GROUP 1 AUTOMOTIVE INC - 10-K Annual Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

COMMISSION FILE NUMBER: 1-13461

GROUP 1 AUTOMOTIVE, INC.
(Exact name of Registrant as specified in its charter)

DELAWARE 76-0506313
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

950 ECHO LANE, SUITE 100, HOUSTON, TEXAS 77024
(Address of principal executive offices) (Zip code)

Registrant's telephone number including area code (713) 647-5700

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None.

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.

The aggregate market value of the voting stock held by non-affiliates
of the Registrant was approximately $698.1 million as of February 28, 2002
(based on the last sale price of such

stock as quoted on the New York Stock Exchange). At such date there was no
non-voting stock outstanding.

As of February 28, 2002, there were 22.8 million shares of our common
stock, par value $.01 per share, outstanding.

Documents incorporated by reference: Proxy Statement of Group 1
Automotive, Inc. for the Annual Meeting of Stockholders to be held on May 22,
2002, which is incorporated into Part III of this Form 10-K.

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TABLE OF CONTENTS

PART I............................................................................................................4
Item 1. Business.............................................................................................4
Item 2. Properties..........................................................................................17
Item 3. Legal Proceedings...................................................................................17
Item 4. Submission of Matters to a Vote of Security Holders.................................................18

PART II..........................................................................................................19
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...............................19
Item 6. Selected Consolidated Financial Data................................................................20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...............21
Item 7A. Qualitative and Quantitative Disclosures About Market Risk..........................................32
Item 8. Financial Statements and Supplementary Data.........................................................32
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure................32

PART III.........................................................................................................33
Item 10. Directors and Executive Officers of the Registrant...................................................33
Item 11. Executive Compensation...............................................................................33
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................................33
Item 13. Certain Relationships and Related Transactions.......................................................33

PART IV..........................................................................................................33
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....................................33

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PART I

ITEM 1. BUSINESS

GENERAL

Group 1 Automotive, Inc. ("Group 1", the "Company", "we" or "us") is a
leading operator in the $1 trillion automotive retailing industry.
Simultaneously with the closing of our initial public offering in 1997, we
acquired four automobile dealership groups, representing 30 automobile
dealership franchises. Through a series of acquisitions, we now operate 96
dealership franchises in Texas, Oklahoma, Florida, Georgia, New Mexico,
Colorado, Louisiana and Massachusetts. Through our dealerships and Internet
sites, we sell new and used cars and light trucks; arrange related financing,
vehicle service and insurance contracts; provide maintenance and repair
services; and sell replacement parts.

INVESTMENT STRATEGY

Our investment strategy is focused on return on invested capital and is
funded with internally generated cash flow, debt and, subject to market
conditions, common stock. Based on a risk-adjusted analysis of expected returns,
we allocate our resources among capital projects which expand existing
operations, acquisitions and common stock repurchases.

OPERATING STRATEGY

We follow an operating strategy that focuses on decentralized
management, expansion of higher margin businesses, customer service,
centralization of certain administrative functions and new technology
initiatives. We estimate that our parts and service operations contribute
approximately 40% of our pretax income; finance and insurance operations
contribute approximately 28% of our pretax income; and new and used vehicle
operations each contribute approximately 16% of our pretax income. During 2001,
we achieved an operating margin of 3.3% and have established a goal of a 4.0%
operating margin.

DECENTRALIZED MANAGEMENT. We believe that by managing our dealerships
on a decentralized basis, we provide superior customer service and a focused,
market-specific responsiveness to sales, service, marketing and inventory
control. Local presence and an in-depth knowledge of customers' needs and
preferences are important in generating market share growth. By coordinating
certain operations on a platform basis, we believe that we achieve cost savings
in such areas as advertising, vendor consolidation, data processing and
personnel utilization.

EXPAND HIGHER MARGIN ACTIVITIES. We focus on expanding our higher
margin businesses such as used vehicle retail sales, parts and service and
arranging finance, vehicle service and insurance contracts. While each of our
platforms operates independently in a manner consistent with its specific
market's characteristics, they also pursue an integrated company-wide strategy
designed to grow each of these higher margin businesses to enhance profitability
and stimulate internal growth. With a competitive advantage in sourcing
inventory, new vehicle franchises are especially well positioned to capitalize
on industry growth in used vehicle sales. In addition, each of our dealerships
offers an integrated parts and service department, which provides an important
source of recurring higher margin revenues. We also have the opportunity on each
new or used vehicle sold to generate incremental revenues from the arranging of
finance and lease contracts, vehicle service contracts and credit insurance
policies.

COMMITMENT TO CUSTOMER SERVICE. We focus on providing high quality
service to meet the needs of our customers. Our dealerships strive to cultivate
lasting relationships with their customers, and we believe these efforts
increase our opportunities for significant repeat and referral business. For
example, the dealerships regard their service and repair activities as an
integral part of their overall approach to customer service. This approach
provides us with an opportunity to foster ongoing relationships with customers
and deepen customer loyalty. In addition, our dealerships continually review
their processes in an effort to better meet the needs of

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their customers. Some of our dealerships utilize the one-price method of pricing
their inventory for sale, while the majority of our dealerships utilize
non-confrontational variable pricing.

COST AND REVENUE SYNERGIES. We believe that by consolidating the
purchasing power of our dealerships on a centralized basis we have benefited
from significant cost savings. For example, since we began operations, we have
significantly reduced the interest rate on our floorplan financing through our
consolidated credit facility. Furthermore, we have benefited from the
consolidation of administrative functions such as risk management, employee
benefits and employee training. We have also enhanced revenues by establishing
preferred providers for retail finance and vehicle service contracts.

TECHNOLOGY INITIATIVES. We use the Internet to more effectively
communicate with our customers. Customers can arrange service appointments,
search our inventory and receive notice of special offers. Our platform portal
web pages provide customers a direct one-stop shopping experience in their local
market, providing multiple brands and an extensive inventory of vehicles. Also,
as franchised dealerships, we receive Internet leads from manufacturers'
e-commerce programs and, through a contractual relationship with an e-commerce
software company, we receive Internet leads from several major portals. Lastly,
at times, we use automotive Internet referral services to provide incremental
sales opportunities.

DEALERSHIP OPERATIONS

Each of our platforms has an established management structure that
promotes and rewards entrepreneurial spirit, and the achievement of team goals.
The general manager of each dealership is ultimately responsible for the
operation, personnel and financial performance of the dealership. The general
manager is complemented with a management team consisting of a new vehicle sales
manager, used vehicle sales manager, parts and service managers and finance
managers. Each dealership is operated as a distinct profit center, in which
dealership general managers are given a high degree of autonomy. The general
manager and the other members of the dealership management team, as long-time
members of their local communities, are typically best able to judge how to
conduct day-to-day operations based on their experience in and familiarity with
the local market.

NEW VEHICLE SALES. We currently represent 28 American, Asian and
European brands of economy, family, sports and luxury cars, light trucks and
sport utility vehicles. The following table sets forth for the twelve months
ended December 31, 2001, the brands of new vehicles, of the manufacturers that
we represent ("Manufacturers"), that we sold at retail:

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Our dealerships' new vehicle retail sales include traditional new
vehicle retail lease transactions and lease-type transactions, both of which are
arranged by the dealerships. New vehicle leases generally have short terms,
bringing the customer back to the market sooner than if the purchase was debt
financed. In addition, leases provide our dealerships with a steady source of
late-model, off-lease vehicles for their used vehicle inventory. Generally,
leased vehicles remain under factory warranty for the term of the lease,
allowing the dealerships to provide repair services to the lessee throughout the
lease term. We do not guarantee residual values on lease transactions.

Our dealerships seek to provide customer-oriented service designed to
meet the needs of its customers and establish lasting relationships that will
result in repeat and referral business. The dealerships continually evaluate
innovative ways to improve the buying experience for their customers. We believe
that our ability to share best practices among our dealerships gives us an
advantage over smaller dealerships. For example, the dealerships strive to:

(1) employ more efficient selling approaches;

(2) utilize computer technology that decreases the time necessary to
purchase a vehicle;

(3) engage in extensive follow-up after a sale in order to develop
long-term relationships with customers; and

(4) extensively train their sales staffs to be able to meet the needs
of the customer.

Our dealerships acquire substantially all of their new vehicle
inventory from the Manufacturers. Manufacturers allocate a limited inventory
among their franchised dealers based primarily on sales volume and input from
dealers. Our dealerships finance their inventory purchases through the floorplan
portion of our revolving credit facility. Increasingly, the Manufacturers are
offering incentives to the dealerships to achieve new vehicle sales goals set by
them. These incentives are recorded as a reduction of new vehicle cost of sales
as the vehicles are sold. We also receive interest assistance from various
Manufacturers. Generally, this assistance equals approximately 70% to 100% of
our floorplan interest expense. During 2001, we recognized $29.1 million of
assistance, which we accounted for as a purchase discount and reflected as a
reduction of cost of sales in the income statement as vehicles were sold.

USED VEHICLE SALES. We sell used vehicles at each of our franchised
dealerships. Sales of used vehicles are a significant source of profit for the
dealerships. Consumer demand for used vehicles has increased as more high
quality used vehicles have become available. Furthermore, used vehicles
typically generate higher gross margins than new vehicles because of their
limited comparability and the somewhat subjective nature of their valuation. We
intend to continue growing our used vehicle sales operations by maintaining a
high quality inventory, providing competitive prices, offering vehicle service
contracts for our used vehicles, and continuing to promote used vehicle sales.

Profits from sales of used vehicles depend primarily on the
dealerships' ability to obtain a high quality supply of used vehicles and
effectively manage that inventory. Our new vehicle operations provide the used
vehicle operations with a large supply of high quality trade-ins and off-lease
vehicles, which are the best sources of high quality used vehicles. The
dealerships supplement their used vehicle inventory with used vehicles purchased
at auctions.

Each of our dealerships generally maintains a 30-day supply of used
vehicles and offers to other dealers and wholesalers, used vehicles that they do
not retail to customers. Vehicles may be transferred among our dealerships to
provide balanced inventories of used vehicles at each of our dealerships.

Our dealerships have taken several steps towards building customer
confidence in their used vehicle inventory, including participation in
Manufacturer certification processes, which are available only to new vehicle
franchises. This process makes these used vehicles eligible for new vehicle
benefits such as new vehicle finance rates and in some cases, extension of the

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manufacturer warranty. In addition, the dealerships offer vehicle service
contracts covering the used vehicles that they sell.

We believe that our franchised dealerships' strengths in offering used
vehicles include:

(1) access to trade-ins on new vehicle purchases, which are typically
lower mileage and higher quality relative to trade-ins on used car
purchases,

(2) access to late-model, low mileage off-lease vehicles,

(3) access to manufacturers' auctions available only to their
respective franchised dealers, and

(4) the availability of manufacturer certification programs for our
higher quality used vehicles.

A supply of high quality trade-ins and off-lease vehicles reduces our
dependence on auction vehicles, which are typically a higher cost source of used
vehicles.

PARTS AND SERVICE SALES. We provide parts and service at each of our
franchised dealerships, primarily for the vehicle makes sold at that dealership.
We perform both warranty and non-warranty service work. Warranty work accounts
for approximately 20% of our parts, service and collision service revenues. In
addition to each of our dealerships' parts and service businesses, we currently
own 24 collision service centers.

Historically, the automotive repair industry has been highly
fragmented. However, we believe that the increased use of advanced technology in
vehicles has made it difficult for independent repair shops to retain the
expertise to perform major or technical repairs. Additionally, Manufacturers
permit warranty work to be performed only at franchised dealerships. Hence,
unlike independent service operations, our franchised dealerships are qualified
to perform work covered by Manufacturer warranties. Given the increasing
technological complexity of motor vehicles and the trend toward extended
warranty periods for new vehicles, we believe that an increasing percentage of
repair work will be performed at our franchised dealerships, each of which have
the sophisticated equipment and skilled personnel necessary to perform complex
repairs and warranty repairs.

We attribute our profitability in parts and service to a comprehensive
management system, including the use of variable rate pricing structures,
cultivation of strong customer relationships through an emphasis on preventive
maintenance and the efficient management of our parts inventory.

