EXHIBIT 10.4
CHERRY CREEK DODGE, INCORPORATED
AGREEMENT AND PLAN OF REORGANIZATION
By and Between
LITHIA MOTORS, INC.,
an Oregon corporation
("Lithia")
And
CHERRY CREEK DODGE LIMITED PARTNERSHIP, RLLLP
(the "Shareholders")
And
CHERRY CREEK DODGE, INCORPORATED,
a Colorado corporation
(the "Company")
TABLE OF CONTENTS
PAGE
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1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.1 Shares and Shareholders. . . . . . . . . . . . . . . . . . . . . . 5
2.2 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.3 Effective Time of the Merger . . . . . . . . . . . . . . . . . . . 5
2.4 Shareholder Approval . . . . . . . . . . . . . . . . . . . . . . . 6
2.5 Merger Consideration . . . . . . . . . . . . . . . . . . . . . . . 6
3. FORMATION OF MERGER SUB . . . . . . . . . . . . . . . . . . . . . . . . . 7
4. MERGER CONSIDERATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5. REORGANIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6. CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.1 Date, Time and Place of Closing. . . . . . . . . . . . . . . . . . 8
6.2 Documents To Be Delivered at Closing by the Shareholders . . . . . 8
6.3 Documents To Be Delivered at Closing by Lithia . . . . . . . . . . 9
7. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS. . . . . . . . . . . . 9
7.1 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
7.2 Incorporation and Good Standing. . . . . . . . . . . . . . . . . . 9
7.3 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . .10
7.4 No Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . .10
7.5 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
7.6 Real Property. . . . . . . . . . . . . . . . . . . . . . . . . . .10
7.7 Tangible Personal Property . . . . . . . . . . . . . . . . . . . .10
7.8 Parts Inventories. . . . . . . . . . . . . . . . . . . . . . . . .10
7.9 Licenses and Permits . . . . . . . . . . . . . . . . . . . . . . .11
7.10 Intellectual Property. . . . . . . . . . . . . . . . . . . . . . .11
7.11 Title to Properties; Encumbrances. . . . . . . . . . . . . . . . .11
7.12 Financial Statements . . . . . . . . . . . . . . . . . . . . . . .11
7.13 Indebtedness for Borrowed Money; Guaranties. . . . . . . . . . . .11
7.14 Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . .12
7.15 Transactions Since Balance Sheet Date. . . . . . . . . . . . . . .12
7.16 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
7.17 Compliance With Laws . . . . . . . . . . . . . . . . . . . . . . .13
7.18 Contracts and Agreements . . . . . . . . . . . . . . . . . . . . .13
7.19 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . .13
7.20 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
7.21 Personnel. . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
7.22 Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . .13
7.23 Brokers and Finders. . . . . . . . . . . . . . . . . . . . . . . .13
7.24 Delivery of Documents. . . . . . . . . . . . . . . . . . . . . . .14
7.25 Powers of Attorney; Authorized Signatories . . . . . . . . . . . .14
7.26 Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . .14
7.27 Environmental. . . . . . . . . . . . . . . . . . . . . . . . . . .14
ii
7.28 Continuation of Business . . . . . . . . . . . . . . . . . . . . .14
7.29 Contracts in Transit . . . . . . . . . . . . . . . . . . . . . . .14
7.30 Evaluation of Risks in Receiving Lithia Securities . . . . . . . .14
7.31 Limitations on Transfer of Stock . . . . . . . . . . . . . . . . .15
7.32 Lack of Registration of Stock. . . . . . . . . . . . . . . . . . .15
7.33 Information Concerning Lithia. . . . . . . . . . . . . . . . . . .15
7.34 Investor Status. . . . . . . . . . . . . . . . . . . . . . . . . .15
8. REPRESENTATIONS AND WARRANTIES OF LITHIA. . . . . . . . . . . . . . . . .16
8.1 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . . .16
8.2 Incorporation. . . . . . . . . . . . . . . . . . . . . . . . . . .16
8.3 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . .16
8.4 No Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . .16
8.5 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
8.6 SEC Filings. . . . . . . . . . . . . . . . . . . . . . . . . . . .16
8.7 Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . .17
8.8 Transactions Since Latest Balance Sheet Date . . . . . . . . . . .17
8.9 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
8.10 Compliance With Laws . . . . . . . . . . . . . . . . . . . . . . .17
8.11 Brokers and Finders. . . . . . . . . . . . . . . . . . . . . . . .18
8.12 Delivery of Documents. . . . . . . . . . . . . . . . . . . . . . .18
8.13 Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . .18
9. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
9.1 Notices and Consents . . . . . . . . . . . . . . . . . . . . . . .18
9.2 Conduct of Business by the Company Prior to the Closing Date . . .18
9.3 Lithia's Examination . . . . . . . . . . . . . . . . . . . . . . .18
9.4 Shareholders' Review . . . . . . . . . . . . . . . . . . . . . . .18
9.5 Notice of Changes. . . . . . . . . . . . . . . . . . . . . . . . .19
9.6 Standstill Agreement . . . . . . . . . . . . . . . . . . . . . . .19
9.7 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . .19
9.8 Employee Stock Options . . . . . . . . . . . . . . . . . . . . . .19
9.9 Release of Guarantees. . . . . . . . . . . . . . . . . . . . . . .19
9.10 Non-Compete. . . . . . . . . . . . . . . . . . . . . . . . . . . .19
9.11 Update of Representations. . . . . . . . . . . . . . . . . . . . .20
9.12 Service Contract Pricing . . . . . . . . . . . . . . . . . . . . .20
9.13 Hail Damage Reserve. . . . . . . . . . . . . . . . . . . . . . . .20
10. CONDITIONS PRECEDENT TO OBLIGATION OF LITHIA. . . . . . . . . . . . . . .21
10.1 Representations, Warranties of the Shareholders and Covenants
of the Company and the Shareholders. . . . . . . . . . . . . . . .21
10.2 No Adverse Change. . . . . . . . . . . . . . . . . . . . . . . . .21
10.3 Approval of Lithia's Shareholders. . . . . . . . . . . . . . . . .21
10.4 Third Party Approvals. . . . . . . . . . . . . . . . . . . . . . .21
10.5 Xxxx-Xxxxx-Xxxxxx Waiting Period . . . . . . . . . . . . . . . . .21
10.6 Approval of Lithia as the Dealer . . . . . . . . . . . . . . . . .21
10.7 Consent from Lithia's Lender . . . . . . . . . . . . . . . . . . .21
10.8 Tax Opinion. . . . . . . . . . . . . . . . . . . . . . . . . . . .21
10.9 Legal Opinion. . . . . . . . . . . . . . . . . . . . . . . . . . .21
10.10 Fulfillment of Conditions in Related Transactions. . . . . . . . .22
10.11 Employee and Related Party Loans . . . . . . . . . . . . . . . . .22
iii
10.12 Assignment and Licenses of Intangible Assets . . . . . . . . . . .22
10.13 Completion of Audit and Purchase Price Determination . . . . . . .22
10.14 Dealer Option Agreements . . . . . . . . . . . . . . . . . . . . .22
11. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE
SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
11.1 Representations, Warranties and Covenants of Lithia. . . . . . . .22
11.2 No Adverse Changes . . . . . . . . . . . . . . . . . . . . . . . .22
11.3 Third Party Approvals. . . . . . . . . . . . . . . . . . . . . . .22
11.4 Xxxx-Xxxxx-Xxxxxx Waiting Period . . . . . . . . . . . . . . . . .22
11.5 Tax Opinion. . . . . . . . . . . . . . . . . . . . . . . . . . . .22
11.6 Legal Opinion. . . . . . . . . . . . . . . . . . . . . . . . . . .22
11.7 Fulfillment of Conditions in Related Transactions. . . . . . . . .22
11.8 Assignment and Licenses of Intangible Assets . . . . . . . . . . .23
11.9 Voting Agreement . . . . . . . . . . . . . . . . . . . . . . . . .23
11.10 Completion of Audit and Purchase Price Determination . . . . . . .23
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . .23
13. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
13.1 General Indemnity. . . . . . . . . . . . . . . . . . . . . . . . .23
13.2 Defense of Claims. . . . . . . . . . . . . . . . . . . . . . . . .23
13.3 Limitations. . . . . . . . . . . . . . . . . . . . . . . . . . . .23
14. XXXX-XXXXX-XXXXXX NOTIFICATION. . . . . . . . . . . . . . . . . . . . . .24
15. TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
15.1 Mutual Consent . . . . . . . . . . . . . . . . . . . . . . . . . .24
15.2 By Lithia. . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
15.3 By the Company . . . . . . . . . . . . . . . . . . . . . . . . . .25
15.4 Effect of Termination. . . . . . . . . . . . . . . . . . . . . . .25
15.5 Break-Up Fee.. . . . . . . . . . . . . . . . . . . . . . . . . . .25
16. DISPUTE RESOLUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . .26
16.1 Mediation. . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
16.2 Binding Arbitration. . . . . . . . . . . . . . . . . . . . . . . .26
16.3 Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
16.4 Hearing and Award. . . . . . . . . . . . . . . . . . . . . . . . .27
17. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . .27
17.1 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . .27
17.2 Exhibit and Schedules. . . . . . . . . . . . . . . . . . . . . . .27
17.3 Publicity. . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
17.4 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
17.5 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . .27
17.6 Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
17.7 Payment of Expenses. . . . . . . . . . . . . . . . . . . . . . . .28
17.8 Binding Effect and Assignment. . . . . . . . . . . . . . . . . . .28
17.9 Applicability of Exceptions and Disclosure . . . . . . . . . . . .28
17.10 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
17.11 Definition of Knowledge. . . . . . . . . . . . . . . . . . . . . .29
17.12 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
iv
17.13 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
17.14 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . .29
17.15 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . .29
17.16 No Strict Construction . . . . . . . . . . . . . . . . . . . . . .29
v
DEFINED TERMS
ADJUSTED NET WORTH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
BALANCE SHEET DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
BASE 1999 NET ADJUSTED PRETAX INCOME . . . . . . . . . . . . . . . . . . . . .2
BUSINESS REAL PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
CLASS A COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
CONTINGENT MERGER CONSIDERATION. . . . . . . . . . . . . . . . . . . . . . . .2
DAILY SALES PRICE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
DOJ. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
EFFECTIVE TIME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
EMPLOYMENT AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
ENVIRONMENTAL LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
FLOORPLAN RATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
FTC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
INITIAL MERGER CONSIDERATION . . . . . . . . . . . . . . . . . . . . . . . . .2
LEASE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
LICENSES AND PERMITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
LITHIA FLOORPLAN RATES . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
LITHIA INDEMNIFIED PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . 23
LITHIA SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
MERGER SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
MERGER SUB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
XXXXXXXX GAAP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
XXXXXXXX GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
XXXXXXXX TRANSACTION EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . .3
NET ADJUSTED PRETAX INCOME . . . . . . . . . . . . . . . . . . . . . . . . . .3
OTHER REORGANIZATION AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . .5
QUALIFYING MEMBER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
REGISTRATION RIGHTS AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . .9
SEC FILINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SERIES M PREFERRED STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . .5
SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
SPECIAL HAIL-DAMAGE RESERVE. . . . . . . . . . . . . . . . . . . . . . . . . .5
vi
EXHIBITS
Exhibit A - Example Calculation of Adjusted Net Worth
Exhibit B - Example Calculation of Net Adjusted Pretax Income
Exhibit C - Plan of Merger
Exhibit D - Series M Preferred Stock
Exhibit E - Xxxxxx Pepper & Shefelman PLLC Tax Opinion
Exhibit F - Xxxxxxx & Xxxxxx L.L.C. Tax Opinion
Exhibit G - Lease Agreement
Exhibit H - Registration Rights Agreement
Exhibit I - W. Xxxxxxx Xxxxxxxx Employment Agreement
Exhibit J - Xxxxxxx & Xxxxxx L.L.C. Legal Opinion
Exhibit K - Assignment and Licenses of Intangible Assets
Exhibit L - Xxxxxx Pepper & Shefelman PLLC Legal Opinion
Exhibit M - Voting Agreement
Exhibit N - North Avenue Auto, Inc. Dealer Option Agreement
Exhibit O - Grand Auto, Inc. Dealer Option Agreement
Exhibit P - Skyline Automotive, Inc. Dealer Option Agreement
Exhibit Q - The Xxxx Xxxxx Motor Company Dealer Option Agreement
Exhibit R - Avondale Automotive, Inc. Dealer Option Agreement
Exhibit S - Peoples Chrysler Plymouth Jeep Eagle, Inc. Dealer Option
Agreement
Exhibit T - Kids' Automotive, Inc. Dealer Option Agreement
Exhibit U - Xxxxxxx Financial, Inc. Dealer Option Agreement
Exhibit V - Xxxxxxxx Auto Group, LLLP Dealer Option Agreement
SCHEDULES
Schedule 2.1 - Company Shareholders List
Schedule 7.2 - Subsidiaries and Equity Interests of the Company
Schedule 7.3 - Rights to Purchase Securities of the Company/Voting Rights
Schedule 7.5 - Company Consents and Approvals
Schedule 7.6 - Legal Description of Real Property of the Company
Schedule 7.7 - Equipment, Furniture, Fixtures and Other Tangible
Personal Property of the Company
Schedule 7.9 - Permits and Licenses of the Company
Schedule 7.10 - Intellectual Property of the Company
Schedule 7.11 - Encumbrances of the Company
Schedule 7.12 - Financial Statements of the Company
Schedule 7.13 - Guaranties and Obligations of the Company
Schedule 7.15 - Changes Since Balance Sheet Date of the Company
Schedule 7.16 - Orders and Legal Proceedings of the Company
Schedule 7.18 - Material Contracts of the Company
Schedule 7.19 - Employee Benefit Plans of the Company
vii
Schedule 7.20 - Insurance of the Company
Schedule 7.21 - Employees of the Company
Schedule 7.22 - Receivables of the Company
Schedule 7.27 - Underground Storage Tanks of the Company
Schedule 8.4 - Lithia Conflicts
Schedule 8.5 - Lithia Required Consents
Schedule 8.8 - Lithia Changes in Business
Schedule 8.9 - Lithia Orders and Legal Proceedings
viii
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "AGREEMENT") dated
effective January 1, 1999, by and between LITHIA MOTORS, INC., an Oregon
corporation ("Lithia"); CHERRY CREEK DODGE LIMITED PARTNERSHIP, RLLLP (whether
one or more, the "SHAREHOLDERS"); and CHERRY CREEK DODGE, INCORPORATED, a
Colorado corporation (the "COMPANY").
