing
Our sales philosophy is to provide customer-oriented service designed
to meet the needs of a diverse, increasingly sophisticated and demanding body of
automotive consumers. We seek to provide our customers with a satisfying,
pleasant and informative retailing experience that entails "one-stop" shopping
convenience, no-haggle competitive pricing and a sales staff that is
knowledgeable about our product offerings and responsive to the customer's
needs. Continuous training of our sales force focuses on providing skills that
improve each salesperson's interactions with customers. A key management tool
for us is the customer service index, or CSI score, which is derived from data
accumulated by manufacturers through customer surveys. Management carefully
monitors these scores to improve dealership operations and uses these as a
factor in determining compensation.
Our marketing efforts focus on continuing and increasing business with
existing customers as well as referral and new customers. We employ mass-
marketing and advertising in various media, including television, radio,
newspaper, billboard, direct mail and the Internet to attract a broad retail
customer base and to establish us as a nationally-recognized brand name.
Our goal is for the FirstAmerica Automotive name, logo and Internet
address to become symbols of value, convenience, selection and outstanding
customer service in our target market. Once a consumer does business with any of
our dealerships we want that consumer to feel that he or she has chosen a
company that can supply a lifetime of automotive products and services. We are
continuing to develop our FirstAmerica Automotive brand through a multi-level
process:
o We have established a consistent look and message in all of our
advertising. FirstAmerica Automotive branded formats are now in use
for all print, radio, television and Internet advertising. We
consistently use our corporate colors, logo and Internet address to
develop brand identity and to solidify a clear image in the
consumer's mind. Our newspaper advertising campaign won the Dealer
Automotive Newspaper Display Advertising Award for best campaign by
an individual dealer in 1996, 1997 and 1998 and for best of show in
1997 and 1998.
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o We recently launched a company-wide consumer benefit program, which
initially focuses on our used car operations. This program includes
our introduction of our used car reconditioning, certification and
roadside assistance program, "Pre-Owned, Pre-Loved."
o We intend to update dealership signage in all locations to include
our logo. All of our company vehicles including customer shuttles
and parts delivery trucks will include our name and logo.
o We plan to migrate dealership names in markets where we have a
cluster of dealerships to include "FirstAmerica Automotive" in the
dealership's name and signage, along with our logo.
Our goal is to create an advertising program that focuses on building a
long-term relationship with consumers, but does not alienate any particular
manufacturer. As we build brand awareness we intend to become less reliant on
price point advertising and more focused on delivering a value message.
Additionally, we have adopted a three-tiered Internet marketing
strategy. The first tier uses our own Web site, www.anyauto.com, which provides
users access to information related to all of our dealerships. We include the
Internet address of this site in all of our marketing material. The second tier
involves using our relationship with www.autotown.com to provide additional
customer prospects through a credible third-party provider of comparative
automotive information. Finally, we use our buying power to obtain the lowest-
cost leads from most major Internet purchase request providers, including Auto-
by-Tel, Autoweb.com, Auto Mall U.S.A. and CarPoint. We have a staff in each of
our dealerships dedicated to handling Internet prospects as well as regional
Internet directors to assist in training and process development. In addition,
we have an advisory committee that explores future product development and
alternative distribution methods seeking to use the Internet's potential as a
source of additional revenue. We believe the California market is particularly
well suited to Internet sales initiatives. A portion of our 1998 new vehicle
sales through the dealerships resulted from leads generated through
www.anyauto.com and Web sites of third party lead providers.
Auto Town
In late 1998, we purchased Auto Town which develops proprietary
software applications for automobile dealerships. These applications serve four
primary functions: (1) Internet Web site administration, (2) customer tracking,
(3) inventory tracking and (4) an easy-to-use finance and insurance module that
is fully integrated with leading accounting packages. These software
applications are designed to enhance dealership sales, efficiencies and
profitability.
Relationships with Manufacturers
Each of our dealerships operates under one or more separate sales and
service or dealer agreements with one or more manufacturers that govern the
relationship between the dealership and the manufacturer. Through our wholly
owned subsidiaries, we currently have 24 separate dealer agreements with nine
manufacturers. We have entered into one or more dealer agreements with the
following manufacturers:
o Honda o Mitsubishi
o Toyota o Nissan
o Chrysler o Volkswagen
o General Motors o BMW
o Isuzu
In general, each dealer agreement specifies the location of the
dealership in a specified market area. Each dealer agreement also requires the
dealer to meet specified standards regarding showrooms, facilities and equipment
for servicing vehicles, inventories, minimum net working capital, personnel
training and other aspects of dealership operations. Each dealer agreement also
gives each manufacturer the right to approve the dealership's general manager
and any material change in management or ownership of the dealership. Each
manufacturer may terminate a dealer agreement under limited circumstances, like
a change in control of the dealership without manufacturer
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approval, material impairment of the financial condition of the dealership,
insolvency or bankruptcy of the dealership or a material breach of other
provisions of the dealer agreement.
Manufacturers' policies regarding public ownership of dealerships
continue to evolve as the consolidation of automobile dealerships by publicly
held companies progresses. We believe that these policies will continue to
change as more dealership groups sell their stock to the public and as
established public dealership groups acquire more dealerships. All of the
manufacturers with which we currently have dealer agreements have approved us as
a publicly held entity. Some of the manufacturers have, however, placed
restrictions on our ability to acquire additional dealerships as well as on the
transferability of our common stock. These policies could have a material
adverse effect on our business. See "Factors That May Affect Future Results --
Automobile manufacturers exercise significant control over operations and we are
dependent on them to operate our business."
Nissan
In addition to our customary dealer agreement with Nissan, we have
entered into a contiguous market ownership agreement with Nissan and related
agreements for us to own and operate multiple and contiguous Nissan dealerships
in two contiguous market areas or CMOs in the San Francisco Bay Area. These CMO
agreements provide that if we want to sell one Nissan dealership within the CMO,
Nissan has the right to require that we sell all or none of our dealerships
within that area. Further, if we want to sell or transfer one of our two San
Francisco Bay Area contiguous market areas without Nissan's consent, Nissan may
require us to sell or transfer one or all, or any combination, of the areas to a
proposed buyer acceptable to Nissan. Termination of one Nissan dealer services
agreement within a CMO constitutes termination of all dealer agreements within
that CMO.
Toyota
Under our agreement with Toyota, the number of Toyota dealerships we
may acquire is restricted to:
o the greater of one dealership or twenty percent of the Toyota dealer
count in a "Metro" market (Metro markets are multiple Toyota
dealership markets within some geographic areas as defined by
Toyota);
o the lesser of five dealerships or 5% of the Toyota dealerships
within regional geographic areas designated by Toyota; and
o seven Toyota dealerships nationally.
Our agreement with Toyota also limits the number of Lexus dealerships
we may acquire to not more than:
o two Lexus dealerships in any Area regional geographic area
designated by Toyota; or
o three Lexus dealerships nationally.
We currently own and operate three Toyota dealerships and one Lexus
dealership. Subject to the restrictions limiting the acquisition by us of
additional dealerships within specified geographic regions, we are currently
limited to acquiring not more than four additional Toyota dealerships and two
additional Lexus dealerships. Under our agreement with Toyota, Toyota has the
right to approve any acquisition of 20% or more of the voting power of our
outstanding stock by any person or entity. If Toyota reasonably determines that
the person or entity is unqualified, or has interests incompatible with Toyota,
we must reacquire the stock until the person or entity holds less than 20%. If
we cannot reacquire the stock, Toyota may force us to sell our dealerships, or
Toyota may purchase the dealerships from us.
After we entered into our agreement with Toyota, Toyota modified its
policy on public ownership of multiple dealerships. Under the current Toyota
policy, a single owner may own and operate in excess of seven Toyota dealerships
if the owner can demonstrate that it meets capitalization and management
requirements established by Toyota for multiple dealer ownership. The multiple
ownership policy limits the number of Toyota dealerships in a region provided
that the number of dealerships in a region varies depending on whether the sales
volume of the dealerships are less than 9% of the sales volume of the entire
region. Toyota's San Francisco region
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provides for a limit of three Toyota dealerships, as long as the dealerships
have a combined sales volume of more than 9% of the regions or up to four
dealerships as long as the sales volume of the combined dealerships is less than
9% of the region. Further, Toyota's policy provides that no owner shall own or
control dealerships that represent more than 20% of the dealerships in a Metro
market as defined by Toyota.
Honda
Our current agreement with Honda limits our ability to acquire
additional Honda dealerships and restricts the transferability of our common
stock. Our agreement with Honda limits our ownership and acquisition of Honda
dealerships to not more than:
o one Honda dealership in a Metro market, a geographical area
designated by Honda, having two to ten Honda dealerships;
o two Honda dealerships in a Metro market having 11 to 20 Honda
dealerships;
o three Honda dealerships in a Metro market having 21 or more Honda
dealerships;
o 4% of the Honda dealerships in any one of ten Honda geographic zones
(large geographic areas designated by Honda); and
o seven Honda dealerships nationally.
Our agreement with Honda further limits our ownership of Acura
dealerships to not more than:
o one Acura dealership in a Metro market having two or more Acura
dealerships;
o two Acura dealerships in any one of six Acura zones (large
geographical areas designated by Honda); and
o three Acura dealerships nationally.
Our agreement with Honda further requires that specific current
stockholders retain voting control of us. This requirement restricts the number
of shares we can sell to the public. Honda also has the right to disapprove the
acquisition by any individual or entity of more than 5% of our outstanding
capital stock. If this type of acquisition takes place without Honda's consent,
Honda may force us to sell all of the assets of our Honda and Acura dealerships.
Honda has proposed a new agreement to replace our current agreement.
Under the proposed new agreement, Honda's general policy regarding ownership of
Honda dealerships by publicly traded companies would be applicable to us. The
new Honda policy does not prohibit public trading of our stock or require
specific ownership percentage by current stockholders. The new policy also does
not require that we obtain Honda's consent to any equity offering. The new
policy does, however, retain Honda's right to approve our acquisition of any
Honda or Acura dealership, and does provide that Honda may force us to sell our
dealerships if a person or entity with interests adverse to Honda acquires more
than 5% (or 10% if the entity is an institutional investor) of our outstanding
stock.
California Law
Statutes in California and other states in which we may expand limit
manufacturers' control over dealerships.
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o Under California law, despite any contrary terms in a dealer
agreement, manufacturers may not unreasonably withhold approval for
the sale of a dealership. Acceptable grounds for disapproval include
the unsatisfactory financial condition of the proposed transferee
and the unsatisfactory experience in the automobile business of the
proposed transferee, including CSI scores and sales results of the
proposed transferee with respect to other automobile dealerships
owned or operated by the proposed transferee.
o Despite any provision in the franchise agreement, no manufacturer
may modify, replace, enter into, relocate, terminate, or refuse to
renew a franchise agreement without good cause. Good cause
considerations include, among other things, the amount of business
transacted by the franchisee as compared to business available to
the franchisee, whether the proposed termination or modification is
injurious or beneficial to the public welfare, whether the
franchisee has adequate motor vehicles sales and service facilities
and qualified personnel, and the extent of the franchisee's failure
to comply with the terms of the franchise agreement.
o Prior to the termination of a franchise, the dealer has the right to
a hearing before the California New Motor Vehicle Board where the
manufacturer will have the burden of proof that the franchisee has
violated the franchise agreement.
o The manufacturer may not appoint new dealers or allow the relocation
of any dealers without notifying dealers in the relevant market area
who will have a right to file a protest with the California New
Motor Vehicle Board prior to the opening of a new dealership. A
protest will determine whether good cause appears for the
appointment of a new dealer in a market area. Good cause
considerations include whether the manufacturer is adequately
represented in the area and if it is in the best interest of the
public to establish a new dealership in the market area.
Competition
Automobile retailing is a highly competitive business with over 22,000
franchised automobile dealerships in the United States at the beginning of 1998.
Our competition includes:
o franchised automobile dealerships selling the same or similar makes
of our new and used vehicles in the same markets as us and sometimes
at lower prices than ours;
o other franchised dealers;
o independent leasing companies, parts brokers and warehouse clubs;
o private market buyers and sellers of used vehicles;
o online purchasing services;
o used vehicle dealers; and
o service center chains and independent service and repair shops.
Gross profit margins on sales of new vehicles have been generally
declining since 1986. We do not have any cost advantage in purchasing new
vehicles from the manufacturers. We typically rely on advertising,
merchandising, sales expertise, service reputation and dealership locations to
sell new vehicles. The following characterizes the types of competition we face:
o The used car market faces increasing competition from non-
traditional outlets such as nationwide networks of used vehicle
"superstores" like AutoNation or CarMax which use sales techniques
such as one-price and "no-haggle" shopping. Some of these used car
"superstores" have opened in markets where our dealerships compete.
We, along with our competition, are beginning to use the Internet as
part of the sales process. Consumers are using the Internet to
comparison shop for vehicles, which
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may further reduce margins for new and used cars. No-haggle sales
methods are also being tried for new car sales by at least one of
these superstores and dealers for Saturn and other makes.
o Some recent market entrants may be capable of operating on smaller
gross margins than ours and may have greater financial, marketing
and personnel resources than ours.
o Ford, General Motors and Saturn have acquired dealerships in various
cities in the United States. Other manufacturers may also directly
enter the retail market in the future, which could have a material
adverse effect on our business.
o The increased popularity of short-term vehicle leasing has also
resulted in a large increase in the number of late-model used
vehicles available in the market, which puts added pressure on the
profit margin on used vehicle sales margins.
o As we seek to acquire dealerships in new markets, we may face
significant competition (including competition from other publicly
owned dealer groups) as we strive to gain market share.
Our finance and insurance business and other related businesses, which
have higher contributions to earnings than the sale of new and used vehicles,
are subject to strong competition from third parties which may increase if these
third parties are able to sell products over the Internet.
We believe that the principal competitive factors in vehicle sales are:
o the marketing campaigns conducted by manufacturers;
o the ability of dealerships to offer a wide selection of the most
popular vehicles; and
o the location of dealerships and the quality of customer service.
Other competitive factors include customer preference for makes of
automobiles, pricing (including manufacturer rebates and other special offers)
and warranties. We believe our dealerships are competitive in all of these
areas.
In addition to competition for vehicle sales, our dealerships compete
against other franchised dealers to perform warranty repairs and other vehicle
dealers, franchised and independent service center chains and independent
garages for non-warranty repair and routine maintenance business. We believe
that the principal competitive factors in parts and service sales are:
o price;
o the use of factory-approved replacement parts;
o the familiarity with a dealer's makes and models;
o convenience; and
o the quality of customer service.
A number of regional and national chains offer selected parts and
service at prices that may be lower than our prices.
In arranging or providing financing and insurance for our customers'
vehicle purchases, we compete with a broad range of financial institutions. We
believe that the principal competitive factors in providing financing are
convenience, interest rates and contract terms.
Our success depends, in part, on national and regional automobile-
buying trends, local and regional economic factors and other regional
competitive pressures. We sell our vehicles in the greater San Francisco Bay
Area, the San Jose metropolitan area, San Diego County and in the Los Angeles
market, all of which are in
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California. Conditions and competitive pressures affecting these markets, like
price-cutting by dealers in these areas, or in any new markets we enter, could
adversely affect us, although the retail automobile industry as a whole might
not be affected. See "Factors That May Affect Future Results -- Intense
competition in vehicle retailing and related businesses could reduce our profit
margins."
Governmental Regulations and Environmental Matters
A number of regulations affect the business of marketing, selling,
financing and servicing automobiles. We are also subject to laws and regulations
relating to business corporations generally.
The relationship between an automobile dealership and a manufacturer is
governed by various federal and state laws established to protect dealerships
from the generally unequal bargaining power between the parties. Federal laws,
as well as California state law, prohibit a manufacturer from terminating or
failing to renew a dealer agreement without good cause. Under California law, a
manufacturer may not require a dealer to accept any vehicle, part or accessory
not voluntarily ordered by the dealer, to refuse to deliver any new vehicle,
part or accessory advertised by the manufacturer as available, or to require
monetary participation in any sales promotion or advertising campaign.
Manufacturers are entitled to approve or disapprove a proposed transferee in
connection with any transfer of a dealership. Further, a dealer is entitled to
seek judicial relief to prevent a manufacturer from establishing a competing
dealership of the same vehicle make within the dealer's relevant market area.
California Dealership Laws
Under California law as well as the laws of other states into which we
may expand, we must obtain a license in order to establish, operate or relocate
a dealership or operate an automotive repair service. The licensing of
automobile dealerships in California is principally within the jurisdiction of
the California Department of Motor Vehicles. In addition to establishing
licensing requirements, California law also regulates aspects of the conduct of
our business, including our advertising and sales practices. Other states may
have similar requirements.
Lemon Laws
Our operations are also subject to consumer protection laws known as
"Lemon Laws." These laws typically require a manufacturer or dealer to replace a
new vehicle or accept it for a full refund within one year after initial
purchase if the vehicle does not conform to the manufacturer's express
warranties and the dealer or manufacturer, after a reasonable number of
attempts, is unable to correct or repair the defect. Federal laws require
written disclosures to be provided on new vehicles, including anticipated gas
mileage and pricing information.
Import Restrictions
The imported automobiles we purchase are subject to U.S. customs
duties. In the ordinary course of our business, we may, from time to time, be
subject to claims for duties, penalties, liquidated damages, or other charges.
Currently, U.S. customs duties are generally assessed at 2.5% of the customs
value of the automobiles imported, as classified pursuant to the Harmonized
Tariff Schedule of the United States. See "Factors That May Affect Future
Results -- Imported product restrictions and foreign trade risk may impair our
ability to sell foreign vehicles profitably."
Financing Laws
Our financing activities with customers are subject to federal truth-
in-lending, consumer leasing and equal credit opportunity regulations as well as
state and local motor vehicle finance laws, installment finance laws, usury laws
and other installment sales laws. Some states regulate finance fees that may be
paid as a result of vehicle sales.
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Environmental Laws
Federal, state and local environmental regulations, including
regulations governing air and water quality, the clean-up of contaminated
property and the storage and disposal of gasoline, oil and other materials, also
apply to us and our dealership properties. As with automobile dealerships
generally, and service parts and body shop operations in particular, our
business involves the use, storage, handling and contracting for recycling or
disposal of hazardous or toxic substances or wastes and other environmentally
sensitive materials. Our business also involves the past and current operation
and/or removal of aboveground and underground storage tanks containing these
substances or wastes. Accordingly, we are subject to regulation by federal,
state and local authorities which establish health and environmental quality
standards, provide for liability related to those standards, and in some
circumstances provide penalties for violations of those standards. We are also
subject to laws, ordinances and regulations governing remediation of
contamination at facilities we operate or to which we send hazardous or toxic
substances or wastes for treatment, recycling or disposal.
We believe that we do not have any material environmental liabilities
and that compliance with environmental laws and regulations will not,
individually or in the aggregate, have a material adverse effect on our results
of operations or financial condition. Further, environmental laws and
regulations are complex and subject to frequent change. In addition, in
connection with our acquisitions, it is possible that we will assume or become
subject to new or unforeseen environmental costs or liabilities, some of which
may be material. Compliance with current or amended, or new or more stringent,
laws or regulations, stricter interpretations of existing laws or the future
discovery of environmental conditions subject us to additional expenditures and
these expenditures may be material. See "Factors That May Affect Future Results
- --Governmental regulation and environmental regulation compliance costs may
have a material adverse effect on our profits."
We believe that we comply in all material respects with the laws
affecting our business. Possible penalties for violation of any of these laws
include revocation of our licenses and fines. In addition, many laws may give
customers a private cause of action.
Employees
As of December 31, 1998, we employed 1,431 people, of whom
approximately 143 were employed in executive and managerial positions, 344 were
employed in non-managerial sales positions, 743 were employed in non-managerial
parts, service and other positions and 201 were employed in administrative
support positions.
We believe that many dealerships in the retail automobile industry have
difficulty in attracting and retaining qualified personnel for a number of
reasons, including the historical inability of dealerships to provide employees
with an equity interest in the profitability of the dealerships. We provide
certain executive officers, managers and other employees with stock options. We
believe these types of equity incentives are attractive to our existing and
prospective employees. See "Factors That May Affect Future Results -- The loss
of key personnel and our limited management and personnel resources could
adversely affect our operations and growth."
We believe that our relationship with our employees is good.
Approximately 55 of our employees are represented by a labor union. Because of
our dependence on manufacturers, we may be affected by labor strikes, work
slowdowns and walkouts at a manufacturer's manufacturing facilities. See
"Factors That May Affect Future Results -- Automobile manufacturers exercise
significant control over our operations and we are dependent on them to operate
our business."
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Item 2. Properties.
Our principal executive offices are located at 601 Brannan St., San
Francisco, California 94107, and our telephone number is (415) 284-0444. These
executive offices are located on the premises occupied by our downtown San
Francisco service center.
Our dealerships are generally located along major U.S. or interstate
highways. One of the principal factors we consider in evaluating an acquisition
candidate is its location. We prefer to acquire dealerships located along major
thoroughfares, primarily interstate highways with ease of access, which can be
easily visited by prospective customers.
We lease 20 properties, which are utilized by our dealership
operations, generally under long term leases. There are four leases that will
expire by March 31, 2000. We believe that our facilities are adequate for our
current needs. Certain of these leases are related party leases. See "Certain
Relationships and Related Transactions."
Under the terms of our franchise agreements with manufacturers, we must
maintain an appropriate appearance and design of our facilities and we are
restricted in our ability to relocate our dealerships. See "Business --
Relationships with Manufacturers."
Item 3. Legal Proceedings.
From time to time, we are named in claims involving the manufacture of
automobiles, contractual disputes and other matters arising in the ordinary
course of our business. Currently, no legal proceedings are pending against or
involve us that, in the opinion of our management, could reasonably be expected
to have a material adverse effect on our business, financial condition or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
There is no established public trading market for any class of our
common stock. As of December 31, 1998, there were approximately 339 holders of
record of our Class A Common Stock and seven holders of record of our Class B
Common Stock. Because many of our shares of Class A Common Stock are held by
brokers and other institutions on behalf of stockholders, we are unable to
estimate the exact number of stockholders represented by the holders of record,
but we believe the actual number of underlying holders of record to be in excess
of 300.
We have not paid dividends on any class of our common stock for our two
most recent fiscal years or any subsequent interim period, excluding S
distributions made to stockholders when we were taxed as an S corporation. We
currently intend to retain future earnings, if any, to finance the development
and expansion of our business and do not anticipate paying any cash dividends on
our common stock in the foreseeable future. Our certificate of incorporation
restricts the payment of dividends on our capital stock under certain
circumstances. Specifically, it prohibits the payment of dividends on our common
stock so long as any shares of our 8% Cumulative Redeemable Preferred Stock due
2005 remain outstanding and any dividends owed thereon remain unpaid. Under the
terms of our financing arrangements, we are also subject to restrictions on
paying dividends on our common stock.
Recent Sales of Unregistered Securities
In connection with and in partial consideration for consulting services
performed for us, on October 1, 1998, we issued warrants to purchase 40,000
shares of our Class A Common Stock to Brown, Gibbons & Lang.
20
<PAGE>
The exercise price of these warrants is $2.00 per share. These warrants are
exercisable at any time prior to October 1, 2003.
In connection with our lending arrangements, on October 1, 1998, we
issued $12,000,000 in notes and 500,000 shares of our Class B Common Stock for
an aggregate consideration of $1,000,000 to three affiliates of Trust Company of
the West.
In connection with our acquisition of DSW & Associates, Inc., d/b/a
AutoTown, on December 31, 1998, we issued an aggregate of 335,015 shares of
Class A Common Stock to former shareholders of Autotown in exchange for shares
of stock of Autotown.
The issuances described above were deemed exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act as
transactions by an issuer not involving a public offering. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about us or had access, through employment
or other relationships, to such information.
21
<PAGE>
Item 6. Selected Consolidated Financial Information.
The following table sets forth our historical consolidated financial
information. The statement of operations data for each of the calendar years in
the four year period ended December 31, 1998 and the balance sheet data as of
December 31, 1995, 1996, 1997 and 1998 have been derived from our consolidated
financial statements audited by KPMG, LLP, independent auditors. The statement
of operations for the year ended December 31, 1994 and the balance sheet data as
of December 31, 1994 are unaudited. The following selected consolidated
financial information and notes thereto should be read in conjunction with our
consolidated financial statements and notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." The following
selected financial data represents the historical financial information of the
former Tom Price dealerships prior and subsequent to our Combination with them
on July 11, 1997, and the financial information of all the other dealerships
acquired by us from their dates of acquisition.
Selected financial data for each of the five years ended December 31,
1998, is as follows (in thousands, except for share data):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
1994 1995 1996 1997 1998
--------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations, Data
Revenues
New vehicle $134,980 $147,088 $ 200,185 $290,281 $475,847
Used vehicle 53,280 60,967 81,706 111,616 191,829
Service and parts 30,441 33,428 42,416 58,707 91,134
Other dealership revenues, net 3,680 6,702 8,215 13,444 24,261
--------------------------------------------------------------
Total sales 222,381 248,185 332,522 474,048 783,071
Cost of sales 189,757 213,463 288,918 406,296 663,902
Gross profit 32,624 34,722 43,604 67,752 119,169
Selling, general and
administrative expenses 28,424 30,060 38,330 58,761 99,603
Depreciation and amortization 284 381 611 678 1,952
Combination and related expenses -- -- -- 2,268 --
--------------------------------------------------------------
Operating income 3,916 4,281 4,663 6,045 17,614
Interest expense, floor plan (2,160) (2,864) (2,922) (3,669) (5,521)
Interest expense, other -- -- -- (1,866) (5,432)
--------------------------------------------------------------
Income before income taxes 1,756 1,417 1,741 510 6,661
Income tax expense 47 26 48 446 2,864
--------------------------------------------------------------
Net income $1,709 $1,391 $1,693 $64 $3,797
==============================================================
Net income (loss) per common share--diluted (1) $0.19 $0.15 $0.19 $ (0.01) $0.23
==============================================================
Weighted average common shares outstanding
--diluted (1)(2) 5,526 5,526 5,526 10,915 14,928
==============================================================
Balance Sheet Data
Total assets $46,403 $54,423 $ 56,127 $124,002 $178,452
Long-term debt 686 112 -- 21,938 34,547
Redeemable preferred stock -- -- -- 3,439 3,579
Stockholders' equity (3) 6,573 6,644 4,880 6,563 11,716
</TABLE>
22
<PAGE>
- -----------------------------
(1) We were an S corporation until January 1, 1997. Accordingly, we were not
subject to federal income taxes prior to January 1, 1997. Adjusted net
income of $1,027, $836 and $1,025 was used to calculate net income per
share for 1996, 1995 and 1994, respectively, which reflects the adjusted
effect of federal and state income taxes as if we had been a C corporation,
based on the effective tax rates that would have been in effect during
these periods.
(2) Prior to 1997, adjusted net income per share is calculated using the
5,526,000 shares issued to the stockholders of the former Tom Price
dealerships we combined with in July 1997.
(3) Stockholders' equity is presented net of advances to stockholders during
the years 1994 through 1996. Accordingly, the change in stockholders'
equity is reflected net of stockholders' advances.
Item 7. Management's Discussion and Analysis of Financial Condition and
Operating results.
The following discussion of the results of operations and financial
condition should be read in conjunction with our Consolidated Financial
Statements and the related notes thereto in this Form 10-K.
Overview
We are a leading automotive retailer and consolidator in the highly
fragmented automotive retailing industry. We currently operate in four major
metropolitan markets in California, and are focusing our consolidation strategy
in the western United States. We generate revenues through all activities
typical of automotive dealerships. These consist of the sale and lease of new
and used vehicles, parts and service sales, collision repair service revenues,
financing fees, vehicle insurance commissions, document processing fees,
extended service warranty sales, and after-market product sales. As of December
31, 1998, we sold 12 domestic and foreign brands consisting of BMW, Buick,
Dodge, Honda, Isuzu, GMC, Lexus, Mitsubishi, Nissan, Pontiac, Toyota and
Volkswagen.
In July 1997, we combined with a group of six automobile dealerships
then owned by Thomas A. Price, our president and chief executive officer. The
combination was accounted for as the acquisition of us by the former Tom Price
dealerships, and accordingly, the financial information for periods before the
combination represent financial information of the former Tom Price dealerships.
New vehicle revenues include the sale and lease of new cars and light
trucks. Used vehicle revenues include retail and wholesale sales of used cars
and light trucks. Service and parts revenues include vehicle servicing revenues,
warranty repairs, collision repairs and sales of parts to retail and wholesale
customers. Other dealership revenues include financing fees, document processing
fees, vehicle insurance commissions, extended service warranty contract sales
and after-market product sales.
Our gross margin varies based on the mix between new vehicle sales,
used vehicle sales, parts and service sales and other dealership revenues. Gross
margins on new vehicle sales can be affected by the availability of popular
model types as well as manufacturer promotions. Factors such as seasonality,
weather, and cyclicality may also impact our product mix and influence our gross
margin. Used vehicle gross margins are primarily impacted by supply and the
price of new vehicles. Service and parts gross margins are primarily impacted by
the productivity and wage rate of service personnel.
Sales commissions, salaries, advertising and rent constitute the
largest components of selling, general and administrative expenses. Interest
expense primarily consists of interest charges on debt incurred for vehicle
inventory financing and interest on debt incurred for dealership acquisitions.
Vehicle sales are cyclical and can be impacted by consumer confidence,
levels of consumer disposable income, inflation, interest rates, credit
availability, and other economic conditions. A significant portion of the costs
associated with vehicle sales are variable costs and can be adjusted during
periods of depressed sales. The parts and service repair business can be counter
cyclical to vehicle sales to the extent customers repair and service vehicles
rather than replace them.
