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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, 1997
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 350, HOUSTON, TEXAS 77024
(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code (713)467-6268
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Securities Exchanges on which Registered
------------------- -----------------------------
COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of 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.
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The aggregate market value of the voting stock held by non-affiliates
of the Registrant was approximately $90,296,000 as of March 27, 1998 (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 March 27, 1998, there were 16,101,209 shares of Registrant's
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 28,
1998, 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................................................................................................ 14
Item 3. Legal Proceedings......................................................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders....................................................... 17
PART II.............................................................................................................. 17
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .................................... 17
Item 6. Selected Consolidated Financial Data .................................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .................... 19
Item 8. Financial Statements and Supplementary Data .............................................................. 30
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ..................... 31
PART III ............................................................................................................ 31
Item 10. Directors and Executive Officers of the Registrant ...................................................... 31
Item 11. Executive Compensation .................................................................................. 31
Item 12. Security Ownership of Certain Beneficial Owners and Management .......................................... 31
Item 13. Certain Relationships and Related Transactions .......................................................... 31
PART IV ............................................................................................................. 32
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ........................................ 32
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PART I
ITEM 1. BUSINESS
GENERAL
Group 1 Automotive, Inc. ("Group 1" or the "Company") was founded to
become a leading operator and consolidator in the highly fragmented automotive
retailing industry. Simultaneously with the closing of its initial public
offering ("IPO") in November 1997, Group 1 acquired four automobile dealership
groups ("Founding Groups") comprised of 30 automobile dealership franchises.
During the first quarter of 1998, the Company closed acquisitions which
comprise four additional automobile dealership franchises. The Company's
automobile dealership franchises are located in Florida, Georgia, Oklahoma and
Texas, and sell new and used cars and light trucks, provide maintenance and
repair services, sell replacement parts and arrange related financing,
insurance and extended service contracts.
BUSINESS STRATEGY
Group 1 plans to achieve its goal of becoming a leading consolidator,
while maintaining its high operating standards, in the automotive retailing
industry, by (i) emphasizing growth through acquisitions and (ii) implementing
an operating strategy that focuses on decentralized dealership operations,
nationally centralized administrative functions, the expansion of higher margin
businesses, a commitment to customer service and the implementation of new
technology initiatives. By complementing the Founding Groups' industry
leaders, management talent and proven operating capabilities with a corporate
management team which is experienced in achieving and managing long-term growth
in a consolidation environment, the Company believes that it is in a strong
position to execute this strategy.
GROWTH THROUGH ACQUISITIONS
Group 1 has implemented an aggressive, yet disciplined, acquisition
program by pursuing (i) large, profitable and well managed "platform"
acquisitions in large metropolitan and high-growth suburban geographic markets
that the Company does not currently serve and (ii) smaller "tuck-in"
acquisitions that will allow the Company to increase brand diversity,
capitalize on regional economies of scale and offer a greater breadth of
products and services in each of the markets in which it operates. In this
regard, the Company has obtained a $125 million credit facility, of which a
portion will be used, in combination with the Company's common stock, for
acquisitions. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Forward Looking Information and Certain Risks and Uncertainties that Could
Affect Future Operating Results".
ENTERING NEW GEOGRAPHIC MARKETS. Group 1 intends to expand into
geographic markets it does not currently serve by acquiring large, profitable
and well established megadealers that, like the Founding Groups, are leaders in
their regional markets. The Company will target new platform megadealers
having superior operational and financial management personnel which the
Company will seek to retain. Group 1 believes that the retention of existing
high quality management will enable acquired megadealers to continue to operate
effectively with management personnel who understand the local market while
allowing the Company to source future acquisitions more effectively and expand
its operations without having to employ and train untested new personnel.
Moreover, Group 1 believes that the Company will be well positioned to pursue
larger, well established acquisition candidates as a result of its depth of
management, the Company's capital structure and the reputation of the
principals of the Founding Groups as leaders in the automotive retailing
industry.
EXPANDING WITHIN EXISTING MARKETS. Group 1 plans to acquire
additional dealerships in each of the markets in which it operates, including
acquisitions that increase the brands, products or services offered in that
market. Group 1 believes that these acquisitions facilitate the Company's
operating efficiencies and cost savings on a regional level in areas such as
facility and personnel utilization, vendor consolidation and advertising.
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RECENT ACQUISITIONS. The Company has signed definitive purchase
agreements related to eight dealership acquisitions. Three of these
acquisitions are new platforms and will expand the Company's geographic
diversity to include Georgia, New Mexico and South Florida. Certain of the
remaining acquisitions are tuck-ins which will complement the Company's platform
operations in Austin and Beaumont, Texas and in South Florida. These
acquisitions will bring the Company's total number of dealership franchises to
58 and the number of brands represented to 24. The closing of each of these
acquisitions is subject to customary closing conditions, including manufacturer
approval and the completion of due diligence. The aggregate consideration paid,
or to be paid, in completing these acquisitions, including real estate acquired
and excluding the assumption of an estimated $92.5 million of inventory
financing, is $80.2 million in cash and 3,450,358 shares of Group 1 Common
Stock.
As part of certain of the acquisitions the Company has committed, for
a limited period of time, to certain sellers, that they will realize an agreed
upon minimum price upon the sale of the Common Stock received in the
acquisitions. If the Company is called upon to perform under this arrangement,
the cash payment will result in an increase in Goodwill on the balance sheet of
Group1. No Common Stock issued in the acquisitions is permitted to be sold for
a minimum of one year from the date of its issuance.
Additionally, in certain transactions, the sellers may earn contingent
consideration ("Earnouts") based on an increase in earnings before taxes of
their operations, as defined. Currently, the future amounts payable are not
determinable. When made, the contractual provisions governing the payments will
result in approximately one-half of the payments being made in Group 1 Common
Stock and one-half in cash. The Earnout amounts, if earned, will result in
increases in Goodwill on the balance sheet of Group 1.
In connection with these acquisitions, certain of the former owners
involved in the management of the dealerships will execute long-term employment
agreements with the Company that contain post-employment non-competition
covenants. Generally, the real estate and facilities comprising the acquired
dealerships are leased from affiliates of the former stockholders of the
acquired companies under long-term leases, with fair market value rental rates.
OPERATING STRATEGY
Group 1 has implemented an operating strategy that focuses on
decentralized dealership operations, nationally centralized administrative
functions, expansion of higher margin businesses, commitment to customer
service and new technology initiatives.
Group 1 has formed an operations committee comprised of the chief
operating officers of the Founding Groups and the general managers of the
dealerships in order to identify and share best practices. Group 1 intends to
incorporate the key officers and management of the Company's future
acquisitions into this operations committee. Group 1 believes that this
operations committee will promote the widespread application of the Company's
broad strategic initiatives, facilitate the integration of the future
acquisitions and improve operating efficiency and overall customer
satisfaction.
DECENTRALIZED DEALERSHIP OPERATIONS. Group 1 believes that
decentralizing the Company's dealership operations on a regional, or platform,
basis enables it to provide superior customer service and a focused,
market-specific responsiveness to sales, service, marketing and inventory
control. Local presence and an in-depth knowledge of customers' needs and
preferences are important in generating internally-driven market share growth.
By coordinating certain operations on a platform basis, the Company believes
that it will achieve cost savings in such areas as vendor consolidation,
facility and personnel utilization and advertising. Group 1 has created
incentives for the Company's entrepreneurial management teams and sales forces
at the regional level through the use of stock options and/or cash bonus
programs.
NATIONALLY CENTRALIZED ADMINISTRATIVE FUNCTIONS. The consolidation
of purchasing power on a centralized basis in the area of financing should
result in significant cost savings. For example, all of the Company's
floorplan financing has benefited from interest rate reductions. Furthermore,
Group 1 expects that significant cost savings can be achieved through the
consolidation of administrative functions such as risk management, employee
benefits and employee training. For example, Group 1 has negotiated
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insurance coverage that will result in annual cost savings to the Company of
approximately 25 to 30 percent from the costs incurred by the Founding Groups
prior to their being acquired by Group 1.
EXPAND HIGHER MARGIN ACTIVITIES. The Company is focusing on
expanding higher margin businesses such as used vehicle retail sales, parts and
service and finance and insurance. While each of the Company's platforms
operates independently in a manner consistent with its specific market's
characteristics, each platform will pursue an integrated strategy to grow each
of these higher margin businesses to enhance profitability and stimulate
internal growth. With a competitive advantage in sourcing and attractive lease
financing, new vehicle franchises are especially well positioned to capitalize
on industry growth in used vehicle sales. In addition, each of the Company's
dealerships offer an integrated parts and service department, which provides an
important source of recurring higher margin revenues. The Company also has the
opportunity on each new or used vehicle sold to generate incremental revenues
from the sale of extended service contracts, credit insurance policies and
finance and lease contracts. Each of these business areas is a focus of
internal growth.
COMMITMENT TO CUSTOMER SERVICE. The Company is focused on providing
a high level of customer service to meet the needs of an increasingly
sophisticated and demanding automotive consumer. The Company's dealerships
strive to cultivate lasting relationships with its customers, which the Company
believes enhances the opportunity 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, providing an
opportunity to foster ongoing relationships with their customers and deepen
customer loyalty. The Company's dealerships will continuously review their
selling processes in their effort to satisfy their customers.
