-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SHBzwhaPEMIswGCGCeEnPC4itwrVpYDshzKSntEFJkRp//GNm+Fmp5XLxtz8pk4U OgZvGJpMAACRLSxxpBfV3A== 0000950136-98-000682.txt : 19980415 0000950136-98-000682.hdr.sgml : 19980415 ACCESSION NUMBER: 0000950136-98-000682 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980414 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED AUTO GROUP INC CENTRAL INDEX KEY: 0001019849 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-AUTO DEALERS & GASOLINE STATIONS [5500] IRS NUMBER: 223086739 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12297 FILM NUMBER: 98592816 BUSINESS ADDRESS: STREET 1: 375 PARK AVE STREET 2: 22ND FL CITY: NEW YORK STATE: NY ZIP: 10152 BUSINESS PHONE: 2122233300 MAIL ADDRESS: STREET 1: 375 PARK AVENUE STREET 2: 22ND FL CITY: NEW YORK STATE: NY ZIP: 10152 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ COMMISSION FILE NUMBER 1-12297 UNITED AUTO GROUP, INC. (Exact name of registrant as specified in its charter) DELAWARE 22-3086739 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 375 PARK AVENUE, NEW YORK, NEW YORK 10152 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 223-3300 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED Voting Common Stock, par value $0.0001 per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes..x.. No ..... Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the 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. [x] The aggregate market value of voting common stock held by non-affiliates as of March 24, 1998 was $286,862,693. As of March 24, 1998, there were 19,178,180 shares of voting Common Stock and 605,454 shares of non-voting Common Stock outstanding. Portions of the registrant's proxy statement to be filed in connection with the annual meeting of shareholders, presently scheduled to be held on May 21, 1998, are incorporated by reference in Part III of this Form 10-K.
TABLE OF CONTENTS PART I PAGE 1. Business........................................................................................ 2 2. Properties...................................................................................... 8 3. Legal Proceedings............................................................................... 9 4. Submission of Matters to a Vote of Securityholders.............................................. 9 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters........................... 9 6. Selected Consolidated Financial Data............................................................ 11 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 13 8. Financial Statements and Supplementary Data..................................................... 20 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............ 21 PART III 10. Directors and Executive Officers of the Registrant.............................................. 21 11. Executive Compensation.......................................................................... 21 12. Security Ownership of Certain Beneficial Owners and Management.................................. 21 13. Certain Relationships and Related Transactions.................................................. 21 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................ 21
1 PART I ITEM 1. BUSINESS OVERVIEW United Auto Group, Inc. ("UAG" or the "Company") is a leading acquirer, consolidator and operator of franchised automobile and light truck dealerships and related businesses. The Company is the second largest publicly-traded retailer of new motor vehicles in the United States. At the end of 1997, the Company operated franchises located in Arizona, Arkansas, Connecticut, Florida, Georgia, Nevada, New Jersey, New York, North Carolina, South Carolina, Tennessee, Texas and Puerto Rico. As an integral part of its dealership operations, UAG also sells used vehicles. All of UAG's franchised dealerships include integrated service and parts operations, which are an important source of recurring revenues. The Company also owns UnitedAuto Finance Inc. ("UnitedAuto Finance"), an automobile finance company engaged in the purchase, sale and servicing of primarily prime credit quality automobile loans originated by both UAG and third-party dealerships. In addition, UAG dealerships market a complete line of aftermarket automotive products and services through UnitedAuto Care, an aftermarket products and services subsidiary. UAG was incorporated in the State of Delaware in December 1990 and commenced dealership operations in October 1992. Unless the context otherwise requires, references herein to "Common Stock" refers to the Company's Voting Common Stock, par value $0.0001 per share. The Company was formed to capitalize on consolidation opportunities within the highly fragmented automotive retailing industry by acquiring, consolidating, and operating large automobile retailers and related businesses. As capital requirements to operate 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. These conditions present attractive consolidation opportunities for larger automobile retailers such as UAG. The following table sets forth information with respect to the dealerships acquired by the Company during 1997: 2
DATE ACQUIREE ACQUIRED LOCATIONS FRANCHISES - -------- -------- --------- ---------- Crown Automotive 3/97 Houston, TX Chrysler-Plymouth, Dodge, Jeep-Eagle Hanna Nissan 4/97 Las Vegas, NV Nissan Staluppi Group 4/97 Long Island, NY Nissan, Toyota W. Palm Beach, FL Chrysler-Plymouth, Infiniti, Jeep-Eagle, Nissan, Toyota Reed Group 5/97 Fayetteville, NC Chevrolet North Charleston, SC Chevrolet Summerville, SC Chevrolet-Geo, Oldsmobile Lance Landers 6/97 Benton, AR Buick, Isuzu, Pontiac Stone Mountain 8/97 Stone Mountain, GA Chyrsler-Plymouth, Jeep-Eagle Shreveport Dodge 9/97 Shreveport, LA Dodge Covington Pike Dodge 11/97 Memphis, TN Dodge Central Ford 11/97 Little Rock, AK Ford Triangle Dealers 12/97 San Juan, Puerto Rico Chrysler, Honda, Toyota, Daewoo Mayaguez, Puerto Rico Chrysler, Honda, Acura, Daewoo Ponce, Puerto Rico Honda, Acura, Suzuki
Management believes that UAG is well-positioned to continue capitalizing on the consolidation trend in the automotive retailing industry due to its proven acquisition history, diverse geographic presence, substantial size and financial resources. Since December 31, 1997, the Company has entered into agreements to purchase five franchises. Also during the first quarter of 1998, the Company has completed the acquisition, pending manufacturer approval relating to certain franchises, of four dealer groups operating 32 franchises in seven states, including the Young Automotive Group and the Classic Automotive Group. UAG purchases substantially all new car inventories directly from manufacturers. Each of the Company's dealerships operates pursuant to a franchise agreement between the applicable manufacturer and the subsidiary of the Company that operates such dealership. In accordance with the individual franchise agreements, each dealership is subject to certain rights and restrictions typical of the industry. The ability of manufacturers to influence the operations of a dealership, or the loss of a franchise agreement, could have a negative impact on the Company's operating results. Manufacturers allocate inventory based on the size and location of dealerships, but actual shipments result from negotiations with individual dealers. The Company believes that larger dealers, such as UAG, are better positioned to secure favorable inventory shipments and optimize manufacturers' allocations. UAG finances its inventory purchases through revolving credit arrangements known in the industry as floor plan facilities. GROWTH STRATEGY UAG seeks to be a leader in the consolidation of the automotive retailing industry and to increase stockholder value through a growth strategy that includes the following principal elements: 3 Acquire and Integrate Profitable Dealership Operations UAG seeks to capitalize on continuing consolidation in the U.S. automotive retailing industry by selectively acquiring profitable dealerships. The Company targets dealerships or dealership groups with established records of profitability as well as with experienced management willing to remain in place. The Company focuses on opportunities in geographic markets with above-average projected population and job growth. Of the approximately 20,000 dealerships in the United States, the Company believes that at least 2,000 dealerships, some of which are members of dealership groups, meet its acquisition criteria. The Company may also target dealerships in North American Markets outside the United States. The Company is also creating regional hubs of dealerships that will be able to share administrative and other operations to reduce costs. The Company's acquisition program has been specifically tailored to address dealers' desire to retain a management role in their businesses while achieving personal liquidity. Owners of acquired dealerships typically continue as dealership managers and some also participate in overall Company operations through UAG's Chairman's Committee. The Company believes it provides dealership managers additional management tools, as its economies of scale, marketing expertise and corporate resources act as catalysts for continual dealership growth. In addition, the dealer may retain an equity interest in the business through the ownership of capital stock and/or stock options of UAG. Grow Higher-Margin Operating Businesses UAG is focusing on higher-margin businesses such as the retail sale of used vehicles, aftermarket products and service and parts. Used Vehicles. Used vehicle sales by franchised dealers, with average prices approximating 60% of new vehicle prices, typically generate higher gross margins than new car sales because of limited comparability among them and the somewhat subjective nature of their valuation. Consumer acceptance of used vehicle purchasing has grown, due principally to (i) an increase in the availability of late-model, low-mileage used vehicles due in part to the large supply of vehicles coming off short-term leases, (ii) improvements in the quality of motor vehicles and (iii) increases in the prices of new vehicles. UAG believes that through its new vehicle franchises, it enjoys significant advantages over both independent and chain used-vehicle companies in sourcing used vehicles. Specifically, the Company has access to (i) a steady supply of used vehicles accepted as trade-ins for new vehicle purchases, (ii) off-lease vehicles that were originally leased through the new vehicle franchise and (iii) used vehicle auctions open only to new vehicle dealers. In addition, only new vehicle franchises are able to sell used vehicles certified by the manufacturer under recently introduced programs in which the manufacturer supports specific high-quality used cars with extended warranties and attractive financing options. 4 Aftermarket Products. Each sale of a new or used vehicle provides the opportunity for the Company to sell aftermarket products. Aftermarket products include accessories such as radios, cellular phones, alarms, custom wheels, paint sealants and fabric protectors, as well as agency services such as extended service contracts and credit insurance policies. In addition, the Company receives fees for placing financing and lease contracts. In order to meet customers' needs and help create a "one-stop" shopping experience, management continues to expand aftermarket product offerings through its UnitedAuto Care subsidiary. Service and Parts. Each of UAG's new vehicle dealerships offers a fully integrated service and parts department. The service and parts business provides an important recurring revenue stream to the Company's dealerships, which may help to mitigate the effects of downturns in the automobile sales cycle. Unlike independent service shops or used car dealerships with service operations, UAG is qualified to perform work covered by manufacturer warranties. Since warranty service work is paid for by the manufacturer, consumers are motivated to service their vehicles at a dealership for the warranty period. In recent years, manufacturers have generally lengthened standard warranty coverage on new cars and introduced warranty coverage on used cars, further enhancing customer retention opportunities in the service area. To grow their service and parts businesses, UAG dealerships have implemented programs to track maintenance records of customers and contact them regarding dealership promotions and maintenance schedules. In addition, the Company is actively marketing warranty-covered services to potential customers such as municipalities and corporations with large fleets of automobiles located near certain of its dealerships. The Company is able to offer repair services to such customers on a more efficient and less costly basis than such customers generally can perform themselves. The Company believes that its market share will grow at the expense of independent mechanics' shops, which may be unable to address the increased mechanical and electronic sophistication of today's motor vehicles and the increased expenses of compliance with more stringent environmental regulations. Generate Incremental Revenue from Automobile Finance Business The majority of new and used automobiles purchased from franchised dealerships and independent businesses are financed. To further increase the incremental profit achievable through its vehicle sales by capturing some of this financing business, the Company established UnitedAuto Finance, its own automobile finance subsidiary. UnitedAuto Finance purchases, sells and services primarily prime credit quality automobile loans originated by both UAG and third-party dealerships. Additionally, UnitedAuto Finance receives fees from financial institutions which purchase installment contracts from customers referred to them by UnitedAuto Finance. Based in Rochester, New York, UnitedAuto Finance commenced loan operations in January 1995 and, as of December 31, 1997, served approximately 250 dealerships in Arizona, Arkansas, Connecticut, Georgia, New Jersey, New York, Tennessee and Texas. 5 OPERATING STRATEGY Implement "Best Practices" The Chairman's Committee, comprised of senior executives and key managers, meets regularly to review the operating performance of individual dealerships, as well as to examine important industry trends and, where appropriate, recommend specific operating improvements. This facilitates implementation of successful strategies throughout the organization so that each dealership can benefit from the successes of the others, as well as from the knowledge and experience of UAG's senior management. Management also attends various industry sponsored leadership and management seminars and receives continuing education in products, marketing strategies and management information systems. The Company shares training techniques across its dealership base and has made improving service absorption and aftermarket revenues a Company-wide focus. Emphasize Customer Service Central to UAG's overall philosophy is customer-oriented service designed to meet the needs of an increasingly sophisticated and demanding automotive consumer through "one-stop" shopping convenience, competitive pricing and a sales staff that is knowledgeable about product offerings and responsive to a customer's particular needs. The Company's goal is to establish lasting relationships with its customers, which enhance its reputation in the community and create the opportunity for significant repeat and referral business. The quality of customer service provided by dealerships' sales and service departments is measured by customer satisfaction index ("CSI") scores, which are derived from data accumulated by manufacturers through individual customer surveys. UAG relies on this data to improve dealership operations and uses it as a factor in determining the compensation of general managers and sales and service personnel in all its dealerships. The Company's most recent CSI scores indicate that a majority of its dealerships' CSI scores were at or above the average CSI scores for the applicable regions. COMPETITION Automobile Dealerships The automotive retailing industry is extremely competitive. In large metropolitan areas, consumers have a number of choices in deciding where to purchase a new or used vehicle and where to have such a vehicle serviced. 6 For new vehicle sales, the Company competes with other franchised dealers in each of its marketing areas. The Company does not have any cost advantage in purchasing new vehicles from the manufacturer, and typically relies on advertising and merchandising, sales expertise, service reputation and location of its dealerships to sell new vehicles. In recent years, automobile dealers have also faced increased competition in the sale of new vehicles from independent leasing companies and on-line purchasing services and warehouse clubs. Due to lower overhead and sales costs, these companies may be capable of operating on smaller gross margins and offering lower sales prices than franchised dealers. In addition, the Company may face competition in the future from partnerships between manufacturers and dealers. For used vehicle sales, the Company competes with other franchised dealers, independent used vehicle dealers, automobile rental agencies, private parties and used vehicle "superstores" for supply and resale of used vehicles. The Company believes that the principal competitive factors in vehicle sales are the marketing campaigns conducted by manufacturers, the ability of dealerships to offer a wide selection of the most popular vehicles, the location of dealerships and the quality of customer service. Other competitive factors include customer preference for particular brands of automobiles, pricing (including manufacturer rebates and other special offers) and warranties. The Company believes that its dealerships are competitive in all of these areas. The Company competes against other franchised dealers to perform warranty repairs and against other automobile dealers, franchised and unfranchised service center chains, and independent garages for non-warranty repair and routine maintenance business. The Company competes with other automobile dealers, service stores and auto parts retailers in its parts operations. The Company believes that the principal competitive factors in parts and service sales are price, the use of factory-approved replacement parts, the familiarity with a manufacturer's brands and models and the quality of customer service. A number of regional or national chains offer selected parts and services at prices that may be lower than the Company's prices. UnitedAuto Finance UnitedAuto Finance faces competition from a variety of lenders in the fragmented auto finance market: captive finance companies, banking institutions and independent finance companies. Captive finance companies such as General Motors Acceptance Corporation, Ford Motor Credit Company and Chrysler Financial Corporation primarily focus on increasing dealer sales volume by offering low-yield rates when promoting certain products. In general, captive finance companies provide standardized products with fixed market rates, and are not as flexible in the marketplace. Independent auto finance companies focus on unconventional segments of the market with some lending to lower credit borrowers in exchange for higher yields. The Company believes that the principal competitive factors in offering financing are convenience, interest rates and contract terms. Certain larger competitors of UnitedAuto Finance are able to borrow at lower interest rates and, therefore, are at a competitive advantage. While market shares shift over time, the trend in the banking market share is toward fewer and larger super-regional competitors, reflecting the ongoing consolidations in that industry. As in the case of UnitedAuto Finance, some finance companies are organized by large dealership groups as part of a vertical integration strategy. 7 EMPLOYEES AND LABOR RELATIONS As of December 31, 1997, UAG employed approximately 4,000 people, approximately 145 of whom are covered by collective bargaining agreements with labor unions. Relations with employees are considered by the Company to be satisfactory. The Company's policy is to motivate its key managers through, among other things, grants of stock options. ENVIRONMENTAL MATTERS As with automobile dealerships generally, and service parts and body shop operations in particular, the Company's business involves the use, handling and contracting for recycling or disposal of hazardous or toxic substances or wastes, including environmentally sensitive materials such as motor oil, waste motor oil and filters, transmission fluid, antifreeze, refrigerant, waste paint and lacquer thinner, batteries, solvents, lubricants, degreasing agents, gasoline and diesel fuels. The Company's business also involves the past and current operation and/or removal of aboveground and underground storage tanks containing such substances or wastes. Accordingly, the Company is subject to regulation by federal, state and local authorities establishing health and environmental quality standards, and liability related thereto, and imposing penalties for violations of those standards. The Company is also subject to laws, ordinances and regulations governing remediation of contamination at facilities it operates or to which it sends hazardous or toxic substances or wastes for treatment, recycling or disposal. The Company believes that it does not have any material environmental liabilities and that compliance with environmental laws, ordinances and regulations will not, individually or in the aggregate, have a material adverse effect on the Company's results of operations or financial condition. However, soil and groundwater contamination has been known to exist at certain properties leased by the Company. Furthermore, environmental laws and regulations are complex and subject to frequent change. There can be no assurance that compliance with amended, new or more stringent laws or regulations, stricter interpretations of existing laws or the future discovery of environmental conditions will not require additional expenditures by the Company, or that such expenditures would not be material. ITEM 2. PROPERTIES The Company seeks to structure its operations so as to avoid the ownership of real property. As a result, the Company leases or subleases all of its facilities, including dealerships and office space used for corporate activities. As of December 31, 1997, the Company has leases at each of its dealerships, which can include facilities for (i) new and used vehicle sales, (ii) vehicle service operations, (iii) retail and wholesale parts operations, (iv) body shop operations, (v) storage and (vi) general office use. Such leases are generally for a period of between five and twenty years and typically include renewal options for an additional five to ten years in favor of the Company. In addition, the Company leases office space in New York, NY and Rochester, NY for the Company's corporate headquarters and the corporate offices of UnitedAuto Finance. 8 ITEM 3. LEGAL PROCEEDINGS In May and June, 1997, three complaints were filed in the United States District Court for the Southern District of New York on behalf of a purported class consisting of all persons who purchased the Company's Voting Common Stock issued in connection with and/or traceable to the Company's initial public offering (the "IPO") at any time up to and including February 26, 1997 (the "Lawsuits"). The complaints name as defendants the Company, Carl Spielvogel, Marshall S. Cogan, J.P. Morgan Securities Inc., Montgomery Securities and Smith Barney Inc. The plaintiffs in the Lawsuits seek unspecified damages in connection with their allegations that the prospectus and the related registration statement disseminated in connection with the IPO contained material misrepresentations and omissions in violation of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended (the "Securities Act"). They also seek to have their actions certified as class actions under Federal Rules of Civil Procedure. On August 5, 1997, the Lawsuits were ordered consolidated for all purposes. On October 3, 1997, the plaintiffs filed a consolidated amended class action complaint. On November 17, 1997, the Company filed a motion to dismiss the consolidated amended class action complaint. The court has not yet ruled on this motion. The Company believes that the plaintiffs' claims are without merit and intends to defend the Lawsuits vigorously. Additionally, the Company and its subsidiaries are involved in litigation that has arisen in the ordinary course of business. None of these matters, either individually or in the aggregate, are expected to have a material adverse effect on the Company's results of operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock is listed on the New York Stock Exchange ("NYSE") under the symbol "UAG." There were 119 holders of record of the Common Stock and one holder of record of the Non-voting Common Stock as of March 24, 1998. There is no established market for the Company's Non-voting Common Stock, but such stock is convertible into an equal number of shares of Voting Common Stock at any time, subject to certain conditions, for no cost at the option of the holder thereof. The following table sets forth the high and low sales prices as reported on the NYSE during each fiscal quarter since the Company's Common Stock began trading on the NYSE after its initial public offering in October 1996. 9 1997 1996 QUARTER ENDED HIGH LOW HIGH LOW ------------- ---- --- ---- --- March 31 31 3/4 19 1/4 N/A June 30 19 7/8 16 N/A September 30 27 7/8 19 1/4 N/A December 31 26 13/16 13 3/4 35 1/4 21 3/8 The Company has not declared or paid dividends on its Common Stock during 1997 or 1996. The Company intends to retain future earnings, if any, to finance the development and expansion of its business and, therefore, does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. The decision whether to pay dividends will be made by the Board of Directors of the Company in light of conditions then existing, including the Company's results of operations, financial condition and requirements, business conditions and other factors. The Senior Credit Facility (as hereinafter defined) restricts the Company from paying dividends in excess of $5.0 million in the aggregate. In addition, the indentures governing the Notes (as hereinafter defined) limit the Company's ability to pay dividends based on a formula which takes into account, among other things, the Company's consolidated net income. The Company is a holding company whose assets consist primarily of the indirect ownership of the capital stock of its operating subsidiaries. Consequently, the Company's ability to pay dividends is dependent upon the earnings of its subsidiaries and their ability to distribute earnings to the Company and other advances and payments by such subsidiaries to the Company. Pursuant to support agreements by the Company in favor of subsidiaries of UnitedAuto Finance that were entered into in connection with securitization transactions or sales of automobile loan receivables, the Company is prohibited from paying dividends in excess of 50% of its cumulative net income measured over specified periods. Pursuant to the automobile franchise agreements to which the Company's dealerships are subject, all dealerships are required to maintain a certain minimum working capital, and some dealerships are also required to maintain a certain minimum net worth. These requirements may restrict the ability of the Company's operating subsidiaries to make dividend payments, which in turn may restrict the Company's ability to make dividend payments. 10 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected historical consolidated financial and other data of the Company as of and for the five years in the period ended December 31, 1997. Such financial information has been derived from the Company's consolidated financial statements. During the five year period, the Company made a number of acquisitions, each of which has been accounted for using the purchase method of accounting. Accordingly, the Company's financial statements include the results of operations of the acquired dealerships only from the date of acquisition. As a result, the Company's period to period results of operations vary depending on the dates of such acquisitions. The selected consolidated financial data should be read in conjunction with the Company's consolidated financial statements and related footnotes included elsewhere herein.