23
<PAGE>
We have accounted for all of our acquisitions using the purchase method
of accounting and, as a result, we do not include in our financial statements
the results of operations of acquisitions prior to the date they were acquired
by us.
Results of Operations
The following table summarizes, for the periods presented, the
percentages of total revenues represented by certain items reflected in our
statement of operations.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1997 1998
------------------------------------------------
<S> <C> <C> <C>
New vehicles 60.2% 61.2% 60.8%
Used vehicles 24.6% 23.6% 24.5%
Service and parts 12.8% 12.4% 11.6%
Other dealership revenues, net 2.4% 2.8% 3.1%
------------------------------------------------
Total sales 100.0% 100.0% 100.0%
Gross profit 13.1% 14.3% 15.2%
------------------------------------------------
Incomes before income taxes 0.5% 0.1% 0.9%
================================================
</TABLE>
New vehicle sales statistics:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1997 1998
------------------------------------------------
<S> <C> <C> <C>
Units 9,450 13,835 20,468
Sales (in thousands) $200,185 $290,281 $475,847
Gross profit (in thousands) $12,907 $18,869 $37,121
Gross margin 6.45% 6.50% 7.80%
Gross profit per unit $1,366 $1,364 $1,814
</TABLE>
Used vehicle retail sales statistics, excluding wholesale sales and units:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1997 1998
---------------------------------------------------------
<S> <C> <C> <C>
Units 4,921 6,639 9,901
Sales (in thousands) $67,944 $90,436 $141,946
Gross profit (in thousands) $5,522 $8,841 $13,560
Gross margin 8.13% 9.78% 9.55%
Gross profit per unit $1,122 $1,332 $1,370
</TABLE>
Service and parts statistics:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1997 1998
--------------------------------------------------
<S> <C> <C> <C>
Sales (in thousands) $42,416 $58,707 $91,134
Gross profit (in thousands) $16,966 $26,512 $41,711
Gross margin 40.0% 45.2% 45.8%
</TABLE>
1998 Compared to 1997
24
<PAGE>
Sales. Our sales increased $309.1 million or 65.2% to $783.1 million
for the year ended December 31, 1998 from $474.0 million in 1997. We acquired
four dealerships in 1998 and eight dealerships in 1997, which for the periods
following their acquisition accounted for $288.5 million or 93.4% of the
increase in 1998 sales.
New vehicles. In 1998 and 1997, we sold 20,468 and 13,835 new
vehicles, generating revenues of $475.8 million and $290.3 million,
which constituted 60.8% and 61.2% of our total sales. The increase in
revenues and units was due primarily to the dealerships acquired in
1998 and 1997. Average unit prices increased 10.8% from $20,982 to
$23,248 per vehicle due to the higher mix of luxury vehicles sold in
1998.
Used vehicles. In 1998, we sold 9,901 retail used vehicles and
7,137 wholesale used vehicles. In 1997, we sold 6,639 retail used
vehicles and 4,182 wholesale used vehicles. This increase in units was
primarily due to the dealerships acquired in 1998 and 1997. Total used
vehicle sales were $191.8 million and $111.6 million in 1998 and 1997.
Retail and wholesale used vehicle sales comprised 24.5% of our total
sales in 1998 compared to 23.6% of our total sales in 1997. Our average
price used vehicle unit increased 9.2% from $10,315 to $11,259 per
vehicle.
Service and parts. Service and parts revenue increased 55.2%
in 1998 from $58.7 million in 1997 to $91.1 million, primarily due to
dealerships acquired in 1998 and 1997.
Other dealership revenues, net. Other dealership revenues
increased 80.5% from $13.4 million in 1997 to $24.3 million in 1998 due
to dealerships acquired in 1998 and 1997 as well as a $2.1 million
increase from our dealer services subsidiary which we started in late
1997.
Gross profit. Gross profit increased 75.8% during 1998 and totaled
$119.2 million, compared with $67.8 million for 1997. Our overall gross profit
margins increased to 15.2% in 1998, from 14.3% in 1997, primarily due to
increase in new vehicles margins and an increase in other dealership revenues as
a percentage of total sales. The gross profit margin on new vehicle sales
increased to 7.8% in 1998, from 6.5% in 1997. The gross profit margin on used
vehicle sales was 8.4% in 1998 and 8.0% in 1997. This increase was due
to increased margins on wholesale used vehicles resulting from our centralized
wholesale vehicle auction started in December 1997. Gross profit margins on
service and parts increased to 45.8% in 1998 from 45.2% of revenues in 1997,
primarily due to increased emphasis on service operations and profitability.
Selling, general and administrative expense. Our selling, general and
administrative expense increased $40.8 million, or 69.5%, to $99.6 million for
1998 compared to $58.8 million for 1997. Selling, general and administrative
expense as a percentage of sales increased to 12.7% for 1998 from 12.4% for
1997. The increase was due primarily to an increase in compensation for
additional personnel and management required as a result of dealership
acquisitions and building a management structure for executing our acquisition
strategies.
Depreciation and amortization. Depreciation and amortization expense
increased $1.3 million, or 188%, to $2.0 million for 1998, compared to $0.7
million for 1997. The increase was due to additional depreciation and goodwill
amortization from acquired dealerships.
Combination and related expenses. During 1997, we incurred $2.3
million of legal, accounting, consulting and compensation expenses associated
with our combination with the former Tom Price dealerships and the development
of our organization and business plan. No similar expenses were incurred in
1998.
Interest expense. Floor plan interest expense increased $1.9 million or
50.5% to $5.5 million for the year ended December 31, 1998 compared to $3.7
million for 1997 primarily as a result of increased floor plan debt in 1998 from
the acquired dealerships. Interest expense other than floor plan increased, $3.6
million or 191% to $5.4 million for the year ended December 31, 1998. The
increase was due to debt incurred from dealerships we acquired.
Income tax expense. Income tax expense increased to $2.9 million in
1998 from $0.4 million in 1997 due to higher pretax income in 1998. Our
effective income tax rate for 1998 was 43% compared to 88% for 1997 due to
25
<PAGE>
certain non-deductible expenses incurred in 1997. Our effective tax rate in the
future may be affected by certain nondeductible expenses incurred as a result of
additional acquisitions.
Net income. Net income increased from $64,000 in 1997 to $3.8 million
in 1998, due to the effects of the items discussed above.
1997 Compared to 1996
Sales. Sales increased $141.5 million, or 42.6% to $474.0 million for
the year ended December 31, 1997 from $332.5 million in 1996. We acquired eight
dealerships in 1997, which accounted for $133.2 million or 94.1% of the increase
in 1997 revenues.
New vehicles. In 1997 and 1996, we sold 13,835 and 9,450 new
vehicles, generating revenues of $290.3 million and $200.2 million,
which constituted 61.2% and 60.2% of our total sales. The increase in
revenues and units was due primarily to the dealerships acquired in
1997. Average unit prices decreased 1.0% from $21,184 to $20,982 per
vehicle due to the lower prices in the product mix of dealerships
acquired in 1997.
Used vehicles. In 1997, we sold 6,639 retail used vehicles and
4,182 wholesale used vehicles. In 1996, we sold 4,921 retail used
vehicles and 3,073 wholesale used vehicles. Total used vehicle sales
were $111.6 million and $81.7 million in 1997 and 1996, respectively.
Retail and wholesale used vehicle sales comprised 23.6% of our total
sales in 1997 compared to 24.6% of our total sales in 1996. Our average
used vehicle unit prices increased from $10,221 to $10,315 per vehicle.
Service and parts. Service and parts sales increased 38.4% in
1997 from $42.4 million in 1996 to $58.7 million, due to a 38.4%
increase in service department maintenance and repairs, largely
attributable to the dealerships acquired in 1997.
Other dealership revenues, net. Other dealership revenues
increased 63.7% from $8.2 million in 1996 to $13.4 million in 1997,
primarily due to the eight dealerships acquired in 1997.
Gross profit. Our overall gross profit margins increased from 13.1% in
1996 to 14.3% in 1997, primarily due to increases in margins on sales, parts and
other, and to a lesser extent, increases in the used vehicle profit margins.
Gross profit increased 55.4% during 1997 and totaled $67.8 million, compared
with $43.6 million for 1996, due to the increase in new and used vehicle unit
sales as well as the increase in service, parts and other operating revenues
contributed from the dealerships acquired in 1997. The gross profit margin on
new vehicle sales during 1997 and 1996 was relatively consistent at 6.5%. The
gross profit margin on used vehicle sales was 8.0% in 1997 and 6.8% in 1996.
This increase was primarily due to our emphasis on improving the used vehicle
reconditioning process and implementation of best practices. Gross profit
margins on service and parts increased from 40.0% in 1996 to 45.2% in 1997,
primarily due to higher profitability in service, parts and maintenance
activities due to increased emphasis on its service operations and
profitability.
Selling, general and administrative expense. Our selling, general and
administrative expense increased $20.4 million, or 53.3%, to $58.8 million for
1997 compared to $38.3 million for 1996. Selling, general and administrative
expense as a percentage of sales increased to 12.4% for 1997 from 11.5% for
1996. The increase was due primarily to an increase in compensation for
additional personnel and management required as a result of dealership
acquisitions and the activities associated with building a management structure
for executing our acquisition strategy.
Depreciation and amortization. Depreciation and amortization expense
increased $0.1 million, or 11.0%, to $0.7 million for 1997, compared to $0.6
million for 1996.
26
<PAGE>
Combination and related expenses. In 1997 we incurred $2.3 million in
certain legal, accounting, consulting and compensation expenses associated with
our combination with the former Tom Price dealerships and the development of our
organization and business plan. There were no similar expenses in 1996.
Interest expense. Floor plan interest expense increased $0.7 million or
25.6% to $3.7 million for the year ended December 31, 1997 compared to $2.9
million for 1996 primarily as a result of increased floor plan debt in 1997 from
the acquired dealerships. Interest expense other than floor plan increased due
to debt incurred for the acquisition of additional dealerships during 1997.
Income tax expense. Income tax expense increased to $0.4 million in
1997 from $48,000 in 1996 due to our change in status from an S Corporation to a
C Corporation on January 1, 1997. Our effective tax rate for 1997 was 88%
compared to 3% for 1996 due to certain non-deductible expenses incurred in 1997
and our change in tax status. On January 1, 1997, our change in tax status
resulted in the recognition of $1.6 million in net deferred tax assets, which
was offset by a $1.4 million tax liability resulting from a change in accounting
for inventory.
Net income. Net income decreased from $1.7 million in 1996 to $64,000
in 1997, primarily due to one-time combination with the former Tom Price
dealerships, increased interest expense relating to acquisitions offset by
increased operating income from acquired dealerships.
Liquidity and Capital Resources
Our cash and liquidity requirements are primarily for acquiring new
dealerships, working capital, information systems and expanding existing
facilities. Historically, we have relied primarily upon cash flows from
operations, floor plan financing, and other borrowings under our credit facility
to finance our operations, and the proceeds from our private placements to
finance our expansion. At December 31, 1998, we had working capital of $3.9
million including $2.2 million in cash.
During 1998, operating activities resulted in net cash provided by
operations of $4.3 million compared to $7.6 million used in operations in 1997.
The increase was attributable principally to a reduction in purchased inventory,
and an increase in net income, offset by a decrease in accounts payable and
accrued liabilities compared to the prior year.
In 1998, the net cash used in investing activities totaled $33.6
million, which consisted of $29.0 million used for acquisitions and $4.6 million
of capital expenditures including information systems and improvements to
existing facilities. This compared to $1.1 million used in 1997 for expansion
and improvement of facilities and $11.7 million used for acquisition.
In 1998, net cash provided by financing activities totaled $28.5
million, which consisted of $15.0 million resulting from the issuance of notes
and $13.0 million borrowed on secured lines of credit and $1.0 million from the
issuance of Class B common stock. Proceeds from the issuance of the notes and
Class B common stock were used to help finance the acquisitions of dealerships.
Proceeds from borrowings on secured lines of credit were used to finance
acquisitions and purchase inventories. In 1997, net cash provided from financing
activities totaled $22.7 million, which consisted of $16.6 million from the
issuance of notes net of repayments and origination costs, $4.0 million of
borrowings on secured lines of credit, and $6.2 million from the issuance of
common and preferred stock, less $4.1 million of dividends and distributions
paid.
Flooring Notes Payable and Secured Lines of Credit
In 1997, we entered into a three year $175 million loan and security
agreement with a financial company, replacing our existing $37 million line of
credit. The loan agreement matures in July 2000.
The loan and security agreement permits us to borrow up to $115 million
in floor plan notes payable, restricted by new and a portion of our used vehicle
inventory and provides for revolver advances up to $35 million, secured by used
vehicle and parts inventories. The loan agreement also provides a discretionary
line up to $25 million that the financial company makes at its absolute
discretion upon our request.
27
<PAGE>
As of December 31, 1998 and 1997, we had floor plan notes payable and
revolving advances outstanding of $81.5 and $67.4 million, $17.0 and $4.0
million, respectively. There were no discretionary advances outstanding as of
December 31, 1998 and 1997.
Floor plan notes payables are due when vehicles are sold, leased, or
delivered. Revolver advances are due whenever the used vehicle and parts
borrowing base as defined in the loan agreement is exceeded. Revolver advances
are classified as secured lines of credit in the accompanying financial
statements. The loan agreement grants a collateral interest in substantially all
of our assets.
Our ability to draw on the floor plan notes payable, revolver advances,
and discretionary advances, for the purpose of acquiring automobile dealerships,
is limited by the amount of vehicle and parts inventory of the acquired
dealership. Consequently, we have little discretionary borrowing capacity.
Interest rates on the floor plan notes and the revolver advances are
variable and change based on movements in the prime rate. The interest rates on
the floor plan notes equal prime minus 75 basis points and the interest rate on
the revolver advances equals prime minus 35 basis points. During 1998 and 1997,
the average monthly borrowing on the floor plan notes was $73.4 and $44.0
million, respectively, and the average monthly borrowing on the revolver
advances was $13.5 and $0.3 million, respectively. The aggregate average
interest rate was 7.67% and 7.75% for 1998 and 1997.
The loan agreement contains various financial covenants such as minimum
interest coverage, working capital, and maximum debt to equity ratios.
Senior Notes
In July 1997, we entered into a securities purchase agreement with a
financial company to provide an aggregate funding commitment of up to $40
million. The commitment consisted of $36 million of 12.375% senior notes, $3.5
million 8% Cumulative Redeemable Preferred Stock, or CRPS, and $0.5 million
Redeemable Preferred Stock, or RPS, and up to 5 million shares of our Class B
common stock.
During 1997, we received $28 million from a financial company. In
exchange, we issued notes with a principal amount of $24 million at a discount
of $2.2 million, 3,500 shares of CRPS at a discount of $0.6 million, 500
shares of RPS at a discount of $0.1 million and 3,032,000 shares of Class B
common stock at $0.92 per share. The notes, CRPS and RPS are due June 30, 2005.
During 1998, we received an additional $12 million from a financial
company. In exchange, we issued notes with a principal amount of $12 million at
a discount of $1 million and 0.5 million shares of Class B common stock at $2.00
per share. The notes are due June 30, 2005. We used the proceeds to acquire a
dealership.
For financial reporting purposes, the difference between the issue
price and the face value of each security is recorded as a discount and is
amortized over the life of each security using the effective interest method.
The notes discount amortization is included in interest expense and the CRPS and
RPS discount amortization is recorded as a deduction from retained earnings.
The notes are unsecured and rank behind all debts of our operating
subsidiaries, rank equal to our other existing and future senior indebtedness,
and are senior in right of payment to any additional subordinated debt. The CRPS
and RPS shares rank behind all of our debt and the debt of our subsidiaries and
have priority over our common stock. We can redeem all the notes or any part
thereof, at any time, upon notice to the holders of the notes. The redemption
price for the period July 1, 1998 to June 30, 1999 is 108.75% of the principal
balance and decreases by 1.25% for each year on July 1, thereafter. The
redemption price per share on June 30, 2005 is equal to be CRPS and RPS
liquidation preference of $1,000 and $1,720, respectively. If the aggregate
outstanding principal balance of the notes is less than $2 million at any time,
we are required to redeem all outstanding notes.
28
<PAGE>
On July 1, 2003 and July 1, 2004, we must redeem notes in the aggregate
principal amount equal to the lesser of (a) 30% of the aggregate principal
amount of notes issued or (b) the aggregate amount of issued and outstanding
notes on such date, at the applicable redemption price plus all accrued and
unpaid interest on the notes to the redemption date. On June 30, 2005, we must
redeem all remaining issued and outstanding notes, paying all outstanding
principal and accrued and unpaid interest.
If we have a public offering of our stock, we may within 45 days of the
completion of the offering, redeem all the outstanding notes. In such
circumstances, the redemption price for the period from July 1, 1998 to June 30,
1999 is 104.375% of the principal balance and decreases by 0.625% for each year
on July 1, thereafter.
The securities purchase agreement contains various financial covenants
such as minimum interest coverage, and non-financial covenants including
limitations on our ability to pay dividends, retire or acquire debt, make
capital expenditures, and sell assets.
Acquisitions Closed During 1998
On April 1, 1998, we acquired substantially all of the operating assets
of Beverly Hills, BM, Ltd., a BMW automobile dealership located in West Los
Angeles, California. On June 12, 1998, we acquired substantially all of the
operating assets of Starfire Body Shop located in San Jose, California. On June
19, 1998, we acquired substantially all of the operating assets of Burgess Honda
located in Daly City, California. On October 19, 1998, we acquired all of the
outstanding capital stock of an authorized Toyota automobile dealership commonly
known as Concord Toyota located in Concord, California. On November 19, 1998 we
acquired substantially all of the operating assets of Woodland Hills Volkswagen.
On December 31, 1998 we completed the acquisition of an automotive-related
software company, DSW & Associates, Inc., commonly known as Auto Town. The
aggregate consideration paid for the acquisitions completed during 1998 was
$29.8 million, consisting of $29.0 million in cash and 335,015 shares of Class A
Common Stock. We financed these acquisitions by borrowing $13.0 million on our
secured line of credit, $11.0 million from the issuance of senior notes, $4.0
million from the issuance of other notes payable, $1.0 million from the issuance
of Class B Common Stock and $0.8 million from cash provided by operations.
Acquisitions and Dispositions Closed After December 31, 1998 and Pending
Acquisitions
We completed one dealership acquisition in March 1999 and currently
have one automobile dealership acquisition pending. The aggregated estimated
purchase price for the two acquisitions is approximately $8.0 million. We
financed the completed acquisition with $2.0 million of notes payable to sellers
and a $1.0 million note payable to Thomas Price, our Chief Executive Officer. We
will finance the pending acquisition utilizing our secured lines of credit.
In March 1999, we sold the operating assets of Serramonte GMC to the
manufacturer and recorded net proceeds of approximately $1.7 million.
Additional Capital for Acquisitions
Our principal source of growth has been from acquisitions. To continue
to pursue additional acquisitions, we will need to raise additional capital
through the public or private issuance of equity or debt securities or through
additional borrowings from financial institutions. There can be no assurance
that we can obtain sufficient funding to finance our acquisition strategy.
Seasonality and quarterly fluctuations
Our sales are usually lower in the first and fourth quarters of each
year largely due to consumer purchasing patterns during the holiday season,
inclement weather and the reduced number of business days during the holiday
season. As a result, our financial performance is generally lower during the
first and fourth quarters than during the other quarters of each fiscal year.
We believe that interest rates, levels of consumer debt, consumer buying
patterns and confidence, as well as general economic conditions also contribute
to fluctuations in sales and operating results. The timing of acquisitions may
also cause substantial fluctuations of operating results from quarter to
quarter.
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New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 130, "Reporting Comprehensive Income." This statement
establishes standards of reporting and presentation of comprehensive income and
its components in a full set of general-purpose financial statements. This
statement is effective for the fiscal years beginning after December 15, 1997.
We have determined that net income and comprehensive income are the same for the
periods presented.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Standard requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. This statement is effective for financial
statements for periods beginning after December 15, 1997. We operate in two
business segments, automotive and software. We believe that our automobile
operations constitute our only significant operating segment.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This Statement of Position
requires the capitalization of eligible costs of specialized activities related
to computer software developed or obtained for internal use. We believe the
adoption of this Statement of Position will not have a material effect on our
financial position or results of operations. The Statement is effective for
fiscal years beginning after December 15, 1998. We expect to adopt this
Statement of Position on January 1, 1999.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting the Cost of Start Up Activities,"
which requires costs related to start-up activities to be expensed as incurred.
The statement requires that initial application be reported as a cumulative
effect of a change in accounting principle. The adoption of this statement will
have an immaterial impact on our consolidated financial statements.
Amortization of Goodwill
Goodwill as of December 31, 1998 was $34.0 million, or 19.0% of total
assets. Goodwill represents the excess purchase price over the estimated fair
value of the tangible and measurable intangible assets purchased in an
acquisition. Generally accepted accounting principles require that goodwill be
amortized over the period benefited, not to exceed 40 years. We have determined
that the period benefited by most of our goodwill is over forty years and
therefore are amortizing goodwill over a 40-year period. Earnings reported in
periods immediately following an acquisition would be overstated if we
attributed a forty-year benefit period to intangible assets that should have had
a shorter benefit period. In later years, we would be burdened by a continuing
charge against earnings without the associated benefit to income valued by
management in arriving at the price paid for businesses acquired. Earnings in
later years also could be significantly affected if management then determined
that the remaining balance of goodwill was impaired. We periodically compare the
carrying value of goodwill to the anticipated undiscounted future cash flows
from operations of the businesses we have acquired to evaluate the
recoverability of goodwill.
Inflation
We believe that the relatively moderate rate of inflation over the past
few years has not had a significant impact on our revenues or profitability.
Interest rates have been relatively stable.
Year 2000 Project
We are in the process of addressing the impact on our operations of
computer programs that are unable to distinguish between the year 1900 and the
year 2000.
Year 2000 Readiness Preparation
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Our year 2000 program is comprised of several individual projects which
address primarily the following broad areas: data processing systems, embedded
technology in equipment and facilities, vendor and supplier risk, and
contingency planning. We have created a year 2000 task force that has assigned a
priority to all projects and broadly classified projects into critical and non-
critical categories indicating the importance of the function to our continuing
operations.
We are in the process of updating our data processing systems. We have
converted or will complete conversion of all of our noncompliant software and
computer systems to compliant systems by the fourth quarter of 1999. The most
critical data processing system is the dealership management systems in our
dealerships. As a result of an unrelated project to integrate computing systems
across the company, these dealer management systems have been replaced or
upgraded with year 2000 compliant software and hardware platforms. This
conversion project is fully complete and we expect to test for compliance by the
fourth quarter of 1999.
Although we are converting to year 2000 compliant systems, management
recognizes that it could potentially acquire a dealership that doesn't have year
2000 compliant systems. As part of our dealership acquisition due diligence
process, acquired dealership systems are evaluated for year 2000 compliance and
scheduled for upgrade or replacement as acquired dealerships are assimilated
into our company.
We are currently assessing the readiness preparations of our major
suppliers. Manufacturers of vehicles and parts have been identified as the most
critical suppliers, and inquiries are underway regarding their year 2000
readiness plans and status. Contingency plans will be developed based on written
risk assessments of major suppliers' states of readiness. In addition, financial
institutions have been identified as critical suppliers of inventory financing
and customer financing, and are in the process of being evaluated for year 2000
compliance.
We also recognize that there may be embedded technology in our
equipment and facilities that could be impacted by the year 2000 issue. We have
a project plan in place to address this issue, and are in the process of
evaluating service equipment, other equipment and telephone systems for year
2000 compliance. Service equipment that is not year 2000 compliant has been
identified and will be replaced. All other equipment identified as not being
year 2000 compliant will also be replaced.
Year 2000 Risks
The principal risk and most likely worst case scenario associated with
the year 2000 program is the risk of disrupting our operations due to
operational failure of third-party suppliers, primarily vehicle manufacturers.
Such failures could materially and adversely affect our ability to obtain
vehicles and parts for sale. Although our inquiries are underway, we do not yet
have the information to estimate the likelihood of significant disruptions among
our suppliers. We believe that, with the completion of the year 2000 project as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
Year 2000 Costs
The conversion of our data processing systems and its related costs
have been incorporated into our planned replacement or upgrade of its software
and other computer systems and therefore we have not experienced any significant
incremental costs that are specifically related to year 2000 compliance issues.
Total year 2000 project costs for replacing or upgrading our noncompliant
equipment and facilities are estimated to be approximately $1 million. Estimated
total project costs could change in the future as analysis continues.
Year 2000 Contingency Planning
We are in the process of assessing the consequences if our year 2000
initiative is not completed on schedule. Upon completion of this assessment, we
will begin contingency planning. In addition, we are in the process of
developing business contingency plans that address the actions that would be
taken if critical business operations were disrupted due to system or supplier
failure. We expect the plan development and their validation to be completed by
the fourth quarter of 1999.
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Year 2000 Forward-looking Statements
This discussion of the implications of the year 2000 for us contains
numerous forward-looking statements based on inherently uncertain information.
Statements about the cost of the project and the date on which we plan to
complete the internal year 2000 modifications are based on management's best
estimates, which were derived utilizing a number of assumptions of future events
including the continued availability of internal and external resources, third
party modifications and other factors. However, we may not achieve these
estimates or there may be a delay in, or increased costs associated with, the
implementation of the year 2000 program. In addition, we place a high degree of
reliance on computer systems of third parties, such as vendors, suppliers, and
financial institutions. Although we are assessing the readiness of these third
parties and will prepare contingency plans, the failure of these third parties
to modify their systems in advance of December 31, 1999 could have a material
adverse affect on our business.
Factors That May Affect Future Results:
Intense competition in vehicle retailing and related businesses could reduce our
profit margins.
Automobile retailing is a highly competitive business with over 22,000
franchised automobile dealerships in the United States at the beginning of 1998.
Our competition includes:
o franchised automobile dealerships selling the same or similar makes
of our new and used vehicles in the same markets as us and sometimes
at lower prices than ours;
o other franchised dealers;
o private market buyers and sellers of used vehicles;
o used vehicle dealers; and
o service center chains and independent service and repair shops.
Gross profit margins on sales of new vehicles have been generally
declining since 1986. We do not have any cost advantage in purchasing new
vehicles from the manufacturers. We typically rely on advertising,
merchandising, sales expertise, service reputation and dealership locations to
sell new vehicles. The following characterizes the types of competition we face:
o The used car market faces increasing competition from non-
traditional outlets such as nationwide networks of used vehicle
"superstores" like AutoNation or CarMax which use sales techniques
such as one-price and "no-haggle" shopping. Some of these used car
"superstores" have opened in markets where our dealerships compete.
We, along with our competition, are beginning to use the Internet as
part of the sales process. Consumers are using the Internet to
comparison shop for vehicles, which may further reduce margins for
new and used cars. No-haggle sales methods are also being tried for
new car sales by at least one of these superstores and dealers for
Saturn and other makes.
o Some recent market entrants may be capable of operating on smaller
gross margins than ours and may have greater financial, marketing
and personnel resources than ours.
o Ford, General Motors and Saturn have acquired dealerships in various
cities in the United States. Other manufacturers may also directly
enter the retail market in the future, which could have a material
adverse effect on our business.
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o The increased popularity of short-term vehicle leasing has also
resulted in a large increase in the number of late-model used
vehicles available in the market, which puts added pressure on the
profit margin on used vehicle sales margins.
o As we seek to acquire dealerships in new markets, we may face
significant competition (including competition from other publicly
owned dealership groups) as we strive to gain market share.
Our finance and insurance business and other related businesses, which
have higher contributions to earnings than the sale of new and used vehicles,
are subject to strong competition from third parties which may increase if these
third parties are able to sell products over the Internet.
Automobile manufacturers exercise significant control over our operations and we
are dependent on them to operate our business.
Manufacturers Control Access to New Vehicles
We operate each of our dealerships under a franchise agreement between
the applicable vehicle manufacturer or related distributor and our subsidiary
that operates the dealership. Without the franchise agreement, we cannot obtain
the manufacturer's new vehicles. Vehicles built by the following manufacturers
accounted for the following approximate percentage of our 1998 new vehicle
revenues on a pro forma basis (as if we owned each of the dealerships we
acquired in 1998 as of January 1, 1998):
<TABLE>
<CAPTION>
Percentage of Our 1998 New
Manufacturer Vehicle Pro Forma Revenues
------------------------- ----------------------------
<S> <C>
Nissan 22.2%
Toyota/Lexus 30.6%
Daimler Chrysler 14.5%
Honda 13.5%
</TABLE>
No other manufacturer accounted for more than 10% of our pro forma 1998
new vehicle revenues. Accordingly, a significant change in our relationships
with Nissan, Toyota, Chrysler or Honda could have a material adverse effect on
our business.
We depend on the manufacturers to provide us with a desirable mix of
new vehicles, including popular vehicles like sports utility vehicles that
produce the highest profit margins. If we are unable to obtain enough of the
most popular vehicles, our business may be materially adversely affected. In
some instances, to obtain additional allocations of popular vehicles, we must
purchase a larger number of less desirable vehicles than we otherwise would and
this could also have a material adverse affect on our business.
We depend on the success of our manufacturers.
The success of our dealerships depends to a great extent on these
manufacturers':
o financial condition;
o quality and quantity of marketing;
o vehicle design;
o production capabilities;
o management;
o relationship with employees including events like strikes and other
labor actions by unions, or negative publicity concerning a
manufacturer or vehicle model; and
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o timely delivery of vehicles, particularly in connection with the
introduction of new models.