DEALERSHIP OPERATIONS
Each platform has an established management structure that promotes
and rewards entrepreneurial spirit, individual pride and responsibility 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
the team's experience in and familiarity with its local market.
NEW VEHICLE SALES. The Company currently represents 20 American and
Asian brands of economy, family, sports and luxury cars and light trucks and
sport utility vehicles. The following table sets forth for 1997, certain
information relating to the brands of new vehicles sold at retail by the
Company on a pro forma basis assuming that the acquisitions of the Founding
Groups occurred on January 1, 1997. These results may not be indicative of the
Company's post-combination results:
NUMBER OF NEW PERCENTAGE OF
MANUFACTURER VEHICLES SOLD AT RETAIL TOTAL
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Toyota ................. 5,938 25.6%
Nissan ................. 4,518 19.5
Honda ................... 2,868 12.4
Chevrolet ............... 1,597 6.9
Lexus ................... 1,279 5.5
GMC ..................... 998 4.3
Acura ................... 874 3.8
Dodge ................... 814 3.5
Mitsubishi............... 810 3.5
Pontiac ................. 700 3.0
Isuzu ................... 696 3.0
Chrysler ................ 578 2.5
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Jeep ...................... 516 2.2
Mazda ...................... 291 1.3
Mercury .................... 204 0.9
Other ...................... 520 2.1
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Total 23,201 100.0%
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The 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, which brings the consumer back to the market sooner than if the purchase
were debt financed. In addition, leases provide the dealerships with a steady
source of late-model, off-lease vehicles for its used vehicle inventory.
Generally, leased vehicles remain under factory warranty for the term of the
lease, which allows the dealerships to provide repair service to the lessee
throughout the lease term.
The 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. For example, the dealerships strive
to: (i) employ more efficient selling approaches; (ii) utilize computer
technology that decreases the time necessary to purchase a vehicle; (iii)
engage in extensive follow-up after a sale in order to develop long-term
relationships with customers; and (iv) extensively train their sales staffs to
be able to meet the needs of the customer. The dealerships continually
evaluate innovative ways to improve the buying experience for their customers.
The Company believes that its ability to share best practices among its
dealerships gives it an advantage over smaller dealerships.
The dealerships acquire substantially all their new vehicle inventory
from the automobile manufacturers ("Manufacturers"). Manufacturers allocate a
limited inventory among their franchised dealers based primarily on sales
volume and input from dealers. The dealerships finance their inventory
purchases through revolving credit arrangements known in the industry as
floorplan facilities.
USED VEHICLE SALES. The Company sells used vehicles at each of its
franchised dealerships. Sales of used vehicles have become an increasingly
significant source of profit for the dealerships. Consumer demand for used
vehicles has increased as prices of new vehicles have risen and as more high
quality used vehicles have become available. Furthermore, used vehicles
typically generate higher gross margins than new vehicles because of their
limited comparability and the somewhat subjective nature of their valuation.
The Company intends to continue growing its used vehicle sales operations by
maintaining a high quality inventory, providing competitive prices and extended
service contracts for its used vehicles and continuing to promote used vehicle
sales.
Profits from sales of used vehicles are dependent primarily on the
ability of the dealerships to obtain a high quality supply of used vehicles and
effectively manage that inventory. The Company's 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 the dealerships generally maintains a 45 to 60 day supply of
used vehicles and offers to other dealers and wholesalers used vehicles that
they do not retail to customers. Trade-ins may be transferred among
dealerships to provide balanced inventories of used vehicles at each of the
Company's dealerships. Group 1 believes that the acquisitions of additional
dealerships will expand the internal market for transfers of used vehicles
among the Company's dealerships and, therefore, increase the ability of each of
the Company's dealerships to offer the same brand of used vehicles as it sells
new and to maintain a balanced inventory of used vehicles. Group 1 intends to
develop integrated computer inventory systems that will allow it to coordinate
vehicle transfers between the Company's dealerships, primarily on a regional
basis.
The dealerships have taken several steps towards building client
confidence in their used vehicle inventory, one of which includes their
participation in the Manufacturers' certification processes which are available
only to new vehicle franchises. This process makes these used vehicles
eligible for new vehicle benefits such as new vehicle finance rates and
extended Manufacturer warranties. In addition, the dealerships offer extended
warranties covering the used vehicles that they sell.
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Group 1 believes that franchised dealership strengths in offering used
vehicles include: (i) access to trade- ins on new vehicle purchases, which are
typically lower mileage and higher quality relative to trade-ins on used car
purchases, (ii) access to late-model, low mileage off-lease vehicles, and (iii)
the availability of Manufacturer certification programs for the Company's
higher quality used vehicles. This supply of high quality trade-ins and off-
lease vehicles reduces the Company's dependence on auction vehicles, which are
typically a higher cost source of used vehicles.
PARTS AND SERVICE SALES. The Company provides parts and service at
each of its franchised dealerships primarily for the vehicle makes sold at that
dealership. The Company performs both warranty and non-warranty service work.
Historically, the automotive repair industry has been highly
fragmented. However, the Company believes that the increased use of advanced
technology in vehicles has made it difficult for independent repair shops to
retain the expertise to perform major or technical repairs. Additionally,
Manufacturers permit warranty work to be performed only at franchised
dealerships. Hence, unlike independent service stations, or independent and
superstore used car dealerships with service operations, the Company's
franchised dealerships are qualified to perform work covered by Manufacturer
warranties. Given the increasing technological complexity of motor vehicles
and the trend toward extended manufacturer and dealer warranty periods for new
vehicles, Group 1 believes that an increasing percentage of repair work will be
performed at the Company's franchised dealerships, each of which have the
sophisticated equipment and skilled personnel necessary to perform such repairs
and offer extended service contracts.
The Company attributes its 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 parts inventory.
In charging for their mechanics' labor, the 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. The Company believes
that variable rate pricing helps the dealerships to achieve overall gross
margins in parts and service superior to those of certain competitors who rely
on fixed labor rates and percentage markups.
The dealerships seek to retain each purchaser of a vehicle 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
vehicle makes and models sold by that dealership. These parts are either used
in repairs made by the dealership or sold at retail to its customers or at
wholesale to independent repair shops and other franchised dealerships.
Currently, each of the dealerships employs its own parts manager and
independently controls its parts inventory and sales. Dealerships that sell
the same new vehicle makes have access to each other's computerized inventories
and frequently obtain unstocked parts from other dealerships.
OTHER DEALERSHIP REVENUES. Other dealership revenues consist
primarily of finance and insurance income. The dealerships arrange financing
for their customers' vehicle purchases, sell extended service contracts and
arrange selected types of credit insurance in connection with the financing of
vehicle sales. The dealerships place heavy emphasis on finance and insurance
("F&I") and offer advanced F&I training to their 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 charge-back 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. As a
result, the dealerships must arrange financing for a customer that is
competitive (i.e., the customer is more likely to accept the financing terms
and the loan is less likely to be refinanced) and affordable (i.e., the loan is
more likely to be repaid). The Company does not own a finance company and,
generally, does not retain
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significant credit risk after a loan is made.
At the time of a new vehicle sale, the dealerships offer extended
service contracts to supplement the Manufacturer warranty. Additionally, the
dealerships sell primary service contracts for used vehicles. Currently, the
dealerships primarily sell service contracts of third party vendors, for which
they recognize a commission upon the sale of the contract.
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, which policies provide for repayment of the vehicle loan if the
obligor dies while the loan is outstanding. The dealerships also sell accident
and health insurance policies, which provide payment of the monthly loan
obligations during a period in which the obligor is disabled.
AGREEMENTS WITH MANUFACTURERS
PUBLIC ENTITY AGREEMENTS
As a condition to granting their consent to the acquisition of the
Founding Groups, American Honda Motor Co., Inc. ("American Honda"), General
Motors Corporation ("GM"), Toyota Motor Sales, U.S.A., Inc. ("Toyota Motor"),
Nissan North America, Inc. ("Nissan North America"), American Isuzu Motors,
Inc. ("American Isuzu"), Ford Motor Company ("Ford Motor") and Mitsubishi Motor
Sales of America, Inc., ("Mitsubishi Motor") imposed restrictions on the
Company. These restrictions include restrictions on (i) the acquisition of more
than a specified percentage of the Company's Common Stock (5% in the case of
American Honda; 20% in the case of GM, Toyota Motor, Nissan North America and
American Isuzu, and 50% in the case of Ford Motor and Mitsubishi Motor) by any
one person who in the opinion of the Manufacturer is unqualified to own a
dealership of such Manufacturer or has interests incompatible with the
Manufacturer, (ii) certain material changes in the Company or extraordinary
corporate transactions such as a merger or sale of a material amount of assets;
(iii) the removal of a dealership general manager without the consent of the
Manufacturer; (iv) the use of dealership facilities to sell or service new
vehicles of other Manufacturers; (v) in the case of GM, the advertising or
marketing of non-GM operations with GM operations; (vi) in the case of Ford
Motor, mandatory binding arbitration of any dispute between the Company and
Ford Motor concerning Ford Motor's franchise agreements; (vii) in the case of
Nissan Motor, a decrease in ownership of the Company's Common Stock to below
169,750 or 739,239 shares by Charles M. Smith or Robert E. Howard II,
respectively, directors of the Company, at any time during the five-year period
following the Company's execution of the new Nissan Motor franchise agreement;
(viii) in the case of GM and Mitsubishi Motor, any change in control of the
Company's Board of Directors; and (ix) in the case of Ford Motor, any change in
the Company's Board of Directors or management.