In charging for their technicians' labor, our dealerships use variable
rate structures designed to reflect the difficulty and sophistication of
different types of repairs. The percentage mark-ups on parts are similarly
priced based on market conditions for different parts. We believe that variable
rate pricing helps our dealerships achieve overall gross margins in parts and
service which are superior to those of certain competitors who rely on fixed
labor rates and percentage markups. Additionally, it allows the dealership to be
competitive with local service centers that provide discounted pricing on select
services.

Our dealerships seek to retain each vehicle purchaser as a customer of
the dealership's parts and service departments. The dealerships have systems in
place that track their customers' maintenance records and notify owners of
vehicles purchased or serviced at the dealerships when their vehicles are due
for periodic services. The dealerships regard service and repair activities as
an integral part of their overall approach to customer service, providing an
opportunity to foster ongoing relationships with the dealership's customers and
deepen customer loyalty.

The dealerships' parts departments support their respective sales and
service departments. Each of the dealerships sells factory-approved parts for
the vehicle makes and models sold by that dealership. These parts are used
either in repairs made by the dealership, sold at retail to its customers or at
wholesale to independent repair shops and other franchised dealerships.
Currently, each of the dealerships employs its own parts manager and
independently controls its parts inventory and sales. Our dealerships frequently
obtain unstocked parts from each other.

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OTHER DEALERSHIP REVENUES. Other dealership revenues consist primarily
of finance, vehicle service and insurance contract income. The dealerships
arrange financing for their customers' vehicle purchases, sell vehicle service
contracts and arrange selected types of credit insurance in connection with the
financing of vehicle sales. We place heavy emphasis on finance and insurance
("F&I") and offer advanced F&I training to our finance and insurance managers.
Typically, the dealerships forward proposed financing contracts to
Manufacturers' captive finance companies, selected commercial banks or other
financing parties. The dealerships receive a financing fee from the lender for
arranging the financing and are typically assessed a chargeback against a
portion of the financing fee if the contract is terminated prior to its
scheduled maturity for any reason, such as early repayment or default.
Additionally, we have negotiated special incentive programs with several of the
financing institutions we use that provide for additional fees to be paid to us
when we achieve certain volumes of business with them. We do not own a finance
company and, generally, do not retain credit risk after a loan is made.

At the time of a new vehicle sale, the dealerships offer vehicle
service contracts to supplement the manufacturer warranty. Additionally, the
dealerships sell primary vehicle service contracts for used vehicles. Our
dealerships sell service contracts of third party vendors and Manufacturers, for
which they receive a fee upon the sale of the contract. In administrator-obligor
states the fees are recorded in income at the time of the sale. In
dealer-obligor states the fees and related direct costs are deferred and
recognized over the life of the contracts.

The dealerships also offer certain types of credit insurance to
customers who arrange the financing of their vehicle purchases through the
dealerships. The dealerships sell credit life insurance policies to these
customers, providing for repayment of the vehicle loan if the obligor dies while
the loan is outstanding. The dealerships also sell accident and disability
insurance policies, which provide payment of the monthly loan obligations during
a period in which the obligor is disabled. The dealerships sell this insurance
through third party vendors and we reinsure the policies. As such, we defer all
of the revenues and direct costs related to the sales of these policies and
recognize them over the life of the policies.

ACQUISITION PROGRAM

We have a disciplined two-tier acquisition program that is designed to
enhance brand and geographic diversity, create economies of scale and deliver a
targeted return on invested capital. Under our acquisition program, we pursue:

(1) "platform" acquisitions of large, profitable and well managed
multi-franchise dealership groups in large metropolitan and
suburban geographic markets that we do not currently serve, and

(2) "tuck-in" acquisitions, which are key, single-point dealerships
that are added to existing platforms. They allow us to increase
brand diversity, capitalize on economies of scale and offer a
greater breadth of products and services in each of the markets in
which we operate.

We have used, and may in the future use, our common stock to fund a
portion of our acquisitions.

During October 2001, we completed an offering of 3.3 million shares of
our common stock for proceeds of approximately $100 million, which we used to
repay borrowings under our revolving credit facility. These amounts may be
re-borrowed later for acquisitions and working capital needs. In addition to
approximately $100 million of excess working capital at December 31, 2001, the
acquisition portion of the credit facility provides us with the ability to
borrow up to $198 million for acquisitions and working capital needs.

During 2002, we anticipate that we will use borrowings under our credit
facility, cash flow from operations and common stock to complete acquisitions of
at least $500 million in revenues, consisting of platform and tuck-in
acquisitions.

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ENTERING NEW GEOGRAPHIC MARKETS. We intend, over time, to expand into
geographic markets we do not currently serve by acquiring large, profitable and
well-established megadealers that are leaders in their regional markets. We
pursue megadealers that have superior operational and financial management
personnel, whom we seek to retain. We believe that by retaining existing high
quality management we will be able to effectively operate acquired megadealers
with management personnel who understand the local market without having to
employ and train new and untested personnel. The following table sets forth our
geographic diversity, based on new vehicle retail sales:

EXPANDING WITHIN EXISTING MARKETS. We plan to make tuck-in acquisitions
of additional dealerships in each of the markets in which we operate, including
acquisitions that increase the brands, products and services offered in these
markets. We believe that these acquisitions will increase our operating
efficiencies and cost savings on a regional level in areas such as advertising,
vendor consolidation, data processing and personnel utilization.

RECENT ACQUISITIONS AND DISPOSITIONS. During 2001 we completed tuck-in
acquisitions of four franchises including Chevrolet in Oklahoma, Mitsubishi in
New Mexico and Lincoln-Mercury in Atlanta, with annual revenues of approximately
$135 million. The aggregate consideration paid in completing these acquisitions
includes approximately $11.0 million in cash, the assumption of approximately
$7.7 million of inventory financing and the assumption of approximately $0.3
million of non-inventory notes payable. Additionally, in January 2002, we opened
a new Dodge dealership in Rockwall, Texas, that was granted to us by the
Manufacturer.

During 2001, we sold eight dealership franchises in Florida, Texas and
Massachusetts, with annual revenues of approximately $103.6 million. In February
2002, we sold a dealership franchise in Florida with annual revenues of
approximately $22.1 million. No gain or loss was realized on these transactions.

COMPETITION

The automotive retailing industry is highly competitive. In large
metropolitan areas consumers have a number of choices in deciding where to
purchase a new or used vehicle and where to have the vehicle serviced.

In the $386 billion new vehicle market, our dealerships compete with
other franchised dealerships in their marketing areas. Our dealerships do not
have any cost advantage in purchasing new vehicles from the Manufacturers, and
typically rely on advertising and merchandising, sales expertise, service
reputation and location of the dealership to sell new vehicles.

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In the $401 billion used vehicle market, our dealerships compete with
other franchised dealers, independent used vehicle dealers, automobile rental
agencies and private parties for supply and resale of used vehicles.

In the $219 billion parts and service market, our dealerships compete
against franchised dealers to perform warranty repairs and against other
automobile dealers, franchised and independent service center chains and
independent garages for non-warranty repair and routine maintenance business.
The dealerships compete with other automobile dealers, service stores and auto
parts retailers in their parts operations. We believe that the principal
competitive factors in parts and service sales are the quality of customer
service, the use of factory-approved replacement parts, familiarity with a
Manufacturer's brands and models, and price. A number of regional or national
chains offer selected parts and services at prices that may be lower than our
dealerships' prices.

Some of our competitors may have greater financial, marketing and
personnel resources and lower overhead and sales costs. We cannot guarantee that
our strategy will be more effective than the strategies of our competitors.

In the acquisition area, we compete with other national dealer groups
for acquisitions. Some of our competitors may have greater financial resources
and competition may increase acquisition pricing. We cannot guarantee that we
will be able to complete acquisitions on terms acceptable to us.

GOVERNMENTAL REGULATIONS

A number of regulations affect our business of marketing, selling,
financing and servicing automobiles. We are also subject to laws and regulations
relating to business corporations generally.

Typically, we must obtain a license in order to establish, operate or
relocate a dealership or provide certain automotive repair services. These laws
also regulate the way we conduct our business, including our advertising and
sales practices.

Various federal and state laws established to protect dealerships from
the general unequal bargaining power between the parties also govern the
automobile franchise relationship. The following discussion of state court and
administrative holdings and various state laws is based on management's beliefs
and may not be an accurate description of the state court and administrative
holdings and various state laws. The state statutes generally provide that it is
a violation for a manufacturer to terminate or fail to renew a franchise without
good cause. These statutes also provide that the manufacturer is prohibited from
unreasonably withholding approval for a proposed change in ownership of the
dealership. Acceptable grounds for disapproval include material reasons relating
to the character, financial ability or business experience of the proposed
transferee. Accordingly, certain provisions of the franchise agreements,
particularly as they relate to a manufacturer's rights to terminate or fail to
renew the franchise, have repeatedly been held invalid by state courts and
administrative agencies.

Our financing activities with our customers are subject to federal
truth in lending, consumer leasing and equal credit opportunity regulations as
well as state and local motor vehicle finance laws, installment finance laws,
insurance laws, usury laws and other installment sales laws. Some states
regulate finance fees that may be paid as a result of vehicle sales. Penalties
for violation of any of these laws or regulations may include revocation of
certain licenses, assessment of criminal and civil fines and penalties, and in
certain instances, create a private cause of action for individuals. We believe
that our dealerships comply substantially with all laws and regulations
affecting their business and do not have any material liabilities under such
laws and regulations and that compliance with all such laws and regulations will
not, individually or in the aggregate, have a material adverse effect on our
liquidity, earnings, or competitive position.

ENVIRONMENTAL MATTERS

We are subject to a wide range of federal, state, and local
environmental laws and regulations, including those governing discharges into
the air and water, the storage of petroleum substances and chemicals, the
handling and disposal of wastes, and the remediation of

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contamination arising from spills and releases. These environmental laws and
regulations have become very complex and stringent over the years, and the task
of achieving and maintaining full compliance with all applicable environmental
laws and regulations has become much more rigorous. Failure to comply with these
laws and regulations may result in the assessment of administrative, civil and
criminal penalties, imposition of injunctions that limit or prohibit certain
activities, or the performance of investigatory and remedial activities. We
believe that we are in substantial compliance with current applicable
environmental laws and regulations and that continued compliance with these
existing laws and regulations will not have a material adverse effect on our
operations, earnings or competitive position. Moreover, we generally obtain
environmental studies on dealerships to be acquired and, as necessary, implement
environmental management or remedial activities to reduce the risk of
noncompliance with environmental laws and regulations.

As with automobile dealerships generally, and parts, service and
collision service center operations in particular, our business involves the
generation, use, handling, storage, transport and disposal of hazardous or toxic
substances or wastes. Operations involving the management of hazardous and
nonhazardous wastes are subject to requirements of the federal Resource
Conservation and Recovery Act ("RCRA") and comparable state statutes. Pursuant
to these laws, federal and state environmental agencies have established
approved methods for storage, treatment, and disposal of regulated wastes with
which we must comply.

Our business involves the use of aboveground and underground storage
tanks. Under applicable laws and regulations, we are responsible for the proper
use, maintenance and abandonment of regulated storage tanks which we own or
operate, and for remediation of subsurface soils and groundwater impacted by
releases from such existing or abandoned aboveground or underground storage
tanks. In addition to these regulated tanks, we own, operate, or have otherwise
abandoned, other underground and aboveground devices or containers (e.g.,
automotive lifts and service pits) that may not be classified as regulated
tanks, but which are capable of releasing stored materials into the environment,
thereby potentially obligating us to remediate any soils or groundwater
resulting from such releases.

We are also subject to laws and regulations governing remediation of
contamination at facilities we operate or to which we send hazardous or toxic
substances or wastes for treatment, recycling or disposal. The Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), also known as
the "Superfund" law, and analogous state laws impose liability, without regard
to fault or the legality of the original conduct, on certain classes of persons
that are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
the disposal site or sites where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances released at
such sites. Under CERCLA, these "responsible parties" may be subject to joint
and several liability for the costs of cleaning up the hazardous substances that
have been released into the environment, for damages to natural resources and
for the costs of certain health studies, and it is not uncommon for neighboring
landowners and other third parties to file claims for personal injury and
property damage allegedly caused by the release of hazardous substances.