SELECTED CONSOLIDATED FINANCIAL DATA (1) YEARS ENDED DECEMBER 31, (Dollars in thousands, except per share data) 1997 (2)(3) 1996 (4) 1995 (5) 1994 1993 ----------- -------- -------- ---- ---- STATEMENT OF OPERATIONS DATA: AUTO DEALERSHIPS Total revenues $2,087,148 $1,302,031 $805,621 $731,629 $606,091 Cost of sales, including floor plan interest 1,830,086 1,156,459 720,634 646,197 536,542 ------------------------------------------------------------------------------------- Gross profit 257,062 145,572 84,987 85,432 69,549 Selling, general and administrative expenses 255,066 124,244 90,586 80,415 66,910 ------------------------------------------------------------------------------------- Operating income (loss) 1,996 21,328 (5,599) 5,017 2,639 Other interest expense (14,071) (4,398) (1,438) (860) (1,233) Other income (expense), net 297 2,506 2,208 (2,899) - ------------------------------------------------------------------------------------- Income (loss) before income taxes (11,778) 19,436 (4,829) 1,258 1,406 AUTO FINANCE Loss before income taxes (3,735) (1,490) (1,382) (616) - ------------------------------------------------------------------------------------- TOTAL COMPANY Income (loss) before minority interests, income tax (provision) benefit and (15,513) 17,946 (6,211) 642 1,406 extraordinary item Minority interests (138) (3,306) 366 (887) (117) Income tax (provision) benefit 5,511 (6,606) 2,191 - (47) ------------------------------------------------------------------------------------- Income (loss) before extraordinary item (10,140) 8,034 (3,654) (245) 1,242 Extraordinary item - (4,987) - - - ------------------------------------------------------------------------------------- Net income (loss) $(10,140) $3,047 $(3,654) $(245) $1,242 ===================================================================================== Income (loss) before extraordinary item per diluted common share $(0.54) $0.74 $(0.67) $(0.06) $0.65 ===================================================================================== OTHER AUTO DEALERSHIP DATA: Gross profit margin 12.3% 11.2% 10.5% 11.7% 11.5% Operating margin 0.1% 1.6% (0.7)% 0.7% 0.4% New cars sold at retail 50,985 36,802 25,138 22,464 18,608 Used cars sold at retail 31,253 18,344 8,953 8,340 7,891
11
SELECTED CONSOLIDATED FINANCIAL DATA (1) - -------------------------------------------------------------------------------------------------------------------------- AS OF DECEMBER 31, (Dollars in thousand) 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- BALANCE SHEET DATA: AUTO DEALERSHIPS Intangible assets, net $326,774 $177,194 $48,774 $23,018 $22,832 Long-term debt 238,550 11,121 24,073 6,735 4,122 AUTO FINANCE Net assets 32,601 14,552 3,501 291 - TOTAL COMPANY Total assets 975,662 528,244 240,397 174,922 157,041 Total stockholders' equity 300,557 284,501 51,699 31,432 26,410
- ------------------------------ (1) During 1997, the Company changed its method of accounting for new vehicle inventory from LIFO to the specific identification method. Management believes the specific identification method (i) more accurately matches revenues with costs, (ii) more accurately reflects the current market value of new vehicle inventories and (iii) will provide for a more meaningful comparison of the Company's operating results and financial position with that of its competition. This change in accounting principle has been applied by retroactively restating the Company's financial statements for prior years. The effect of the change in accounting for new vehicle inventories was to increase net income and income before extraordinary item by $573 ($0.05 per diluted share) in 1996, decrease net income and income before extraordinary item by $188 ($0.03 per diluted share) in 1995 and increase net income and income before extraordinary item by $1,446 ($0.38 per diluted share) and $1,099 ($0.60 per diluted share) in 1994 and 1993, respectively. (2) Includes a $31.7 million charge recorded during 1997 (the "Fourth Quarter Charge"). The charge included costs associated with (i) the divestiture of automotive franchises, (ii) the closure of three stand-alone used vehicle satellite locations in Arkansas and the disposal of related inventory, (iii) the implementation of a new policy to more efficiently manage the Company's working capital invested in retail inventory, (iv) excess real estate, (v) the write-off of non-performing assets and (vi) certain corporate consulting agreements. Costs associated with the Fourth Quarter Charge amounting to $9.8 million and $20.9 million have been reflected in cost of goods sold and selling, general and administrative expenses, respectively, in the Consolidated Statements of Operations. In addition, $1.0 million has been reflected in the results of UnitedAuto Finance. (3) Includes the results of Crown Automotive, Hanna Nissan, the Staluppi Automotive Group, the Gene Reed Automotive Group, the Lance Landers dealerships, Stone Mountain Jeep Eagle, Shreveport Dodge, Central Ford, Covington Pike Dodge and the Triangle Group from their respective dates of acquisition (4) Includes the results of Atlanta Toyota, United Nissan (GA), Peachtree Nissan, the Sun Automotive Group, the Evans Group and United Nissan (TN) from their respective dates of acquisition. (5) Includes the results of Landers Auto from its date of acquisition. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company retails new and used automobiles and light trucks, operates service and parts departments and sells various aftermarket products, including finance and insurance contracts. The Company also owns UnitedAuto Finance, an automobile finance company. New vehicle revenues include sales to retail customers and to leasing companies providing consumer automobile leasing. Used vehicle revenues include amounts received for used vehicles sold to retail customers, leasing companies providing consumer leasing, other dealers and wholesalers. Finance and insurance revenues are generated from sales of accessories such as radios, cellular phones, alarms, custom wheels, paint sealants and fabric protectors, as well as amounts received as fees for placing extended service contracts, credit insurance policies, and financing and lease contracts. UAG dealerships market a complete line of aftermarket automotive products and services through the Company's wholly-owned subsidiary, United AutoCare. Service and parts revenues include fees paid by consumers for repair and maintenance service and the sale of replacement parts. UnitedAuto Finance derives revenues from the purchase, sale and servicing of motor vehicle installment contracts originated by both UAG and third-party dealerships, as well as from fees paid by financial institutions which purchase installment contracts from customers referred to them by UnitedAuto Finance. The Company's selling expenses consist of advertising and compensation for sales department personnel, including commissions and related bonuses. General and administrative expenses include compensation for administration, finance and general management personnel, depreciation, amortization, rent, insurance, utilities and other outside services. Interest expense consists of interest charges on all of the Company's interest-bearing debt, other than interest relating to floor plan inventory financing which is included in cost of sales. During 1997, the Company recorded a pre-tax charge of $31.7 million (the "Fourth Quarter Charge"). The charge included costs associated with (i) the divestiture of automotive franchises, (ii) the closure of three stand-alone used vehicle satellite locations in Arkansas and the disposal of related inventory, (iii) the implementation of a new policy to more efficiently manage the Company's working capital invested in retail inventory, (iv) excess real estate, (v) the write-off of non-performing assets and (vi) certain corporate consulting agreements. Costs associated with the Fourth Quarter Charge amounting to $9.8 million and $20.9 million have been reflected in cost of goods sold and selling, general and administrative expenses, respectively, in the Consolidated Statements of Operations. In addition, $1.0 million has been reflected in the results of UnitedAuto Finance. Also, the Company changed its method of accounting for new vehicle inventory from LIFO to the specific identification method. All prior period results of operations and related comparisons in this Management's Discussion and Analysis of Financial Condition and Results of Operations have been restated to reflect such change in accounting principle. 13 Also, the Company made a number of dealership acquisitions in 1997, 1996 and 1995. Each of these acquisitions has been accounted for using the purchase method of accounting and as a result, the Company's financial statements include the results of operations of the acquired dealerships only from the date of acquisition. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Auto Dealerships Revenues. Revenues increased by $785.1 million, or 60.3%, from $1.3 billion to $2.1 billion. The overall increase in revenues is due principally to dealership acquisitions made in 1997 and the inclusion of a full year's revenues for dealerships acquired in 1996, offset by a net decrease in sales at dealerships owned prior to January 1, 1996. The net decrease in revenues at dealerships owned prior to January 1, 1996 is due primarily to (i) a reduction in revenues at Atlanta Toyota, impacted by shortages of inventory of certain models and weakness in the Atlanta market, and (ii) a decrease in sales volume at the Company's DiFeo division, resulting principally from the closure of unprofitable dealerships. Sales of new and used vehicles increased by $663.0 million, or 56.9%, from $1.2 billion to $1.8 billion. The overall increase in vehicle sales is due principally to dealership acquisitions made in 1997 and the inclusion of a full year's revenues for dealerships acquired in 1996, offset by the net decrease in new and used vehicle sales at dealerships owned prior to January 1, 1996 noted above. Aggregate unit retail sales of new and used vehicles increased by 38.5% and 70.4%, respectively, due principally to acquisitions, offset by the sales declines noted above. For the year ended December 31, 1997, the Company sold 50,985 new vehicles (62.0% of total vehicle sales) and 31,253 used vehicles (38.0% of total vehicle sales). For the year ended December 31, 1996, the Company sold 36,802 new vehicles (66.7% of total vehicle sales) and 18,344 used vehicles (33.3% of total vehicle sales). The increase in the relative proportion of used vehicle sales to total vehicle sales was due primarily to the expansion of used car operations in response to the popularity of used cars. New vehicle selling prices increased by an average of 11.4% due primarily to changes in the mix of models sold and changes in manufacturer pricing. Used vehicle selling prices increased by an average of 9.2% due to changes in market conditions which resulted in a change in the mix of used vehicles sold and the increase in sales of recent model year off-lease vehicles. Finance and insurance revenues (aftermarket product sales) increased by $25.2 million, or 57.8%, from $43.6 million to $68.8 million. The increase is due primarily to (i) dealership acquisitions made in 1997, (ii) the inclusion of a full year's revenues for dealerships acquired in 1996 and (iii) the establishment of UnitedAuto Care, partially offset by a net decrease in finance and insurance revenues in the DiFeo Group. The decrease in the DiFeo Group is due principally to the closure of certain franchises. 14 Service and parts revenues increased by $96.9 million, or 103.2%, from $93.9 million to $190.8 million. The increase is due primarily to dealership acquisitions made in 1997 and the inclusion of a full year's revenues for dealerships acquired in 1996, partially offset by a net decrease in service and parts revenues in the DiFeo Group. The decrease in the DiFeo Group is due to the closure of certain franchises. Gross Profit. Gross profit increased by $111.5 million, or 76.6%, from $145.6 million to $257.1 million. Gross profit as a percentage of revenues increased from 11.2% to 12.3%. The increase in gross profit and in gross profit as a percentage of revenues is due to (i) dealership acquisitions made in 1997 and the inclusion of a full year's operations for dealerships acquired in 1996, (ii) increased dealership finance and insurance and service and parts revenues, which yield higher margins, as a percentage of total revenues, (iii) improved gross profit margins on vehicle sales revenues, (iv) improved gross profit margins on finance and insurance revenues, (v) improved gross profit margins on service and parts revenues and (vi) the establishment of UnitedAuto Care, offset by the Fourth Quarter Charge. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $130.8 million, or 105.3%, from $124.2 million to $255.1 million due principally to (i) dealership acquisitions made in 1997 and the inclusion of a full year's operations for dealerships acquired in 1996, (ii) an increase in the infrastructure required to manage the substantial increase in the Company's operations and planned expansion of its business in the future and (iii) the Fourth Quarter Charge. Selling, general and administrative expenses as a percentage of revenue increased to 12.2 % from 9.5%. Other Interest Expense. Other interest expense increased by $9.7 million, from $4.4 million to $14.1 million. The increase is due to interest expense arising from (i) borrowings under the Senior Credit Facility, (ii) the issuance of the Company's Senior Subordinated Notes due 2007 and (iii) the issuance of acquisition-related debt, offset by a reduction in interest expense due to the retirement of the Company's Senior Notes in October 1996. Other Income (Expense), Net. Other income (expense), net decreased by $2.3 million, from $2.6 million to $0.3 million, due principally to a reduction in related party interest income resulting from the disposition of the minority interests in certain dealerships in October 1996. Auto Finance Loss before income taxes. UnitedAuto Finance's loss before income taxes increased by $2.2 million, from $1.5 million to $3.7 million. The increase is due principally to (i) an increase in the infrastructure required to manage the substantial increase in UnitedAuto Finance's operations and planned expansion of its business in the future, (ii) charges relating to revised loan loss estimates and (iii) the Fourth Quarter Charge. 15 Total Company Provision for Income Taxes. During 1997, the Company recorded an income tax benefit in the amount of $5.5 million, compared with income tax expense of $6.6 million in the prior year. The change is due to the Company's experiencing a net operating loss in 1997 compared with net income in 1996. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Auto Dealerships DiFeo Restructuring. The Company undertook a broad restructuring of its DiFeo Group in 1995 (the "DiFeo Restructuring"). The restructuring included (i) the elimination of 17 unprofitable franchises, (ii) a significant reduction in personnel and (iii) the liquidation of outdated inventory. Costs associated with the DiFeo Restructuring were approximately $0.5 million and $0.7 million for the years ended December 31, 1996 and 1995, respectively, primarily related to severance. Revenues. Revenues increased by $496.4 million, or 61.6%, from $805.6 million to $1,302.0 million due to the full year contribution of Landers Auto, which was acquired in August 1995, and the acquisitions made in 1996. Revenues at Landers Auto were $323.2 million in 1996. Revenues at the continuing franchises of the DiFeo Group increased by $82.9 million, or 13.8%, from $598.7 million to $681.6 million. That increase was more than offset by a decrease of $90.6 million due to the elimination of unprofitable franchises as part of the DiFeo Restructuring. Sales of new and used vehicles increased by $448.2 million, or 62.6%, from $716.4 million to $1,164.6 million. Dealerships acquired in 1996 contributed $266.5 million to that increase. New and used vehicle sales at the continuing franchises of the DiFeo Group increased by $66.2 million, or 12.5%, from $529.0 million to $595.2 million. That increase was more than offset by a decrease of $78.2 million in sales due to the elimination of unprofitable franchises as part of the DiFeo Restructuring. Unit retail sales of new and used vehicles increased by 46.4% and 104.9%, respectively, due principally to the 1996 acquisitions and the full year contribution of Landers Auto. During 1996, the Company sold 36,802 new vehicles (66.7% of total vehicle sales) and 18,344 used vehicles (33.3% of total vehicle sales). During 1995, the Company sold 25,138 new vehicles (73.7% of total vehicle sales) and 8,953 used vehicles (26.3% of total vehicle sales). The increase in the relative proportion of used vehicle sales to new vehicle sales was due principally to the expansion of existing used car facilities and the establishment of stand-alone retail used car centers in response to the increased popularity of used cars. New vehicle selling prices increased by an average of 5.4% due primarily to changes in the mix of models sold and changes in manufacturer pricing. Used vehicle selling prices increased by an average of 13.7% due to changes in market conditions which resulted in a change in the mix of used vehicles sold. 16 Finance and insurance revenues (aftermarket product sales) increased by $13.8 million, or 46.3%, from $29.8 million to $43.6 million due to the full year contribution of Landers Auto and the acquisitions made in 1996. Sales of such products increased by $6.3 million, or 24.5%, from $25.7 million to $32.0 million at the continuing franchises of the DiFeo Group, offsetting the $2.0 million decrease in sales due to the elimination of unprofitable franchises as part of the DiFeo Restructuring. Service and parts revenues increased by $34.5 million, or 58.1%, from $59.4 million to $93.9 million due to the full year contribution of Landers Auto and the acquisitions made in 1996. Gross Profit. Gross profit increased by $60.6 million, or 71.3%, from $85.0 million to $145.6 million. The full year contribution of Landers Auto accounts for $16.2 million of the increase and the remaining $37.5 million increase is due to the 1996 acquisitions. Gross profit at the continuing franchises of the DiFeo Group increased by $13.4 million, or 20.0%, from $66.9 million to $80.3 million. Gross profit as a percentage of revenues increased 6.7% from 10.5% to 11.2%. Included in the above gross profit figures is gross profit from finance and insurance activities, which increased by $8.9 million, or 38.2%, from $23.4 million to $32.3 million due principally to the full year contribution of Landers Auto and the 1996 acquisitions. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $33.6 million, or 37.1%, from $90.6 million to $124.2 million due principally to the full year ownership of Landers Auto and the 1996 acquisitions. Such expenses as a percentage of revenues decreased from 11.2% to 9.5%. Other Interest Expense. Interest expense other than floor plan increased by $3.0 million, or 214.3%, from $1.4 million to $4.4 million as a result of increased borrowings to finance the acquisitions made in 1995 and 1996 Auto Finance Loss before Income Taxes. The pretax loss from operations at Atlantic Finance increased by $0.1 million from a loss of $1.4 million to $1.5 million. Total Company Provision for Income Taxes. The 1996 provision for income taxes is $6.6 million, compared to an income tax credit of $2.2 million recorded in 1995. The credit for 1995 was taken as the Company determined in the fourth quarter that it was more likely than not that future taxable income from operations would be sufficient to fully realize the tax benefits of net operating losses incurred in prior years. Extraordinary Item, Net of Income Tax Benefits. The extraordinary item, net of income tax benefits, of $5.0 million represents a loss on the retirement of long-term debt resulting from a prepayment premium and a write-off of associated debt issuance costs. 17 LIQUIDITY AND CAPITAL RESOURCES CASH AND LIQUIDITY REQUIREMENTS The cash requirements of the Company are primarily for acquisition of new dealerships, working capital and the expansion of existing facilities. Historically, these cash requirements have been met through issuances of equity and debt instruments and cash flow from operations. At December 31, 1997, the Company had working capital of $105.1 million. During 1997, dealership activities resulted in net cash provided by operations of $18.3 million. Net cash used by dealerships in investing activities during the year ended December 31, 1997 totaled $173.0 million, relating primarily to dealership acquisitions, funding provided to UnitedAuto Finance and capital expenditures. Dealership financing activities provided $182.3 million of cash during the year ended December 31, 1997 principally relating to net proceeds from the issuance of long-term debt. The Company finances substantially all of its new and used vehicle inventory under revolving floor plan financing arrangements with various lenders. The floor plan lenders pay the manufacturer directly with respect to new vehicles. The Company makes monthly interest payments on the amount financed, but is not required to make loan principal repayments prior to the sale of new and used vehicles. Substantially all of the assets of the Company's dealerships are subject to security interests granted to their floor plan lending sources. At December 31, 1997, the Company had approximately $94.4 million of cash available to fund operations and future acquisitions. In addition, the Company was party to a $50.0 million Senior Credit Facility, dated March 20, 1997 (as amended) (the "Senior Credit Facility"), with a group of banks, which was to be used principally for acquisitions. On February 27, 1998, the Company replaced the Senior Credit Facility with a new credit agreement, which provides for up to $75.0 million in term loans, revolving loans and letters of credit, to be used principally for acquisitions. During 1997, the Company issued $200.0 million aggregate principal amount of its 11% Senior Subordinated Notes due 2007 (the "Notes"). Net proceeds from the sale of the Notes amounted to $189.5 million, of which $50.0 million was used to repay in full amounts then outstanding under the Senior Credit Facility. The balance of the proceeds was deposited with the Company's floor plan lenders, which deposits earn interest at rates designated in the Company's floor plan agreements with the various floor plan lenders, and ultimately was used for working capital and to fund acquisitions. 18 The Company's principal source of growth has come, and is expected to continue to come, from acquisitions of automobile dealerships. The Company believes that its existing capital resources will be sufficient to fund its current acquisition commitments. During January and February 1998, the Company completed the acquisition of several dealerships and dealer groups. Approximately $98.2 million of the aggregate consideration in connection therewith was paid in cash, $28.0 million of which was borrowed under the new credit agreement. To the extent the Company pursues additional significant acquisitions, it may need to raise additional capital either through the public or private issuance of equity or debt securities or through additional bank borrowings. A public equity offering would require the prior approval of certain automobile manufacturers. CYCLICALITY Unit sales of motor vehicles, particularly new vehicles, historically have been cyclical, fluctuating with general economic cycles. During economic downturns, the automotive retailing industry tends to experience similar periods of decline and recession as the general economy. The Company believes that the industry is influenced by general economic conditions and particularly by consumer confidence, the level of personal discretionary spending, interest rates and credit availability. SEASONALITY The Company's combined business is modestly seasonal overall. The greatest seasonalities exist with the dealerships in the New York metropolitan area, for which the second and third quarters are the strongest with respect to vehicle related sales. The service and parts business at all dealerships experiences relatively modest seasonal fluctuations. EFFECTS OF INFLATION The Company believes that the relatively moderate rates of inflation over the last few years have not had a significant impact on revenue or profitability. The Company does not expect inflation to have any near-term material effects on the sale of its products and services. However, there can be no assurance that there will be no such effect in the future. The Company finances substantially all of its inventory through various revolving floor plan arrangements with interest rates that vary based on the prime rate or LIBOR. Such rates have historically increased during periods of increasing inflation. The Company does not believe that it would be placed at a competitive disadvantage should interest rates increase due to increased inflation since most other automobile dealers have similar floating rate borrowing arrangements. IMPACT OF YEAR 2000 Many existing computer programs use only two digits to identify a year in the date field and, if not corrected, many computer applications could fail or generate erroneous results in the year 2000. Based on a recent assessment, management of the Company believes that its computer systems will not require any significant modifications in order to properly process date-related 19 information in the year 2000 and thereafter (or be "year 2000 compliant"). However, the Company could be materially adversely affected if the systems of its significant vendors, including those supplying and maintaining the general ledger and related accounting systems at each of the Company's dealerships, will not be year 2000 compliant. The Company has received assurances that such vendors are adequately addressing this issue. Nevertheless, there can be no guarantee that the systems provided by such vendors, or that the systems of other companies with which the Company does business, will be year 2000 compliant and that any such non-compliance will not have a material adverse effect on the Company. NEW ACCOUNTING PRONOUNCEMENT In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, Financial Reporting for Segments of a Business Enterprise ("FAS No. 131"). FAS No. 131 establishes standards relating to the means by which business' report operating segment information in financial information issued to shareholders. FAS No. 131, effective for interim periods beginning after December 31, 1997, is not expected to result in significant changes to the financial statements and related disclosures prepared by the Company. FORWARD LOOKING STATEMENTS Certain portions of this Annual Report contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included in this Annual Report or incorporated herein by reference regarding the Company's financial position and business strategy may constitute forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations, some of which are described in greater detail elsewhere in this Annual Report, include the following: (i) the Company is subject to the influence of various manufacturers whose franchises it holds; (ii) the Company is leveraged and subject to restrictions imposed by the terms of its indebtedness; (iii) the Company's growth depends in large part on the Company's ability to manage expansion, control costs in its operations and consummate and consolidate dealership acquisitions; (iv) many of the Company's franchise agreements impose restrictions on the transferability of the Company's Common Stock; (v) the Company will require substantial additional capital to acquire automobile dealerships and purchase inventory; (vi) unit sales of motor vehicles historically have been cyclical; (vii) the automotive retailing industry is highly competitive; (viii) the automotive retailing industry is a mature industry; (ix) the Company's success depends to a significant extent on key members of its management; and (x) the Company's business is seasonal. In light of the foregoing, readers of this Annual Report are cautioned not to place undue reliance on the forward-looking statements contained herein. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the consolidated financial statements listed in the accompanying Index to Consolidated Financial Statements for the information required by this item. 20 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III The information required by Items 10 through 13 is included in the Company's definitive proxy statement under the captions "The Board of Directors and its Committees," "Election of Directors," "Executive Officers," "Security Ownership of Certain Beneficial Owners and Management" and "Certain Relationships and Related Transactions." Such information is incorporated herein by reference, pursuant to General Instruction G(3). PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements The consolidated financial statements listed in the accompanying Index to Consolidated Financial Statements are filed as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K. The Company filed the following Current Reports on Form 8-K during the quarter ended December 31, 1997: 1. October 31, 1997, reporting under Items 5 and 7 (Hanna Nissan and Reed Group financial information). 2. November 6, 1997, reporting under Items 5 and 7 (announcement of Young Automotive acquisition). 3. November 20, 1997, reporting under item 7 (United Auto Group, Inc. pro forma financial information). (c) Exhibits 3.1(c) Third Restated Certificate of Incorporation. 3.2(a) Restated Bylaws. 4.1(a) Specimen Common Stock certificate. 4.2(f) Indenture, dated as of July 23, 1997, among the Company, the Guarantors party thereto and The Bank of New York, as Trustee, including form of Note and Guarantee. 21 4.4(f) Indenture, dated as of September 16, 1997, among the Company, the Guarantors party thereto and The Bank of New York, as Trustee, including form of Series B Note and Guarantee. 10.1.1(a) Registration Rights Agreement, dated as of October 15, 1993, among the Company and the investors listed therein, as amended July 31, 1996. 10.1.4(a) Form of Warrant. 10.1.8(a) Stock Option Plan of the Company. 10.1.11(a) Letter, dated July 24, 1996, from Chrysler Corporation to the Company. 10.1.12(a) Agreement, dated July 24, 1996, between the Company and Toyota Motor Sales U.S.A., Inc. 10.1.13(a) Non-employee Director Compensation Plan of the Company. 10.1.14(a) Form of Agreement among the Company, certain of its affiliates and American Honda Motor Co., Inc. 10.1.15(a) Form of Option Certificate of the Company in favor of Samuel X. DiFeo and Joseph C. DiFeo. 10.1.18(d) Consulting Agreement, dated March 3, 1997, between the Company and Carl Spielvogel. 10.2.1(a) Honda Automobile Dealer Sales and Service Agreement, including Standard Provisions. 10.2.2(a) Lexus Dealer Agreement, including Standard Provisions. 10.2.3(a) Mitsubishi Dealer Sales and Services Agreement, including Standard Provisions. 10.2.4(a) BMW of North America, Inc. Dealer Agreement, including Standard Provisions. 10.2.5(a) Suzuki Term Dealer Sales and Service Agreement, including Standard Provisions. 10.2.6(a) Toyota Dealer Agreement, including Standard Provisions. 10.2.7(a) General Motors Dealer Sales and Service Agreement, including Standard Provisions. 10.2.9(a) Nissan Dealer Term Sales and Service Agreement, including Standard Provisions. 10.2.10(a) Chrysler Corporation Term Sales and Service Agreement, including Standard Provisions. 10.2.15(a) Hyundai Motor America Dealer Sales and Service Agreement, including Standard Provisions. 10.2.21 Isuzu Dealer Sales and Service Agreement, including and .22(a) Standard Provisions. 10.2.26(a) Settlement Agreement, dated as of October 3, 1996, among the Company and certain of its affiliates, on the one hand, and Samuel X. DiFeo, Joseph C. DiFeo and certain of their affiliates, on the other hand. 10.3.1 Ford Sales and Service Agreement, including Standard Provisions. 10.4.5(a) Employment Agreement, dated as of August 1, 1995, between Landers Auto Sales, Inc. and Steve Landers. 10.5.13(a) Employment Agreement, dated as of January 16, 1996, among the Company, UAG Atlanta, Inc. and John Smith. 