R E C I T A L S :
A. The Shareholders are the owners of all of the issued and
outstanding shares of capital stock of the Company (the "SHARES").
B. The Company is engaged in the business of selling and servicing
Dodge automobiles and light trucks and related parts and accessories from
premises located at 0000 X. Xxxxxx, Xxxxxx, Xxxxxxxx; 0000 X. Xxxxxxxx,
Xxxxxxxxx, Xxxxxxxx; and 000 X. Xxxxxx, Xxxxxx, Xxxxxxxx (the "BUSINESS REAL
PROPERTY").
C. All the parties desire to consummate a business combination
transaction pursuant to which the Company will merge with and into a subsidiary
of Lithia, for the consideration and on the other terms set forth in this
Agreement.
The parties intending to be legally bound, agree as follows:
1. DEFINITIONS
As used herein, the following terms have the indicated meanings:
"ADJUSTED NET WORTH" of the Company or any other member of the Xxxxxxxx
Group as of December 31, 1998 means the excess of the total assets of such
entity over its total liabilities as of that date, determined in accordance with
Xxxxxxxx GAAP, with the following adjustments:
(i) Assets will be increased by an amount equal to 0.63 times
LIFO reserves at December 31, 1998; and
(ii) Any good will or other intangibles will be deducted from
the total assets.
(iii) Net Worth shall be increased by the Company's proportionate
share of Xxxxxxxx Transaction Expenses recorded in 1998. Net Worth shall
be decreased by the Company's proportionate share of "excess transaction
expenses." For that purpose, excess transaction expenses means the
amount, if any, by which the total Xxxxxxxx Transaction Expenses recorded
in 1998 exceed the remainder obtained by subtracting $11,000,000 from the
aggregate Net Adjusted Pretax Income of all members of the Xxxxxxxx Group
for 1998. The Company's proportionate share of the Xxxxxxxx Transaction
Expenses or the excess transaction expenses shall be determined by
multiplying the total Xxxxxxxx Transaction Expenses or excess transaction
expenses by a fraction, the numerator of which is the Company's Net
Adjusted Pretax Income for 1998 and the denominator of which is the
aggregate Net Adjusted Pretax Income of all members of the Xxxxxxxx Group
for 1998.
(iv) The North Avenue Auto, Inc. note of $2,100,000 shall be
valued at the full principal amount of such note.
An example of the calculation of the Adjusted Net Worth of the Company
using unaudited numbers is attached as Exhibit A.
1
"BASE 1999 NET ADJUSTED PRETAX INCOME" means, for each member of the
Xxxxxxxx Group, the lesser of (i) 110 percent of such member's Net Adjusted
Pretax Income for 1998 or (ii) the product of $12,100,000 times a fraction of
which the numerator is such member's Net Adjusted Pretax Income for 1998 and the
denominator is the aggregate Net Adjusted Pretax Income for 1998 of all members
of the Xxxxxxxx Group.
"CLASS A COMMON STOCK" means Lithia's Class A Common Stock, without par
value.
"CONTINGENT MERGER CONSIDERATION" means an amount equal to CMC in the
formula
J-K
CMC = [ 6(H-I) ----- ] + N
X-X
where:
H = the aggregate Net Adjusted Pretax Income of
all members of the Xxxxxxxx Group for 1999,
but H shall not be less than I or more than I
plus $3,000,000.
I = the aggregate Base 1999 Net Adjusted Pretax
Income for all members of the Xxxxxxxx Group;
J = the Company's Net Adjusted Pretax Income for
1999, but J shall not be less than K;
K = the Company's Base 1999 Net Adjusted Pretax
Income;
L = the aggregate Net Adjusted Pretax Income for
1999 of all Qualifying Members; and
M = the aggregate Base 1999 Net Adjusted Pretax
Income of all Qualifying Members.
N = the amount, if any, of the Special-Hail
Damage Reserve existing at March 31, 2000.
"FLOORPLAN RATE" means the rate of interest that the Xxxxxxxx Group and
all affiliated dealerships would have paid on their floorplan financing with
Chrysler Financial Company LLC during 1999 had the Xxxxxxxx Group not been
acquired by Lithia.
"INITIAL MERGER CONSIDERATION" means $16,189,474 adjusted as follows as
of the Effective Date or as soon thereafter as the information necessary to make
such adjustments is available:
(i) First, the Initial Merger Consideration shall be adjusted
to equal IMC in the equation:
B
IMC = (A x 6) --- - $ 3,850,000
C
where:
A = the lesser of $11,000,000 or C;
B = the Company's Net Adjusted Pretax Income for 1998;
and
C = The aggregate Net Adjusted Pretax Income of
all members of the Xxxxxxxx Group for 1998.
(ii) Second, the adjusted Initial Merger Consideration
determined in (i) above shall be adjusted by adding thereto (if positive)
or subtracting therefrom (if negative) the amount of NWA in the equation:
2
E
NWA = (D - $28,000,000) ---
D
where:
D = the aggregate Adjusted Net Worth of all
members of the Xxxxxxxx Group as of December
31, 1998; and
E = the Adjusted Net Worth of the company as of
December 31, 1998.
(iii) Finally, the adjusted Initial Merger Consideration
determined in (ii) above shall be increased by an amount equal to IA in
the equation
(F + $3,850,000) G
IA = ------------------
730
where:
F = the adjusted Initial Merger Consideration
determined in (ii) above; and
G = the sum of the Lithia Floorplan Rates in
effect on each day from and including January 1,
1999 to but excluding the Effective Date.
"LITHIA FLOORING PLAN RATES" means the rate of interest that Lithia is
paying on its least expensive new vehicle flooring line from time to time.
"XXXXXXXX GAAP" means the generally accepted accounting principles
followed in the preparation of the financial statements as of and for the years
ended December 31, 1996 and 1997 for the Xxxxxxxx Automotive Group (which
include entities not included in the Xxxxxxxx Group as defined herein) audited
by Xxxxxx Xxxxxxxx LLP and accompanied by their report thereon dated May 21,
1998.
"XXXXXXXX GROUP" means Cherry Creek Dodge, Incorporated, Xxxxxxx X.
Corp., Colorado Springs Jeep/Eagle, Inc., Foothills Automotive Plaza, Inc.,
L.A.H. Automotive Enterprises, Inc. and Xxxxxxxx Auto Corp., all Colorado
corporations, and Reno Auto Sales, Inc., a Nevada corporation.
"XXXXXXXX TRANSACTION EXPENSES" means all expenses incurred by all
members of the Xxxxxxxx Group in connection with the transactions contemplated
by this Agreement and the Other Reorganization Agreements including, without
limitation, the fees of Xxxxxx Xxxxxxxx LLP for services relating to audits of
the Xxxxxxxx Groups' financial statements for 1998 and subsequent years and
other transaction-related services, fees and expenses of counsel for the
Xxxxxxxx Group and all filling fees payable to governmental entities relating to
the transactions contemplated hereby.
"NET ADJUSTED PRETAX INCOME" of the Company or any other member of the
Xxxxxxxx Group for any period means the net income of such entity for the
period, determined in accordance with Xxxxxxxx GAAP, with the following
adjustments:
(i) Income taxes shall be added back to net income.
(ii) All salaries, bonuses and other compensation expense
incurred or paid to W. Xxxxxxx Xxxxxxxx and the general manager of the
dealership owned by the entity for the period prior to the Effective Date
and any bonus paid to W. Xxxxxxx Xxxxxxxx for the period after the
Effective Date shall be added back to net income.
(iii) The salary and other compensation expenses that would have
been payable for the period prior to the Effective Date to W. Xxxxxxx
Xxxxxxxx and the salary, bonus and other
3
compensation expense that would have been payable for the period prior to
the Effective Date to the general manager of the dealership owned by the
entity under the employment arrangements between those persons and Lithia
or the entity, shall be deducted from net income. The salary payable to
W. Xxxxxxx Xxxxxxxx under his Employment Agreement shall be allocated
among the members of the Xxxxxxxx Group in proportion to their respective
Net Adjusted Pretax Incomes for the year. No bonus payable to W. Xxxxxxx
Xxxxxxxx under his Employment Agreement shall be deducted from net income
under this clause (iii).
(iv) Any increase or decrease in the LIFO reserve of such entity
after December 31, 1997 will be added back to or deducted from net
income.
(v) All Xxxxxxxx Transaction Expenses recorded in the period
shall be added back to net income, but only to the extent that such
Xxxxxxxx Transaction Expenses were taken into account in computing net
income in the first instance.
(vi) Any goodwill or other intangibles booked or other purchase
accounting adjustments made as a result of the acquisition of such entity
by Lithia and any amortization thereof shall be backed out of the
calculation of net income.
(vii) Revenues earned or expenses incurred by such entity for
credit life insurance and financing contracts shall be adjusted to the
revenues or expenses that would have been earned or incurred by such
entity for the same contacts under arrangements in effect during 1998.
Extended service contract costs will be based upon the costs charged to
the Company pursuant to Section 9.12.
(viii) Net income shall be increased by an amount equal to the
interest that would have accrued at the Floorplan Rate on the amount of
all funds paid by such entity to Lithia or any affiliate of Lithia during
the period as a dividend or loan and on the amount of any fees or other
charges paid to Lithia to the extent that such fees are not included as
expenses in calculating Net Adjusted Pretax Income pursuant to clause
(xiii) below, from the date such payment was made to the end of the
period or the date of its repayment.
(ix) Net income shall be decreased by an amount equal to the
interest that would have accrued at the Floorplan Rate on the amount of
all funds provided by Lithia or any affiliate of Lithia to such entity
during the period as a loan or contribution and on the amount of any cost
savings described in clause (xii) below, from the date of such loan or
contribution or the date the savings were realized to the date of
repayment or the end of the period.
(x) Net income shall be increased by all fees paid to Lithia by
such entity under the Consulting Agreement between Lithia and such entity
as in effect from January 1, 1999 to the Effective Date.
(xi) Except as provided in this subparagraph, non-reoccurring
and extraordinary income or expense items will be deducted or added back
to the net income. Some members of the Xxxxxxxx Group held, on
January 1, 1999, vehicles which had suffered hail damage in 1998 and a
related insurance damage reserve. Amounts transferred from that
insurance damage reserve shall not be considered non-reoccurring or
extraordinary income and shall be included in net income, subject to
Section 9.13.
(xii) If Lithia is able to reduce operating costs to the Xxxxxxxx
Group by using its systems (e.g. MIS), purchasing power (e.g. fuels,
lubricants, etc.) or preferential rates (e.g. workers' compensation
premiums) the savings will be added back as an expense item.
(xiii) To the extent that Lithia provides services the cost of
which was previously incurred by the Company or procured from a third
party, the income of the Company will be adjusted to reflect the costs
that would have been incurred by the Company under the
4
arrangements in effect during 1998. If Lithia provides a service or
product not previously utilized by the Company, the reasonable or agreed
costs of such services or product will be included if W. Xxxxxxx Xxxxxxxx
agreed or agrees that the cost of such service or product would be
included in determining Net Adjusted Pretax Income hereunder.
In addition to the specific adjustments described above, net income of
each entity for 1999 shall be adjusted in such other respects as may be
necessary to eliminate the effect of any additional costs resulting from changes
implemented by Lithia not concurred in by W. Xxxxxxx Xxxxxxxx. For example, if
Lithia makes capital improvements or increases inventory levels not concurred in
by W. Xxxxxxx Xxxxxxxx, all current operating expenses associated with those
decisions, including financing costs, would be added back to net income.
It is the intent of the parties that, subject to the specific adjustments
described above, the Net Adjusted Pretax Income of each entity for 1999 will
reflect the net pretax income that such entity would have earned in 1999 had it
been operated during that year in the same manner that it was operated during
1998. An example of the calculation of Net Adjusted Pretax Income is attached
as Exhibit B.
"OTHER REORGANIZATION AGREEMENTS" means the six separate Agreements and
Plans of Reorganization of even date herewith whereunder Lithia is acquiring the
other members of the Xxxxxxxx Group.
"QUALIFYING MEMBER" means a member of the Xxxxxxxx Group whose Net
Adjusted Pretax Income for 1999 exceeds its Base 1999 Net Adjusted Pretax
Income.
"SERIES M PREFERRED STOCK" means shares of Lithia's preferred stock,
without par value, designated as Series M-2002 Preferred Stock and Series M-2003
Preferred Stock and having the right and preferences set forth in Lithia's
Articles of Incorporation.
"SPECIAL HAIL-DAMAGE RESERVE" means a reserve established by Cherry Creek
Dodge, Incorporated, Xxxxxxxx Auto Corp. and Xxxxxxx X. Corp. from unallocated
insurance proceeds for hail-damage suffered to vehicles still in inventory at
December 31, 1998, which reserve will be $200,000 for Cherry Creek Dodge,
Incorporated, and $50,000 each for Xxxxxxxx Auto Corp. and Xxxxxxx X. Corp. The
Special Hail-Damage Reserve constitutes only a portion of the total insurance
damage reserve established by those three entities in respect of hail damage
suffered in 1998.