Toyota Motor policies currently applicable to Group 1 limit the number
of dealerships which may be owned by any one group to seven Toyota and three
Lexus dealerships nationally and restricts the number of dealerships that may
be owned to (i) the greater of one dealership, or 20% of the Toyota dealer
count in a "Metro" market (multiple Toyota dealership markets as defined by
Toyota Motor), (ii) a specified number (ranging from three to five) in any
Toyota region (currently 12 geographic regions), provided that if a calculation
based on retail sales of all Toyota dealerships owned in a region by Group 1 is
less than 9% of a calculation based on retail sales of all Toyota dealerships
in the region, the number of Toyota dealerships that may be acquired is
increased for each region up to seven dealerships, and (iii) two Lexus
dealerships in any one of the four Lexus geographic areas. Toyota Motor further
requires that at least nine months elapse between acquisitions of Toyota or
Lexus dealerships. Similarly, it is currently the policy of American Honda to
restrict any company from holding more than seven Honda or more than three
Acura franchises nationally and to restrict the number of franchises to (i) one
Honda dealership in a "Metro" market (a metropolitan market represented by two
or more Honda dealers) with two to 10 Honda dealership points, (ii) two Honda
dealerships in a Metro market with 11 to 20 Honda dealership points, (iii)
three Honda dealerships in a Metro market with 21 or more Honda dealership
points, (iv) no more than 4% of the Honda dealerships in any one of the 10
Honda geographic zones, (v) one Acura dealership in a Metro market (a
metropolitan market with two or more Acura dealership points), and (vi) two
Acura
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dealerships in any one of the six Acura geographic zones. Toyota Motor and
American Honda also prohibit ownership of contiguous dealerships and the
dualing of a franchise with any other brand without their consent. Because the
Company intends to pursue "platform" acquisitions in large metropolitan markets
that the Company does not currently serve, as well as "tuck-in" acquisitions
that will increase brand diversity, the Company's acquisition program will not
be dependent on its ability to acquire multiple dealerships of any one
Manufacturer in any given Metro market. Therefore, the Company does not believe
that the foregoing restrictions on ownership of contiguous dealers impose
significant limitations on its acquisition program.
American Honda also requires that 50% of the outstanding Common Stock of
the Company be owned at all times by persons approved by American Honda. Because
the Company intends to finance future acquisitions by issuing shares of Common
Stock as full or partial consideration for acquired dealerships, such
restriction could have the effect of limiting the Company's ability to implement
its acquisition program. The Company's agreement with American Honda ("Honda
Agreement") also requires American Honda's approval prior to any future public
offering of Common Stock of the Company, and provides that American Honda shall
have the right to approve the acquisition of more than 5% of the Common Stock of
the Company by any individual or entity, and any subsequent acquisition of more
than 10%, if such acquisition is reasonably deemed to be detrimental to the
interests of American Honda. The Honda Agreement provides that any such
acquisition may be reasonably deemed to be detrimental to the interests of
American Honda if the acquiring entity (a) competes with American Honda or its
parent, subsidiaries or affiliates in the manufacturing, marketing or selling of
automobile products or services, or owns a substantial economic interest in an
entity that so competes (not including any dealership that sells products of a
competing manufacturer); (b) has criminal affiliations or a criminal record; (c)
has inadequate experience in the automotive sales and service business; (d) has
an unacceptable credit rating; (e) has unacceptable customer satisfaction index
("CSI") scores; or (f) has had prior unsatisfactory relationships with American
Honda. An institutional investor may acquire up to 10% of the Common Stock of
the Company without the consent of American Honda, unless such institutional
investor (a) is owned or controlled by or has a substantial economic interest in
an entity that competes with American Honda; (b) has criminal affiliations or a
criminal record; or (c) has acquired, or has a reasonable likelihood of
acquiring a controlling interest in the Company. The Company will be required
to notify American Honda with respect to any such acquisition or proposed
acquisition, and if American Honda does not approve of such acquisition, the
Company will be required to use its best efforts to prevent such acquisition or,
if such acquisition has already occurred, to reacquire the shares so
transferred. The inability of the Company to prevent such acquisition or to
reacquire the shares will be deemed to be a material breach of the Honda
Agreement. In addition, pursuant to the Honda Agreement, each stockholder of the
Founding Groups has agreed not to sell, transfer or in any manner encumber any
of the shares of Common Stock of the Company acquired by them pursuant to the
acquisitions, or enter into any agreement or other arrangement providing for the
voting of such shares of Common Stock, without the prior written approval of
American Honda. In the event of any transfer of shares of Common Stock in
violation of such restriction, the Company will be required to inform American
Honda, and if American Honda does not approve such transfer, the inability of
the Company either to reacquire the shares or arrange for the retransfer of such
shares to a person approved by American Honda will be deemed to be a material
breach of the Honda Agreement. The Honda Agreement also provides that, in the
event a controlling interest in the Company or any subsidiary of the Company
that owns any Honda and Acura dealerships is acquired or threatened to be
acquired by an entity not approved by American Honda, American Honda will be
entitled to claim material breach of the Honda Agreement and exercise its rights
upon the occurrence thereof. In addition, American Honda's policy on public
ownership of Honda and Acura dealerships requires that individuals or entities
that acquire, own or control more than 5% of the Common Stock of the Company
must provide American Honda with copies of all filings made to the Securities
and Exchange Commission, all comparable filings made to state agencies and
annual audited financial statements.
Ford Motor currently limits the number of dealerships to the greater
of (a) 15 Ford and 15 Lincoln Mercury dealerships, or (b) the number of
dealerships with total retail sales of new vehicles in the immediately
preceding calendar year that would equal not more than 5% of total Ford and
Lincoln Mercury vehicles sold at retail in the United States during that year,
which number for each of Ford and Lincoln
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Mercury dealerships treated separately may not exceed (a) one Ford dealership
in those market areas as defined by Ford Motor from time to time by Ford Motor
for its dealership network having two or less authorized Ford dealerships in
them, or (b) 33 1/3% of the dealerships in any market area, as defined from
time to time by Ford Motor for its dealership network, having more than three
authorized Ford dealerships in them (estimated by the Company to be
approximately 400 dealerships assuming that each Ford and Lincoln Mercury
dealership in the United States had the same revenues). GM has limited the
number of GM dealerships that the Company may acquire prior to October 1999, to
10 additional GM dealership locations (any one dealership, however, may include
a number of different GM franchises, such as a combination of GMC, Pontiac and
Buick franchises). In addition, GM limits the maximum number of GM dealerships
that the Company may acquire to 50% of the GM dealerships, by franchise line,
in a GM-defined geographic market area (currently approximately 10,000
dealerships). However, Group 1's current agreement with GM does not include
Saturn dealerships and the Company's future acquisition of a Saturn dealership
will be subject to GM approval on a case-by-case basis.
FRANCHISE AGREEMENTS
Each of the dealerships operates pursuant to a franchise agreement
between the applicable Manufacturer and the dealership. The typical automotive
franchise agreement specifies the locations at which the dealer has the right
and the obligation to sell motor vehicles and related parts and products and to
perform certain approved services in order to serve a specified market area.
The designation of such areas and the allocation of new vehicles among
dealerships are subject to the discretion of the Manufacturer, which generally
does not guarantee exclusivity within a specified territory. A franchise
agreement may impose requirements on the dealer concerning such matters as the
showrooms, the facilities and equipment for servicing vehicles, the maintenance
of inventories of vehicles and parts, the maintenance of minimum net working
capital and the training of personnel. Compliance with these requirements is
closely monitored by the Manufacturer. In addition, Manufacturers require each
dealership to submit a financial statement of operations on a monthly and
annual basis. The franchise agreement also grants the dealer the non-exclusive
right to use and display the Manufacturer's trademarks, service marks and
designs in the form and manner approved by the Manufacturer.
Each franchise agreement sets forth the name of the person approved by
the Manufacturer to exercise full managerial authority over the dealership's
operations and the names and ownership percentages of the approved owners of
the dealership and contains provisions requiring the Manufacturer's prior
approval of changes in management or transfers of ownership of the dealership.
Each of the dealerships is owned, directly or indirectly, by Group 1, at the
subsidiary level. A number of Manufacturers prohibit the acquisition of a
substantial ownership interest in Group 1 or transactions that may affect
management control of Group 1, in each case without the approval of the
Manufacturer.
Most franchise agreements expire after a specified period of time,
ranging from one to five years, and Group 1 expects to renew any expiring
agreements in the ordinary course of business. The typical franchise agreement
provides for early termination or non-renewal by the Manufacturer under certain
circumstances such as change of management or ownership without Manufacturer
approval, insolvency or bankruptcy of the dealership, death or incapacity of
the dealer manager, conviction of a dealer manager or owner of certain crimes,
misrepresentation of certain information by the dealership, dealer manager or
owner to the Manufacturer, failure to adequately operate the dealership,
failure to maintain any license, permit or authorization required for the
conduct of business, or material breach of other provisions of the franchise
agreement. The dealership is typically entitled to terminate the franchise
agreement at any time without cause.