22 10.8.1(a) Stock Purchase Agreement, dated as of June 6, 1996, among the Company, UAG West, Inc., Scottsdale Jaguar, LTD., SA Automotive, LTD., SL Automotive, LTD., SPA Automotive, LTD., LRP, LTD., Sun BMW, LTD., Scottsdale Management Group, LTD., 6725 Dealership LTD. and certain parties named therein, as amended on October 21, 1996 by Amendment No. 1, Amendment No. 2 and Amendment No. 3. 10.8.3(a) Form of Employment Agreement between the Company, UAG West, Inc., and Steven Knappenberger. 10.8.5(a) Audi Dealer Agreement, including Standard Provisions. 10.8.6(a) Acura Automobile Dealer Sales and Service Agreement, including Standard Provisions. 10.8.8(a) Porsche Sales and Service Agreement, including Standard Provisions. 10.8.9(a) Land Rover North America, Inc. Dealer Agreement, including Standard Provisions. 10.8.21(e) Rolls-Royce Dealer Agreement. 10.11.1(b) Agreement and Plan of Merger, dated December 16, 1996, among Crown Jeep Eagle, Inc., Berylson, Inc., Shannon Automotive, Ltd., Kevin J. Coffey, Paul J. Rhodes, the Company, UAG Texas, Inc. and UAG Texas II, Inc. 10.13.1(d) Stock Purchase Agreement, dated February 19, 1997, among the Company, UAG East, Inc., Amity Auto Plaza Ltd., Massapequa Imports Ltd., Westbury Nissan Ltd., Westbury Superstore Ltd., J&S Auto Refinishing Ltd., Florida Chrysler Plymouth Jeep Eagle Inc., Palm Auto Plaza Inc., West Palm Infiniti Inc., West Palm Nissan Inc., Northlake Auto Finish Inc., John A. Staluppi and John A. Staluppi, Jr., as amended April 7, 1997 and April 30, 1997. 10.15.1(e) Stock Purchase Agreement, dated April 12, 1997, among the Company, Gene Reed Chevrolet, Inc., Michael Chevrolet-Oldsmobile, Inc., Reed-Lallier Chevrolet, Inc., Gene Reed, Jr., Michael L. Reed, Michael G. Lallier, Deborah B. Lallier, John P. Jones, Charles J. Bradshaw, Charles J. Bradshaw, Jr., Julia D. Bradshaw and William B. Bradshaw, as amended May 31, 1997. 10.18.1(f) Stock Purchase Agreement, dated July 25, 1997 among The Company, UAG Classic, Inc., Classic Auto Group, Inc., Cherry Hill Classic Cars, Inc., Classic Enterprises, Inc., Classic Buick, Inc., Classic Chevrolet, Inc., Classic Management, Inc., Classic Turnersville, Inc., Classic Imports, Inc. and Thomas J. Hessert, Jr. (as amended). 10.19.1.1(f) Stock Purchase Agreement, dated as of September 25, 1997 among The Company, UAG Young, Inc., Dan Young Chevrolet, Inc., Dan Young, Inc., Parkway Chevrolet, Inc., Young Management Group, Inc. and certain parties named therein. 10.19.1.2(f) Agreement and Plan of Merger, dated as of September 25, 1997 among The Company, UAG Kissimmee Motors, Inc., UAG Paramount Motors, Inc., UAG Century Motors, Inc., Paramount Chevrolet-Geo, Inc., Century Chevrolet-Geo, Inc. and certain parties named therein. 18.1 Letter from Coopers & Lybrand L.L.P. regarding change in accounting principle. 21.1 Subsidiaries of the Company. 23.1 Consent of Coopers & Lybrand L.L.P. 27.1 December 31, 1997 Financial Data Schedule. 27.2 September 30, 1997 Financial Data Schedule, restated to reflect (i) a change in the Company's accounting for new vehicle inventories from LIFO to the Specific Identification method and (ii) basic and diluted earnings per share data as required by SFAS 128. 27.3 June 30, 1997 Financial Data Schedule, restated to reflect (i) a change in the Company's accounting for new vehicle inventories from LIFO to the Specific Identification method and (ii) basic and diluted earnings per share data as required by SFAS 128. 27.4 March 31, 1997 Financial Data Schedule, restated to reflect (i) a change in the Company's accounting for new vehicle inventories from LIFO to the Specific Identification method and (ii) basic and diluted earnings per share data as required by SFAS 128. 27.5 December 31, 1996 Financial Data Schedule, restated to reflect (i) a change in the Company's accounting for new vehicle inventories from LIFO to the Specific Identification method and (ii) basic and diluted earnings per share data as required by SFAS 128. 27.6 September 30, 1996 Financial Data Schedule, restated to reflect (i) a change in the Company's accounting for new vehicle inventories from LIFO to the Specific Identification method and (ii) basic and diluted earnings per share data as required by SFAS 128. - ------------------------ 23 (a) Incorporated herein by reference to the identically numbered exhibit to the Company's Registration Statement on Form S-1, Registration No. 333-09429. (b) Incorporated herein by reference to the identically numbered exhibit to the Company's Current Report on Form 8-K filed on December 24, 1996, File No. 1-12297. (c) Incorporated herein by reference to the identically numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12297. (d) Incorporated herein by reference to the identically numbered exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, File No. 1-12297. (e) Incorporated herein by reference to the identically numbered exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, File No. 1-12297. (f) Incorporated herein by reference to the identically numbered exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, File No. 1-12297. (d) Schedules - No Financial Statement Schedules are required to be filed as part of this Annual Report on Form 10-K. 24 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, in New York, New York on April 13, 1998. UNITED AUTO GROUP, INC. By: /s/ Marshall S. Cogan --------------------------------- Marshall S. Cogan Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on its behalf by the registrant and in the capacities and on the dates indicated:
Signature Title Date - --------- ----- ---- /s/ Marshall S. Cogan Chairman of the Board and Chief Executive April 13, 1998 - --------------------------- Officer (Principal Executive Officer) Marshall S. Cogan /s/ Samuel X. DiFeo President and Chief Operating Officer April 13, 1998 - --------------------------- and Director Samuel X. DiFeo /s/ Karl H. Winters Executive Vice President and April 13, 1998 - --------------------------- Chief Financial Officer Karl H. Winters (Principal Financial Officer) /s/ James R. Davidson Executive Vice President - Accounting April 13, 1998 - --------------------------- and Treasurer James R. Davidson (Principal Accounting Officer) /s/ Robert H. Nelson Executive Vice President - Operations April 13, 1998 - --------------------------- and Director Robert H. Nelson /s/ Richard Sinkfield Executive Vice President - Administration April 13, 1998 - --------------------------- and Director Richard Sinkfield /s/ Michael R. Eisenson Director April 13, 1998 - ----------------------- Michael R. Eisenson /s/ John J. Hannan Director April 13, 1998 - --------------------------- John J. Hannan /s/ Jules B. Kroll Director April 13, 1998 - --------------------------- Jules B. Kroll /s/ John M. Sallay Director April 13, 1998 - --------------------------- John M. Sallay
25 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS UNITED AUTO GROUP, INC. Report of Independent Accountants................................... F-2 Consolidated Balance Sheets as of December 31, 1997 and 1996........ F-3 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995................................. F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995........................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995................................. F-6 Notes to Consolidated Financial Statements.......................... F-7 F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders of United Auto Group, Inc.: We have audited the consolidated financial statements of United Auto Group, Inc. (the "Company") listed in Item 14 of this Form 10-K. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. Princeton, New Jersey February 27, 1998 F-2 UNITED AUTO GROUP, INC. CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
ASSETS DECEMBER 31, 1997 1996 ----- ---- AUTO DEALERSHIPS Cash and cash equivalents $94,435 $66,875 Accounts receivable, net 92,601 52,018 Inventories 324,330 173,983 Deferred tax assets 16,039 7,004 Other current assets 4,374 4,819 ---------------------------- Total current assets 531,779 304,699 Property and equipment, net 37,588 22,341 Intangible assets, net 326,774 177,194 Other assets 42,322 6,587 ---------------------------- TOTAL AUTO DEALERSHIP ASSETS 938,463 510,821 ---------------------------- AUTO FINANCE Cash and cash equivalents 1,557 1,138 Restricted cash 3,547 1,850 Finance assets, net 30,408 12,476 Other assets 1,687 1,959 ---------------------------- TOTAL AUTO FINANCE ASSETS 37,199 17,423 ---------------------------- TOTAL ASSETS $975,662 $528,244 ============================ LIABILITIES AND STOCKHOLDERS' EQUITY AUTO DEALERSHIPS Floor plan notes payable $328,203 $170,170 Short-term debt 6,069 6,069 Accounts payable 30,199 22,187 Accrued expenses 52,180 19,680 Current portion of long-term debt 9,981 5,444 ---------------------------- Total current liabilities 426,632 223,550 Long-term debt 238,550 11,121 Due to related party 616 1,334 Deferred tax liabilities 4,709 4,867 ---------------------------- TOTAL AUTO DEALERSHIP LIABILITIES 670,507 240,872 ---------------------------- AUTO FINANCE Short-term debt 387 1,001 Accounts payable and other liabilities 4,211 1,870 ---------------------------- TOTAL AUTO FINANCE LIABILITIES 4,598 2,871 ---------------------------- Commitments and contingent liabilities STOCKHOLDERS' EQUITY Voting Common Stock 2 2 Non-voting Common Stock - - Additional paid-in-capital 310,373 284,502 Retained earnings (accumulated deficit) (9,818) (3) ---------------------------- TOTAL STOCKHOLDERS' EQUITY 300,557 284,501 ---------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $975,662 $528,244 ============================
See Notes to Consolidated Financial Statements. F-3 UNITED AUTO GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Amounts)
YEARS ENDED DECEMBER 31, 1997 1996 1995 ---- ---- ---- AUTO DEALERSHIPS Vehicle sales $1,827,609 $1,164,569 $716,394 Finance and insurance 68,754 43,574 29,806 Service and parts 190,785 93,888 59,421 ----------------------------------------- Total revenues 2,087,148 1,302,031 805,621 Cost of sales, including floor plan interest 1,830,086 1,156,459 720,634 ----------------------------------------- Gross profit 257,062 145,572 84,987 Selling, general and administrative expenses 255,066 124,244 90,586 ----------------------------------------- Operating income (loss) 1,996 21,328 (5,599) Other interest expense (14,071) (4,398) (1,438) Other income (expense), net 297 2,506 2,208 ----------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES - AUTO DEALERSHIPS (11,778) 19,436 (4,829) ----------------------------------------- AUTO FINANCE Revenues 2,615 1,798 530 Interest expense (1,014) (421) (174) Operating and other expenses (5,336) (2,867) (1,738) ----------------------------------------- LOSS BEFORE INCOME TAXES - AUTO FINANCE (3,735) (1,490) (1,382) ----------------------------------------- TOTAL COMPANY Income (loss) before minority interests, income tax (provision) benefit and extraordinary item (15,513) 17,946 (6,211) Minority interests (138) (3,306) 366 Income tax (provision) benefit 5,511 (6,606) 2,191 ----------------------------------------- Income (loss) before extraordinary item (10,140) 8,034 (3,654) Extraordinary item (net of income tax benefit of $2,685) - (4,987) - ========================================= Net income (loss) $(10,140) $3,047 $(3,654) ========================================= Basic income (loss) before extraordinary item per common share $(0.56) $0.79 $(0.74) ========================================= Basic net income (loss) per common share $(0.56) $0.30 $(0.74) ========================================= Income (loss) before extraordinary item per diluted common share $(0.54) $0.74 $(0.67) ========================================= Net income (loss) per diluted common share $(0.54) $0.28 $(0.67) ========================================= Shares used in computing basic per share data 18,227 10,144 4,932 ========================================= Shares used in computing diluted per share data 18,607 10,851 5,482 =========================================
See Notes to Consolidated Financial Statements. F-4 UNITED AUTO GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in Thousands)
CLASS A VOTING AND CONVERTIBLE NON-VOTING PREFERRED STOCK COMMON STOCK --------------- ------------ RETAINED ADDITIONAL EARNINGS TOTAL ISSUED ISSUED PAID-IN (ACCUMULATED STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) EQUITY ------ ------ ------ ----- ------- ------- ----- Balances, December 31, 1994 1,971,611 $1 1,529,236 $1 $30,827 $604 $31,432 Issuance of stock for cash 1,679,118 - 1,053,549 - 23,921 - 23,921 Net loss - - - - - (3,654) (3,654) --------------------------------------------------------------------------------------- Balances, December 31, 1995 3,650,729 1 2,582,785 1 54,748 (3,050) 51,699 Issuance of stock, primarily for 1,576,617 - 1,010,965 - 22,854 - 22,854 acquisitions Preferred stock conversion (5,227,346) (1) 5,227,346 - 1 - 1 Issuance of common stock in minority exchanges - - 1,113,841 - 34,015 - 34,015 Issuance of stock in initial public - - 6,250,000 1 170,410 - 170,411 offering Issuance of stock on exercise of warrants - - 1,109,491 - 2,769 - 2,769 Issuance of stock on exercise of stock options - - 46,500 - 884 - 884 Repurchase of common stock - - (46,000) - (1,179) - (1,179) Net income - - - - - 3,047 3,047 --------------------------------------------------------------------------------------- Balances, December 31, 1996 - - 17,294,928 2 284,502 (3) 284,501 Issuance of stock for acquisitions - - 1,497,218 - 27,986 - 27,986 Issuance of stock - exercise of stock options - - 503,000 - 6,706 6,706 Repurchase of common stock - - (397,000) - (8,821) - (8,821) Unrealized gain on marketable securities -UnitedAuto Finance - - - - - 325 325 Net loss - - - - - (10,140) (10,140) --------------------------------------------------------------------------------------- Balances, December 31, 1997 - $- 18,898,146 $2 $310,373 $(9,818) $300,557 =======================================================================================
See Notes to Consolidated Financial Statements. F-5 UNITED AUTO GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands)
YEARS ENDED DECEMBER 31, ------------------------ 1997 1996 1995 ----------------------- --------------------- ---------------------- AUTO AUTO AUTO AUTO AUTO AUTO DEALERSHIPS FINANCE DEALERSHIPS FINANCE DEALERSHIPS FINANCE ----------- ------- ----------- ------- ----------- ------- OPERATING ACTIVITIES: Net income (loss) $(7,731) $(2,409) $3,989 $(942) $(2,760) $(894) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 9,100 580 5,325 2,472 2,536 284 Fourth quarter charge 30,660 1,000 - - - - Deferred income tax benefit (9,193) - 2,401 - (2,374) - Related party interest income - - (2,580) - (3,039) - Gain on sales of loans - (101) - (800) - (129) Loans originated - (193,774) - (75,440) - (18,769) Loans repaid or sold - 175,751 - 72,659 - 11,236 Minority interests 138 - 3,306 - (366) - Changes in operating assets and liabilities: Finance subsidiary assets - (2,208) - (3,346) - - Accounts receivable (8,317) - (6,480) - (1,524) - Inventories (39,280) - (10,581) - 16,319 - Floor plan notes payable 37,210 - 25,548 - (14,753) - Accounts payable and accrued expenses 2,433 906 (60) 385 5,240 302 Other 3,269 318 2,374 (1,566) 1,417 (77) --------------------------------------------------------------------------- Net cash provided by (used in) operating activities 18,289 (19,937) 23,242 (6,578) 696 (8,047) --------------------------------------------------------------------------- INVESTING ACTIVITIES: Purchase of equipment and improvements (11,915) (246) (6,457) (314) (1,496) (243) Dealership acquisitions (139,639) - (98,812) - (19,921) - Investment in auto finance subsidiary (21,468) 21,468 (12,582) 12,582 (4,592) 4,592 Other investments - - (3,726) (1,417) (4,135) - --------------------------------------------------------------------------- Net cash provided by (used in) investing activities (173,022) 21,222 (121,577) 10,851 (30,144) 4,349 --------------------------------------------------------------------------- FINANCING ACTIVITIES: Proceeds from issuance of stock 4,772 - 195,818 - 25,220 - Repurchase of common stock (8,821) - (1,179) - - - Proceeds from borrowings of long-term debt 252,999 - 20,092 - 16,300 - Deferred financing costs (10,689) - (1,011) - (2,549) - Net repayments of short-term debt (400) - (10,118) - (3,863) - Payments of long-term debt and capital leases (54,850) - (43,314) - (2,073) - Advances from (to) affiliates, net (718) - 225 - 359 - Borrowings of warehouse credit line - 51,749 - 56,762 - 14,202 Payments of warehouse credit line - (52,615) - (60,428) - (10,005) --------------------------------------------------------------------------- Net cash provided by (used in) financing activities 182,293 (866) 160,513 (3,666) 33,394 4,197 --------------------------------------------------------------------------- Net increase in cash and cash equivalents 27,560 419 62,178 607 3,946 499 Cash and cash equivalents, beginning of year 66,875 1,138 4,697 531 751 32 =========================================================================== Cash and cash equivalents, end of year $94,435 $1,557 $66,875 $1,138 $4,697 $531 ===========================================================================
See Notes to Consolidated Financial Statements. F-6 UNITED AUTO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, Except Per Share Amounts) 1. ORGANIZATION United Auto Group, Inc. ("UAG" or the "Company") is engaged in the sale of new and used motor vehicles and related products and services, including vehicle service and parts, finance and insurance products and other aftermarket products. Through its wholly-owned consumer finance subsidiary, UnitedAuto Finance Inc. ("UnitedAuto Finance"), UAG also purchases, sells and services financing contracts on new and used vehicles originated by both UAG and third party dealerships. As discussed in Note 5, the Company completed a number of acquisitions during the three years in the period ended December 31, 1997. In October 1996, The Company consummated an initial public offering of 6,250,000 shares of its common stock (the "IPO"). Net proceeds from the IPO amounted to $170,410, which were used to prepay outstanding indebtedness, fund certain acquisitions, fund the expansion of UnitedAuto Finance and for working capital purposes. The Company operates dealerships which hold franchise agreements with a number of automotive manufacturers. In accordance with the individual franchise agreements, each dealership is subject to certain rights and restrictions typical of the industry. The ability of the manufacturers to influence the operations of the dealerships, or the loss of a franchise agreement, could have a negative impact on the Company's operating results. 2. CHANGE IN ACCOUNTING PRINCIPLE In 1997, the Company changed its method of accounting for new vehicle inventory from LIFO to the specific identification method. Management believes the specific identification method (i) more accurately matches revenues with costs, (ii) more accurately reflects the current market value of new vehicle inventories and (iii) will provide for a more meaningful comparison of the Company's operating results and financial position with that of its competition. This change in accounting principle has been applied by retroactively restating the Company's financial statements for prior years. The effect of the change in accounting principle was to increase income before extraordinary item and net income by $573 ($0.05 per diluted share) in 1996 and to decrease income before extraordinary item and net income by $188 ($0.03 per diluted share) in 1995. F-7 UNITED AUTO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Dollars in thousands, Except Per Share Amounts) 3. UNUSUAL ITEMS During the fourth quarter of 1997, the Company recorded a $31,660 pre-tax charge. The charge included costs associated with (i) the divestiture of automotive franchises, (ii) the closure of three stand-alone used vehicle satellite locations in Arkansas and the disposal of related inventory, (iii) the implementation of a new policy to more efficiently manage the Company's working capital invested in retail inventory, (iv) excess real estate, (v) the write-off of non-performing assets and (vi) certain corporate consulting agreements. Costs associated with the pre-tax charge amounting to $9,800 and $20,900 have been reflected in cost of goods sold and selling, general and administrative expenses, respectively, in the Consolidated Statements of Operations. In addition, $1,000 has been reflected in the results of UnitedAuto Finance. During 1995, the Company undertook a restructuring of its then unprofitable DiFeo Group. Such restructuring included the termination of certain unprofitable franchises, a reduction in personnel and the liquidation of outdated inventory. Costs associated with this restructuring, relating primarily to severance, were approximately $500 and $680 for the years ended December 31, 1996 and 1995, respectively. 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include all significant majority-owned subsidiaries and reflect operating results, assets, liabilities and cash flows for the major aspects of the business: auto dealerships and auto finance. Assets and liabilities of the auto dealerships are classified as current or noncurrent and those relating to financial services are unclassified. All material accounts and transactions among the consolidated subsidiaries have been eliminated. Affiliated companies that are 20% to 50% owned are accounted for using the equity method of accounting. Cash and Cash Equivalents Cash and cash equivalents include all highly-liquid investments that have an original maturity of three months or less at the date of purchase. Fair Value of Financial Instruments Financial instruments consist of cash and cash equivalents, accounts receivable and payable, finance assets, interest rate hedge agreements and debt, including floor plan notes payable. The carrying amount of financial instruments approximates fair value due either to length of maturity or the existence of variable interest rates that approximate prevailing market rates. F-8 UNITED AUTO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Dollars in thousands, Except Per Share Amounts) Revenue Recognition - Auto Dealerships Revenue is recognized when vehicles are delivered to consumers or motor vehicle service work is performed and parts are delivered. Finance and insurance revenues are recognized upon the sale of the finance or insurance contract or other aftermarket products. An allowance for chargebacks against revenue recognized from customer finance contracts is established during the period in which the related revenue is recognized. Revenue Recognition - Auto Finance Revenue from finance receivables is recognized over the term of the contract using the interest method. Certain loan origination costs are deferred and amortized over the term of the related receivable as a reduction in financing revenue. Generally, finance receivables are accumulated by the Company and are periodically sold into a commercial paper conduit or to a financial institution. Interest income is recognized based on the daily principal balance of the receivables outstanding. An allowance for financing losses on receivables may be provided for the period from the date of origination to the date of sale. Revenue is recognized upon the sale of the finance receivables. Contractual servicing fees on loans sold are recognized as earned and ancillary loan fees are recognized as collected. Inventory Valuation Inventories are stated at the lower of cost or market with cost determined by the following methods: Inventory Component Valuation Method - ------------------- ---------------- New vehicles Specific identification Used vehicles Specific identification Parts, accessories and other Factory list price New vehicle and parts inventories are purchased primarily from vehicle manufacturers. Property and Equipment Property and equipment are recorded at cost and depreciated over their estimated useful lives, primarily using the straight-line method. Useful lives for purposes of computing depreciation are: Leasehold improvements and equipment under - Economic life or life of the capital lease whichever is shorter. Equipment, furniture and fixtures - 5 to 7 years Expenditures for betterments that increase the useful life or substantially increase the serviceability of an existing asset are capitalized. When equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is included in the Consolidated Statements of Operations. F-9 UNITED AUTO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Dollars in thousands, Except Per Share Amounts) Income Taxes Income taxes are provided in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109") which requires an asset and liability approach to accounting for income taxes. Deferred tax assets or liabilities are computed based upon the difference between financial reporting and tax bases of assets and liabilities using enacted tax rates. A valuation allowance is provided when it is more likely than not that taxable income will not be sufficient to fully realize deferred tax assets. Intangible Assets Intangible assets of $326,774, consisting primarily of excess of cost over the fair value of net assets acquired in purchase business combinations, are being amortized on a straight-line basis over periods not exceeding 40 years. Accumulated amortization at December 31, 1997 amounted to $10,192. Amortization expense for the years ended December 31, 1997, 1996 and 1995 was $6,300, $1,712 and $904, respectively. 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. Auto Finance - Finance Assets Finance receivables, consisting of retail vehicle loans purchased by UnitedAuto Finance, are accumulated in pools and sold either to financial institutions or into commercial paper conduits. Prior to their sale, these contracts are carried at the lower of their principal balance outstanding or their market value. Market value is estimated based on the characteristics of the finance receivable held for sale and the terms of recent sales of similar finance receivables. Periodically, UnitedAuto Finance repurchases the pools of finance receivables from the financial institutions or commercial paper conduits and sells them in a term securitization through special purpose subsidiaries (a "Securitization"). In connection with each Securitization, UnitedAuto Finance retains the servicing rights and an interest in the sold receivables, and is paid a servicing fee which is recognized as collected over the remaining term of the receivables. F-10 UNITED AUTO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Dollars in thousands, Except Per Share Amounts) Pursuant to agreements covering the sale of finance receivables to financial institutions or into commercial paper conduits, UnitedAuto Finance is required to hedge each such pool to provide protection relating to the pool's net yield. The notional amounts of outstanding hedges entered into to hedge pools of finance receivables were $42,837 and $37,612 at December 31, 1997 and 1996, respectively. The fair value of such hedge agreements represented unrecorded liabilities of $721 and $288 as of December 31, 1997 and 1996, respectively. UnitedAuto Finance has credit and interest rate risk exposure on finance receivables held for sale. Accordingly, UnitedAuto Finance has a program of credit review prior to final approval of specific loans and maintains reserves as appropriate. Interest rate risk is mitigated by the short period of time that receivables are held. From time to time, while finance receivables are being accumulated for sale, they may be pledged against a liquidity credit line established by UnitedAuto Finance. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accounts which require the use of significant estimates are accounts receivable, inventories, income taxes, intangible assets, finance assets and accrued expenses. Advertising Advertising costs are expensed as incurred. The Company incurred advertising costs of $25,075, $14,217 and $10,705 for the years ended December 31, 1997, 1996 and 1995, respectively. Net Income (loss) per Common Share Basic earnings per share data was computed based on the weighted average number of common shares outstanding. Diluted earnings per share data was computed based on the weighted average number of shares of common stock outstanding, adjusted for the dilutive effect of stock options, warrants and preferred stock. Reclassifications In order to maintain consistency and comparability of financial information between periods presented, certain reclassifications have been made to the Company's December 31, 1996 financial statements to conform to the current year presentation. F-11 UNITED AUTO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Dollars in thousands, Except Per Share Amounts) 5. BUSINESS COMBINATIONS During 1997 and 1996, the Company completed a number of acquisitions. Each of these acquisitions has been accounted for using the purchase method of accounting and as a result, the Company's financial statements include the results of operations of the acquired dealerships only from the date of acquisition. Acquisitions Completed During 1997 In December 1997, the Company acquired the Triangle Group, located in Puerto Rico, for $12,800 in cash. In May 1997, the Company acquired the Gene Reed Automotive Group, located in North and South Carolina, for $34,000, consisting of $17,000 in cash, $4,000 of promissory notes and $13,000 of UAG common stock. The acquisition agreement provides for an additional contingent cash payment to the extent that the UAG common stock has an aggregate market value of less than $13,000 on the date it becomes freely tradable. In April 1997, the Company acquired the Staluppi Automotive Group (the "Staluppi Group"), located in New York and Florida, for $49,614, consisting of $25,450 in cash, $21,864 of promissory notes and $2,300 of UAG common stock. In addition, if the Staluppi Group achieves certain levels of annual pre-tax earnings during any of the next three years, the Company will be required to make additional payments. In April 1997, the Company acquired Gary Hanna Nissan, Inc., located in Las Vegas Nevada, for $13,740, consisting of $7,000 in cash, $1,240 of promissory notes and $5,500 of UAG common stock. The acquisition agreement provides for an additional contingent cash payment to the extent that the UAG common stock has an aggregate market value of less than $6,000 on the date it becomes freely tradable. In February 1997, the Company acquired Shannon Automotive Limited, located in the Houston area, for $7,000 in cash and 335,329 shares of UAG common stock. During the year ended December 31, 1997, the Company also acquired (i) Covington Pike Dodge, located in Memphis Tennessee, (ii) Central Ford, located in Little Rock Arkansas, (iii) Shreveport Dodge, located in Shreveport Louisiana, (iv) Stone Mountain Chyrsler-Plymouth Jeep-Eagle, located in Stone Mountain Georgia and (v) the Lance Landers dealerships, located in Benton Arkansas. The Company paid $15,500 in cash in consideration for such acquisitions. F-12 UNITED AUTO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Dollars in thousands, Except Per Share Amounts) Acquisitions Completed During 1996 In October 1996, the Company acquired substantially all of the Sun Group, located in the Phoenix area, for a total of $24,666 payable in cash plus the assumption of $4,929 of indebtedness. If the Sun Group achieves certain levels of annual pre-tax earnings for the two-year period ending October 31, 1998, the Company will be required to make additional payments. During the year ended December 31, 1996, the Company also acquired (i) the Evans Group (ii) Standefer Motor Sales, Inc. (iii) Hickman Nissan, Inc. (iv) Steve Rayman Nissan, Inc. and (v) Atlanta Toyota, each of which is located in the Atlanta area. The Company issued $4,400 of seller financed notes payable and paid $61,800 in cash in consideration for such acquisitions. Pro Forma Results of Operations The following unaudited consolidated pro forma results of operations of the Company for the years ended December 31, 1997 and 1996 give effect to (i) acquisitions consummated during 1997 and 1996 and (ii) the offering of the Company's Senior Subordinated Notes due 2007 as if they had occurred on January 1, 1996.