Nissan, our largest vehicle supplier has had significant financial
difficulty in the U.S. market in the past year with unit sales dropping from
663,000 in 1997 to 558,000 in 1998. Adverse conditions affecting manufacturers,
and Nissan, Toyota, Chrysler or Honda in particular, all of whom accounted for
greater than 10% of our pro forma 1998 new vehicle revenues, could have a
material adverse effect on our business.
Manufacturers Have Significant Control Over Our Dealership Operations
A manufacturer can terminate or not renew its franchise agreement for a
variety of reasons, including any unapproved change of ownership or management
of our company or the dealerships, and other material contract breaches. Certain
of the manufacturers, including Nissan, have a right of first refusal if we seek
to sell one of that manufacturer's dealerships. We believe that we will be able
to renew all of our existing franchise agreements upon expiration, but we cannot
guarantee renewal or that any manufacturer's terms and conditions for renewal
will be acceptable to us. A manufacturer's termination or decision not to renew
one or more of our franchise agreements could have a material adverse effect on
our business. A manufacturer could use its superior bargaining position in
renewal or other franchise agreement negotiations to obtain concessions from us
that have a material adverse effect on our business.
We Depend on Manufacturers' Sales Incentive and Other Dealership Support
Programs
Our dealerships depend on manufacturers for certain sales incentives
and other programs that are intended to promote dealership sales or support
dealership profitability. For example, the manufacturers sometimes provide the
following programs:
o customer rebates on new vehicles;
o dealer incentives on new vehicles;
o special financing or lease terms;
o warranties on new and used vehicles; and
o sponsorship of used vehicle sales by authorized new vehicle dealers.
Manufacturers have frequently made many changes to their incentive
programs during a given year. A reduction or discontinuation of a manufacturer's
incentive programs may have a material adverse affect on our business.
Manufacturers Could Adversely Affect Our Business By Granting Additional
Franchises in Our Markets
Our franchise agreements do not grant us the exclusive right to sell a
manufacturer's vehicles within a given geographic area. Our business could be
harmed if any of our manufacturers award additional franchises to others in our
markets.
We may not be able to complete desired acquisitions to increase our revenues.
The U.S. automotive retailing industry is a mature industry in which we
expect minimal growth in unit sales of new vehicles. Consequently, our principal
strategy for increasing our revenues and earnings is to acquire additional
dealerships. Our revenues and profits will significantly depend on our ability
to make desired acquisitions. We may encounter the following difficulties in
acquiring dealerships:
Manufacturers Might Not Consent to Our Acquisitions
We cannot acquire a dealership without the consent of the applicable
manufacturer. Each of our dealerships operates under a franchise agreement with
one of our manufacturers and these franchise agreements
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give manufacturers the power to block dealership transfers. Manufacturers' delay
in or refusal to grant approval of our dealership acquisitions could have a
material adverse effect on our growth strategy and business.
In deciding whether to approve an acquisition, manufacturers are likely
to consider:
o management's moral character;
o business experience of the dealership principals;
o financial condition;
o condition of dealership facility;
o ownership structure; and
o dealership compliance with manufacturers' minimum customer
satisfaction levels, as determined through systems generally known
as consumer satisfaction indices, or CSIs. Manufacturers have
modified components of CSIs in the past, and they may replace them
with different systems.
In addition, our current agreement with Honda requires Honda's consent
for any equity offering by us. Honda's proposed new agreement with us does not
contain that requirement. We have not negotiated or executed the proposed new
agreement, nor have we obtained Honda's consent for any equity offering. If
Honda were to claim that we breached its existing agreement with us by
consummating any equity offering and seek to enforce its remedies, we could be
adversely affected.
If we materially breach our agreement with Honda, Honda could purchase
our Honda dealerships at their fair market value and terminate our dealer
agreements with Honda. For the year ended December 31, 1998, our Honda
dealerships represented approximately 12.1% of our pro forma revenues and 11.6%
of our pro forma operating income.
Honda's proposed new agreement prohibits pledging the stock of Honda
franchised dealerships to secure debt financing, although it allows pledging the
proceeds from the sale of Honda franchised dealership stock. We are continuing
to negotiate with Honda on the terms of the proposed new agreement.
Manufacturers May Impose Limits on the Number and Location of Dealerships We Own
A manufacturer may limit the total number of its dealerships that we
can own or the number that we may own in a particular geographic area. The
following is a summary of the restrictions imposed by our most significant
manufacturers:
Nissan. Nissan restricts us from owning Nissan dealerships which
account for:
o more than 5% of Nissan's total national competitive segment
registrations based on the sum of the retail competitive
segment registrations in our primary marketing areas, or
o 20% of any Nissan region's total competitive segment
registrations contained in all of our primary marketing areas
in that region.
In addition to a customary agreement with Nissan, we have
entered into a contiguous market ownership agreement, or CMO, and related
agreements with Nissan for us to own and operate multiple and contiguous Nissan
dealerships in two contiguous markets in the San Francisco Bay area. These CMO
agreements provide that if we want to sell one Nissan dealership within the CMO,
Nissan has the right to require that we sell all of our Nissan dealerships
within the CMO area. Further, if we want to sell or transfer one of our two
San Francisco Bay area CMO's without Nissan's consent, Nissan may require us to
sell one or all or a combination of these dealerships to a proposed buyer
acceptable to Nissan. Termination of one Nissan dealer services agreement within
a CMO constitutes termination of all dealer agreements within that CMO.
Toyota/Lexus. Toyota restricts the number of dealerships that we
may own in a specific region and the time frame over which they may be acquired.
We can acquire no more than two Toyota dealerships in each semi-
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annual period from January to June and July to December until we acquire a total
of seven Toyota dealerships. After we acquire seven Toyota dealerships we can
acquire, if we are then qualified, additional dealerships over a minimum of
seven semi-annual periods up to a maximum number of dealerships equal to 5% of
Toyota's aggregate national annual retail sales volume. In addition, Toyota
restricts the number of Toyota dealerships that we may acquire in any Toyota-
defined region and "Metro" market, as well as any contiguous market. We may
acquire only three Lexus dealerships nationally.
Honda/Acura. Under our current agreement with Honda, Honda
limits the number of dealerships that we may own to not more than:
o seven Honda and three Acura franchises nationally;
o one Honda dealership in a Honda-defined "Metro" market having
two to ten Honda dealerships;
o two Honda dealerships in a Metro market with 11 to 20 Honda
dealerships;
o three Honda dealerships in a Metro market with 21 or more
Honda dealerships;
o 4% of the Honda dealerships in any one of the ten Honda
geographic zones,
o one Acura dealership in a Metro market having two or more
Acura dealerships; and
o two Acura dealerships in any one of the six Acura geographic
zones.
Chrysler. Currently, we have no agreement with Chrysler
restricting our ability to acquire Chrysler dealerships. Chrysler has advised us
that in determining whether to approve an acquisition of a Chrysler dealership,
Chrysler considers the number of Chrysler dealerships the acquiring company
already owns. Chrysler currently considers carefully, on a case-by-case basis,
any acquisition that would cause the acquiring company to own more than ten
Chrysler dealerships nationally, six in the same Chrysler-defined zone and two
in the same market.
General Motors. General Motors currently limits the number of GM
dealerships that we may acquire over the next two years to between five and ten
additional GM dealership locations. Any one dealership, however, may include a
number of different GM franchises, like a combination of Chevrolet, Oldsmobile
and Cadillac franchises. In addition, GM limits the maximum number of GM
dealerships that we may acquire at any time to 50% of the GM dealerships, by
franchise line, in a GM-defined geographic market area. Our current agreement
with GM does not include Saturn dealerships.
BMW. BMW prohibits publicly held companies from owning BMW
dealerships representing more than 5% of all BMW sales in the United States, or
more than 50% of BMW dealerships in a given metropolitan market.
We currently own three Chrysler, three Toyota, one Lexus, three Honda,
one Mitsubishi, two Volkswagen, one BMW, one GM and one Isuzu dealership
franchises. Under current restrictions, we may acquire the maximum number of
Toyota dealerships described above based on aggregate national retail sales
volume of Toyota, two additional Lexus dealerships, four additional Honda
dealerships and three Acura dealerships.
Increased Competition Could Result in Lost Dealership Opportunities and
Increased Acquisition Costs
We anticipate increased competition for acquisitions from other public
and privately held dealer groups as well as from manufacturers who are beginning
to acquire dealerships. This could result in fewer acquisition opportunities for
us and higher acquisition prices.
We Might Not Be Able to Obtain the Equity or Debt Financing Needed to Finance
Acquisitions
We intend to finance acquisitions with cash on hand and cash raised
through equity security issuances and borrowings under our credit facilities. We
may not be able to raise the borrowing limit under our long-term credit
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arrangements high enough to meet our future acquisition financing needs.
Similarly, we may not be able to obtain additional debt or equity financing on
favorable terms, if at all.
Our ability to acquire dealerships also will depend on our ability to
finance the new dealerships' inventory purchases, which in the automotive retail
industry involves significant borrowings commonly referred to as floor plan
financing. As of December 31, 1998, we had approximately $138.5 million of
indebtedness, which included $81.5 million of floor plan financing.
Substantially all of our assets are pledged to secure this indebtedness, which
may impede our ability to borrow from other sources. Upon acquiring additional
dealerships, we will require new floor plan financing or will need to obtain
consents to assume the acquired dealership's existing floor plan financing.
To continue to pursue additional acquisitions we will need to raise
additional capital. However, we may not be able to obtain such additional
capital and if the timing of acquisitions should accelerate or the number or
cost of acquisitions increase, our capital may be inadequate to fund our growth
strategy, harming our business.
Manufacturer and Bank Stock Ownership and Issuance Restrictions May Limit Our
Ability to Issue Additional Equity to Meet Our Financing Needs
A standard automobile franchise agreement and certain bank agreements
prohibit transfers of any ownership interest of a dealership and its parent, and
therefore, do not permit public trading of the capital stock of a dealership or
its parent. Our manufacturers have agreed to permit public trading of our common
stock, but a number of these manufacturers impose restrictions upon the
transferability of our common stock held by our principal stockholders which
will impede our ability to raise needed capital or to issue stock as
consideration for future acquisitions.
o Toyota, Lexus, Isuzu and Nissan may force the sale of their
franchises or in some cases, terminate the franchise, if 20% of more
of our common stock is acquired by an individual or entity
unqualified, as defined by the manufacturer, to own one of its
dealerships.
o Honda requires that our original ownership group retain more than
50% of our capital stock and these shares may not be publicly
traded. Honda provides that it may force the sale of our Honda
dealerships if any person or entity, excluding current 5% holders,
acquires 5% of our common stock, and Honda considers that person or
entity to be incompatible with the manufacturer. Our original
ownership group, which includes Messrs. Thomas A. Price and Donald
Strough, currently owns 71.6% of our common stock. Honda has
proposed a new agreement to replace our current agreement that would
eliminate this restriction but the proposal has not yet been
executed.
o Volkswagen may force the sale of their respective franchises if 10%
or more of our common stock is acquired by an individual or entity
unqualified, as defined by Volkswagen, to own that dealership.
o GM may force the sale of their franchises if 20% or more of our
common stock is acquired by an individual or entity unqualified, as
defined by GM, to own a GM dealership.
Our lending arrangements require that Mr. Price, who currently controls
38.0% of our stock, control at least 20% of our common stock and remain in his
current position as Chief Executive Officer (unless he dies or becomes disabled,
in which case we will not be in default provided that a successor reasonably
acceptable to the lenders is appointed within six months). The terms of our
senior subordinated notes indicates that upon a "change of control," which
includes among other things, that Mr. Price does not own more than 20% of our
voting power, we are required to offer to redeem the notes at a premium. In
addition, under the terms of the redeemable preferred stock, we are required to
redeem the preferred stock upon a change of control.
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Our Ability to Acquire Dealerships May Be Impeded or Blocked by Antitrust Law
In certain cases, federal antitrust laws may require us to file
applications and obtain clearances under applicable federal antitrust laws
before completing an acquisition. These requirements may restrict or delay
acquisitions, and may increase the cost of completing these transactions.
The cyclical, seasonal and local nature of vehicle sales may adversely affect
our business.
The automotive retailing industry is cyclical and has experienced
periodic downturns due to oversupply and weak demand. Many factors affect the
industry, including general economic conditions, consumer confidence, the level
of discretionary personal income, interest rates and credit availability. For
the year ended December 31, 1998, industry retail sales increased 2.9% as a
result of retail car sales declines of 1.2% offset by retail truck sales gains
of 7.9% from the same period in 1997. Future recessions may have a material
adverse effect on our business. In addition, changes in interest rates may
significantly impact our car sales since a significant portion of car buyers
finance their purchases.
Vehicle sales tend to be seasonal, with higher revenues in the first
and third calendar quarters of the year. If we fail to adequately forecast
seasonal variation in sales, our financial results could be materially adversely
affected.
Local economic, competitive and other conditions also affect the
performance of dealerships. Our dealerships currently are located in the San
Francisco Bay, San Jose/Silicon Valley, San Diego and Los Angeles markets. While
we intend to pursue acquisitions outside of these markets, we expect that the
substantial majority of our operations will continue to be concentrated in these
areas for the foreseeable future. As a result, the success of our business will
depend substantially on general economic conditions and consumer spending habits
in California, as well as various other factors, like tax rates, interest
rates, state and local regulations and weather conditions. We may not be able to
expand geographically, and any expansion may not adequately insulate us
from the adverse effects of local or regional economic conditions.
We have a substantial amount of debt.
As of December 31, 1998, our total consolidated long-term indebtedness
was $34.5 million, our total consolidated short-term indebtedness (including
floor plan notes payable) was $104.0 million and our total stockholders' equity
was $11.7 million.
The amount of our outstanding debt could have important consequences to
the holders of our common stock, including:
o our ability to obtain additional financing for acquisitions, capital
expenditures, working capital or general corporate purposes may be
impaired in the future;
o a substantial portion of our cash flow from operations must be
dedicated to the payment of principal and interest on borrowings
under our credit facility, our standardized floor plan credit
facility for each of our dealership subsidiaries and other
indebtedness, reducing the funds available to us for our operations
and other purposes;
o substantially all of our borrowings are and may continue to be at
variable rates of interest, which exposes us to the risk of
increased interest rates;
o the indebtedness outstanding under our credit facilities will likely
be secured by a pledge of substantially all the assets of our
dealerships; and
o we may have substantially more debt than some of our competitors,
which may place us at a relative competitive disadvantage and make
us more vulnerable to changing market conditions and regulations.
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In addition, our debt agreements contain numerous covenants that limit
the discretion of our and our subsidiaries' management with respect to business
matters including restriction on dividend payments, capital expenditures and
acquisitions and dispositions of assets.
Risks associated with acquisitions may hinder our ability to increase revenues
and earnings.
In pursuing a strategy of acquiring other dealerships, we face risks
commonly encountered with growth through acquisitions. These risks include:
o incurring significantly higher capital expenditures and operating
expenses;
o failing to assimilate the operations and personnel of acquired
dealerships;
o entering new markets with which we are unfamiliar;
o disrupting our ongoing business;
o diverting our limited management resources;
o failing to maintain uniform standards, controls and policies;
o impairing relationships with employees, manufacturers and customers
as a result of changes in management;
o causing increased expenses for accounting and computer systems; and
o potential undiscovered liabilities of our acquisition targets.
Although we believe that as a matter of course we conduct a prudent
level of investigation regarding the operating condition of the dealerships we
purchase, various unavoidable levels of risk remain regarding the actual
operating condition of the target dealerships. Until we actually assume
operating control of a dealership, we may not be able to ascertain its actual
value and, therefore, we may be unable to tell whether the price paid for a
dealership was reasonable.
To manage our expansion, we intend to evaluate on an ongoing basis the
adequacy of our existing systems and procedures, including our financial and
reporting controls systems, data processing systems and management structure. We
may not adequately anticipate all of the demands that our growth will impose on
these systems, procedures and structures. If we cannot adequately anticipate and
respond to these demands, our business could be adversely affected.
Failing to retain qualified management personnel at any acquired
dealership may increase the risk associated with integrating that dealership. We
expect that it takes approximately three to six months to fully integrate an
acquired dealership into our operations and realize the full benefit of our
strategies and systems. We may not be successful in overcoming these risks or
any other problems encountered with acquisitions. Acquisitions may also result
in significant goodwill and other intangible assets that are amortized in future
years and reduce future stated earnings.
The loss of key personnel and our limited management and personnel resources
could adversely affect our operations and growth.
Our success significantly depends on the continued contributions of our
management team and service and sales personnel. In particular, we depend on our
senior managers, regional vice presidents, regional general managers and general
managers to supervise the day-to-day operations of our dealerships. Manufacturer
franchise agreements require the manufacturer's prior approval of any change in
franchise general managers. In addition, as we expand, we may need to hire
additional managers and we will likely be dependent on the senior management of
acquired dealerships. The market for qualified employees in the automotive
retailing industry and in the regions in which we operate, particularly for
general managers and sales and service personnel, is highly competitive and we
may incur increased labor costs in periods of low unemployment. The loss of the
services of key employees or the
39
<PAGE>
inability to attract additional qualified managers could have a material adverse
effect on our business. In addition, the lack of qualified management or
employees employed by our potential acquisition targets may limit our ability to
consummate future acquisitions.
Imported product restrictions and foreign trade risks may impair our ability to
sell foreign vehicles profitably.
Some of the vehicles and major vehicle components that we sell are
manufactured outside the United States. Accordingly, we are subject to the
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 our products originate may, from time to
time, adjust existing, or impose new, quotas, tariffs, duties or other
restrictions which could affect our operations and our ability to purchase
imported vehicles and/or parts.
Governmental regulation and environmental regulation compliance costs may have a
material adverse affect on our profits.
We are subject to a wide range of federal, state and local laws and
regulations, like local licensing requirements and consumer protection laws.
Our violation of these laws and regulations could result in civil and criminal
penalties being levied against us or in a cease and desist order against our
non-complying operations. We believe that we comply in all material respects
with all laws and regulations applicable to our business, but future regulations
may be more stringent and require us to incur significant additional costs.
Our facilities and operations are also subject to federal, state and
local laws and regulations relating to environmental protection and human health
and safety, including those governing wastewater discharges, air emissions, the
operation and removal of underground storage tanks, the use, storage, treatment,
transportation and disposal of solid and hazardous materials and wastes and the
remediation of contamination associated with any disposal or release. These
laws and regulations may impose joint and several liability on statutory classes
of persons for the costs of investigating and/or remediating contaminated
properties, regardless of fault or the legality of the original disposal. These
persons include the present or former owner or operator of a contaminated
property and companies that generated, disposed of or arranged for the disposal
of hazardous substances found at the property.
Our past and present business operations subject to these laws and
regulations include the use, storage handling and contracting for recycling or
disposal of hazardous or toxic substances or wastes. These toxic substances
include environmentally sensitive materials like motor oil, waste motor oil
and filters, transmission fluid, antifreeze, freon, waste paint and lacquer
thinner, batteries, solvents, lubricants, degreasing agents, gasoline and diesel
fuels. We are subject to other laws and regulations as a result of the past or
present existence of underground storage tanks at many of our properties. Like
many of our competitors, we have incurred, and will continue to incur, capital
and operating expenditures and other costs in complying with these laws and
regulations. In addition, in connection with future acquisitions, we could
become subject to new or unforeseen environmental costs or liabilities, some of
which could be material.
Laws and regulations will require us to comply with new or more
stringent environmental compliance standards as of future dates. We cannot
predict future environmental legislation and regulations, how existing or future
laws or regulations will be administered or interpreted or what environmental
conditions may be found to exist in the future. Compliance with new or more
stringent laws or regulations, stricter interpretation of existing laws or the
future discovery of environmental conditions may require us to make additional
expenditures, some of which may be material.
Lack of independent directors could result in conflicts with stockholders.
A majority of the members of our board of directors are our employees
and/or principal stockholders or of one of our affiliates. Although we intend to
appoint at least two additional independent directors in the future,
40
<PAGE>
they will not constitute a majority of the board, and the board might not have a
majority of independent directors in the future. Without a majority of
independent directors, our executive officers, who also are principal
stockholders and directors, could establish policies and enter into transactions
without independent review and approval, subject to restrictions required by
Delaware law. In addition, although we intend to establish audit and
compensation committees which will consist entirely of independent directors,
until they are established, audit and compensation policies could be approved
without independent review. These and other transactions present the potential
for a conflict of interest between us and our stockholders generally and our
controlling officers, stockholders or directors.
A major earthquake or other natural disaster would harm our business.
We conduct the vast majority of our operations in major metropolitan
markets in California, each of which has been subject to unpredictable
earthquake activity. A major earthquake or other natural disaster affecting one
or more of our markets could at least temporarily reduce sales by diverting
consumers' discretionary income to other purposes, and could harm our business.
Moreover, the continued operation and success of our business are dependent in
part upon our ability to protect our facilities against physical damage from
power outages, telecommunications failures, physical break-ins and other similar
events. We may not be able to prevent catastrophic damage to our facilities in
the event of a major earthquake or other natural disaster, which damage could
harm our business.
Item 7A. Quantitative and Qualitative Disclosure About Market Risks.
Our primary market risk exposure is interest rate risk. A change in the
U.S. prime interest rate would affect the rate at which we could borrow funds
under our floor plan and secured line of credit borrowing facilities. We
estimate that a one percent increase or decrease in our variable rate debt would
result in an increase or decrease, respectively, in interest expense of $1.0
million in 1999. We estimate that a two percent increase or decrease in our
variable rate debt would result in an increase or decrease, respectively, in
interest expense of $2.0 million in 1999. Our senior notes are at fixed rates.
Our remaining financial instrument liabilities are immaterial.
Item 8. Consolidated Financial Statements and Supplementary Data.
The Financial Statements and Supplementary Data required by this item
are set forth at the pages indicated at Item 14(a).
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
41
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Our current executive officers and directors are as follows:
<TABLE>
<CAPTION>
Director or
Name Age Position Officer Since
- ------------------------------------ -------- ------------------------------------------------ ----------------
<S> <C> <C> <C>
Thomas A. Price.................... 55 Chief Executive Officer, President and Director 1996
Donald V. Strough.................. 61 Chairman 1995
W. Bruce Bercovich................. 48 Secretary and Director 1995
Jean-Marc Chapus................... 39 Director 1997
H. Robert Heller................... 58 Director 1999
Charles R. Oglesby................. 52 Chief Operating Officer 1998
Debra L. Smithart.................. 44 Chief Financial and Administrative Officer 1997
Steven S. Hallock.................. 42 Regional General Manager 1997
</TABLE>
Thomas A. Price has been our President, Chief Executive Officer and a
director since September 1996. From March 1976 to June 1997, Mr. Price owned and
operated nine vehicle dealerships, which, when combined with us, comprised six
automotive dealerships and eleven new car franchises. Mr. Price has worked in
the automobile industry since 1963 in various capacities including marketing and
field assignments at Ford Motor Company. Mr. Price is currently a member of the
Lexus National Dealer Advisory Board and he is a charter member of the J.D.
Power Superdealer Roundtable.
Donald V. Strough has been a director and our Chairman since
October 1995. From May 1990 to October 1995, Mr. Strough owned and operated six
dealerships with nine franchises. From 1963 to May 1990, Mr. Strough owned and
operated the Val Strough Dealership Group, which, upon its sale in 1990,
consisted of 12 separate automotive dealerships and 19 franchises. Mr. Strough
is a former President of the Northern California Chevrolet Dealers Association.
W. Bruce Bercovich has been our Secretary and a director since
October 1995. Mr. Bercovich has been a partner in the California law firm Kay &
Merkle since 1977. Mr. Bercovich has extensive experience in the acquisition and
sale of automobile dealerships having been involved in the acquisition or sale
of over 100 dealerships.
Jean-Marc Chapus has been a director since July 1997. Mr. Chapus has
served as a Managing Director for Trust Company of the West and President of
TCW/Crescent Mezzanine L.L.C., a private investment fund, since March 1995. From
December 1991 to March 1995, Mr. Chapus was a Managing Director of Crescent
Capital Corp. Mr. Chapus serves as a director of Home Asset Management Company
and is a trustee of Starwood Hotels & Resorts Trust.
H. Robert Heller was appointed as a director in January 1999. Mr.
Heller currently serves as a director of Fair, Isaac and Company since 1994, and
as Executive Vice President since 1996. At Fair, Isaac and Company, he is
responsible for joint ventures and the Risk Management Technologies Division.
From 1991 to 1993, Mr. Heller served as President and Chief Executive Officer of
Visa. Mr. Heller is a former Governor of the Federal Reserve System, and has had
an extensive career in banking, international finance, government service and
education.
Charles R. Oglesby has been our Chief Operating Officer since September
1998. From March 1996 to September 1998, Mr. Oglesby was President of Union City
Toyota in Union City, Georgia.
42
<PAGE>
From May 1995 to March 1996, Mr. Oglesby was an independent consultant in the
automotive retailing industry. From February 1992 to May 1995, Mr. Oglesby was
President and CEO of the Superior Automotive Corporation, which consisted of 14
dealerships in Kansas City, Kansas.
Debra L. Smithart has been our Chief Financial and Administrative
Officer since October 1997. From June 1985 to October 1997, Ms. Smithart served
as Executive Vice President and Chief Financial Officer of Brinker
International, a major restaurant operator and franchisor with over 800
locations and annual sales of approximately $1.8 billion.
Steven S. Hallock was our Chief Operating Officer from March 1997 to
October 1998. In October 1998, Mr. Hallock became a regional general manager.
Mr. Hallock was for the last 15 years chief executive officer of the HG
Dealership Group, which consisted of five dealerships in the Concord, California
area.
Director Compensation
Directors do not receive any cash compensation for their services as
members of the board of directors, although they are reimbursed for their
reasonable expenses.
Compensation Committee Interlocks and Insider Participation
None of our executive officers has served as a member of a compensation
committee or board of directors of any other entity which has an executive
officer serving as a member of the board of directors. Thomas A. Price, our
President, Chief Executive Officer and a director, participated in deliberations
concerning executive compensation.
Item 11. Executive Compensation.
The following table sets forth information concerning the compensation
paid by us during the fiscal years ended December 31, 1997 and December 31, 1998
to our Chief Executive Officer and our four other most highly paid executive
officers.
43
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
------------------------------------------------- ----------------------
Awards
----------------------
Name and Other Annual Securities
Principal Position Year Salary Bonus Compensation (2) Underlying Options (#)
- ----------------------------------------- -------- ------------ ------------ ------------------- ----------------------
<S> <C> <C> <C> <C> <C>
Thomas A. Price 1998 $508,800 $ 127,200(6) $ 14,400 --
President and Chief Executive Officer ... 1997 470,500(3) -- 9,885 --
Donald V. Strough 1998 424,000 106,000(6) 7,200 --
Chairman ................................ 1997 108,000 -- -- --
Charles R. Oglesby
Chief Operating Officer ................. 1998(1) 141,667 85,000(4) 47,301 306,667
Debra L. Smithart
Chief Financial and Administrative 1998 300,000 142,500(6) 17,072 --
Officer .............................. 1997 50,000 18,750(5) 1,100 200,000
Steven S. Hallock 1998 389,000 275,000(6) 8,900 100,000
Regional General Manager................ 1997 333,000 620,000(7) 5,000 280,000
</TABLE>
- --------------------------------
(1) Mr. Oglesby joined us in September 1998 replacing Mr. Hallock as chief
operating officer.
(2) Consists of car allowances and relocation amounts.
(3) Includes $230,500 paid to Mr. Price prior to the acquisition of the former
Tom Price dealerships.
(4) Consists of $85,000 of an accrued guaranteed bonus payment unpaid as of
December 31, 1998.
(5) Consists of $18,750 of accrued guaranteed bonus payments paid in 1998.
(6) Consists of accrued bonus payments unpaid as of December 31, 1998.
(7) Includes a one-time sign-on bonus of $500,000 and an accrued guaranteed
bonus payment paid in 1998.
The following table provides information regarding stock option grants
made during fiscal 1998 to the persons named in the Summary Compensation Table:
Option Grants in 1998*
<TABLE>
<CAPTION>
% of Total
Options Granted Value at Assumed Annual
Options Granted to Employees in Exercise Price Expiration Date Rates of Stock Price
Name (Shares) (1) Fiscal Year (2) per Share (1) (3) Appreciation for Option Term(4)
- --------------------- ----------------- ------------------ ---------------- ----------------- ------------------------------
5% 10%
----------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Charles R. Oglesby 306,667(5) 60.1 $4.00 9/1/08 (7) $364,162
Steven S. Hallock 100,000(6) 19.6 2.00 10/1/08 $125,779 318,748
</TABLE>
- ------------------
(*) No stock appreciation rights were granted to executive officers for the
fiscal year ended December 31, 1998.
(1) All options granted in 1998 were granted under our 1997 Stock Option Plan.
Under the 1997 option plan, the board of directors retains discretion to
modify the terms, including the price, of outstanding options. See also
"Executive Compensation -- Employment Contracts and Change of Control
Arrangements."
(2) We granted options to purchase 510,000 shares of common stock for the
fiscal year ended December 31, 1998.
44
<PAGE>
(3) Options may terminate before their expiration date upon the termination of
optionee's status as an employee or upon the optionee's death or
disability.
(4) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The assumed
5% and 10% rates of stock price appreciation are mandated by rules of the
SEC and do not represent our estimate or projection of the future common
stock price. This table does not take into account any appreciation in the
price of the common stock to date.
(5) The options vest ratably over 60 months from the date of grant.
(6) These options are fully vested.