The automobile franchise relationship is also governed by various
federal and state laws established to protect dealerships from the general
unequal bargaining power between the parties. The following discussion of
state court and administrative holdings and various state laws is based on
management's beliefs and may not be an accurate description of the state court
and administrative holdings and various state laws. The state statutes
generally provide that it is a violation for a manufacturer to terminate or
fail to renew a franchise without good cause. These statutes also provide that
the manufacturer is prohibited from unreasonably withholding approval for a
proposed change in ownership of the dealership. Acceptable grounds for
disapproval include material reasons relating to the
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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.
For example, under Texas law, despite the terms of contracts between
manufacturers and dealers, manufacturers may not unreasonably withhold approval
of a transfer of a dealership. It is unreasonable under Texas law for a
manufacturer to reject a prospective transferee of a dealership who is of good
moral character and who otherwise meets the manufacturer's written, reasonable
and uniformly applied standards or qualifications relating to the prospective
transferee's business experience and financial qualifications. In addition,
under Texas and Oklahoma law and the laws of other states, franchised
dealerships may challenge manufacturers' attempts to establish new franchises
in the franchised dealers' markets, and state regulators may deny applications
to establish new dealerships for a number of reasons, including a determination
that the Manufacturer is adequately represented in the region. Texas and
Oklahoma law limit the ability of manufacturers to terminate or fail to renew
franchises. In addition, other laws in Texas and elsewhere limit the ability of
manufacturers to withhold their approval for the relocation of a franchise or
require that disputes be arbitrated. In addition, a manufacturer's license to
distribute vehicles in Texas and Oklahoma may be revoked if, among other
things, the manufacturer has forced or attempted to force an automobile dealer
to accept delivery of motor vehicles not ordered by that dealer. In Oklahoma,
a manufacturer's license to operate in the state may be revoked or suspended
upon a finding that a manufacturer has coerced or intimidated a dealer or acted
dishonestly or failed to act in accordance with reasonable standards of fair
dealing.
COMPETITION
The automotive retailing industry is competitive. In large
metropolitan areas, consumers have a number of choices in deciding where to
purchase a new or used vehicle and where to have such vehicle serviced.
In the new vehicle area, the dealerships compete with other franchised
dealers in their marketing areas. The 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 its dealerships to sell new vehicles. In recent years, automobile
dealers have also faced increased competition in the sale or lease of new
vehicles from independent leasing companies, on-line purchasing services and
warehouse clubs.
In used vehicles, the dealerships compete with other franchised
dealers, independent used car dealers, automobile rental agencies, private
parties and used car "superstores" for supply and resale of used vehicles.
Used car "superstores" have recently opened in certain markets in which the
dealerships compete. In addition, the Company expects that additional used car
"superstores" will open in other markets in which it operates.
Group 1 believes that the principal competitive factors in vehicle
sales are the marketing campaigns conducted by Manufacturers, the ability of
dealerships to offer a wide selection of the most popular vehicles, the
location of dealerships and the quality of customer service. Other competitive
factors include customer preference for particular brands of automobiles,
pricing (including Manufacturer rebates and other special offers) and
warranties. Group 1 believes that its dealerships are competitive in all of
these areas.
The 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.
Group 1 believes that the principal competitive factors in parts and service
sales are price, the use of factory-approved replacement parts, the familiarity
with a Manufacturer's brands and models and the quality of customer service. A
number of regional or national chains offer selected parts and services at
prices that may be lower than the dealerships prices.
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GOVERNMENTAL REGULATIONS
A number of regulations affect the Company's business of marketing,
selling, financing and servicing automobiles. The Company is also subject to
laws and regulations relating to business corporations generally.
Generally, the Company must obtain a license in order to establish,
operate or relocate a dealership or provide certain automotive repair services.
These laws also regulate the Company's conduct of business, including its
advertising and sales practices.
The Company's financing activities with its customers are subject to
federal truth in lending, consumer leasing and equal credit opportunity
regulations as well as state and local motor vehicle finance laws, installment
finance laws, insurance laws, usury laws and other installment sales laws.
Some states regulate finance fees that may be paid as a result of vehicle
sales. Penalties for violation of any of these laws or regulations may include
revocation of certain licenses, assessment of criminal and civil fines and
penalties, and in certain instances, create a private cause of action for
individuals. The Company believes that the 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 its capital expenditures, earnings, or competitive
position.
ENVIRONMENTAL MATTERS
The Company is subject to a wide range of federal, state, and local
environmental laws and regulations, including those governing discharges to the
air and water, the storage of petroleum substances and chemicals, the handling
and disposal of wastes, and the remediation of contamination arising from
spills and releases. As with automobile dealerships generally, and parts,
service and collision service center operations in particular, the Company's
business involves the generation, use, handling and disposal of hazardous or
toxic substances or wastes. Operations involving the management of hazardous
and nonhazardous wastes are subject to requirements of the federal Resource
Conservation and Recovery Act and comparable state statutes. Pursuant to these
laws, federal and state environmental agencies have established approved
methods for storage, treatment, and disposal of regulated wastes with which the
Company must comply.
The Company's business also involves the use of aboveground and
underground storage tanks. Under applicable laws and regulations, the Company
is responsible for the proper use, maintenance and abandonment of regulated
storage tanks owned or operated by it, 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, the Company owns, operates, or has otherwise abandoned other underground
and aboveground devices or containers (e.g., automotive lifts and service pits)
that may not be classified as regulated tanks, but which are capable of
releasing stored materials into the environment, thereby potentially obligating
the Company to remediate any soils or groundwater resulting from such releases.
The Company is also subject to laws and regulations governing
remediation of contamination at facilities it operates or to which it sends
hazardous or toxic substances or wastes for treatment, recycling or disposal.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons that are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator
of the disposal site or sites where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances released at
such sites. Under CERCLA, these "responsible parties" may be subject to joint
and several liability for the costs of cleaning up the hazardous substances
that have been released into the environment, for damages to natural resources
and for the costs of certain health studies, and it is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the release of hazardous
substances.
Further, the Federal Water Pollution Control Act, also known as the
Clean Water Act, and
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comparable state statutes prohibit discharges of pollutants into regulated
waters without authorized National Pollution Discharge Elimination System
(NPDES) and similar state permits, require containment of potential discharges
of oil or hazardous substances, and require preparation of spill contingency
plans. The Company expects to implement programs that address wastewater
discharge requirements as well as containment of potential discharges and spill
contingency planning.
Environmental laws and regulations have become very complex and it has
become very difficult for businesses that routinely handle hazardous and
non-hazardous wastes to achieve and maintain full compliance with all
applicable environmental laws. Like virtually any network of automobile
dealerships and vehicle service facilities, from time to time the Company,
including any future acquisitions, can be expected to experience incidents and
encounter conditions that will not be in compliance with environmental laws and
regulations. However, none of the Founding Groups have been subject to any
material environmental liabilities in the past and the Company does not
anticipate that any material environmental liabilities will be incurred by the
Founding Groups in the future. In addition, to minimize the risk of
environmental liability related to acquired dealerships, the Company generally
obtains environmental studies on such dealerships as a condition to their
acquisition. Furthermore, the Company is in the process of establishing an
environmental management program that is intended to reduce the risk of
noncompliance with environmental laws and regulations. Nevertheless,
environmental laws and regulations and their interpretation and enforcement are
changed frequently and the Company believes that the trend of more expansive
and more strict environmental legislation and regulations is likely to
continue. Hence, there can be no assurance that compliance with environmental
laws or regulations or the future discovery of unknown environmental conditions
will not require additional expenditures by the Company, or that such
expenditures would not be material.
EMPLOYEES
As of December 31, 1997, the Company employed 1,556 people, of whom
approximately 193 were employed in managerial positions, 529 were employed in
non-managerial sales positions, 612 were employed in non-managerial parts and
service positions and 222 were employed in administrative support positions.
Group 1 believes that its relationships with its employees are
favorable. None of the Company's employees are represented by a labor union.
Because of its dependence on the Manufacturers, however, the Company may be
affected by labor strikes, work slowdowns and walkouts at the Manufactures'
manufacturing facilities.
ITEM 2. PROPERTIES
Set forth in the table below is certain information relating to the
properties that the Company uses in its business.