YEAR ENDED 1997 1996 ---- ---- Revenues $2,564,164 $2,573,648 Income (loss) before minority interests and income tax provision (22,650) 26,285 Net income (loss) (13,501) 15,471 Net income (loss) per diluted common share (0.71) 0.81
Pending Acquisitions In December 1997, the Company entered into a definitive agreement to acquire the New Graceland Dodge ("Graceland"), located in Memphis Tennessee, for $5,500 in cash. The acquisition of Graceland closed in February 1998. In November 1997, the Company entered into a definitive agreement to acquire the Skelton Automotive Group ("Skelton"), located in Memphis Tennessee. Consideration for the purchase amounts to $16,500, including $14,700 in cash and $1,800 of seller financed promissory notes. The acquisition of Skelton closed in January 1998. In September 1997, the Company entered into a definitive agreement to acquire the Young Automotive Group ("Young"), with operations in North Carolina, South Carolina, Florida, Illinois and Indiana. The aggregate consideration for the acquisition amounts to $68,600, consisting of $50,000 in cash, 1,040,039 shares of UAG common stock and $7,000 of seller financed promissory notes. The Company agreed to make a contingent payment in cash or stock to the extent the shares issued in connection with this transaction have an aggregate market value of less than $27,000 on the date they become freely tradable. The acquisition of Young closed in February 1998, pending manufacturer approval relating to certain franchises. In July 1997, the Company entered into a definitive agreement to acquire the Classic Automotive Group ("Classic") in New Jersey. The aggregate consideration for the acquisition was $28,700, consisting of $28,000 in cash and $700 of UAG common stock. The acquisition of Classic closed in February 1998, pending manufacturer approval relating to certain franchises. F-13 UNITED AUTO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Dollars in thousands, Except Per Share Amounts) 6. INVENTORIES Inventories consisted of the following:
DECEMBER 31, 1997 1996 ---- ---- New vehicles $232,804 $114,542 Used vehicles 74,285 50,060 Parts, accessories and other 17,241 9,381 ------------------------------- Total Inventories $324,330 $173,983 ===============================
7. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
DECEMBER 31, 1997 1996 ---- ---- Furniture, fixtures and equipment $18,202 $9,742 Equipment under capital lease 4,280 2,201 Leasehold improvements 21,546 14,024 ------------------------- Total 44,028 25,967 Less: Accumulated depreciation and amortization 6,440 3,626 ------------------------- Property and equipment, net $37,588 $22,341 =========================
Depreciation and amortization expense for the years ended December 31, 1997, 1996 and 1995 was $2,800, $1,888 and $1,632, respectively. Accumulated amortization at December 31, 1997 and 1996 on equipment under capital lease, included in accumulated depreciation and amortization above, amounted to $830 and $1,072, respectively. 8. FLOOR PLAN NOTES PAYABLE The Company's automobile dealerships have "floor plan" agreements with several finance companies to finance the purchase of their automobile inventory. Floor plan notes payable consisted of the following:
DECEMBER 31, 1997 1996 ---- ---- Chrysler Financial Corporation, interest - 8.26% and 8.16% at December 31, 1997 and 1996, respectively. $215,902 $114,533 World Omni Corp., interest - 8.26% and 7.94% at December 31, 1997 and 1996, respectively. 91,388 18,512 Other, interest - between 7.87% and 8.97% at December 31, 1997 and between 7.75% and 9.25% at December 31, 1996. 20,913 37,125 --------------------------- Total floor plan notes payable $328,203 $170,170 ===========================
F-14 UNITED AUTO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Dollars in thousands, Except Per Share Amounts) The floor plan agreements grant a security interest in substantially all of the dealerships assets and require the repayment of debt after a vehicle's sale. Interest rates on the floor plan agreements are variable and increase or decrease based on movements in prime or LIBOR borrowing rates. The weighted average interest rate on floor plan borrowings was 8.2%, 8.3% and 8.9% for the years ended December 31, 1997, 1996 and 1995, respectively. 9. SHORT-TERM DEBT The Company and Chrysler Financial Corporation ("CFC") are party to a short-term debt agreement which shares in the security interest granted under the floor plan arrangement at one of the Company's dealerships. The agreement permits borrowings, subject to a formula based on parts and used vehicle collateral, up to a maximum of $10,000, and includes covenants that require the maintenance of tangible net worth and other financial ratios. At December 31, 1997, $6,069 was outstanding under this agreement. Interest on borrowings under this agreement are based on LIBOR plus 2.25%. The CFC agreement replaced an agreement with GMAC with similar terms. At December 31, 1996, $6,069 was outstanding under the GMAC agreement. The borrowing rate at December 31, 1997 and 1996 under these agreements was 8.26% and 9.50%, respectively. The weighted average interest rate on short-term borrowings was 8.15% and 9.89% for the years ended December 31, 1997 and 1996, respectively. In addition, UnitedAuto Finance maintained a $5,000 loan arrangement with a bank (the "Loan Arrangement") for the purpose of purchasing finance receivables. Under the terms of the Loan Agreement, the amount borrowed by UnitedAuto Finance could not exceed 95% of the outstanding principal balance of eligible receivables pledged to secure the loan. The Loan Arrangement expired on October 30, 1997. The amount outstanding under the Loan Arrangement as of December 31, 1996 was $748. On February 26, 1998, UnitedAuto Finance established a new $5,000 loan arrangement with another bank with terms and conditions similar to the Loan Arrangement. 10. LONG-TERM DEBT Long-term debt consisted of the following:
DECEMBER 31, 1997 1996 ---- ---- Series A and B Senior Subordinated Notes due 2007, less net unamortized discount of $1,744 at December 31,1997 $198,256 $ - Seller financed promissory notes payable through 2002, weighted average interest - 7.22% and 8.5% at December 31, 1997 and 1996, respectively. 36,096 6,990 Term loans, weighted average interest - 8.26% and 9.25% at December 31, 1997 and 1996, respectively. 3,266 3,458 Capitalized lease obligations 3,867 4,832 Other installment loans 7,046 1,285 -------------------------- Total long-term debt 248,531 16,565 Less: Current portion 9,981 5,444 -------------------------- Net long-term debt $238,550 $11,121 ==========================
F-15 UNITED AUTO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Dollars in thousands, Except Per Share Amounts) Scheduled maturities of long-term debt for each of the next five years and thereafter are as follows: 1998 $9,981 1999 8,807 2000 15,020 2001 1,777 2002 11,644 2003 and thereafter 201,302 ----------- Total long-term debt $248,531 =========== On July 23, 1997, the Company completed the sale of $150,000 aggregate principal amount of 11% Senior Subordinated Notes due 2007 (the "Series A Notes"). On September 16, 1997, the Company completed the sale of an additional $50,000 aggregate principal amount of 11% Senior Subordinated Notes due 2007, Series B (together with the Series A Notes the "Notes"). The sale of the Notes were exempt from registration under the Securities Act of 1933 pursuant to Rule 144A thereunder. Proceeds from the offering of the Notes after issue discount, discount to initial purchasers and transaction costs amounted to approximately $189,469. The Notes are fully and unconditionally guaranteed (subject to fraudulent conveyence laws) on a joint and several basis by the Company's Auto Dealership subsidiaries (the "Note Guarantors"). Separate financial information of the Note Guarantors has been omitted because (i) the Company is a holding company with no independent operations and (ii) separate financial information for the Note Guarantors is presented on the face of the Company's consolidated financial statements under the caption "Auto Dealerships." In March 1997, the Company entered into a $50,000 senior credit facility (as amended, the "Senior Credit Facility"), with a group of banks, which was to be used principally for acquisitions. The Senior Credit Facility provides for borrowings on a revolving basis of up to $50,000, bears interest at LIBOR plus 2.75% and matures in March 2000. Pursuant to the terms of the Senior Credit Facility, the Company is required to pay certain fees relating to outstanding letters of credit and unused commitments. There were no amounts borrowed against the Senior Credit Facility as of December 31, 1997. The Senior Credit Facility contains a number of significant covenants that, among other things, restrict the ability of the Company to dispose of assets, incur additional indebtedness, repay other indebtedness, pay dividends, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. In addition, the Company is required to comply with specified ratios and tests, including cash interest expense coverage, debt service coverage, debt to earnings ratios and a minimum net worth covenant. The Senior Credit Facility also contains typical events of defaults including change of control, material adverse change and non-payment of obligations. On February 27, 1998, the Company replaced the Senior Credit Facility with a new credit agreement (the "Credit Agreement"), which provides for up to $75,000 in term loans, revolving loans and letters of credit, to be used principally for acquisitions. The Credit Agreement matures in three years and contains conditions, covenants and events of default similar to those included in the terminated Senior Credit Facility. F-16 UNITED AUTO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Dollars in thousands, Except Per Share Amounts) During 1995, the Company issued indebtedness (the "Old Notes") that was due in 2003, which were redeemed in October 1996 with a portion of the proceeds from the IPO. The redemption of the Old Notes resulted in an extraordinary pre-tax loss of $7,672, due to (i) a 10% call premium, (ii) the write-off of original issue discount and (iii) the write-off of deferred financing costs. The Old Notes also contained detachable warrants that granted the holders the option to purchase UAG Common Stock at $0.01 per share. Upon the consummation of the IPO, 1,109,491 shares of UAG Common Stock were issued in a cash-less exchange for all of the then outstanding warrants. The settlement of the warrants resulted in a $2,769 increase to the Company's stockholders' equity. 11. OPERATING LEASE OBLIGATIONS The Company leases its dealership facilities and corporate office under non-cancelable operating lease agreements, which expire on various dates through 2017. Minimum future rental payments required under non-cancelable operating leases in effect as of December 31, 1997 are as follow: 1998 $21,567 1999 21,436 2000 20,941 2001 20,789 2002 19,632 2003 and thereafter 198,247 ------------- $302,612 ============= Rent expense for the years ended December 31, 1997, 1996, and 1995 amounted to $17,674, $8,729 and $7,113, respectively. A number of the dealership leases are with former owners who continue to operate the dealerships as employees of the Company. Of the total rental payments, $10,911, $5,240 and $4,502, respectively, were made to related parties. 12. RELATED PARTY TRANSACTIONS The Company is the tenant under a number of non-cancelable lease agreements with employees of the Company. The Company believes all such leases are on terms no less favorable to the Company than would be obtained through arm's-length negotiations with unaffiliated third parties. As of January 1, 1997, the Company entered into an agreement whereby the Company's exposures with respect to the majority of the extended service contracts sold by UnitedAuto Care are to be assumed by an affiliate of a major stockholder in exchange for certain fees. It is the Company's belief that the fees relating to these transactions are on terms at least as favorable as those which could be obtained from an unrelated third party. Aggregate fees paid by the Company during 1997 relating to this agreement totaled approximately $3,154. F-17 UNITED AUTO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Dollars in thousands, Except Per Share Amounts) At December 31, 1995, the Company was owed $14,578 by minority or former minority shareholders and certain of their related entities. This indebtedness to the Company arose from advances to these shareholders for certain business acquisitions and from working capital advances to dealerships owned by those shareholders in which the Company has no ownership. Interest income on such advances, amounting to $2,580 and $3,039 in 1996 and 1995, respectively, has been reflected in other income (expense), net in the accompanying Consolidated Statements of Operations. From time to time, the Company pays and/or receives fees from certain major stockholders for services rendered in the normal course of business. These transactions reflect the providers' cost or an amount mutually agreed upon by both parties. It is the Company's belief that the payments relating to these transactions are on terms at least as favorable as those which could be obtained from an unrelated third party. Aggregate (income) expense relating to such transactions of $(2,118), $225 and $359 for the years ending December 31, 1997, 1996 and 1995, respectively, has been reflected in selling, general and administrative expenses in the accompanying Consolidated Statements of Operations. As of December 31, 1997 and 1996, the Company owes $616 and $1,334, respectively, for such services. 13. STOCK COMPENSATION PLANS During 1996, the Company's Board of Directors and stockholders adopted a Stock Option Plan and granted options to certain employees. Under the Stock Option Plan, all full-time employees of the Company and its subsidiaries and affiliates are eligible to participate. During 1997, the Company granted options to purchase 594,800 shares at the fair market value of the Company's stock on the date of the grant. As of December 31, 1997, the aggregate number of shares of Common Stock for which stock options may be granted under the Stock Option Plan may not exceed 1,500,838. As of December 31, 1997, 333,413 shares of Common Stock were available for the grant of options under the Stock Option Plan. Presented below is a summary of the status of stock options held by eligible employees during 1997 and 1996:
YEAR ENDED DECEMBER 31, 1997 1996 ---- ---- WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE STOCK OPTIONS SHARES PRICE SHARES PRICE - ------------------------------------------------------------------------------------ Options outstanding at beginning of year 1,026,500 $13.90 127,200 $12.50 Granted 594,800 18.98 945,800 14.22 Exercised 503,000 10.34 46,500 10.00 Forfeited 39,325 11.41 - - ------------------------------------------------------- Options outstanding at end of year 1,078,975 $18.45 1,026,500 $13.90 =======================================================
F-18 UNITED AUTO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Dollars in thousands, Except Per Share Amounts) A portion of the options granted in 1996 retroactively vested to dates prior to the date of grant. Prior to the adoption of the Stock Option Plan, options had been granted to purchase 127,200 shares of the Company's Common Stock under an employment agreement at an exercise price of twelve dollars and fifty cents per share. These options were replaced prior to the Company's IPO with options that vest and become exercisable over four years on a schedule similar to the previously granted options. In addition, during 1996 the Company granted 272,800 more options to purchase shares of Common Stock at an exercise price of ten dollars per share. The following table summarizes the status of UAG's employee stock options outstanding and exercisable at January 1, 1998:
STOCK OPTIONS STOCK OPTIONS OUTSTANDING EXERCISABLE ------------------------------------------- ---------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE CONTRACTUAL EXERCISE EXERCISE SHARES LIFE PRICE SHARES PRICE - --------------------------------------------------------------------------------------- 250,000 7.7 $30.00 137,500 $30.00 316,400 8.8 10.00 215,700 10.00 512,575 9.6 18.04 75,700 17.00 ================== ============= 1,078,975 428,900 ================== =============
The Company has adopted the disclosure only provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation ("SFAS 123"). Had the Company elected to recognize compensation expense for stock options based on the fair value at the grant dates of awards, net income and earnings per share would have been as follows:
YEAR ENDED DECEMBER 31, 1997 1996 ---- ---- Income (loss) before extraordinary item $(10,760) $7,094 Income (loss) before extraordinary item per diluted share (0.59) 0.65 Net income (loss) (10,760) 2,107 Net income (loss) per diluted share (0.59) 0.19
The weighted average fair value of the Company's stock options was calculated using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997 and 1996: no dividend yield; expected volatility of 30%; a risk-free interest rate of 7% and expected lives of five years. The weighted average fair value of options granted during the years ended December 31, 1997 and 1996 is $4.74 and $4.23 per share, respectively. F-19 UNITED AUTO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Dollars in thousands, Except Per Share Amounts) 14. STOCKHOLDERS' EQUITY At December 31, 1997 and 1996, the following classes of stock are authorized, issued or outstanding (share amounts in thousands): Class A Convertible Preferred Stock, $0.0001 par value; retired in 1996. $- $- Preferred Stock, $0.0001 par value; 100 shares authorized, none issued and - - outstanding Voting Common Stock, $0.0001 par value, 40,000 shares authorized; 18,736 shares issued, including 443 treasury shares, at December 31, 1997; 16,736 shares issued, including 46 treasury shares, at December 31, 1996. 2 2 Non-voting Common Stock, $0.0001 par value, 1,125 shares authorized; 605 issued and outstanding at December 31, 1996 and 1995. - - Class C Common Stock, $0.0001 par value, 20,000 shares authorized; none issued and outstanding - - Additional paid-in-capital 310,373 284,502 Retained earnings (accumulated deficit) (9,818) (3) -------------------------- Total stockholders' equity $300,557 $284,501 ==========================
In December 1996, the Board of Directors authorized a program to repurchase the Company's common stock, spending up to a maximum of $10,000. The repurchase program was completed during 1997, pursuant to which the Company repurchased a total of 443,000 shares at an average price per share of $22.57. Concurrent with the IPO, all 5,227,346 outstanding shares of Class A Convertible Preferred Stock converted into an equal number of shares of Common Stock and 1,113,841 shares of Common Stock were issued in an exchange for the minority interests then outstanding. In addition, the Company became authorized to issue up to 100,000 shares of a new series of Preferred Stock, with rights, preferences and privileges thereon to be determined by the Board of Directors. The Company also became authorized to issue up to 20,000,000 shares of Class C Common Stock. No such Preferred or Class C Common Stock has been issued as of December 31, 1997. F-20 UNITED AUTO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Dollars in thousands, Except Per Share Amounts) 15. INCOME TAXES The income tax (provision) benefit consisted of the following:
YEAR ENDED DECEMBER 31, 1997 1996 1995 ---- ---- ---- Current: Federal $- $(187) $- State and local (1,932) (997) (285) ------------------------------------------ Total current (1,932) (1,184) (285) ------------------------------------------ Deferred: Federal 4,456 (5,422) 2,476 State and local 2,987 - - ------------------------------------------ Total deferred 7,443 (5,422) 2,476 ------------------------------------------ Income tax (provision) benefit before extraordinary item 5,511 (6,606) 2,191 Income tax benefit from extraordinary item - 2,685 - ------------------------------------------ Income tax (provision) benefit $5,511 $(3,921) $2,191 ==========================================
The income tax (provision) benefit varied from the U.S. federal statutory income tax rate due to the following:
YEARS ENDED DECEMBER 31, 1997 1996 1995 ---- ---- ---- Income tax (provision) benefit at Federal statutory rate of 35%. $5,479 $(5,142) $2,046 State and local income taxes, net of federal benefit 720 (892) (186) Non-deductible amortization of goodwill (750) - - Valuation allowance - - 745 Tax on income of minority interests - (570) - Other 62 (2) (414) ------------------------------------- Income tax (provision) benefit before extraordinary item $5,511 $(6,606) $2,191 =====================================
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Under SFAS 109, deferred income taxes reflect the estimated tax effect of temporary differences between assets and liabilities for financial accounting purposes and those amounts as measured by tax laws and regulations. The components of deferred tax assets and liabilities at December 31, 1997 and 1996 were as follows:
1997 1996 ---- ---- DEFERRED TAX ASSETS Net operating loss carryforwards $7,751 $6,065 Accrued liabilities 4,988 - Partnership investments 2,038 - Other 1,262 939 ------------------------- Total deferred tax assets $16,039 $7,004 ------------------------- DEFERRED TAX LIABILITIES Depreciation and amortization $(3,848) $- Sale of finance receivables and other items (861) (1,590) Partnership investments - (3,277) ------------------------- Total deferred tax liabilities (4,709) (4,867) ------------------------- Net deferred tax assets (liabilities) $11,330 $2,137 =========================
F-21 UNITED AUTO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Dollars in thousands, Except Per Share Amounts) At December 31, 1997, the Company has $15,693 of net operating loss carryforwards that expire through 2012. In addition, at December 31, 1997, the Company also has $33,625 of state net operating loss carryforwards that expire at various dates through 2012. 16. SUPPLEMENTAL CASH FLOW INFORMATION The following table presents supplementary cash flow information:
1997 1996 1995 ----- ----- ---- AUTO AUTO AUTO AUTO AUTO AUTO DEALERSHIPS FINANCE DEALERSHIPS FINANCE DEALERSHIPS FINANCE ----------- ------- ----------- ------- ----------- -------- Supplemental information: Cash paid interest $8,016 $276 $9,912 $420 $8,437 $109 Cash paid income taxes 3,321 56 420 37 - 3 Non-cash financing and investing activities: Dealership acquisition costs financed by issuance of stock 28,150 - - - - - Dealership acquisition cost financed by long-term debt 27,104 - 4,100 - 4,014 - Capitalized lease obligations 1,101 252 1,570 - - - Stock issuance costs amortized against proceeds from issuance of stock - - 775 - 910 - Minority interests acquired by issuance of stock - - 34,015 - - -
17. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH STATEMENTS OF OPERATIONS DATA (1) : QUARTER QUARTER QUARTER QUARTER (2) ------- ------- ------- ----------- 1997 (3) Auto Dealerships Total revenues $388,200 $526,958 $625,975 $546,015 Gross profit 47,612 68,650 80,641 60,159 Operating income (loss) 5,856 14,683 15,997 (34,540) Auto Finance Loss before income taxes (96) (103) (1,175) (2,361) Total Company Income (loss) before minority interests and income tax (provision) benefit 5,588 12,803 9,819 (43,723) Net income (loss) 3,317 7,599 5,870 (26,926) Basic net income (loss) per common share 0.19 0.42 0.31 (1.43) Net income (loss) per diluted common share 0.19 0.42 0.31 (1.41)
F-22 UNITED AUTO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Dollars in thousands, Except Per Share Amounts)
FIRST SECOND THIRD FOURTH STATEMENTS OF OPERATIONS DATA (1): QUARTER QUARTER QUARTER QUARTER 1996 (4) ------- ------- ------- ------- Auto Dealerships Total revenues $261,719 $336,220 $356,845 $347,247 Gross profit 29,717 37,412 39,892 38,551 Operating income (loss) 2,054 8,055 6,872 4,347 Auto Finance Loss before income taxes (264) (85) (377) (764) Total Company Income (loss) before minority interests and income tax (provision) benefit 1,706 7,672 5,553 3,015 Income before extraordinary item 449 3,894 2,221 1,470 Extraordinary item - - - (4,987) Net income (loss) 449 3,894 2,221 (3,517) Basic income before extraordinary item per common share 0.07 0.49 0.26 0.10 Income before extraordinary item per diluted common share 0.06 0.44 0.21 0.09
(1) As discussed in Note 2, the Company changed its method of accounting for new vehicle inventory from LIFO to the specific identification method. (2) As discussed in Note 3, the Company recorded a $31.7 million charge during the fourth quarter of 1997. (3) Includes the results of Crown Automotive, Hanna Nissan, the Staluppi Automotive Group, the Gene Reed Automotive Group, the Lance Landers dealerships, Stone Mountain Jeep Eagle, Shreveport Dodge, Central Ford, Covington Pike Dodge and the Triangle Group from their respective dates of acquisition (4) Includes the results of Atlanta Toyota, United Nissan (GA), Peachtree Nissan, the Sun Automotive Group, the Evans Group and United Nissan (TN) from their respective dates of acquisition. The net income (loss) per common share amounts are calculated independently for each of the quarters presented. The sum of the quarters may not equal the full year net income (loss) per common share amount. 18. YEAR 2000 RISKS Many existing computer programs use only two digits to identify a year in the date field and, if not corrected, many computer applications could fail or generate erroneous results in the year 2000. Based on a recent assessment, management of the Company believes that its computer systems will not require any significant modifications in order to properly process date-related information in the year 2000 and thereafter (or be "year 2000 compliant"). However, the Company could be materially adversely affected if the systems of its significant vendors, including those supplying and maintaining the general ledger and related accounting systems at each of the Company's dealerships, will not be year 2000 compliant. The Company has received assurances that such vendors are adequately addressing this issue. Nevertheless, there can be no guarantee that the systems provided by such vendors, or that the systems of other companies with which the Company does business, will be year 2000 compliant and that any such non-compliance will not have a material adverse effect on the Company. F-23 19. LEGAL PROCEEDINGS In May and June, 1997, three complaints were filed in the United States District Court for the Southern District of New York on behalf of a purported class consisting of all persons who purchased the Company's Voting Common Stock issued in connection with and/or traceable to the Company's IPO at any time up to and including February 26, 1997 (the "Lawsuits"). The complaints name as defendants the Company, Carl Spielvogel, Marshall S. Cogan, J.P. Morgan Securities Inc., Montgomery Securities and Smith Barney Inc. The plaintiffs in the lawsuits seek unspecified damages in connection with their allegations that the prospectus and the related registration statement disseminated in connection with the IPO contained material misrepresentations and omissions in violation of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended (the "Securities Act"). They also seek to have their actions certified as class actions under Federal Rules of Civil Procedure. On August 5, 1997, the Lawsuits were ordered consolidated for all purposes. On October 3, 1997, the plaintiffs filed a consolidated amended class action complaint. On November 17, 1997, the Company filed a motion to dismiss the consolidated amended class action complaint. The court has not yet ruled on this motion. The Company believes that the plaintiffs' claims are without merit and intends to defend the Lawsuits vigorously. Additionally, the Company and its subsidiaries are involved in litigation that has arisen in the ordinary course of business. None of these matters, either individually or in the aggregate, are expected to have a material adverse effect on the Company's results of operations or financial condition. F-24 EX-10.3.1 2 FORD SALES AND SERVICE AGREEMENT, INCLUDING STANDARD PROVISIONS EXHIBIT 10.3.1 [LOGO] FORD MOTOR COMPANY Memphis Region FORD SALES AND SERVICE AGREEMENT AGREEMENT made as of the 1st day of December, 1997, by and between Central Ford Center, Inc., an Arkansas corporation, doing business as Landers Ford and with a principal place of business at 4600 S. University, PO Box 1649, Little Rock (Pulaski County), AR 72209 (72018) (hereafter called the "Dealer") and Ford Motor Company, a Delaware corporation with its principal place of business at Dearborn, Michigan (hereinafter called the "Company"). - PREAMBLE - The purpose of this agreement is to (i) establish the Dealer as an authorized dealer in COMPANY PRODUCTS including VEHICLES (as herein defined), (ii) set forth the respective responsibilities of the Company in producing and selling those products to the Dealer and of the Dealer in reselling and providing service for them and (iii) recognize the interdependence of both parties in achieving their mutual objectives of satisfactory sales, service and profits by continuing to develop and retain a broad base of satisfied owners of COMPANY PRODUCTS. In entering into this agreement, the Company and the Dealer recognize that the success of the Company and of each of its authorized dealers depends largely on the reputation and competitiveness of COMPANY PRODUCTS and dealers' services, and on how well each fulfills its responsibilities under this agreement. It is the opinion of the Company that sales and service of COMPANY PRODUCTS usually can best be provided to the public through a system of independent franchised dealers, with each dealer fulfilling its responsibilities in a given locality from properly located, adequate, well-equipped and attractive dealerships, which are staffed by competent personnel and provided with the necessary working capital. The Dealer recognizes that, in such a franchise system, the Company must plan for the establishment and maintenance of the numbers, locations and sizes of dealers necessary for satisfactory and proper sales and service representation in each market area as it exists and as it develops and changes. At the same time, the Company endeavors to provide each of its dealers with a reasonable profit opportunity based on the potential for sales and service of COMPANY PRODUCTS within its locality. The Company endeavors to make available to its dealers a variety of quality products, responsive to broad wants and needs of the buying public, which are attractively styled, of sound engineering design and produced on a timely basis at competitive prices. The development, production and sale of such products require that the Company and its manufacturing sources make large continuing investments in plants, equipment, tools and other facilities, engineering and styling research and development, quality control procedures, trained personnel and marketing programs. Heavy commitments must also be made in advance for raw materials and finished parts. For purposes of making these investments and commitments, planning production and estimating costs for setting prices, the Company assumes in advance an estimated volume of sales for each of its products. Within each year, it develops production schedules from orders submitted by its franchised dealers and its and their best estimates of the market demand for COMPANY PRODUCTS. In turn, each of the Company's franchised dealers makes important investments or commitments in retail sales and service facilities and equipment, in working capital, in inventories of vehicles, parts and accessories, and trained sales and service personnel based on annual planning volumes for their markets. If satisfactory volumes for either the Company or a dealer are not realized, each may suffer because of commitments already made and the cost of manufacturing and of selling each product may be increased. Each dealer must give the Company orders for the products needed to serve its market. The Company seeks to adjust production schedules, to the extent feasible, to fill dealer orders, and to allocate fairly any product in short supply, but inevitably both the Company and its dealers suffer loss of profits to the extent they cannot meet market demands. Thus, the automotive