We currently own or lease, and in connection with our acquisition
program will in the future own or lease, properties that in some instances have
been used for auto retailing and servicing for many years. Although we have
utilized operating and disposal practices that were standard in the industry at
the time, it is possible that environmentally sensitive materials such as new
and used motor oil, transmission fluids, antifreeze, lubricants, solvents and
motor fuels may have been spilled or released on or under the properties owned
or leased by us or on or under other locations where such materials were taken
for disposal. Further, we believe that structures found on some of these
properties may contain suspect asbestos-containing materials, albeit in an
undisturbed condition. In addition, many of these properties have been operated
by third parties whose use, handling and disposal of such environmentally
sensitive materials were not under our control.

These properties and the waste materials spilled, released or otherwise
found thereon may be subject to RCRA, CERCLA and analogous state laws. Under
such laws, we could be required to remove or remediate previously spilled or
released waste materials (including such materials spilled or released by prior
owners or operators), or property contamination (including

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groundwater contamination caused by prior owners or operators), or to perform
monitoring or remedial activities to prevent future contamination (including
asbestos found to be in a friable and disturbed condition). In September 2001,
we responded to a request for information from the U.S. Environmental Protection
Agency ("EPA") regarding materials sent by one of our dealerships to the R&H Oil
Company site in Bexar County, Texas, which site currently has been proposed for
inclusion on the EPA's National Priorities List of superfund sites. Our
dealership apparently is one of some 300 or more parties that may have
contributed materials to the R&H site. Our records indicate that this dealership
sent one 50-gallon barrel of used oil to the R&H site. In addition, five of our
dealerships as well as some 2,000 other parties were notified in late December
2001 by the Georgia Department of Natural Resources of their identification as
potentially responsible parties with respect to the M&J Solvents site in
Atlanta, Georgia, which is on the agency's Hazardous Site Inventory list.
Currently, the agency is planning to pursue delineation activities at the M&J
Solvents site. No further response is required from us with respect to both of
these matters at this time.

Further, the Federal Water Pollution Control Act, also known as the
Clean Water Act, and comparable state laws prohibit discharges of pollutants
into regulated waters without authorized National Pollution Discharge
Elimination System (NPDES) and similar state permits, require containment of
potential discharges of oil or hazardous substances, and require preparation of
spill contingency plans. Some of our operations involving the release of
emissions, such as spray painting activities, are also subject to regulation
under the Clean Air Act and comparable state and local requirements. We believe
we are in substantial compliance with these water and air related laws and
regulations.

EMPLOYEES

As of December 31, 2001, we employed approximately 6,000 people, of
whom approximately 750 were employed in managerial positions, 1,850 were
employed in non-managerial sales positions, 2,630 were employed in
non-managerial parts and service positions and 770 were employed in
administrative support positions.

We believe that our relationships with our employees are favorable.
None of our employees are represented by a labor union; however, because of our
dependence on the Manufacturers we may be affected by labor strikes, work
slowdowns and walkouts at the Manufacturers' manufacturing facilities.

RISK FACTORS

OUR RELATIONSHIP WITH OUR MANUFACTURERS IMPOSES A NUMBER OF
RESTRICTIONS ON OUR OPERATIONS.

The following table sets forth the percentage of our new vehicle retail
unit sales and pretax profit attributable to the Manufacturers we represented
during 2001 that represented 10% or more of our new vehicle retail unit sales:

FRANCHISE AGREEMENTS. Each of our dealerships operates under a
franchise agreement with one of our Manufacturers (or authorized distributors).
Under our dealership franchise

12

agreements, the Manufacturers exert considerable influence over the operations
of our dealerships. Each of the franchise agreements may be terminated or not
renewed by the Manufacturer for a variety of reasons, including any unapproved
changes of ownership or management. While we believe that we will be able to
renew all of our franchise agreements, we cannot guarantee that all of our
franchise agreements will be renewed or that the terms of the renewals will be
favorable to us. Our franchise agreements do not give us the exclusive right to
sell a Manufacturer's product within a given geographic area. Accordingly, a
Manufacturer may, subject to any protection of state law, grant another dealer a
franchise to start a new dealership near one of our locations, or an existing
dealer may move a dealership to a location, which would compete directly with
us.

Acquisitions. We must obtain the consent of the Manufacturer prior to
the acquisition of any of its dealership franchises. Delays in obtaining, or
failing to obtain, Manufacturer approvals for dealership acquisitions could
adversely affect our acquisition program. Obtaining the consent of a
Manufacturer for the acquisition of a dealership could take a significant amount
of time or might be rejected entirely. In determining whether to approve an
acquisition, Manufacturers may consider many factors, including the moral
character and business experience of the dealership principals and the financial
condition, ownership structure and customer satisfaction index scores of our
dealerships.

Our Manufacturers attempt to measure customers' satisfaction with
automobile dealerships through systems generally known as the customer
satisfaction index or "CSI". The Manufacturers have modified the components of
their CSI scores from time to time in the past, and they may replace them with
different systems.

In addition, a Manufacturer may limit the number of its dealerships
that we may own or the number that we may own in a particular geographic area.
The following is a summary of the restrictions imposed by the Manufacturers that
accounted for 10% or more of our new vehicle retail unit sales.

Ford. Ford currently limits the number of dealerships that we may own
to the greater of (1) 15 Ford and 15 Lincoln-Mercury dealerships and (2) that
number of Ford, Lincoln and Mercury dealerships accounting for 5% of the
preceding year's total Ford, Lincoln and Mercury retail sales of those brands in
the United States. Currently, we own a total of 18 Ford, Lincoln and Mercury
dealership franchises and represent only approximately 0.7% of the national
retail sales of Ford, Lincoln and Mercury. In addition, Ford limits us to one
Ford dealership in a Ford-defined market area having two or less authorized Ford
dealerships and one-third of Ford dealerships in any Ford-defined market area
having more than three authorized Ford dealerships. In many of its dealership
franchise agreements Ford has the right of first refusal to acquire, subject to
applicable state law, a Ford franchised dealership when its ownership changes.

Toyota/Lexus. Toyota restricts the number of dealerships that we may
own and the time frame over which we may acquire them. In order for us to
acquire additional dealerships we must execute Toyota's standard Level Two
Multiple Ownership Agreement, which we expect to execute in the near future.
Under the Level Two Multiple Ownership Agreement, we may acquire additional
dealerships, over a minimum of seven semi-annual periods, up to a maximum number
of dealerships equal to 5% of Toyota's aggregate national annual retail sales
volume. In addition, Toyota restricts the number of Toyota dealerships that we
may acquire in any Toyota-defined region and "Metro" market, as well as any
contiguous market. We may acquire only three Lexus dealerships nationally and
two Lexus dealerships in any one of the four Lexus geographic areas. While we
own a Lexus companion dealership located south of Houston, this dealership is
not considered by Lexus to be a new and separate Lexus dealership for purposes
of the restriction on the number of Lexus dealerships we may acquire. Currently,
we own seven Toyota and two Lexus dealership franchises and represent only
approximately 1.2% of the national retail sales of Toyota.

General Motors. General Motors ("GM") currently evaluates our
acquisitions of GM dealerships on a case-by-case basis. GM, however, limits the
maximum number of GM dealerships that we may acquire at any time to 50% of the
GM dealerships, by franchise line, in a GM-defined geographic market area.
Currently, we own 18 GM dealership franchises and could acquire approximately
8,200 GM dealership franchises, dependent upon franchise line.

13

Additionally, our current agreement with GM does not include Saturn dealerships
and our future acquisition of a Saturn dealership will be subject to GM approval
on a case-by-case basis.

DaimlerChrysler. Currently, we have no agreement with Chrysler
restricting our ability to acquire Chrysler dealerships. Chrysler has advised us
that in determining whether to approve an acquisition of a Chrysler dealership,
Chrysler considers the number of Chrysler dealerships the acquiring company
already owns. Chrysler currently carefully considers, on a case-by-case basis,
any acquisition that would cause the acquiring company to own more than 10
Chrysler dealerships nationally, six in the same Chrysler-defined zone and two
in the same market. Our agreement with Mercedes-Benz, in addition to limitations
on the number of dealership franchises in particular metropolitan markets and
regions, limits us to a maximum of the greater of four Mercedes-Benz dealership
franchises or the number of dealership franchises that would account for up to
3% of the preceding year's total Mercedes-Benz retail sales. Currently, we own
22 Chrysler and two Mercedes-Benz dealership franchises.

FINANCINGS. Provisions in our agreements with our Manufacturers may
restrict in the future our ability to obtain certain types of financing. A
number of our Manufacturers prohibit pledging the stock of their franchised
dealerships. For example, our agreement contains provisions prohibiting pledging
the stock of our GM franchised dealerships. Our agreement with Ford permits
pledging our Ford franchised dealerships' stock and assets, but only for Ford
dealership-related debt. Moreover, our Ford agreement permits our Ford
franchised dealerships to guarantee, and to use Ford franchised dealership
assets to secure our debt, but only for Ford dealership-related debt. Ford
waived that requirement with respect to our March 1999, senior subordinated
notes offering and the subsidiary guarantees of those notes. Certain
Manufacturers require us to meet certain financial ratios, which, if we fail to
meet these ratios the Manufacturers may reject proposed acquisitions, and may
give them the right to purchase their franchises for fair value.

OUR OWNERSHIP AND MANAGEMENT. As a condition to granting their consent
to our previous acquisitions and our public offerings of common stock, some
Manufacturers have imposed other restrictions on us. These restrictions
prohibit, among other things:

o any one person, who in the opinion of the Manufacturer is
unqualified to own its franchised dealership or has interests
incompatible with the Manufacturer, from acquiring more than a
specified percentage of our common stock (for example, 20% in the
case of General Motors and Toyota, and 50% in the case of Ford);

o certain material changes in our business or extraordinary corporate
transactions such as a merger or sale of a material amount of our
assets;

o the removal of a dealership general manager without the consent of
the Manufacturer;

o the use of dealership facilities to sell or service new vehicles of
other Manufacturers, in certain situations; and

o change in control of our Board of Directors or management.

If we are unable to comply with these restrictions, we generally must
(1) sell the assets of the dealerships to the Manufacturer or to a third party
acceptable to the Manufacturer, or (2) terminate the dealership agreements with
the Manufacturer. The Manufacturers may impose additional restrictions on us in
the future.

OPERATIONS. We depend on our Manufacturers for operational support:

o We depend on the Manufacturers to provide us with a desirable mix
of new vehicles. The most popular vehicles usually produce the
highest profit margins and are frequently difficult to obtain from
the Manufacturers. If we cannot obtain sufficient quantities of the
most popular models, our profitability may be adversely affected.
Sales of less desirable models may reduce our profit margins.

o We depend on the Manufacturers for sales incentives and other
programs that are intended to promote dealership sales or support
dealership profitability.

14

Manufacturers historically have made many changes to their
incentive programs during each year. A discontinuation or change in
Manufacturers' incentive programs could adversely affect our
business. Moreover, some Manufacturers use a dealership's CSI
scores as a factor for participating in incentive programs. Failure
to comply with the CSI standards could adversely affect our
participation in dealership incentive programs, which could have a
material adverse effect on us.

Our Manufacturer agreements also specify that, in certain situations,
we cannot operate a dealership franchised by another Manufacturer in the same
building as that Manufacturer's franchised dealership. In addition, some
Manufacturers, like GM, are in the process of realigning their franchised
dealerships along defined "channels", such as combining Pontiac, Buick and GMC
in one dealership location. As a result, GM may require us to move or sell some
dealerships. Moreover, our Manufacturers generally require that the dealership
premises meet defined image standards. All of these requirements could impose
significant capital expenditures on us in the future.

OUR SUCCESS DEPENDS UPON THE OVERALL SUCCESS OF THE LINE OF VEHICLES
THAT EACH OF OUR DEALERSHIPS SELLS.

Demand for our Manufacturers' vehicles as well as the financial
condition, management, marketing, production and distribution capabilities of
our Manufacturers affect our business. Our Ford, Toyota, Lexus and GM
dealerships represent approximately 69% of our total new vehicle retail sales.
Although we have attempted to lessen our dependence on any one Manufacturer by
buying dealerships representing a number of different domestic and foreign
Manufacturers, events such as labor disputes and other production disruptions
that may adversely affect a Manufacturer may also adversely affect us.
Similarly, the late delivery of vehicles from Manufacturers, which sometimes
occurs during periods of new product introductions, can lead to reduced sales
during those periods. Moreover, any event that causes adverse publicity
involving any of our Manufacturers may have an adverse effect on us regardless
of whether such event involves any of our dealerships.