OCCUPANT LOCATION USE LEASE/OWN
-------- -------- --- ---------
Bob Howard Automall.... 13300 N. Broadway New and used vehicle Lease; expires in 2027 and is
Extension, sales; service; F&I cancelable at the Company's option
Oklahoma City, Oklahoma in 2007 and at the end of each
subsequent five year period
13220 N. Broadway New and used vehicle Lease; expires in 2027 and is
Extension, sales; service; F&I cancelable at the Company's option
Oklahoma City, Oklahoma in 2007 and at the end of each
subsequent five year period
715 W. Memorial Road, Storage and make Lease; expires in 1999
Oklahoma City, Oklahoma ready facility
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OCCUPANT LOCATION USE LEASE/OWN
-------- -------- --- ---------
Bob Howard
Chevrolet........... 13130 N. Broadway New and used vehicle Lease; expires in 2027 and is
Extension, sales; service; F&I cancelable at the Company's option
Oklahoma City, Oklahoma in 2007 and at the end of each
subsequent five year period
Bob Howard Toyota..... 13200 N. Broadway New and used vehicle Lease; expires in 2027 and is
Extension, sales; service; F&I cancelable at the Company's option
Oklahoma City, Oklahoma in 2007 and at the end of each
subsequent five year period
Bob Howard
Honda/Acura......... 14137 N. Broadway New and used vehicle Lease; expires in 2001
Extension, sales; service; F&I
Edmond, Oklahoma
3700 S. Broadway Collision service Lease; expires in 1999
Extension, center
Edmond, Oklahoma
Bob Howard Dodge ..... 616 W. Memorial Road, New and used vehicle Lease; expires in 2001
Edmond, Oklahoma sales; service; F&I
Bob Howard Nissan .... 13241 N. Broadway Ext. New and used vehicle Lease; expires in 2006
Oklahoma City, Oklahoma sales; service; F&I
Sterling McCall
Toyota.............. 9400 Southwest Freeway New and used vehicle Lease; two leases which expire in
Houston, Texas sales; service; F&I 2027 and are cancelabe at the
Company's option in 2007 and at
the end of each subsequent five
year period
9400 Southwest Freeway Service Owned
Houston, Texas
Sterling McCall
Lexus............... 10422 Southwest Freeway New and used vehicle Lease; expires in 2027 and is
Houston, Texas sales; service; F&I cancelable at the Company's option
in 2007 and at the end of each
subsequent five year period
10610 Wilcrest Collision services Lease; expires in 2027 and is
Houston, Texas center cancelable at the Company's option
in 2007 and at the end of each
subsequent five year period
10430 Southwest Freeway New vehicle sales Lease; expires in 2000 with an
Houston, Texas option to extend until 2005
Courtesy Nissan....... 1777 North Central Expwy. New and used vehicle Lease; expires in 2013
Richardson, Texas sales; service; F&I
421 Industrial Boulevard Storage and make Lease; expires in 2000
Richardson, Texas ready facility
Mike Smith Autoplaza.. 1515 I-10 South New and used vehicle Lease; expires in 2027 and is
Beaumont, Texas sales; service; F&I cancelable at the Company's option
in 2007 and at the end of each
subsequent five year period
Town North ........... 9150 U.S. Highway 183 New and used vehicle Owned
Austin, Texas sales; service; F&I
9112 U.S. Highway 183 New and used vehicle Owned
Austin, Texas sales; service; F&I
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OCCUPANT LOCATION USE LEASE/OWN
-------- -------- --- ---------
9008 United Drive Used vehicle sales Lease; expires in 2001
Austin, Texas
9094 U.S. Highway 183 Storage Facility Lease; expires in 2001
Austin, Texas
9400 United Drive Storage Facility Lease; expires December 31, 1997
Austin, Texas and automatically renews for
successive one year terms unless
notice given by either party
8908 McCann Street Storage Facility Lease; month to month; may be
Austin, Texas terminated by either party with 30
days written notice
Round Rock Nissan..... 3050 North IH 35 New and used vehicle Lease; expires in 2027 and is
Austin, Texas sales; service; F&I cancelable at the Company's option
in 2007 and at the end of each
subsequent five year period
Acura Southwest....... 10455 Southwest Freeway New and used vehicle Owned
Houston, Texas sales; service; F&I
A.J. Foyt
Honda/Isuzu......... 22575 Highway 59 N New and used vehicle Owned
Kingwood, Texas sales; service; F&I
22577 Highway 59 N New and used vehicle Owned
Kingwood, Texas sales; service; F&I
Elgin Ford............ 1213 North Highway 290 New and used vehicle Owned
Elgin, Texas sales; service; F&I
World Ford Hollywood 3101 N. State Road #7 New and used vehicle Lease; renewable, through 2028,
Hollywood, Florida sales; service; F&I at the Company's option in 2008
and at the end of each subsequent
five year period
N. State Road #7 Storage facility Lease; renewable, through 2028,
Hollywood, Florida at the Company's option in 2008
and at the end of each subsequent
five year period
World Ford Kendall.... 15551 S. Dixie Highway New and used vehicle Lease; renewable, through 2028,
Miami, Florida sales; service; F&I at the Company's option in 2008
and at the end of each subsequent
five year period
9828 Southwest 168th Collision services Lease; renewable, through 2028,
Street center at the Company's option in 2008
Miami, Florida and at the end of each subsequent
five year period
Perimeter Ford........ 6407 Barfield Road New and used vehicle Lease; renewable, through 2028,
Atlanta, Georgia sales; service; F&I at the Company's option in 2008
and at the end of each subsequent
five year period
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company's 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 the Company that, in the opinion of
management,
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could be expected to have a material adverse effect on the business, financial
condition or results of operations of the Company.
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 an umbrella policy with a
$50 million per occurrence limit as well as insurance on its real property,
comprehensive coverage for its vehicle inventory, general liability insurance,
employee dishonesty coverage and errors and omissions insurance in connection
with its vehicle sales and financing activities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 29, 1997, during the fourth quarter of the fiscal year
covered by this report, two matters were submitted to a vote of the
stockholders. By a unanimous consent of the stockholders, the 1998 Employee
Stock Purchase Plan and the second amendment to the 1996 Stock Incentive Plan
were adopted.
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 136 holders of record of the Common Stock
as of March 6, 1998.
Since the Company's Common Stock began trading on the NYSE after its
initial public offering in October 1997, the high and low sales prices per
share have been $13 15/16 and $7 3/4, respectively through December 31, 1997.
On March 27, 1998, the last reported sales price was $10 13/16 per share.
The Company has never declared or paid dividends on its Common Stock.
The Company intends to retain future earnings, if any, to finance the
development and expansion of its business and, therefore, does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future. The
decision whether to pay dividends will be made by the Board of Directors of the
Company in light of conditions then existing, including the Company's results
of operations, financial condition, capital requirements, general business
conditions and other factors.
Pursuant to financing agreements with floorplan lenders and the Credit
Facility, the Company is required to maintain a certain minimum working capital
and a certain aggregate net worth and is prohibited 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 the Company's dealerships are subject, all
dealerships are required to maintain a certain minimum working capital.
Group 1 has entered into agreements to purchase all of the outstanding
capital stock or purchase certain assets and assume certain liabilities of
various automobile dealerships for cash and shares of Group 1 Common Stock.
The following is a summary of the four transactions in which stock has been or
is to be issued:
DATE OF AGREEMENT ACQUISITION SHARES
------------------- ------------------------- ---------
December 17, 1997 Carroll Automotive Group 1,428,158
December 18, 1997 Maxwell Automotive Group 805,929
February 25, 1998 Johns Automotive Group 875,000
March 11, 1998 Luby Chevrolet 341,271
The Carroll Automotive Group acquisition closed on March 16, 1998, and
the remaining acquisitions are pending as of the date of this report. Group 1
is relying on Regulation D under the Securities Act of 1933, as amended as an
exemption from registration of the Common Stock to be issued in the
acquisitions. Group 1 believes it is justified in relying on such exemption
since there are only
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thirteen stockholders of the groups who will receive shares of Group 1 Common
Stock, each of whom is an "accredited investor" under Regulation D.
USE OF PROCEEDS
The Company's Registration Statement on Form S-1 (Registration No.
333-29893), as amended, initially filed with the Securities and Exchange
Commission on June 24, 1997, became effective concurrent with the commencement
of the IPO on October 29, 1997. The Company closed the IPO on November 4,
1997. In the IPO, the Company registered for sale 5,148,136 shares of Common
Stock at an aggregate offering price of approximately $61.8 million, for the
account of the Company, and 371,864 shares of Common Stock at an aggregate
offering price of approximately $4.5 million, for the account of the selling
stockholder. Included in the 5,148,136 shares sold by the Company were 720,000
shares sold pursuant to the underwriter's over-allotment option. All of the
shares registered for the account of the Company and for the account of the
selling stockholder were sold in the IPO for approximately $61.8 million and
approximately $4.5 million, respectively. The managing underwriters were
Goldman, Sachs & Co., Merrill Lynch & Co. and NationsBanc Montgomery
Securities, Inc. The underwriter's discount paid by the Company in connection
with the IPO totaled $4.3 million and expenses paid by the Company were
approximately $5.7 million. The net proceeds to the Company after giving
effect to the underwriter's discount and IPO expenses were approximately $51.8
million. Of the net proceeds to the Company, $5.4 million was used to pay the
cash portion of the purchase price of the acquisitions, which included $2.3
million paid to Robert E. Howard II, an officer, director and significant
stockholder of the Company. Approximately $35.4 million of the net proceeds
have been utilized to repay indebtedness with the remaining proceeds being used
for working capital purposes.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Group 1 acquired the Founding Groups on November 3, 1997. For
financial statement presentation purposes, however, the Howard Group, one of
the Founding Groups, has been identified as the accounting acquiror. As such,
the financial data as of December 31, 1993, 1994, 1995 and 1996, and for each
of the four years in the period ended December 31, 1996 represent the
historical financial data of the Howard Group on a stand-alone basis. The
financial data as of and for the year ended December 31, 1997, includes the
operations of Group1 Automotive, Inc., the parent company, and the Founding
Groups, excluding the Howard Group, beginning October 31, 1997, the effective
closing date of the acquisitions for accounting purposes. The Howard Group is
included for the entire year ended December 31, 1997. The following selected
historical financial data as of December 31, 1995, 1996 and 1997, and for each
of the four years in the period ended December 31, 1997, have been derived from
audited financial statements. The following selected historical financial data
as of December 31, 1993 and 1994 and for the period ended December 31, 1993,
have been derived from unaudited financial statements, which have been prepared
on the same basis as the audited financial statements and, in the opinion of
the Company, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such data.