2. THE MERGER
2.1 SHARES AND SHAREHOLDERS. Schedule 2.1 sets forth the name, as it
appears in the Company's corporate records, of each record owner of shares of
the Company's capital stock, the number and class or series of the shares of
capital stock held by each Shareholder, and the percentage of the Merger
Consideration each Shareholder is to receive. Schedule 2.1 also reflects the
proportions in which the Shareholders will share the cash and stock components
of the Merger Consideration, which are different than their percentage ownership
interests in the Company. The Shareholders hereby agree to those proportions
and waive any right they may have to receive all elements of the Merger
Consideration in proportion to their stock ownership of the Company.
2.2 THE MERGER. Subject to the terms and conditions set forth in this
Agreement, and in accordance with the applicable provisions of law, at the
Effective Time, Merger Sub (hereinafter defined) and the Company shall
consummate a merger as set forth in the Plan of Merger (attached as Exhibit C),
pursuant to which the Company shall be merged with and into Merger Sub, the
separate corporate existence of the Company shall thereupon cease, and Merger
Sub shall continue as the surviving corporation.
2.3 EFFECTIVE TIME OF THE MERGER. Lithia, Merger Sub, the Shareholders
and the Company will cause the Plan of Merger and Articles of Merger in the form
required by Colorado law to be executed and
5
filed as soon as reasonably possible following the date of the Closing, or on
such other date as Lithia and the Company may agree, with the Secretary of State
for the state of Colorado. The Merger shall become effective at the time at
which the Articles of Merger shall have been accepted for filing by the
Secretary of State for the state of Colorado or such time specified in the
Articles of Merger as may be agreed upon by Lithia and the Company, and such
time is hereinafter referred to as the "EFFECTIVE TIME."
2.4 SHAREHOLDER APPROVAL. The signature of each Shareholder on this
Agreement shall be deemed such Shareholder's irrevocable written consent
approving the Plan of Merger and this Agreement in lieu of a shareholders'
meeting of the Company. The signature of Lithia on this Agreement shall be
deemed its irrevocable written consent approving the Plan of Merger and this
Agreement as the sole shareholder of Merger Sub.
2.5 MERGER CONSIDERATION. Upon the Effective Date, each outstanding
share of Company Common Stock shall be converted into the right to receive a
portion of the Merger Consideration determined by dividing the total Merger
Consideration by the number of shares of Company Common Stock outstanding. The
Initial Merger Consideration and the Contingent Merger Consideration
(collectively referred to as the "Merger Consideration") will be calculated and
paid as follows:
2.5.1 INITIAL MERGER CONSIDERATION. As soon as reasonably
practicable, the Company shall cause its auditors to prepare an audited balance
sheet and income statement for the Company as of and for the year ended
December 31, 1998 in accordance with Xxxxxxxx GAAP and shall calculate the
Company's Adjusted Net Worth and Net Adjusted Pretax Income and the Initial
Merger Consideration on the basis thereof. The Company shall deliver such
financial statements and calculations to Lithia. Lithia shall have a period of
15 days after its receipt of such financial statements and calculations to make
any objections it may have to the Adjusted Net Worth and Net Adjusted Pretax
Income of the Company and the Initial Merger Consideration as calculated by the
Company. If Lithia does not give notice of objections within that period, the
Adjusted Net Worth, Net Adjusted Pretax Income and Initial Merger Consideration
so calculated shall be final. If Lithia does give notice of objections within
that time, and Lithia and the Company are unable to resolve the matter by
agreement, either side may submit the matter to PricewaterhouseCoopers LLP or
another independent accounting firm selected by the Shareholders and Lithia for
resolution. The decision of that accounting firm shall be binding on the
parties.
2.5.2 PAYMENT OF INITIAL MERGER CONSIDERATION. The Initial
Merger Consideration shall be payable in a combination of cash, Class A Common
Stock and Series M-2002 Preferred Stock. The amount of the Initial Merger
Consideration to be paid in Lithia stock shall equal ISP in the formula:
T + $12,677,500 U
ISP = --------------- x ---
2 V
WHERE:
T = the Initial Merger Consideration payable under this
Agreement plus the Initial Merger Consideration payable
under all of the other reorganization agreements;
U = the Initial Merger Consideration under this Agreement;
and
V = T minus the Initial Merger Consideration payable under
the Other Reorganization Agreements relating to the
acquisition of L.A.H. Automotive Enterprises, Inc. and
Reno Auto Sales, Inc.
Of the stock portion of the Initial Merger Consideration, 70 percent will be
paid in Class A Common stock and 30 percent in Series M-2002 Preferred Stock.
The balance of the Initial Merger Consideration shall be paid in cash. The
Class A Common stock shall be valued for purposes of the Initial Merger
Consideration at (i) $19.00 per share. The Series M Preferred Stock shall be
valued at $1,000 per share for purposes of the Initial Merger Consideration.
6
2.5.3 CONTINGENT MERGER CONSIDERATION. As soon as possible, and
in any event within 120 days after December 31, 1999, Lithia shall cause its
auditors to prepare a balance sheet and income statement for the Company as of
December 31, 1999 and for the year then ended and shall calculate the Adjusted
Net Worth, Net Adjusted Pretax Income and Contingent Merger Consideration on the
basis thereof. Lithia shall deliver such financial statements and calculations
to the Shareholders. The Shareholders' opportunity to object, the effect of
failure to do so and the resolution of any dispute shall be determined in the
manner provided in Section 2.5.1 above for determining the Initial Merger
Consideration.
2.5.4 PAYMENT OF CONTINGENT MERGER CONSIDERATION. The Contingent
Merger Consideration shall be paid in a combination of cash, Class A Common
Stock and Series M-2003 Preferred Stock within two business days after the
amount thereof has been determined. The amount of the Contingent Merger
Consideration to be paid in Lithia stock shall equal CSP in the formula:
X Y
CSP = --- x ---
2 Z
Where:
X = the sum of the Contingent Merger Consideration payable under
this Agreement plus the Contingent Merger Consideration
payable under all of the Other Reorganization Agreements;
Y = the Contingent Merger Consideration payable under this
Agreement; and
Z = X minus the Contingent Merger Consideration payable under the
Other Reorganization Agreements relating to the acquisition
of L.A.H. Automotive Enterprises, Inc. and Reno Auto Sales,
Inc.
The stock portion of the Contingent Merger Consideration will be payable 50
percent in Class A Common Stock and 50 percent in Series M-2003 Preferred Stock.
The balance of the Contingent Merger Consideration will be payable in cash. Any
imputed interest with respect to the payment of the Contingent Merger
Consideration shall be deemed paid from the cash portion of the Contingent
Merger Consideration. The Class A Common Stock shall be valued for purposes of
the Contingent Merger Consideration at the average Daily Sales Price over the 15
trading days ending with the second trading day before the date that such shares
are issued. "DAILY SALES PRICE" means, for any trading day, the last sales
price of the Class A Common Stock reported by the New York Stock Exchange or if
the Class A Common Stock is not then trading on the NYSE, such other source as
Lithia and the Shareholders may agree. The Series M Preferred Stock shall be
valued at $1,000 per share for purposes of the Contingent Merger Consideration.
2.5.4 FRACTIONAL SHARES. Lithia shall not issue fractional
shares of Class A Common Stock. In lieu thereof, Company shareholders will
be entitled to receive cash in the amount of any fractional share valued as
set forth in the preceding paragraph.
2.5.6 ADJUSTMENTS. Anything in this Agreement to the contrary
notwithstanding, all prices per share, share amounts, and per-share amounts
referred to in this Agreement shall be appropriately adjusted to account for
stock dividends, split-ups, mergers, recapitalizations, combinations,
conversions, exchanges of shares or the like occurring between the first day
of each pricing period through the date such shares are issues.
3. FORMATION OF MERGER SUB
Prior to Closing, Lithia will form Lithia Acquisition Corp. #99-1, a
wholly owned subsidiary under Colorado law ("MERGER SUB"), which subsidiary,
subject to the satisfaction of all conditions to
7
Closing, Lithia will cause to execute the Plan of Merger and the Articles of
Merger. Lithia will cause the Board of Directors of Merger Sub to approve the
Plan of Merger.
4. MERGER CONSIDERATION
Lithia will cause to be adopted and filed Articles of Amendment to
Lithia's Articles of Incorporation pursuant to which 10,500 shares of Lithia's
preferred stock will be designated as Series M-2002 Preferred Stock and 4,500
shares of Lithia preferred stock will be designated as Series M-2003 Preferred
Stock (collectively, "Series M Preferred Stock"), with the relative rights and
preferences as set forth in the attached Exhibit D. Lithia shall make available
such shares of Series M Preferred Stock, shares of Class A Common Stock and cash
as may be required by the terms of this Agreement and the Plan of Merger. Such
securities are being offered and sold pursuant to exemptions from registration
under both the Securities Act of 1933, as amended, and state securities laws in
reliance upon the representation and warranties of Shareholders herein.
5. REORGANIZATION
The parties intend that the transaction to be effected by the Plan of
Merger will qualify as a reorganization under Section 368(a)(1) of the code and
the regulations and rules promulgated thereunder. A condition of closing is the
receipt of opinions from the firm of Xxxxxx Pepper & Shefelman PLLC to Lithia
and from the firm of Xxxxxxx & Xxxxxx, L.L.C. to the Company and the
Shareholders that the transaction would qualify as to treatment as a
reorganization under Section 368(a)(1) of the Code, substantially in the form of
Exhibit E and F, respectively, attached hereto. In rendering such opinions,
counsel may require and rely upon representations contained in certificates from
officers of Lithia, the Shareholders and the Company.
6. CLOSING
6.1 DATE, TIME AND PLACE OF CLOSING. Subject to the terms and conditions
set forth in this Agreement, the Closing of this Agreement shall take place at
the offices of Xxxxxxx & Xxxxxx, L.L.C. at 000 00xx Xxxxxx, Xxxxxx, Xxxxxxxx, at
9:00 a.m. on the second business day following the fulfillment of the conditions
to the obligations of the parties under Sections 10 and 11, or at such other
time or place as may be mutually agreed upon by Lithia, the Shareholders and the
Company. Notwithstanding any provision in this Agreement to the contrary, if
the Closing has not occurred on or before June 30, 1999, either Lithia or the
Company, provided that the failure of the Closing to occur did not result from a
breach of this Agreement by such party, shall have the right to terminate this
Agreement pursuant to Section 15.
6.2 DOCUMENTS TO BE DELIVERED AT CLOSING BY THE SHAREHOLDERS. At
Closing, the Shareholders will deliver or cause the Company to deliver to Lithia
the following:
6.2.1 Certified copies of resolutions adopted by the board of
directors of the Company approving the Agreement and the Plan of Merger and the
transactions contemplated hereby;
6.2.2 The Plan of Merger duly executed on behalf of the Company;
6.2.3 Articles of Merger in the appropriate form for filing duly
executed on behalf of the Company;
6.2.4 Stock certificates representing all of the Shares;
6.2.5 Lease agreements substantially in the form of Exhibit G and
a mutually acceptable Sublease Agreement for any properties subleased by the
Company from a related party to transfer to the Company the benefits of such
underlying leases, with monthly rents in the amount set forth in Schedule G-1
attached to Exhibit G (the "LEASE AGREEMENT") duly executed by the Landlord as
specified therein;
8
6.2.6 The Registration Rights Agreement between Lithia, the
Shareholders and the majority shareholders of the other members of the Xxxxxxxx
Group substantially in the form of Exhibit H (the "REGISTRATION RIGHTS
AGREEMENT"), duly executed by the Shareholders; and
6.2.7 An employment agreement between Lithia and W. Xxxxxxx
Xxxxxxxx substantially in the form of Exhibit I (the "EMPLOYMENT AGREEMENT")
duly executed by the employee as specified therein.
6.3 DOCUMENTS TO BE DELIVERED AT CLOSING BY LITHIA. At Closing, Lithia
will deliver, or cause to be delivered, to the Shareholders the following:
6.3.1 Certified copies of resolutions adopted by the board of
directors of Lithia and of resolutions adopted by the board of directors and
shareholder of Merger Sub approving this Agreement and the Plan of Merger and
the transactions contemplated hereby.
6.3.2 The Plan of Merger duly executed on behalf of Merger Sub
and Lithia;
6.3.3 Articles of Merger in the appropriate form for filing duly
executed on behalf of the Merger Sub;
6.3.4 The cash portion of the Initial Merger Consideration
payable as provided in the Plan of Merger;
6.3.5 Stock certificates for the shares of Class A Common Stock
and Series M-2002 Preferred Stock constituting the stock portion of the Initial
Merger Consideration issued in the names of the Shareholders;
6.3.6 The Lease Agreements duly executed by Lithia Real Estate,
Inc., a wholly owned subsidiary of Lithia, as lessee, and guaranteed by Lithia;
6.3.7 The Registration Rights Agreement, duly executed by Lithia;
and
6.3.8 The Employment Agreement duly executed on behalf of Lithia.
7. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
The Shareholders jointly and severally represent and warrant to Lithia as
follows:
7.1 AUTHORIZATION. The execution, delivery and performance of this
Agreement and the Plan of Merger have been duly authorized by the Board of
Directors and the shareholders of the Company, and this Agreement has been duly
executed and delivered by the Company and each Shareholder. The Company has all
necessary corporate authority to execute and deliver this Agreement and to
perform the Company's obligations hereunder. This Agreement is a valid and
legally binding obligation of the Company and the Shareholders, enforceable
against the Company and the Shareholders in accordance with its terms, except as
the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to the enforcement of
creditors' rights generally and by general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
The Shareholders have the complete and unrestricted right, power and authority
to execute this Agreement and perform their covenants in accordance with this
Agreement and will have at Closing good, absolute and marketable title to the
Shares, free and clear of any liens, claims, encumbrances or restrictions of any
kind.