GROWTH IN OUR REVENUES AND EARNINGS WILL BE IMPACTED BY OUR ABILITY TO
ACQUIRE AND SUCCESSFULLY OPERATE DEALERSHIPS.

We cannot guarantee that we will be able to identify and acquire
dealerships in the future. In addition, managing and integrating additional
dealerships into our existing mix of dealerships may result in substantial
costs, delays or other operational or financial problems.

Restrictions by our Manufacturers as well as covenants contained in our
debt instruments limit our ability to acquire additional dealerships. In
addition, increased competition for acquisition candidates may develop, which
could result in fewer acquisition opportunities available to us and/or higher
acquisition prices.

Further, acquisitions involve a number of special risks, including
possible diversion of resources and management's attention, inability to retain
key acquired personnel and risks associated with unanticipated events or
liabilities, some or all of which could have a material adverse effect on our
business, financial condition and results of operations.

We will continue to need substantial capital in order to acquire
additional automobile dealerships. In the past, we have financed these
acquisitions with a combination of cash flow from operations, proceeds from
borrowings under our credit facility, bond issuances and stock offerings and
issuances of our common stock to the sellers of the acquired dealerships.

We currently intend to finance future acquisitions by issuing shares of
common stock as full or partial consideration for acquired dealerships. The
extent to which we will be able or willing to issue common stock for
acquisitions will depend on the market value of the common stock from time to
time and the willingness of potential acquisition candidates to accept common
stock as part of the consideration for the sale of their businesses. If
potential acquisition candidates are unwilling to accept our common stock, we
will be forced to rely solely on available cash or debt or equity financing,
which could adversely affect our acquisition program. Accordingly, our ability
to make acquisitions could be adversely affected if the price of our common
stock declines.

15

THE LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR OPERATIONS AND
GROWTH.

We depend to a large extent upon the abilities and continued efforts of
our executive officers, senior management and principals of our dealerships.
Furthermore, we will likely be dependent on the senior management of any
dealerships acquired in the future. If any of those persons leave or if we fail
to attract and retain other qualified employees, our business could be adversely
affected.

Although we have entered into employment agreements with each of our
executive officers and some of the principals of our dealerships, we cannot
guarantee that any individual will continue in his present capacity with us for
any particular period of time. We currently have no key man insurance for any of
our officers or senior management.

CHANGES IN INTEREST RATES COULD ADVERSELY IMPACT OUR PROFITABILITY.

All of the borrowings under our credit facility bear interest based on
a floating rate. At times we manage our exposure to interest rate volatility
through the use of interest rate swaps. A significant increase in interest rates
could cause a substantial increase in our cost of borrowing.

Additionally, a significant increase in interest rates could impact our
ability to offer financing for vehicle sales at rates acceptable to our
customers and the fee we receive for arranging the sales.

CHANGES IN OUR INSURANCE PROGRAMS COULD ADVERSELY IMPACT OUR
PROFITABILITY.

Because of vehicle inventories and nature of our business, automobile
dealerships generally require significant levels of insurance covering a broad
variety of risks. Our insurance includes umbrella policies with a $105 million
aggregate limit, as well as insurance on our real property, comprehensive
coverage for our vehicle inventory, general liability insurance, employee
dishonesty coverage, employment practices liability insurance, pollution
coverage and errors and omissions insurance in connection with vehicle sales and
financing activities.

Additionally, we retain some risk of loss under our self-insured
medical and property/casualty programs. Changes in the insurance market could
impact our level of retained risk and our results of operations.

WE ARE SUBJECT TO A NUMBER OF RISKS ASSOCIATED WITH IMPORTING
INVENTORY.

A portion of our new vehicle business involves the sale of vehicles,
vehicle parts or vehicles composed of parts that are manufactured outside the
United States. As a result, our operations are subject to customary risks
associated with imported merchandise, including fluctuations in the value of
currencies, import duties, exchange controls, trade restrictions, work stoppages
and general political and economic conditions in foreign countries.

The United States or the countries from which our products are imported
may, from time to time, impose new quotas, duties, tariffs or other
restrictions, or adjust presently prevailing quotas, duties or tariffs on
imported merchandise. Any of those impositions or adjustments could affect our
operations and our ability to purchase imported vehicles and parts. This, in
turn, could have an adverse effect on our business.

OUR STOCKHOLDER RIGHTS PLAN AND CERTAIN PROVISIONS OF OUR CERTIFICATE
OF INCORPORATION AND BYLAWS CONTAIN CERTAIN PROVISIONS THAT MAKE A TAKEOVER OF
GROUP 1 DIFFICULT.

Our stockholder rights plan and certain provisions of our certificate
of incorporation and bylaws could make it more difficult for a third party to
acquire control of Group 1, even if such change of control would be beneficial
to stockholders. These include provisions:

16

o providing for a board of directors with staggered, three-year
terms, permitting the removal of a director from office only for
cause;

o allowing only the board of directors to set the number of
directors;

o requiring super-majority or class voting to affect certain
amendments to our certificate of incorporation and bylaws;

o limiting the persons who may call special stockholders' meetings;

o limiting stockholder action by written consent;

o establishing advance notice requirements for nominations for
election to the board of directors or for proposing matters that
can be acted upon at stockholders' meetings; and

o allowing our board of directors to issue shares of preferred stock
without stockholder approval.

Certain of our dealer agreements prohibit the acquisition of more than
a specified percentage of common stock without the consent of the relevant
Manufacturer. These terms of our dealer agreements could also make it more
difficult for a third party to acquire control of Group 1.

THE CYCLICALITY AND SEASONALITY OF VEHICLE SALES MAY ADVERSELY IMPACT
OUR PROFITABILITY.

Our operations, like the automotive retailing industry in general, can
be impacted by a number of factors relating to general economic conditions,
including consumer business cycles, consumer confidence, economic conditions,
availability of consumer credit and interest rates. Although the above factors,
among others, may impact our business, we believe the impact on our operations
of future negative trends in such factors will be somewhat mitigated by our (i)
strong parts, service and collision repair service operations, (ii) variable
cost structure, (iii) geographic diversity and (iv) product diversity.

Our operations are subject to seasonal variations, with the second and
third quarters generally contributing more operating profit than the first and
fourth quarters. Three primary forces drive this seasonality: (i)
manufacturer-related factors, primarily the historical timing of major
manufacturer incentive programs and model changeovers, (ii) weather-related
factors and (iii) consumer buying patterns.

ITEM 2. PROPERTIES

We use a number of facilities to conduct our dealership operations.
Each of our dealerships may include facilities for (1) new and used vehicle
sales, (2) vehicle service operations, (3) retail and wholesale parts
operations, (4) collision service operations, (5) storage and (6) general office
use. We try to structure our operations so as to avoid the ownership of real
property. In connection with our acquisitions, we generally seek to lease rather
than acquire the facilities on which the acquired dealerships are located. We
generally enter into lease agreements with respect to such facilities that have
30-year total terms with 15-year initial terms and three five-year option
periods, at our option. As a result, we lease the majority of our facilities
under long-term operating leases. See Note 11 to the Financial Statements, which
summarizes our obligations to related and third-parties.

ITEM 3. LEGAL PROCEEDINGS

From time to time, our dealerships are named in claims involving the
manufacture of automobiles, contractual disputes and other matters arising in
the ordinary course of business. Currently, no legal proceedings are pending
against or involve us that, in our opinion, could be expected to have a material
adverse effect on our business, financial condition or results of operations.

17

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

18

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The common stock is listed on the New York Stock Exchange ("NYSE")
under the symbol "GPI". There were 138 holders of record of our common stock as
of February 28, 2002.

The following table presents the quarterly high and low sales prices
for our common stock since January 1, 2000, as reported on the New York Stock
Exchange Composite Tape under the symbol "GPI".

We have never declared or paid dividends on our common stock. We intend
to retain future earnings, if any, to finance the development and expansion of
our business and/or repurchase our common stock and/or senior subordinated
notes. Therefore, we do not anticipate paying any cash dividends on our common
stock in the foreseeable future. The decision whether to pay dividends will be
made by our Board of Directors after considering our results of operations,
financial condition, capital requirements, general business conditions and other
factors.

Certain provisions of the credit facility and the senior subordinated
notes require us to maintain certain financial ratios and restrict us from
making substantial disbursements outside the ordinary course of business,
including limitations on the payment of cash dividends. In addition, pursuant to
the automobile franchise agreements to which our dealerships are subject, all
dealerships are required to maintain a certain minimum working capital.

19

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

We completed our initial public offering and acquisition of our first
four dealership groups on November 3, 1997. Before that date, Group 1
Automotive, Inc. had no operations and each of the dealership groups were
privately owned and operated independently. The following selected historical
financial data as of December 31, 2001, 2000, 1999, 1998 and 1997, and for the
four years in the period ended December 31, 2001, include the operations of all
dealerships acquired from the effective dates of the acquisitions and have been
derived from our audited financial statements.

20

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

We are a leading operator in the $1 trillion automotive retailing
industry. Simultaneously with the closing of our initial public offering in
1997, we acquired four automobile dealership groups, representing 30 automobile
dealership franchises. Through a series of acquisitions, we now operate 96
dealership franchises in Texas, Oklahoma, Florida, Georgia, New Mexico,
Colorado, Louisiana and Massachusetts. Through our dealerships and Internet
sites, we sell new and used cars and light trucks; arrange related financing,
vehicle service and insurance contracts; provide maintenance and repair
services; and sell replacement parts. We also operate 24 collision service
centers.

We have diverse sources of revenues, including: new car sales, new
truck sales, used car sales, used truck sales, manufacturer remarketed vehicle
sales, parts sales, service sales, collision repair services, finance fees,
vehicle service contract fees, insurance fees, documentary fees and after-market
product sales. Sales revenues from new and used vehicle sales and parts and
service sales include sales to retail customers, other dealerships and
wholesalers. Other dealership revenue includes revenues from arranging
financing, vehicle service and insurance contracts and documentary fees, net of
a provision for anticipated chargebacks.

Our total gross margin varies as our merchandise mix (the mix between
new vehicle sales, used vehicle sales, parts and service sales, collision repair
service sales and other dealership revenues) changes. Our gross margin on the
sale of products and services varies significantly, with new vehicle sales
generally resulting in the lowest gross margin and other dealership revenues
generally resulting in the highest gross margin. When our new vehicle sales
increase or decrease at a rate greater than our other revenue sources, our gross
margin responds inversely. Factors such as seasonality, weather, cyclicality and
manufacturers' advertising and incentives may impact our merchandise mix, and
therefore influence our gross margin.

Selling, general and administrative expenses consist primarily of
incentive-based compensation for sales, administrative, finance and general
management personnel, rent, marketing, insurance and utilities. We believe that
approximately 60% of our selling, general and administrative expenses are
variable, allowing us to adjust our cost structure based on business trends.
Interest expense consists of interest charges on interest-bearing debt,
including floorplan inventory financing, net of interest income earned. We
receive interest assistance from various of our Manufacturers. This assistance,
which is reflected as a reduction of cost of sales, generally equals between 70%
and 100% of floorplan interest expense, which mitigates the impact of interest
rate changes on our financial results.

21

RESULTS OF OPERATIONS

SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE YEARS ENDED DECEMBER 31, 2001
AND DECEMBER 31, 2000

NEW VEHICLE DATA

(dollars in thousands,
except per unit amounts)

USED VEHICLE DATA

(dollars in thousands,
except per unit amounts)

- ----------
(1) Excludes used vehicle wholesale revenues, as these transactions facilitate
retail vehicle sales and are not expected to generate profit.

(2) Retail gross margin equals gross profit divided by retail sales revenues.
Total gross margin equals gross profit divided by total revenues.

PARTS AND SERVICE DATA

(dollars in thousands)

OTHER DEALERSHIP REVENUES, NET

(dollars in thousands,
except per unit amounts)

22

SAME STORE REVENUES COMPARISON (1)

(dollars in thousands)

- ----------
(1) Includes only those dealerships owned during all of the months of both
periods in the comparison.

YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000

REVENUES. Revenues increased $410.3 million, or 11.4%, to $3,996.4
million for the year ended December 31, 2001, from $3,586.1 million for the year
ended December 31, 2000. New vehicle revenues increased primarily due to strong
customer acceptance of our products, particularly Toyota, Lexus and Honda,
aggressive manufacturer incentives and the acquisitions of additional dealership
operations during 2000 and 2001. The growth in used vehicle revenues was
primarily attributable to an emphasis on used vehicle sales in the New Mexico,
Atlanta, Oklahoma, Boston, Houston, West Texas and Austin markets and the
additional dealership operations acquired. The increase in parts and service
revenues was due to strong organic growth in the Boston, Houston, Oklahoma and
south Florida markets and the additional dealership operations acquired. Other
dealership revenues increased primarily due to increased sales training,
company-wide benchmarking, a favorable interest rate environment and an increase
in the number of retail new and used vehicle sales.

GROSS PROFIT. Gross profit increased $79.9 million, or 15.1%, to $607.3
million for the year ended December 31, 2001, from $527.4 million for the year
ended December 31, 2000. The increase was attributable to an increase in the
gross margin from 14.7% for the year ended December 31, 2000, to 15.2% for the
year ended December 31, 2001, and increased revenues. The gross margin increased
as lower margin new vehicle revenues decreased as a percentage of total
revenues, and increased gross profits on parts and service, and other dealership
revenues offset reduced gross margins on new vehicle sales. The gross margin on
new retail vehicle sales declined to 7.6% from 7.8% due primarily to the decline
in interest rates during the year, which resulted in a reduction in the amount
of floorplan assistance paid by various of our Manufacturers. The gross margin
on retail used vehicle sales decreased to 9.6% from 9.9% due primarily to
pressure on used vehicle values caused by aggressive incentives placed on new
vehicles by the manufacturers.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $64.8 million, or 16.5%, to $458.5 million for
the year ended December 31, 2001, from $393.7 million for the year ended
December 31, 2000. The increase was primarily attributable to the additional
dealership operations acquired and increased variable expenses, particularly
incentive pay to employees, which increased as gross profit increased. Selling,
general and administrative expenses increased as a percentage of gross profit to
75.5% from 74.6% due primarily to the additional dealership operations acquired
and incentive compensation.

INTEREST EXPENSE. Floorplan and other interest expense, net, decreased
$11.2 million, or 21.1%, to $41.8 million for the year ended December 31, 2001,
from $53.0 million for the year ended December 31, 2000. The decrease was due
primarily to a decline in interest rates. During the year ended December 31,
2001, there was an approximately 240 basis point reduction in our floorplan
financing rate as compared to the prior year.

OTHER INCOME (EXPENSE), NET. Other income (expense), net, decreased
$1,270,000 to $(128,000) for the year ended December 31, 2001, from $1,142,000
for the year ended December 31, 2000. The decrease is due primarily to a $1.0
million gain from the sale of a Chrysler franchise in Austin, Texas, during
2000.

23

SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE YEARS ENDED DECEMBER 31, 2000
AND DECEMBER 31, 1999

NEW VEHICLE DATA

(dollars in thousands,
except per unit amounts)

USED VEHICLE DATA

(dollars in thousands,
except per unit amounts)

OTHER DEALERSHIP REVENUES, NET

(dollars in thousands,
except per unit amounts)

24

SAME STORE REVENUES COMPARISON(1)

(dollars in thousands)

- ----------
(1) Includes only those dealerships owned during all of the months of both
periods in the comparison.

YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999

REVENUES. Revenues increased $1,077.8 million, or 43.0%, to $3,586.1
million for the year ended December 31, 2000, from $2,508.3 million for the year
ended December 31, 1999. New vehicle revenues increased primarily due to strong
customer acceptance of our products, particularly Lexus, Honda, Nissan and
Toyota, partially offset by some weakness in the General Motors brands, and the
acquisitions of additional dealership operations during 1999 and 2000. The
growth in used vehicle revenues was primarily attributable to an emphasis on
used vehicle sales in the Dallas, Denver, Oklahoma and south Florida markets,
and the additional dealership operations acquired. The increase in parts and
service revenues was due to the additional dealership operations acquired,
coupled with strong organic growth in the Austin, Houston and south Florida
markets. Other dealership revenues increased primarily due to an increase in the
number of retail new and used vehicle sales.

GROSS PROFIT. Gross profit increased $151.0 million, or 40.1%, to
$527.4 million for the year ended December 31, 2000, from $376.4 million for the
year ended December 31, 1999. The increase was attributable to increased
revenues, net of a decrease in gross margin from 15.0% for the year ended
December 31, 1999, to 14.7% for the year ended December 31, 2000. The gross
margin decreased as lower margin new vehicle revenues increased as a percentage
of total revenues, and the gross margin on new vehicle sales declined. The gross
margin on new retail vehicle sales declined to 7.8% from 8.3% due to the lower
margins of our last two platform acquisitions. Our new vehicle gross margin
would have been 8.2%, excluding the impact of our last two platform
acquisitions. The gross margins on our other products and services remained
relatively consistent with the prior year.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $113.9 million, or 40.7%, to $393.7 million
for the year ended December 31, 2000, from $279.8 million for the year ended
December 31, 1999. The increase was primarily attributable to the additional
dealership operations acquired and increased variable expenses, particularly
incentive pay to employees, which increased as gross profit increased.
Additionally, we recorded a $1.5 million charge, during the first quarter of
2000, related to unfavorable medical claims experience. Our medical plan was
revised as of March 1, 2000. Selling, general and administrative expenses
increased as a percentage of gross profit to 74.6% from 74.3% due to the medical
plan charge and under-performance in our Albuquerque and south Florida
operations.

INTEREST EXPENSE. Floorplan and other interest expense, net, increased
$22.6 million, or 74.3%, to $53.0 million for the year ended December 31, 2000,
from $30.4 million for the year ended December 31, 1999. The increase was due to
increases in total debt outstanding and interest rates. The increase in debt
outstanding was primarily attributable to the floorplan borrowings of the
additional dealership operations acquired and additional borrowings to complete
acquisitions. Further, contributing to the increase was a 100 basis point
increase in the weighted average LIBOR. Partially mitigating the LIBOR increase
was a 25 basis point rate reduction of the spread charged on our floorplan notes
payable, which was effective in May 1999. Additionally, in December 2000, we
received another 12.5 basis point reduction of the spread charged.

OTHER INCOME, NET. Other income, net, increased $956,000 to $1,142,000
for the year ended December 31, 2000, from $186,000 for the year ended December
31, 1999. The increase is due primarily to a $1.0 million gain from the sale of
a Chrysler franchise in Austin, Texas.

25

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity are cash from operations, our credit
facility (which includes the floorplan facility and the acquisition facility)
and equity and debt offerings.

The following table sets forth selected historical information from our
statements of cash flows:

CASH FLOWS

Total cash and cash equivalents at December 31, 2001, were $147.2
million, and include $130.4 million of contracts-in-transit, which are generated
in the ordinary course of business.

OPERATING ACTIVITIES. For the three-year period ended December 31,
2001, we generated $255.8 million in net cash from operating activities,
primarily driven by net income plus depreciation and amortization. Excluding
working capital changes, during 2001 cash flows from operating activities
increased $10.2 million over the prior-year period.

INVESTING ACTIVITIES. The $27.2 million of cash used for investing
activities during 2001 was primarily attributable to purchases of property and
equipment and cash paid in acquisitions, net of cash balances obtained in the
acquisitions, partially offset by proceeds from sales of franchises. During
2001, we used approximately $20.9 million in purchasing property and equipment,
of which, approximately $12.5 million was for the purchase of land and
construction of new facilities.

During 2000, $72.8 million of cash was used for investing activities,
primarily attributable to cash paid in completing acquisitions, net of cash
balances obtained in the acquisitions, and purchases of property and equipment,
partially offset by proceeds from the sales of franchises. During 2000, we used
approximately $17.3 million in purchasing property and equipment, of which,
approximately $8.8 million was for the purchase of land and construction of new
facilities.

During 1999, $126.9 million was used for investing activities,
primarily attributable to completing acquisitions, net of cash balances obtained
in the acquisitions, and purchases of property and equipment, partially offset
by sales of property and equipment. During 1999, we used approximately $27.4
million in purchasing property and equipment, of which, approximately $19.6
million was for the purchase of land and construction of new facilities.
Partially offsetting these uses of cash, we received $11.7 million from sales of
property and equipment. The proceeds were received primarily from the sale of
dealership properties to a REIT for approximately $11.2 million, and for which
no gain or loss was recognized.

FINANCING ACTIVITIES. We used approximately $53.4 million in financing
activities during 2001. The uses were primarily attributable to paydowns made on
our revolving credit facility and purchases of treasury stock, largely offset by
the proceeds of our common stock offering. In October 2001, we completed an
offering of 3.3 million shares of our common stock, with net proceeds from the
offering, after expenses, of approximately $98.5 million. The proceeds from the
offering, as well as cash flows from operations, were used to reduce the
outstanding balance under our credit facility by $118.6 million. We may
re-borrow the amounts repaid under our credit facility for general corporate
purposes, including acquisitions.

26

During 2000 we used approximately $770,000 in financing activities.
Cash was provided primarily through borrowings on our revolving credit facility.
We used $6.3 million for principal payments of long-term debt. Additionally, we
used $20.9 million for purchases of treasury stock.

The net cash provided during 1999 was generated primarily from our
March 1999 offerings of 2 million shares of common stock and $100 million of
senior subordinated notes. The net proceeds from these offerings, approximately
$137.7 million, were used to repay $59.0 million borrowed under the acquisition
portion of the credit facility, with the remainder of the proceeds being used in
completing acquisitions during 1999. Additionally, in connection with the sale
of properties to a REIT, we paid off mortgages of approximately $2.5 million.

WORKING CAPITAL. At December 31, 2001, we had working capital of $154.7
million, which is approximately $100 million higher than we believe we need to
operate our business. We expect to use this excess working capital to fund
acquisitions and anticipated capital expenditures. Historically, we have funded
our operations with internally generated cash flow and borrowings. Certain
Manufacturers have minimum working capital guidelines, which may limit a
subsidiary's ability to make distributions to the parent company. While we
cannot guarantee it, based on current facts and circumstances, we believe we
have adequate cash flow coupled with borrowing capacity under our credit
facility to fund our current operations, anticipated capital expenditures and
acquisitions.

STOCK REPURCHASE

The board of directors has authorized us to repurchase a portion of our
stock, subject to management's judgment and the restrictions of our various debt
agreements. Our agreements, subject to other covenants, allow us to spend
approximately 33 percent of our cumulative net income to repurchase stock.
During 2001 we repurchased 0.4 million shares for approximately $9.3 million,
excluding shares repurchased to fulfill obligations under our employee stock
purchase plan. At times we have purchased our stock from related parties. These
transactions were completed at then current market prices. We allocate resources
based on a risk-adjusted analysis of expected returns. As such, we may
repurchase shares of our common stock if market conditions allow us to receive
an acceptable return on investment.

CAPITAL EXPENDITURES

Our capital expenditures include expenditures to extend the useful life
of current facilities and expenditures to start or expand operations.
Historically, our annual capital expenditures exclusive of new or expanded
operations have approximately equaled our annual depreciation charge.
Expenditures relating to the construction or expansion of dealership facilities,
generally, are driven by new franchises being awarded to us by a manufacturer or
significant growth in sales at an existing facility. During 2002, we plan to
invest approximately $21 million to expand nine existing facilities and prepare
six new facilities for operations. Additionally, during 2002, we will be
relocating certain dealerships we own to new facilities that are being
constructed and financed by related and third-parties. We estimate that the
relocation of our stores to the new facilities will result in incremental rent
expense of approximately $0.7 million, per year.

ACQUISITION FINANCING

We anticipate acquiring at least $500 million in revenues during 2002,
consisting of both platform and tuck-in acquisitions. We expect the cash needed
to complete our acquisitions will come from excess working capital, operating
cash flows of our dealerships and borrowings under our credit facility.