business is a high risk business in which the Company, its manufacturing sources and its dealers can succeed only through cooperative and competitive effort in their respective areas of manufacturing, sales, service and customer satisfaction. Because it is the dealer who deals directly with, and develops the sale of COMPANY PRODUCTS to the consuming public, the Company substantially relies on its dealers to provide successful sales and merchandising programs, competent service operations and effective owner relations programs. To do this, dealers must carry out their responsibilities of establishing and maintaining adequate wholesale and retail finance plans, new and used vehicle sales programs, parts and service sales programs, personnel training and supportive capitalization and working capital. To assist its dealers in these responsibilities, the Company establishes and periodically updates standards of operation and planning guides based on its experience and current conditions. It also offers sales and service training courses, advice as to facilities, counseling in the various phases of new and used vehicle merchandising, parts and service merchandising, leasing, daily rentals and facilities development. It also conducts national advertising, promotional and other marketing programs and assists dealers in developing complementary group and individual programs. To enable the Company to provide such assistance, it requires dealers to submit uniform and accurate sales, operating and financial reports from which it can derive and disseminate analytical and comparative operating data and advice to dealers. The Company also solicits dealers to bring to its attention through their National Dealer Council organization any mutual dealer problems or complaints as they arise. Because the Company relies heavily on its dealers for success, it reserves the right to cease doing business with any dealer who is not contributing sufficiently to such success. Similarly, the Company recognizes that its dealers look to it to provide competitive products and programs and that, if it does not do so, any dealer may elect to cease doing business with the Company. ii The Company has elected to enter into this agreement with the Dealer with confidence in the Dealer's integrity and ability, its intention to carry out its responsibilities set forth in this agreement, and its desire to provide courteous, competent and satisfying sales and service representation to consumers for COMPANY PRODUCTS, and in reliance upon its representations as to the persons who will participate in the ownership and management of the dealership. The dealer has elected to enter into this agreement with the Company with confidence in its integrity and ability, its intention to provide competitive products and assist the Dealer to market them successfully, and its desire to maintain high quality dealers. Both parties recognize the rights of the Dealer and the Company under this agreement are defined and limited by the terms of this agreement and applicable law. The Company and the Dealer further acknowledge that their methods of operation and business practices have an important effect on the reputation of the Dealer, the Company, COMPANY PRODUCTS and other franchised dealers of the Company. The Company and the Dealer also acknowledge that certain practices are detrimental to their interests, such as deceptive, misleading or confusing advertising, pricing, merchandising or business practices, or misrepresenting the characteristics, quality, condition or origin of any item of sale. It is the expectation of each of the parties that by entering into this agreement, and by the full and faithful observance and performance of its duties, a mutually satisfactory relationship will be established and maintained. - TERMS OF THE AGREEMENT - IN CONSIDERATION of the mutual agreements and acknowledgements hereinafter made, the parties hereto agree as follows: A. The Company hereby appoints the Dealer as an authorized dealer at retail in VEHICLES and at retail and wholesale in other COMPANY PRODUCTS and grants the Dealer the privilege of buying COMPANY PRODUCTS from the Company for sale in its DEALERSHIP OPERATIONS (as herein defined). The Company also grants to the Dealer the privilege of displaying, at approved location(s), the Company's trademarks and trade names applicable to COMPANY PRODUCTS. The Dealer hereby accepts such appointment. B. Subject to and in accordance with the terms and conditions of this agreement, the Company shall sell COMPANY PRODUCTS to the Dealer and the Dealer shall purchase COMPANY PRODUCTS from the Company. C. The Ford Motor Company Ford Sales and Service Agreement Standard Provisions (Form "FD925-A"), a duplicate original of which is attached to the Dealer's duplicate original of this agreement, have been read and agreed to by the Company and by the Dealer, and such Standard Provisions and any duly executed and delivered supplement or amendment thereto, are hereby made a part of this agreement with the same force and effect as if set forth herein in full. iii D. This agreement shall bind the Company when it bears the facsimile signature of the General Manager, and the manual countersignature of the General Sales Manager, Market Representation Manager, or a Regional Sales Manager, of the Ford Division of the company and a duplicate original thereof is delivered personally or by mail to the Dealer or the Dealer's principal place of business. E. The Dealer acknowledges that (i) this agreement may be executed only in the manner provided in paragraph D hereof, (ii) no one except the General Manager, The General Sales Manager, or Market Representation Manager of the Ford Division of the Company, or the Secretary or an Assistant Secretary of the Company, is authorized to make or execute any other agreement relating to the subject matter hereof on behalf of the Company, or in any manner to enlarge, vary or modify the terms of this agreement, and then only by an instrument in writing, and (iii) no one except the General Manager of the Ford Division of the Company, or the Secretary or an Assistant Secretary of the Company, is authorized to terminate this agreement on behalf of the Company, and then only by an instrument in writing. F. In view of the personal nature of this agreement and its objectives and purposes, the Company expressly reserves to itself the right to execute a Ford Sales and Service Agreement with individuals or other entities specifically selected and approved by the Company. Accordingly, this agreement and the rights and privileges conferred on the Dealer hereunder are not transferable, assignable or salable by the Dealer and no property right or interest, direct or indirect, is sold, conveyed or transferred to the Dealer under this agreement. This Agreement has been entered into by the Company with the Dealer in reliance (i) upon the representation and agreement that the following person(s), and only the following person(s), shall be the principal owners of the Dealer:
HOME PERCENTAGE OF NAME ADDRESS INTEREST BPT Holding, Inc. 7800 Alcoa Rd. - Benton, AR 72015 100 - ------------------------------------------------------------------------------------------------------------------------- Landers United Auto Group No. 5, Inc. 100 - ------------------------------------------------------------------------------------------------------------------------- Landers Auto Sales, Inc. 100 - ------------------------------------------------------------------------------------------------------------------------- United Auto Group, Inc. 100 - -------------------------------------------------------------------------------------------------------------------------
(ii) upon the representation and agreement that the following person(s), and only the following person(s), shall have full managerial authority for the operating management of the Dealer in the performance of this agreement:
HOME NAME ADDRESS TITLE Steve Landers 3316 Highway 5 - Benton, AR 72015 President - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------
iv and (iii) upon representation and agreement that the following person(s), and only the following person(s), shall be the remaining owners of the Dealer:
HOME PERCENTAGE OF INTEREST NAME ADDRESS - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------
The Dealer shall give the Company prior notice of any proposed change in the said ownership or managerial authority, and immediate notice of the death or incapacity of any such person. No such change or notice, and no assignment of this agreement or of any right or interest herein, shall be effective against the Company unless and until embodied in an appropriate amendment to or assignment of this agreement, as the case may be, duly executed and delivered by the Company and by the Dealer. The Company shall not unreasonably withhold its consent to any such change. G. (Strike out either subparagraph (1) or (2) whichever is not applicable.) (1) This agreement shall continue in force and effect from the date of its execution until terminated by either party under the provisions of paragraph 17 hereof. H. Both the Company and the Dealer assume and agree to carry out and perform their respective responsibilities under this agreement. The parties hereto have duly executed this agreement in duplicate as of the day and year first above written. [LOGO] FORD MOTOR COMPANY /s/ LANDERS FORD ----------------------------- (Dealer's Trade Name) General Manager, Ford Division By /s/ Steve J. Landers ------------------------- Countersigned by (Title) President -------------------- /s/ [illegible] - ---------------------------------- - ---------------------------------- v FORD SALES & SERVICE AGREEMENT FORD MOTOR COMPANY FORD DIVISION
TABLE OF CONTENTS Paragraph Page 1. DEFINITIONS..............................................................................................1 2. RESPONSIBILITIES WITH RESPECT TO VEHICLES................................................................3 (a) Sales.................................................................................................3 (b) Orders................................................................................................5 (d) Stocks................................................................................................6 (e) Demonstrators.........................................................................................6 (f) Factory Suggested Price Labels........................................................................7 (g) Owner Literature......................................................................................7 (h) Rebates and Allowances................................................................................7 (i) Warranty..............................................................................................7 3. RESPONSIBILITIES WITH RESPECT TO GENUINE PARTS...........................................................8 (a) Sales.................................................................................................8 (b) Orders................................................................................................8 (c) Consideration of Orders...............................................................................9 (d) Stocks................................................................................................9 (e) Returns and Allowances................................................................................9 (f) Warranty..............................................................................................9 4. RESPONSIBILITIES WITH RESPECT TO SERVICE.................................................................9 (a) Predelivery Service..................................................................................10 (b) Warranty and Policy and Campaign Service.............................................................10 (c) Maintenance and Repair Service.......................................................................11 (d) Service Tools and Equipment..........................................................................11 5. RESPONSIBILITIES WITH RESPECT TO DEALERSHIP FACILITIES..................................................11 (a) Locations and Facilities.............................................................................11 (b) Dealership Facilities Supplement.....................................................................11 (c) Changes and Additions................................................................................11 (d) Company Assistance...................................................................................12 (e) Fulfillment of Responsibility........................................................................12 6. OTHER DEALER AND COMPANY RESPONSIBILITIES...............................................................12 (a) Signs................................................................................................12 (b) Personnel............................................................................................12 (c) Dealer Residence.....................................................................................13 (d) Capital..............................................................................................13 (e) Accounting System....................................................................................13 (f) Financial Reports....................................................................................13 (g) Delivery and Sales Reports...........................................................................13 (h) Customer Handling....................................................................................14 (i) Business Practices, Advertising and Programs.........................................................14 (j) Compliance with Laws, Rules and Regulations..........................................................14 (k) Indemnification by the Company.......................................................................15 7. DEALER'S RESPONSIBILITIES WITH RESPECT TO HOURS OF BUSINESS.............................................16 8. PURCHASES FROM OTHERS AND SALES TO OTHERS...............................................................16 9. DETERMINATION OF DEALER REPRESENTATION..................................................................16 (a) Representation Planning..............................................................................16 (b) Information to Dealer................................................................................16 (c) Additional Dealers...................................................................................17 (d) Established Dealer Points............................................................................17 i Paragraph Page 10. PRICES AND CHARGES......................................................................................17 11. TERMS AND TITLE.........................................................................................18 (a) Payment..............................................................................................18 (b) Title................................................................................................18 (c) Risk of Loss and Claims..............................................................................18 (d) Demurrage and Diversion Liability....................................................................18 (e) State and Local Taxes................................................................................19 12. RECORDS, INSPECTIONS AND TESTS..........................................................................19 (a) Record Retention.....................................................................................19 (b) Inspections and Tests................................................................................19 13. CHANGES IN COMPANY PRODUCTS.............................................................................19 14. DEALER NOT AGENT OF THE COMPANY.........................................................................20 15. TRADEMARKS AND TRADE NAMES..............................................................................20 (a) Use in Firm Name.....................................................................................20 (b) Limitations on Use...................................................................................20 16. REPORTS TO FORD MOTOR COMPANY'S DEALER POLICY BOARD.....................................................20 17. TERMINATION OR NONRENEWAL OF AGREEMENT..................................................................21 (a) By Dealer............................................................................................21 (b) By Company Due to Events Controlled by Dealer........................................................21 (c) By Company for Nonperformance by Dealer of Sales, Service, Facilities or Other Responsibilities......22 (d) By Company or Dealer Because of Death or Physical or Mental Incapacity of any Principal Owner........23 (e) By Company or Dealer for Failure of Dealer or Company to be Licensed.................................23 (f) By Company at Will...................................................................................24 (g) By Company Upon the Offer of a New Agreement.........................................................24 (h) Acts in Good Faith...................................................................................24 18. REQUIRED APPEAL TO POLICY BOARD--TERMINATIONS OR NONRENEWALS----OPTIONAL ARBITRATION PLAN...............25 (a) Arbitration Plan.....................................................................................25 (b) Appeal to Policy Board...............................................................................25 (c) Optional Arbitration.................................................................................25 (d) Limitation of Actions................................................................................26 (e) Expenses of Arbitration..............................................................................26 19. OBLIGATIONS UPON TERMINATION OR NONRENEWALS.............................................................27 (a) Sums Owing the Company...............................................................................27 (b) Discontinuance of Use of Trademarks and Trade Names..................................................27 (c) Warranty Work........................................................................................28 (d) Service Records......................................................................................28 (e) Orders and Customer Deposits.........................................................................28 (f) Deliveries After Termination or Nonrenewal...........................................................28 20. SUCCESSOR TO THE DEALER IN THE EVENT OF DEATH OR INCAPACITY.............................................29 (a) Interim Agreement....................................................................................29 (b) Buy-out..............................................................................................31 (c) Term/Continuation....................................................................................31 (d) Limitation of Offer..................................................................................31 (e) Limitation for Acceptance............................................................................32 ii Paragraph Page 21. REACQUISITION OF COMPANY PRODUCTS AND ACQUISITION OF THE DEALER'S SIGNS, SPECIAL TOOLS AND EQUIPMENT, AND MAINTENANCE ITEMS 33 (a) Vehicles.............................................................................................32 (b) Genuine Parts........................................................................................32 (c) Dealer's Signs.......................................................................................32 (d) Special Tools and Equipment..........................................................................33 (e) Procedure Delivery and Title.........................................................................33 (f) Payment..............................................................................................33 (g) Assignment of Benefits...............................................................................34 22. DEALERSHIP FACILITIES ASSISTANCE UPON NONRENEWAL OR CERTAIN TERMINATIONS BY THE COMPANY.................34 (a) Dealer Eligibility...................................................................................34 (b) Eligible Facilities..................................................................................35 (c) Company's Obligation.................................................................................35 (d) Limitations on Company's Obligation..................................................................36 (e) Satisfaction of Company's Obligation.................................................................36 23. TERMINATION BENEFITS FULL COMPENSATION; GENERAL RELEASE.................................................37 24. DISPOSITION OF THE DEALER'S ASSETS......................................................................37 (a) Company Right to Approve Change in Ownership.........................................................37 (b) Company Right to First Refusal to Purchase...........................................................38 25. NEW AGREEMENT...........................................................................................39 26. ACKNOWLEDGEMENTS........................................................................................39 27. NO IMPLIED WAIVERS......................................................................................40 28. RELATIONS AFTER TERMINATION NOT A RENEWAL...............................................................40 29. LIMITATION OF THE COMPANIES LIABILITY...................................................................40 30. NOTICES.................................................................................................40 31. AMENDMENT...............................................................................................41 32. MICHIGAN AGREEMENT......................................................................................41 33. CONFLICT WITH STATUTE...................................................................................41 iii
FORD MOTOR COMPANY FORD SALES AND SERVICE AGREEMENT STANDARD PROVISIONS 1. DEFINITIONS As used herein, the following terms shall have the following meanings, respectively: (A) "COMPANY PRODUCTS" shall mean such (1) new passenger cars, (2) new trucks and chassis, excluding all trucks and chassis of series 850 or higher designations, and (3) parts and accessories therefor, as from time to time are offered for sale by the Company to all authorized Ford dealers as such for resale, plus such other products as may be offered for sale by the Company to the Dealer from time to time. The Company reserves the right to offer any new, different and differently designated passenger car, truck or chassis, and any other product, bearing any trademarks or brand names used or claimed by the Company or any of its subsidiaries, including the name "Ford", to selected authorized Ford dealers or others under existing or separate new agreements; provided, however, that the Company shall not franchise any such new passenger car bearing the name "Ford" (other than the Ford script-in-oval corporate form of trademark) to anyone who is not an authorized Ford dealer. (B) "CAR" shall mean any passenger car, and "TRUCK" shall mean any truck or chassis, included in this agreement pursuant to paragraph 1(a) above. "VEHICLE" shall mean any CAR or TRUCK and "VEHICLES" shall mean CARS and TRUCKS. (C) "COMPETITIVE CARS" and "COMPETITIVE TRUCKS" shall mean those new cars and new trucks, respectively, not marketed by the Company which are selected by the Company as generally comparable with CARS and TRUCKS, respectively, in price and product characteristics. (D) "INDUSTRY CARS" and "INDUSTRY TRUCKS" shall mean all new cars and all new trucks, respectively, of all manufacturers to the extent data therefor are reasonably available. (E) "GENUINE PARTS" shall mean such parts, accessories and equipment for VEHICLES as are offered for sale by the Company from time to time to the Dealer. (F) "DEALER PRICE" shall mean, with respect to each COMPANY PRODUCT to which it refers, the price to the Dealer for such product, as from time to time established by the Company, before deduction of any cash or other discount applicable thereto. It shall not include any amount in the nature of a predelivery or other holdback deposit or charge, any dealer association collection, any charge by the Company for distribution, delivery or taxes, or any other charge for special items or services. (G) "VEHICLE TERMS OF SALE BULLETIN" shall mean the latest VEHICLE TERMS OF SALE BULLETIN and amendments thereto furnished to the Dealer from time to time by the Company setting forth the terms of sale and ordering procedures applicable to sales of VEHICLES to authorized Ford dealers. (H) "PARTS AND ACCESSORIES TERMS OF SALE BULLETIN" shall mean the latest PARTS AND ACCESSORIES TERMS OF SALE BULLETIN and amendments thereto furnished to the Dealer from time to time by the Company setting forth the terms of sale and ordering procedures applicable to sales of GENUINE PARTS to authorized Ford dealers. (I) "CUSTOMER SERVICE BULLETIN" shall mean the latest CUSTOMER SERVICE BULLETIN and amendments thereto furnished to the Dealer from time to time by the Company establishing standards for authorized Ford dealers with respect to service personnel, training, tools and equipment, for customer handling procedures and for evaluating the Dealer's service performance. (J) "DEALER'S LOCALITY" shall mean the locality designated in writing to the Dealer by the Company from time to time as the area of the Dealer's sales and service responsibility for COMPANY PRODUCTS. (K) "DEALERSHIP LOCATION" shall mean the place or places of business of the Dealer for carrying out this agreement which are approved by the Company as provided in paragraph 5 of this agreement. (L) "DEALERSHIP FACILITIES" shall mean the land areas, buildings and improvements established at the DEALERSHIP LOCATION in accordance with the provisions of paragraph 5 of this agreement. (M) "DEALERSHIP OPERATIONS" shall mean the sale of COMPANY PRODUCTS and used vehicles, service operations and (if the Dealer so elects) rental or leasing of VEHICLES, conducted by the Dealer at or from the DEALERSHIP FACILITIES. -2- (N) "CAR PLANNING VOLUME" and "TRUCK PLANNING VOLUME" shall mean the average annual estimated sales base for CARS and TRUCKS, respectively, established by the Company for the Dealer from time to time for planning purposes under its standard procedures for authorized Ford dealers in single or multiple DEALERS' LOCALITIES, as the case may be, based on historical sales and registrations, and current trends, in CARS, TRUCKS, COMPETITIVE CARS and TRUCKS and INDUSTRY CARS and TRUCKS in the DEALER'S LOCALITY. Consideration shall also be given to the environs of the DEALERSHIP LOCATION and market trends therein, consumer shopping habits, demographic factors and other appropriate data to the extent available and pertinent. Such terms shall not represent the actual sales volumes to be achieved by the Dealer to meet his responsibilities under paragraph 2 of this agreement. (O) "PERCENT RESPONSIBILITY" shall mean the ratio of the Dealer's CAR PLANNING VOLUME, and of the Dealer's TRUCK PLANNING VOLUME, to the total CAR PLANNING VOLUMES and to the total TRUCK PLANNING VOLUMES, respectively, for all authorized Ford dealers M" the DEALER'S LOCALITY. (P) "UIO" (units in operation) shall mean the CARS and TRUCKS of the next preceding three or more model years (as determined by the Company from time to time) licensed within the DEALER'S LOCALITY at a given time multiplied by the Dealer's PERCENT RESPONSIBILITY therefor. (Q) "GUIDES" shall mean such reasonable standards as may be established by the Company for the Dealer from time to time under its standard procedures for authorized Ford dealers (i) for DEALERSHIP FACILITIES and equipment, capitalization and net working capital based on such factors as CAR and TRUCK PLANNING VOLUMES, UIO, the DEALER'S LOCALITY and (ii) for inventories, personnel, demonstrators and other elements of DEALERSHIP OPERATIONS based on such factors as sales and service volumes. 