7.2 INCORPORATION AND GOOD STANDING. The Company is duly organized,
validly existing and in good standing under the applicable laws of the state of
its incorporation and has all necessary power and authority to own, lease and
operate its properties and assets and to conduct its business as its business is
now being conducted. The Company has delivered to Lithia complete and accurate
copies of the Company's articles of incorporation and bylaws, including all
amendments thereto. The Company is qualified to do business and is in good
standing in each state in which it transacts business. Except as
9
disclosed in Schedule 7.2, the Company does not have any subsidiaries nor any
direct or indirect equity interest in any corporation, partnership or other
entity.
7.3 CAPITALIZATION. The authorized capital stock of the Company consists
of 500,000 shares of Common Stock, $1 par value, 90,000 shares of which are
outstanding. The Shares constitute all of the issued and outstanding shares of
capital stock of the Company. The Shares have been validly authorized and
issued, are fully paid and non-assessable, and have not been issued in violation
of any preemptive rights or of any federal or state securities law. On the date
hereof, the Shares are owned beneficially and of record by the Shareholders as
set forth on Schedule 2.1. There are and will be on the Closing Date no
outstanding subscriptions, options, rights, warrants, convertible securities,
buy-in or other agreements or commitments obligating the Company to issue any
additional shares of its capital stock of any class or any other securities of
any kind. Except as disclosed in Schedule 7.3, there are no agreements that
relate to the voting or control of the Shares.
7.4 NO CONFLICTS. Neither the execution and delivery of this Agreement
nor the fulfillment of or compliance with the terms and provisions hereof will
violate, conflict with, or result in a breach of the terms, conditions or
provisions of, or constitute a default or an event which, with notice or lapse
of time or both, would constitute a default under, the articles of incorporation
or bylaws of the Company, any contract, agreement, mortgage, deed of trust or
other instrument or obligation to which either the Shareholders or the Company
are parties or by which any of them is bound (assuming receipt of the consents
and approvals disclosed in Schedule 7.5), or violate any provision of any
applicable law or regulation or of any order, decree, writ or injunction of any
court or governmental body, or result in the creation or imposition of any lien,
charge, restriction, security interest or encumbrance of any nature whatsoever
on any property or asset of the Company or on the Shares.
7.5 CONSENTS. Except as otherwise set forth in Schedule 7.5, no consent
from, or other approval of, any governmental entity or agency or any other
person or entity is necessary in connection with the execution, delivery or
performance of this Agreement by the Company.
7.6 REAL PROPERTY. Set forth in Schedule 7.6 is a complete and accurate
legal description of the Business Real Property. The zoning of the Business
Real Property permits the presently existing improvements and the continuation
of the business presently being conducted on such real property. To the best of
the Company's and each of the Shareholders' knowledge, there are no pending or
proposed changes to such zoning.
7.7 TANGIBLE PERSONAL PROPERTY. Schedule 7.7 sets forth a complete and
accurate description of all equipment, furniture, fixtures and other tangible
personal property (except inventory of vehicles, parts and supplies) owned by,
in possession of, or used by the Company on December 31, 1998 in connection with
its business and a complete and accurate description of all tangible personal
property in which the Company has a leasehold interest, together with a complete
and accurate description of each lease under which the Company holds such
leasehold interests. Each of the leases is in full force and effect and
constitutes a legal, valid and binding obligation of the parties thereto. The
Company has performed in all material respects the covenants required to be
performed by it under each of the leases to which it is a party and is not in
default under any of the leases to which it is a party.
7.8 PARTS INVENTORIES. The parts inventories of the Company at December
31, 1998 consist of goods of a quality and in quantities that are suitable for
sale in the ordinary course of its business with normal xxxx-up at prevailing
market prices. All parts and accessories in the inventories of the Company are
undamaged parts and accessories that (i) are still in the original, resalable
merchandising package, and in unbroken lots, (ii) were listed for sale in the
then-current dealer parts and accessories price schedule for the represented
manufacturers, (iii) were purchased directly from the represented manufacturers,
and (iv) are returnable under the terms of the represented manufacturers' sales
and service agreement for credit to the account of the Company.
10
7.9 LICENSES AND PERMITS. Schedule 7.9 sets forth a complete and
accurate description of all material permits, licenses, franchises, certificates
and similar items and rights, owned or held by the Company (hereinafter
collectively referred to as the "LICENSES AND PERMITS"). The Licenses and
Permits are adequate for the operation of the Company's business; are valid and
in full force and effect, and no basis exists for a grantor of any such Licenses
or Permits to terminate the same. No additional material permit, license,
franchise, certificate or similar item or right is required by the Company for
the operation of its business. Except as set forth on Schedule 7.9, the
Company's rights under the Licenses and Permits will, by operation of law,
vested in Merger Sub upon the Effective Time.
7.10 INTELLECTUAL PROPERTY. Schedule 7.10 sets forth a complete and
accurate description of all intellectual property presently in use by the
Company, which intellectual property includes (without limitation) patents,
trademarks, trade names, service marks, copyrights, trade secrets, customer
lists, inventions, formulas, methods, processes, advertising materials, Internet
sites and any other proprietary information or property. Except as disclosed in
Schedule 7.10, there are no outstanding licenses or consents to third parties
granting the right to use any intellectual property owned by the Company. To
the best of the Company's and each of the Shareholders' knowledge and except as
disclosed in Schedule 7.10, the Company owns and has the right to use its
intellectual property free and clear of any claims and without any conflict with
the rights of others and no royalties or fees are payable by the Company to any
third party by reason of the use of any intellectual property by the Company.
No additional intellectual property is required by the Company for the operation
of its business.
7.11 TITLE TO PROPERTIES; ENCUMBRANCES. The Company has good, absolute
and marketable title to (or, in the case of leased property, valid and
subsisting leasehold interests in) all of its properties and assets, including
(without limitation) the properties and assets that will be listed on Schedules
7.6 and 7.7 except for properties and assets sold, consumed or otherwise
disposed of by the Company in the ordinary course of its business, and will have
good, absolute and marketable title to all assets included in the Audited
Balance Sheet. The Company and the Business Real Property are not subject to
any liens, mortgages, encumbrances, conditional sales agreements, security
interests, claims or restrictions of any kind or character, except for (i) the
encumbrances listed on Schedule 7.11, (ii) liens for current taxes not yet due
and payable and (iii) mechanics and materialmen's liens arising in the ordinary
course of business and securing obligations that are not overdue.
7.12 FINANCIAL STATEMENTS. Schedule 7.12 sets forth the Company's
Dealer Financial Statements as of the end of and for the Company's two most
recent fiscal years. These Dealer Financial Statements were prepared in
accordance with the applicable manufacturer's requirements and fairly reflect in
all material respects the results of operations and financial condition of the
Company for the periods and at the dates indicated.
The Company will, prior to Closing, deliver to Lithia copies of balance
sheets for the Company dated December 31, 1998 (the "BALANCE SHEET DATE") and
December 31, 1997, and the related statements of income for each of the three
years ended December 31, 1998 (hereinafter collectively referred to as the
"FINANCIAL STATEMENTS"). The Financial Statements will be prepared in
accordance with Xxxxxxxx GAAP on a LIFO basis and consistent with prior periods,
and will fairly present in all material respects the financial condition of the
Company at the dates mentioned and the results of its operations for the periods
specified. The Financial Statements will be accompanied with an unqualified
audit report from the Company's accountants, Xxxxxx Xxxxxxxx, LLP. KPMG Peat
Marwick LLP, Lithia's accountants, will be permitted to review the work papers
of Xxxxxx Xxxxxxxx LLP prior to the issuance of Xxxxxx Xxxxxxxx LLP's report for
the Financial Statements at and for the periods through December 31, 1998.
7.13 INDEBTEDNESS FOR BORROWED MONEY; GUARANTIES. The Company has
delivered to Lithia a complete and accurate copy of all instruments evidencing
or relating to the Company's indebtedness for borrowed money at December 31,
1998. The Company is not in default or violation of any provision of any
agreement evidencing or relating to its indebtedness for borrowed money.
Schedule 7.13 sets forth as
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of December 31, 1998 a complete and accurate description of all guaranties by
the Company of any obligation or liability of any person or entity, including
(without limitation) any guaranties of installment sales contracts, leases or
obligations under service contracts.
7.14 TAX MATTERS. The Company has duly filed all federal, state and
local tax returns required to be filed by it. All federal, state, local and
foreign income, ad valorem, excise, sales, use, payroll, unemployment and other
taxes and assessments that are due and payable by the Company have been properly
computed, duly reported, fully paid, and discharged and the Company has
conformed with applicable requirements to maintain its LIFO election. The only
unpaid taxes that require payment by the Company are current taxes not yet due
and payable. All current taxes not yet due and payable by the Company have been
properly accrued and are accurately reflected in the Company's balance sheet in
the Financial Statements. The Company has not been delinquent in the payment of
any tax, assessment or governmental charge, nor has any tax deficiency been
proposed or assessed against it, nor has it executed any waiver of the statute
of limitations on the assessment or collection of any tax.
7.15 TRANSACTIONS SINCE BALANCE SHEET DATE. Since the Balance Sheet
Date, except as anticipated by this Agreement or set forth on Schedule 7.15,
(i) the Company has not incurred any material debts, liabilities or obligations
except current liabilities in the ordinary course of business; discharged or
satisfied any material liens or encumbrances, or paid any material debts,
liabilities or obligations, except in the ordinary course of business;
mortgaged, pledged or otherwise subjected to any lien or other encumbrance any
of its properties or assets; canceled any material debt or claim; sold or
transferred any properties or assets except sales from inventory in the ordinary
course of business; nor entered into any material transaction other than in the
ordinary course of business; (ii) there has not been any change in the financial
condition, net income, assets, liabilities, operations or business of the
Company other than changes in the ordinary course of business, none of which,
individually or in the aggregate, has been materially adverse; (iii) there has
not been any declaration, setting aside or payment of any dividend or other
distribution in respect of, or any repurchase or acquisition of, the capital
stock of the Company; (iv) the Company has not issued any securities or options
to purchase any securities of any nature whatsoever; (v) the Company has not
increased the compensation, commissions, bonuses or other remuneration payable
to any officer, director, employee or to any other person or entity, whether now
or hereafter payable, except in the ordinary course of business, nor paid any
bonuses to any Shareholder, (vi) there has not been any damage, destruction or
loss (whether or not covered by insurance) materially and adversely affecting
the assets, properties or business of the Company; (vii) the Company has not
made any capital expenditure or commitment in excess of $50,000 for additions to
property, plant or equipment; (viii) the Company has not made any loan or
advance to any person or entity, other than advances to commission salespersons
in the ordinary course of business; guaranteed any obligation or liability of
any person or entity, including (without limitation) any guaranties of any
installment sales contracts or leases, or given any indemnification to any
person or entity; (ix) the Company has not made any sale, assignment or transfer
of, additions to or transactions involving any tangible asset other than in the
ordinary course of business; (x) the Company has not made any change in its
method of accounting or accounting practices, including (without limitation) any
change in depreciation or amortization policies or rates; (xi) the Company has
not granted any waiver or release of any material claim or right, or canceled
any material debt or claim held by it; (xii) the Company has not amended or
terminated any material contract, agreement or license to which it is a party;
(xiii) the Company has not agreed, in writing or otherwise, to do or permit any
of the foregoing.
7.16 LITIGATION. Schedule 7.16 sets forth a complete and accurate
description of all orders, decrees, writs or injunctions of any court or
governmental body applicable specifically to the Company and all legal actions,
suits, arbitrations, condemnation actions or other proceedings pending or, to
the knowledge of the Shareholders, threatened against the Shareholders with
respect to their Shares or against the Company or any of its properties, assets
or business. The Company has no knowledge of any facts that might result in any
other material action, suit, arbitration or proceeding.
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7.17 COMPLIANCE WITH LAWS. To the best of the Company's and each of
the Shareholders' knowledge, there are no existing violations of federal, state
or local laws, ordinances, rules, codes, regulations or orders by the Company
which are reasonably likely to materially affect the properties, assets or
business of the Company. To the best of the Company's and each of the
Shareholders' knowledge, the Company is not subject to any restriction,
judgment, order, writ, injunction, decree or award, which materially and
adversely affects or is likely to materially and adversely affect the business,
operations, properties, assets or condition (financial or otherwise) of the
Company.
7.18 CONTRACTS AND AGREEMENTS. Schedule 7.18 sets forth a complete and
accurate description of all material contracts and agreements to which the
Company is a party or by which it or any of its property is bound. All such
contracts and agreements are in full force and effect and neither the Company
nor, to the Company's knowledge, the other parties thereto are in breach of any
of the provisions thereof. Except as set forth on Schedule 7.18, the Company is
not a party to any contract or agreement which materially and adversely affects
or is likely to materially or adversely affect the business, operations,
properties, assets or condition (financial or otherwise) of the Company.
7.19 EMPLOYEE BENEFIT PLANS. Schedule 7.19 sets forth a complete and
accurate description of all pension, profit sharing, bonus, deferred
compensation, percentage compensation, severance pay, retirement, health, stock
option, stock buy-in, insurance and other employee benefit plans and
arrangements binding upon the Company. The Company has complied with the
provisions of and has performed the obligations required of it under such plans
and arrangements, and the Company is not in default under any provision thereof
in any material respect. There have been no material defaults, breaches or
omissions by the Company or any fiduciary under any of these plans or
arrangements.
7.20 INSURANCE. Schedule 7.20 sets forth a complete and accurate
description of all insurance, including (without limitation) worker's
compensation, maintained by the Company and summarizes the coverage provided by
each of the insurance policies, including (without limitation) whether the
insurance policies are "claims made" or "occurrence" policies. All of the
insurance is in full force and effect, and the Company will keep such insurance
in full force and effect until the Closing Date.