CREDIT FACILITY

Our credit facility provides a floorplan facility of $702 million, with
an interest rate of LIBOR plus 112.5 basis points, for financing vehicle
inventories. Additionally, the credit facility provides an acquisition facility
of $198 million for financing acquisitions, general corporate purposes and
capital expenditures and bears interest at LIBOR plus a margin varying between
175 to 325 basis points, dependent upon certain financial ratios. The amount
available to be

27

borrowed under the acquisition portion of the credit facility is dependent upon
a calculation based on our cash flow and maintaining certain financial ratios.
The credit facility also contains various covenants including financial ratios,
such as fixed-charge coverage, interest coverage and a minimum net worth
requirement, among others, as well as other requirements which must be
maintained. The lending group making up the credit facility is comprised of 15
major financial institutions, including five manufacturer captive finance
companies. The manufacturer captive finance companies are Ford Motor Credit
Company, Toyota Motor Credit Corporation, BMW Financial Services N.A. Inc.,
Chrysler Financial Company, L.L.C. and Mercedes-Benz Credit Corporation. As of
March 15, 2002, $198 million is available to be drawn under the acquisition
facility, subject to a cash flow calculation and the maintenance of certain
financial ratios and various covenants. The credit facility allows 33% of net
income to be paid as cash dividends.

During July 2001, we entered into a two-year interest rate swap with a
notional amount of $100 million. Additionally, during October 2001, we entered
into a three-year interest rate swap with a notional amount of $100 million. The
effect of these swaps is to convert the interest rate on a portion of our
borrowings from the 30-day LIBOR to an average fixed rate of interest of 5.20%.

LEASES

We lease various real estate, facilities and equipment under long-term
operating lease agreements, including leases with related parties. Generally,
the related-party and third-party leases have 30-year total terms with initial
terms of 15 years and three five-year option periods, at our option. See Note 11
to the Financial Statements, which summarizes our obligations to related and
third-parties. Additionally, we generally have an option to purchase the real
estate and facilities at the end of the lease term, and a right of first
refusal, giving us the opportunity to purchase the real estate and facilities,
if the owner reaches an agreement to sell them to a third party.

OBLIGATIONS AND COMMITMENTS

The following is a summary of our future contractual cash obligations:

- ----------
(1) Excludes interest payments.

Our credit facility is currently set to mature on December 31, 2003.
The credit facility provides commitments for inventory financing, floorplan
notes payable, up to $702 million, of which we had borrowed $365.0 million at
December 31, 2001. Payments, generally, are required to be made on the floorplan
notes payable as the vehicles are sold. The credit facility also provides
commitments for a revolving credit line for general corporate purposes,
including acquisitions, up to $198 million, of which none was outstanding at
December 31, 2001. Other than the interest rate swap agreements discussed above,
there are no other significant contractual commitments to or from us.

CURRENT BUSINESS TRENDS

During 2001, approximately 17.2 million new vehicles were sold in the
United States. Industry analyst estimates for 2002 are predicting new vehicle
unit sales of between 15.5 million and 16.0 million units. Annual sales of 15.5
million units would rank as the sixth highest total of new vehicle retail sales
in the United States during the past 100 years. As the used vehicle market is
less cyclical than the new vehicle market, we expect to see continued
single-digit growth in used vehicle retail sales volume. Due to the increase in
units in operation from the recent record new vehicle sales, and the increasing
complexity of the vehicles being sold today, we expect to see growth in the
parts and service market for franchised automobile dealers. With

28

respect to interest rates, the one-month LIBOR, which averaged approximately
3.9% during 2001, has fallen to approximately 1.9% in March 2002.

DISCUSSION OF CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions in
determining the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
significant estimates made by us in the accompanying consolidated financial
statements relate to reserves for inventory valuations and future chargebacks on
finance and vehicle service contract fees, and valuation of intangible assets.
Actual results could differ from those estimates.

Critical accounting policies are those that are both most important to
the portrayal of a company's financial position and results of operations, and
require management's most difficult, subjective or complex judgments. Below is a
discussion of what we believe are our critical accounting policies. See Note 2
to our consolidated financial statements for additional discussion regarding our
accounting policies.

INVENTORIES

New, used and demonstrator vehicles are stated at the lower of cost or
market, determined on a specific-unit basis. Vehicle inventory cost consists of
the amount paid to acquire the inventory, plus reconditioning cost, cost of
equipment added and transportation cost. Additionally, we receive interest
assistance from some of our Manufacturers. The assistance is accounted for as a
purchase discount and is reflected as a reduction to the inventory cost on the
balance sheet and as a reduction to cost of sales in the income statement as the
vehicles are sold. Parts and accessories are stated at the lower of cost
(determined on a first-in, first-out basis) or market. As the market value of
our inventories typically declines with the passage of time, valuation reserves
are provided against the inventory balances based on the agings of the
inventories and market trends.

FINANCE AND SERVICE CONTRACT INCOME RECOGNITION

We arrange financing for customers through various institutions and
receive financing fees based on the difference between the loan rates charged to
customers over predetermined financing rates set by the financing institution.
In addition, we receive fees from the sale of vehicle service contracts to
customers.

We may be charged back ("chargebacks") for unearned financing fees or
vehicle service contract fees in the event of early termination of the contracts
by customers. The revenues from financing fees and vehicle service contract fees
in administrator-obligor states are recorded at the time of the sale of the
vehicles and a reserve for future chargebacks is established based on historical
operating results and the termination provisions of the applicable contracts. In
dealer-obligor states, revenues from vehicle service contract fees and related
direct costs are deferred and recognized over the life of the contracts. Finance
and vehicle service contract revenues, net of estimated chargebacks, are
included in other dealership revenues in the accompanying consolidated financial
statements.

INTANGIBLE ASSETS

The following are recently issued statements by the Financial
Accounting Standards Board that we believe could have a significant impact on
our reported financial condition or statement of operations.

In June 2001, Statement of Financial Accounting Standards ("SFAS") No.
141, "Business Combinations" was issued. SFAS No. 141 eliminates the use of the
pooling-of-interests method of accounting for business combinations and
establishes the purchase method as the only acceptable method. We adopted this
statement effective July 1, 2001. Acquired intangible assets, if any, are
separately recognized if, among other things, the benefit is obtained through

29

contractual or other legal rights, such as franchise agreements. Goodwill is
recorded only to the extent the purchase price for an entity exceeds the fair
value of the net tangible assets and identifiable intangible assets acquired.

In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
issued. SFAS No. 142 changes the treatment of goodwill by no longer amortizing
goodwill, however, other identifiable intangible assets are to be separately
recognized and amortized, as applicable. The statement requires, at least
annually, an assessment for impairment of goodwill and other indefinite life
intangible assets by applying a fair-value based test. A portion of our
intangible assets relate to franchise value, which is considered to have an
indefinite life. The statement is effective for fiscal years beginning after
December 15, 2001. The adoption of the statement will result in the elimination
of approximately $7.5 million of goodwill amortization, annually, subsequent to
December 31, 2001. Additionally, adoption could result in an impairment of
goodwill, based on the new fair-value based test, which would be reflected as a
cumulative effect of change in accounting principle on January 1, 2002. We are
currently analyzing the impact this statement will have on our consolidated
results of operations and financial position.

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

This annual report includes certain "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements include statements regarding
our plans, goals, beliefs or current expectations, including those plans, goals,
beliefs and expectations of our officers and directors with respect to, among
other things:

o the completion of pending and future acquisitions

o operating cash flows and availability of capital

o future stock repurchases

o capital expenditures

o changes in sales volumes in the new and used vehicle and parts and
service markets

o impact of new accounting standards

o business trends and interest rates

Any such forward-looking statements are not assurances of future
performance and involve risks and uncertainties. Actual results may differ
materially from anticipated results in the forward-looking statements for a
number of reasons, including;

o the future economic environment, including consumer confidence,
interest rates and manufacturer incentives, may affect the demand
for new and used vehicles and parts and service sales

o regulatory environment, adverse legislation, or unexpected
litigation

o our principal automobile manufacturers, especially Ford, Toyota and
GM may not continue to produce or make available to us vehicles
that are in high demand by our customers

o requirements imposed on us by our Manufacturers may affect our
acquisitions and capital expenditures related to our dealership
facilities

o our dealership operations may not perform at expected levels or
achieve expected improvements

o we may not achieve expected future cost savings and our future
costs could be higher than we expected

o available capital resources and various debt agreements may limit
our ability to repurchase shares. Any repurchases of our stock may
be made, from time to time, in accordance with applicable
securities laws, in the open market or in privately negotiated
transactions at such time and in such amounts, as we consider
appropriate

o available capital resources may limit our ability to complete
acquisitions

o available capital resources may limit our ability to complete
construction of new or expanded facilities

o our cost of financing could increase significantly

o new accounting standards could materially impact our reported
earnings per share

30

The information contained in this annual report, including the
information set forth under the heading "Business", identifies factors that
could affect our operating results and performance. We urge you to carefully
consider those factors.

All forward-looking statements attributable to us are qualified in
their entirety by this cautionary statement.

31

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

The table below provides information about our market-sensitive
financial instruments and constitutes a "forward-looking statement." Our major
market-risk exposure is changing interest rates. Our policy is to manage
interest rates through use of a combination of fixed and floating rate debt.
Interest rate swaps may be used to adjust interest rate exposures when
appropriate, based upon market conditions. These swaps are entered into with
financial institutions with investment grade credit ratings, thereby minimizing
the risk of credit loss. All items described are non-trading.

- ----------
(1) The rate shown includes the 112.5 basis point spread charged on the
floorplan notes payable.

(2) Both swaps variable rates are based on 30-day LIBOR. The rate shown is as of
December 31, 2001.

We receive interest assistance from various Manufacturers. Generally,
this assistance equals approximately 70% to 100% of our floorplan notes payable
interest expense. During 2001, we recognized $29.1 million of assistance, which
we accounted for as a purchase discount and reflected as a reduction of cost of
sales in the income statement as vehicles were sold.

Based on our capital structure as of December 31, 2001, a 100 basis
point change in interest rates would result in an estimated $1.5 million change
in interest expense, net of tax. However, as a portion of the interest
assistance we receive from the Manufacturers tracks changes in interest rates,
we estimate that there is effectively no direct impact on our net income of any
change in interest rates.

Also see "Business - Factors that may Affect Future Results - Impact of
Changes in Interest Rates."

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See the Financial Statements for the information required by this item.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

32

PART III

For information concerning:

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

See the definitive Proxy Statement of Group 1 Automotive, Inc. for the
Annual Meeting of Stockholders to be held on May 22, 2002, which will be filed
with the Securities and Exchange Commission and is incorporated herein by
reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Financial Statements

The financial statements listed in the accompanying Index to
Financial Statements are filed as part of this Annual Report on
Form 10-K.

(b) Reports on Form 8-K

On October 30, 2001, the Company filed a Current Report on Form 8-K
reporting under Item 5 and including exhibits under Item 7 thereof.

(c) Exhibits

35

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the city of Houston,
Texas, on the 20th day of March, 2002.

Group 1 Automotive, Inc.

By: /s/ B.B. Hollingsworth, Jr.
----------------------------------
B.B. Hollingsworth, Jr.
Chairman, President and
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on the 20th day of March, 2002.

36

INDEX TO FINANCIAL STATEMENTS

Group 1 Automotive, Inc. and Subsidiaries -- Consolidated Financial Statements
Report of Independent Public Accountants...................................................................F-2
Consolidated Balance Sheets................................................................................F-3
Consolidated Statements of Operations......................................................................F-4
Consolidated Statements of Stockholders' Equity............................................................F-5
Consolidated Statements of Cash Flows......................................................................F-6
Notes to Consolidated Financial Statements.................................................................F-7

F-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Group 1 Automotive, Inc. and Subsidiaries:

We have audited the accompanying consolidated balance sheets of Group 1
Automotive, Inc. (a Delaware corporation) and Subsidiaries (the "Company") as of
December 31, 2001 and 2000 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2001 and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.

/s/ Arthur Andersen LLP

Houston, Texas
February 14, 2002

F-2

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated
financial statements.

F-3

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these consolidated
financial statements.

F-4

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

The accompanying notes are an integral part of these consolidated
financial statements.

F-5

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these
consolidated financial statements.