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YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- ------- -------- ---------
(in thousands)
INCOME STATEMENT DATA:
Revenues............................... $167,252 $227,259 $254,003 $281,492 $403,967
Cost of sales.......................... 146,239 197,642 219,907 241,898 349,366
-------- -------- -------- -------- --------
Gross profit......................... 21,013 29,617 34,096 39,594 54,601
Goodwill amortization.................. - 21 27 37 170
Selling, general and
Administrative expenses.............. 16,610 24,232 26,139 30,731 44,210
-------- -------- -------- -------- --------
Income from operations............... 4,403 5,364 7,930 8,826 10,221
Other income (expense):
Interest expense, net................ (1,433) (2,452) (3,471) (3,168) (3,986)
Other income (expense), net.......... (28) 9 (80) (69) 156
-------- -------- -------- -------- --------
Income before income taxes........... 2,942 2,921 4,379 5,589 6,391
Provision for income taxes............. 367 768 744 382 573
-------- -------- -------- -------- --------
Net income............................. $2,575 $2,153 $3,635 $5,207 $5,818
======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1993 1994 1995 1996 1997
-------- ------- -------- ------- ----------
(in thousands)
BALANCE SHEET DATA:
Working capital.......................... $ 2,435 $ 2,356 $ 4,708 $ 6,436 $ 50,209
Inventories.............................. 23,180 34,699 39,573 47,674 105,421
Total assets............................. 32,955 51,124 61,641 72,874 213,149
Total debt, including current portion.... 21,199 31,601 37,320 42,887 67,858
Stockholders' equity..................... 3,637 5,346 8,620 12,210 89,372
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Group 1 was founded to become a leading operator and consolidator in the
highly fragmented automotive retailing industry. The Company owns automobile
dealership franchises located in Texas and Oklahoma. Additionally, the Company
provides maintenance and repair services at its dealerships and collision
service centers. From 1995 to 1997, the Founding Groups' pro forma revenues
increased by $172.9 million, or 23.7%, to $902.3 million from $729.4 million.
During this period, pro forma gross profit increased $27.1 million, or 27.1%,
to $127.1 million from $100.0 million, to 14.1% from 13.7% of revenues. Group
1 expects that a significant portion of its future growth will be derived from
acquisitions of additional dealerships.
The Company has diverse sources of revenues, including: new car sales, new
truck sales, used car sales, used truck sales, manufacturer remarketed vehicle
sales, parts sales, service sales, collision repair services, finance fees,
insurance commissions, extended service contract sales, documentary fees and
after-market product sales. Sales revenues include sales to retail customers,
other dealers and wholesalers. Other dealership revenue includes revenue from
the sale of financing, insurance and extended service contracts, net of a
provision for anticipated chargebacks and documentary fees charged to
customers.
The Company's gross profit will vary as the Company's merchandise mix (the
mix between new vehicle sales, used vehicle sales, parts and service sales,
collision repair services and other dealership revenues) changes. The gross
margin realized by the Company on the sale of its products and services
generally varies between approximately 7.5% and 60.0%, with new vehicle sales
generally resulting in the lowest gross margin and parts and service sales
generally resulting in the highest gross margin. Revenues from other dealership
revenues contribute a disproportionate share of gross, operating and pre-
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tax margins. When the Company's new vehicle sales increase or decrease at a
rate greater than the Company's other revenue sources, the Company's gross
margin will respond inversely. Factors such as seasonality, weather,
cyclicality and manufacturers' advertising and incentives may impact the
Company's merchandise mix and, therefore influence the Company's gross margin.
Selling, general and administrative expenses consist primarily of
compensation for sales, administrative, finance and general management
personnel, rent, marketing, insurance and utilities. Interest expense consists
of interest charges on interest-bearing debt, including floorplan inventory
financing, net of interest income earned. The Founding Groups had been
managed, until they were acquired by Group 1, as independent private companies
and their results of operations reflect different tax structures (S
Corporations and C Corporations) which influenced, among other things, their
historical levels of owners' compensation. These owners and certain key
employees agreed to certain reductions in their compensation and benefits in
connection with the organization of the Company.
Group 1 is integrating certain functions and installing practices that have
been successful at other franchises and in other retail segments ("best
practices"). This integration of functions and installation of best practices
may present opportunities to increase revenues and reduce costs but may also
necessitate additional costs and expenditures for corporate administration,
including expenses necessary to implement the Company's acquisition strategy.
These various costs and possible cost-savings and revenue enhancements may make
historical operating results not comparable to, or indicative of, future
performance.
PRO FORMA COMBINED FOUNDING GROUPS' DATA
The pro forma combined Founding Groups' data for 1995, 1996 and 1997 do not
purport to present the combined Founding Groups in accordance with generally
accepted accounting principles, but represent a summation of certain data of
the individual Founding Groups on an historical basis including the effects of
the pro forma adjustments. This data will not be comparable to and may not be
indicative of the Company's post-combination results of operations because (i)
the Founding Groups were not under common control of management and had
different tax structures (S Corporations and C Corporations) during the periods
presented and (ii) the Company used the purchase method to establish a new
basis of accounting to record the acquisitions.
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PARTS AND SERVICE DATA
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1996 1997
------- ------- -------
(dollars in thousands)
Sales revenue......................... $65,599 $73,451 $77,215
Gross profit.......................... $31,408 $35,978 $40,691
Gross margin.......................... 47.9% 49.0% 52.7%
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
REVENUES. Revenues increased $80.4 million, or 9.8%, from $821.9 million
for the year ended December 31, 1996 to $902.3 million for the year ended
December 31, 1997. New vehicle revenues increased $44.6 million, or 9.5% from
$469.3 million for the year ended December 31, 1996 to $513.9 million for the
year ended December 31, 1997. The increase in revenue was primarily
attributable to significant revenue growth from maturing Round Rock Nissan and
Bob Howard Dodge franchise operations, successful marketing efforts and strong
customer acceptance of the Founding Groups' products, particularly Lexus. Used
vehicle revenues increased $30.0 million, or 11.6%, from $258.0 million for the
year ended December 31, 1996 to $288.0 million for the year ended December 31,
1997. The increase was primarily attributable to the maturing franchise
operations, successful marketing efforts and an emphasis on used vehicle sales
in the Oklahoma market to mitigate the impact of lower than expected new
vehicle demand. Parts and service sales increased $3.7 million, or 5.0%, from
$73.5 million for the year ended December 31, 1996 to $77.2 million for the
year ended December 31, 1997. The increase was primarily attributable to the
maturing dealership operations and increased vehicle sales. Other dealership
revenues increased $2.1 million or 10.0% from $21.1 million for the year ended
December 31, 1996 to $23.2 million for the year ended December 31, 1997. The
increase was due primarily to an increase in the number of retail new and used
vehicle sales.
GROSS PROFIT. Gross profit increased $11.0 million, or 9.5%, from $116.1
million for the year ended December 31, 1996 to $127.1 million for the year
ended December 31, 1997. The increase was attributable to increased revenues
and a stable overall gross margin. The gross margin on new retail vehicle
sales increased from 8.0% for the year ended December 31, 1996 to 8.2% for the
year ended December 31, 1997 primarily due to stronger margins in the Lexus and
Nissan product lines, partially offset by reduced margins in the Oklahoma
market. The gross margin for used retail vehicle sales declined from 9.7% for
the year ended December 31, 1996 to 8.9% for the year ended December 31, 1997.
The decline was primarily attributable to efforts to increase market share in
the Oklahoma market while customer demand for new vehicles was not as strong as
in prior years. Parts and service gross margin increased from 49.0% for the
year ended December 31, 1996 to 52.7% for the year ended December 31, 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
REVENUES. Revenues increased $92.5 million, or 12.7%, from $729.4 million
for the year ended December 31, 1995 to $821.9 million for the year ended
December 31, 1996. New vehicle revenues increased $47.0 million, or 11.1%,
from $422.3 million for the year ended December 31, 1995 to $469.3 million for
the year ended December 31, 1996. This increase was primarily attributable to
increased sales at all but one of the Founding Groups with the McCall Group
accounting for $40.6 million of the increase. New and expanded franchise
operations, primarily the Howard Group's new Dodge franchise, successful
marketing efforts and strong customer acceptance of the Founding Groups'
products, particularly Toyota, Lexus and Chevrolet, contributed to the
increase. The Smith Group had an $8.0 million decline in new vehicle revenues
caused by reduced unit sales at its Dallas Nissan franchise. Used vehicle
revenues increased $35.6 million, or 16.0%, from $222.4 million for the year
ended December 31, 1995 to $258.0 million for the year ended December 31, 1996.