(7) The exercise price of Mr. Oglesby's options exceeded the fair market value
of the common stock on the date of issuance. At the assumed appreciation
rate of 5%, there is no potential positive realizable value of the options.
The persons named in the following table did not exercise options
during fiscal 1998. The following table provides information concerning the
value of unexercised options held as of December 31, 1998, by the executive
officers named in the Summary Compensation Table above:
Fiscal 1998 Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options at 12/31/98 In-The-Money Options at 12/31/98 ($)
---------------------------------- ------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Charles R. Oglesby 20,444 286,223 (1) (1)
Steven S. Hallock 184,000 196,000 $149,600 $274,400
Debra L. Smithart 46,667 153,333 (1) (1)
</TABLE>
- -------------------------
(1) The options have no positive realizable value based on a fair market value
as determined by the board of directors of $2.32 per share, as of December
31, 1998, minus an exercise price of $4.00 per share.
Employment Contracts and Change of Control Arrangements
In July 1997, we entered into an employment agreement with Thomas A.
Price under which he is employed as our President and Chief Executive Officer
through July 1, 2002, which term may be extended upon the mutual agreement of
the parties. Mr. Price receives a base annual salary of $508,800 and an annual
performance bonus of up to 50% of his base salary. Mr. Price also receives all
standard benefits provided to senior management. The salary, bonus and benefits
are guaranteed unless he is terminated for cause, voluntarily terminates his
employment, dies or becomes disabled.
In July 1997, we entered into an employment agreement with Donald V.
Strough under which he is employed as our Chairman through July 1, 2002, which
term may be extended upon the mutual agreement of the parties. Mr. Strough
receives a base annual salary of $424,000 and an annual performance bonus of up
to 50% of his base salary. Mr. Strough also receives all standard benefits
provided to senior management. The salary, bonus and benefits are guaranteed
unless he is terminated for cause, voluntarily terminates his employment, dies
or becomes disabled.
In March 1997, we entered into an at-will employment agreement with
Steven S. Hallock. Mr. Hallock receives a base annual salary of $400,000 and an
annual performance bonus of up to 90% of base salary. Mr. Hallock is entitled to
all standard benefits provided to senior management. Mr. Hallock was granted
options to purchase 280,000 shares of Class A Common Stock at a price of $0.92
per share under our 1997 stock option plan.
45
<PAGE>
These options vest monthly from the date of grant over a 60 month period. If Mr.
Hallock terminates his employment agreement for good reason following a change
of control, his options vest immediately. In addition, Mr. Hallock received
fully vested options to acquire up to 100,000 shares of Class A Common Stock
upon our acquisition of the Concord Toyota dealership. The exercise price of
these options is $2.00. If Mr. Hallock terminates his employment for good reason
following a change of control or is terminated by us other than for cause, he is
entitled to receive continued salary payments for a period of one year plus an
amount equal to the average of his previous performance bonuses and his
remaining unvested options will vest immediately. In September 1998, Mr. Hallock
became a regional general manager, and his employment agreement was amended.
In March 1999, we entered into an at-will employment agreement with
Debra L. Smithart. Ms. Smithart receives a base annual salary of $300,000, and
an annual performance bonus of up to 50% of base salary. Ms. Smithart is
entitled to all standard benefits provided to senior management. Ms. Smithart
was granted options to purchase 200,000 shares of Class A Common Stock at a
price of $4.00 per share under our 1997 Stock Option Plan. These options vest
monthly from the date of grant over a 48 month period. If Ms. Smithart
terminates her employment agreement for good reason following a change of
control, her options will vest immediately, and she is entitled to receive
continued salary payments for a period of one year plus an amount equal to the
average of her previous performance bonuses. If Ms. Smithart is terminated for
cause, she will not be entitled to any compensation or benefits from the Company
other than those already earned.
In March 1999, we entered into an at-will employment agreement with
Charles R. Oglesby. Mr. Oglesby receives a base annual salary of $425,000, and
an annual performance bonus of up to 60% of base salary. Mr. Oglesby is entitled
to all standard benefits provided to senior management. Mr. Oglesby was granted
options to purchase 300,000 shares of Class A Common Stock at a price of $4.00
per share under our 1997 Stock Option Plan. These options vest monthly from the
date of grant over a 60 month period. If Mr. Oglesby terminates his employment
agreement for good reason following a change of control, his options will vest
immediately, and he is entitled to receive continued salary payments for a
period of one year plus an amount equal to the average of his previous
performance bonuses. If Mr. Oglesby is terminated for cause, he will not be
entitled to any compensation or benefits from the Company other than those
already earned.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information relating to the
ownership of our voting stock as of February 28, 1999 by:
o each of our directors;
o each of our executive officers, including the chief executive
officer;
o all of our directors and executive officers as a group; and
o each stockholder who is known to us to beneficially own five percent
or more of our outstanding voting stock.
46
<PAGE>
<TABLE>
<CAPTION>
Class A Common Stock Shares Class B Common Stock Shares
Owned (1) Owned (1)
------------------------------- ---------------------------------
Name and Address of Number of Percentage of Number of Percentage of
Beneficial Owners (#) Shares Class (2) Shares Class (2)
- ---------------------------- ------------ ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Directors and Executive
Officers
W. Bruce Bercovich (3) 1,005,000 8.7%
Jean-Marc Chapus (4) -- -- 3,532,000 100%
Thomas A. Price (5) 5,722,681 49.7%
Donald V. Strough (6) 1,455,000 12.6%
Charles R. Oglesby (7) 35,788 *
Steven S. Hallock (8) 398,000 3.5%
Debra L. Smithart (9) 56,667 *
Executive officers and 8,673,126 75.3% 3,532,000 100%
directors as a group (six
persons) (10)
Other 5% Stockholders
Bert Wollen (11) 590,000 5.1%
Al Babbington (12) 745,014 6.5%
Fred Cziska (13) 836,224 7.3%
The TCW Group, Inc. (4) -- -- 3,532,000 100%
</TABLE>
- ------------------------------
* Less than 1%
(1) Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them, subject to community
property laws, where applicable.
(2) For the Company's Class A Common Stock and Class B Common Stock, the
percentages listed were calculated on the basis of 11,514,044 shares and
3,532,000 shares outstanding, respectively. Shares of Class A common stock
underlying options exercisable within 60 days of February 28, 1999 are
deemed to be outstanding for purposes of calculating the beneficial
ownership of securities of the holders of such options or of shares of
Class A common stock.
(3) Includes 590,000 shares of Class A common stock held by Embarcadero
Automotive, LLC, 290,000 shares of Class A common stock held by BB
Investments, and 125,000 shares of Class A common stock held by Geary Plaza
Irrevocable Trust. Mr. Bercovich is a Managing Member of Embarcadero
Automotive, LLC, a General Partner of BB Investments, and a trustee of
Geary Plaza Irrevocable Trust, and as such may be deemed to be a beneficial
owner of such shares. Mr. Bercovich disclaims beneficial ownership of all
shares of Geary Plaza Irrevocable Trust. Alexandra Strough, daughter of
chairman Donald V. Strough, is the sole beneficiary of the Geary Plaza
Irrevocable Trust.
(4) Number of shares which may be deemed beneficially owned includes shares
held by various, trusts and investment partnerships related to or managed
by affiliates of The TCW Group, Inc., of which Mr. Chapus is a managing
director. Mr. Chapus disclaims beneficial ownership of all shares held by
these trusts and investment partnerships. The address of The TCW Group,
Inc. is 11100 Santa Monica Blvd., Suite 2000, Los Angeles, CA 94025.
(5) Includes 5,722,681 shares of Class A common stock held by the Price Trust.
Mr. Price is a trustee and beneficiary of this trust and as such may be
deemed to be a beneficial owner of such shares.
(6) Includes 1,455,000 shares owned by the Strough Revocable Trust of 1983, as
amended. Mr. Strough and his wife are co-trustees of this trust.
(7) Includes 35,778 shares purchasable pursuant to outstanding options
exercisable on or before April 29, 1999.
(8) Includes 198,000 shares purchasable pursuant to outstanding options
exercisable on or before April 29, 1999.
(9) Includes 56,667 shares purchasable pursuant to outstanding options
exercisable on or before April 29, 1999.
(10) See footnotes (3) through (9). Includes 290,445 shares purchasable pursuant
to outstanding options exercisable on or before April 29, 1999.
47
<PAGE>
(11) Includes 590,000 shares of Class A Common held by Raintree Capital. Mr.
Tucker is a member of Raintree Capital, L.L.C., and as such may be deemed
to be a beneficial owner of such shares.
(12) Mr. Babbington is our vice president of marketing and strategic planning.
Includes 17,500 shares purchasable pursuant to outstanding options
exercisable on or before April 29, 1999.
(13) Mr. Cziska is our vice president of parts, service and purchasing. Includes
17,500 shares purchasable pursuant to outstanding options exercisable on or
before April 29, 1999.
Item 13. Certain Relationships and Related Transactions.
In 1997, Rosewood Village Associates, a partnership in which Donald V.
Strough serves as general partner and holds an 85% equity interest, acquired
from a third party, certain real property which is leased to us. In addition,
Rosewood Village Associates acquired approximately $0.8 million of certain
leasehold improvements from us. Rosewood Village Associates leases this
dealership property, the leasehold improvements, and one other dealership
property to us. Annual obligations on these leases totaled approximately
$900,000 in 1998.
W. Bruce Bercovich, our Secretary and a director, is a partner in the
San Francisco, California law firm of Kay & Merkle. We paid Key & Merkle
approximately $360,000 for legal services performed during fiscal 1998.
In 1997, we leased one dealership property and one dealership service
repair property under agreements from the Price Trust. During 1998, we leased an
additional dealership property under an agreement with the Price Trust. In 1998,
annual obligations on these leases totaled approximately $2,532,000. Thomas A.
Price and his spouse are the sole beneficiaries of the Price Trust.
We lease one dealership property from Bay Automotive Properties LLC.
Annual obligations on this lease totaled approximately $576,000 in 1998. Thomas
A. Price and Donald V. Strough are both members of Bay Automotive, with equal
interests.
We lease two dealership properties from the Strough Revocable Trust
of 1983. In 1998 annual obligations on these leases totaled approximately
$638,000. Mr. Strough and his wife are co-trustees of this trust.
The Price Trust owns the real property at 601 Brannan Street, San
Francisco, California, where our executive offices and downtown San Francisco
service and repair center are located. We have made leasehold improvements with
an approximate value of $2,400,000 to this property. These leasehold
improvements were sold to Mr. Price for a sale price equal to our cost, then
leased back to us through a ground lease. Mr. Price and his spouse are the sole
beneficiaries of the Price Trust. Annual obligations on this lease totaled
$540,000 in 1998.
In June 1998, Donald V. Strough loaned us $4,000,000 to assist in the
financing of the acquisition of our Burgess Honda dealership. We pay Mr. Strough
interest determined at prime plus 62.5 basis points, or 8.37% as of December 31,
1998 on this amount in accordance with the terms of a letter agreement between
Mr. Strough and us. In connection with Mr. Strough's loan to us, he was paid a
one-time loan origination fee of $120,000.
In March 1999, Thomas A. Price loaned us $1,000,000 to assist in the
financing of the acquisition of our Ritchey Fipp Chevrolet dealership. We pay
Mr. Price interest at a rate equal to our senior credit facilities.
48
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this Form:
1. Financial Statements
Page
----
Report of Independent Public Accountants.............. F-2
Consolidated Balance Sheets as of December 31,
1998 and 1997......................................... F-3
Consolidated Statements of Operations
for the Three Years Ended December 31, 1998........... F-5
Consolidated Statements of Stockholders' Equity
for the Three Years Ended December 31, 1998........... F-6
Consolidated Statements of Cash Flows
for the Three Years Ended December 31, 1998........... F-7
Notes to Consolidated Financial Statements............ F-8
2. Financial Statement Schedules
Included in Part IV of this report:
Schedule II Valuation and Qualifying Accounts
All other schedules are omitted because they are not required,
or are not applicable, or the information is included in the
consolidated financial statements or notes to consolidated
financial statements.
3. Exhibits
See Index to Exhibits. The Exhibits listed in the accompanying
Index are filed as part of this report.
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K under Item 2.,
Acquisition of Disposition of Assets, dated October 1, 1998, and
filed with the Securities and Exchange Commission on October 16,
1998.
49
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(With Independent Auditors' Report Thereon)
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
FirstAmerica Automotive, Inc.:
We have audited the accompanying consolidated balance sheets of
FirstAmerica Automotive, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the related statements of operations, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1998. In
connection with our audits of the consolidated financial statements, we also
have audited the related consolidated financial statement schedule listed in the
Index at Item 14(a)(2). These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule 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, such consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
FirstAmerica Automotive, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1998 in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ KPMG, LLP
San Francisco, California
March 19, 1999
F-2
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
Consolidated Balance Sheets
As of December 31,
(In thousands)
<TABLE>
<CAPTION>
Assets 1998 1997
- ---------------------------------------- --------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents............. $ 2,191 $ 2,924
Contracts in transit.................. 13,567 9,454
Accounts receivable................... 18,460 11,061
Inventories........................... 90,947 78,607
Deferred income taxes................. 853 618
Deposits, prepaid expenses and other.. 2,996 2,614
--------- ---------
Total current assets................. 129,014 105,278
Property and equipment.................. 9,879 6,348
Other assets:
Loan origination and other costs, net
of amortization of $754 in 1998 and
$195 in 1997......................... 3,107 3,407
Other noncurrent assets............... 2,457 2,629
Goodwill and other intangible assets.. 33,995 6,340
--------- ---------
Total assets......................... $178,452 $124,002
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
Consolidated Balance Sheets (continued)
As of December 31,
(In thousands, except share data)
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity 1998 1997
- ---------------------------------------- -------- --------
<S> <C> <C>
Current liabilities:
Floor plan........................... $ 81,452 $ 67,401
Secured lines of credit.............. 17,025 4,000
Notes payable and other.............. 5,512 1,218
Accounts payable..................... 6,009 5,275
Accrued liabilities.................. 13,028 8,804
Deferred revenue..................... 2,054 2,034
--------- ---------
Total current liabilities........ 125,080 88,732
Long-term liabilities:
Capital lease obligation and
equipment loan...................... 1,386 --
Senior notes, net of discount of
$2,839 in 1998 and $2,062 in 1997... 33,161 21,938
Deferred income taxes................ 1,055 269
Deferred revenue..................... 2,475 3,061
--------- ---------
Total liabilities................ 163,157 114,000
--------- ---------
Commitments and contingencies (note 17)
Cumulative redeemable preferred stock,
$.00001 par value; 3,500 shares issued
and outstanding in 1998 and 1997 (net
of discount of $456 in 1998 and $526
in 1997, liquidation preference of
$3,500 in 1998 and 1997)............. 3,044 2,974
Redeemable preferred stock, $.00001 par
value; 500 shares issued and
outstanding in 1998 and 1997 (net of
discount of $65 in 1998 and $75 in
1997, liquidation preference of $600
in 1998 and $540 in 1997)............ 535 465
Stockholders' equity:
Common stock, $0.00001 par value:
Class A, 30,000,000 shares
authorized, 11,514,044 shares
issued and outstanding in 1998
and 11,201,152 shares in 1997... -- --
Class B, 5,000,000 shares
authorized, 3,532,000 shares
issued and outstanding in 1998
and 3,032,000 shares in 1997.... -- --
Class C, 30,000,000 shares
authorized, 0 issued and
outstanding..................... -- --
Additional paid-in capital........... 8,320 6,544
Retained earnings.................... 3,396 19
--------- ---------
Total stockholders' equity........ 11,716 6,563
--------- ---------
$178,452 $124,002
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
Consolidated Statements of Operations
Years ended December 31,
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ----------
<S> <C> <C> <C>
Sales:
New vehicle.......................... $475,847 $290,281 $200,185
Used vehicle......................... 191,829 111,616 81,706
Service and parts.................... 91,134 58,707 42,416
Other dealership revenues, net....... 24,261 13,444 8,215
--------- --------- ---------
Total sales....................... 783,071 474,048 332,522
Cost of sales:
New vehicle.......................... 438,726 271,412 187,278
Used vehicle......................... 175,753 102,689 76,190
Service and parts.................... 49,423 32,195 25,450
--------- --------- ---------
Total cost of sales............... 663,902 406,296 288,918
--------- --------- ---------
Gross profit...................... 119,169 67,752 43,604
Operating expenses:
Selling, general and administrative.. 99,603 58,761 38,330
Depreciation and amortization........ 1,952 678 611
Combination and related expenses..... -- 2,268 --
--------- --------- ---------
Operating income.................. 17,614 6,045 4,663
Other expense:
Interest expense, floor plan......... (5,521) (3,669) (2,922)
Interest expense, other.............. (5,432) (1,866) --
--------- --------- ---------
Income before income taxes........ 6,661 510 1,741
Income tax expense....................... 2,864 446 48
--------- --------- ---------
Net income........................ $ 3,797 $ 64 $ 1,693
========= ========= =========
Pro forma net income (unaudited)......... $ 1,027
=========
Net income (loss) per common share-basic. $0.24 $(0.01) $0.19
========= ========= =========
Weighted average common shares-basic..... 14,341 10,915 5,526
========= ========= =========
Net income (loss) per common
share-diluted........................... $0.23 $(0.01) $0.19
========= ========= =========
Weighted average common shares
outstanding-diluted.................... 14,928 10,915 5,526
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
FirstAmerica Automotive, Inc.
Common Stock
-------------------------------------
Price Class A Class B
Dealerships' ------------------- ----------------- Paid-in Retained Total
Equity Shares Amount Shares Amount Capital Earnings Equity
------------ -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996......................$ 6,644 -- $ -- -- $ -- $ -- $ -- $ 6,644
Stock issuance................................ 250 -- -- -- -- -- -- 250
Net income.................................... 1,693 -- -- -- -- -- -- 1,693
Distributions to S corporation stockholders... (3,707) -- -- -- -- -- -- (3,707)
-------- -------- ------- ------ ------- ------ ------- --------
Balance, December 31, 1996....................$ 4,880 -- $ -- -- $ -- $ -- $ -- $4,880
Distributions to S corporation stockholders... (4,000) -- -- -- -- -- -- (4,000)
Exchange of stock related to Combination...... (880) 7,841 -- -- -- 880 -- --
Stock issuance for acquisitions............... -- 1,620 -- -- -- 1,490 -- 1,490
Stock issuance relating to financing.......... -- -- -- 3,032 -- 2,789 -- 2,789
Stock issuance, net........................... -- 1,740 -- -- -- 1,554 -- 1,554
Preferred dividend and liquidation preference. -- -- -- -- -- (169) -- (169)
Amortization of discount...................... -- -- -- -- -- -- (45) (45)
Net income.................................... -- -- -- -- -- -- 64 64
-------- -------- ------- ------ ------- ------ ------- --------
Balance, December 31, 1997.................... $ -- 11,201 $ -- 3,032 $ -- $ 6,544 $ 19 $ 6,563
Stock issuance for acquisitions............... -- 335 -- -- -- 776 -- 776
Stock issuance relating to financing.......... -- -- -- 500 -- 1,000 -- 1,000
Stock redemptions............................. -- (22) -- -- -- -- -- --
Preferred dividend and liquidation preference. -- -- -- -- -- -- (340) (340)
Amortization of discount...................... -- -- -- -- -- -- (80) (80)
Net income.................................... -- -- -- -- -- -- 3,797 3,797
-------- -------- ------- ------ ------- ------ ------- --------
Balance, December 31, 1998.................... $ -- 11,514 $ -- 3,532 $ -- $ 8,320 $3,396 $11,716
========= ======== ======= ====== ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
Consolidated Statements of Cash Flows
Years ended December 31,
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 3,797 $ 64 $ 1,693
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization............................... 1,952 678 611
Non-cash interest expense................................... 782 195 --
Deferred income taxes....................................... (659) (349) --
Non-cash stock compensation................................. -- 701 --
Amortization of deferred revenue............................ (457) (373) 1,048
Changes in operating assets and liabilities:
Receivables and contracts in transit..................... (8,606) (8,007) 718
Inventories.............................................. (4,391) (17,087) (567)
Other assets............................................. (500) (815) (192)
Floor plan notes payable................................. 9,504 7,918 809
Accounts payable and accrued liabilities................. 2,899 9,489 77
-------- -------- -------
Net cash provided by (used in) operating activities...... 4,321 (7,586) 4,197
-------- -------- -------
Cash flows from investing activities:
Capital expenditures............................................ (4,594) (1,090) (805)
Acquisitions, net of cash acquired.............................. (28,980) (11,726) --
-------- -------- -------
Net cash used in investing activities.................... (33,574) (12,816) (805)
-------- -------- -------
Cash flows from financing activities:
Borrowings on secured lines of credit........................... 13,025 4,000 --
Proceeds from issuance of Senior Notes.......................... 11,000 21,851 --
Proceeds from notes payable and other........................... 4,033 -- --
Repayments on notes payable and other........................... -- (1,632) 167
Loan origination costs.......................................... (258) (3,602) --
Proceeds from issuance of common stock.......................... 1,000 2,789 250
Proceeds from issuance of preferred stock....................... -- 3,360 --
Distributions to S Corporation stockholders..................... -- (4,000) (3,707)
Preference dividend paid........................................ (280) (108) --
-------- -------- -------
Net cash provided by (used in) financing activities...... 28,520 22,658 (3,290)
-------- -------- -------
Net increase/(decrease) in cash and equivalents.......... (733) 2,256 102
Cash at beginning of period........................................ 2,924 668 566
-------- -------- -------
Cash at end of period.............................................. $ 2,191 $ 2,924 $ 668
======== ======== =======
Cash paid during the period for:
Interest........................................................ $ 4,053 $ 5,311 $ 2,941
Income taxes.................................................... 3,803 885 16
Non-cash activity was as follows:
Common stock issued for acquisitions............................ 776 1,490 --
Common stock issued as compensation............................. -- 701 --
Capital lease obligation........................................ 703 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies
(a) Organization and Combination
In July 1997, FirstAmerica Automotive, Inc., a public company with no
significant assets or operations, combined (the "Combination") with a group of
automobile dealership entities under common ownership and control (the "Price
Dealerships"). The stockholders of the Price Dealerships received 5,526,000
shares of FirstAmerica Automotive, Inc.'s common stock, which represented a
majority of the total outstanding shares of capital stock of FirstAmerica
Automotive, Inc. immediately following the Combination. The Combination was
accounted for as the acquisition of FirstAmerica Automotive, Inc. by the Price
Dealerships, and, accordingly, the financial statements for periods before the
Combination represent the financial statements of the Price Dealerships.
FirstAmerica Automotive, Inc. and the Price Dealerships are collectively
referred to as "FirstAmerica" or the "Company".
(b) Business
The Company is a leading automotive retailer and consolidator in the highly
fragmented automotive retailing industry. We currently operate in four major
metropolitan markets in California, and are focusing our consolidation strategy
in the western United States. Our source of revenues consists of all activities
typical of automotive dealerships. These consist of the sale and lease of new
and used vehicles, parts and service sales, collision repair service revenues,
financing fees, vehicle insurance commissions, document processing fees,
extended service warranty sales, and after-market product sales. As of December
31, 1998, we sold 12 domestic and foreign brands consisting of BMW, Buick,
Dodge, Honda, Isuzu, GMC, Lexus, Mitsubishi, Nissan, Pontiac, Toyota and
Volkswagen.
The Company's plan is to continue making opportunistic acquisitions in
the western United States. The Company currently operates in the following four
metropolitan markets:
. San Francisco Bay Area . San Jose/Silicon Valley
. San Diego . Los Angeles
(c) Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the
accounts of FirstAmerica Automotive, Inc. and its subsidiaries. All significant
intercompany transactions and balances have been eliminated in the consolidated
financial statements. Certain prior period amounts have been reclassified to
conform with the current financial statement presentation.
(d) Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents. Cash balances consist of demand deposits.
(e) Inventories
Inventories are stated at the lower of cost or market value. Vehicle
cost is determined by using the specific identification method. Parts and
accessories cost is determined by using the first-in, first-out method (FIFO).
F-8
<PAGE>
(f) Property and Equipment
Property and equipment, including improvements that significantly
extend useful lives, are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are calculated using the straight-
line method over the estimated useful lives of the assets. Leasehold
improvements are amortized using a straight-line basis over the shorter of the
lease term or estimated useful lives of the assets.
The range of estimated useful lives is as follows:
Leasehold improvements 5 to 20 years
Equipment 5 to 10 years
Furniture, signs and fixtures 5 to 10 years
Company vehicles 5 years
The cost of maintenance, repairs and minor renewals is expensed as
incurred. When an asset is retired or otherwise disposed of, the related cost
and accumulated depreciation are removed from the account, and any gain or loss
is credited or charged to income.
(g) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or 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. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Prior to January 1, 1997, the Company was an S Corporation for federal
and state income tax reporting purposes. Federal and state income taxes on the
income of an S Corporation are payable by the individual stockholders rather
than the corporation. The Company terminated its S Corporation status effective
January 1, 1997.
(h) Financial Instruments
The carrying amount of current assets and current liabilities
approximates fair value because of the short-term nature of these instruments.
The carrying amount of long-term debt is not determinable because of the
structure of the transaction.
Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These estimates are
subjective in nature, involve uncertainties and matters of significant judgment,
and therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
(i) Goodwill and Other Intangible Assets
Goodwill on acquired dealership operations, which represents the
excess of purchase price over the fair value of net assets acquired, is
amortized on a straight-line basis over 40 years. The Company evaluates the
periods of amortization continually to determine whether later events and
circumstances warrant revised estimates of useful lives.
F-9
<PAGE>
Goodwill on software company and other intangible assets are primarily
acquired software and intellectual property. Other intangible assets are
amortized on a straight-line basis over 5 years.
Accumulated amortization of goodwill and other intangibles totaled
approximately $619,000 and $125,000 as of December 31, 1998 and 1997,
respectively. Amortization expense charged to operations totaled $494,000,
$102,000 and $23,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
(j) Impairment of Long-Lived Assets
The carrying value of long-lived assets, including intangibles, is reviewed
if the facts and circumstances, such as significant declines in revenues,
earnings or cash flows or material adverse changes in the business climate,
suggest that it may be impaired. The Company performs its review by comparing
the book value of long-lived assets to the estimated undiscounted cash flows
relating to such assets. If any impairment in the value of the long-lived assets
is indicated, the carrying value of the long-lived assets is adjusted to reflect
such impairment calculated based on the discounted cash flows of the impaired
assets or the assets fair value, as appropriate.
(k) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts in the financial statements and accompanying
notes. Actual results could differ from those estimates.
(l) Revenue Recognition
Vehicle sales revenue is recognized upon delivery. Service and parts
revenues are recognized at the time of product sale or completion of service.
Other dealership revenues include finance fees received for notes sold to
finance companies. Finance fees are recognized, net of anticipated chargebacks,
upon acceptance of the credit by the finance companies. These fees are included
in other dealership revenues in the consolidated statements of operations.
The Company recognizes fees from the sale of third party extended
warranty service contracts at the time of sale. Where the Company is the
primary obligor of the extended warranty service contract, the costs directly
related to sales of the contracts are deferred and charged to expense over the
periods that the revenues are recognized. Warranty service contract revenues
are included in other dealership revenues in the consolidated statements of
operations.
(m) Advertising
Advertising costs are expensed in the period in which advertising
occurs and are included in selling, general and administrative expenses in the
consolidated statements of operations. Advertising expense totaled $9.1
million, $5.9 million and $3.8 million for 1998, 1997 and 1996, respectively.
(n) Major Suppliers and Dealer Agreements
The Company purchases substantially all of its new vehicles and
inventory from various manufacturers at the prevailing prices charged by the
manufacturers. A manufacturer's inability or unwillingness to supply the
dealerships with an adequate supply of popular models could affect the Company's
overall sales.
The Company enters into dealer sales and service agreements ("Dealer
Agreements") with each manufacturer. The Dealer Agreement generally limits the
location of the dealership and grants the manufacturer approval rights over
changes in dealership management and ownership. A manufacturer is also entitled
to cancel the Dealer Agreement if the dealership is in material breach of its
terms.
The Company's ability to acquire additional dealerships depends, in
part, on obtaining manufacturers' approval.
(o) Pro Forma 1996 Net Income and Per Share Amounts
Pro forma 1996 net income reflects income tax expense as if the
Company had terminated its S Corporation status on January 1, 1996, and had
normal statutory tax rates for 1996 (see Note 13). In addition, since the
capital structure of the Price Dealerships prior to the Combination is not
comparable to the capital structure
F-10
<PAGE>
subsequent to the Combination, pro forma net income per share for 1996 is
presented based on the 5,526,000 shares issued to the Price Dealership
stockholders in the Combination.
(p) Stock-based Compensation
As allowed under the provisions of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation", the Company recognizes compensation
expense using the intrinsic value-based method of valuing stock options
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related Interpretations. Under the intrinsic value-
based method, compensation cost is measured as the amount by which the quoted
market price of the Company's stock at the date of grant exceeds the stock
option exercise price.
(q) Comprehensive Income
The Company has determined that net income and comprehensive income
are the same for the periods presented.