F-6

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION:

Group 1 Automotive, Inc., a Delaware corporation, is a leading operator
in the automotive retailing industry. Group 1 Automotive, Inc. is a holding
company with no independent assets or operations other than its investments in
its subsidiaries, which are located in Texas, Oklahoma, Florida, Georgia, New
Mexico, Colorado, Louisiana and Massachusetts. These subsidiaries sell new and
used cars and light trucks through their dealerships and Internet sites; arrange
related financing, vehicle service and insurance contracts; provide maintenance
and repair service; and sell replacement parts. Group 1 Automotive, Inc. and its
subsidiaries are herein collectively referred to as the "Company" or "Group 1".

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation / Reclassifications

All acquisitions of dealerships completed during the periods presented
have been accounted for using the purchase method of accounting and their
results of operations are included from the effective dates of the closings of
the acquisitions. The allocations of purchase price to the assets acquired and
liabilities assumed have been initially assigned and recorded based on
preliminary estimates of fair value and may be revised as additional information
concerning the valuation of such assets and liabilities becomes available. All
significant intercompany balances and transactions have been eliminated in
consolidation. Certain reclassifications have been made to prior year financial
statements to conform to the current year presentation.

Revenue Recognition

Revenues from vehicle sales, parts sales and vehicle service are
recognized upon completion of the sale and delivery to the customer. Conditions
to completing a sale include having an agreement with the customer, including
pricing, and the sales price must be reasonably expected to be collected.

Finance, Insurance and Service Contract Income Recognition

The Company arranges financing for customers through various
institutions and receives financing fees based on the difference between the
loan rates charged to customers and predetermined financing rates set by the
financing institution. In addition, the Company receives fees from the sale of
vehicle service contracts to customers.

The Company may be charged back ("chargebacks") for unearned financing
fees or vehicle service contract fees in the event of early termination of the
contracts by customers. The revenues from financing fees and vehicle service
contract fees in administrator-obligor states are recorded at the time of the
sale of the vehicles and a reserve for future chargebacks is established based
on historical operating results and the termination provisions of the applicable
contracts. In dealer-obligor states, revenues from vehicle service contract fees
and related direct costs are deferred and recognized over the life of the
contracts. Finance and vehicle service contract revenues, net of estimated
chargebacks, are included in other dealership revenues in the accompanying
consolidated financial statements.

The Company consolidates the operations of its reinsurance company. The
Company reinsures the credit life and accident and health insurance policies
sold by its dealerships. All of the revenues and related direct costs from the
sales of these policies are deferred and recognized over the life of the
policies, in accordance with Statement of Financial Accounting Standards
("SFAS") No. 60, "Accounting and Reporting by Insurance Enterprises."

Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments that have
an original maturity of three months or less at the date of purchase, as well as
contracts-in-transit. Contracts-in-transit represent contracts on vehicles sold,
for which the proceeds are in transit from financing institutions. As of
December 31, 2001 and 2000, contracts-in-transit totaled $130.4 and $117.6
million, respectively.

Inventories

New, used and demonstrator vehicles are stated at the lower of cost or
market, determined on a specific-unit basis. Vehicle inventory cost consists of
the amount paid to acquire the inventory, plus

F-7

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

reconditioning cost, cost of equipment added and transportation cost.
Additionally, the Company receives interest assistance from some of the
automobile manufacturers. The assistance is accounted for as a purchase discount
and is reflected as a reduction to the inventory cost on the balance sheet and
as a reduction to cost of sales in the income statement as the vehicles are
sold. At December 31, 2001 and 2000, inventory cost had been reduced by $4.2 and
$5.2 million, respectively, for interest assistance received from manufacturers.

Parts and accessories are stated at the lower of cost (determined on a
first-in, first-out basis) or market.

Valuation reserves are provided against the inventory balances based on
the agings of the inventories and market trends.

Property and Equipment

Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated useful life of the asset.

Expenditures for major additions or improvements, which extend the
useful lives of assets, are capitalized. Minor replacements, maintenance and
repairs, which do not improve or extend the lives of the assets, are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in current operations.

Intangible Assets

Intangible assets represent the excess of the purchase price of
dealerships acquired over the fair value of tangible assets acquired at the date
of acquisition. Currently, goodwill is amortized on a straight-line basis over
40 years. Amortization expense charged to operations totaled approximately $7.5,
$6.7, and $4.5 million for the years ended December 31, 2001, 2000 and 1999,
respectively. Accumulated amortization totaled approximately $21.0 and $13.7
million as of December 31, 2001 and 2000, respectively. See "Recent Accounting
Pronouncements" for discussion of SFAS No. 142, which will impact the accounting
for intangible assets in subsequent years.

Impairment of Long-Lived Assets

SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" requires that long-lived assets be
reviewed for impairment whenever there is evidence that the carrying amount of
such assets may not be recoverable. This consists of comparing the carrying
amount of the asset with its expected future undiscounted cash flows without
interest costs. If the asset carrying amount is less than such cash flow
estimate, it is written down to its fair value. Estimates of expected future
cash flows represent management's best estimate based on currently available
information and reasonable and supportable assumptions. Any impairment
recognized in accordance with SFAS No. 121 is permanent and may not be restored.
Through December 31, 2001, the Company has not recorded any significant
impairment writedowns of its long-lived assets.

Income Taxes

The Company follows the liability method of accounting for income taxes
in accordance with SFAS No. 109, "Accounting for Income Taxes." Under this
method, deferred income taxes are recorded based upon differences between the
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the underlying
assets are realized or liabilities are settled. A valuation allowance reduces
deferred tax assets when it is more likely than not that some or all of the
deferred tax assets will not be realized. See Note 12 regarding income taxes.

Self-Insured Medical and Property/Casualty Plans

The Company is self-insured for a portion of the claims related to its
employee medical benefits and property/casualty insurance programs. Claims, not
subject to stop-loss insurance, are accrued based upon the Company's estimates
of the aggregate liability for claims incurred using certain actuarial
assumptions and the Company's historical claims experience.

F-8

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value of Financial Instruments

The Company's financial instruments consist primarily of floorplan
notes payable and long-term debt. Excluding the Company's senior subordinated
notes, the carrying amount of these financial instruments approximates fair
value due either to length of maturity or existence of variable interest rates
that approximate market rates. Specifically, the carrying value of the Company's
senior subordinated notes, which are currently on the books with a cost basis of
$85.0 million, net of discount, have a fair value, based on current market
prices, of $90.7 million.

During 2001, the Company entered into two interest rate swap
transactions. The Company entered into the swaps to mitigate its exposure to
fluctuations in interest rates and has designated the swaps as cash flow hedges,
in accordance with SFAS No. 133. The details of the transactions are as follows:

The net fair value of the swaps is included in other liabilities, with
a corresponding charge to other comprehensive income, net of tax. If the
interest rates at December 31, 2001, remain unchanged, the cash flow settlements
to be paid by the Company for the next twelve months would total approximately
$4.4 million.

Factory Incentives

The Company receives various incentive payments from some of its
automobile manufacturers. These incentive payments are typically received on
parts purchases from the automobile manufacturers and on new vehicle retail
sales. These incentives are reflected as reductions of cost of sales in the
statement of operations.

Advertising

The Company expenses production and other costs of advertising as
incurred. Advertising expense for the years ended December 31, 2001, 2000, and
1999 totaled $38.3, $38.1 and $25.9 million, respectively.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in determining the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The significant estimates made by management in the
accompanying consolidated financial statements relate to reserves for inventory
valuations and future chargebacks on finance and vehicle service contract fees,
and valuation of intangible assets. Actual results could differ from those
estimates.

Statements of Cash Flows

For purposes of the statements of cash flows, cash and cash equivalents
include contracts-in-transit, which are typically collected within 15 days.
Additionally, the net change in floorplan financing of inventory, which is a
customary financing technique in the industry, is reflected as an operating
activity in the statements of cash flows.

Related Party Transactions

From time-to-time, the Company enters into transactions with related
parties. Related parties include officers, directors, five percent or greater
shareholders and other management personnel of the Company.

F-9

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At times, the Company has purchased its stock from related parties.
These transactions were completed at then current market prices. See Note 11 for
information regarding related party lease commitments. There are no other
significant related party transactions.

Earnings Per Share

SFAS No. 128, "Earnings per Share" requires the presentation of basic
earnings per share and diluted earnings per share in financial statements of
public enterprises. Under the provisions of this statement, basic earnings per
share is computed based on weighted average shares outstanding and excludes
dilutive securities. Diluted earnings per share is computed including the impact
of all potentially dilutive securities. The following table sets forth the
shares outstanding for the earnings per share calculations for the years ended
December 31, 2001, 2000 and 1999:

Recent Accounting Pronouncements

In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognizes
all derivatives as either assets or liabilities in the statement of financial
position and measures those instruments at fair value. The accounting for
changes in the fair value of a derivative (that is, gains or losses) depends on
the intended use of the derivative and the resulting designation. SFAS No. 137
amended the effective date to be for all fiscal quarters of fiscal years
beginning after June 15, 2000. SFAS No. 138, issued in June 2000, addresses a
limited number of issues that were causing implementation difficulties for
numerous entities applying SFAS No. 133. The Company's adoption of the
provisions of this statement on January 1, 2001, did not have any impact on the
results of operations or financial position.

In June 2001, SFAS No. 141, "Business Combinations" was issued. SFAS
No. 141 eliminates the use of the pooling-of-interests method of accounting for
business combinations and establishes the purchase method as the only acceptable
method. The Company adopted this statement effective July 1, 2001. Acquired
intangible assets, if any, are separately recognized if, among other things, the
benefit is obtained through contractual or other legal rights, such as franchise
agreements. Goodwill is recorded only to the extent the purchase price for an
entity exceeds the fair value of the net tangible assets and identifiable
intangible assets acquired.

In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
issued. SFAS No. 142 changes the treatment of goodwill by no longer amortizing
goodwill, however, other identifiable intangible assets are to be separately
recognized and amortized, as applicable. The statement requires, at least
annually, an assessment for impairment of goodwill and other indefinite life
intangible assets by applying

F-10

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

a fair-value based test. A portion of the Company's intangible assets relate to
franchise value, which is considered to have an indefinite life. The statement
is effective for fiscal years beginning after December 15, 2001. The adoption of
the statement will result in the elimination of approximately $7.5 million of
goodwill amortization, annually, subsequent to December 31, 2001. Additionally,
adoption could result in an impairment of goodwill, based on the new fair-value
based test, which would be reflected as a cumulative effect of change in
accounting principle on January 1, 2002. Management is currently analyzing the
impact this statement will have on its consolidated results of operations and
its financial position.

In August 2001, SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" was issued. SFAS No. 144 supercedes SFAS No. 121
and Accounting Principles Board Opinion ("APB") No. 30, "Reporting the Results
of Operations - Reporting the Effects of the Disposal of a Segment Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
No. 144 establishes a single accounting model for assets to be disposed of by
sale whether previously held and used or newly acquired. SFAS No. 144 retains
the provisions of APB No. 30 for presentation of discontinued operations in the
income statement, but broadens the presentation to include a component of an
entity. SFAS No. 144 is effective for fiscal years beginning after December 15,
2001, and the interim periods within. The Company does not believe that the
adoption of SFAS No. 144 will have a material impact on its consolidated results
of operations or financial position.

Business Segment Information

The Company, through its operating companies, operates in the
automotive retailing industry. All of the operating companies sell new and used
vehicles, provide maintenance and repair services, sell replacement parts and
arrange vehicle financing, service and insurance contracts. For the reasons
discussed below, all of our operating companies represent one reportable segment
under SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information." Accordingly, the accompanying consolidated financial statements
reflect the operating results of the Company's reportable segment.

The Company's operating companies deliver the same products and
services to a common customer group. The Company's customers, generally, are
individuals. All of the operating companies, generally, follow the same
procedures and methods in managing their operations. Each operating company also
operates in a similar regulatory environment. The Company's management evaluates
performance and allocates resources based on the operating results of the
individual operating companies.

3. BUSINESS COMBINATIONS:

During 2001, the Company acquired four automobile dealership
franchises. These acquisitions were accounted for as purchases. The aggregate
consideration paid in completing these acquisitions included approximately $11.0
million in cash, net of cash received, the assumption of an estimated $7.7
million of inventory financing and the assumption of approximately $0.3 million
of notes payable. The consolidated balance sheet includes preliminary
allocations of the purchase price of the acquisitions, which are subject to
final adjustment. These allocations resulted in recording approximately $8.5
million of intangible assets, a portion of which is currently being amortized
over 40 years. See "Recent Accounting Pronouncements" for a discussion of SFAS
No. 142, which will impact the accounting for intangible assets in subsequent
years. Additionally, during 2001, the Company sold eight dealership franchises
for $5.4 million in cash. No gain or loss was recognized on these sales as they
were completed at net book value.