All of the Founding Groups had increases in used vehicle revenues with the
McCall Group accounting for $22.6 million of the increase. The increase was
attributable primarily to a strong used vehicle market and successful marketing
efforts. Parts and service
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The following tables set forth certain unaudited pro forma combined data of
the Founding Groups for the periods indicated:
OPERATIONS DATA
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1995 1996 1997
--------------------- --------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- -------- --------- ------- --------- ---------
(dollars in thousands)
Revenues
New vehicle sales........ $422,348 57.9% $469,318 57.1% $513,864 56.9%
Used vehicle sales....... 222,373 30.5 258,027 31.4 288,010 31.9
Parts and service sales.. 65,599 9.0 73,451 8.9 77,215 8.6
Other dealership
revenues, net.......... 19,033 2.6 21,117 2.6 23,206 2.6
-------- ----- -------- ----- -------- -----
Total revenues.... 729,353 100.0 821,913 100.0 902,295 100.0
Cost of sales............ 629,305 86.3 705,783 85.9 775,164 85.9
-------- ----- -------- ----- -------- -----
Gross profit............. $100,048 13.7% $116,130 14.1% $127,131 14.1%
======== ===== ======== ===== ======== =====
NEW VEHICLE DATA
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1995 1996 1997
------------ -------- ---------
(dollars in thousands)
Retail unit sales............... 20,357 21,378 23,201
Retail sales revenue............ $422,348 $469,318 $513,864
Gross profit.................... $32,047 $37,677 $42,199
Gross margin.................... 7.6% 8.0% 8.2%
Average gross profit per retail
unit sold..................... $1,574 $1,762 $1,819
USED VEHICLE DATA
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1995 1996 1997
------------ -------- ---------
(dollars in thousands)
Retail unit sales............... 15,358 17,220 18,130
Retail sales revenue (1)........ $185,665 $219,183 $235,353
Gross profit.................... $17,560 $21,358 $21,035
Gross margin.................... 9.5% 9.7% 8.9%
Average gross profit per retail
unit sold..................... $1,143 $1,240 $1,160
_________________
(1) Excludes wholesale revenues.
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sales increased $7.9 million, or 12.0%, from $65.6 million for the year ended
December 31, 1995 to $73.5 million for the year ended December 31, 1996. The
increase was primarily attributable to new and expanded operations at McCall
Lexus, and increased vehicle sales. Other dealership revenues increased $2.1
million or 11.1% from $19.0 million for the year ended December 31, 1995 to
$21.1 million for the year ended December 31, 1996. The increase was due
primarily to an increase in the number of retail new and used vehicle sales.
GROSS PROFIT. Gross profit increased $16.1 million, or 16.1%, from $100.0
million for the year ended December 31, 1995 to $116.1 million for the year
ended December 31, 1996. The increase was attributable to increased revenues
and an increase in gross margin from 13.7% for the year ended December 31, 1995
to 14.1% for the year ended December 31, 1996. The increase in gross margin
was primarily due to a change in the merchandise mix as used vehicle sales
became a greater percentage of total revenues and margins on vehicle and parts
and service sales grew. The gross margin on new retail vehicle sales increased
from 7.6% for the year ended December 31, 1995 to 8.0% for the year ended
December 31, 1996. The gross margin on used retail vehicle sales increased
from 9.5% for the year ended December 31, 1995 to 9.7% for the year ended
December 31, 1996. The gross margin on parts and service sales increased from
47.9% for the year ended December 31, 1995 to 49.0% for the year ended December
31, 1996.
HISTORICAL RESULTS OF OPERATIONS - GROUP 1 AUTOMOTIVE, INC.
The historical results of operations for the years ended December 31, 1995,
1996 and 1997 are a presentation in accordance with generally accepted
accounting principles. For historical presentation purposes, the Howard Group
has been identified as the accounting acquiror. As such, the financial data
for the years ended December 31, 1995 and 1996 represent the historical results
of operations of the Howard Group on a stand-alone basis. The financial data
for the year ended December 31, 1997, includes the operations of Group 1
Automotive, Inc., the parent company, and the Founding Groups, excluding the
Howard Group, beginning October 31, 1997, the effective closing date of the
acquisitions for accounting purposes. The Howard Group is included for the
entire year ended December 31, 1997. During the periods presented, the
companies within the Howard Group operated under different tax structures (S
Corporations and C Corporations). All S Corporation entities were converted to
C Corporations as of October 31, 1997.
The following table sets forth certain selected financial data and data as
a percentage of revenues for the Company for the periods indicated:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1995 1996 1997
--------------------- --------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ------- ---------- ------- ---------- -------
(dollars in thousands)
Revenues:
New vehicle sales............ $151,227 59.5% $164,979 58.6% $228,044 56.5%
Used vehicle sales........... 79,448 31.3 88,477 31.4 135,507 33.5
Parts and service sales...... 16,940 6.7 20,649 7.4 30,006 7.4
Other dealership
revenues, net.............. 6,388 2.5 7,387 2.6 10,410 2.6
-------- ----- -------- ----- -------- -----
Total Revenues........ 254,003 100.0 281,492 100.0 403,967 100.0
Cost of sales................ 219,906 86.6 241,898 85.9 349,366 86.5
-------- ----- -------- ----- -------- -----
Gross profit................. 34,097 13.4 39,594 14.1 54,601 13.5
-------- ----- -------- ----- -------- -----
Goodwill amortization........ 27 - 37 - 170 .1
Selling, general and
administrative expenses.... 26,139 10.3 30,731 10.9 44,210 10.9
-------- ----- -------- ----- -------- -----
Income from operations....... 7,931 3.1 8,826 3.2 10,221 2.5
Other income and expense:
Interest expense, net...... (3,471) (1.4) (3,168) (1.2) (3,986) (1.0)
Other income (expense),
net....................... (81) - (69) - 156 0.1
-------- ----- -------- ----- -------- -----
Income before income taxes... 4,379 1.7 5,589 2.0 6,391 1.6
Provision for income taxes... 744 0.3 382 0.1 573 0.1
-------- ----- -------- ----- -------- -----
Net income................... $3,635 1.4% $5,207 1.9% $5,818 1.5%
======== ===== ======== ===== ======== =====
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S Corporation pro forma
income taxes............... 990 0.4 1,831 0.7 1,465 0.4
-------- ----- ------- ---- ------- ----
Pro forma net income......... 2,645 1.0% $3,376 1.2% $4,353 1.1%
======== ===== ======= ==== ======= ====
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
REVENUES. Revenues increased by $122.5 million, or 43.5%, from $281.5
million for the year ended December 31, 1996 to $404.0 million for the year
ended December 31, 1997. New vehicle sales increased $63.0 million, or 38.2%,
from $165.0 million for the year ended December 31, 1996 to $228.0 million for
the year ended December 31, 1997. Used vehicle sales increased $47.0 million,
or 53.1%, from $88.5 million for the year ended December 31, 1996 to $135.5
million for the year ended December 31, 1997. Parts and service sales
increased $9.4 million, or 45.6%, from $20.6 million for the year ended
December 31, 1996 to $30.0 million for the year ended December 31, 1997. Other
dealership revenues increased $3.0 million, or 40.5%, from $7.4 million for the
year ended December 31, 1996 to $10.4 million for the year ended December 31,
1997. These increases were due primarily to the inclusion of the acquisitions
of the McCall, Smith and Kingwood Groups for the last two months of the year.
GROSS PROFIT. Gross profit increased by $15.0 million, or 37.9%, from
$39.6 million for the year ended December 31, 1996 to $54.6 million for the
year ended December 31, 1997. The increase was attributable to the inclusion
of the acquisitions for the last two months of the year, which was partially
offset by a reduced gross margin from 14.1% for the year ended December 31,
1996 to 13.5% for the year ended December 31, 1997. This decline was due
primarily to reduced vehicle gross margins. The reduced vehicle margin was
caused by an emphasis on increasing market share in the Oklahoma market while
customer demand was not as strong as in prior years.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $13.4 million, or 43.5%, from $30.8 million
for the year ended December 31, 1996 to $44.2 million for the year ended
December 31, 1997. The increase was primarily attributable to the inclusion of
the acquisitions for last two months of the year and a one time $825,000
non-cash compensation charge recorded by the Howard Group for grants of equity
to certain key employees of the Howard Group. Selling, general and
administrative expenses remained constant as a percentage of revenues at 10.9%
for the years ended December 31, 1996 and 1997. Excluding the impact of the
one-time $825,000 non- cash compensation charge, selling, general and
administrative expense would have declined to 10.7% of revenues for the year
ended December 31, 1997.
INTEREST EXPENSE, NET. Interest expense, net, increased $0.8 million,
or 25.0%, from $3.2 million for the year ended December 31, 1996 to $4.0
million for the year ended December 31, 1997. The increase was primarily
attributable to the inclusion of the acquisitions for the last two months of
the year.