(2) Acquisitions
Acquisitions Completed During the Year Ended December 31, 1998
On April 1, 1998, the Company acquired substantially all of the operating
assets of Beverly Hills, BMW, Ltd., a BMW automobile dealership located in West
Los Angeles, California. On June 12, 1998, the Company acquired substantially
all of the operating assets of Starfire Body Shop located in San Jose,
California. On June 19, 1998, the Company acquired substantially all of the
operating assets of Burgess British Cars, Inc., a Honda automobile dealership
located in Daly City, California. On October 19, 1998, the Company acquired all
of the outstanding capital stock of an authorized Toyota automobile dealership
commonly known as Concord Toyota located in Concord, California. On November 19,
1998, the Company acquired substantially all of the operating assets of Woodland
Hills Volkswagen. On December 31, 1998, the Company completed the acquisition of
an automotive-related software company, DSW & Associates, Inc., commonly known
as Auto Town. The aggregate consideration paid for the acquisitions completed
during 1998 was $29.8 million, consisting of $29.0 million in cash and 0.3
million shares of Class A Common Stock.
All of the acquisitions were accounted for using the purchase method of
accounting and the operating results of these acquisitions have been included in
the Company's results of operations since the date they were acquired. The
purchase prices have been allocated to assets acquired and liabilities assumed
based on the fair values on the acquisition dates. Amounts recorded for these
acquisitions were as follows: current assets, net of cash acquired, of $10.4
million, fixed assets of $0.8 million, goodwill and other intangibles of $27.5
million, floor plan and other liabilities of $7.8 million, and recognition of
deferred tax liability of $1.1 million.
F-11
<PAGE>
Acquisitions Completed During the Year Ended December 31, 1997
During 1997, the Company acquired substantially all of the operating
assets of eight automobile dealerships. The aggregate consideration paid for
the acquired dealerships during 1997 was $13.2 million, consisting of $11.7
million in cash, 1.6 million shares of Class A Common Stock, and warrants to
acquire up to 20,000 shares of Class A Common Stock. Amounts recorded for these
acquisitions were as follows: current assets, net of cash acquired, of $25.9
million, fixed assets of $3.4 million, non-current assets of $0.1 million,
goodwill of $4.8 million and floor plan notes payable and current liabilities of
$21.0 million.
The following unaudited pro forma financial information presents a
summary of consolidated results of operations as if the acquisitions completed
in 1998 and 1997 had occurred as of January 1, 1997 after giving effect to
certain adjustments, including amortization of goodwill, interest expense on
acquisition debt, reductions in floorplan interest expense resulting from re-
negotiated floorplan financing agreements and related income tax effects. The
pro forma results have been prepared for comparative purposes only and are not
necessarily indicative of results of operations that would have occurred had the
acquisitions been completed on January 1, 1997. These results are also not
necessarily indicative of the results of future operations:
(Unaudited)
(dollars in thousands except per share data)
1998 1997
------------------- ---------------------
Total sales $ 874,223 $ 756,035
Income (loss) before taxes 4,521 (2,308)
Net income (loss) 2,577 (1,316)
Net income (loss) per common
share - diluted $ 0.15 $ (0.12)
Acquisitions Closed After December 31, 1998 and Pending Acquisitions
We completed one dealership acquisition in March 1999 and currently have
one automobile dealership acquisition pending. The aggregated estimated purchase
price for the two acquisitions is approximately $8.0 million. We financed the
completed acquisition with $2.0 million of notes payable to sellers and a $1.0
million note payable to the CEO of the Company. We will finance the pending
acquisition utilizing our secured lines of credit.
(3) Accounts Receivable
Accounts receivable is comprised of the following (in thousands):
December 31,
-------------------------------------------
1998 1997
------------------- ---------------------
Accounts receivable $ 16,341 $ 10,648
Accounts receivable - related
party (Note 15) 2,528 733
----------- ------------
Total accounts receivable 18,869 11,381
Less allowance for doubtful accounts 409 320
----------- ------------
Accounts receivable, net $ 18,460 $ 11,061
=========== ============
(4) Inventories
Inventories are comprised of the following (in thousands):
December 31,
-------------------------------------------
1998 1997
------------------- ---------------------
New vehicles $ 65,152 $ 58,344
Used vehicles 20,049 15,040
Parts and accessories 5,746 5,223
----------- ------------
Inventories $ 90,947 $ 78,607
=========== ============
F-12
<PAGE>
(5) Property and Equipment
Property and equipment is comprised of the following (in thousands):
December 31,
-------------------------------------------
1998 1997
------------------- ---------------------
Leasehold improvements $ 3,255 $ 2,392
Equipment 3,413 2,924
Furniture, signs and fixtures 5,576 2,333
Company vehicles 1,088 832
----------- ------------
Total property and equipment 13,332 8,481
Less accumulated depreciation 3,453 2,133
----------- ------------
Property and equipment, net $ 9,879 $ 6,348
=========== ============
(6) Floor Plan Notes Payable and Secured Lines of Credit
In July 1997, the Company entered into a three year $175 million Loan
and Security Agreement with a financial company, replacing an existing $37
million line of credit to the Company. The Loan and Security Agreement matures
in July 2000.
The Loan and Security Agreement permits the Company to borrow up to
$115 million in floor plan notes payable, restricted by new and certain used
vehicle inventory and provides an additional line of credit up to $35 million
("Revolver Advances"), restricted by used vehicle and parts inventory. The Loan
and Security Agreement also provides a discretionary line up to $25 million
("Discretionary Advances") which the financial company makes at its absolute
discretion upon request of the Company.
Floor plan notes payable are due when vehicles are sold, leased, or
delivered. Revolver Advances are due whenever the used vehicle and parts
borrowing base as defined in the Loan and Security Agreement is exceeded. The
Loan and Security Agreement grants a collateral interest in substantially all of
the Company's assets.
As of December 31, 1998 and 1997, the Company had floor plan notes payable
of $81.5 and $67.4 million, respectively, and outstanding Revolver Advances of
$17.0 and $4.0 million, respectively. Revolver Advances are classified as
secured lines of credit in the accompanying financial statements. There were no
Discretionary Advances outstanding as of December 31, 1998 and 1997. As of
December 31, 1998 and 1997, $5.0 million and zero of the Revolver Advances were
guaranteed by a Trust affiliated with the Chief Executive Officer.
The availability of the company to draw on the floor plan notes
payable, Revolver Advances, and Discretionary Advances, for the purpose of
acquiring automobile dealerships, is limited by the amount of vehicle and parts
inventory of the acquired dealership.
Interest rates on the floor plan notes and the Revolver Advances are
variable and change based on movements in the prime rate. The interest rates
equal the prime rate minus 35 to 75 basis points, which was 8.15% to 7.00% and
8.15% to 7.75% at December 31, 1998 and 1997. During 1998 and 1997, the average
monthly borrowing on the floor plan notes and Revolver Advances was $73.4 and
$44.0 million and $13.5 and $0.3 million, respectively, and the aggregate
average interest rate was 7.67% and 7.75%, respectively. Interest expense was
$6.7 and $3.8 million at December 31, 1998 and 1997.
The Loan and Security Agreement contains various financial covenants
such as minimum interest coverage, working capital, and maximum debt to equity
ratios.
F-13
<PAGE>
(7) Senior Notes
At the time of the Combination (see Note 1), the Company entered into
a Securities Purchase Agreement with a financial company to provide an aggregate
funding commitment of up to $40 million. In exchange for the $40 million, the
Company had the ability to issue on a pro-rata basis up to $36 million of
12.375% Senior Notes, $3.5 million of 8% Cumulative Redeemable Preferred Stock
("CRPS"), and $0.5 million Redeemable Preferred Stock ("RPS"), and up to 5
million shares of the Company's Class B Common Stock, par value $0.00001 per
share.
In 1997, the Company had received $28 million from the financial company.
In exchange, the Company issued notes with a principal amount of $24 million at
a discount of $2.2 million, 3,500 shares of CRPS at a discount of $0.6 million,
500 shares of RPS at a discount of $0.1 million and 3,032,000 shares of Class B
Common Stock at $0.92 per share. The notes and the preferred stock are due June
30, 2005 (see Note 8).
In 1998, the Company received an additional $12.0 million from the
financial company. In exchange, the Company issued 12.375% Senior Notes with a
principal amount of $12.0 million at a discount of $1.0 million, and issued 0.5
million shares of Class B Common Stock at $2.00 per share. The notes are due
June 30, 2005.
For financial reporting purposes, the difference between the issue
price and the face value of each security is recorded as a discount and is
amortized over the life of each security using the effective interest method.
The discount amortization on the notes is included in interest expense, and the
CRPS and RPS discount amortization is recorded as a deduction from retained
earnings. The Company incurred $3.5 and $1.5 million in interest expense
related to the notes during 1998 and 1997, including $224,000 and $88,000,
respectively, for the non-cash amortization of discount.
The notes are unsecured and subordinated to all debts of the Company's
operating subsidiaries, rank pari passu to the Company's other existing and
future senior indebtedness, and are senior in right of payment to any future
subordinated debt of the Company. The CRPS and RPS shares will be subordinate
to all the debt of the Company and its subsidiaries and have priority over the
common stock of the Company.
On July 1, 2003 and July 1, 2004, the Company shall redeem the notes
in the aggregate principal amount equal to the lesser of (a) 30% of the
aggregate principal amount of notes issued or (b) the aggregate amount of issued
and outstanding notes on such date. On these dates, the Company shall redeem
the notes, at the applicable redemption price plus all accrued and unpaid
interest on the notes to the redemption date. On June 30, 2005, the Company
shall redeem all remaining issued and outstanding notes, including accrued and
unpaid interest.
The Company can redeem all the notes or any part thereof, at any time,
upon due notice to the holders of the notes. The redemption price for the
period beginning July 1, 1998 through June 30, 1999 is 108.75% of the principal
balance and decreases by 1.25% for each year on July 1, thereafter. The
redemption price on June 30, 2005 is equal to the CRPS and RPS liquidation
preference of $1,000 and $1,720 respectively. If the aggregate outstanding
principal balance of the notes, at any time, is less than $2 million, the
Company is required to redeem all outstanding notes. If the Company has a
public offering of its stock, the Company may within 45 days of consummation of
public offering, redeem all the outstanding notes. In such circumstances, the
redemption price for the period July 1, 1998 to June 30, 1999 is 104.375% of the
principal balance and decreases by 0.625% for each year on July 1, thereafter.
The Securities Purchase Agreement contains various financial covenants
such as minimum interest coverage, and non-financial covenants including
limitations on the Company's ability to pay dividends, retire or acquire debt,
make capital expenditures, and sell assets.
(8) Redeemable Preferred Stock
The Company has 10,000 shares of authorized Preferred Stock with par
value of $0.00001 per share. In connection with the Securities Purchase
Agreement (see Note 7), the Company issued 3,500 shares of CRPS, due
F-14
<PAGE>
June 30, 2005, with a par value of $0.00001 per share, and 500 shares of RPS,
due June 30, 2005, with a par value of $0.00001 per share. As of December 31,
1998 and 1997, 3,500 CRPS and 500 RPS were issued and outstanding.
CRPS
The holders of CRPS are entitled to receive a dividend at an annual
rate of 8% of CRPS, payable, equally, on May 31, and November 30 of each year.
Any unpaid dividends accrue cumulatively at an annual rate of 14%. The Company
is required to redeem the CRPS on June 30, 2005, but CRPS may be redeemed, all
or in part, at any time prior to that date at the Company's election.
The liquidation preference for each share of CRPS is $1,000. The
redemption price per share (expressed as a percentage of the CRPS liquidation
preference) for the period beginning June 30, 1998 to June 29, 1999, is 108.75%
of the CRPS liquidation preference and decreases by 1.25% for each year on June
30, thereafter. The redemption price per share on June 30, 2005, is equal to
the CRPS liquidation preference.
RPS
The holders of RPS are not entitled to receive any dividends. Each
RPS share has an initial liquidation preference of $1,080, which increases by
$80 per share each year on June 30. The RPS liquidation preference will be
$1,720 on June 30, 2005. All the RPS, or any part thereof, may be redeemed for
cash at the Company's election. The redemption price per share (expressed as a
percentage of the RPS liquidation preference) for the period June 30, 1998 to
June 29, 1999 is 108.75% of the RPS liquidation preference and decreases by
1.25% for each year on June 30, thereafter. The redemption price per share on
June 30, 2005, is equal to the RPS liquidation preference.
The Preferred Stock has no voting rights except (a) as required by the
law of the State of Delaware, (b) to approve certain transactions that would
otherwise violate the terms of Agreement governing the sale of Preferred Stock
by the Company (see Note 7), and (c) to elect a director to the Board of
Directors to represent the CRPS stockholders if dividends on CRPS remain in
arrears and unpaid for two semiannual dividend periods, or, if the Company fails
to mandatorily redeem the Preferred Stock after June 30, 2005.
During 1998 and 1997, the Company recorded $280,000 and $128,000 as
CRPS preference dividend, $60,000 and $40,000 for the accretion of the RPS
liquidation preference with a corresponding charge to paid in capital, and
$80,200 and $45,000 for the non-cash amortization of the discount with a
corresponding charge to retained earnings.
(9) Common Stock
The Company has authorized Class A Common Stock of 30 million shares,
Class B Common Stock of 5 million shares, and Class C Common Stock of 30 million
shares, all with a par value of $0.00001 per share.
The Class A and Class B Common Stock have equal voting rights and the
Class C Common Stock is non-voting, except as otherwise required by Delaware
law. Class B Common Stockholders, voting as a separate class, are entitled to
elect one Director to the Board of Directors of the Company. Each share of
Class B Common Stock will be automatically converted into one share of Class A
Common Stock upon the closing of a firm commitment to register at least $50
million of Common Stock under the Securities Act of 1933. Class C Common Stock
will be issued only under certain conditions as defined in the Certificate of
Incorporation.
The Company is prohibited from paying dividends on its common stock so
long as any shares of CRPS are outstanding. Under certain circumstances
pursuant to the terms of its financing agreements, the Company is prohibited
from paying dividends on its common stock.
F-15
<PAGE>
(10) Stock Options
The Company's Board of Directors has approved the 1997 Stock Option Plan,
as amended through October 27, 1998, (the "Option Plan"), pursuant to which an
aggregate of 1.5 million shares of Class A Common Stock were reserved for
issuance to key employees of the Company. The Option Plan permits awards of
either incentive or non-qualified stock options. The exercise price of the
options may not be less than the fair market value as determined by a committee
of the Board of Directors. As of December 31, 1998, the Company has granted
options to employees covering an aggregate of 1,450,000 shares of Class A common
stock. The options vest over a five year period, and expire if unexercised ten
years from the date of grant.
The following table summarizes the Company's outstanding stock options
(in thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1998 1997
--------------------------- ----------------------------
Weighted Weighted
Number of Average Number of Average
Shares Exercise Price Shares Exercise Price
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year 942 $2.65 -- $ --
Granted 508 $3.61 942 $2.65
Exercised -- -- -- --
Forfeited 2 $4.00 -- --
--------- -------
Options outstanding, end of year 1,448 $2.78 942 $2.65
========= =======
Options exercisable, end of year 360 $2.20 103 $2.09
========= ========
</TABLE>
The Company has elected the disclosure requirements of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("SFAS No. 123") and continues to recognize compensation expense as prescribed
in Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25"). Under this method of accounting for stock options,
compensation cost is measured as the amount by which the fair value of the
company's stock at the grant date exceeds the stock option exercise price. For
the years ended December 31, 1998 and 1997, compensation expense was $0 and
$701,000, respectively.
The weighted average remaining contractual life of options outstanding is
9.0 years. The weighted average fair value of options granted was $0.73 during
1998 and $0.25 during 1997. The fair value of each option grant is estimated
based on the date of grant using the Black-Scholes option valuation model with
the following assumptions used for grants made in 1998: expected common stock
price volatility of 50%, risk-free interest of 4.75%, and an expected option
life of 5.0 years. The following assumptions were used for grants made in 1997:
expected volatility of 42%, risk-free interest of 6.25%, and an expected option
life of 5.5 years.
Had compensation expense of the Company's stock-based compensation
plan been determined based on the fair value method prescribed by SFAS No. 123,
the Company's pro forma net income and diluted earnings per share for the years
ended December 31, 1998 and 1997 would have been (in thousands except per share
amounts):
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Net income
As reported $3,797 $ 64
Pro forma 3,679 18
Net income (loss) per common share - basic
As reported $ 0.24 $(0.01)
Pro forma 0.23 (0.02)
Net income (loss) per common share - diluted
As reported $ 0.23 $(0.01)
Pro forma 0.22 (0.02)
</TABLE>
F-16
<PAGE>
(11) Warrants
During 1998 and 1997, the Company issued warrants to purchase
approximately 40,000 and 332,000 shares of Class A Common Stock at an exercise
price of $2.00 and $0.92 per share respectively. The warrants expire in 2002
and 2003 and were issued in connection with obtaining financing of the senior
notes.
(12) Earnings Per Share
The following table reconciles basic and diluted earnings per share
for the years ended December 31, 1998, 1997, and 1996 (in thousands, except per
share data):
1998 1997 1996
-------- ------- -------
Net income per income statement (a) $ 3,797 $ 64 $ 1,027
Less:
Cumulative redeemable preference dividends 280 128 --
Redeemable preferred stock liquidation
preference accretion 60 40 --
Cumulative and redeemable preferred stock
discount amortization 80 45 --
-------- ------- -------
Net income applicable to common stockholders 3,377 (149) 1,027
Add:
Interest charges applicable to convertible debt 44 -- --
-------- ------- -------
Net income applicable to common stockholders and
assumed conversions $ 3,421 $ (149) $ 1,027
======== ======= =======
Basic Earnings Per Share:
Weighted average common shares
outstanding-basic (b) 14,341 10,915 5,526
======== ======= =======
Net income (loss) per common share-basic $ 0.24 $ (0.01) $ 0.19
======== ======= =======
Diluted Earnings Per Share:
Weighted average common shares
outstanding-basic (b) 14,341 10,915 5,526
Net effect of dilutive stock options 282 -- --
Net effect of warrants 205 -- --
Net effect of convertible notes 100 -- --
-------- ------- -------
Total weighted average common shares
outstanding-diluted (b) 14,928 10,915 5,526
======== ======= =======
Net income (loss) per common share-diluted (c) $ 0.23 $ (0.01) $ 0.19
======== ======= =======
- ---------------------------------------
(a) Net income for 1996 is presented on a pro forma basis to reflect net income
that would have been reported if the Company had been a C Corporation
instead of an S Corporation for the year ended December 31, 1996. See Note
13 on Income Taxes.
F-17
<PAGE>
(b) Since the capital structure of the Price Dealerships prior to the
combination is not comparable to the capital structure subsequent to the
combination, the number of weighted average shares, both basic and diluted,
for 1996 is presented based on the 5,526,000 shares issued to the Price
Dealership stockholders in the Combination.
(c) In 1997, diluted earnings per share does not include dilutive securities,
such as options and warrants, as their inclusion would be anti-dilutive for
1997.
(13) Income Taxes
On January 1, 1997, the Company terminated its S Corporation election
and elected C Corporation status. This change in tax status resulted in the
immediate recognition of $214,000 in net deferred tax assets. In connection
with the change in tax status, the Company changed its method of valuing
inventories from the last-in first-out ("LIFO") method to the specific
identification method. This change resulted in a tax liability of $1.4 million
and is payable equally over the next six years ("LIFO recapture").
Income tax expense (benefit) consists of the following (in thousands):
Years Ended December 31,
-------------------------
1998 1997
--------- ----------
Current
Federal $ 2,795 $ 625
State 728 170
--------- ----------
Total Current 3,523 795
Deferred
Federal (523) (306)
State (136) (43)
--------- ----------
Total Deferred (659) (349)
--------- ----------
Total $ 2,864 $ 446
========= ==========
The income tax rate on pre-tax income differed from the federal
statutory rate as follows:
Years Ended December 31,
-------------------------------------
1998 1997 1996
------- -------- --------
Computed tax expense 34% 34% 34%
State taxes 6% 25% --
Permanent difference 2% -- --
S Corporation status -- -- (31%)
Change in tax status to C
corporation including LIFO
recapture -- (42%) --
Non-deductible stock -- 56% --
compensation
Other 1% 15% --
------- -------- --------
Total 43% 88% 3%
======= ======== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of December
31, are presented below (in thousands):
F-18
<PAGE>
Deferred tax assets: 1998 1997
-------- --------
Extended warranty service contracts $ 1,001 $ 1,184
State taxes 217 58
Accrued bonuses and vacation 624 204
Allowance for doubtful accounts 210 132
Other accrued liabilities 306 32
-------- --------
Total deferred tax assets 2,358 1,610
Deferred tax liabilities:
Acquired tax basis difference (1,210) --
LIFO recapture (988) (1,160)
Other (362) (101)
-------- --------
Total deferred tax liabilities (2,560) (1,261)
-------- --------
Net deferred tax (liabilities)
assets $ (202) $ 349
======== ========
Pro Forma Income Taxes
Prior to January 1, 1997, the Company was an S Corporation. The
following unaudited pro forma provision for income taxes reflects the components
of income tax expense that would have been reported if the Company had been a C
Corporation for the year ended December 31, 1996 (in thousands):
Federal State Total
------- ----- -----
Year ended December 31, 1996 $592 $122 $714
======= ===== =====
(14) Employee Benefit Plans
Substantially all of the employees of the Company are eligible to
participate in the FirstAmerica Automotive, Inc. Retirement Savings Plan ("the
Plan"), a defined contribution plan, after meeting minimum service requirements.
Employees of acquired companies are eligible to join the Plan if or when the
minimum service criteria has been met. Service completed at the time of
acquisition will apply towards the meeting of the criteria. The Company has
recorded matching contributions in the amount of approximately $440,000,
$334,000, and $196,000, in 1998, 1997 and 1996, respectively.
(15) Related Party Transactions
Accounts Receivable
The Company had accounts receivable from related parties of $2.5 million at
December 31, 1998. Of this amount, $2.4 million relates to a receivable from the
Chief Executive Officer of the Company related to leasehold improvements paid by
the Company on a building the Company leases from the CEO. The Company was
subsequently reimbursed for the original cost of the leasehold improvements in
January 1999. The remaining $0.1 million relates to an advance to an executive.
Operating Leases
The Company leases facilities under various agreements from a Trust
affiliated with the Chief Executive Officer ("CEO") of the Company, and from
partnerships in which the Chairman of the Company and the CEO are partners.
During 1997, a partnership in which the Chairman of the Company is a partner
purchased a facility leased by the Company. As part of the acquisition, the
partnership reimbursed the Company $0.8 million for leasehold improvements.
F-19
<PAGE>
These leases have an initial term of 15 years and are renewable at the
option of the Company. Selling, general and administrative expense includes
related party rental expense of $4.6 million, $2.3 million, and $1.7 million in
1998, 1997, and 1996, respectively.
Acquisitions
On June 1998, the Company acquired substantially all of the operating
assets of a Honda automobile dealership located in Daly City, California. The
purchase price was partially financed by the proceeds of a $4.0 million loan
from the Chairman of the Company's Board of Directors to the Company. Pursuant
to the terms of a Letter of Agreement, the Chairman is entitled to a 3%
origination fee on the loan, and the Company will be responsible for interest
payments to the commercial bank that made a $4.0 million personal loan to the
Chairman. The principal amount is due at the earlier of June 1, 1999 or upon
the refinancing and/or equity offering of either preferred or common shares in
the Company. The Company believes the terms of the origination fee paid to the
Chairman are no less favorable to the Company than those arranged with other
parties. The $4.0 million loan outstanding at December 31, 1998 is included in
other notes payable in the accompanying condensed consolidated financial
statements. As of December 31, 1998 the origination fee in the amount of
$120,000 is outstanding and is included in accrued liabilities in the
accompanying financial statements.
On October 1, 1998, the Company completed the acquisition of an
authorized Toyota automobile dealership. Pursuant to a Stock Purchase Agreement
dated July 17, 1998, the Company acquired all of the outstanding capital stock
from the Seller. The Seller's trustee is the father of an officer of the
Company. The Company believes it purchased the Corporation under terms no less
favorable to the Company than those arranged with other parties. In connection
with the acquisition, the Company issued options to purchase 100,000 shares of
Class A Common Stock at an exercise price of $2.00 per share to the officer of
the Company as a finders fee, in accordance with the terms of his employment
agreement with the Company.
During 1997, the Company issued 1.3 million shares of its Class A Common
Stock in exchange for substantially all the operating assets of a dealership
owned by the Chairman of the Company. The Chairman was indebted to the Company
in the amount of approximately $500,000 as a result of this transaction, which
was subsequently paid.
During 1997, the Company acquired substantially all the operating
assets of a dealership owned by an officer of the Company for $2.9 million.
The Company believes it purchased the dealerships acquired from related
parties under terms no less favorable than those arranged with other parties.
Management Services
In July 1997, a Company affiliated with the CEO provided management
services to the Company. Selling, general and administrative expense includes
approximately $0.8 million and $1.8 million for the years ended December 31,
1997 and 1996, respectively for data processing, executive compensation,
professional, and other services.
Legal Services
A law firm, in which one of the Directors of the Company is a partner,
provides legal services to the Company which amounted to approximately $0.4
million in both 1998 and 1997.
Notes Payable
The Company had $0.6 million of convertible notes payable due to
stockholder at December 31, 1998 and 1997, respectively. These notes are
convertible into Class A Common Stock at $4.00 per share.
F-20
<PAGE>
(16) Operating Segments
The Company operates primarily in the automotive segment in California. The
Company sells new vehicles, used vehicles, light trucks, and replacement parts.
In addition, it provides vehicle maintenance and repair services, and arranges
related financing and warranty products for its automotive customers.
To supplement its core business, the Company acquired on December 31,
1998 a software company, Auto Town, that provides software products and services
to automobile dealerships. The acquisition was accounted for as a purchase, and
the results of operations were not included prior to December 31, 1998.
(17) Commitments and Contingencies
Operating and Capital Leases
All of the Company's operations are conducted in leased facilities.
The Company leases certain facilities from certain officers of the Company (see
Note 15). The minimum future rental payments by the Company as of December 31,
1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Leases
------------------------------
Years ending December 31, Related Parties Other Capital Leases
- ---------------------------------------- --------------- ------------ ---------------
<S> <C> <C> <C>
1999 $ 5,024 $5,964 $ 177
2000 5,125 5,617 177
2001 5,300 5,006 177
2002 5,124 4,540 177
2003 5,129 4,409 154
Thereafter 33,371 19,616 --
------- ------- -----
Total minimum lease payments $59,073 $45,152 862
======= =======
Less amount representing interest (159)
-----
Present value of net minimum lease payments $ 703
=====
</TABLE>
The current portion of capital lease payments of $122,000 is included
in notes payable and other in the accompanying consolidated financial
statements.
The non-current portion of the capital leases of $581,000 and the non-
current portion of an equipment financing loan of $805,000, which bears interest
at 8.25% and amortizes monthly expiring in December 2002, are included in
capital lease obligation and equipment loan in the accompanying financial
statements .
Rental expense for operating leases was $9.0 million, $5.8 million,
and $2.8 million in 1998, 1997 and 1996, respectively.
Litigation
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position or the future results of operations and cash flows.
(18) Combination and Related Expenses
During 1997, the Company incurred $2.3 million in certain legal,
accounting, consulting and compensation expenses associated with the combination
and development of its organization and business plan. There were no
combination and related expenses in 1998.
(19) Subsequent Event
In March 1999, the Company sold the operating assets of Serramonte GMC to
the manufacturer and recorded net proceeds of approximately $1.7 million.
(20) Summary of Quarterly Financial Data (Unaudited)
F-21
<PAGE>
The following table summarizes the Company's results of operations as
presented in the Consolidated Statements of Income by quarter for 1998 and 1997
(in thousands, except per share data).
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------
Year Ended December 31, 1998
- -------------------------------------------------------------------------------
Total sales $160,617 $183,051 $223,486 $215,917
Gross profit 24,418 28,911 33,739 32,101
Operating income 3,361 4,563 5,552 4,138
Income before income taxes 1,290 1,902 2,812 657
Net income 735 1,084 1,603 375
Net income per share - diluted 0.04 0.07 0.10 0.02
Year Ended December 31, 1997
- -------------------------------------------------------------------------------
Total sales $ 93,024 $ 97,050 $139,172 $144,802
Gross profit 12,433 13,616 19,275 22,428
Operating income 1,093 (518) 2,131 3,339
Income before income taxes 271 (1,441) 416 1,264
Net income (loss) 34 (179) 51 158
Net income (loss) per share - diluted 0.01 (0.02) 0 0
F-22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRSTAMERICA AUTOMOTIVE, INC.
Dated: March 31, 1999 By: /s/ THOMAS A. PRICE
-------------------------------------
Thomas A. Price
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears above constitutes and appoints Thomas A. Price and Debra Smithart his
true and lawful attorney-in-fact and agent, with full power of substitution and,
for him and in his name, place and stead, in any and all capacities to sign any
and all amendments to this Report on Form 10-K, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE
CAPACITIES AND ON THE DATES INDICATED.
Dated: March 31, 1999 By: /s/ THOMAS A. PRICE
---------------------------------------
Thomas A. Price
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Dated: March 31, 1999 By: /s/ DEBRA SMITHART
---------------------------------------
Debra Smithart
Chief Financial Officer
(Principal Financial and Principal
Accounting Officer)
Dated: March 31, 1999 By: /s/ DONALD V. STROUGH
---------------------------------------
Donald V. Strough
Chairman of the Board of Directors
Dated: March 31, 1999 By: /s/ W. BRUCE BERCOVICH
---------------------------------------
W. Bruce Bercovich
Director
Dated: March 31, 1999 By: /s/ JEAN MARC CHAPUS
---------------------------------------
Jean Marc Chapus
Director
Dated: By:
---------------------------------------
Robert Heller
Director
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(a) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
The Registrant has not provided an annual report to stockholders
covering its fiscal year ended December 31, 1998 nor has it sent a proxy
statement to its stockholders with respect to any annual or special meeting of
stockholders.