The following pro forma financial information consists of income
statement data from the consolidated financial statements plus (1) unaudited
income statement data for all acquisitions and dispositions completed between
January 1, 2001, and December 31, 2001, assuming that they occurred on January
1, 2000, and (2) certain pro forma adjustments discussed below:

F-11

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Pro forma adjustments included in the amounts above primarily relate
to: (a) increases in revenues related to changes in the contractual commission
arrangements on certain third-party products sold by the dealerships; (b)
changes in interest expense resulting from net cash borrowings utilized to
complete acquisitions, net of interest rate reductions received; and (c)
incremental provisions for federal and state income taxes relating to the
compensation differential, S Corporation income and other pro forma adjustments.

During 2000, the Company acquired 16 automobile dealership franchises.
These acquisitions were accounted for as purchases. The aggregate consideration
paid in completing these acquisitions, including real estate acquired and
satisfying certain contingent acquisition payment arrangements from previous
transactions, included approximately $65.1 million in cash, net of cash
received, $6.8 million of acquisition payments payable, the issuance of
approximately 630,000 shares of restricted/unregistered common stock, the
assumption of an estimated $59.8 million of inventory financing and the
assumption of approximately $11.1 million of notes payable. The purchase price
allocations resulted in recording approximately $64.3 million of goodwill, which
is currently being amortized over 40 years. See "Recent Accounting
Pronouncements" for a discussion of SFAS No. 142, which will impact the
accounting for intangible assets in subsequent years.

During 1999, the Company acquired 32 automobile dealership franchises.
These acquisitions were accounted for as purchases. The aggregate consideration
paid in completing these acquisitions, including real estate acquired and
satisfying certain contingent acquisition payment arrangements from previous
transactions, included approximately $109.9 million in cash, net of cash
received, approximately 1.5 million shares of common stock and the assumption of
an estimated $101.5 million of inventory financing and approximately $500,000 of
notes payable. The purchase price allocations resulted in recording
approximately $116.2 million of goodwill, which is currently being amortized
over 40 years. See "Recent Accounting Pronouncements" for a discussion of SFAS
No. 142, which will impact the accounting for intangible assets in subsequent
years.

4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

Accounts and notes receivable consist of the following:

Inventories, net of valuation reserves, consist of the following:

F-12

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following:

6. FLOORPLAN NOTES PAYABLE:

Floorplan notes payable reflect amounts payable for the purchase of
specific vehicle inventory and consist of the following:

The Company obtains its floorplan financing through its Revolving
Credit Agreement with a lending group (the "Credit Facility"). The lending group
making up the Credit Facility is comprised of 15 major financial institutions,
including five manufacturer captive finance companies. The manufacturer captive
finance companies are Ford Motor Credit Company, Toyota Motor Credit
Corporation, BMW Financial Services N.A., Inc., Chrysler Financial Company,
L.L.C. and Mercedes-Benz Credit Corporation. The maturity date of the Credit
Facility is December 31, 2003. The notes payable bear interest at the London
Interbank Offered Rate ("LIBOR") plus 112.5 basis points. As of December 31,
2001 and 2000, the interest rate on floorplan notes payable outstanding was
3.27% and 7.97%, respectively. See the discussion of the Company's interest rate
swaps under Note 2. As discussed more fully in Note 2, the Company receives
interest assistance from some automobile manufacturers. The assistance,
generally, equals approximately 70% to 100% of the Company's floorplan interest
expense.

The floorplan arrangement permits the Company to borrow up to $702
million, dependent upon new and used vehicle inventory levels. As of December
31, 2001, total available borrowings under the floorplan agreements were
approximately $337 million.

Payments on the floorplan notes payable are due as the vehicles are
sold. The floorplan notes payable are collateralized by substantially all of the
vehicle inventories of the Company.

F-13

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. LONG-TERM DEBT:

In addition to floorplan notes payable, the Credit Facility provides an
acquisition line of credit of up to $198 million for the financing of
acquisitions, general corporate purposes or capital expenditures. The amount of
funds available under the acquisition line is dependent upon a calculation based
on the Company's cash flow and maintaining certain financial ratios. The
acquisition line of credit of the Credit Facility bears interest based on the
LIBOR plus a margin varying from 175 to 325 basis points, dependent upon certain
financial ratios. Additionally, the loan agreement contains various covenants
including financial ratios, such as, fixed-charge coverage, interest coverage
and a minimum net worth requirement, among others, and other requirements, which
must be maintained by the Company. As of December 31, 2001, the Company was in
compliance with these requirements. The Credit Facility allows 33% of net income
to be paid as cash dividends. The interest rate on borrowings under the
acquisition line of credit of the Credit Facility was 8.70% at December 31,
2000, and would have been 3.62% based on LIBOR at December 31, 2001, but there
were no amounts outstanding at that time. Land, buildings or other assets secure
all of the notes payable.

Total interest incurred on long-term debt was approximately $5.2, $5.7
and $2.4 million for the years ended December 31, 2001, 2000 and 1999,
respectively, which included approximately $897,000, $352,000, and $592,000 of
capitalized interest on construction projects in 2001, 2000 and 1999,
respectively.

The aggregate maturities of long-term debt as of December 31, 2001,
were as follows (in thousands):

2002 .................... $1,687
2003 .................... 1,381
2004..................... 874
2005 .................... 881
2006 .................... 555
Thereafter............... 6,806
-------
Total long-term debt... $12,184
=======

8. SENIOR SUBORDINATED NOTES

The Company completed the offering of $100 million of its 10 -7/8%
Senior Subordinated Notes due 2009 (the "Notes") on March 5, 1999. The Notes pay
interest semi-annually on March 1 and September 1, each year. The Company may
redeem all or part of the Notes at redemption prices of 105.438%, 103.625%,
101.813% and 100.000% of the principal amount plus accrued interest during the
twelve-month periods beginning March 1, of 2004, 2005, 2006, and 2007 and
thereafter, respectively. The Notes are jointly and severally and fully and
unconditionally guaranteed, on an unsecured senior subordinated basis, by all
subsidiaries of the Company (the "Subsidiary Guarantors"), other than certain
minor subsidiaries. All of the Subsidiary

F-14

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Guarantors are wholly-owned subsidiaries of the Company. Certain manufacturers
have minimum working capital guidelines, which may limit a subsidiary's ability
to make distributions to the parent company.

During 2000 and 2001, the Company repurchased a portion of its Notes.
The purchases were completed at or near the Company's carrying value of the
Notes.

Total interest expense on the senior subordinated notes for the years
ended December 31, 2001, 2000, and 1999 was approximately $10.1 million, $10.7
million and $9.1 million, respectively.

9. STOCK-BASED COMPENSATION PLANS:

In 1996, Group 1 adopted the 1996 Stock Incentive Plan (the "Plan"),
which provides for the granting or awarding of stock options, stock appreciation
rights and restricted stock to employees and directors. The number of shares
authorized and reserved for issuance under the Plan is 4.5 million shares, of
which 532,228 are available for future issuance as of December 31, 2001. The
terms of the option awards (including vesting schedules) are established by the
Compensation Committee of the Company's Board of Directors. All outstanding
options are exercisable over a period not to exceed 10 years and vest over
three- to six-year periods.

The following table summarizes the Company's outstanding stock options:

At December 31, 2001, 2000 and 1999, 1,309,079, 799,111 and 448,544
options, respectively, were exercisable at weighted average exercise prices of
$13.02, $11.88 and $9.86, respectively. The weighted average fair value per
share of options granted during the years ended December 31, 2001, 2000 and 1999
is $18.67, $7.34 and $13.40, respectively. The fair value of options granted is
estimated on the date of grant using the Black-Scholes option pricing model. The
following table summarizes the weighted average information used in determining
the fair value of the options granted during the years ended December 31, 2001,
2000 and 1999:

F-15

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes information regarding stock options
outstanding as of December 31, 2001:

In September 1997, Group 1 adopted the Group 1 Automotive, Inc. 1998
Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan authorizes
the issuance of up to 1.5 million shares of common stock and provides that no
options may be granted under the Purchase Plan after June 30, 2007. The Purchase
Plan is available to all employees of the Company and its participating
subsidiaries and is a qualified plan as defined by Section 423 of the Internal
Revenue Code. At the end of each fiscal quarter (the "Option Period") during the
term of the Purchase Plan, the employee contributions are used to acquire shares
of common stock at 85% of the fair market value of the common stock on the first
or the last day of the Option Period, whichever is lower. During 2001, 2000 and
1999, the Company issued 257,235, 338,204 and 246,595 shares, respectively, of
common stock to employees participating in the Purchase Plan.

In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which, if fully adopted,
requires the Company to record stock-based compensation at fair value. The
Company has adopted the disclosure requirements of SFAS No. 123 and has elected
to record employee compensation expense in accordance with APB No. 25,
"Accounting for Stock Issued to Employees." Accordingly, compensation expense is
recorded for stock options based on the excess of the fair market value of the
common stock on the date the options were granted over the aggregate exercise
price of the options. As the exercise price of options granted under the Plan
has been equal to or greater than the market price of the Company's stock on the
date of grant, no compensation expense related to the Plan has been recorded.
Additionally, no compensation expense is recorded for shares issued pursuant to
the Purchase Plan as it is a qualified plan.

Had compensation expense for the stock incentive and employee stock
purchase plans been determined based on the provisions of SFAS No. 123, the
impact on the Company's net income would have been as follows:

10. DEFERRED COMPENSATION PLAN:

The Company has a deferred compensation plan to provide selected
employees with the opportunity to accumulate additional savings for retirement
on a tax-deferred basis. Participants in the plan are allowed to defer receipt
of a portion of their salary and/or bonus compensation earned. The participants
can choose from various defined investment options to determine their earnings
crediting rate, however, the Company has complete discretion over how the funds
are utilized. Participants in the plan

F-16

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

are unsecured creditors of the Company. The balances due to participants of the
deferred compensation plan as of December 31, 2001 and 2000, were $3.3 and $1.5
million, respectively.

11. OPERATING LEASES:

The Company leases various facilities and equipment under long-term
operating lease agreements. These leases, with third-parties and
related-parties, expire on various dates through December 2031 and, in general,
have renewal or cancellation options, at the Company's option, at various times
during the lease term.

Future minimum lease payments for operating leases are as follows:

Total rent expense under all operating leases, including operating
leases with related parties, was approximately $30.7, $28.3 and $19.9 million
for the years ended December 31, 2001, 2000 and 1999, respectively. Rental
expense on related-party leases, which is included in the above amounts, totaled
approximately $7.9, $10.9 and $9.6 million for the years ended December 31,
2001, 2000 and 1999, respectively.

12. INCOME TAXES:

Federal and state income taxes are as follows:

F-17

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 35% in 2001, 2000 and
1999 to income before income taxes as follows:

Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets (liabilities) result principally from the following:

The net deferred tax assets (liabilities) are comprised of the
following:

The Company believes it is more likely than not, that the deferred tax
assets will be realized, based primarily on the assumption of future taxable
income.

F-18

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. COMMITMENTS AND CONTINGENCIES:

Legal Proceedings

The Company is a defendant in several lawsuits arising from normal
business activities. Management has reviewed all pending litigation with legal
counsel and believes that the ultimate liability, if any, resulting from such
actions will not have a material adverse effect on the Company's financial
position or results of operations.

Insurance

Because of their vehicle inventory and nature of business, automobile
dealerships generally require significant levels of insurance covering a broad
variety of risks. The Company's insurance includes umbrella policies with a $105
million aggregate limit, as well as insurance on its real property,
comprehensive coverage for its vehicle inventory, general liability insurance,
employee dishonesty coverage, employment practices liability insurance,
pollution coverage and errors and omissions insurance in connection with its
vehicle sales and financing activities. Additionally, the Company retains some
risk of loss under its self-insured medical and property/casualty plans. See
further discussion under Note 2.

14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):

F-19

EXHIBIT INDEX