2. RESPONSIBILITIES WITH RESPECT TO VEHICLES (A) SALES. The Dealer shall promote vigorously and aggressively the sale at retail (and, if the Dealer elects, the leasing and rental) of CARS and TRUCKS to private and fleet customers within the DEALER'S LOCALITY, and shall develop energetically and satisfactorily the potentials for such sales and obtain a reasonable share thereof; but the Dealer shall not be limited to the DEALER'S LOCALITY in making sales. To this end, the Dealer shall develop, maintain and direct a trained, quality vehicle sales organization and shall conduct throughout each model year aggressive advertising and sales promotion activities, making use to the greatest feasible extent of the Company's advertising and sales promotion programs relating to VEHICLES. -3- The Dealer's performance of his sales responsibility for CARS shall be measured by such reasonable criteria as the Company may develop from time to time, including: (1) Dealer's sales of CARS to private and fleet users located in the DEALER'S LOCALITY as a percentage of: (i) all private and all fleet registrations of CARS in the DEALER'S LOCALITY, (ii) all private and all fleet registrations of COMPETITIVE CARS in the DEALER'S LOCALITY, (iii) all private and all fleet registrations of INDUSTRY CARS in the DEALER'S LOCALITY, and (iv) the private and fleet sales objectives for CARS established by the Company for the Dealer from time to time. (2) If the Dealer is not the only authorized dealer in CARS in the DEALER'S LOCALITY, the following factors shall be used in computing percentages pursuant to 2(a)(1) above: (i) The Dealer's sales of CARS to users located in the DEALER'S LOCALITY shall be deemed to be the total registrations thereof in the DEALER'S LOCALITY multiplied by the Dealer's percent of sales of all CARS made by all authorized Ford dealers located in the DEALER'S LOCALITY unless the Dealer or the Company shows that the Dealer actually has made a different number of such sales, (ii) The registrations of CARS and COMPETITIVE and INDUSTRY CARS in the DEALER'S LOCALITY against which the Dealer shall be measured shall be the total thereof multiplied by the Dealer's PERCENT RESPONSIBILITY, and (iii) The Dealer's objectives for CARS shall be the total objectives therefor of all authorized Ford dealers in the DEALER'S LOCALITY multiplied by the Dealer's PERCENT RESPONSIBILITY. (3) A comparison of each such percentage with percentages similarly obtained for all other authorized Ford dealers combined in the Company's sales zone and district in which the Dealer is located, and where subparagraph 2(a)(2) applies, -4- for all other authorized Ford dealers combined in the DEALER'S LOCALITY. (4) In evaluating any comparisons provided for in subparagraph 2(a)(3) above, the Company shall give consideration to the availability of CARS to the Dealer and other authorized Ford dealers and any special local marketing conditions that might affect the Dealer's sales performance differently from the sales performance of COMPETITIVE or INDUSTRY CAR dealers or other authorized Ford dealers. (5) The sales and registration data referred to in this subparagraph 2(a) shall include sales to and registrations in the name of leasing and daily rental operations and shall be those utilized in the Company's records or in reports furnished to the Company by independent sources selected by it and generally available for such purpose in the automotive industry. In the event such reports of the registrations and/or sales of INDUSTRY or COMPETITIVE CARS in the DEALER'S LOCALITY are not generally available, the evaluation of the Dealer's sales performance shall be based on such registrations and/or sales or purchase data as can be reasonably obtained by the Company. The Dealer's performance of his sales responsibility for TRUCKS shall be determined in the same manner as for CARS. The Company will provide to the Dealer an evaluation of his performance under this subparagraph (2)(a) from time to time as initiated by the Company, or not more than once a month upon the written request of the Dealer. (B) ORDERS. (1) To enable the Company to plan for and establish, and its manufacturing sources to carry out, production schedules, the Dealer shall, on the dates and forms provided by the Company, furnish the Company basic orders for types of VEHICLES and specific orders for individual VEHICLES against the applicable basic order as specified in the applicable VEHICLE TERMS OF SALE BULLETIN. (2) The Company is authorized to have installed on any VEHICLE ordered by the Dealer any equipment or accessory required by any applicable federal, state or local law, rule, or regulation. -5- (3) Any order for a VEHICLE not shipped during the month for which delivery was scheduled will remain in effect unless canceled by the Dealer or the Company by written notice to the other. An order for an "off standard" VEHICLE may be canceled only by or with the consent of the Company. Any VEHICLE which differs from the Company's standard specifications, or which incorporates special equipment, shall be considered an "off standard" VEHICLE. (4) The Dealer shall not be liable to the Company for any failure to accept shipments of VEHICLES ordered from the Company where such failure is due to any labor difficulty at the DEALERSHIP LOCATION or to any cause beyond the Dealer's control or without the Dealer's fault or negligence. (C) CONSIDERATION OF ORDERS. (1) The Company may reject orders not submitted in accordance with subparagraph 2(b)(1) above. The Company shall make reasonable efforts to fill each order of the Dealer that is accepted by the Company. During any period of shortage of any VEHICLE, the Company shall be entitled to give priority to accepted orders for such VEHICLES for resale to users residing within the DEALER'S LOCALITY of the ordering dealer. (2) The Company shall not be liable to the Dealer in any respect for failure to ship or for delay in shipment of accepted orders for VEHICLES where such failure or delay is due wholly or in part to (i) shortage or curtailment of material, labor, transportation, or utility services, (ii) any labor or production difficulty in any of its own or any of its suppliers' locations, (iii) any governmental action, or (iv) any cause beyond the Company's control or without its fault or negligence. (D) STOCKS. The Dealer shall maintain stocks of current models of such lines or series of VEHICLES, of an assortment and in quantities as are in accordance with Company GUIDES therefor, or adequate to meet the Dealer's share of current and anticipated demand for VEHICLES in the DEALER'S LOCALITY. The Dealer's maintenance of VEHICLE stocks shall be subject to the Company's filling the Dealer's orders therefor. (E) DEMONSTRATORS. The Dealer shall maintain at all times in good condition and running order for demonstration and loan to prospective purchasers, such numbers of the latest model of such -6- lines or series of VEHICLES as are in accordance with Company GUIDES therefor. (F) FACTORY SUGGESTED PRICE LABELS. If any CAR is delivered by the Company to the Dealer with an incorrect label, or without a completed label, affixed thereto pursuant to the Federal Automobile Information Disclosure Act, the Dealer shall promptly complete and affix to such CAR a correct label on the form and in accordance with the directions furnished by the Company. (G) OWNER LITERATURE. The Dealer shall, in accordance with the Company's instructions, complete, execute and deliver to each retail purchaser of a VEHICLE from him the Company's then current publications for owners with respect to the operation, maintenance and warranty of that VEHICLE (hereinafter called "Owner's Literature"). The Dealer shall fulfill promptly all dealer responsibilities under each piece of the Owner's Literature delivered by him. The Company may specify in the Owner's Literature that the Dealer will perform certain inspections of the VEHICLE. The Dealer authorizes the Company to charge his account for work done by another Company authorized CAR or TRUCK dealer under the Owner's Literature delivered by the Dealer, and to credit his account for work done by him under Owner's Literature delivered by another Company authorized CAR or TRUCK dealer. The charge or credit shall be in the amount specified by the Company from time to time. (H) REBATES AND ALLOWANCES. The Dealer shall be entitled to such rebates and allowances from the Company on VEHICLES and factory-installed options, subject to such conditions and procedures, as may be specified in the applicable VEHICLE TERMS OF SALE BULLETIN or other notice pertaining thereto sent to the Dealer by the Company, provided that any change in the model close-out allowance shall be announced to the Dealer prior to the Company's solicitation of the build-out order. (I) WARRANTY. The Company shall from time to time establish, by notice to the Dealer, the warranty to the owner applicable to each VEHICLE. There shall be NO OTHER WARRANTY, express or implied, including any warranty of MERCHANTABILITY OR FITNESS, or any other obligation of the Company to the Dealer or the owner with respect to the VEHICLE or any part thereof except the warranty established pursuant to this subparagraph. The Dealer shall expressly incorporate such warranty as a part of each buyer's order form or other contract for the sale of a VEHICLE and shall deliver a copy of the warranty, in. the form furnished by the Company, to the owner at the time the VEHICLE is delivered to the owner, all in accordance with instructions set forth in the Company's then current Warranty and Policy Manual and supplements thereto (hereinafter called "Warranty Manual"). -7- 3. RESPONSIBILITIES WITH RESPECT TO GENUINE PARTS (A) SALES. The Dealer shall promote vigorously and aggressively the sale of GENUINE PARTS to service, wholesale and other customers within the DEALER'S LOCALITY, and shall develop energetically and satisfactorily the potentials for such sale and obtain a reasonable share thereof; but the Dealer shall not be limited to the DEALER'S LOCALITY in making sales. To this end, the Dealer shall develop, maintain and direct a trained quality parts sales organization and shall conduct aggressive advertising and sales promotion activities, making use to the greatest feasible extent of the Company's advertising and sales promotion programs relating to GENUINE PARTS. The Dealer shall not sell or offer for sale or use in the repair of any COMPANY PRODUCT, as a GENUINE PART, any part or accessory that is not in fact a GENUINE PART. The Dealer's performance of his sales responsibility for GENUINE PARTS shall be measured by such reasonable criteria as the Company may develop from time to time including: (1) His sales as a percentage of the sales objectives established for him by the Company from time to time, and his sales per UIO, and (2) A comparison of such percentage and sales per UIO with the percentage similarly obtained and sales per UIO of all other authorized Ford dealers combined in one or more of the following: (i) the DEALER'S LOCALITY, (ii) the Company's sales or service zone, and (iii) the district in which the Dealer is located, as the Company may determine. (B) ORDERS. (1) Stock orders for the Dealer's requirements of GENUINE PARTS shall be furnished to the Company by the Dealer in accordance with the applicable PARTS AND ACCESSORIES TERMS OF SALE BULLETIN. (2) Any order for a GENUINE PART not shipped in accordance with normal shipping schedules will remain in effect unless cancelled by the Dealer or the Company by written notice to the other. (3) The Dealer shall not be liable to the Company for any failure to accept shipment of GENUINE PARTS ordered from the Company where such failure is due to any labor difficulty in the Dealer's place of business or to any cause beyond the Dealer's control or without the Dealer's fault or negligence. -8- (C) CONSIDERATION OF ORDERS. (1) The Company shall make reasonable efforts to fill each order of the Dealer that is accepted by the Company. (2) The Company shall not be liable to the Dealer in any respect for failure to ship or for delay in shipment of accepted orders for GENUINE PARTS where such failure or delay is due wholly or in part to (i) shortage or curtailment of material, labor, transportation or utility services, (ii) any labor or production difficulty in any of its own or any of its suppliers' locations, (iii) any governmental action or (iv) any cause beyond the Company's control or without its fault or negligence. (D) STOCKS. The Dealer shall maintain a stock of parts, including GENUINE PARTS, in accordance with Company GUIDES therefor, and of an assortment in quantities adequate to meet the current and anticipated demand therefor. The Dealer's maintenance of stocks of GENUINE PARTS shall be subject to the Company's filling the Dealer's orders therefor. (E) RETURNS AND ALLOWANCES. The Dealer shall be entitled to such allowances, discounts, incentives and return privileges from the Company on GENUINE PARTS subject to such conditions and procedures as may be specified in the applicable PARTS AND ACCESSORIES TERMS OF SALE BULLETIN or other notice pertaining thereto sent to the Dealer by the Company. (F) WARRANTY. The Company shall from time to time establish, by notice to the Dealer, the warranty applicable to each GENUINE PART. There shall be NO OTHER WARRANTY, express or implied, including any warranty of MERCHANTABILITY OR FITNESS, or any other obligation of the Company to the Dealer or the customer with respect to any GENUINE PART or any part thereof except the warranty established pursuant to this subparagraph. The Dealer shall expressly incorporate such warranty as a part of each sale of a GENUINE PART, in accordance with instructions set forth in the Warranty Manual. 4. RESPONSIBILITIES WITH RESPECT TO SERVICE The Dealer shall develop, maintain and direct a trained, quality service organization and render at the DEALERSHIP FACILITIES prompt, workmanlike, courteous and willing service to owners and users of COMPANY PRODUCTS, in accordance with the standards and procedures set forth in the applicable CUSTOMER SERVICE BULLETIN, including without limitation all service to which a purchaser of a COMPANY PRODUCT from any authorized Ford dealer may be entitled. -9- (A) PREDELIVERY SERVICE. The Dealer shall perform or be responsible for the performance of such inspection, conditioning and repair of each VEHICLE before delivery as may be prescribed for such VEHICLE in the Company's applicable predelivery inspection and conditioning schedules furnished by the Company to the Dealer. The Dealer shall maintain or be responsible for the maintenance of adequate records of all predelivery inspection, conditioning and repair work performed by or for the Dealer. (B) WARRANTY AND POLICY AND CAMPAIGN SERVICE. (1) The Dealer shall perform all warranty and policy service on each COMPANY PRODUCT it is certified to sell and service, presented by owners, in accordance with the warranty and policy applicable thereto and the applicable provisions of the Warranty Manual and CUSTOMER SERVICE BULLETIN. (2) The Dealer shall perform campaign inspections and/or corrections for owners and users of all VEHICLES, subject to the campaign instructions issued by the Company from time to time and the applicable provisions of the Warranty Manual. The Company may ship parts in quantity to the Dealer to effect such campaign work and if such parts are in excess of the Dealer's requirements, the Dealer may return unused parts to the Company for credit after completion of the campaign. (3) The Dealer shall use only GENUINE PARTS in performing warranty, policy and campaign work, except as otherwise provided in the Warranty Manual, CUSTOMER SERVICE BULLETIN or campaign instructions, and shall give precedence to all such work over other service work if the use of the vehicle is impaired. The Dealer shall promptly report to the Company, and seek the Company's assistance with respect to, any warranty or policy or campaign work which cannot be performed to the owner's or the Dealer's satisfaction. The Company shall give precedence to such requests over other service assistance. The Dealer shall provide the owner with a copy of the repair order for such work itemizing the work performed. The Dealer shall have such repair order signed by the owner except in unusual circumstances where it is not feasible to obtain such signature. (4) The Dealer shall submit claims to the Company for reimbursement for the parts and labor used in performing warranty, policy and campaign work and the Company shall reimburse the Dealer therefor, -10- in accordance with the provisions of the Warranty Manual or campaign instructions and the Dealer's approved warranty labor rate. The Dealer shall maintain adequate records and documents supporting such claims in accordance with the provisions of the Warranty Manual. (C) MAINTENANCE AND REPAIR SERVICE. The Dealer shall perform all other maintenance and repair services, including, where feasible, body repair services, reasonably required by owners and users of VEHICLES and shall provide each customer a copy of the repair order itemizing the work performed and the charges therefor. The Dealer shall have the customer sign such repair order except in unusual circumstances where it is not feasible to obtain such signature. (D) SERVICE TOOLS AND EQUIPMENT. The Dealer shall acquire and maintain for use in DEALERSHIP OPERATIONS such diagnostic equipment and other tools, equipment and machinery, comparable to the type and quality recommended by the Company from time to time, as are necessary to meet the Dealer's service responsibilities hereunder and substantially in accordance with Company GUIDES therefor and the applicable CUSTOMER SERVICE BULLETIN. 5. RESPONSIBILITIES WITH RESPECT TO DEALERSHIP FACILITIES (A) LOCATIONS AND FACILITIES. The Dealer shall establish and maintain at the DEALERSHIP LOCATION approved by the Company DEALERSHIP FACILITIES of satisfactory appearance and condition and adequate to meet the Dealer's responsibilities under this agreement. The DEALERSHIP FACILITIES shall be substantially in accordance with the GUIDES therefor established by the Company from time to time. (B) DEALERSHIP FACILITIES SUPPLEMENT. The Dealer and the Company have executed, as a part of and simultaneously with this agreement, a Dealership Facilities Supplement which includes a description of all of the DEALERSHIP LOCATION and FACILITIES, the GUIDES therefor as of the date of this agreement and the purpose for which each shall be used. (C) CHANGES AND ADDITIONS. The Dealer shall not move or substantially modify or change the usage of any of the DEALERSHIP LOCATION or FACILITIES for COMPANY PRODUCTS, nor shall the Dealer or any person named in subparagraphs F(i) or F(ii) hereof directly or indirectly establish or operate in whole or in part any other locations or facilities for the sale or service of COMPANY PRODUCTS or the sale of used vehicles without the prior written consent of the Company. Any such change shall be evidenced by a new Dealership Facilities Supplement executed by the Dealer and the Company. To ensure that all data included on the Dealership Facilities Supplement are reasonably accurate, the -11- Company and the Dealer shall execute a new Dealership Facilities Supplement at least once every five (5) years. (D) COMPANY ASSISTANCE. To assist the Dealer in planning, establishing and maintaining DEALERSHIP LOCATION and FACILITIES in accordance with his responsibilities under this agreement, the Company will make available, at the request of the Dealer, and at a mutually convenient time and place, personnel to provide counsel and advice regarding location and facility planning, including layout and design. (E) FULFILLMENT OF RESPONSIBILITY. The Dealer shall be deemed to be fulfilling his responsibilities under this paragraph 5 when and as long as the DEALERSHIP LOCATION is approved by the Company and the DEALERSHIP FACILITIES are substantially in accordance with the current GUIDES therefor. The execution of this agreement or of any Dealership Facilities Supplement shall not of itself be construed as evidence of the fulfillment by the Dealer of his responsibilities to provide adequate DEALERSHIP LOCATION and FACILITIES. 6. OTHER DEALER AND COMPANY RESPONSIBILITIES (A) SIGNS. The Dealer shall install and maintain at the DEALERSHIP LOCATION signs of good appearance and adequate to identify such locations as (1) authorized sales and service establishments for VEHICLES and other COMPANY PRODUCTS identifying such products as products of the Company, (2) authorized sales locations for used vehicles and (3) authorized locations for the leasing or rental of vehicles, as the case may be. Each sign shall be compatible with the design standards established by the Company from time to time and shall be subject to the Company's approval with respect to any display of any trademark or trade name used or claimed by the Company or any of its subsidiaries. Fulfillment of any separate Dealership Identification Agreement between the Dealer and the Company shall be deemed fulfillment of this subparagraph 6(a). The Company will make available, at the request of the Dealer, and at a mutually convenient time and place, personnel to provide counsel and advice regarding dealership signs and identification. (B) PERSONNEL. The Dealer shall employ and train such numbers and classifications of competent personnel of good character, including, without limitation, sales, parts, service, owner relations and other department managers, salesmen and service technicians, as will enable the Dealer to fulfill all his responsibilities under this agreement. The Company shall provide assistance to the Dealer in determining personnel requirements. In response to the training needs of the Dealer's personnel, the Dealer at his expense shall cause his personnel to attend training schools or courses conducted by the Company from time to time. -12- (C) DEALER RESIDENCE. Effective operation of the Dealer's business is dependent in large part on the Dealer's management becoming a part of and accepted within his local community. Accordingly, each person named in subparagraph F(ii) hereof shall (unless otherwise approved in writing by the Company because of individual circumstances) reside within the DEALER'S LOCALITY. (D) CAPITAL. The Dealer shall at all times maintain and employ in connection with his DEALERSHIP OPERATIONS separately from any other business of the Dealer, such total investment, net working capital, adequate lines of wholesale credit and competitive retail financing plans for VEHICLES as are in accordance with Company GUIDES therefor and will enable the Dealer to fulfill all his responsibilities under this agreement. (E) ACCOUNTING SYSTEM. It is in the mutual interests of the Dealer and the Company that uniform accounting systems and practices be maintained by the Company's authorized dealers in order that the Company may develop and disseminate helpful information, evaluate the relative operating performance of each dealer and develop criteria that will enable the Company to formulate plans and policies in the interests of its dealers and the Company and that will assist each dealer to obtain satisfactory results from his dealership operations. Accordingly, the Dealer shall install and use in his DEALERSHIP OPERATIONS, whether conducted as one or several business entities, an accounting system, not exclusive of any other system the Dealer may wish to use, in accordance with the Company's Manual of Dealer Accounting Procedures as amended from time to time. (F) FINANCIAL REPORTS. In furtherance of the mutual interests set forth in paragraph 6(e) hereof, the Dealer shall furnish to the Company each month, at the time and on the forms prescribed by the Company, a complete statement reflecting the true financial condition and the month and year-to-date operating results of his DEALERSHIP OPERATIONS as of the end of the preceding month. The Dealer also shall promptly furnish to the Company a copy of any adjusted annual statement that may be prepared by or for the Dealer. All such statements, reports and data shall be based whenever applicable upon the accounting system installed and used by the Dealer in accordance with subparagraph 6(e). Financial information furnished by the Dealer shall be handled on a confidential basis by the Company and, unless authorized by the Dealer or required by law, or offered in evidence in judicial or arbitration proceedings, shall not be furnished, except as an unidentified part of a composite or coded report, to any party outside of the Company. (G) DELIVERY AND SALES REPORTS. To assist the Company in evaluating current sales and market trends, in advising its manufacturing sources of adjustments desired in production and distribution schedules, and in providing the type of information -13- necessary to provide assistance and counsel to the Dealer, the Dealer shall (1) accurately complete the information prescribed on the vehicle delivery card and forward such card to the Company at or as soon as reasonably possible after the end of the day on which the new VEHICLE is delivered or sold, whichever shall occur first, to the private or fleet customer or to rental or leasing operations, if any, conducted or controlled by the Dealer, and (2) furnish the Company with accurate and complete delivery or sales reports and data relating to the Dealer and his DEALERSHIP OPERATIONS at the times and on such forms as the Company may specify from time to time. (H) CUSTOMER HANDLING. The Dealer shall cooperate with Company programs, and develop and maintain his own programs, designed to develop good relationships between the Dealer and the public. The Dealer shall promptly investigate and handle all matters brought to his attention by the Company or the public relating to the sale or servicing of COMPANY PRODUCTS in the DEALER'S LOCALITY, in accordance with procedures set forth in the applicable CUSTOM SERVICE BULLETIN, so as to develop public confidence in the Dealer, the Company and COMPANY PRODUCTS. The Dealer shall report promptly to the Company the details of each inquiry or complaint received by the Dealer relating to any COMPANY PRODUCT which the Dealer cannot handle satisfactorily. The Dealer shall not make, directly or indirectly, any false or misleading statement or representation to any customer as to any VEHICLE, GENUINE PART or other COMPANY PRODUCT as to the source, condition or capabilities thereof, or the Dealer's or the Company's prices or charges therefor or for distribution, delivery, taxes or other items. (I) BUSINESS PRACTICES, ADVERTISING AND PROGRAMS. The Dealer shall conduct DEALERSHIP OPERATIONS in a manner that will reflect favorably at all times on the reputation of the Dealer, other Company authorized dealers, the Company, COMPANY PRODUCTS and trademarks and trade names used or claimed by the Company or any of its subsidiaries. The Dealer shall avoid in every way any "bait", deceptive, misleading, confusing or illegal advertising or business practice. The Company shall not publish or employ any such advertising or practice or encourage any dealer or group of dealers to do so. (J) COMPLIANCE WITH LAWS, RULES AND REGULATIONS. The Dealer shall comply with all applicable federal, state, and local laws, rules and regulations in the ordering, sale and service of COMPANY PRODUCTS and the sale and service of used vehicles, including without limitation those related to motor vehicle safety, emissions control and customer service. The Company shall provide the Dealer, and the Dealer shall provide the Company, such information and assistance as may be reasonably requested by the other in connection with the performance of obligations under such laws, rules and regulations. -14- (K) INDEMNIFICATION BY THE COMPANY. The Company shall defend, indemnify, hold harmless and protect the Dealer from any losses, damages or expense, including costs and attorney's fees, resulting from or related to lawsuits, complaints or claims commenced against the Dealer by third parties concerning: (1) Property damage to a COMPANY PRODUCT or bodily injury or property damage arising out of an occurrence caused solely by a "production defect" in that product (i.e., due to defective materials or workmanship utilized or performed at the factory, except for any "production defect" in tires and diesel engines made by others, provided, however, that the "production defect" could not have been discovered by the Dealer in the reasonable pre-delivery inspection of the VEHICLE, as recommended by the Company. (2) Property damage to a COMPANY PRODUCT or bodily injury or property damage arising out of an occurrence caused solely by a defect in the design of that product, except for a defect in the design of tires or diesel engines made by others. (3) Any damage occurring to a new VEHICLE, and repaired by the Company (excluding removal and replacement of an entire component with a like component where no welding, riveting or painting is involved), from the time the VEHICLE leaves the Company's assembly plant or warehouse to the time it is delivered to the Dealer's designated location, provided the Company failed to notify the Dealer in writing of such damage and repair in transit prior to delivery of the VEHICLE to the first retail customer. In the event that any legal action arising out of any of these causes is brought against the Dealer, the Company shall undertake, at its sole expense, to defend said action on behalf of the Dealer when requested to do so by the Dealer, provided that the Dealer promptly notifies the Company in writing of the commencement of the action against the Dealer and cooperates fully in the defense of the action in such manner and to such extent as the Company may reasonably require (provided, however, that the Company shall have the right to continue the suit in the name of the Dealer, if the Company deems such action to be necessary). Should the Company refuse to undertake the defense on behalf of the Dealer, or fail to undertake an adequate defense, the Dealer may conduct its own defense and the Company shall be liable for the -15- cost of such defense, including reasonable attorney's fees, together with any verdict, judgment or settlement paid by the Dealer (provided, however, that the Dealer shall notify the Company within a reasonable period of any such settlement). (4) Personal injury or property damage arising solely out of a negligent or improper act of an employee of the Company. 7. DEALER'S RESPONSIBILITIES WITH RESPECT TO HOURS OF BUSINESS To the end that the needs of customers and owners served by the Dealer are fulfilled properly, the Dealer shall maintain DEALERSHIP OPERATIONS open for business during all hours and days which are customary in the trade and lawful for such operations in the DEALER'S LOCALITY. 8. PURCHASES FROM OTHERS AND SALES TO OTHERS The Dealer reserves the right to make purchases from others without obligation or liability of any kind to the Company, provided that the Dealer shall not be relieved of any responsibility assumed by the Dealer under this agreement; and, except as otherwise expressly provided herein, the Company reserves the right to make sales to others (including without limitation to other dealers) without obligation or liability of any kind to the Dealer. 9. DETERMINATION OF DEALER REPRESENTATION (A) REPRESENTATION PLANNING. The Company reserves the right to determine, from time to time, in its best judgment, the numbers, locations and sizes of authorized dealers necessary for proper and satisfactory sales and service representation for COMPANY PRODUCTS within and without the DEALER'S LOCALITY. In making such determinations, the Company from time to time conducts, to the extent deemed adequate by the Company and subject to the ready availability of information, studies of the locality, including such factors as its geographic characteristics, consumer shopping habits, competitive representation patterns, sales and service requirements, convenience of customers or potential customers and past and future growth and other trends in marketing conditions, population, income, UIO, VEHICLE sales and registrations and COMPETITIVE and INDUSTRY CAR and TRUCK registrations. (B) INFORMATION TO DEALER. The Company will inform the Dealer of any proposed change in the Company's market representation plans for the DEALER'S LOCALITY, provided that if the Company's market representation plans do not provide for the continuation of representation of COMPANY PRODUCTS from the -16- Dealer's DEALERSHIP FACILITIES (except for a relocation thereof), the Company shall not be obligated to inform other dealers thereof, but shall give the Dealer written notice thereof. If, in the Company's opinion, such changes should be disclosed to other dealers in connection with the Company's market representation plans for their respective DEALERSHIP OPERATIONS, the Company may inform such other dealers thereof, without liability to the Dealer, no earlier than thirty (30) days after such notice to the Dealer and shall inform such other dealers that the Dealer may maintain his DEALERSHIP OPERATIONS for so long as the Dealer desires and fulfills his responsibilities under this agreement. (C) ADDITIONAL DEALERS. The Company shall have the right to appoint additional dealers in VEHICLES within or without the DEALER'S LOCALITY except that, if an additional dealer will be within the DEALER'S LOCALITY and within ten (10) miles driving distance of the Dealer's principal place of business, the Company shall not appoint the additional dealer unless a study made pursuant to subparagraph 9(a) reasonably demonstrates, in the Company's opinion, that such appointment is necessary to provide VEHICLES with proper sales and service representation in such locality with due regard to the factors referred to above in subparagraph 9(a). The Company by written notice to the Dealer will give the Dealer thirty (30) days in which to review the applicable study (excluding information regarding other dealers considered confidential by the Company), to discuss such additional dealer with representatives of the Company and to give the Company written notice of objection to the proposed addition. If the Dealer fails to give such written notice by such time, he shall be deemed to have consented to the proposed addition. The Company will give consideration to any such written objection and advise the Dealer in writing of its decision before any commitment is made or negotiations conducted with any dealer prospect. If the Dealer appeals to the Dealer Policy Board within fifteen (15) days of such decision, no action will be taken by the Company until the Dealer Policy Board has rendered a decision on the matter. (D) ESTABLISHED DEALER POINTS. Nothing in this paragraph 9 shall restrict the right of the Company to appoint a dealer in VEHICLES as a replacement for a dealer in VEHICLES, or to fill an established open point for a dealer in VEHICLES, at or near a location previously approved by the Company. 10. PRICES AND CHARGES Sales of COMPANY PRODUCTS by the Company to the Dealer hereunder will be made in accordance with the prices, charges, discounts and other terms of sale set forth in price schedules or other notices published by the Company to the Dealer from time to -17- time in accordance with the applicable VEHICLE TERMS OF SALE BULLETIN or PARTS AND ACCESSORIES TERMS OF SALE BULLETIN. Except as otherwise specified in writing by the Company, such prices, charges, discounts and terms of sale shall be those in effect, and delivery to the Dealer shall be deemed to have been made and the order deemed to have been filled on the date of delivery to the carrier or the Dealer, whichever occurs first. The Company has the right at any time and from time to time to change or eliminate prices, charges, discounts, allowances, rebates, refunds or other terms of sale affecting COMPANY PRODUCTS by issuing a new VEHICLE or PARTS AND ACCESSORIES TERMS OF SALE BULLETIN, new price schedules or other notices. In the event the Company shall increase the DEALER PRICE for any COMPANY PRODUCT, the Dealer shall have the right to cancel, by notice to the Company within ten (10) days after receipt by the Dealer of notice of such increase, any orders for such product placed by the Dealer with the Company prior to receipt by the Dealer of notice of such increase and unfilled at the time of receipt by the Company of such notice of cancellation. 