51
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
Schedule II - Valuation and Qualifying Accounts
Years Ended December 31, 1998, 1997, 1996
<TABLE>
<CAPTION>
Balance at Balance at
Beginning Charge to End
of Period Income of Period
('000s) ('000s) ('000s)
---------- --------- ----------
<S> <C> <C> <C>
For the year ended 12/31/98
Allowance for doubtful accounts $ 320 $ 89 $ 409
========== ========= ==========
For the year ended 12/31/97
Allowance for doubtful accounts 182 138 320
========== ========= ==========
For the year ended 12/31/96
Allowance for doubtful accounts 106 76 182
========== ========= ==========
</TABLE>
52
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
EXHIBITS
TO
FORM 10-K ANNUAL REPORT
For the Year Ended
December 31, 1998
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
2.1.1* Agreement and Plan of Reorganization dated July 1, 1997
by and among the Company, California Carriage, Ltd.,
dba Concord Honda and Donald V. Strough, Trustee of the
Strough 1983 Revocable Trust.
2.1.2* Agreement and Plan of Reorganization dated July 1, 1997
by and among the Company, Price Auto Holding, Inc., dba
Melody Toyota, Price Trust utd 10/5/84, Fred Cziska and
FAA San Bruno, Inc.
2.1.3* Agreement and Plan of Reorganization dated July 1, 1997
by and among the Company, Serramonte Motorcars, Inc.,
dba Lexus of Serramonte, Price Trust utd 10/5/84, Fred
Cziska, John Driebe and FAA Serramonte L, Inc.
2.1.4* Agreement and Plan of Reorganization dated July 1, 1997
between the Company, Cziska Price, Inc., dba Stevens
Creek Nissan, the shareholders of Cziska Price, Inc.
and FAA Stevens Creek, Inc.
2.1.5* Agreement and Plan of Reorganization dated July 1, 1997
between the Company, Transcar Leasing, Inc., dba
Serramonte Auto Plaza, the shareholders of Transcar
Leasing, Inc. and FAA Serramonte GM, Inc.
2.1.6* Asset Purchase Agreement dated March 14, 1997 by and
among FAA Concord N, Inc., Concord Nissan, Inc. and
Steven Hallock.
2.1.7* Stock Purchase Agreement dated July 1, 1997, by and
between the Company, The Price Trust u/t/d 10/5/84 and
Smart Nissan, Inc.
2.1.8* Asset Purchase Agreement dated March 19, 1997 by and
between the Company and Asian Pacific Industries, Inc.
2.1.9* Asset Purchase Agreement dated January 23, 1997 by and
among the Company, Auto Center of Poway, Inc., Thomas
Nokes and H. Matthew Travis.
2.1.10* Asset Purchase Agreement dated January 23, 1997 by and
among the Company, Auto Center of North County, Inc.,
Thomas Nokes and H. Matthew Travis.
2.1.11** Asset Purchase Agreement dated January 29, 1998 by and
among the Company, Burgess British Cars, Inc., and
Keith Burgess.
2.1.12** Letter of Agreement dated June 11, 1998 by and between
the Company and Donald V. Strough.
53
<PAGE>
2.1.13*** Asset Purchase Agreement dated January 1998 by and
among the Company, Beverly Hills BM, Ltd., dba Beverly
Hills BMW ("Seller"), and Ross Gilbert.
2.1.14*** Asset Purchase Agreement dated July 17, 1997 by and
among the Company, Golden Sierra Auto Group, dba
Capitol Nissan and Capman, Inc.
2.1.15+ Stock Purchase Agreement dated July 17, 1998, by and
between Graybehl Family Trust utd 3/22/78, Concord
Toyota Sales, Inc., and the Company.
2.1.16+ First Amendment to Stock Purchase Agreement dated
October 1, 1998, by and between the Company, Vacation
Motors, and the Graybehl Family Trust utd 3/22/78.
2.1.17+ Second Amendment to Stock Purchase Agreement dated
October 13, 1998 by and between the Company, Vacation
Motors, and the Graybehl Family Trust utd 3/22/78.
2.1.18++ Agreement and Plan of Reorganization, dated December 8,
1998, among the Company, DSW Acquisition Corporation,
DSW Associates, Inc., and certain shareholders of DSW
Associates, Inc.
3.1* Amended and Restated Certificate of Incorporation,
dated July 8, 1997.
3.2+++ By-Laws.
4.1* Stockholders' Agreement dated July 11, 1997 by and
among the Company and its stockholders, Thomas Price,
Donald Strough, Steven Hallock, Fred Cziska, Al
Babbington, John Driebe, Embarcadero Automotive, LLC,
Raintree Capital LLC, BB Investments and certain
affiliates of Trust Company of the West.
4.1.1+++ Amendment No. 1 to Stockholders Agreement dated as of
October 13, 1998, by and among the Company, Thomas A.
Price, Donald Stough and certain affiliates of Trust
Company of the West.
4.1.2* Securities Purchase Agreement dated as of July 11, 1997
by and among the Company, certain of its wholly-owned
subsidiaries and Trust Company of the West and certain
of its affiliates, as purchasers.
4.1.3* Amendment No. 1 to Securities Purchase Agreement dated
as of January 9, 1998 by and among each of FAA Capitol
N, Inc., FAA Auto Factory, Inc. and each of the parties
to the Securities Purchase Agreement dated as of July
11, 1997.
4.1.4+++ Amendment No. 2 to Securities Purchase Agreement, dated
as of June 10, 1998, by and among each of FAA Beverly
Hills, Inc., FAA Poway G, Inc., FAA Serramonte H, Inc.
and each of the parties to the Securities Purchase
Agreement dated as of July 11, 1997.
4.1.5+++ Amendment No. 3 to Securities Purchase Agreement, dated
as of October 13, 1998, by and among each of FAA
Concord T, Inc., a California corporation and each of
the parties to the Securities Purchase Agreement dated
as of July 11, 1997.
54
<PAGE>
4.1.6+++ Amendment No. 4 to Securities Purchase Agreement, dated
as of November 19, 1998, by and among each of FAA
Woodland Hills VW, Inc. and each of the parties to the
Securities Purchase Agreement dated as of July 11,
1997.
4.1.7+++ Amendment No. 5 to Securities Purchase Agreement, dated
as of December 31, 1998, by and among each of DSW
Associates, Inc. and each of the parties to the
Securities Purchase Agreement dated as of July 11,
1997.
4.1.8 Amendment No. 6 to Securities Purchase Agreement, dated
as of December 31, 1998, by and among each of the
parties to the Securities Purchase Agreement dated
as of July 11, 1997, as amended.
10.1* Loan and Security Agreement by and between General
Electric Capital Corporation, and 13 subsidiaries of
the Company dated as of July 2, 1997.
10.1.1* Intercreditor and Subordination Agreement dated as of
July 8, 1997 by and among TCW/Crescent Mezzanine
Partners, L.P., TCW/Crescent Mezzanine Trust,
TCW/Crescent Mezzanine Investment Partners, L.P., and
General Electric Capital Corporation.
10.2* Agreement between American Honda Motor Co., Inc. and
the Company dated as of May 1, 1997 by and among the
Company, Donald V. Strough, Thomas A. Price, Steven S.
Hallock, Fred Cziska, Al Babbington, John Driebe,
Raintree Capital, LLC, BB Investments, Brown Gibbons &
Lang, L.P. and American Honda Motor Co., Inc.
10.2.1 Honda Automobile Dealer Sales and Service Agreement
dated as of September 15, 1998 by and between the
Company and American Honda Motor Co., Inc.
10.3* Nissan Dealer Agreement Sales and Service Agreement
Standard Provisions, dated as of July 16, 1997 by and
between Nissan Division, Nissan Motor Corporation in
U.S.A. and the Company.
10.3.1* Nissan Dealer Term Sales and Service Agreement dated
June 30, 1997 by and between Nissan Motor Corporation
in U.S.A. and FAA Serramonte, Inc.
10.3.2* Nissan Contiguous Market Ownership Holding Company
Agreement dated June 30, 1997 by and among Nissan Motor
Corporation in U.S.A., the Company, FAA Concord N,
Inc., and FAA Dublin N, Inc.
10.3.3* Nissan Dealer Term Sales and Service Agreement dated as
of July 16, 1997 by and between Nissan Motor
Corporation in U.S.A. and FAA Dublin N, Inc.
10.3.4* Nissan Contiguous Market Ownership Addendum dated July
16, 1997 by and among Nissan Motor Corporation in
U.S.A., Thomas A. Price, FAA Dublin N, Inc. and the
Company.
10.3.5* Nissan Contiguous Market Ownership Areas Formation and
Linkage Agreement dated June 30, 1997 by and between
Nissan Motor Corporation in U.S.A. and the Company (FAA
Dublin N, Inc.).
10.3.6* Nissan Dealer Term Sales and Service Agreement dated
June 30, 1997 by and between Nissan Motor Corporation
in U.S.A. and Smart Nissan, Inc.
10.3.7* Nissan Contiguous Market Ownership Addendum dated June
30, 1997 by and among Nissan Motor Corporation in
U.S.A., Thomas A. Price, Smart Nissan, Inc. and the
Company.
55
<PAGE>
10.3.8* Nissan Contiguous Market Holding Company Agreement
dated June 30, 1997 by and between Nissan Motor
Corporation in U.S.A. and the Company (Smart Nissan,
Inc.; FAA Serramonte, Inc.).
10.3.9* Nissan Contiguous Market Ownership Areas Formation and
Linkage Agreement dated June 30, 1997 by and between
Nissan Motor Corporation in U.S.A. and the Company
(Smart Nissan, Inc.).
10.3.10* Nissan Contiguous Market Ownership Addendum dated June
30, 1997 by and among Nissan Motor Corporation in
U.S.A., Thomas A. Price, FAA Serramonte, Inc., and the
Company.
10.3.11* Nissan Contiguous Market Ownership Holding Company
Agreement dated June 30, 1997 by and between Nissan
Motor Corporation in U.S.A. and the Company (FAA
Serramonte, Inc.).
10.3.12* Nissan Dealer Term Sales and Service Agreement dated
June 30, 1997 by and between Nissan Motor Corporation
in U.S.A. and FAA Stevens Creek, Inc.
10.3.13* Nissan Contiguous Market Ownership Addendum dated June
30, 1997 by and among Nissan Motor Corporation in
U.S.A., Thomas A. Price, FAA Stevens Creek, Inc. and
the Company.
10.3.14* Nissan Contiguous Market Ownership Areas Formation and
Linkage Agreement dated June 30, 1997 by and between
Nissan Motor Corporation in U.S.A. and the Company (FAA
Stevens Creek, Inc.).
10.3.15* Nissan Dealer Term Sales and Service Agreement dated as
of September 25, 1997 by and between Nissan Motor
Corporation in U.S.A. and FAA Capitol N, Inc.
10.3.16* Nissan Contiguous Market Ownership Addendum dated
September 25, 1997 by and among Nissan Motor
Corporation in U.S.A., Thomas A. Price, FAA Capitol N,
Inc. and the Company.
10.3.17* Nissan Contiguous Market Ownership Holding Company
Agreement dated September 25, 1997 by and between
Nissan Motor Corporation in U.S.A. and the Company (FAA
Capitol N, Inc.).
10.3.18* Nissan Contiguous Market Ownership Addendum dated June
30, 1997 by and among Nissan Motor Corporation in
U.S.A., Thomas A. Price, FAA Concord N, Inc. and the
Company.
10.3.19* Nissan Dealer Term Sales and Service Agreement dated
June 30, 1997 by and between Nissan Motor Corporation
in U.S.A. and FAA Concord N, Inc.
10.3.20* Nissan Contiguous Market Ownership Areas Formation and
Linkage Agreement dated June 30, 1997 by and between
Nissan Motor Corporation in U.S.A. and the Company (FAA
Concord N, Inc.).
10.4* Toyota Dealer Agreement dated as of April 24, 1997 by
and between Toyota Motor Sales, U.S.A., Inc. and FAA
Poway T, Inc.
56
<PAGE>
10.4.1* Agreement dated as of May 2, 1997 between the Company
and Toyota Motor Sales, U.S.A., Inc.
10.4.2* Toyota Dealer Agreement dated as of June 30, 1997 by
and between the Company and Toyota Motor Sales, USA,
Inc.
10.4.3 Toyota Dealer Agreement (Concord Toyota) dated as of
October 1, 1998 by and between the Company and Toyota
Motor Sales, USA, Inc.
10.4.4* Lexus Dealer Agreement dated as of June 30, 1997
between Lexus and FAA Serramonte L, Inc.
10.5* Dealer Sales and Service Agreement dated as of June 13,
1997 by and between Mitsubishi Motor Sales of America,
Inc. and FAA Serramonte, Inc.
10.6* Isuzu Dealer Sales and Service Agreement effective May
1, 1997 by and between American Isuzu Motors, Inc. and
FAA Serramonte, Inc.
10.6.1* Supplemental Agreement to Dealer Sales and Service
Agreement dated as of May 1, 1997 by and among FAA
Serramonte, Inc. dba Serramonte Auto Plaza, the Company
and American Isuzu Motors, Inc.
10.7* Master Agreement dated as of July 1, 1997 between FAA
Serramonte, Inc. d/b/a Dodge of Serramonte; FAA Poway
D, Inc. d/b/a Poway Dodge; FAA Dublin VWD, Inc., d/b/a
Dublin Dodge; the Company; Thomas A. Price and Chrysler
Corporation.
10.7.1* Chrysler Corporation Dodge Sales and Services Agreement
dated as of May 1997 by and between FAA Poway D, Inc.,
dba Poway Dodge and Chrysler Corporation.
10.7.2* Chrysler Corporation Dodge Sales and Services Agreement
dated as of July 7, 1997 by and between FAA Serramonte
Inc. D, Inc., dba Dodge of Serramonte Dodge and
Chrysler Corporation.
10.7.3* Chrysler Corporation Dodge Sales and Services Agreement
dated as of July 18, 1997 between FAA Dublin VWD, Inc.,
dba Dublin Dodge and Chrysler Corporation.
10.8* Pontiac-GMC Division Pontiac Dealer Sales and Service
Agreement dated as of June 30, 1997 between General
Motors Corporation, Pontiac and Transcar Leasing, Inc.,
dba Serramonte Pontiac-Buick-GMC.
10.9* Lease Agreement dated as of September 18, 1997 by and
among Bay Automotive Properties, LLC, the Company and
FAA Capitol N, Inc.
10.9.1* Lease Agreement dated as of July 1, 1997 by and among
the Price Trust u/t/d 10/5/84, the Company and FAA
Serramonte L, Inc.
10.9.2* Lease Agreement dated as of April 15, 1998 by and among
Price Trust u/t/d 10/5/84, the Company and FAA
Serramonte H, Inc.
10.9.3* Lease Agreement dated as of July 1, 1997 among Price
Trust u/t/d 10/5/84, the Company and FAA Serramonte L,
Inc.
57
<PAGE>
10.9.4* Lease Agreement dated as of July 1, 1997 among Rosewood
Village Associates, the Company and California Carriage
Limited.
10.9.5* Lease dated as of July 1, 1997 among Rosewood Village
Associates, the Company and FAA Stevens Creek, Inc.
10.10* Executive Employment Agreement dated as of July 1, 1997
by and between the Company and Donald V. Strough.
10.10.1* Executive Employment Agreement dated as of July 1, 1997
by and between the Company and Thomas A. Price.
10.10.2 Executive Employment Agreement dated as of March 30,
1999 by and between the Company and Debra L. Smithart.
10.10.3 Executive Employment Agreement dated as of March 30,
1999 by and between the Company and Charles Oglesby.
10.10.4* Employment Agreement dated as of March 1, 1997 by and
between the Company and Steven S. Hallock.
10.10.6* Noncompetition Agreement dated as of July 8, 1997 by
and among Thomas A. Price, Donald Strough and the
Company.
10.11+++ FirstAmerica Automotive, Inc. 1997 Stock Option Plan.
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG, LLP.
24.1 Powers of attorney (included on signature page).
27.1 Financial Data Schedule.
- -------------
* As filed with the SEC in our annual report on Form 10-K for the Fiscal
Year ended December 31, 1997, filed on May 14, 1998.
** As filed with the SEC in our Current Report on Form 8-K filed on July 6,
1998.
*** As filed with the SEC in our Quarterly Report on Form 10-Q for the
Quarterly Period ended June 30, 1998, filed on August 14, 1998.
+ As filed with the SEC in our Current Report on Form 8-K filed on October
16, 1998.
++ As filed with the SEC in our Current Report on Form 8-K filed on January
14, 1999.
+++ As filed with the SEC in our Current Report on Form S-8 filed on March 16,
1999.
58
<PAGE>
EXHIBIT 4.1.8
AMENDMENT NO. 6
TO
SECURITIES PURCHASE AGREEMENT
This Amendment No. 6 to Securities Purchase Agreement (this
"Amendment") dated as of December 31, 1998 is entered into by and among each of
---------
the parties to the Securities Purchase Agreement dated as of July 11, 1997 (the
"Securities Purchase Agreement") by and among FirstAmerica Automotive, Inc., a
-----------------------------
Delaware corporation (the "Company"), the Guarantors (as defined therein) and
-------
the purchasers listed on the signature pages thereto, as amended.
WHEREAS, the parties hereto desire to amend certain provisions of the
Securities Purchase Agreement.
NOW, THEREFORE, in consideration of the foregoing, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
Section 1. Definitions. For all purposes of this Amendment:
-----------
(a) Capitalized terms used but not defined herein shall have the
respective meanings assigned to such terms in the Securities Purchase
Agreement; and
(b) The terms "hereby," "hereto," "hereof" and "herewith" and other
words of similar import refer to this Amendment.
Section 2. Minimum Consolidated Interest Expense Coverage Ratio. Section
----------------------------------------------------
5.12 of the Securities Purchase Agreement is hereby amended and restated in its
entirety to read as follows:
5.12 Minimum Consolidated Interest Expense Coverage Ratio.
----------------------------------------------------
The Company shall not permit its Consolidated Interest Expense
Coverage Ratio for the four fiscal quarters ending on or about the
date listed below, to be less than the correlative levels for such
dates shown below; provided, that for the September 30, 1997, December
31, 1997 and March 31, 1998 Measurement Dates, the Consolidated
Interest Expense Coverage Ratio shall be calculated for the one, two,
and three fiscal quarters, respectively, ending on such dates.
<TABLE>
<CAPTION>
Measurement Date Minimum Ratio
---------------- -------------
<S> <C>
September 30, 1997 2.0
December 31, 1997 2.0
March 31, 1998 2.1
June 30, 1998 2.1
September 30, 1998 2.2
December 31, 1998 1.9
March 31, 1999 1.9
June 30, 1999 2.3
September 30, 1999 2.4
December 31, 1999 2.4
March 31, 2000 2.5
June 30, 2000 and thereafter 2.6
</TABLE>
<PAGE>
Section 3. Definition of Consolidated Interest Expense Coverage Ratio. The
----------------------------------------------------------
definition of the term "Consolidated Interest Expense Coverage Ratio" appearing
in Section 9.1 of the Securities Purchase Agreement is hereby amended by
inserting the following provision at the end of such definition:
Notwithstanding any provision hereof to the contrary, for the
sole purpose of calculating the Company's Consolidated Interest
Expense Coverage Ratio for the year ended December 31, 1998, the term
"Capital Expenditures" shall not include the aggregate amount of
capital expenditures that is both (i) made by the Company for
leasehold improvements to its corporate headquarters located at 601
Brannan Street, San Francisco, California and (ii) fully reimbursed
to the Company in cash by Thomas A. Price on or prior to January 31,
1999.
Section 4. Miscellaneous.
-------------
(a) THIS AMENDMENT AND ALL ISSUES HEREUNDER SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA
(WITHOUT REFERENCE TO PRINCIPLES OF CONFLICTS OF LAW).
(b) Upon the execution and delivery of this Amendment, the Securities
Purchase Agreement shall be amended in accordance herewith and this
Amendment shall form a part of the Securities Purchase Agreement for all
purposes, and the parties hereto and every Holder shall be bound by the
Securities Purchase Agreement, as so amended.
(c) This Amendment may be executed in as many counterparts as may be
deemed necessary and convenient, and by the different parties hereto on
separate counterparts each of which, when so executed, shall be deemed an
original, but all such counterparts shall constitute one and the same
instrument.
(d) The Section headings of this Amendment are for convenience of
reference only and shall not be deemed to modify, explain, restrict, alter
or affect the meaning or interpretation of any provision hereof.
[Signatures Follow]
2
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed by the
parties set forth below as of the date first written above.
Company:
-------
FIRSTAMERICA AUTOMOTIVE, INC.
By: /s/Debra Smithart
-----------------------------
Name: Debra Smithart
---------------------------
Title: Chief Financial Officer
--------------------------
3
<PAGE>
Guarantors:
- --------------------------------------
FAA SAN BRUNO, INC. FAA STEVENS CREEK, INC.
By: /s/ Thomas A. Price By: /s/ Thomas A. Price
--------------------------- -----------------------------
Name: Thomas A. Price Name: Thomas A. Price
------------------------- ---------------------------
Title: President Title: President
------------------------ --------------------------
SMART NISSAN, INC. FAA DEALER SERVICES, INC.
By: /s/ Thomas A. Price By: /s/ Thomas A. Price
--------------------------- -----------------------------
Name: Thomas A. Price Name: Thomas A. Price
------------------------- ---------------------------
Title: President Title: President
------------------------ --------------------------
TRANSCAR LEASING, INC. FAA CONCORD H, INC.
By: /s/ Thomas A. Price By: /s/ Thomas A. Price
--------------------------- -----------------------------
Name: Thomas A. Price Name: Thomas A. Price
------------------------- ---------------------------
Title: President Title: Vice-President
------------------------ --------------------------
FAA CONCORD N, INC. FAA CONCORD T, INC.
By: /s/ Thomas A. Price By: /s/ Thomas A. Price
--------------------------- -----------------------------
Name: Thomas A. Price Name: Thomas A. Price
------------------------- ---------------------------
Title: President Title: President
------------------------ --------------------------
FAA POWAY D, INC. FAA POWAY T, INC.
By: /s/ Thomas A. Price By: /s/ Thomas A. Price
--------------------------- -----------------------------
Name: Thomas A. Price Name: Thomas A. Price
------------------------- ---------------------------
Title: President Title: President
------------------------ --------------------------
FAA POWAY H, INC. FAA DUBLIN VWD, INC.
By: /s/ Thomas A. Price By: /s/ Thomas A. Price
--------------------------- -----------------------------
Name: Thomas A. Price Name: Thomas A. Price
------------------------- ---------------------------
Title: Vice-President Title: President
------------------------ --------------------------
FAA DUBLIN N, INC. FAA SERRAMONTE H, INC.
By: /s/ Thomas A. Price By: /s/ Thomas A. Price
--------------------------- -----------------------------
Name: Thomas A. Price Name: Thomas A. Price
------------------------- ---------------------------
Title: President Title: Vice-President
------------------------ --------------------------
4
<PAGE>
FAA SERRAMONTE L, INC. FAA SERRAMONTE, INC.
By: /s/ Thomas A. Price By: /s/ Thomas A. Price
--------------------------- -----------------------------
Name: Thomas A. Price Name: Thomas A. Price
------------------------- ---------------------------
Title: President Title: President
------------------------ --------------------------
FAA BEVERLY HILLS, INC. FAA AUTO FACTORY, INC.
By: /s/ Thomas A. Price By: /s/ Thomas A. Price
--------------------------- -----------------------------
Name: Thomas A. Price Name: Thomas A. Price
------------------------- ---------------------------
Title: President Title: President
------------------------ --------------------------
FAA CAPITOL N, INC. DSW & ASSOCIATES, INC.
By: /s/ Thomas A. Price By: /s/ Thomas A. Price
--------------------------- -----------------------------
Name: Thomas A. Price Name: Thomas A. Price
------------------------- ---------------------------
Title: President Title: President
------------------------ --------------------------
FAA WOODLAND HILLS VW, INC. DEALERSOFT TECHNOLOGIES CORPORATION
By: /s/ Thomas A. Price By: /s/ Thomas A. Price
--------------------------- -----------------------------
Name: Thomas A. Price Name: Thomas A. Price
------------------------- ---------------------------
Title: President Title: President
------------------------ --------------------------
5
<PAGE>
Holders
- -------
TCW/CRESCENT MEZZANINE PARTNERS, L.P.
TCW/CRESCENT MEZZANINE TRUST
TCW/CRESCENT MEZZANINE INVESTMENT PARTNERS, L.P.
By: TCW/CRESCENT MEZZANINE, L.L.C.,
its general partner or managing owner
By: /s/ Jean-Marc Chapus
------------------------------
Name: Jean-Marc Chapus
----------------------------
Title: President
---------------------------
TCW LEVERAGED INCOME TRUST, L.P.
By: TCW ADVISORS (BERMUDA), LIMITED,
as General Partner
By: /s/ Mark L. Attanasio
------------------------------
Name: Mark L. Attanasio
----------------------------
Title: Group Managing Director
---------------------------
By: TCW INVESTMENT MANAGEMENT COMPANY,
as Investment Advisor
By: /s/ Jean-Marc Chapus
------------------------------
Name: Jean-Marc Chapus
----------------------------
Title: Managing Director
---------------------------
6
<PAGE>
TCW LEVERAGED INCOME TRUST II, L.P.
By: TCW (LINC II), L.P.,
as General Partner
By: TCW ADVISORS (BERMUDA), LIMITED,
as General Partner
By: /s/ Mark L. Attanasio
------------------------------
Name: Mark L. Attanasio
----------------------------
Title: Group Managing Director
---------------------------
By: TCW INVESTMENT MANAGEMENT COMPANY,
as Investment Advisor
By: /s/ Jean-Marc Chapus
------------------------------
Name: Jean-Marc Chapus
----------------------------
Title: Managing Director
---------------------------
CRESCENT/MACH I PARTNERS, L.P.
By: TCW ASSET MANAGEMENT COMPANY,
as investment manager and attorney-in-fact
By: /s/ Jean-Marc Chapus
------------------------------
Name: Jean-Marc Chapus
----------------------------
Title: Managing Director
---------------------------
By: /s/ Mark L. Attansio
------------------------------
Name: Mark L. Attansio
----------------------------
Title: Group Managing Director
---------------------------
TCW SHARED OPPORTUNITY FUND II, L.P.
By: TCW INVESTMENT MANAGEMENT COMPANY,
its investment advisor
By: /s/ Jean-Marc Chapus
------------------------------
Name: Jean-Marc Chapus
----------------------------
Title: Managing Director
---------------------------
By: /s/ Mark L. Attansio
------------------------------
Name: Mark L. Attansio
----------------------------
Title: Group Managing Director
---------------------------
7
<PAGE>
EXHIBIT 10.2.1
[HONDA LOGO APPEARS HERE]
AUTOMOBILE DEALER
SALES AND SERVICE
AGREEMENT
FAA Serramonte H, Inc. dba
HONDA OF SERRAMONTE #208176
485 Serramonte Boulevard
Colma, California 94014
AMERICAN HONDA MOTOR CO., INC.
<PAGE>
A
This is an agreement between the Honda Automobile Division, American Honda
Motor Co., Inc. (American Honda) and FAA Serramonte H Inc. (Dealer), a(n)
---------------------
California corporation doing business as HONDA OF SERRAMONTE. By this agreement,
- ---------------------- -------------------
which is made and entered into at Torrance , California, effective the 15th day
-------- ---------- ----
of September, 1998, American Honda gives to Dealer the nonexclusive right to
--------- --
sell and service Honda Products at the Dealership Location. It is the purpose of
this Agreement, including the Honda Automobile Dealer Sales and Service
Agreement Standard Provisions (Standard Provisions), which are incorporated
herein by reference, to set forth the rights and obligations which Dealer will
have as a retail seller of Honda Products. Achievement of the purposes of this
Agreement is premised upon the mutual understanding and cooperation between
American Honda and Dealer. American Honda and Dealer have each entered into this
Agreement in reliance on the integrity and ability and expressed intention of
each to deal fairly with the consuming public and with each other.
For consistency and clarity, terms which are used frequently in this
Agreement have been defined in Article 12 of the Standard Provisions.
B
American Honda grants to Dealer the nonexclusive right to buy Honda
Products and to identify itself as a Honda dealer at the Dealership Location.
Dealer assumes the obligations specified in this Agreement and agrees to sell
and service effectively Honda Products within Dealer's Primary Market Area and
to maintain premises satisfactory to American Honda.
C
Dealer covenants and agrees that this Agreement is personal to Dealer, to
the Dealer Owner, and to the Dealer Manager, and American Honda has entered into
this Agreement based upon their particular qualifications and attributes and
their continued ownership or participation in Dealership Operations. The parties
therefore recognize that the ability of Dealer to perform this Agreement
satisfactorily and the Agreement itself are both conditioned upon the continued
active involvement in or ownership of Dealer by either:
(1.) the following person(s) in the percentage(s) shown:
<TABLE>
<CAPTION>
PERCENT OF
NAME ADDRESS TITLE OWNERSHIP
<S> <C> <C> <C>
First America Automotive, Inc. 100%
(see "Exhibit A")
</TABLE>
<PAGE>
(2.)
---------------------------------------------------------------------
an individual personally owning an interest in Dealer of at least 25%
and who has presented to American Honda a firm and binding contract
giving to him the right and obligation of acquiring an ownership
interest in Dealer in excess of 50% within five years of the
commencement of Dealership Operations and being designated in that
contract as Dealer operator.