7.21 PERSONNEL. Schedule 7.21 sets forth a complete and accurate list
of all employees of the Company as of the date indicated thereon and all
independent contractors regularly performing services on behalf of the Company
and their respective rates of compensation, including any salary, bonus or other
payment arrangement made with any of them. Except as disclosed in Schedule
7.21, the Company does not have any employment agreements or contracts between
the Company and any person or entity. The Company is not a party to or bound by
any collective bargaining agreement, nor has the Company experienced any
strikes, grievances, claims of unfair labor practices or other collective
bargaining dispute. There are no unions representing any employees of the
Company. The Company has no knowledge of any organizational effort presently
being made or threatened by or on behalf of any labor union with respect to
employees of the Company. The Company has paid or has made provision for the
payment of all compensation due any person or entity and has complied in all
material respects with all applicable laws, rules and regulations relating to
the employment of labor, including those related to wages, hours, collective
bargaining and the payment and withholding of taxes, and has withheld and paid
to the appropriate governmental authority, or is holding for payment not yet due
to such authority, all amounts required by law or agreement to be withheld from
the compensation of its employees.
7.22 ACCOUNTS RECEIVABLE. Schedule 7.22 sets forth a complete and
accurate list of all accounts receivable, notes receivable and vehicle leases of
the Company as of the date indicated thereon and an aging analysis of such
accounts. All receivables of the Company are valid and enforceable claims,
arose in the ordinary course of business, require no further performance by
the Company and, to the Company's knowledge, are not subject to claims or
offset.
7.23 BROKERS AND FINDERS. The Company has not employed, directly or
indirectly, any broker or finder, nor incurred any liability for any brokerage
fees, commissions or finders fees.
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7.24 DELIVERY OF DOCUMENTS. Complete and accurate copies of all
written instruments listed or described on the schedules have been furnished or
made available to Lithia. The Company will make available to Lithia, to the
extent requested by Lithia, all books, records and facilities of the Company.
7.25 POWERS OF ATTORNEY; AUTHORIZED SIGNATORIES. The Company has
provided to Lithia (i) the names and addresses of all persons holding a power of
attorney on behalf of the Company, and (ii) the account numbers and names of all
banks or other financial institutions in which the Company currently has an
account, deposit or safe deposit box, with the names of all persons authorized
to draw on the accounts or deposits or to have access to the boxes.
7.26 FULL DISCLOSURE. The representations and warranties by the
Company and the Shareholders in this Agreement and in the schedules attached
hereto, and the other statements in writing and information furnished or to be
furnished to Lithia by or on behalf of the Company or the Shareholders in
connection with the transactions contemplated by this Agreement, taken as a
whole, do not and will not contain any untrue statement of a material fact, or
omit to state a material fact necessary to make the statements contained herein
not misleading.
7.27 ENVIRONMENTAL
7.27.1 There are no past or present events, conditions,
circumstances, activities, practices, incidents, plans or actions, based on or
resulting from the conduct of the business of the Company, including the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling, or the emission, discharge, release or threatened release
into the environment, of any pollutant, contaminant, chemical or industrial
toxic or hazardous material, substance or waste, which will violate any laws
chargeable to the Company currently in effect relating to pollution or
protection of the environment (the "ENVIRONMENTAL LAWS") or any plan, order,
decree, judgment, injunction, notice or demand letter from a governmental entity
applicable to the Company, or which will give rise to any common law or other
legal liability, including, without limitation, liability under the
Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA")
or similar state or local laws in effect as of the date hereof. To the best of
the Company's and each of the Shareholders' knowledge, the Business Real
Property contains no spill, deposit or discharge of any hazardous substance (as
that term is currently defined under CERCLA or any applicable state law), as a
result of which there would be a materially adverse effect on the Company.
7.27.2 Schedule 7.27 sets forth a complete and accurate
description of each underground storage tank of any kind or nature located on
the Business Real Property and known to the Shareholders.
7.27.3 The Company has delivered to Lithia copies of all existing
environmental site audits on the Business Real Property. The Company shall
allow Lithia and its consultants access to the Business Real Property for the
purpose of conducting any further environmental assessment it may desire to
conduct, upon execution by Lithia and such consultants of an appropriate
indemnity agreement.
7.28 CONTINUATION OF BUSINESS. Neither the Company nor the
Shareholders know of any reason why the Company cannot continue its business in
all material respects in the same manner following the execution of this
Agreement and the Closing as it has been operated prior thereto, except to the
extent that Lithia causes the business of the Company to change following the
Closing.
7.29 CONTRACTS IN TRANSIT. At the time of Closing, the Company will
provide a complete and accurate description of all contracts in transit for the
Company.
7.30 EVALUATION OF RISKS IN RECEIVING LITHIA SECURITIES. Each
Shareholder is capable of evaluating the merits and risks of an investment in
the Class A Common Stock and the Series M Preferred Stock. By reason of their
respective business or financial experience, and/or the business or financial
experience of their respective professional advisors (who are not affiliated,
either directly or indirectly, with Lithia or any affiliate or selling agent of
Lithia), each Shareholder has the capacity to protect their
14
interests in connection with an investment in the Lithia securities. Each
Shareholder has had access to and has reviewed such portions of Lithia's SEC
Filings as he or his professional advisors has deemed necessary and has met
either directly or through such respective professional advisors with a
representative of Lithia and has had the opportunity to ask questions of, and
receive answers from, Lithia concerning Lithia, the Class A Common Stock and the
Series M Preferred Stock and the terms and conditions of this transaction. Each
Shareholder has received any information requested by such Shareholder or his
professional advisors. Any questions raised concerning this transaction have
been answered to the satisfaction of each Shareholder or their respective
professional advisor.
7.31 LIMITATIONS ON TRANSFER OF STOCK. The Class A Common Stock and
Series M Preferred Stock to be issued to each Shareholder pursuant to the Plan
of Merger and any additional shares of Class A Common Stock which may be issued
upon a conversion of the Series M Preferred Stock will be held as an investment
and not with a view to distribution.
7.32 LACK OF REGISTRATION OF STOCK. Each Shareholder understands that:
(a) the offer and sale of the Class A Common Stock and Series M Preferred Stock
to be issued to the Shareholder pursuant to the Plan of Merger and any
additional shares of Class A Common Stock which may be issued upon a conversion
of the Series M Preferred Stock have not been registered under the Securities
Act of 1933, as amended, or any state securities laws in reliance upon
exemptions from registration; (b) the shares of Class A Common Stock and Series
M Preferred Stock must be held indefinitely, unless their resale is subsequently
registered under the Securities Act of 1933, as amended, and under applicable
state securities laws or unless exemptions from registration are available; (c)
except as provided in the Registration Rights Agreement, Lithia has not agreed
to register the resale of any of the securities to be received by the
Shareholders; (d) the Class A Common Stock and Series M Preferred Stock may not
be offered, sold, transferred, pledged or otherwise disposed of in the absence
of either an effective registration statement under the Securities Act of 1933
and applicable state securities laws or an opinion of counsel acceptable to
Lithia that such registration is not required; and (e) the certificates
representing Series M Preferred Stock and the Class A Common Stock (including
any additional shares of Class A Common Stock which may be issued upon a
conversion of the Series M Preferred Stock) will contain the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933. NO OFFER, SALE,
TRANSFER, PLEDGE OR OTHER DISPOSITION OF THE SHARES MAY BE
EFFECTED IN THE ABSENCE OF EITHER AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933 AND APPLICABLE STATE
SECURITIES LAWS OR AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED.
7.33 INFORMATION CONCERNING LITHIA. Each Shareholder acknowledges that
they have received a copy of Lithia's Registration Statement on Form S-1 filed
May 1, 1998, Lithia's Form 10-K for the year-end December 31, 1997, Lithia's
Form 10-Q for the period ended September 30, 1998, and Lithia's Information
Statement for the annual meeting of Lithia's shareholders on Form DEF 14C dated
May 14, 1998, and have had the opportunity to review the information contained
in these filings and discuss the same with their respective professional
advisors.
7.34 INVESTOR STATUS. Each of the Shareholders is an "accredited
investor" as such term is defined under the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder by the Securities and
Exchange Commission.
15
8. REPRESENTATIONS AND WARRANTIES OF LITHIA
Lithia represents and warrants to the Shareholders as follows:
8.1 AUTHORIZATION. The execution, delivery and performance of this
Agreement and the Plan of Merger have been duly authorized by the Board of
Directors of Lithia and this Agreement has been duly executed and delivered by
Lithia. Lithia has all necessary corporate authority to execute and deliver
this Agreement and to perform its obligations hereunder. This Agreement is, and
when executed at the Closing the Plan of Merger will be, a valid and legally
binding obligation of Lithia, enforceable against Lithia in accordance with its
terms, except as the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to the
enforcement of creditors' rights generally and by general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law). Lithia has the complete and unrestricted right, power and
authority to execute this Agreement and the Plan of Merger and perform its
covenants in accordance with this Agreement and the Plan of Merger.
8.2 INCORPORATION. Lithia is duly organized and validly existing under
the applicable laws of the state of its incorporation and has all necessary
power and authority to own, lease and operate its properties and assets and to
conduct its business as its business is now being conducted. Lithia is qualified
to do business and is in good standing in each state in which it transacts
business.
8.3 CAPITALIZATION. The authorized capital stock of Lithia consists of
100,000,000 shares of Class A Common Stock, no par share, 25,000,000 shares of
Class B Common Stock, no par value and 15,000,000 shares of preferred stock, no
par value, of which 10,500 shares will be designated as Series M-2002 Preferred
Stock and 4,500 shares will be designated as Series M-2003 Preferred Stock,
prior to Closing. Lithia SEC Filings reflect, as of the dates referred to in
such filings, all shares of capital stock issued and outstanding (the "LITHIA
SHARES") or plans pursuant to which such shares may be issued. The Lithia Shares
have been validly authorized and issued, are fully paid and non-assessable, and
have not been issued in violation of any preemptive rights.
The Class A Common Stock and Series M Preferred Stock to be issued as
part of the Merger Consideration, including any Class A Common Stock issued upon
conversion of the Series M Preferred Stock (collectively, the "MERGER SHARES")
have been duly authorized and, when issued in accordance with this Agreement,
the Plan of Merger and the terms of the Series M Preferred Stock, will be
validly issued, fully paid and non-assessable and will not have been issued in
violation of the preemptive or similar rights of any person. Prior to issuance,
all Class A Common Stock to be issued to the Shareholders shall have been
approved for listing on the New York Stock Exchange. The Merger Shares will not
be subject to any restriction on transfer except as contemplated by Section
7.32.
8.4 NO CONFLICTS. Except as identified in Schedule 8.4, neither the
execution and delivery of this Agreement nor the fulfillment of or compliance
with the terms and provisions hereof will violate, conflict with or result in a
breach of the terms, conditions or provisions of, or constitute a default or an
event which, with notice or lapse of time or both, would constitute a default
under, the articles of incorporation or bylaws of Lithia, any contract,
agreement, mortgage, deed of trust or other instrument or obligation to which
Lithia is bound (assuming receipt of the consents and approvals disclosed in
Schedule 8.5), or violate any provision of any applicable law or regulation or
of any order, decree, writ or injunction of any court or governmental body, or
result in the creation or imposition of any lien, charge, restriction, security
interest or encumbrance of any nature whatsoever on any property or asset of
Lithia.
8.5 CONSENTS. Except as otherwise identified in this Agreement or in
Schedule 8.5, no consent from, or other approval of, any governmental entity or
agency or any other person or entity is necessary in connection with the
execution, delivery or performance of this Agreement by Lithia.
8.6 SEC FILINGS. Lithia has filed a Form 10 and subsequent quarterly
and other reports under the Securities Exchange Act of 1934 and various filing
with the Securities and Exchange Commission under
16
the Securities Act of 1933 (collectively, Lithia's "SEC FILINGS"). Prior to
Closing, Lithia agrees to file such other filings as the federal securities laws
require and to provide copies of such filings to Shareholders within 5 business
days from the date of such filing. The SEC Filings comply and all additional
filings prior to Closing will comply with the requirements of applicable laws,
regulations and forms, and none of such filings contain or will contain a
material misstatement or omit or will omit to state a material fact.
8.7 TAX MATTERS. Lithia has duly filed all federal, state and local tax
returns required to be filed by it. All federal, state, local and foreign
income, ad valorem, excise, b&o, sales, use, payroll, unemployment and other
taxes and assessments that are due and payable by Lithia and have been properly
computed, duly reported, fully paid and discharged. The only unpaid taxes that
require payment by Lithia are current taxes not yet due and payable. All current
taxes not yet due and payable by Lithia have been properly accrued and are
accurately reflected in its balance sheet in the SEC Filings. Lithia has not
been delinquent in the payment of any tax, assessment or governmental charge,
nor has any tax deficiency been proposed or assessed against it, nor has it
executed any waiver of the statute of limitations on the assessment or
collection of any tax.
8.8 TRANSACTIONS SINCE LATEST BALANCE SHEET DATE. Since the date of the
latest balance sheet in any SEC Filings and except as set forth in Schedule 8.8
(i) Lithia has not incurred any material debts, liabilities or obligations
except current liabilities in the ordinary course of business; discharged or
satisfied any material liens or encumbrances, or paid any material debts,
liabilities or obligations, except in the ordinary course of business;
mortgaged, pledged or otherwise subjected to any lien or other encumbrance any
of its properties or assets; canceled any material debt or claim; sold or
transferred any properties or assets except sales from inventory in the ordinary
course of business; nor entered into any material transaction other than in the
ordinary course of business; (ii) there has not been any change in the financial
condition, net income, assets, liabilities, operations or business of Lithia
other than changes in the ordinary course of business, none of which,
individually or in the aggregate, has been materially adverse; (iii) there has
not been any declaration, setting aside or payment of any dividend or other
distribution in respect of, or any repurchase or acquisition of, the capital
stock of Lithia except pursuant to plans identified in SEC Filings; (iv) Lithia
has not issued any securities or options to purchase any securities of any
nature whatsoever; (v) there has not been any damage, destruction or loss
(whether or not covered by insurance) materially and adversely affecting the
assets, properties or business of Lithia; (vi) Lithia has not made any sale,
assignment or transfer of, additions to or transactions involving any of its
tangible assets other than in the ordinary course of business; (vii) Lithia has
not granted any waiver or release of any material claim or right, or canceled
any material debt or claim held by it; (viii) Lithia has not amended or
terminated any material contract, agreement or license to which it is a party;
or (ix) Lithia has not agreed, in writing or otherwise, to do or permit any of
the foregoing. Except as set forth in the SEC Filings or Schedule 8.8, Lithia is
not a party to any agreement, letter of intent or other understanding that would
result in the issuance of any equity securities of Lithia, and as of the date
hereof, Lithia is not engaged in discussions with any person that are reasonably
likely to result in such an agreement or understanding. Without the prior
written consent of W. Xxxxxxx Xxxxxxxx, Lithia will not, prior to the Effective
Date, agree to issue any equity securities in any acquisitions, having an
aggregate value in excess of $20,000,000.