11. TERMS AND TITLE (A) PAYMENT. Payment by the Dealer for each COMPANY PRODUCT shall be in accordance with the terms and conditions set forth in the applicable VEHICLE or PARTS AND ACCESSORIES TERMS OF SALE BULLETIN. (B) TITLE. Title to each COMPANY PRODUCT purchased by the Dealer shall (unless otherwise provided in the applicable VEHICLE or PARTS AND ACCESSORIES TERMS OF SALE BULLETIN) pass to the Dealer, or to such financing institution or other party as may have been designated to the Company by the Dealer, upon delivery thereof to the carrier or to the Dealer, whichever occurs first, but the Company shall retain a security interest in and right to repossess any product until paid therefor. (C) RISK OF LOSS AND CLAIMS. The Company shall assume all risk of loss or damage to any VEHICLE purchased by the Dealer from the Company which is not borne by the carrier while the VEHICLE is in the possession of the carrier provided the Dealer properly inspects and records any loss or damage of the VEHICLE upon receipt thereof. The Dealer shall cooperate with the Company in processing all claims for loss or damage of the VEHICLE in accordance with the Company's then current procedures. (D) DEMURRAGE AND DIVERSION LIABILITY. The Dealer shall be responsible for and pay any and all demurrage, storage and other charges accruing after arrival of any shipment at its destination. In the event the Dealer shall fail or refuse for any reason (other than labor difficulty in the Dealer's place of business or any cause beyond the Dealer's control or without the Dealer's fault or negligence) to accept delivery of any COMPANY PRODUCT ordered by the Dealer, the Dealer shall also pay the -18- Company the amount of all expenses incurred by the Company in shipping such product to the Dealer and in returning such product to the original shipping point or diverting it to another destination; but in no event shall the Dealer pay the Company more for any such diversion than the expense of returning the product to its original shipping point. (E) STATE AND LOCAL TAXES. The Dealer hereby represents and warrants that all COMPANY PRODUCTS purchased from the Company are purchased for resale in the ordinary course of the Dealer's business. The Dealer further represents and warrants that the Dealer has complied with all requirements for his collection and/or payment of applicable sales, use and like taxes, and has furnished or will furnish evidence thereof to the Company. These representations and warranties shall be deemed a part of each order given by the Dealer to the Company. The Dealer agrees that, as to any COMPANY PRODUCT put to a taxable use by the Dealer, or in fact purchased by the Dealer other than for resale, the Dealer shall make timely and proper return and payment of all applicable sales, use and like taxes, and shall hold the Company harmless from all claims and demands therefor. 12. RECORDS, INSPECTIONS AND TESTS (A) RECORD RETENTION. The Dealer shall retain for at least two (2) years all records and documents, including journals and ledgers, which relate in any way, in whole or in part, to DEALERSHIP OPERATIONS, except for records used as a basis for submission of warranty and policy claims, which shall be retained for at least one (1) year. (B) INSPECTIONS AND TESTS. The Dealer shall allow persons designated by the Company, at reasonable times and intervals and during normal business hours, to examine the DEALERSHIP FACIL1TIES and OPERATIONS, the Dealer's stocks of COMPANY PRODUCTS and used vehicles and vehicles at the DEALERSHIP FACILITIES for service or repair, to test the Dealer's equipment, to check and instruct the Dealer and his employees in the proper handling of warranty and other repairs and claims based thereon, and to examine, copy and audit any and all of the Dealer's records and documents. The Company may charge back to the Dealer all payments or credits made by the Company to the Dealer pursuant to such claims or otherwise which were improperly claimed or paid. 13. CHANGES IN COMPANY PRODUCTS The Company may change the design of any COMPANY PRODUCT, or add any new or different COMPANY PRODUCT or line, series or body style of VEHICLES, at any time and from time to time, without notice or obligation to the Dealer, including any obligation with -19- respect to any COMPANY PRODUCT theretofore ordered or purchased by or delivered to the Dealer. Such changes shall not be considered model year changes as contemplated by the provisions of any VEHICLE TERMS OF SALE BULLETIN. The Company may discontinue any VEHICLE or other COMPANY PRODUCT at any time without liability to the Dealer. 14. DEALER NOT AGENT OF THE COMPANY This agreement does not in any way create the relationship of principal and agent between the Company and the Dealer and under no circumstances shall the Dealer be considered to be an agent of the Company. The Dealer shall not act or attempt to act, or represent himself, directly or by implication, as agent of the Company or in any manner assume or create any obligation on behalf of or in the name of the Company. 15. TRADEMARKS AND TRADE NAMES (A) USE IN FIRM NAME. The Dealer may not use any trademark or trade name used or claimed by the Company or any of its subsidiaries in the Dealer's firm name or trade name except with the Company's prior written approval. If, after such approval, the Company should at any time so request, the Dealer shall promptly discontinue such use and take all steps necessary or appropriate in the opinion of the Company to eliminate such trademark or trade name from the Dealer's firm name or trade name. (B) LIMITATIONS ON USE. The Dealer shall not use any trademark or trade name used or claimed by the Company or any of its subsidiaries, or coined words or combinations containing the same or parts thereof, in connection with any business conducted by the Dealer other than in dealing in COMPANY PRODUCTS to which such trademark or trade name refers, and then only in the manner and form approved by the Company; provided that the word "Ford" may be used in connection with a business operated by or affiliated with the Dealer as the Dealer's used vehicle outlet if the Dealer obtains the Company's prior written approval, which may be revoked at any time, and if the Dealer retains the right to require any such affiliated business to discontinue such use at any time the Dealer may direct. The Dealer shall direct such discontinuance on request of the Company at any time. The Dealer shall not contest the right of the Company to exclusive use of any trademark or trade name used or claimed by the Company or any of its subsidiaries. 16. REPORTS TO FORD MOTOR COMPANY'S DEALER POLICY BOARD In the interest of maintaining harmonious relationships between the parties to this agreement, the Dealer shall report promptly in writing to the Company's Dealer Policy Board -20- (hereafter called "Policy Board") any act or failure to act on the part of the Company or any of its representatives which the Dealer believes was not in accordance with this agreement or was not reasonable, fair, for good cause or provocation or in good faith as to the Dealer. For the purposes of this agreement, the term "good faith" shall mean the Company and its representatives acting in a fair and equitable manner toward the Dealer so as to guarantee the Dealer freedom from coercion or intimidation from the Company. It is the purpose of the Policy Board to receive, carefully evaluate and, to the extent possible, resolve any such claim to the mutual satisfaction of the parties. Any decision of the Policy Board shall be binding on the Company but shall not be binding on the Dealer. 17. TERMINATION OR NONRENEWAL OF AGREEMENT (A) BY DEALER. The Dealer may terminate or not renew this agreement at any time at will by giving the Company at least thirty (30) days prior written notice thereof. (B) BY COMPANY DUE TO EVENTS CONTROLLED BY DEALER. The following represent events which are substantially within the control of the Dealer and over which the Company has no control, and which are so contrary to the intent and purpose of this agreement as to warrant its termination or nonrenewal (1) Any transfer or attempted transfer by the Dealer of any interest in, or right, privilege or obligation under this agreement; or transfer by operation of law or otherwise, of the principal assets of the Dealer that are required for the conduct of DEALERSHIP OPERATIONS; or any change, however accomplished, without the Company's prior written consent, which consent shall not be unreasonably withheld, in the direct or indirect ownership or operating management of the Dealer as set forth in paragraph F. (2) Any misrepresentation in applying for this agreement by the Dealer or any person named in paragraph F; or submission by the Dealer to the Company of any false or fraudulent application or claim, or statement in support thereof, for warranty, policy or campaign adjustments, for wholesale parts or VEHICLE sales incentives or for any other refund, credit, rebate, incentive, allowance, discount, reimbursement or payment under any Company program; or acceptance by the Dealer of any payment for any work not performed by the Dealer in accordance with the provisions of this agreement, the Warranty Manual or any applicable CUSTOMER SERVICE BULLETIN. -21- (3) Insolvency of the Dealer, inability of the Dealer to meet debts as they mature, filing by the Dealer of a voluntary petition under any bankruptcy or receivership law, adjudication of the Dealer as a bankrupt or insolvent pursuant to an involuntary petition under any such law, appointment by a court of a temporary or permanent receiver, trustee or custodian for the Dealer or the Dealer's assets, or execution of an assignment by the Dealer for the benefit of creditors; dissolution of the Dealer; or failure of the Dealer for any reason to function in the ordinary course of business, or to maintain the DEALERSHIP OPERATIONS open for business during and for not less than the hours customary in the trade and lawful in the DEALER'S LOCALITY as set forth in paragraph 7. (4) Conviction in a court of original jurisdiction of the Dealer or any person named in paragraph F for any violation of law, or any conduct by any such person unbecoming a reputable businessman, or disagreement between or among any persons named in paragraph F, which in the Company's opinion tends to affect adversely the operation or business of the Dealer or the good name, goodwill or reputation of the Dealer, other authorized dealers of the Company, the Company, or COMPANY PRODUCTS. (5) The Dealer shall have engaged, after written warning by the Company, in any advertising or business practice contrary to the provisions of subparagraph 6(i) of this agreement. (6) Failure of the Dealer to fulfill any provision of paragraph 10 (as to prices or charges), or paragraph 11 (as to terms and title, including payment for COMPANY PRODUCTS), or paragraph 15 (as to trademarks or trade names), or to pay the Company any sum due pursuant to any agreement, including any purchase or lease agreement, between the Company and the Dealer. Upon occurrence of any of the foregoing events, the Company may terminate this agreement by giving the Dealer at least fifteen (15) days prior written notice thereof. (C) BY COMPANY FOR NONPERFORMANCE BY DEALER OF SALES, SERVICE, FACILITIES OR OTHER RESPONSIBILITIES. If the Dealer shall fail to fulfill any of his responsibilities with respect to: -22- (1) CARS or TRUCKS under the provisions of paragraph 2 of this agreement, (2) GENUINE PARTS under the provisions of paragraph 3 of this agreement, (3) Service under the provisions of paragraph 4 of this agreement, (4) DEALERSHIP LOCATION or FACILITIES under the provisions of paragraph 5 of this agreement, or (5) Other responsibilities under the provisions of subparagraphs 6(a) through 6(h) (as to signs, personnel residence, capital, accounting system, financial reports, delivery or sales reports or customer handling), subparagraph 6(j) (as to laws, rules or regulations), paragraph 12 (as to records, inspections and tests) or paragraph 14 (as to the Dealer not being an agent of the Company) of this agreement, the Company shall notify the Dealer in writing of such failure or failures, will offer to review promptly with the Dealer the reasons which, in the Company's or Dealer's opinion, account for such failure or failures and will provide the Dealer with a reasonable opportunity to cure the same. If the Dealer fails or refuses to cure the same within a reasonable time after such notice, the Company may terminate or not renew this agreement by giving the Dealer at least ninety (90) days prior written notice thereof. (D) BY COMPANY OR DEALER BECAUSE OF DEATH OR PHYSICAL OR MENTAL INCAPACITY OF ANY PRINCIPAL OWNER Since this agreement has been entered into by the Company in reliance upon the continued participation in the ownership of the Dealer by the persons named in subparagraph F(i) hereof, the Company or the Dealer may (subject to the provisions of paragraph 20 hereof) terminate or not renew this agreement, by giving the other at least fifteen (15) days prior written notice thereof, in the event of the death or physical or mental incapacity of any owner of the Dealer named in subparagraph F(i); provided, however, that in order to facilitate orderly termination and liquidation of the dealership, the Company shall defer for a period of three (3) months to one (1) year, as the Company may determine, the exercise of its right to terminate in such event if the executor or representative of such deceased or incapacitated owner shall so request and shall demonstrate the ability to carry out the terms and conditions of this agreement. (E) BY COMPANY OR DEALER FOR FAILURE OF DEALER OR COMPANY TO BE LICENSED. If the Company or the Dealer requires a license for the performance of any responsibility under this agreement in -23- any jurisdiction where this agreement is to be performed and if either party shall fail to secure and maintain such license, or if such license is suspended or revoked, irrespective of the cause or reason, either party may terminate or not renew this agreement by giving the other at least fifteen (15) days prior written notice thereof. (F) BY COMPANY AT WILL. If this agreement is not for a stated term specified in paragraph G of this agreement, the Company may terminate this agreement at will at any time by giving the Dealer at least one hundred and twenty (120) days prior written notice thereof. (G) BY COMPANY UPON THE OFFER OF A NEW AGREEMENT. The Company may terminate this agreement at any time by giving the Dealer at least thirty (30) days prior written notice thereof in the event the Company offers a new or amended form of agreement to its authorized dealers in COMPANY PRODUCTS. (H) ACTS IN GOOD FAITH. (1) The Dealer acknowledges that each of his responsibilities under this agreement is reasonable, proper and fundamental to the purpose of this agreement and that (i) his failure to fulfill any of them would constitute a material breach of this agreement, (ii) the occurrence of any of the events set forth in subparagraph 17(b), 17(c), or 17(e) would seriously impair fundamental considerations upon which this agreement is based, and (iii) the rights of termination or nonrenewal reserved in the events specified in subparagraph 17(g) are necessary to permit the Company to remain competitive at all times. The Dealer acknowledges that any such failure, occurrence or event constitutes a reasonable, fair, good, due and just cause and provocation for termination or nonrenewal of this agreement by the Company. (2) The Dealer agrees that if the Company or any of its representatives (i) requests the Dealer to fulfill any of such responsibilities, (ii) believes that any such failure, occurrence or event is occurring or has occurred and advises the Dealer that, unless remedied, such failure, occurrence or event may result in Company termination or nonrenewal of this agreement, (iii) gives the Dealer notice of termination or nonrenewal, or terminates or falls to renew this agreement, because of any such failure, occurrence or event, then such request, advice, notice, termination or nonrenewal shall not be considered to constitute or be evidence of coercion or -24- intimidation, or threat thereof, or to be unreasonable, unfair, undue or unjust, or to be not in good faith. 18. REQUIRED APPEAL TO POLICY BOARD--TERMINATIONS OR NONRENEWALS--OPTIONAL ARBITRATION PLAN (A) ARBITRATION PLAN. The Company has adopted the Ford Motor Company Plan and Rules of Arbitration ("Arbitration Plan") effective June 1, 1972, a copy of which was delivered to the Dealer with this agreement. The Company reserves the right to terminate, change or modify the Arbitration Plan at any time upon notice to the Dealer. Any arbitration pursuant to the Arbitration Plan shall be governed by the terms of the Arbitration Plan in effect on the date such arbitration is commenced. (B) APPEAL TO POLICY BOARD. Any protest, controversy or claim by the Dealer (whether for damages, stay of action or otherwise) with respect to any termination or nonrenewal of this agreement by the Company or the settlement of the accounts of the Dealer with the Company after any termination or nonrenewal of this agreement by the Company or the Dealer has become effective, shall be appealed by the Dealer to the Policy Board within fifteen (15) days after the Dealer's receipt of notice of termination or nonrenewal, or, as to settlement of accounts after termination or nonrenewal, within one year after the termination or nonrenewal has become effective. Appeal to the Policy Board shall be a condition precedent to the Dealer's right to pursue any other remedy available under this agreement or otherwise available under law. The Company, but not the Dealer, shall be bound by the decision of the Policy Board. (C) OPTIONAL ARBITRATION. If the Dealer is dissatisfied with the decision of the Policy Board in a case referred to in subparagraph 18(b), the Dealer may, at his option, elect to arbitrate in accordance with the Arbitration Plan or elect not to arbitrate and retain the right to pursue whatever other remedies may be available, provided that: (1) The Dealer's election to arbitrate shall be made by filing an Arbitration Demand with the Secretary appointed under the Arbitration Plan within thirty (30) days after receipt by the Dealer of a decision by the Policy Board. The Arbitration Demand shall set forth a clear and complete statement of the nature of the Dealer's claim and the basis thereof, the amount involved, if any, and the remedy sought. The Arbitration Demand shall be in writing and shall be given by personal delivery or sent by registered or certified mail, postage prepaid, to the Secretary, Arbitration -25- Panel, Ford Motor Company, at the address shown in the Plan and Rules of Arbitration. (2) If the Dealer, by filing a timely Arbitration Demand, elects to arbitrate, arbitration shall be the sole and exclusive remedy of the Dealer in such cases, and the decision and award of the Arbitration Panel provided for in the Arbitration Plan shall be final and binding on both parties. (3) If the Dealer elects to arbitrate, either party may enjoin the other from pursuing any other remedy in such cases, except that either party may sue to enforce any order or award of the Arbitration Panel and judgment upon such order or award may be entered by any court having jurisdiction. (D) LIMITATION OF ACTIONS. If the Dealer elects not to arbitrate by failing to file a timely Arbitration Demand, all causes of action at law or in equity and all rights and remedies before federal, state, or local administrative agencies, departments or boards shall be forever barred unless commenced or instituted within one year after the date of the decision of the Policy Board. (E) EXPENSES OF ARBITRATION. During the first quarter of each calendar year, the Company and the Chairmen of the Ford and Lincoln-Mercury National Dealer Councils ("Dealer Council Chairmen") shall jointly establish a budget for that calendar year for the retainer fees, daily few, clerical costs, travel expenses and living allowances Compansation") of the Arbitrator selected by the Dealer Council Chairmen, for one-half of the Compensation of the Arbitrator selected as Chairman of the Arbitration Panel, and for one-half of the cost of outside services employed by the Arbitration Panel, pursuant to the Arbitration Plan. (1) The amount of such budget shall be advanced by the Company to a Trustee selected by the Company and the Dealer Council Chairmen. The Trustee shall pay the Compensation of the Arbitrator selected by the Dealer Council Chairmen, one-half of the Compensation of the Chairman of the Arbitration Panel, and one-half of the cost of outside services employed by the Arbitration Panel, as statements are rendered therefor, from and to the extent of such advance. All other costs of the Arbitration Panel for that calendar year shall be borne by the Company except as hereinafter provided. Any unexpended portion of such budget shall be carried forward to the next calendar year. -26- (2) The amount of such budget shall be spread in equal amounts among all dealerships then having valid and outstanding Ford, Mercury or Lincoln Sales and Service Agreements with the Company ("Authorized Dealers"). Such equal amount shall be charged to each Authorized Dealer. The Dealer shall promptly pay the amount so charged. (3) Each party shall pay and bear all costs of any witness called or other evidence adduced by that party, of any attorney, accountant or other person retained by that party and of any transcript ordered by that party in connection with any arbitration under the Arbitration Plan. (4) The Arbitration Panel, as a part of any award, may assess, against any party or parties to an arbitration under the Arbitration Plan, all or any part of the costs of any witness called, any other evidence adduced, or any outside service employed, at the direct request of any Arbitrator. 19. OBLIGATIONS UPON TERMINATION OR NONRENEWALS Upon termination or nonrenewal of this agreement by either party, the Dealer shall cease to be an authorized Ford dealer; and: (A) SUMS OWING THE COMPANY. The Dealer shall pay to the Company all sums owing to the Company by the Dealer. (B) DISCONTINUANCE OF USE OF TRADEMARKS AND TRADE NAMES. The Dealer shall at his own expense (1) remove all signs erected or used by the Dealer, or by any business associated or affiliated with the Dealer, and bearing the name "Ford" or any other trademark or trade name used or claimed by the Company or any of its subsidiaries (except signs owned by the Company and except as such use may be permitted under other agreements relating to products of the Company other than COMPANY PRODUCTS) or any word indicating that the Dealer is an authorized dealer with respect to any COMPANY PRODUCT, (2) erase or obliterate all such trademarks, trade names and words from stationery, forms and other papers used by the Dealer, or any business affiliated with the Dealer, (3) discontinue all advertising of the Dealer as an authorized dealer in COMPANY PRODUCTS, (4) discontinue any use of any such trademark, trade name or word in the Dealer's firm or trade name and take all steps necessary or appropriate in the opinion of the Company to change such firm or trade name to eliminate any such trademark, trade name or word therefrom, and (5) refrain from doing anything whether or not specified above that would indicate that the Dealer is or was an authorized Dealer in COMPANY PRODUCTS. -27- If the Dealer fails to comply with any of the requirements of this subparagraph 19(b), the Dealer shall reimburse the Company for all costs and expenses, including reasonable attorney's fees, incurred by the Company in effecting or enforcing compliance. (C) WARRANTY WORK. The Dealer shall cease to be eligible to receive reimbursement from the Company with respect to any work thereafter performed or part thereafter supplied under any warranty or policy applicable to any COMPANY PRODUCT, unless specifically authorized by the Company in writing to perform such work and then only in the manner and for the period of time set forth in such authorization. (D) SERVICE RECORDS. The Dealer shall deliver to the Company or its nominee all of the Dealer's records with respect to predelivery, warranty, policy, campaign and other service work of the Dealer. (E) ORDERS AND CUSTOMER DEPOSITS. The Dealer shall assign to the Company or its nominee all customer orders for COMPANY PRODUCTS which the Dealer has not filled and which the Company is not obligated by subparagraph 19(f) to supply to the Dealer, and all customer deposits made thereon; and deliver to the Company or its nominee the names and addresses of the Dealer's existing and prospective customers for COMPANY PRODUCTS. (F) DELIVERIES AFTER TERMINATION OR NONRENEWAL. If this agreement shall be terminated or not renewed by the Company (1) because of the death or physical or mental in capacity of any principal owner of Dealer pursuant to subparagraph 17(d) hereof, or (2) at will pursuant to subparagraph 17(f) hereof, the Company shall use its best efforts to fill the Dealer's bona fide orders for COMPANY PRODUCTS outstanding on the effective date of termination or nonrenewal. The Company's fulfillment of such orders for VEHICLES, however, may be limited to the number and type of VEHICLES delivered to the Dealer by the COMPANY during the ninety (90) days immediately preceding such date, or the number and type of bona fide retail orders for VEHICLES accepted by the Dealer and unfilled on such date, whichever is smaller. Deliveries under this subparagraph shall be made in substantial accord with the Company's normal delivery schedules for the area, unless the Company ejects to make all such deliveries within thirty (30) days after the effective date of termination. The Dealer shall inspect, condition and repair such VEHICLES in the manner specified in this agreement and in accordance with procedures outlined by the Company from time to time. Except for deliveries required by this subparagraph 19(f), each order for a COMPANY PRODUCT received by the Company from the Dealer and unfilled on the effective date of termination or expiration of this agreement shall be deemed cancelled. -28- 20. SUCCESSOR TO THE DEALER IN THE EVENT OF DEATH OR INCAPACITY In the event of termination or nonrenewal of this agreement by the Company pursuant to subparagraph 17(d) because of the death or physical or mental incapacity of a principal owner of the Dealer named in subparagraph F(i) hereof: (A) INTERIM AGREEMENT. The Company, subject to the other provisions of this paragraph, shall offer an Interim Ford Sales and Service Agreement for COMPANY PRODUCTS: (1) To a successor dealership composed of the last person nominated by such principal owner as his successor, together with any other principal and remaining owners named in subparagraphs, F(i) and F(iii) (hereafter called "Other Owners") hereof, provided that: (i) The nomination had been submitted to the Company in writing on the form supplied by the Company with the consent of the Other Owners prior to such death or the occurrence of such incapacity, and (ii) The Company, upon receipt of the nomination had accepted the nominee as then being qualified (or as capable of becoming qualified in five (5) years), and at the time the notice of termination or nonrenewal is given, approves the nominee as then being qualified, to assume full managerial authority for the DEALERSHIP OPERATIONS, which acceptance or approval shall not be unreasonably withheld, and (iii) The nominee has been named as a manager of, and has been actively participating in the general management of, the Dealer or a satisfactorily performing automotive or comparable retail business for a reasonable period of time prior to the time of the notice of termination or nonrenewal, and (iv) The successor dealership, at the time the Interim Agreement is to be offered, has capital and facilities substantially in accordance with Company GUIDES therefor, and (v) In the event more than one nominee fulfills the above conditions, the Company, in its discretion, shall determine which nominee or nominees, together with the Other Owners, shall compose the successor dealership -29- towhich such Interim Agreement shall be offered; (2) To a successor dealership, in the event that any principal owner has notified the Company in writing that the spouse or another relative or heir of such principal owner shall retain or acquire a financial interest in the successor dealership and the Company has approved such spouse, relative or heir for such financial interest which approval shall not be unreasonably withheld. Such successor dealership shall be composed of such spouse, relative or heir, together with the Other Owners and any nominee or nominee approved and qualified pursuant to subparagraph 20(a)(1) hereof, provided that: (i) The Other Owners and any nominees and such spouse, relative or heir agree in writing how each of them shall participate in the ownership and management of the successor dealership, and (ii) Managerial authority, and responsibility of the successor dealership shall be vested in a nominee approved and qualified pursuant to subparagraph 20(a)(1) hereof, or in a person or persons who have been named in subparagraph F(ii) of this agreement and have been actually participating in the general management of the Dealer for a reasonable period of time prior to the notice of termination or nonrenewal or in another person or persons qualified to same managerial authority and responsibility and approved by the Company to he so named, which approval shall not be unreasonably withheld, and (iii) The successor dealership, at the time the Interim Agreement is to be offered has capital and facilities substantially in accordance with Company GUIDES therefor; (3) To a successor dealership in the event that the deceased or incapacitated Principal owner has neither nominated a successor pursuant to subparagraph 20(a)(1) hereof, nor notified the Company of a retained or acquired financial interest pursuant to subparagraph 20(a)(2) hereof which successor dealership shall be composed of the Other Owners; provided that the Other Owners agree in writing how each of them shall -30- participate in the ownership and management of the successor dealership and the successor dealership fulfills the conditions set forth in subparagraphs 20(a) (2) (ii) and (iii) of this agreement (B) BUY-OUT. The successor dealership named in such Interim Agreement shall arrange in writing, subject to the approval of the Company which shall not be unreasonably withheld, for one or more persons named in subparagraph F(ii) of the Interim Agreement to have the right acquire during its term at least a 20% ownership interest in the successor dealership and, if the successor dealership is offered a standard Sales and Service Agreement for COMPANY PRODUCTS at the expiration of the Interim Agreement, to have the right to acquire additional ownership interests therein during the first five (5) years of such standard agreement and, at the end of such five (5) years, to acquire the entire ownership interest therein. (C) TERM/CONTINUATION. Any Interim Agreement offered pursuant to this paragraph 20 shall be in the form in effect between the Company and its authorized dealers in COMPANY PRODUCTS at the time of such offer, and the term of such Interim Agreement shall be for twenty-four (24) months, or such longer term as the Company shall determine to be reasonable to permit the person or persons named in subparagraph F(i) thereof to acquire a 20% ownership interest in the successor dealership pursuant to subparagraph 20(b) of this agreement, subject to termination during such term as provided in such Interim Agreement. At least ninety (90) days prior to the end of the term of such Interim Agreement, the Company shall determine whether or not the person or persons composing the successor dealership with which such Interim Agreement shall have been executed possess the qualifications with respect to management, capital and facilities necessary to fulfill the responsibilities of an authorized dealer in COMPANY PRODUCTS and, if the Company shall determine that they do possess the same, which determination shall not be unreasonably made, the Company shall offer to such successor dealership, upon the expiration of the term of the Interim Agreement, a standard Sales and Service Agreement for COMPANY PRODUCTS in the form then in effect. (D) LIMITATION OF OFFER. Notwithstanding anything stated or implied to the contrary in this paragraph 20, the Company shall not be obligated to offer an Interim Agreement to any successor dealership if the Company has notified the Dealer in writing prior to such death or physical or mental incapacity that the Company's market representation plans do not provide for continuation of representation from the DEALERSHIP FACILITIES as determined by the Company under paragraph 9 of this agreement. If such market representation plans provide for the relocation of the Dealer to another location, however, the Company shall offer an Interim Agreement subject to the condition that the successor -31- dealership relocate within a reasonable time to such other location in facilities approved by the Company. (E) LIMITATION FOR ACCEPTANCE. In the event that the person or persons composing a proposed successor dealership to which any offer of an Interim Agreement or Standard Sales and Service Agreement for COMPANY PRODUCTS shall have been made pursuant to this paragraph 20, shall not accept the same within thirty (30) days after notification to them of such offer, such offer shall automatically expire. 