D
Dealer represents, and American Honda enters into this Agreement in
reliance upon the representation, that James D. Evans exercises the functions of
--------------
Dealer Manager and is in complete charge of Dealership Operations with authority
to make all decisions on behalf of Dealer with respect to Dealership Operations.
Dealer agrees that there will be no change in Dealer Manager without the prior
written approval of American Honda.
E
American Honda has approved the following premise as the location(s) for
the display of Honda Trademarks and for Dealership Operations.
HONDA NEW VEHICLE PARTS AND SERVICE FACILITY
SALES SHOWROOM
485 Serramonte Blvd. 485 Serramonte Blvd.
Colma, California Colma, California
SALES AND GENERAL OFFICES USED VEHICLE DISPLAY
AND SALES FACILITIES
485 Serramonte Blvd. 485 Serramonte Blvd.
Colma, California Colma, California
F
There shall be no voluntary or involuntary change, direct or indirect, in
the legal or beneficial ownership or executive power or responsibility of Dealer
for the Dealership Operations, specified in Paragraphs C and D hereof, without
the prior written approval of American Honda.
<PAGE>
G
Dealer agrees to maintain, solely with respect to the Dealership
Operations, minimum net working capital of $950,300.00, minimum owner's equity
----------
of $ * , and flooring and a line or lines of credit in the aggregate amount of
----
$3,180,000.00 with banks or financial institutions approved by American Honda
------------
for use in connection with Dealer's purchases of and carrying of inventory of
Honda Products, all of which American Honda and Dealer agree are required to
enable Dealer to perform its obligations pursuant to this Agreement. If Dealer
also carries on another business or sells other products, Dealer's total net
working capital, owner's equity and lines of credit shall be increased by an
appropriate amount.
* Long Term Debt, less Real Estate Mortgages, shall not exceed a ratio of 1:1
when compared to Effective Net Worth which is defined as Total Net Worth less
Total Other Assets.
H
This Agreement is made for the period beginning September 15, 1998
-----------------------
and ending June 30, 2000 , unless sooner terminated. Continued dealings between
---------------
American Honda and Dealer after the expiration of this Agreement shall not
constitute a renewal of this Agreement for a term, but rather shall be on a day-
to-day basis, unless a new agreement or a renewal of this Agreement is fully
executed by both parties.
I
This Agreement may not be varied, modified or amended except by an
instrument in writing, signed by duly authorized officers of the parties,
referring specifically to this Agreement and the provision being modified,
varied or amended.
J
Neither this Agreement, nor any part thereof or interest therein, may be
transferred or assigned by Dealer, directly or indirectly, voluntarily or by
operation of law, without the prior written consent of American Honda.
FAA Serramonte H, Inc. dba
HONDA OF SERRAMONTE #208176 By /s/ Donald Strough
- ---------------------------------- --------------------------------
(Corporate or Firm Name) (Dealer)
AMERICAN HONDA MOTOR CO., INC.
HONDA AUTOMOBILE DIVISION (Corporate Seal)
By /s/ Richard Colliver
----------------------------------
Richard Colliver
Executive Vice President
<PAGE>
ADDENDUM TO HONDA AUTOMOBILE DEALER
SALES AND SERVICE AGREEMENT
This Addendum (the "Addendum") dated September 15, 1998, is entered into
between FAA Serramonte H, inc. dba Honda of Serramonte ("Dealer"), a California
corporation, with its principal place of business at 485 Serramonte Blvd.,
Colma, California 94014 ("Dealership Premises"), and American Honda Motor Co.,
Inc. ("American Honda"), a California corporation, with its principal place of
business at 1919 Torrance Boulevard, Torrance, California 90501.
WHEREAS, Dealer and American Honda are entering into the Honda Automobile Dealer
Sales and Service Agreement including the Standard Provisions (the "Dealer
Agreement"), a copy of which is attached hereto, as of the date hereof; and
WHEREAS, Dealer and American Honda are entering into the "Agreement Between
American Honda Motor Co., Inc. and FirstAmerica Automotive, Inc. et al."
effective as of May 1, 1997 (the "FirstAmerica Agreement"); and
WHEREAS, Dealer and American Honda desire that this Addendum and the
FirstAmerica Agreement be incorporated into and become part of the Dealer
Agreement;
NOW THEREFORE, in consideration of the mutual convenants set forth herein and in
the Dealer Agreement and other good and valuable consideration the sufficiency
of which is hereby acknowledged, the parties agree as follows:
1. Status of the Addendum. This Addendum is hereby incorporated into and is made
----------------------
part of the Dealer Agreement. The Dealer Agreement and this Addendum shall,
when possible, be read as an integrated document; however, if there is any
conflict between the terms of this Addendum and the Dealer Agreement, this
Addendum shall govern.
2. Incorporation of the Applicable Terms of the FirstAmerica Agreement. Attached
-------------------------------------------------------------------
hereto as Schedule A is the FirstAmerica Agreement. Dealer represents and
warrants that it has read the FirstAmerica Agreement and acknowledges that
the FirstAmerica Agreement includes provisions that pertain to FirstAmerica's
management, ownership, and right to acquire and transfer Honda dealerships
and other matters. Dealer has executed the FirstAmerica Agreement and agrees
to be bound by all provisions of the FirstAmerica Agreement that are
applicable to or affect it and/or the actions of any Honda and Acura
dealership owned by Dealer. Dealer and American Honda agree that the terms
and
<PAGE>
conditions of the FirstAmerica Agreement are hereby incorporated into and
made part of the Dealer Agreement.
3. Additional Terms. Dealer shall satisfy the following terms on a continuing
----------------
basis during the term of the Dealer Agreement, as well as during any periods
following any renewal or extension of the Dealer Agreement:
a. Exclusive Facilities. As provided in Paragraph 3.1 of the FirstAmerica
--------------------
Agreement, Dealer shall maintain separate, exclusive, freestanding Honda
Dealership Operations that are in full and timely compliance with American
Honda standards and guidelines relating to Honda Dealership Operations,
facility design, functionality and capacity, and enhancements to American
Honda's brand image, which standards and guidelines American Honda may
reasonably modify from time to time, shall exclusively offer a full range
of Honda Products and services and shall not offer competing products or
services from its Dealership Premises. In addition, Dealer agrees that
even though the facilities may exceed American Honda's minimum
requirements now or in the future, the separate, exclusive, freestanding
Honda Dealership Operations will remain separate, exclusive and
freestanding for Honda Products and Honda Dealership Operations.
b. Honda Exclusive Minimum Facility Requirements. The Dealership Premises
---------------------------------------------
shall provide the following Honda exclusive minimum square footage
requirements, arranged in a manner conducive to the reasonable sales and
service of Honda Automobiles, Honda Parts and accessories:
<TABLE>
<CAPTION>
Building
--------
<S> <C>
Honda New Vehicle Sales Showroom Display 1,600 Sq. Ft.
Sales Office 1,544 Sq. Ft.
General Office 2,604 Sq. Ft.
Honda Service Workshop and Support 5,183 Sq. Ft.
Stall/Lifts 13/8
Honda Parts and Accessories Department 4,633 Sq. Ft.
Total Building 15,564 Sq. Ft.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Land
----
<S> <C>
New Vehicle Display and Storage 25,600 Sq. Ft.
Used Car Display 20,000 Sq. Ft.
Customer and Employee Parking 10,900 Sq. Ft.
Honda Service Parking 3,800 Sq. Ft.
Circulation and Landscaping 26,000 Sq. Ft.
Total Land 86,300 Sq. Ft.
Total Land and Building 101,864 Sq. Ft.
</TABLE>
c. Facility Construction. Complete initial consultation with the Honda Design
---------------------
Center no later than January 1, 1999. The construction of the Honda
Product facility will begin by August 31, 1999, and be completed and open
for business to the general public on or before March 31, 2000. In
addition, Dealer agrees that even though the facilities at the Dealership
Premises may exceed American Honda's minimum standards now or in the
future, the separate, freestanding and exclusive Honda facilities will
remain separate, freestanding and exclusive for Honda Products and
operations. American Honda has agreed to authorize Dealer as a Honda
dealer specifically because Dealer is able to make such separate,
freestanding and exclusive facilities available. Dealer further agrees
that any breach of Dealer's obligations in this LOI, including any
obligations in this paragraph, shall be a material and substantial breach
of Dealer's Agreement (or any renewal or extension thereof) and a failure
to comply with reasonable terms of the Agreement.
d. Zoning and Permits. Secure the necessary zoning and permits to provide for
------------------
the construction at the Dealership Premises specified in paragraph No. 2c.
A copy of all documents evidencing the foregoing must be sent to American
Honda, Western Zone no later than May 31, 1999. American Honda has agreed
to authorize Dealer as a Honda dealer specifically because Dealer is able
to make such separate, freestanding and exclusive facilities available.
e. Plans Submission and Construction Deadlines. Submit blueprints and site
-------------------------------------------
plans for the Honda facility specified in paragraph No. 2d for prior
written approval no later than May 31, 1999. Such plans will comply with
all American Honda Minimum Requirements for Honda facilities, as well as
completely and timely comply with facility design and image enhancements
to American Honda's brand image, functionality and capacity standards and
guidelines, which standards and guidelines American Honda may reasonably
modify from time to time.
<PAGE>
g. Financial Statement Submission. Dealer agrees to continue to comply with
------------------------------
American Honda's dealer financial requirements as specified in the Dealer
Agreement. These specifically provide that Dealer will furnish a
complete, timely and accurate financial statement on a monthly basis,
electronically, on the form required by American Honda.
h. Personnel Minimum Requirements. Dealer agrees to employ Honda service and
------------------------------
parts staff which meets at all times the minimum service and parts
training standards specified by American Honda for its authorized dealers
and whose members are properly licensed.
i. Communications Equipment. Dealer agrees to provide appropriate data
------------------------
communications equipment, compatible with American Honda's
specifications, which currently must accommodate HondaNet 2000.
4. No Guarantee of Financial Success. Dealer recognizes and acknowledges that
---------------------------------
American Honda's approval of Dealer's application and Dealership Premises
does not in any way constitute a representation, assurance, or guarantee by
American Honda that Dealer will achieve any particular level of sales,
operate at a profit, or realize any return on Dealer's investment.
5. Automobile Availability. Dealer recognizes and acknowledges that American
-----------------------
Honda cannot and does not guarantee a specific number of new Honda
Automobiles to be made available for resale by the Dealer. American Honda
assumes no liability in the event of losses incurred during periods of
unavailability, nor does unavailability excuse Dealer's performance.
6. Compliance with and Impact of Applicable Laws. Dealer shall comply at
---------------------------------------------
Dealer's own expense with all applicable state and federal laws including
those pertaining to vehicle dealerships. Dealer shall secure all licenses and
permissions in accordance with such laws and bear all the cost related
thereto.
7. Assumption of Costs. Dealer will complete the above actions solely at
-------------------
Dealer's own expense and without responsibility on the part of American
Honda.
<PAGE>
8. Severability. If any provision of this Addendum should be held invalid or
------------
unenforceable for any reason whatsoever, or conflicts with any applicable
law, this Addendum 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
Dealer Agreement, then it (they) will be deemed deleted from the Dealer
Agreement in such jurisdiction, and in either case, the remainder of the
Dealer Agreement will be valid and binding. Notwithstanding the foregoing,
if, as a result of any provision of the Dealer Agreement (including this
Addendum) being held invalid or unenforceable, American Honda's ability to
control the selection of the Dealer Owner, Executive Manager, or the Dealer
Manager or to otherwise maintain its ability to exercise reasonable
discretion over the selection of the actual individual who is managing Dealer
is materially restricted beyond the terms of the Dealer Agreement or the
FirstAmerica Agreement, American Honda shall be permitted to invoke the
repurchase provisions of Section 9.3 of the FirstAmerica Agreement.
IN WITNESS WHEREOF, the parties have executed this Addendum as of the date
first above written.
FAA Serramonte H, Inc.
BY: /s/ Donald Strough
--------------------------------
AMERICAN HONDA MOTOR CO., INC.
BY: /s/ Richard Colliver
--------------------------------
<PAGE>
EXHIBIT 10.4.3
[TOYOTA LOGO APPEARS HERE]
DEALER AGREEMENT
----- --------
<PAGE>
TOYOTA DEALER AGREEMENT
TABLE OF CONTENTS
<TABLE>
<S> <C>
PURPOSES AND OBJECTIVES OF THIS AGREEMENT........................... 1
I. RIGHTS GRANTED TO THE DEALER................................... 2
II. RESPONSIBILITIES ACCEPTED BY THE DEALER........................ 2
III. TERM OF AGREEMENT.............................................. 2
IV. OWNERSHIP OF DEALERSHIP........................................ 3
V. MANAGEMENT OF DEALERSHIP....................................... 3
VI. CHANGE IN MANAGEMENT OR OWNERSHIP.............................. 3
VII. APPROVED DEALER LOCATIONS...................................... 4
VIII. PRIMARY MARKET AREA............................................ 4
IX. STANDARD PROVISIONS............................................ 5
X. ADDITIONAL PROVISIONS.......................................... 5
XI. EXECUTION OF AGREEMENT......................................... 6
XII. CERTIFICATION.................................................. 6
XIII. ACQUISITION, DELIVERY AND INVENTORY OF TOYOTA PRODUCTS
A. Acquisition of Toyota Products.............................. 8
B. Availability and Allocation of Product...................... 8
C. Prices and Terms of Sale.................................... 8
D. Mode, Place and Charges for Delivery of Products............ 9
E. Inventory Damage Claims and Liability....................... 9
F. Delay or Failure of Delivery................................ 9
G. Diversion Charges........................................... 9
H. Changes of Design, Options or Specifications................ 10
I. Discontinuance of Manufacture or Importation................ 10
J. Minimum Vehicle Inventories................................. 10
K. Product Modifications....................................... 10
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
XIV. DEALER MARKETING OF TOYOTA PRODUCTS
A. DEALER's Sales Responsibilities............................. 10
B. Export Prohibition.......................................... 11
C. Used Vehicles............................................... 11
D. Assistance Provided by DISTRIBUTOR.......................... 11
1. Sales Training Assistance................................ 11
2. Sales Promotion Assistance............................... 12
3. Field Sales Personnel Assistance......................... 12
XV. DEALER SERVICE OBLIGATIONS
A. Customer Service Standards.................................. 12
B. New Motor Vehicle Pre-Delivery Service...................... 13
C. Warranty and Policy Service................................. 13
D. Use of Parts and Accessories in Non-Warranty Servicing...... 13
E. Warranty Disclosures as to Non-Genuine Parts and Accessories 14
F. Service Campaign Inspections and Corrections................ 14
G. Compliance With Safety and Emission Control Requirements.... 14
H. Compliance With Consumer Protection Statutes, Rules and
Regulations............................................... 15
XVI. SERVICE AND PARTS OPERATIONS
A. Organization and Standards.................................. 15
B. Service Equipment and Special Tools......................... 16
C. Parts Inventory............................................. 16
D. Assistance Provided by DISTRIBUTOR.......................... 16
1. Service Training Assistance.............................. 16
2. Manuals and Materials.................................... 16
3. Field Personnel Assistance............................... 16
XVII. CUSTOMER SATISFACTION RESPONSIBILITIES......................... 17
XVIII. DEALERSHIP FACILITIES AND IDENTIFICATION
A. Facilities.................................................. 17
B. DEALER's Operating Hours.................................... 18
C. Signs....................................................... 18
D. Use of Toyota Marks......................................... 18
1. Use by DEALER............................................ 18
2. Discontinuance of Use.................................... 19
XIX. EVALUATION OF DEALER'S PERFORMANCE
A. Sales Performance Evaluation................................ 20
B. Service Performance Evaluation.............................. 20
C. Parts Performance Evaluation................................ 20
D. Customer Satisfaction Performance Evaluation................ 20
E. Dealership Facilities Evaluation............................ 21
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
XX. CAPITAL, CREDIT, RECORDS AND UNIFORM SYSTEMS
A. Net Working Capital......................................... 21
B. Flooring Line............................................... 21
C. Payment Terms and Settlement of Accounts.................... 22
D. Uniform Accounting System................................... 22
E. Records Maintenance......................................... 23
F. Examination of Dealership Accounts and Records.............. 23
G. Taxes....................................................... 23
H. Confidentiality............................................. 23
I. Information Communication Systems........................... 24
J. Sales Reporting............................................. 24
XXI. RIGHT OF FIRST REFUSAL OR OPTION TO PURCHASE
A. Rights Granted.............................................. 24
B. Exercise of DISTRIBUTOR's Rights............................ 24
C. Right Of First Refusal...................................... 25
D. Option to Purchase.......................................... 25
E. DEALER's Obligations........................................ 25
F. No Applicability to Nominated Successor..................... 26
XXII. SUCCESSION RIGHTS UPON DEATH OR INCAPACITY
A. Succession to Ownership After Death of Owner................ 26
B. Incapacity of Owner......................................... 27
C. Nomination of Successor Prior to Death or Incapacity of
Owner..................................................... 27
XXIII. TERMINATION
A. Voluntary Termination by DEALER............................. 28
B. Termination for Cause....................................... 28
1. Immediate Termination.................................... 28
2. Termination Upon Sixty Days Notice....................... 29
3. Termination for Failure of Performance................... 30
4. Termination Upon Death or Incapacity..................... 30
C. Notice of Termination....................................... 31
D. Continuance of Business Relations........................... 31
E. Repurchase Provisions....................................... 31
1. DISTRIBUTOR's Obligations................................ 31
2. Responsibilities of DEALER............................... 32
3. Payment by DISTRIBUTOR................................... 32
XXIV. MANAGEMENT OF DISPUTES
A. Alternative Dispute Resolution Programs..................... 33
B. Applicable Law.............................................. 33
C. Mutual Release.............................................. 33
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
XXV. DEFENSE AND INDEMNIFICATION
A. Defense and Indemnification by DISTRIBUTOR.................. 34
B. Defense and Indemnification by DEALER....................... 34
C. Conditional Defense and/or Indemnification.................. 35
XXVI. GENERAL PROVISIONS
A. Notices..................................................... 36
B. No Implied Waivers.......................................... 37
C. Sole Agreement of the Parties............................... 37
D. Dealer Not an Agent or Representative....................... 37
E. Assignment of Rights or Delegation of Duties................ 38
F. No Franchise Fee............................................ 38
G. Severability................................................ 38
H. New and Superseding Dealer Agreements....................... 38
I. Benefit..................................................... 38
J. No Fiduciary Relationship................................... 39
K. No Joint Employment......................................... 39
L. Consent of DISTRIBUTOR...................................... 39
M. DISTRIBUTOR's Policies...................................... 39
XXVII. DEFINITIONS
A. Owner....................................................... 40
B. General Manager............................................. 40
C. Dealer Facilities........................................... 40
D. Approved Location(s)........................................ 40
E. Toyota Marks................................................ 40
F. Toyota Products............................................. 40
G. Toyota Motor Vehicles....................................... 40
H. Genuine Toyota Parts and Accessories........................ 40
</TABLE>
iv
<PAGE>
TOYOTA DEALER AGREEMENT
This is an Agreement between Toyota Motor Sales, U.S.A., Inc.
------------------------------------------------
(DISTRIBUTOR), and FAA Concord T Inc.
----------------------------------------------------------
(DEALER), a(n) [ ] individual, [ ] partnership, [X] corporation. If a
corporation, DEALER is duly incorporated in the State of California
---------------------
and doing business as Concord 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 DISTRIBUTOR'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 04176
-------
1
<PAGE>
I. RIGHTS GRANTED TO THE DEALER
Subject to the terms of this Agreement, DISTRIBUTOR hereby grants DEALER
the non-exclusive 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 1st day of October, 1998, and
--- ------- ----
shall continue for a period of 24 Months, and shall expire on
---------
September 30, 2000, 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.
2
<PAGE>
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:
<TABLE>
<CAPTION>
OWNERS' PERCENT OF
NAMES TITLE OWNERSHIP
<S> <C> <C>
FirstAmerica Automotive, Inc. Holding Company 100%
- --------------------------------- --------------------------------- ---------------------------------
Thomas A. Price President 0%
- --------------------------------- --------------------------------- ---------------------------------
- --------------------------------- --------------------------------- ---------------------------------
- --------------------------------- --------------------------------- ---------------------------------
- --------------------------------- --------------------------------- ---------------------------------
- --------------------------------- --------------------------------- ---------------------------------
</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 Steven S. Hallock, 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.
3
<PAGE>
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.
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
------------------------------- ------------------------------
1090 Concord Avenue 1090 Concord Avenue
Concord, California Concord, California
Sales and General Office Body and Paint
------------------------ --------------
SAME AS ABOVE NONE
Parts Service
----- -------
SAME AS ABOVE 1090 Concord Avenue
Concord, California
Other Facilities
----------------
NONE
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,
4
<PAGE>
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.
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:
1. DEALER agrees that this agreement incorporates, here by this
reference, the terms of the Addendum to Section X-Additional
Provisions dated .
--------------------------
Dealer Initials TAP
-----
5
<PAGE>
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.
<TABLE>
<CAPTION>
<S> <C> <C>
FAA Concord T Inc. dba Concord Toyota DEALER
-----------------------------------------------------------------------------------
(Dealer Entity Name)
Date: By: /s/ Thomas A. Price President
-------------------- ---------------------------------------- ---------------------
Signature Thomas A. Price Title
Date: By:
-------------------- ---------------------------------------- ---------------------
Signature Title
Date: By:
-------------------- ---------------------------------------- ---------------------
Signature Title
Toyota Motor Sales, U.S.A., Inc. DISTRIBUTOR
-----------------------------------------------------------------------------------
(Distributor Name)
Date: By: /s/ J. Lentz General Manager
-------------------- ---------------------------------------- ---------------------
Signature J. Lentz Title
Date: By:
-------------------- ---------------------------------------- ---------------------
Signature Title
</TABLE>
6
<PAGE>
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: OCT 01, 1998 By: /s/ Y. Ishizaka President
------------ --------------------------------- ------------
Signature Y. Ishizaka Title
7
<PAGE>
ADDENDUM TO SECTION X - ADDITIONAL PROVISIONS
These Additional Provisions to Toyota Dealer Agreement ("Additional
Provisions") are entered into as of OCT 01 1998, among DISTRIBUTOR and
-----------
DEALER, and form a part of and are incorporated into the Dealer Agreement.
RECITALS
--------
1. DISTRIBUTOR and DEALER have entered into a Toyota Dealer Agreement
(the "Dealer Agreement") dated as of OCT 01 1998:
-----------
2. FirstAmerica Automotive, Inc. is the 100% shareholder of DEALER.
-----------------------------
NOW THEREFORE, in consideration for the mutual agreements contained
herein and in the Dealer Agreement, the Parties agree as follows:
A. Management
----------
1. Role of the Responsible Executive. Thomas A. Price is hereby
--------------------------------------------------
designated as the FirstAmerica executive who will have responsibility and
authority with respect to all matters concerning DEALER and the relationship
between DEALER and DISTRIBUTOR (the "FirstAmerica Executive"). The FirstAmerica
Executive will be actively involved in the management of all aspects of the
operations of DEALER.
(a) The FirstAmerica Executive will be an officer of DEALER. The
FirstAmerica Executive, in consultation with management of FirstAmerica
Automotive, Inc., will have complete control over all day-to-day management
decisions of DEALER or relating to DEALER.
(b) The General Manager will report directly to and be responsible
to the FirstAmerica Executive.
8
<PAGE>
(c) DISTRIBUTOR may rely on oral or written communications and
agreements from the FirstAmerica Executive as being the binding agreements of
DEALER, without any duty of DISTRIBUTOR to confirm that any such communication
or agreement has been duly authorized by the Board of Directors of DEALER,
FirstAmerica Automotive, Inc., or any other individual or entity.
2. Successors to the FirstAmerica Executive. In the event that the
----------------------------------------
FirstAmerica Executive wishes to discontinue his role in the management of
DEALER as set forth in Section A.1, such action may be taken only with the
prior written consent of DISTRIBUTOR. Such consent of DISTRIBUTOR may be
conditioned on transfer of the FirstAmerica Executive's management
responsibilities to an individual or individuals approved by DISTRIBUTOR, taking
into account such factors as DISTRIBUTOR reasonably deems to be relevant and are
consistent with applicable laws.
3. Role of the General Manager.
---------------------------
(a) Steven S. Hallock or any subsequent General Manager of DEALER
-----------------
approved by DISTRIBUTOR, will serve exclusively as General Manager of DEALER on
a full time basis and will not have any management responsibilities with respect
to any other dealership or other business or appear as the General Manager on
any automobile dealership franchise agreement other than that of DEALER.
(b) The General Manager will have responsibility for and authority
with respect to the day-to-day operations of DEALER in the ordinary course of
business, under the supervision of the FirstAmerica Executive, and the General
Manager will have the following authority, without the need for obtaining the
prior approval of any other individual or entity:
9
<PAGE>
(i) the authority to hire or terminate any employee of DEALER.
(ii) the authority to order vehicles and other products.
(iii) the authority to place advertising.
(iv) the authority to communicate with DISTRIBUTOR with respect to all
aspects of the business of DEALER.
(v) the authority to approve expenditures by DEALER in the ordinary
course of business in amounts of less than $50,000 per item.
(vi) the authority to approve capital improvements or modifications to
the DEALER's facilities in amounts not to exceed $15,000 with
respect to any expenditure.
4. Membership of Executive Committee. There shall be no change in the
---------------------------------
membership of the Executive Committee, Board of Directors or other governing
body of DEALER without the prior written approval of DISTRIBUTOR.
B. Succession and Assignment
-------------------------
In the event that any interest in DEALER is transferred in accordance with
the provisions of the Dealer Agreement, the Agreement and these Additional
Provisions, as a condition to such transfer the transferee must agree in writing
to be bound by all of the terms and provisions of the Dealer Agreement, the
Agreement and these Additional Provisions, such agreement to be in form and
substance reasonably acceptable to DISTRIBUTOR.
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C. Deficiencies
l. Dealer acknowledges that its current facility is substantially deficient
in the following respects:
Office Sq. Ft. <2,151>
Used Vehicle Display Sq. Ft./Spaces <12,548>/<44>
Customer/Employee Parking Sq. Ft./Spaces <2,196>/<7>
Parts Dept. Sq. Ft. <1,388>
Total Building Sq. Ft. <918>
Distributor is not requiring Dealer to remedy these deficiencies at this
time. Dealer understands and agrees that, to the extent Distributor has
permitted or will permit Dealer to continue Toyota operations without
full compliance with Toyota facility national minimum standards or
Distributor directives or both, such conduct by the Distributor shall
not constitute a waiver of any such standards or directives. Further,
Distributor may, at any time, amend this Agreement to establish a
timetable for Dealer to fully comply with Distributor's minimum facility
requirements.
IN WITNESS WHEREOF, the Parties have executed these Additional
Provisions as of the date first above written.
TOYOTA MOTOR SALES, U.S.A., INC.
By: /s/ Jim Lentz
-------------------------------
Jim Lentz
Title: General Manager
----------------------------
FAA Concord T, Inc.
By: /s/ Thomas A. Price
-------------------------------
Thomas A. Price
Title: President
----------------------------
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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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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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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 have 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
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advertising and sales promotion activities, the purchase of Toyota
Products by customers. Therefore, DEALER at all times shall:
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.
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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 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 this
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.
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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 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
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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.
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
provision 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
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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. 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.
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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.
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,
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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.
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.
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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.
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.
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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 shrill 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 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, facili-
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ties and customer satisfaction, based upon such reasonable criteria as
DISTRIBUTOR may 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.
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:
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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 mount 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.
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
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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 (10th)
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.
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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.
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
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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
fights 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
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 fights
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
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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).
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.
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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 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 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
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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.
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 mother 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;
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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.
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;
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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.
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.
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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.
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 original 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.
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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.
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 beating
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.
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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.
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
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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. 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
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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:
l. 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
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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.
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.
XXVl. 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 certi-
40
<PAGE>
fied 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 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
41
<PAGE>
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 mended 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 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.
42
<PAGE>
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 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 marketplace. DISTRIBUTOR may
reasonably amend its policies and standards as the marketplace changes
from time to time.
43
<PAGE>
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.
44
<PAGE>
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:
(Internal combustion models only)
Avalon Land Cruiser
Camry RAV4
Celica 4Runner
Corolla Sienna
Paseo Solara
Supra Tacoma Truck
Tercel T100 Truck
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>
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 FAA Concord T, Inc., dba CONCORD 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>
[MAP OF AREA GRAPHIC APPEARS HERE]
- --------------------------------------------------------------------------------
CNCRD-WL M [SCALE APPEARS HERE]
PMA Shaded/Census Tracts outlined in Black
DATE: 09/21/98
<PAGE>
[MAP OF AREA GRAPHIC APPEARS HERE]
- --------------------------------------------------------------------------------
CNCRD-WL M--CONCORD TOYOTA SALES [SCALE APPEARS HERE]
PMA Shaded/ZIP codes outlined in Blue
DATE: 09/21/98
<PAGE>
[MAP OF AREA GRAPHIC APPEARS HERE]
- --------------------------------------------------------------------------------
CNCRD-WL M--CONCORD TOYOTA SALES [SCALE APPEARS HERE]
PMA Shaded/ZIP codes outlined in Blue
DATE: 09/21/98
<PAGE>
DEFINITION: A-ORIGINAL DATE: 9/21/98
PMA 0109020018000001 CONCORD TOYOTA SALES ZIP / ZIP*
94519 94520 p94522 p94524 p94527 p94529
94518(77%) 94521(80%) 94523(70%) 94530(5%) 94547(8%) 94553(90%)
94565(4%) 94596(3%) 94708(48%) 94803(11%)
DEFINITION: A-ORIGINAL DATE: 9/21/98
PMA 0109020018000001 CONCORD TOYOTA SALES Tract / Tract
6-13-3150 3150.99 3160 3170 3180 3190 3100.01 3200.02 3200.99
3211.01 3211.02 3211.03 3212 3220 3230 3240 3270 3280 3290 3300
3310 3320 3331 3332 3340.01 3340.02 3340.03 3350 3361 3362 3371
3372 3381 3552 3560.02
<PAGE>
EXHIBIT 4-8
TOYOTA DEALER
MINIMUM NET WORKING CAPITAL AGREEMENT
THIS AGREEMENT, made as of the 1st day of October, 1998 by and between
--- -------
FAA Concord T Inc. dba CONCORD TOYOTA
- -------------------------------------
(Dealer)
a(an) Individual Partnership X Corporation,
--- --- ---
located at 1090 Concord Avenue Concord, California
--------------------------------------------
(Street) (City, State)
Dealer Code Number 04176 (hereinafter called "DEALER") and
-----
TOYOTA MOTOR SALES, USA, INC.