8.9 LITIGATION. Schedule 8.9 sets forth a complete and accurate
description of all orders, decrees, writs or injunctions of any court or
governmental body specifically applicable to Lithia and all legal actions,
suits, arbitrations, condemnation actions or other proceedings pending or
threatened against Lithia or its subsidiaries, or any of its properties, assets
or business which might have a material adverse effect on its financial
condition or business prospects. Lithia is not aware of any facts that might
result in any other material action, suit, arbitration or proceeding.
8.10 COMPLIANCE WITH LAWS. To the best of Lithia's knowledge, there
are no existing violations of federal, state or local laws, ordinances, rules,
codes, regulations or orders by Lithia which
17
are reasonably likely to materially affect the properties, assets or business of
Lithia. To the best of Lithia's knowledge, Lithia is not subject to any
restriction, judgment, order, writ, injunction, decree or award, which
materially and adversely affects or is likely to materially and adversely affect
the business, operations, properties, assets or condition (financial or
otherwise) of Lithia.
8.11 BROKERS AND FINDERS. Lithia has not employed, directly or
indirectly, any broker or finder or incurred any liability for any brokerage
fees or commissions or finders' fees and no broker or finder has acted directly
or indirectly for Lithia in connection with this Agreement or the transactions
contemplated by this Agreement.
8.12 DELIVERY OF DOCUMENTS. Complete and accurate copies of all
written instruments listed or described on the schedules provided herewith have
been furnished to the Shareholders. Lithia will make available to the
Shareholders or their respective professional advisors, to the extent requested
by the Shareholders, all books, records and facilities of Lithia.
8.13 FULL DISCLOSURE. The representations and warranties by Lithia in
this Agreement and in the schedules provided herewith, and the other statements
in writing and information furnished or to be furnished to the Shareholders by
or on behalf of Lithia in connection with the transactions contemplated by this
Agreement, taken as a whole, do not and will not contain any untrue statement of
a material fact, or omits or will omit to state a material fact necessary to
make the statements contained herein not misleading.
9. COVENANTS
Lithia, the Shareholders and the Company agree that:
9.1 NOTICES AND CONSENTS. The Shareholders, the Company and Lithia
mutually agree to cooperate and use commercially reasonable good faith efforts
to prepare all documentation, to effect all filings and to obtain all permits,
consents, approvals and authorizations of all third parties and governmental
bodies as may be necessary to consummate the transactions contemplated by this
Agreement.
9.2 CONDUCT OF BUSINESS BY THE COMPANY PRIOR TO THE CLOSING DATE. The
Company and the Shareholders shall cause the Company to conduct its operations
according to the ordinary and usual course of business reasonably consistent
with past and current practices, to use commercially reasonable good faith
efforts to maintain and preserve its assets, properties, insurance policies,
business organization, and advantageous business relationships and to retain the
services of its officers, employees, agents and independent contractors, and
shall not allow the Company to engage in any practice, take any material action,
or enter into any material transaction outside of the ordinary course of
business. From the date of the execution of this Agreement to the date of
Closing of the transaction contemplated hereby, neither the Shareholders nor the
Company will commit to or make any obligation which binds the Company to an
expense in excess of $50,000.00 without Lithia's prior consent, other than the
purchase of inventory in the ordinary course of business.
9.3 LITHIA'S EXAMINATION. The Company and the Shareholders shall cause
the Company to permit representatives of Lithia to have full access to and to
examine, at all reasonable times, and in a manner so as not to interfere with
the normal business operations of the Company, the books, records, properties
and assets of the Company and the Business Real Property.
9.4 SHAREHOLDERS' REVIEW. Lithia will make available to Shareholders or
their respective professional advisors such books and records and access to its
senior management as Shareholders reasonably request and in a manner so as not
to interfere with the normal business operations of Lithia and the
responsibilities of its senior management, in order to fully evaluate Lithia and
its Class A Common Stock and Series M Preferred Stock to be issued to such
Shareholders pursuant to the Plan of Merger.
18
9.5 NOTICE OF CHANGES. The Company shall give prompt written notice to
Lithia of any material adverse change in the financial condition, net income,
assets, liabilities, operations or business of the Company. Lithia shall give
prompt written notice to the Shareholders of any material adverse change in the
financial condition, net income, assets, liabilities, operations or business of
the Company.
9.6 STANDSTILL AGREEMENT. Each Shareholder agrees that whenever Lithia
undertakes a firmly underwritten public offering of its securities and, if
requested by the managing underwriter in such offering, the Shareholder will
enter into an agreement not to sell or dispose of any securities of Lithia owned
or controlled by the Shareholder, provided such restriction will not extend
beyond 180 days from the effective date of the registration statement filed in
connection with such offering.
9.7 FURTHER ASSURANCES. From time to time at or after the Closing, as
and when requested by any party hereto, the other party shall execute and
deliver, or cause to be executed and delivered, all such documents and
instruments and shall take, or cause to be taken, all such further or other
actions as such other party may reasonably deem necessary or desirable to
consummate the transactions contemplated by this Agreement.
9.8 EMPLOYEE STOCK OPTIONS. Lithia agrees to grant stock options
pursuant to its 1996 Incentive Stock Plan to management employees remaining with
the Company after Closing. The number of shares available for grant to all
employees in the Xxxxxxxx Group shall be equal to six percent of the total
number of shares of Class A Common Stock issued to all the shareholders of the
companies in the Xxxxxxxx Group at the Closing and the simultaneous closings of
the Other Reorganization Agreements including such additional shares that may be
issued as Contingent Merger Consideration, plus six percent of the shares of
Class A Common Stock issuable upon conversion of the shares of Series M
Preferred Stock issued at the Closing and such simultaneous closings including
such additional shares that may be issued as Contingent Merger Consideration,
determined as though such Series M Preferred Stock were converted to Class A
Common Stock at the date of issuance. The options will be granted during 1999
and 2000 to such persons and in such amounts consistent with Lithia's practices
and as proposed by W. Xxxxxxx Xxxxxxxx.
9.9 RELEASE OF GUARANTEES. All guarantees by the Company of the
indebtedness or obligations of any other party or person (other than the other
members of the Xxxxxxxx Group) and the guaranty of W. Xxxxxxx Xxxxxxxx or any
general manager of any dealership in the Xxxxxxxx Group of any indebtedness or
obligation of the Company or any other member of the Xxxxxxxx Group (except as
may be created or permitted by this Agreement), and any security agreements
entered or collateral pledged to secure such guarantees, shall be released,
discharged or terminated prior to or at Closing.
9.10 NON-COMPETE. For a term of three years following the Closing date
of the Merger, Shareholders will not, directly or indirectly, within 100 miles
of any dealership currently owned or operated by Lithia or any of its
subsidiaries, own, operate, manage, control, participate in the ownership,
management, operation or control of or be paid or employed by or acquire any
interest in or securities of or otherwise become associated with or provide
assistance to, as an employee, consultant, director, officer, shareholder,
partner, agent, associate, principal, representative or any other capacity, any
business entity engaged in the lease or sale of new or used automobiles or light
trucks except as may otherwise be provided in such Shareholders' Employment
Agreements with Lithia. This covenant against competition shall not prohibit
any activity of any Shareholder with respect to any business entity with which
it or he has any such relationship as of the date of this Agreement or any
successor to such a business entity. If Lithia or one of its subsidiaries
acquires or assumes operation of an additional dealership after the date hereof,
this covenant against competition shall be extended to that additional
dealership, but there shall automatically be excepted from such extended
covenant any business entity that is within 100 miles of such additional
dealership and in which any Shareholder had an interest which did not constitute
a breach of this Section before Lithia or such subsidiary acquired or assumed
operation of such additional dealership. For that purpose, a Shareholder shall
be deemed to have an interest in a business entity if he
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or it had any of the relationships with such entity that constitute competition
under this Section 9.10, had signed a letter of intent, terms sheet, or
agreement contemplating such a relationship or had filed an application with a
manufacturer or franchisor which, if granted, would create such a relationship.
9.11 UPDATE OF REPRESENTATIONS. If any party to this Agreement becomes
aware of any breach of the representations and warranties contained herein,
whether made by such party or any other party, such party shall notify all other
parties, by the delivery of a new or revised Schedule disclosing the facts
constituting such breach or otherwise. The non-breaching parties shall be
entitled to exercise any right they may have to terminate this Agreement on the
basis of such breach, but if they elect to proceed with the Closing rather than
terminating, the breach so disclosed and all remedies in respect thereof shall
be deemed to have been waived.
9.12 SERVICE CONTRACT PRICING. Prior to the Effective Date, the
parties will determine a pricing schedule for extended service contracts which
will be charged to each Xxxxxxxx Group dealership. The pricing schedule,
determined for each product line, will be the amount determined by the following
formula:
(A x B) + (C x D)
where:
A = the percentage of all service contracts written by
the Xxxxxxxx Group in 1998 with Xxxx & Associates.
B = the price charged by Xxxx & Associates for that
product line less the inception rebate paid by Xxxx
& Associates (in 1998, this inception rebate was
paid to Diamond Financial and was $15.00 on new
vehicles and $40.00 on used vehicles).
C = the percentage of all service contracts written by
the Xxxxxxxx Group in 1998 with Western National.
D = the price charged by Western National for that
product line less the inception rebate paid by
Western National (in 1998, this inception rebate was
paid to Diamond Financial and was $50.00 on both new
and used vehicles).
9.13 HAIL DAMAGE RESERVE. During 1999, the Shareholders shall be
entitled to cause the Company to transfer to income a reasonable amount from the
insurance damage reserve established in respect of vehicles damaged by hail in
1998 each time a hail-damaged vehicle is sold; provided, however, that no
amounts shall be transferred from the Special Hail-Damage Reserve prior to the
end of 1999. All amounts so transferred shall be included in Net Adjusted
Pretax Income for 1999.
9.13.1 At year end 1999, if any hail-damaged vehicles remain
unsold, the parties will attempt to agree on the amount of the Special
Hail-Damage Reserve that should be allocated to such vehicles to reduce the
carrying value of such vehicles to reflect their market value. If the
parties are unable to agree, the dispute will be determined by
PricewaterhouseCoopers LLP or such other firm as may be agreed upon by Lithia
and the Shareholders.
9.13.2 At the end of 1999, the Shareholders shall have the right
to require the Company and Lithia to calculate the average gross profit on
hail-damaged vehicles sold by the Company during 1999 and the average gross
profit on vehicles sold during the year that had not incurred hail damage. If
that right is exercised, the Shareholders may require the Company to transfer
such amount from the Special Hail-Damage Reserve (but not to exceed 80 percent
of the initial amount of the Special Hail-Damage Reserve) to income in 1999 as
may be necessary to increase the average gross profit on hail-
20
damaged vehicles to 105 percent of the average gross profit on non hail-damaged
vehicles sold during the year. All amounts so transferred shall be included in
Net Adjusted Pretax Income for 1999.
9.13.3 Any amount remaining in the Special Hail-Damage Reserve
after the allocations under 9.13.1 and the transfers under 9.13.2 shall be
held in the reserve until March 31, 2000. Warranty claims for 1998 hail
damage made during the first quarter of 2000 shall be charged against the
Special Hail-Damage Reserve.
9.13.4 Any amount remaining in the Special Hail-Damage Reserve at
March 31, 2000 shall be paid to the Shareholders as part of the Contingent
Merger Consideration as set forth in the definition of that term.
10. CONDITIONS PRECEDENT TO OBLIGATION OF LITHIA
The obligation of Lithia to effect the transactions contemplated by this
Agreement is subject to the satisfaction on or prior to the Closing Date of the
following conditions, each of which may be waived by Lithia:
10.1 REPRESENTATIONS, WARRANTIES OF THE SHAREHOLDERS AND COVENANTS OF
THE COMPANY AND THE SHAREHOLDERS. All representations and warranties of the
Shareholders contained in this Agreement shall be true and correct in all
material respects as of the Closing Date with the same effect as though such
representations and warranties were made on the Closing Date, except to the
extent that such representations and warranties expressly relate to any earlier
date, and the Company and the Shareholders shall have performed and complied in
all material respects with all the covenants and agreements and satisfied in all
material respects all the conditions required by this Agreement to be performed,
complied with or satisfied by the Company and each of the Shareholders on or
prior to the Closing Date. The Company and each of the Shareholders must have
delivered to Lithia a certificate dated as of the Closing Date certifying that
this condition has been fulfilled.
10.2 NO ADVERSE CHANGE. No material adverse change in the financial
condition, net income, assets, liabilities, operations or business of the
Company shall have occurred.
10.3 APPROVAL OF LITHIA'S SHAREHOLDERS. The shareholders of Lithia
shall have approved this Agreement and the issuances of the Class A Common Stock
and Series M Preferred Stock, if such approval is necessary under the listing
requirements of the New York Stock Exchange.