21. REACQUISITION OF COMPANY PRODUCTS AND ACQUISITION OF THE DEALER'S SIGNS, SPECIAL TOOLS AND EQUIPMENT, AND MAINTENANCE ITEMS Upon termination or nonrenewal of this agreement by the Company, the Dealer may elect as provided in paragraph 23 or, upon termination or nonrenewal of this agreement by the Dealer, the Dealer may demand in his notice of termination or nonrenewal, to have the Company purchase or accept upon return from the Dealer, in return for his general release specified in paragraph 23: (A) VEHICLES. Each unused, undamaged and unsold VEHICLE (together with all factory-installed options thereon) in the Dealer's stock on the effective date of such termination or nonrenewal, provided such VEHICLE is in first-class salable condition, is of a then current model has not been altered outside the Company's factory, and was purchased by the Dealer from the Company or another authorized dealer in VEHICLES prior to giving or receiving notice of such termination or nonrenewal. The price for such VEHICLE shall be its DEALER PRICE, plus the Company's charges for distribution, delivery and taxes, at the time it was purchased from the Company, less all allowances paid or applicable allowances offered thereon by the Company. (B) GENUINE PARTS. Each unused, undamaged and unsold GENUINE PART, and each unopened item of appearance and maintenance materials and paints (hereinafter called "maintenance items") in the Dealer's stock on the effective date of such termination or nonrenewal, provided such GENUINE PART or maintenance item is offered for sale by the Company to authorized dealers in VEHICLES in the Company's then current Parts and Accessories Price Schedules, is in first-class salable condition, including reasonably legible and usable packaging and was purchased by the Dealer from the Company or another Company authorized dealer in normal volume prior to giving or receiving notice of such termination or nonrenewal. Notwithstanding the foregoing, the repurchase of such GENUINE PARTS identified by the Company as accessories shall be limited to those so purchased by the Dealer within twelve (12) months preceding such date, or those sold to the Dealer by the Company for use in a VEHICLE that is a current model on such effective date. The price for each -32- such GENUINE PART or maintenance item shall be its DEALER PRICE in effect on the effective date of termination or nonrenewal, less all allowances paid or applicable allowances offered thereon by the Company. The Dealer, at his own expense, shall carefully pack and box such of the eligible GENUINE PARTS and maintenance items as the Company may direct, and the Company shall pay the Dealer an additional five percent (5%) of the DEALER PRICE of the eligible GENUINE PARTS and maintenance items so packaged and boxed. (C) DEALER'S SIGNS. Each sign at DEALERSHIP LOCATION which bears a trademark or trade name used or claimed by the Company or any of its subsidiaries, is owned by the Dealer on the effective date of termination or nonrenewal, was approved by the Company pursuant to subparagraph 6(a) and, if requested by the Company, is removed by the Dealer at his expense. The price for each such sign shall be its fair market value on such effective date as agreed by the Company and the Dealer, or, if they cannot agree, is determined by a qualified independent appraiser selected by the Company and the Dealer. (D) SPECIAL TOOLS AND EQUIPMENT. All special tools and automotive service equipment owned by the Dealer on the effective date of termination or nonrenewal which were designed especially for servicing VEHICLES, which are of the type recommended in writing by the Company and designated as "special" tools and equipment in the applicable CUSTOMER SERVICE BULLETIN or other notice pertaining thereto sent to the Dealer by the Company, which are in usable and good condition except for reasonable wear and tear, and which were purchased by the Dealer within the three (3) year period preceding the effective date of termination or nonrenewal. The price for each special tool and item of automotive service equipment shall be its fair market value on such effective date as agreed by the Company and the Dealer, or, if they cannot agree, as determined by a qualified independent appraiser selected by the Company and the Dealer. (E) PROCEDURE DELIVERY AND TITLE. The Dealer shall return all property to be Purchased or acquired by the Company pursuant to this paragraph 21 in accordance with the Procedures and timetables then established by the Company, shall deliver such property at the DEALERSHIP FACILITY unless the Company directs otherwise (in which event the Company shall pay transportation costs to the place of delivery), shall and hereby does warrant good clear title to all such property, and shall furnish to the Company evidence satisfactory to the Company that the Dealer has complied with all applicable bulk sales laws and that such property is free and clear of all claims liens and encumbrances. (F) PAYMENT. The Company shall pay the Dealer for the property purchased or acquired by it pursuant to this paragraph 21 within a reasonable time following the Dealer's fulfillment of all of the Dealer's obligations under paragraph 19 and this -33- paragraph 21 subject to the Dealer's tender of a general release as specified in paragraph 23, and further subject to offset of any obligations owing by the Dealer to the Company. If the Company has not paid the Dealer the net amount due the Dealer for such property within a period of two (2) months after the Dealer has famed his obligations under this paragraph 21 and provided the Dealer has fully complied with Paragraphs 19 and 23, the Company will, at the Dealers request advance the Dealer seventy-five percent (75%) of the estimated amount due the Dealer net of any monies; owed to the Company by the Dealer. The Company will pay the balance of such amount as soon as practical thereafter. (G) ASSIGNMENT OF BENEFITS. As an assist to the Dealer in effecting an orderly transfer of his assets to a replacement dealer and to minimize possible interruptions in customer convenience and service, in the event of termination or nonrenewal by either party, any rights or benefits with respect to subparagraphs 21(a), 21(b), 21(c) and 21(d), herein may be assigned by the Dealer to anyone to whom the Dealer has agreed to sell the respective property and whom the Company has approved as a replacement for the Dealer. Such assignments will be subject to Dealer's fulfillment of his obligations under paragraph 19 and this paragraph 21 and subject to the Dealer's tender of a general release as specified in paragraph 23. 22. DEALERSHIP FACILITIES ASSISTANCE UPON NONRENEWAL OR CERTAIN TERMINATIONS BY THE COMPANY (A) DEALER ELIGIBILITY. The Dealer may elect, as provided in paragraph 23, to have the Company assist the Dealer with respect to the Dealer's Eligible Facilities (as herein defined), in return for the Dealer's general release as specified in paragraph 23, upon nonrenewal of this agreement by the Company, or upon termination of this agreement by the Company, for the following reasons: (1) Because of disagreement among persons named in paragraphs pursuant to subparagraph 17(b)(4) or because of the Dealer's failure with respect to prices or charges, terms or title or trademarks or trade names, or other sums due the Company pursuant to subparagraph 17(b)(6); (2) Because of the Dealer's nonperformance of his responsibilities set forth in paragraphs 2, 3, 4 or 6 pursuant to subparagraph 17(c); (3) Because of the death or physical or mental incapacity of a principal owner named in subparagraph F(i) pursuant to subparagraph 17(d) providing that a successor dealership is not appointed as provided under paragraph 20; -34- (4) Because of failure of the Dealer or the Company to be licensed pursuant to subparagraph 17(e); or (5) At will pursuant to subparagraph 17(f) if this agreement is not for a stated term specified in paragraph G of this agreement (B) ELIGIBLE FACILITIES. "Eligible Facilities" are hereby defined as only those DEALERSHIP FACILITIES which are listed in the Dealership Facilities Supplement in effect at the time of such nonrenewal or termination, are approved by the Company pursuant to paragraph 5, are owned or leased by the Dealer and are being used by the Dealer solely for fulfilling his responsibilities under this agreement (or under this agreement and one or more vehicle sales agreements with the Company which are not renewed or are terminated by the Company at the same time as this agreement) at the time the Dealer received notice of such nonrenewal or termination. (C) COMPANY'S OBLIGATION. Subject to the provisions of subparagraph 22(d) hereof, if neither the Dealer nor the Company can arrange with a third party within ninety (90) days after the effective date of such termination or nonrenewal: (1) In the case of Eligible Facilities which are owned by the Dealer, either a lease for one year commencing within such ninety (90) days at fair rental value or a sale within such ninety (90) days at fair market value; or (2) In the case of Eligible Facilities which are leased by the Dealer, either an assignment of lease, or a sublease for one year (or for the balance of the term of the Dealer's lease if that is shorter) commencing within such ninety (90) days at the Dealer's rental rate (or, if the facilities are owned by an affiliate of the Dealer at fair rental value, if that is different), the Company shall offer either to make monthly payments to the Dealer, commencing with the ninety-first day, pursuant to subparagraph 22(e) hereof, or to make a lump sum payment to the Dealer pursuant to said subparagraph 22(e), or to accept for itself on the ninety-first day such a lease or sale from the Dealer-owner or such an assignment or sublease from the Dealer-lessee. For the purpose of this subparagraph 22(c), fair market or fair rental value shall mean value based on the use of the facilities in the conduct of DEALERSHIP OPERATIONS. In the event the Dealer and the Company are unable to agree on the fair market or rental value of any Eligible Facilities, such value shim be -35- determined by an independent real estate appraiser selected by the Dealer and the Company. (D) LIMITATIONS ON COMPANY'S OBLIGATION. The Company's obligation with respect to any Eligible Facilities shall be limited to those expressly set forth in this paragraph 22. The Company shall be released from all obligations with respect to any Eligible Facilities if (1) the Dealer fails to give the Company, within thirty (30) days after the Company shall have sent him a tender of benefits as provided in paragraph 23, a written request for assistance pursuant to this paragraph 22, accompanied by a written representation by the Dealer that the Dealer and each owner named in subparagraph F(i) is, for a period of at least one (1) year, retiring from the business of selling new and used passenger cars and trucks in the general area of the DEALER'S LOCALITY, (2) the Dealer fails to make diligent efforts to obtain from third parties an offer to purchase, lease, sublease or take an assignment of lease described in subparagraph 22(c), or refuses, or within a reasonable time fails to accept, such an offer from a third party; (3) the Dealer does not accept any offer with respect to Eligible Facilities made by the Company in accordance with subparagraph 22(c) within thirty (30) days after receiving it, (4) the Dealer or anyone else occupies such facilities for any purpose for a period of more than ninety (90) days following the effective date of such termination or nonrenewal, or (5) the Company arranges a cancellation of the lease of any leased facilities without cost to the Dealer or the Dealer fails or refuses to execute an agreement covering such cancellation. (E) SATISFACTION OF COMPANY'S OBLIGATION. The Company may satisfy all of its obligations under this paragraph 22 with respect to any Eligible Facilities by paying to the Dealer (1) if the facilities are owned by the Dealer, the difference, each month for twelve months (or until facilities are sold if that is earlier), between any lesser rentals received by the Dealer for such facilities for such month and the fair rental value of such facilities for such month, or (2) if the facilities are leased by the Dealer, the difference, each month for twelve months (or until the expiration of the lease if that is earlier) between any lesser rentals received by the Dealer for such facilities for such month and the rental paid by the Dealer (or, if the facilities are owned by an affiliate of the Dealer, the fair rental value if that is different) for such facilities for such month, or (3) at the election of the Company, a lump sum, equal to the total payments contemplated in items (1) or (2) of this subparagraph 22(e), or such lesser sum as may be agreed upon between the Dealer and the Company, or by paying any lease cancellation cost negotiated by the Dealer or the Company not to exceed the total of the Company's obligations under subparagraphs 22(c) and 22(e). -36- 23. TERMINATION BENEFITS FULL COMPENSATION; GENERAL RELEASE In the event of termination or nonrenewal of this agreement by the Company, the Company, within thirty (30) days after the effective date thereof, shall submit to the Dealer (1) a written tender of the benefits provided for in paragraph 21 (and in paragraph 22 where applicable) and (2) a form for the Dealer to use to elect either to reject all of such benefits or to accept one or more of them as full and complete compensation for such nonrenewal or termination. The Dealer shall have thirty (30) days after receipt of such form to return the same to the Company evidencing his election. If the Dealer fails to return the form stating such election within such thirty (30) days, the Dealer shall be deemed to have elected to accept such benefits. Upon the Dealer's election to accept any of such benefits, or upon the Dealer's demand of any such benefits upon any termination or nonrenewal by the Dealer, the Company shall be released from any and an other liability to the Dealer with respect to all relationships and actions between the Dealer and the Company, however claimed to arise, except any liability that the Company may have under subparagraph 19(f) and said paragraphs 21 and 22, and except for such amounts as the Company may have agreed in writing to pay to the Dealer. Simultaneously with the receipt of any benefits so elected or demanded, the Dealer shall execute and deliver to the Company a general release with exceptions, as above described, satisfactory to the Company. 24. DISPOSITION OF THE DEALER'S ASSETS (A) COMPANY RIGHT TO APPROVE CHANGE IN OWNERSHIP. (1) In view of the nature, purposes and objectives of the Company's Dealer sales and Service Agreements, and the differences in operating requirements among dealerships of differing sizes and types of markets, the Company expressly reserves the right to select the dealers with whom it will enter into such agreements so as to maintain as high quality a dealer organization as possible. (2) In the event this agreement is terminated or not renewed by either party or if the Dealer plans to terminate or not renew this agreement, the Company acknowledges that the Dealer has the right to negotiate for the sale of the assets of the Dealer as such price as may be agreed upon by the Dealer and the prospective purchaser. In turn, the Dealer acknowledges that the Company has the right to approve or decline to approve any prospective purchaser as to his character, automotive experience, management, capital and other qualifications for appointment as an authorized dealer in COMPANY PRODUCTS for the DEALERSHEP -37- OPERATIONS involved. Approval by the Company of the prospective purchaser shall not, however, be unreasonably withheld. If, in the opinion of the Company, the price to be paid for such assets appears, on the basis of the average operating results of other dealers, to result in an unsatisfactory return on investment so that such prospective purchaser (1) may not remain as a dealer, or (2) may be impelled to sell COMPANY PRODUCTS at high noncompetitive prices with a probable reduction in sales volume, the Company may, without liability to the Dealer, counsel with such prospective purchaser regarding such opinions. (B) COMPANY RIGHT TO FIRST REFUSAL TO PURCHASE. (1) In the event the Dealer proposes a change in the ownership of 51 percent or more of the stock or transfer by sale or otherwise of the dealership business or its principal assets to any person or entity conditioned upon the Company entering into a Sales and Service Agreement with that person or entity, the Company shall have a Right of First Refusal to Purchase the stock or assets on the same terms and conditions offered or agreed to with such person, regardless of whether the proposed buyer is qualified to be a dealer. (2) To exercise its Right of First Refusal, the Company must notify the Dealer in writing within thirty days of its receipt of the completed proposal for the proposed sale or transfer. (3) Upon the Company's request the Dealer shall provide all documents relating to the transfer. The Company shall have the right to inspect the assets, including real estate, before exercising its Right of First Refusal. (4) The Company's Right of First Refusal under this subparagraph 24(b) may be assigned to any third party ("Assignee"). If there is an assignment, the Company will guarantee full payment of the purchase price by the Assignee. The Company shall have the opportunity to discuss the terms of the buy/sell agreement with any potential Assignee, as long as such information is treated confidentially. (5) The Company's rights hereunder are binding on and enforceable against any successor in interest of the Dealer or purchaser of the Dealer's assets. -38- When the proposed change of ownership involves a transfer by the Dealer solely to a member or members of his or her immediate family, or to a qualifying member of Dealer management, the Company's Right of First Refusal will not apply. An "immediate family member" shall be the spouse, child, grandchild, spouse of a child or grandchild, brother, sister or parent of the Dealer owner or his or her spouse. A "qualifying member of the Dealer's management" shall be an individual who has been employed by the Dealer in the dealership for at least four years and is otherwise qualified as a dealer operator. (6) The Company agrees to pay the reasonable expenses, including attorney's fees which do not exceed the usual, customary, and reasonable fees charged for similar work done for other clients, incurred by the proposed new owners and transferee prior to the Company's exercise of its Right of First Refusal in negotiating and implementing the contract for the proposed sale or transfer of the Dealer or Dealer's assets. (7) Notwithstanding the foregoing, no payment of such expenses and attorney's fees shall be required if the Dealer has not submitted or caused to be submitted an accounting of those expenses within thirty days of the Dealer's receipt of the Company's written request for such an accounting. Such accounting may be requested before the exams by the Company of its Right of First Refusal. 25. NEW AGREEMENT The termination or nonrenewal of this agreement by the Company in connection with the offer by the Company of a new sales and service agreement for one or more COMPANY PRODUCT'S to the Dealer or the Dealer's successor in interest, shall not give rise to the rights and obligations provided in paragraphs 19, 21 and 22 with respect to the COMPANY PRODUCTS included in such new agreement, unless otherwise specified by the Company in writing. 26. ACKNOWLEDGEMENTS This agreement terminates and supersedes all other agreements concerning the DEALERSHIP OPERATIONS and constitutes the entire agreement between the parties with respect to the subject matter hereof. Each party acknowledges that, except as expressly set forth herein, no representation, understanding or presumption of law or fact has been made or relied upon (1) which has induced the execution of this agreement or would in any way modify any of its provisions, or (2) with respect to the -39- effectiveness or duration of this agreement or the sales or profit expectancy of the DEALERSHIP OPERATIONS. The Dealer further acknowledges that he has voluntarily entered into this agreement without coercion or intimidation or threats thereof from the Company, and that each of its provisions is reasonable, fair and equitable. 27. NO IMPLIED WAIVERS Except as expressly provided in this agreement, the waiver by either party, or the failure by either party to claim a breach of any provision of this agreement, shall not constitute a waiver of any subsequent breach, or affect in any way the effectiveness of such provision. 28. RELATIONS AFTER TERMINATION NOT A RENEWAL In the event that, after termination or nonrenewal of this agreement, either party has any business relations with the other party with respect to any COMPANY PRODUCT, such relations shall not constitute either a renewal of this agreement or a waiver of such termination or nonrenewal, but all such relations shall be governed by terms identical with the provisions of such agreement unless the parties execute a new and different agreement. 29. LIMITATION OF THE COMPANIES LIABILITY This agreement contemplates that all investments by or in the Dealer shall be made, and the Dealer shall purchase and resell COMPANY PRODUCTS, in conformity with the provisions hereof but otherwise in the discretion of the Dealer and the Dealer's owners. Except as herein specified, nothing herein contained shall impose any liability on the Company in connection with the DEALERSHIP OPERATIONS or otherwise or for any expenditure made or incurred by the Dealer in preparation for performance or in performance of the Dealers responsibilities under this agreement. 30. NOTICES Any notice required or permitted by this agreement, or given in connection herewith, shall be in writing and shall be given by personal delivery or by first-class or certified or registered mail, postage prepaid. Notices to the Company shall be delivered to or addressed to the District Sales Manager of the area in which the Dealer is located except notices given by the Dealer either to the Policy Board or pursuant to the Arbitration Plan. Notices to the Dealer did be delivered to any person designated in paragraph F(ii) of this agreement or directed to the Dealer at the Dealer's principal place of business as described herein. -40- 31. AMENDMENT Notwithstanding anything in this agreement to the contrary, the Company shall have the right to amend, modify or change this agreement in case of legislation, government regulation or changes in circumstances beyond the control of the Company that might affect materially the relationship between the Company and the Dealer. 32. MICHIGAN AGREEMENT This agreement has been signed by the Dealer and sent to the Company in Michigan for final approval and execution and has there been signed and delivered on behalf of the Company. The parties intend this agreement to be executed as a Michigan Agreement and to be construed in accordance with the laws of the State of Michigan. 33. CONFLICT WITH STATUTE If performance under this agreement is illegal under a valid law of any jurisdiction where such performance is to take place, the performance will be modified to the minimum extent necessary to comply with any such law as was effective on the date of execution of this agreement. -41- EX-18.1 3 LETTER FROM COOPERS & LYBRAND LLP Exhibit 18.1 [Coopers & Lybrand LLP Letterhead] April 13, 1998 United Auto Group, Inc. 375 Park Avenue 22nd Floor New York, NY 10152 We are providing this letter to you for inclusion as an exhibit to your Form 10-K filing pursuant to Item 601 of Regulation S-K. We have read management's justification for the change in accounting from the last-in, first-out method to the specific identification method contained in the Company's Form 10-K for the year ended December 31, 1997. Based on our reading of the data and discussions with Company officials about the business judgment and business planning factors relating to the change, we believe management's change to be reasonable. Accordingly, in reliance on management's determination as regards elements of business judgment and business planning, we concur that the newly adopted accounting principle described above is preferable in the Company's circumstances to the method previously applied. /s/ Coopers & Lybrand L.L.P. EX-21.1 4 SUBSIDIARIES OF THE COMPANY Exhibit 21.1 UNITED AUTO GROUP, INC. Subsidiaries as of December 31, 1997 Name of Company State of Incorporation Carolinas Gene Reed Chevrolet, Inc. SC d/b/a Gene Reed Chevrolet Michael Chevrolet-Oldsmobile, Inc. SC d/b/a Michael Chevrolet Oldsmobile Reed-Lallier Chevrolet, Inc. NC d/b/a Reed-Lallier Chevrolet UAG Carolina, Inc. DE DiFeo-Danbury Danbury Auto Partnership NJ d/b/a Fair Honda Danbury Auto Partnership NJ d/b/a UnitedAuto Mart Danbury Chrysler Plymouth Partnership NJ d/b/a Fair Dodge Fair Chevrolet-Geo Partnership NJ d/b/a Fair Chevrolet/Geo Fair Hyundai Partnership NJ d/b/a Fair Hyundai/Isuzu/Suzuki DiFeo-Jersey City DiFeo Chevrolet-Geo Partnership NJ DiFeo Hyundai Partnership NJ DiFeo Nissan Partnership NJ d/b/a DiFeo Nissan DiFeo Partnership HCT, Inc. DE DiFeo Partnership RCM, Inc. DE DiFeo Partnership SCT, Inc. DE DiFeo Partnership X, Inc. DE Name of Company State of Incorporation DiFeo Partnership, Inc. DE DiFeo Tenafly Partnership NJ d/b/a DiFeo BMW Hudson Motors Partnership NJ d/b/a Hudson Toyota Hudson Toyota, Inc. NJ J & F Oldsmobile Partnership NJ Somerset Motors Partnership NJ d/b/a DiFeo Lexus Somerset Motors, Inc. NJ UAG Northeast (NY), Inc. DE UAG Northeast, Inc. DE DiFeo-Nyack County Auto Group Partnership NJ d/b/a Rockland Toyota DiFeo Chrysler Plymouth Jeep Eagle Partnership NJ d/b/a DiFeo Chrysler Plymouth/ Jeep Eagle/ Hyundai DiFeo Partnership RCT, Inc. DE Rockland Motors Partnership NJ d/b/a Rockland Mitsubishi DiFeo-Toms River NJ DiFeo Partnership IX, Inc. DE DiFeo Partnership VIII, Inc. DE OCM Partnership NJ d/b/a Gateway Mitsubishi Page 2 Name of Company State of Incorporation OCT Partnership NJ d/b/a Gateway Toyota Georgia Atlanta Toyota, Inc. TX d/b/a Atlanta Toyota Conyers Nissan, Inc. GA d/b/a Conyers Nissan Peachtree Nissan, Inc. GA d/b/a Peachtree Nissan UAG Atlanta II, Inc. DE UAG Atlanta III, Inc. DE UAG Atlanta IV Motors, Inc. GA d/b/a United BMW UAG Atlanta IV, Inc. DE UAG Atlanta V, Inc. DE UAG Atlanta VI, Inc. DE UAG Atlanta, Inc. DE United Jeep Eagle Chrysler Plymouth of Stone Mountain, Inc. GA d/b/a United Jeep Eagle/ Chrysler Plymouth of Stone Mountain United Nissan, Inc. (GA) GA d/b/a United Nissan Arkansas BPT Holdings, Inc. AR Central Ford Center, Inc. AR d/b/a Landers Ford Landers Auto Sales, Inc. AR d/b/a Landers Isuzu Page 3 Name of Company State of Incorporation Landers Auto Sales, Inc. AR d/b/a Landers Jeep/Eagle/Chrysler Plymouth/Dodge Landers Buick-Pontiac, Inc. AR d/b/a Landers Buick-Pontiac Landers United Auto Group No. 2, Inc. AR d/b/a Landers Used Cars-North Landers United Auto Group No. 3, Inc. AR d/b/a Landers United AutoMart Landers United Auto Group No. 4, Inc. AR d/b/a Landers Buick Pontiac/GMC Truck Landers United Auto Group No. 5, Inc. AR Landers United Auto Group, Inc. AR United Landers, Inc. DE Louisiana UnitedAuto Dodge of Shreveport, Inc. DE d/b/a UnitedAuto Dodge of Shreveport Nevada UAG Nevada, Inc. DE United Nissan, Inc. (NV) NV Page 4 Name of Company State of Incorporation Puerto Rico HVP Motor Corporation PR d/b/a Triangle del Caribe PVH Motor Corporation PR d/b/a Triangle Chrysler de Infanteria S.H.V.P. Motor Corp. PR d/b/a Triangle el Comandante UAG-Caribbean, Inc. DE VPH Motor Corporation PR d/b/a Triangle del Oeste Sun-Arizona 6725 Agent Partnership AZ 6725 Dealership, Ltd. AZ SA Automotive, Ltd. AZ d/b/a Scottsdale Acura Scottsdale Audi, Ltd. AZ Scottsdale Management Group, Ltd. AZ SK Motors, Ltd. AZ d/b/a Scottsdale/Porsche/Audi/Rolls-Royce/Bentley SL Automotive, Ltd. AZ d/b/a Scottsdale Lexus SPA Automotive, Ltd. AZ d/b/a Land Rover Scottsdale Sun BMW, Ltd. AZ d/b/a Camelback BMW LRP, Ltd. AZ d/b/a Land Rover Phoenix Page 5 Name of Company State of Incorporation UAG West, Inc. DE Tennessee UAG Tennessee, Inc. DE United Nissan, Inc. (TN) TN d/b/a United Nissan Covington Pike Dodge, Inc. DE d/b/a Covington Pike Dodge UAG Memphis, Inc. DE Texas Shannon Automotive, Ltd. TX d/b/a Crown Jeep Eagle/Chrysler Plymouth Shannon Automotive, Ltd. TX d/b/a Crown Dodge UAG Texas II, Inc. DE UAG Texas, Inc. DE UAG East-North UAG East, Inc. DE Westbury Nissan Ltd. NY d/b/a Westbury Nissan Superstore Westbury Superstore, Ltd. NY Page 6 Name of Company State of Incorporation UAG East-South Auto Mall Payroll Services, Inc. FL Auto Mall Storage, Inc. FL Florida Chrysler Plymouth Jeep Eagle, Inc. FL d/b/a Florida Chrysler Plymouth/Jeep Eagle Northlake Auto Finish, Inc. FL Palm Auto Plaza, Inc. FL d/b/a Palm Beach Toyota West Palm Automall, Inc. FL West Palm Infiniti, Inc. FL d/b/a West Palm Infiniti West Palm Nissan, Inc. FL d/b/a West Palm Nissan United AutoCare United AutoCare Products, Inc. DE United AutoCare, Inc. DE UnitedAuto Care (Bermuda), Ltd. BERMUDA UnitedAuto Finance Atlantic Auto Funding Corporation DE Atlantic Auto Second Funding Corporation DE Atlantic Auto Third Funding Corporation DE UnitedAuto Finance Inc. DE Page 7 Name of Company State of Incorporation Other UAG Capital Management, Inc. GA UAG Finance Company, Inc. DE UnitedAuto Enterprises, Inc. DE Page 8 EX-23.1 5 CONSENT OF COOPERS & LYBRAND LLP CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of United Auto Group, Inc. on Form S-3 (Registration No. 333-39997) and Form S-8 (Registration Nos. 333-14971 and 333-26219) of our report dated February 27, 1998 on our audits of the consolidated financial statements as of December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996, and 1995, which report is in this Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. Princeton, New Jersey April 13, 1998 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 94,435 0 93,488 (887) 324,330 531,779 44,028 (6,440) 975,662 426,632 238,550 0 0 2 300,555 975,662 2,087,148 2,089,763 1,830,086 2,085,152 297 0 15,085 (15,513) 5,511 (10,140) 0 0 0 (14,140) (0.56) (0.54)
EX-27.2 7 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 172,638 0 82,842 (2,472) 254,182 516,819 39,427 (4,949) 893,230 316,704 237,356 0 0 2 327,093 893,230 1,541,133 1,543,605 1,344,230 1,504,597 297 0 7,657 28,210 (11,306) 16,786 0 0 0 16,786 0.93 0.91
EX-27.3 8 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 43,318 0 85,699 (4,816) 272,800 404,608 37,286 (4,346) 760,889 333,731 93,722 0 0 2 320,603 760,889 915,158 917,243 798,896 894,619 297 0 2,506 18,391 (7,378) 10,916 0 0 0 10,916 0.62 0.61
EX-27.4 9 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 36,083 0 62,461 (1,147) 218,756 329,826 28,879 (4,020) 576,791 268,395 11,777 0 0 2 286,537 576,791 388,200 389,185 340,588 382,344 (172) 0 144 5,588 (2,235) 3,317 0 0 0 3,317 0.19 0.19
EX-27.5 10 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 66,875 0 53,241 (1,223) 173,983 304,699 25,967 (3,626) 528,244 223,550 11,121 0 0 2 284,499 528,244 1,302,031 1,303,829 1,156,459 1,280,703 2,506 0 4,819 17,946 (6,606) 8,034 0 (4,987) 0 3,047 0.30 0.28
EX-27.6 11 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 9-MOS YEAR DEC-31-1996 DEC-31-1995 JAN-01-1996 JAN-01-1995 SEP-30-1996 DEC-31-1995 6,432 4,697 0 0 43,674 27,349 0 0 131,847 105,926 186,133 146,019 20,480 15,924 (4,230) (3,778) 323,072 240,397 172,357 141,360 45,735 24,073 0 0 1 1 1 1 80,958 51,697 323,072 240,397 954,784 805,621 956,388 806,151 847,763 720,634 937,758 811,220 1,114 2,208 0 0 2,758 1,612 14,932 (6,211) (5,596) 2,191 6,544 (3,654) 0 0 0 0 0 0 6,544 (3,654) 0.84 0.74 0.67 0.67
-----END PRIVACY-ENHANCED MESSAGE-----