SUCCESSOR TO TOYOTA MOTOR DISTRIBUTORS, INC. (hereinafter called "DISTRIBUTOR").
- --------------------------------------------
(Distributor)
DEALER and DISTRIBUTOR have entered into a Toyota Dealer Agreement dated
October 1, 1998 and net working capital requirements have been established in an
- ---------------
effort to ensure that there is sufficient capital available for the growth of a
dealer. The net working capital requirements are the established minimums. The
term "net working capital" shall mean the difference between current assets and
current liabilities plus the current portion of long-term debt.
DEALER and DISTRIBUTOR mutually agree as follows:
1. That it is considered necessary for the proper operation of DEALER's
business that DEALER should have, maintain and actually employ in its
business $2,381,575 of net working capital.
----------
2. X That as of the 30 day of September, 1998 DEALER meets or exceeds the
--- -- ---------
Net Working Capital requirement as documented on DEALER's ,
--------
1998, Year-To-Date Financial Statement or Pro Forma dated August 19,
1998. ----------
----
OR
3. That as of the day of , DEALER is deficient
--- --- ------------
$ in Net Working Capital, as documented on DEALER's
---------
, 1998 Year-To-Date Financial Statement.
-----------------
4. If, because of changed conditions, it should become necessary to revise the
minimum amount of net working capital deemed to be necessary to conduct
DEALER's business properly, DISTRIBUTOR shall have the right to revise
DEALER's minimum net working capital requirement to be used in dealership's
operation and DEALER agrees to meet the new standard within a reasonable
period of time.
5. This Agreement is incorporated in and made a part of the aforesaid Toyota
Dealer Agreement and any subsequent Toyota Dealer Agreement entered into
between DEALER and DISTRIBUTOR.
<PAGE>
DEALER: DISTRIBUTOR:
FAA Concord T Inc. Toyota Motor Sales USA, Inc.
---------------------------- ----------------------------
DEALER ENTITY NAME DISTRIBUTOR NAME
/s/ Thomas A. Price /s/ J. Lentz
---------------------------- ----------------------------
SIGNATURE Thomas A. Price SIGNATURE J. Lentz
President General Manager
---------------------------- ----------------------------
TITLE TITLE
<PAGE>
EXHIBIT 10.10.2
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") made this 30th day of March, 1999, between
FirstAmerica Automotive, Inc. ("FAA", "Employer" or "Corporation"), and Debra
Smithart ("Employee"). Employee began employment on October 26, 1997
("Commencement Date"). This Agreement's purpose is to establish in writing all
the terms and conditions of that employment, and specifically incorporates the
Non-Disclosure and Confidentiality Agreement.
Section 1. Position and Duties.
Employee shall be employed by the Corporation as its Chief Financial
Officer ("CFO") reporting to the Corporation's Chief Executive Officer ("CEO"),
as of the Commencement Date. As Chief Financial Officer, Employee agrees to
devote her full business time, energy and skill to her duties with the
Corporation. These duties shall include, but are not limited to, any duties
consistent with the job position which may be assigned to Employee from time to
time by the Corporation's CEO. Employee shall be subject to all the same rules,
policies and procedures of Employer to the extent they do not directly
contradict the terms of this Agreement. Employer retains the right to modify or
eliminate any rule, policy or procedure at any time at its sole discretion.
Section 2. Term.
Employee's employment with the Corporation pursuant to this Agreement is
"at- will" and is for no specified period of time beginning, subject to the
provisions regarding termination set forth below. Upon the termination of
Employee's employment with the Corporation, for any reason, neither Employee nor
the Corporation shall have any further obligation or liability to the other,
except as set forth in paragraphs 5 or 6 below. Any modification or rescission
of this "at-will" relationship must be in writing signed by the CEO of the
Corporation.
Section 3. Basic Compensation.
The Employer shall pay compensation to the Employee as set forth herein.
Such compensation shall be reviewed annually and modified as determined by the
sole discretion of the Corporate Board of Directors.
Salary
------
An annual base salary of $300,000 (three hundred thousand dollars),
approximately $25,000 (twenty-five thousand dollars) per month, will be paid to
Employee, subject to applicable withholding, in accordance with the
Corporation's normal payroll procedures (the "Base Salary").
Benefits
--------
Employee shall have the right, on the same basis as other members of senior
management of the Corporation, to participate in and to receive benefits under
any of the Corporation's employee benefit plans, including the medical, dental,
vision and disability group insurance plans, if any. Employee shall also be
entitled to participate in any retirement plan maintained by the Corporation for
which she is eligible in accordance with its terms. In addition,
1
<PAGE>
Employee shall be entitled to the benefits afforded to other members of senior
management under the Corporation's vacation, holiday and business expense
reimbursement policies as outlined in the Employee Handbook.
Bonus
-----
Employee is eligible for an annual bonus of 50% of Employee's annual base
salary: 1/2 is based on corporate performance (making plan) and 1/2 is based on
personal performance as determined by the compensation committee.
Corporate Vehicle
-----------------
Employee will be provided a corporate vehicle (and all associated expenses)
commensurate with her executive position (e.g., a Lexus GS400 or equivalent).
Expense Reimbursement
---------------------
Upon receipt of proper documentation establishing the amount of such
expenses, the Corporation shall reimburse Employee for any reasonable business
expenses incurred.
Section 4. Stock Options.
Upon the execution of this Agreement (or upon the Corporation's adoption,
and if required by law, qualification of a stock option plan-- whichever is the
latter), Employee shall be granted a non-statutory stock option to purchase
200,000 shares of the Corporation's Common Stock at the strike price of $4.00
per share. Provided Employee remains an employee of the Corporation, these
shares shall vest at the rate of 4,166.67 shares per month following the
Commencement Date. In the event that Employee terminates her employment with the
Corporation for Good Reason (as defined in paragraph 5(c), below) following a
Transfer of Control (as also defined in paragraph 5(c), below), then, in
addition to the benefits set forth in paragraph 5, Employee shall become
immediately vested in all of the shares subject to the Initial Stock Option,
effective as of the date ten days prior to the Transfer of Control.
Except as otherwise provided herein, the Initial Stock Option shall be
subject to the terms and conditions of the Corporation's stock option plan and
the Corporation's standard form of stock option agreement, which Employee shall
be required to sign as a condition of the issuance of the Initial Stock Option.
Section 5. Benefits Upon Termination.
Employee agrees that her employment may be terminated by the Corporation at
any time, with or without cause. In the event of termination of Employee's
employment by the Corporation, based on the reasons set forth below, she shall
be entitled to the following:
a. Termination for Cause: If Employee's employment is terminated by the
---------------------
Corporation for cause, Employee shall be entitled to no compensation or benefits
from the Corporation other than those already earned under paragraphs 3 and 4
through the date of her termination. For purposes of this Agreement, a
termination "for cause" occurs if (employee) is terminated for any of the
following reasons:
2
<PAGE>
1. theft, dishonesty, or falsification of any employment or Corporation
records;
2. improper disclosure of the Corporation's confidential or proprietary
information, including a violation of the Non-Disclosure and Confidentiality
Agreement.;
3. any intentional act by Employee which has a material detrimental
effect on the Corporation's reputation or business as determined by the
Corporation; or,
4. any material breach of this Agreement by Employee, which breach is
not cured within thirty (30) days following written notice of such breach from
the Corporation.
b. Termination Other Than For Cause: If Employee's employment is terminated
--------------------------------
by the Corporation for any reason other than for cause, Employee shall be
entitled to the following separation benefits:
1. Continuation of Employee's Base Salary for a period of one year, such
salary continuation payments to be made in accordance with the Corporation's
ordinary payroll procedures without regard to whether Employee obtains
alternative employment in the interim; and
2. Payment of an amount equivalent to the annual average of the amounts
of annual Performance Bonuses previously paid to Employee, less applicable
withholding, with such payment to be made in twelve equal monthly installments.
c. Resignation for Good Reason: For purposes of paragraph 5(b) of this
---------------------------
Agreement, Employee's resignation for Good Reason following a Transfer of
Control shall constitute a Termination Other Than for Cause.
For purposes of this Agreement, a "Transfer of Control" shall mean an
"Ownership Change Event" (as defined below) or a series of related Ownership
Change Events (collectively, the "Transaction") wherein the stockholders of the
Corporation immediately before the Transaction do not retain immediately after
the transaction direct or indirect beneficial ownership of more than fifty
percent (50%) of the total combined voting power of the outstanding voting stock
of the Corporation or the corporation or the corporations to which the assets of
the Corporation were transferred (the "Transferee Corporation(s)"), as the case
may be. For purposes of the preceding sentence, indirect beneficial ownership
shall include, without limitation, an interest resulting from ownership of the
voting stock of one or more corporations which, as a result of the Transaction,
own the Corporation or the Transferee Corporation(s), as the case may be, either
directly or through one or more subsidiary corporations. The Board shall have
the right to determine whether multiple sales or exchanges
3
<PAGE>
of the voting stock of the Corporation or Multiple Ownership Change Events are
related, and its determination shall be final, binding and conclusive.
For purposes of this Agreement, "Good Reason" means any of the following
conditions, which condition(s) remain(s) in effect 30 days after written notice
to the Board from Employee of the following condition(s):
(i) a decrease in Employee's base salary and/or a material decrease in
Employee's standard management bonus plan or employee benefits;
(ii) a material, adverse change in Employee's title, authority,
responsibilities or duties, as measured against Employee's title, authority,
responsibilities or duties immediately prior to such change;
(iii) any material breach by the Corporation of any provision of this
Agreement, which breach is not cured within thirty (30) days following written
notice of such breach from Employee;
(iv) Any failure of the Company to obtain the assumption of this Agreement
by any successor or assign of the Company; or
(v) Any purported termination of Employee's employment for "material breach
of contract" which is not effected following a written notice satisfying the
requirements of paragraph 5.
For purposes of this Agreement, an "Ownership Change Event" shall be deemed
to have occurred if any of the following occurs with respect to the Corporation:
(i) The direct or indirect sale or exchange in a single or series of
related transactions by the stockholders of the Corporation of more than fifty
percent (50%) of the voting stock of the Corporation;
(ii) A merger or consolidation in which the Corporation is a party;
(iii) The sale, exchange, or transfer of all or substantially all of the
assets of the Corporation; or
(iv) A liquidation or dissolution of the Company.
Section 6. Benefits Upon Voluntary Termination.
In the event Employee voluntarily resigns from her employment with the
Corporation, or in the event that Employee's employment terminates as a result
of her death or disability, Employee shall be entitled to no compensation or
benefits from the Corporation other than those earned under paragraphs 3 and 4
above.
4
<PAGE>
Section 7. Remedy for Breach.
The Employee acknowledges that a violation of any of the provisions of this
Agreement, including its restrictive covenants, will cause irreparable damage to
the Employer, its successors and assigns. The Employee consents that any
violation shall entitle the Employer or its successors and assigns, in addition
to any other rights or remedies it, or they, may have, to an immediate
injunction restraining any violation.
Section 8. Notices.
All notices, requests, demands, and other communications that are required
or may be given under this Agreement shall be in writing and shall be deemed to
have been duly given if delivered personally or sent by registered or certified
mail, return receipt requested, postage prepaid to the CEO at the Corporate
Headquarters or to the Employee's last known home address, whichever is
applicable.
Section 9. Governing Laws.
This Agreement shall be construed and enforced in accordance with the laws
of the State of California excluding its conflict of law provisions.
Section 10. Entire Agreement.
This Agreement contains the entire agreement among the parties regarding
Employee's pay plan and the "at-will" employment relationship. All prior
negotiations, agreements, and understandings are superseded. This Agreement may
not be amended or revised except by a writing signed by all the parties.
Section 11. Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the heirs,
legal representatives, and successors of the respective parties; provided
however, that this Agreement and all its rights may not be assigned by any party
except by or with the written consent of the other parties.
Section 12. Confidential Information and Nondisclosure Agreement.
Employee agrees to execute and abide by the terms and conditions of the
Company's standard employee Confidential Information and Nondisclosure
Agreement.
Section 13. Non-Solicitation of Employees.
In the event that Employee's employment with the Company is terminated for
any reason, Employee agrees that for a period of one year after the date of this
Agreement, he shall not, either directly or indirectly, solicit the services, or
attempt to solicit the services of any employee of the Corporation or its
affiliated entities to any other person or entity, without the written consent
of the President of the Corporation.
Section 14. Attorneys' Fees.
The prevailing party shall be entitled to recover from the losing party is
attorneys' fees and costs incurred in any action brought to enforce any right
arising out of this Agreement.
5
<PAGE>
Section 15. Mandatory Binding Arbitration.
Employee and Employer knowingly and voluntarily agree that in the event
there is any dispute arising out of Employee's employment with, seeking
employment with, or separation from the Employer that would require or allow
resort to any court, regardless of the kind or type of dispute, including, but
not limited to, claims of discrimination and harassment (except for claims
before the National Labor Relations Board or claims for physical injury under
the Worker's Compensation Act or disputes relating to misappropriation of
intellectual property), such dispute shall be submitted exclusively to final and
binding arbitration pursuant to the provisions of the Federal Arbitration Act,
in conformity with the procedures of the California Arbitration Act (Cal. Code
Civ. Proc. Sec. 1280 et seq.). All such arbitration proceedings shall take place
in the city of San Francisco, California, at a mutually agreed upon location.
Employee understands that by voluntarily agreeing to this binding arbitration
provision, both the Corporation and the Employer give up the right to a trial by
jury.
IT IS SO UNDERSTOOD AND AGREED:
EMPLOYEE:
Dated: March 30, 1999 Signature: /s/ Debra Smithart
--------------------- ---------------------
EMPLOYER:
Dated: March 30, 1999 Signature: /s/ Thomas A. Price
--------------------- ---------------------
6
<PAGE>
EXHIBIT 10.10.3
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") made this 30th day of March 1999, between
FirstAmerica Automotive, Inc. ("FAA", "Employer" or "Corporation"), and Charles
Oglesby ("Employee"). Employee began employment on September 1, 1998
("Commencement Date"). This Agreement's purpose is to establish in writing all
the terms and conditions of that employment, and specifically incorporates the
Non-Disclosure and Confidentiality Agreement.
Section 1. Position and Duties.
Employee shall be employed by the Corporation as its Chief Operating
Officer ("COO") reporting to the Corporation's Chief Executive Officer ("CEO"),
as of the Commencement Date. As COO, Employee agrees to devote his full business
time, energy and skill to his duties with the Corporation. These duties shall
include, but are not limited to, any duties consistent with the job position
which may be assigned to Employee from time to time by the Corporation's CEO.
Employee shall be subject to all the same rules, policies and procedures of
Employer to the extent they do not directly contradict the terms of this
Agreement. Employer retains the right to modify or eliminate any rule, policy or
procedure at any time at its sole discretion.
Section 2. Term.
Employee's employment with the Corporation pursuant to this Agreement is
"at-will" and is for no specified period of time beginning, subject to the
provisions regarding termination set forth below. Upon the termination of
Employee's employment with the Corporation, for any reason, neither Employee nor
the Corporation shall have any further obligation or liability to the other,
except as set forth in paragraphs 5 or 6 below. Any modification or rescission
of this "at-will" relationship must be in writing signed by the CEO of the
Corporation.
Section 3. Basic Compensation.
The Employer shall pay compensation to the Employee as set forth herein.
Such compensation shall be reviewed annually and modified as determined by the
sole discretion of the Corporate Board of Directors.
Salary
------
An annual base salary of $425,000 (four hundred twenty-five thousand
dollars), approximately $35,417 (thirty-five thousand four hundred seventeen
dollars) per month gross pay per month, will be paid to Employee, subject to
applicable withholding, in accordance with the Corporation's normal payroll
procedures (the "Base Salary").
Benefits
--------
Employee shall have the right, on the same basis as other members of senior
management of the Corporation, to participate in and to receive benefits under
any of the Corporation's employee benefit plans, including the medical, dental,
vision and disability group insurance plans, if any. Employee shall also be
entitled to participate in any retirement plan maintained by the Corporation for
which he is eligible in accordance with its terms. In addition, Employee shall
be entitled to the benefits afforded to other members of senior management
1
<PAGE>
under the Corporation's vacation, holiday and business expense reimbursement
policies as outlined in the Employee Handbook.
Bonus
-----
Eligibility for an annual bonus of 60% of Employee's annual base salary
will be based on performance criteria to be determined by the CEO in accordance
with personal performance and corporate performance.
Corporate Vehicle
-----------------
Employee will be provided a corporate vehicle (and all associated expenses)
commensurate with his executive position.
Expense Reimbursement
---------------------
Upon receipt of proper documentation establishing the amount of such
expenses, the Corporation shall reimburse Employee for any reasonable business
expenses incurred.
Closing and Other Related Costs
-------------------------------
Corporation will pay Employee closing and related costs on the purchase of
a new home, not to exceed a total of $35,000 (thirty-five thousand dollars) upon
presentation of documentation showing said expenditures.
Section 4. Stock Options.
Upon the execution of this Agreement (or upon the Corporation's adoption,
and if required by law, qualification of a stock option plan-- whichever is the
latter), Employee shall be granted a non-statutory stock option to purchase
300,000 shares of the Corporation's Common Stock at a strike price of $4.00 per
share. Provided Employee remains an employee of the Corporation, these shares
shall vest at the rate of 5,000 shares per month following the Commencement
Date. In the event that Employee terminates his employment with the Corporation
for Good Reason (as defined in paragraph 5(c), below) following a Transfer of
Control (as also defined in paragraph 5(c), below), then, in addition to the
benefits set forth in paragraph 5, Employee shall become immediately vested in
all of the shares subject to the Initial Stock Option, effective as of the date
ten days prior to the Transfer of Control.
Except as otherwise provided herein, the Initial Stock Option shall be
subject to the terms and conditions of the Corporation's stock option plan and
the Corporation's standard form of stock option agreement, which Employee shall
be required to sign as a condition of the issuance of the Initial Stock Option.
Section 5. Benefits Upon Termination.
Employee agrees that his employment may be terminated by the Corporation at
any time, with or without cause. In the event of termination of Employee's
employment by the Corporation, based on the reasons set forth below, he shall be
entitled to the following:
a. Termination for Cause: If Employee's employment is terminated by the
---------------------
Corporation for cause, Employee shall be entitled to no compensation or benefits
from the Corporation other than those already earned under paragraphs
2
<PAGE>
3 and 4 through the date of his termination. For purposes of this Agreement, a
termination "for cause" occurs if (employee) is terminated for any of the
following reasons:
1. theft, dishonesty, or falsification of any employment or Corporation
records;
2. improper disclosure of the Corporation's confidential or proprietary
information, including a violation of the Non-Disclosure and Confidentiality
Agreement.;
3. any intentional act by Employee which has a material detrimental
effect on the Corporation's reputation or business as determined by the
Corporation; or,
4. any material breach of this Agreement by Employee, which breach is
not cured within thirty (30) days following written notice of such breach from
the Corporation.
b. Termination Other Than For Cause: If Employee's employment is terminated
--------------------------------
by the Corporation for any reason other than for cause, Employee shall be
entitled to the following separation benefits:
1. Continuation of Employee's Base Salary for a period of one year, such
salary continuation payments to be made in accordance with the Corporation's
ordinary payroll procedures without regard to whether Employee obtains
alternative employment in the interim; and
2. Payment of an amount equivalent to the annual average of the amounts
of annual Performance Bonuses previously paid to Employee, less applicable
withholding, with such payment to be made in twelve equal monthly installments.
c. Resignation for Good Reason: For purposes of paragraph 5(b) of this
---------------------------
Agreement, Employee's resignation for Good Reason following a Transfer of
Control shall constitute a Termination Other Than for Cause.
For purposes of this Agreement, a "Transfer of Control" shall mean an
"Ownership Change Event" (as defined below) or a series of related Ownership
Change Events (collectively, the "Transaction") wherein the stockholders of the
Corporation immediately before the Transaction do not retain immediately after
the transaction direct or indirect beneficial ownership of more than fifty
percent (50%) of the total combined voting power of the outstanding voting stock
of the Corporation or the corporation or the corporations to which the assets of
the Corporation were transferred (the "Transferee Corporation(s)"), as the case
may be. For purposes of the preceding sentence, indirect beneficial ownership
shall include,
3
<PAGE>
without limitation, an interest resulting from ownership of the voting stock of
one or more corporations which, as a result of the Transaction, own the
Corporation or the Transferee Corporation(s), as the case may be, either
directly or through one or more subsidiary corporations. The Board shall have
the right to determine whether multiple sales or exchanges of the voting stock
of the Corporation or Multiple Ownership Change Events are related, and its
determination shall be final, binding and conclusive.
For purposes of this Agreement, "Good Reason" means any of the following
conditions, which condition(s) remain(s) in effect 30 days after written notice
to the Board from Employee of the following condition(s):
(i) a decrease in Employee's base salary and/or a material decrease in
Employee's standard management bonus plan or employee benefits;
(ii) a material, adverse change in Employee's title, authority,
responsibilities or duties, as measured against Employee's title, authority,
responsibilities or duties immediately prior to such change;
(iii) any material breach by the Corporation of any provision of this
Agreement, which breach is not cured within thirty (30) days following written
notice of such breach from Employee;
(iv) Any failure of the Company to obtain the assumption of this Agreement
by any successor or assign of the Company; or
(v) Any purported termination of Employee's employment for "material breach
of contract" which is not effected following a written notice satisfying the
requirements of paragraph 5.
For purposes of this Agreement, an "Ownership Change Event" shall be deemed
to have occurred if any of the following occurs with respect to the Corporation:
(i) The direct or indirect sale or exchange in a single or series of
related transactions by the stockholders of the Corporation of more than fifty
percent (50%) of the voting stock of the Corporation;
(ii) A merger or consolidation in which the Corporation is a party;
(iii) The sale, exchange, or transfer of all or substantially all of the
assets of the Corporation; or
(iv) A liquidation or dissolution of the Company.
Section 6. Benefits Upon Voluntary Termination.
In the event Employee voluntarily resigns from his employment with the
Corporation, or in the
4
<PAGE>
event that Employee's employment terminates as a result of his death or
disability, Employee shall be entitled to no compensation or benefits from the
Corporation other than those earned under paragraphs 3 and 4 above.
Section 7. Remedy for Breach.
The Employee acknowledges that a violation of any of the provisions of this
Agreement, including its restrictive covenants, will cause irreparable damage to
the Employer, its successors and assigns. The Employee consents that any
violation shall entitle the Employer or its successors and assigns, in addition
to any other rights or remedies it, or they, may have, to an immediate
injunction restraining any violation.
Section 8. Notices.
All notices, requests, demands, and other communications that are required
or may be given under this Agreement shall be in writing and shall be deemed to
have been duly given if delivered personally or sent by registered or certified
mail, return receipt requested, postage prepaid to the CEO at the Corporate
Headquarters or to the Employee's last known home address, whichever is
applicable.
Section 9. Governing Laws.
This Agreement shall be construed and enforced in accordance with the laws
of the State of California excluding its conflict of law provisions.
Section 10. Entire Agreement.
This Agreement contains the entire agreement among the parties regarding
Employee's pay plan and the "at-will" employment relationship. All prior
negotiations, agreements, and understandings are superseded. This Agreement may
not be amended or revised except by a writing signed by all the parties.
Section 11. Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the heirs,
legal representatives, and successors of the respective parties; provided
however, that this Agreement and all its rights may not be assigned by any party
except by or with the written consent of the other parties.
Section 12. Confidential Information and Nondisclosure Agreement.
Employee agrees to execute and abide by the terms and conditions of the
Company's standard employee Confidential Information and Nondisclosure
Agreement.
Section 13. Non-Solicitation of Employees.
In the event that Employee's employment with the Company is terminated for
any reason, Employee agrees that for a period of one year after the date of this
Agreement, he shall not, either directly or indirectly, solicit the services, or
attempt to solicit the services of any employee of the Corporation or its
affiliated entities to any other person or entity, without the written consent
of the President of the Corporation.
5
<PAGE>
Section 14. Attorneys' Fees.
The prevailing party shall be entitled to recover from the losing party is
attorneys' fees and costs incurred in any action brought to enforce any right
arising out of this Agreement.
Section 15. Mandatory Binding Arbitration.
Employee and Employer knowingly and voluntarily agree that in the event
there is any dispute arising out of Employee's employment with, seeking
employment with, or separation from the Employer that would require or allow
resort to any court, regardless of the kind or type of dispute, including, but
not limited to, claims of discrimination and harassment (except for claims
before the National Labor Relations Board or claims for physical injury under
the Worker's Compensation Act or disputes relating to misappropriation of
intellectual property), such dispute shall be submitted exclusively to final and
binding arbitration pursuant to the provisions of the Federal Arbitration Act,
in conformity with the procedures of the California Arbitration Act (Cal. Code
Civ. Proc. Sec. 1280 et seq.). All such arbitration proceedings shall take place
in the city of San Francisco, California, at a mutually agreed upon location.
Employee understands that by voluntarily agreeing to this binding arbitration
provision, both the Corporation and the Employer give up the right to a trial by
jury.
IT IS SO UNDERSTOOD AND AGREED:
EMPLOYEE:
Dated: March 30, 1999 Signature: /s/ Charles Oglesby
------------------------- -----------------------
EMPLOYER:
Dated: March 30, 1999 Signature: /s/ Thomas Price
------------------------- ----------------------
6
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Name Doing Business As Jurisdiction Percent Owned
- ---- ----------------- ------------ -------------
<S> <C> <C>
DSW & Associates, Inc. Auto Town California 100%
Dealersoft Technologies Corporation -- California 100%
FAA Auto Factory, Inc. -- California 100%
FAA Beverly Hills, Inc. Beverly Hills BMW California 100%
FAA Capitol N, Inc. Capitol Nissan California 100%
FAA Concord H, Inc. Concord Honda California 100%
FAA Concord N, Inc. Concord Nissan California 100%
FAA Concord T, Inc. Concord Toyota California 100%
FAA Dealer Services, Inc. -- California 100%
FAA Dublin N, Inc. Dublin Nissan California 100%
FAA Dublin VWD, Inc. Dublin Dodge California 100%
Dublin Volkswagen California 100%
FAA Marin D, Inc. First Dodge-Marin California 100%
FAA Poway D, Inc. Poway Dodge California 100%
FAA Poway H, Inc. Poway Honda California 100%
FAA Poway G, Inc. Ritchey/Fipp Poway California 100%
FAA Poway T, Inc. Poway Toyota California 100%
FAA San Bruno, Inc. Melody Toyota California 100%
FAA Serramonte H, Inc. Honda of Serramonte California 100%
FAA Serramonte, Inc. Serramonte Auto Plaza California 100%
Serramonte Dodge California 100%
Serramonte Isuzu California 100%
Serramonte Mitsubishi California 100%
Serramonte Nissan California 100%
FAA Serramonte L, Inc. Lexus of Serramonte California 100%
FAA Service Corporation -- California 100%
FAA Stevens Creek, Inc. Stevens Creek Nissan California 100%
Smart Nissan, Inc. Marin Nissan California 100%
FAA Woodland Hills VW, Inc. Volkswagen of Woodland Hills California 100%
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
FirstAmerica Automotive, Inc.
We consent to incorporation by reference in the registration statement (No.
33-74505) on Form S-8 of FirstAmerica Automotive, Inc. of our report dated March
19, 1999, relating to the consolidated balance sheets of FirstAmerica
Automotive, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1998 and
related schedule which report appears in the December 31, 1998 annual report on
Form 10-K of FirstAmerica Automotive, Inc.
/s/ KPMG, LLP
San Francisco, California
March 19, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 2,191 2,924
<SECURITIES> 0 0
<RECEIVABLES> 32,436 20,835
<ALLOWANCES> (409) (320)
<INVENTORY> 90,947 78,607
<CURRENT-ASSETS> 129,014 105,278
<PP&E> 13,332 8,481
<DEPRECIATION> (3,453) (2,133)
<TOTAL-ASSETS> 178,452 124,002
<CURRENT-LIABILITIES> 125,080 88,732
<BONDS> 0 0
3,579 3,439
0 0
<COMMON> 0 0
<OTHER-SE> 11,716 6,563
<TOTAL-LIABILITY-AND-EQUITY> 178,452 124,002
<SALES> 783,071 474,048
<TOTAL-REVENUES> 783,071 474,048
<CGS> 663,902 406,296
<TOTAL-COSTS> 663,902 406,296
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 10,953 5,535
<INCOME-PRETAX> 6,661 510
<INCOME-TAX> (2,864) (446)
<INCOME-CONTINUING> 3,797 64
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,797 64
<EPS-PRIMARY> .24 (.01)
<EPS-DILUTED> .23 (.01)
</TABLE>