10.4 THIRD PARTY APPROVALS. This Agreement and the transactions
contemplated by this Agreement shall have received all required material
approvals and consents from all Company lenders, lessors, automobile
manufacturers and federal, state or local regulatory agencies whose consent is
required and copies of such approvals and consents shall have been delivered to
Lithia.
10.5 XXXX-XXXXX-XXXXXX WAITING PERIOD. The applicable waiting period
under the HSR Act, and the regulations promulgated thereunder, shall have
expired or been terminated.
10.6 APPROVAL OF LITHIA AS THE DEALER. Merger Sub shall have been
approved as the dealer by the manufacturers represented by the Company without
restrictions or requirements deemed unacceptable to Lithia at its sole
discretion.
10.7 CONSENT FROM LITHIA'S LENDER. Lithia shall have received from
Ford Motor Credit Company a waiver or consent to this Agreement and the
transactions contemplated hereby.
10.8 TAX OPINION. Lithia shall have received from Xxxxxx Pepper &
Shefelman, PLLC a tax opinion substantially in the form of Exhibit E.
10.9 LEGAL OPINION. Lithia shall have received from Xxxxxxx &
Xxxxxx L.L.C. its opinion substantially in the form of Exhibit J.
21
10.10 FULFILLMENT OF CONDITIONS IN RELATED TRANSACTIONS. All of the
conditions to Lithia's obligations to effect the transactions contemplated by
the Other Reorganization Agreements shall have been fulfilled.
10.11 EMPLOYEE AND RELATED PARTY LOANS. With the exception of employee
advances in the normal course of business, all employee loans and loans from
Affiliates will be paid in full or otherwise transferred to third parties for
cash at their book value, except for a note from North Avenue Auto, Inc.
10.12 ASSIGNMENT AND LICENSES OF INTANGIBLE ASSETS. Lithia shall have
received fully executed Agreement substantially as set forth in Exhibit K.
10.13 COMPLETION OF AUDIT AND PURCHASE PRICE DETERMINATION. The
Adjusted Net Worth, Net Adjusted Pretax Income for 1998 and Initial Merger
Consideration shall have been determined.
10.14 DEALER OPTION AGREEMENTS. Lithia shall have received fully
executed Dealer Option Agreements with respect to North Avenue Auto, Inc., Grand
Auto, Inc., Skyline Automotive, Inc., The Xxxx Xxxxx Motor Company, Avondale
Automotive, Inc., Peoples Chrysler Plymouth Jeep Eagle, Inc., Kids' Automotive,
Inc. (dba X. X. Xxxxxxx, Inc.), Xxxxxxx Financial, Inc. and Xxxxxxxx Auto Group,
LLLP., substantially in the form of Exhibits N through V.
11. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE SHAREHOLDERS
The obligations of the Shareholders and the Company to effect the
transactions contemplated by this Agreement are subject to the satisfaction on
or prior to the Closing Date of the following conditions, each of which may be
waived by the Company or by the Shareholders:
11.1 REPRESENTATIONS, WARRANTIES AND COVENANTS OF LITHIA. All
representations and warranties of Lithia contained in this Agreement shall be
true and correct in all material respects as of the Closing Date with the same
effect as though such representations and warranties were made on the Closing
Date, except to the extent that such representations and warranties expressly
relate to an earlier date, and Lithia shall have performed and complied in all
material respects with all of the covenants and agreements and satisfied in all
material respects all the conditions required by this Agreement to be performed,
complied with or satisfied by Lithia on or prior to the Closing Date. Lithia
must have delivered to the Company a certificate dated as of the Closing Date
certifying that this condition has been fulfilled.
11.2 NO ADVERSE CHANGES. No material adverse change in the financial
condition, net income, assets, liabilities, operations or business of Lithia
shall have occurred.
11.3 THIRD PARTY APPROVALS. This Agreement and the transactions
contemplated by this Agreement shall have received all required material
approvals and consents from all Company lenders, lessors, automobile
manufacturers and federal, state or local regulatory agencies whose consent is
required, and copies of such approvals and consents shall have been delivered to
the Company.
11.4 XXXX-XXXXX-XXXXXX WAITING PERIOD. The applicable waiting period
under the HSR Act, and the regulations promulgated thereunder, shall have
expired or been terminated.
11.5 TAX OPINION. The Shareholders shall have received from Xxxxxxx &
Xxxxxx, L.L.C. a tax opinion substantially in the form of Exhibit F.
11.6 LEGAL OPINION. The Shareholders shall have received from Xxxxxx
Pepper & Shefelman LLP an opinion substantially in the form of Exhibit L.
11.7 FULFILLMENT OF CONDITIONS IN RELATED TRANSACTIONS. All of the
conditions to the obligations of the other members of the Xxxxxxxx Group to
effect the Other Reorganization Agreements shall have been fulfilled.
22
11.8 ASSIGNMENT AND LICENSES OF INTANGIBLE ASSETS. The Shareholders
will receive fully executed Agreement substantially as set forth in Exhibit K.
11.9 VOTING AGREEMENT. Receipt by W. Xxxxxxx Xxxxxxxx of a fully
executed Voting Agreement substantially in the form of Exhibit M.
11.10 COMPLETION OF AUDIT AND PURCHASE PRICE DETERMINATION. The
Adjusted Net Worth, Net Adjusted Pretax Income for 1998 and Initial Merger
Consideration shall have been determined.
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES
Notwithstanding any investigation or examination conducted before or
after the Closing or the decision of any party to complete the Closing, each
party shall be entitled to rely upon the representations and warranties set
forth in this Agreement. All representations and warranties made in this
Agreement shall survive the Closing until March 31, 2001; provided, however,
that (i) the accuracy of each such representation and warranty shall be
determined only as of the date of the Closing, (ii) the representations and
warranties in Sections 7.14 and 8.7 shall survive until 30 days after the
expiration (without extension) of the statute of limitations for the Company's
or Lithia's (as the case may be) 1998 federal income tax return, and (iii) any
claim based upon fraud shall survive for its applicable statute of limitation.
The period of survival for each representation and warranty established in this
Section 12 is referred to as the "Survival Period" for such representation and
warranty. The liabilities of the parties with respect to their respective
representations and warranties will expire as of the expiration of the
applicable Survival Period; provided, however, that such expiration will not
affect the rights of any party entitled to rely on a representation and warranty
in respect of any breach of which such party has given notice to the breaching
party prior to the expiration of the Survival Period, specifying in reasonable
detail the facts alleged to constitute the breach.
13. INDEMNIFICATION
13.1 GENERAL INDEMNITY. The Shareholders agree to jointly and
severally indemnify, defend and hold harmless the Company and Lithia and their
respective successors and assigns (the "LITHIA INDEMNIFIED PARTIES") from and
against any claims, damages, liabilities, penalties, actions, suits,
proceedings, demands, assessments, costs and expenses, including reasonable
attorneys fees and expenses of investigation ("CLAIMS"), incurred by any Lithia
Indemnified Party arising from or related to (i) any breach of any
representation or warranty made by the Company or the Shareholders in this
Agreement, of which notice is given to the Shareholders by the Lithia
Indemnified Parties prior to the expiration of the Survival Period for such
representation or warranty or (ii) any breach of any covenant or agreement made
by the Company or the Shareholders in this Agreement, to the extent, in the case
of the Company, that such covenant or agreement was to be performed at or before
the Closing.
13.2 DEFENSE OF CLAIMS. Each Lithia Indemnified Party shall promptly
notify the Shareholders of any Claim against which indemnification will be
sought hereunder. If the Claim involves a claim, investigation, demand, action
or suit by a third party, including a governmental authority, the Shareholders
shall have the right to defend the claim with counsel of their choosing, but the
Lithia Indemnified Party shall be entitled to participate in the defense at its
expense. If the Shareholders do not assume the defense of the Claim, the Lithia
Indemnified Party may do so, but the Shareholders will have the right to
participate in the defense at their expense. The party defending a Claim shall
not settle the Claim without the consent of the other party, which consent shall
not be unreasonably withheld.
13.3 LIMITATIONS.
13.3.1 Except for Claims based upon fraud or a breach of Section
7.14, the Lithia Indemnified Parties shall not be entitled to indemnification
under Section 13.1 unless and until the aggregate amounts against which they
would otherwise be entitled to indemnification under Section 13.1
23
of this Agreement and the comparable indemnification provisions of the Other
Reorganization Agreements exceed $500,000, and then only to the extent of such
excess.
13.3.2 In no event shall the Shareholders be liable in the
aggregate under Section 13.1 for an amount that, when added to the amounts for
which the shareholders of the other members of the Xxxxxxxx Group are liable
under the comparable provisions of the Other Reorganization Agreements exceeds
$20,000,000; provided, however, that Claims based upon fraud or based upon a
breach of Section 7.14 are not limited by this subsection. Further, no
Shareholder shall be liable for an amount in excess of the total Merger
Consideration received by such Shareholder.
13.3.3 Following the Closing, the right to be indemnified under
Section 13.1 shall be the sole and exclusive remedy of the Lithia Indemnified
Parties for any breach by the Shareholders or the Company of any representation
or warranty made at or before the Closing or any covenant or agreement to be
performed at or before the Closing.
13.3.4 Any amount against which a Lithia Indemnified Party is
entitled to be indemnified hereunder shall be reduced by (i) the amount of any
insurance proceeds available to such Lithia Indemnified Party in respect of the
matter giving rise to a Claim or, if greater, the proceeds that would have been
available under the insurance policies maintained by the Company prior to the
Closing, (ii) any tax benefits accruing to the Lithia Indemnified Party as a
result of the Claim or the facts underlying the Claim not offset by any tax
charges to the Lithia Indemnified Party as a result of the receipt of the
indemnification payment, and (iii) any recoveries from third parties in respect
of the Claim or the facts underlying the Claim. Lithia shall use reasonable
commercial efforts to recover from third parties in respect of any Claim but
will not be required to exhaust its efforts to recover from third parties prior
to seeking indemnity hereunder. If Shareholders pay the Claim, Lithia will
assign to the Shareholders its or the Company's right of recovery from such
third parties.
13.3.5 Notwithstanding any other provision of this Agreement, the
obligations of the Shareholders to indemnify a Lithia Indemnified Party may be
satisfied in total or in part by the delivery to such party of Series M
Preferred Stock or Class A Common Stock. The Series M Preferred Stock shall,
for these purposes, be valued at its $1,000 stated value per share. The Class A
Common Stock shall, for these purposes, be valued at the average Daily Sales
Price over the 15 consecutive trading days ending the second trading day prior
to its tender to the Lithia Indemnified Party.
14. XXXX-XXXXX-XXXXXX NOTIFICATION
Prior to the Closing Date, the parties shall file all reports or other
documents required or requested by the Federal Trade Commission (the "FTC") or
the Department of Justice (the "DOJ") under the HSR Act, and all regulations
promulgated thereunder, concerning the transactions contemplated by this
Agreement, and comply promptly with any request by the FTC or the DOJ for
additional information concerning such transactions, so that the waiting period
specified in the HSR Act will expire an soon as commercially reasonable after
the execution and delivery of this Agreement. The parties agree to furnish to
one another such information concerning Lithia, the Company, and the
Shareholders as the parties need to perform their obligations hereunder. Lithia
and the Company agree to share the filing fees and costs due governmental
agencies with regard to the HSR Act notification and compliance.
15. TERMINATION
15.1 MUTUAL CONSENT. This Agreement may be terminated by the written
consent of the parties.
15.2 BY LITHIA. This Agreement may be terminated by written notice of
termination given by Lithia to the Company and the Shareholders (i) if the
Company or the Shareholders default in any material respect in the observance of
or in the due and timely performance by them of any of the agreements and
covenants contained herein or in the Other Reorganization Agreements (ii) if any
of the
24
warranties and representations of the Company or the Shareholders contained
herein are false in any material respect, (iii) if the conditions of this
Agreement to be complied with or performed by the Shareholders or the Company at
or before Closing are not complied with or performed at the time required for
such compliance or performance and such noncompliance or nonperformance is not
waived by Lithia or (iv) if Lithia terminates any of the Other Reorganization
Agreements in accordance with the terms and conditions of such other agreements.
15.3 BY THE COMPANY. This Agreement may be terminated by written
notice of termination given by the Company to Lithia (i) if Lithia defaults
in any material respect in the observance of or in the due and timely
performance by Lithia of any agreements and covenants of Lithia contained
herein or in the Other Reorganization Agreement, (ii) if any of the
representations and warranties of Lithia contained herein are false in any
material respect, (iii) if the conditions of this Agreement to be complied
with or performed by Lithia at or before Closing are not complied with or
performed at the time required for such compliance or performance and such
noncompliance or nonperformance is not waived by the Company or (iv) if one
of the other members of the Xxxxxxxx Group terminates any of the Other
Reorganization Agreements in accordance with the terms and conditions of such
other agreements.
15.4 EFFECT OF TERMINATION. Upon any termination of this Agreement
under Section 15.1, no party to this Agreement shall have any liability or
obligation hereunder. Upon any termination of this Agreement under Section 15.2
or 15.3, neither party shall have any prospective obligation hereunder except as
provided in Section 15.5, but each party shall have, if otherwise available, the
remedy of specific enforcement, prior to termination.
15.5 BREAK-UP FEE.
15.5.1 In the event that this Agreement is terminated by the
Company based upon a willful refusal by Lithia to complete this Agreement or any
Other Reorganization Agreement, Lithia shall pay the Company a break-up fee
equal to 200% of all amounts paid or payable to Lithia under the Consulting
Agreement dated as of January 1, 1999 among Lithia and the members of the
Xxxxxxxx Group in respect of the net profits of the Company. For purposes of
this Section 15.5, a willful refusal by any party to complete this Agreement or
any Other Reorganization Agreement means either such party's refusal to
consummate the transactions contemplated by this Agreement or any Other
Reorganization Agreement even though all of the conditions to its obligations to
do so have been fulfilled or such party's failure to take any action within its
reasonable control that would result in the fulfillment of a condition to such
obligations.
15.5.2 In the event that either party terminates this Agreement
for reason of the non-fulfillment of the Designated Condition, Lithia shall pay
to the Company a break-up fee equal to the sum of (i) $150,000 multiplied by a
fraction, the numerator of which is the Net Adjusted Pretax Income of the
Company for 1998 and the denominator of which is the aggregate Net Adjusted
Pretax Income of all members of the Xxxxxxxx Group for 1998 and (ii) 100% of all
amounts paid or payable by the Company to Lithia under the Consulting Agreement
dated as of January 1, 1999 among Lithia and the members of the Xxxxxxxx Group
in respect of the net profits of the Company. For this purpose, the Designated
Condition means the failure of Lithia to have received approvals from any
manufacturer represented by the Company or another member of the Xxxxxxxx Group.
15.5.3 In the event that either party terminates this Agreement
for any reason other than (i) those set forth in Sections 15.5.1 or 15.5.2 or
(ii) a willful refusal by the Company or any of the other members of the
Xxxxxxxx Group or their Shareholders to complete the Agreement or any Other
Reorganization Agreement, Lithia shall pay the Company a break-up fee equal to
100% of all amounts paid or payable by the Company to Lithia under the
Consulting Agreement dated as of January 1, 1999 among Lithia and the members of
the Xxxxxxxx Group in respect of the net profits of the Company.
25
15.5.4 The break-up fees payable under this Section 15.5 shall be
due at the time this Agreement is terminated. Should the transactions
contemplated by this Agreement or the Other Reorganization Agreements fail to
close for any reason other than a willful refusal by the Company or any other
member of the Xxxxxxxx Group to complete this Agreement or any other
Reorganization Agreement, it is acknowledged that the Company and the
Shareholders would suffer damages; however, the precise amount of such damages
would be difficult to establish. The break-up fees provided in this Section
represent a good-faith estimate by the parties of the damage that the Company
and Shareholders would incur. Lithia acknowledges that the break-up fees payable
under Section 15.5.2 and 15.5.3 are reasonable and appropriate, even though
Lithia may not have breached any representation, warranty or covenant contained
herein in the circumstances described in those sections. To the extent of those
break-up fees, Lithia has knowingly accepted the risk of the nonfulfillment of
the conditions to its obligations and the obligations of the Company and the
Shareholders in the circumstances described in Sections 15.5.2 and 15.5.3 in
order to induce the Company and the other members of the Xxxxxxxx Group to enter
into this Agreement and the Other Reorganization Agreements and risk the adverse
effect on their market values that will occur if those agreements are not
completed. Lithia expressly agrees that the break-up fees contemplated by this
Section 15.5 shall be due even though the Company, the Shareholders or any other
member of the Xxxxxxxx Group or any shareholder thereof may have breached any
representation, warranty or covenant of this Agreement or the Other
Reorganization Agreements, with the sole exception of a willful refusal by any
such party to complete this Agreement or any of the Other Reorganization
Agreements. The right to collect break-up fees pursuant to this Section 15.5
shall be the exclusive remedy of the Company and the Shareholders in the event
of a termination of this Agreement in the circumstances described in Section
15.5.1 or 15.5.2. In the event that the Company or the Shareholders terminate
this Agreement under the circumstances described in Section 15.5.3 as a result
of the nonfulfillment of the condition established in Section 11.1 (or Section
11.7 as it relates to the comparable conditions in the Other Reorganization
Agreements), the liquidated damages payable under Section 15.5.3 shall be deemed
to compensate the Company only for the opportunity cost of having taken itself
off the market while this Agreement was being negotiated and was in effect, and
the Company shall be entitled to prove any other damages and pursue any other
remedy available at law or in equity.
16. DISPUTE RESOLUTION
16.1 MEDIATION. The parties hope there will be no disputes arising out
of this transaction. To that end, each commits to cooperate in good faith and to
deal fairly in performing its duties under this Agreement in order to accomplish
their mutual objectives and avoid disputes. But if a dispute arises, the parties
agree to resolve all disputes by the following alternate dispute resolution
process. The parties will seek a fair and prompt negotiated resolution, but if
this is not successful, all disputes shall be resolved by binding arbitration;
provided, however, that during this process, at the request of either party made
not later than twenty-five (25) days after the initial arbitration demand, the
parties will attempt to resolve any dispute by non-binding mediation (but
without delaying the arbitration hearing date). The parties recognize that
negotiation or mediation may not be appropriate to resolve some disputes and
agree that either party may proceed with arbitration without negotiating or
mediating. The parties confirm that by agreeing to this alternate dispute
resolution process, they intend to give up their right to have any dispute
decided in court by a judge or jury.
16.2 BINDING ARBITRATION. Any claim between the parties arising out of
or relating to this Agreement shall be determined by arbitration in Reno, Nevada
(or some other place as the parties may agree). The arbitration shall be
conducted before one neutral arbitrator; provided, however, that if either party
demands a total award greater than $250,000, including interest, attorneys' fees
and costs, then either party may require that there be three (3) neutral
arbitrators. If the parties cannot agree on the identity of the arbitrator(s)
within ten (10) days of the arbitration demand, the arbitrator(s) shall be
selected by the administrator of the American Arbitration Association (AAA)
office having jurisdiction over Reno, Nevada from its Large, Complex Case Panel
(or have similar professional credentials). Each
26
arbitrator shall be an attorney with at least fifteen (15) years' experience in
corporate law. Whether a claim is covered by this Agreement shall be determined
by the arbitrator(s). All statutes of limitations which would otherwise be shall
apply to any arbitration proceeding hereunder.
16.3 PROCEDURES. The arbitration shall be conducted in accordance with
the AAA Commercial Arbitration Rules with Expedited Procedures, as modified by
this Agreement. There shall be no dispositive motion practice. As may be shown
to be necessary to ensure a fair hearing, the arbitrator(s) may authorize
limited discovery, and may enter pre-hearing orders regarding (without
limitation) scheduling, document exchange, witness disclosure and issues to be
heard. The arbitrator(s) shall not be bound by the rules of evidence or of civil
procedure, but may consider such writings and oral presentations as reasonable
business people would use in the conduct of their day-to-day affairs, and may
require the parties to submit some or all of their case by written declaration
or such other manner of presentation as the arbitrator(s) may determine to be
appropriate. The parties intend to limit live testimony and cross-examination to
the extent necessary to ensure a fair hearing on material issues.
16.4 HEARING AND AWARD. The arbitrator(s) shall take such steps as may
be necessary to hold a private hearing within ninety (90) days of the initial
demand for arbitration and to conclude the hearing within three (3) days; and
the arbitrator(s)'s written decision shall be made not later than fourteen (14)
calendar days after the hearing. The parties have included these time limits in
order to expedite the proceeding, but they are not jurisdictional, and the
arbitrator(s) may for good cause afford or permit reasonable extensions or
delays, which shall not affect the validity of the award. The written decision
shall contain a brief statement of the claim(s) determined and the award made on
each claim. In making the decision and award, the arbitrator(s) shall apply
applicable substantive law. Absent fraud, collusion or willful misconduct by an
arbitrator, the award shall be final, and judgment may be entered in any court
having jurisdiction thereof. The arbitrator(s) may award injunctive relief or
any other remedy available from a judge, including the joinder of parties or
consolidation of this arbitration with any other involving common issues of law
or fact or which may promote judicial economy, and may award attorneys' fees and
costs to the prevailing party, but shall not have the power to award punitive or
exemplary damages. If the arbitration is conducted by three arbitrators, the
decision and award of the arbitrators need not be unanimous; rather, the
decision and award of two arbitrators shall be final.
17. GENERAL PROVISIONS
17.1 ENTIRE AGREEMENT. This Agreement and the exhibits and schedules
hereto constitutes the entire agreement between the parties regarding the
subject matter hereof and supersedes all prior agreements and understandings
between the parties relating to the subject matter of this Agreement. There are
no agreements, understandings, restrictions, warranties, representations between
the parties relating to the subject matter hereof other than those set forth in
this Agreement.
17.2 EXHIBIT AND SCHEDULES. The exhibits attached and the schedules
provided pursuant to this Agreement are made a part of this Agreement by this
reference.
17.3 PUBLICITY. The parties hereto agree that no public release or
announcement concerning the terms of the transactions contemplated by this
Agreement shall be issued by any party without the prior consent of the other
party (which consent shall not be unreasonably withheld), except as such release
or announcement may be required by law.
17.4 AMENDMENT. This Agreement may not be amended, modified or
terminated except by an instrument in writing signed by all parties to this
Agreement.
17.5 CONSTRUCTION. All pronouns and any variations thereof shall be
deemed to refer to the masculine, feminine or neuter gender thereof or to the
plurals of each, as the identity of the person or persons or the context may
require. The descriptive headings contained in this Agreement are
27
for reference purposes only and are not intended to describe, interpret, define
or limit the scope, extent or intent of this Agreement or any provision
contained in this Agreement.
17.6 INVALIDITY. If any provision contained in this Agreement shall
for any reason be held to be invalid, illegal, void or unenforceable in any
respect, such provision shall be deemed modified so as to constitute a provision
conforming as nearly as possible to such invalid, illegal, void or unenforceable
provision while still remaining valid and enforceable; and the remaining terms
or provisions contained herein shall not be affected thereby.
17.7 PAYMENT OF EXPENSES. Whether or not the transactions contemplated
by this Agreement are consummated, each of the parties to this Agreement shall
be responsible for its own costs and expenses incurred in connection with the
preparation and negotiation of this Agreement and the transactions contemplated
hereby.
17.8 BINDING EFFECT AND ASSIGNMENT. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
legal representatives, successors and permitted assigns. No party may assign any
of their rights or delegate any of their obligations hereunder. Any assignment
in violation hereof shall be void.
17.9 APPLICABILITY OF EXCEPTIONS AND DISCLOSURE. All facts and
agreements disclosed in the Exhibits and Schedules to this Agreement shall be
deemed to be disclosed for all purposes of this Agreement and to constitute
exceptions not only to the representations and warranties in the specific
Sections that refer to such Exhibits or Schedules, but also to all other
representations and warranties to which such disclosures are relevant.
17.10 NOTICES. All notices and other communications hereunder shall be
(i) in writing, dated with the current date of such notice, and signed by the
party giving such notice, and (ii) mailed, postpaid, registered or certified,
return receipt requested, addressed to the party to be notified, or delivered by
personal delivery or by overnight courier. Notice shall be deemed given when
received by the party to be notified or when the party to be notified refuses to
accept delivery of the notice. The initial addresses of the parties shall be as
follows:
If to Lithia: Lithia Motors, Inc.
000 X. Xxxxxxx
Xxxxxxx, Xxxxxx 00000
Attn: Xxxxxx X. XxXxxx
With a copy to: Xxxxxx Pepper & Shefelman LLP
000 X.X. Xxxx Xxxxxx, 00xx Xxxxx
Xxxxxxxx, Xxxxxx 00000
Attn: Xxxxxxx X. Xxxxxxx
If to the Company: Cherry Creek Dodge, Incorporated
0000 X. Xxxxxx
Xxxxxx, XX 00000
Attn: W. Xxxxxxx Xxxxxxxx
With a copy to: Xxxxxxx & Xxxxxx, L.L.C.
0000 Xxxxx Xxxxxxxxxx Xxxxx Xxxxx
000 00xx Xxxxxx
Xxxxxx, Xxxxxxxx 00000
Attn: Xxxxxx X. Xxxxx, Xx.
28
If to the Shareholders: Cherry Creek Dodge Limited
Partnership, RLLLP
0000 X. Xxxxxx
Xxxxxx, XX 00000
Attn: W. Xxxxxxx Xxxxxxxx
The parties hereto shall have the right from time to time to change their
respective addresses by written notice to the other parties.
17.11 DEFINITION OF KNOWLEDGE. As used in this Agreement, the Company's
and the Shareholders' "knowledge" shall be limited to the actual knowledge of
the Shareholders and W. Xxxxxxx Xxxxxxxx.
17.12 REMEDIES. Except as may be expressly set forth in this Agreement,
none of the remedies provided for in this Agreement shall be the exclusive
remedy of either party for a breach of this Agreement. The parties hereto shall
have the right to seek any other remedy at law or in equity in lieu of or in
addition to any remedies provided for in this Agreement.
17.13 WAIVER. No waiver of any breach or default hereunder shall be
considered valid unless in writing and signed by the party giving such waiver,
and no such waiver shall be deemed a waiver of any subsequent breach or default
of the same or similar nature.
17.14 GOVERNING LAW. This Agreement shall be construed, enforced and
governed in accordance with the laws of the State of Oregon.
17.15 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one and the same
instrument.
17.16 NO STRICT CONSTRUCTION. The parties and their counsel have
participated jointly in the negotiation and drafting of this Agreement. In the
event an ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the parties hereto and no
presumption or burden of proof shall arise favoring or disfavoring any party by
virtue of the authorship of any provisions of this Agreement.
29
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
LITHIA MOTORS, INC.
By:
--------------------------------------
Xxxxx X. XxXxxx, Vice President
CHERRY CREEK DODGE, INCORPORATED
By:
--------------------------------------
W. Xxxxxxx Xxxxxxxx, President
SHAREHOLDERS
CHERRY CREEK DODGE LIMITED PARTNERSHIP, RLLLP
By: Xxxxxxxx/Cherry Creek, Inc.
General Partner
By:
--------------------------------------
W. Xxxxxxx Xxxxxxxx, President
30
SCHEDULE 2.1
SHAREHOLDERS LIST
PERCENT OF MERGER CONSIDERATION
------------------------------------------
SHAREHOLDER MERGER SHARES(1) CASH
------------------------------------ -------------------- ------------------
----------
(1) Each Shareholder will receive the same percentage of Class A Common Stock
and Series M Preferred Stock.
Schedule 2.1