PRO FORMA NET INCOME. Pro forma net income increased $1.0 million or
29.4% from $3.4 million for the year ended December 31, 1996 to $4.4 million
for the year ended December 31, 1997. Excluding the net income impact of the
$825,000 non-cash compensation charge, pro forma net income as a percentage of
revenues remained constant at 1.2% for the years ended December 31, 1996 and
1997. The increase in pro forma net income was primarily attributable to the
inclusion of the acquisitions for the last two months of the year.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
REVENUES. Revenues increased by $27.5 million, or 10.8%, from $254.0
million for the year ended December 31, 1995 to $281.5 million for the year
ended December 31, 1996. New vehicle sales increased $13.8 million, or 9.1%,
from $151.2 million for the year ended December 31, 1995 to $165.0 million for
the year ended December 31, 1996. The increase was primarily attributable to
strong sales at the Chevrolet franchise and the acquisition of Bob Howard
Dodge, offset by reduced sales at Bob Howard Automall. Used vehicle revenues
increased $9.1 million, or 11.5%, from $79.4 million for the year ended
December 31, 1995 to $88.5 million for the year ended December 31, 1996. This
increase was attributable to the acquisition of Bob Howard Dodge and the Howard
Group's successful marketing efforts at all of the Howard Group's other
franchises. Parts and service sales increased $3.7 million, or 21.9%,
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from $16.9 million for the year ended December 31, 1995 to $20.6 million for
the year ended December 31, 1996. The increase was attributable to increased
sales at each of the Howard Group's franchises and new sales from the
acquisition of Bob Howard Dodge. Other dealership revenues increased $1.0
million, or 15.6%, from $6.4 million for the year ended December 31, 1995 to
$7.4 million for the year ended December 31, 1996. The increase was due
primarily to an increase in the number of retail new and used vehicle sales.
GROSS PROFIT. Gross profit increased by $5.5 million, or 16.1%, from
$34.1 million for the year ended December 31, 1995 to $39.6 million for the
year ended December 31, 1996. The increase was attributable to increased sales
and improvement in the Howard Group's gross profit margin from 13.4% for the
year ended December 31, 1995 to 14.1% for the year ended December 31, 1996.
The gross margin improved as revenues from parts and service and other
dealership revenues became a greater percentage of total revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $4.6 million, or 17.6%, from $26.2 million
for the year ended December 31, 1995 to $30.8 million for the year ended
December 31, 1996. The increase was primarily attributable to costs related to
the newly acquired Bob Howard Dodge and variable incentive pay to employees
which was related to the increase in revenues. As a percentage of total
revenues, selling, general and administrative expenses increased from 10.3% for
the year ended December 31, 1995 to 10.9% for the year ended December 31, 1996.
INTEREST EXPENSE, NET. Interest expense, net, decreased $0.3 million,
or 8.6%, from $3.5 million for the year ended December 31, 1995 to $3.2 million
for the year ended December 31, 1996. The decrease was attributable to an
approximately 50 basis point decrease in the average floorplan interest rate,
partially offset by interest expense incurred by the newly acquired Bob Howard
Dodge.
PRO FORMA NET INCOME. Pro forma net income increased $0.8 million, or
30.8%, from $2.6 million for the year ended December 31, 1995 to $3.4 million
for the year ended December 31, 1996. Pro forma net income as a percentage of
revenues increased from 1.0% for the year ended December 31, 1995 to 1.2% for
the year ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash on hand, cash
from operations, floorplan financing and its credit facility.
The following table sets forth historical selected information from
the Company's statements of cash flows:
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997
---------- ---------- ---------
(dollars in thousands)
Net cash provided by (used in)
operating activities............. $7,197 $7,332 $(26,601)
Net cash provided by (used in)
investing activities............. (1,303) (4,615) 10,661
Net cash provided by (used in)
financing activities............. (520) (1,558) 39,352
------ ------ -------
Net increase in cash and cash
Equivalents...................... $5,374 $1,159 $23,412
====== ====== =======
CASH FLOWS
Total cash and cash equivalents at December 31, 1997, were $35.1
million.
For the three-year period ended December 31, 1997, the Company used
$12.1 million in net cash in operating activities, as net income plus
depreciation and amortization were offset by utilization of the
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26
IPO proceeds to pay down floorplan debt. At December 31, 1997, the Company had
paid down its floorplan debt in the amount of $33.5 million. The Company has
the ability to draw on it floorplan facilities in the amount of $33.5 million
in order to complete acquisitions or for working capital or other corporate
purposes.
The change in net cash provided by investing activities was
attributable to cash paid in completing acquisitions offset by the cash
balances obtained in the acquisitions and purchases of property and equipment.
The change in net cash provided by financing activities was primarily
attributable to the net proceeds of the Company's IPO of approximately $51.8
million.
ACQUISITION FINANCING
The Company anticipates that its primary use of cash will be for the
completion of acquisitions. The Company expects the cash needed to complete
its acquisitions will come from the operating cash flows of the existing
dealerships, borrowings under its current credit facilities, other borrowings
or equity/debt offerings. Currently, the Company has adequate cash resources
to meet its contractual obligations. But, in order to continue to implement
the Company's growth through acquisition strategy, the Company will need to
raise additional funds or primarily utilize its Common Stock to complete
acquisitions. See "Forward Looking Information and Certain Risks and
Uncertainties that Could Affect Future Operations Risks Related to
Acquisition Financing; Future Capital Requirements".
Credit Facility
On December 31, 1997, Group 1 entered into a $125 million, three-year
revolving Credit Agreement with a bank group (the "Credit Facility"). The
Credit Facility provides for a floorplan line of credit of $75 million for the
financing of vehicle inventories and an acquisition line of credit of $50
million, for the financing of acquisitions, general corporate purposes or
capital expenditures. There were no amounts drawn on the acquisition line of
credit of the Credit Facility as of March 27, 1998. 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. At Group 1's
option the acquisition line of credit of the Credit Facility may bear interest
based on the London Interbank Offered Rate plus a margin varying from 150 to
275 basis points, dependent upon certain financial ratios. Additionally, the
loan agreement contains various covenants including financial ratios and other
requirements which must be maintained by the Company. The agreement also
limits the amount the Company may pay as cash dividends.
In January 1998, the Company entered into a three-year interest rate
swap agreement with a bank. The effect of this swap will be to convert the
interest rate on $75 million of debt to a fixed rate of approximately 7.16%.
FLOORPLAN FINANCING
The Company currently obtains floorplan financing for its vehicle
inventory primarily through its Credit Facility and Toyota Motor Credit
Corporation. This debt bears interest at rates of LIBOR plus 150 basis points
and Prime minus 75 basis points to Prime minus 100 basis, based on certain
conditions.
LEASES
The Company leases various real estate, facilities and equipment under
long-term operating lease agreements, including leases with related parties.
Substantially all related-party leases have terms of 30 years and are
cancelable at the Company's option ten years from execution of the lease and at
the end of each subsequent five-year period.
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OTHER
The Company had working capital of $50.2 million as of December 31,
1997. Historically, the Company has funded its operations with internally
generated cash flow and borrowings from lenders. While there can be no
assurance, based on current facts and circumstances, management believes it has
adequate cash flows and financing alternatives to fund its current operations,
exclusive of acquisitions.
FORWARD LOOKING INFORMATION AND CERTAIN RISKS AND UNCERTAINTIES THAT COULD
AFFECT FUTURE OPERATING RESULTS
This Annual Report and Management's Discussion and Analysis of Results
of Operations and Financial Condition include 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. All statements other than
statements of historical facts included in this document, including statements
regarding potential acquisitions, expected cost savings, planned capital
expenditures, the Company's future financial position, business strategy and
other plans and objectives for future operations are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, such statements are based upon
assumptions and anticipated results that are subject to numerous uncertainties.
Actual results may vary significantly from those anticipated due to many
factors, including industry conditions, future demand for new and used
vehicles, the ability to obtain Manufacturer consents to acquisitions, the
availability of capital resources and the willingness of acquisition candidates
to accept the Company's capital stock as currency. These important factors,
risks and uncertainties include, but are not limited to, those described in the
following paragraphs and in the discussion above in this Annual Report under
the heading "Business", including, without limitation, the discussions under
the subheadings "Agreements with Manufacturers", "Competition", "Governmental
Regulations" and "Environmental Matters". All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by such factors.
DEPENDENCE ON ACQUISITIONS FOR GROWTH
Growth in the Company's revenues and earnings will depend
significantly on the Company's ability to acquire and consolidate profitable
dealerships. There can be no assurance that the Company will be able to
identify, acquire or profitably manage and integrate additional dealerships, if
any, into the Company, or that it will be able to do so without substantial
costs, delays or other operational or financial problems. In addition,
increased competition for acquisition candidates may develop, which could
result in fewer acquisitions opportunities available to the Company and/or
higher acquisition prices. Further, acquisitions involve a number of special
risks, including possible adverse effects on the Company's operating results,
diversion of resources and management's attention, inability to retain key
acquired personnel, risks associated with unanticipated events or liabilities
and amortization of acquired intangible assets, some or all of which could have
a material adverse effect on the Company's business, financial condition and
results of operations. Finally, the ability of the Company to grow through
acquisitions could be significantly affected by the price of the Common Stock
since the Company intends to grow substantially through the issuance of its
Common Stock in acquisitions. Any substantial decline in the price of the
Common Stock could, therefore, have a material adverse effect on the Company's
growth strategy.
The Company will be required to obtain the consent of the applicable
Manufacturer prior to the acquisition of any dealership franchises. Obtaining
the consent of the Manufacturers for acquisitions of dealerships could take a
significant amount of time. Obtaining the approvals of the Manufacturers for
the acquisition of the Founding Groups took almost one year. Although the
Company believes that subsequent acquisitions by the Company will take
significantly less time since the Company has current completed applications
and/or agreements with all Manufacturers, there can be no assurance that future
approvals will not involve delays. The Manufacturers have not advised the
Company that approvals for subsequent acquisitions will take significantly less
time, and, if the Company experiences delays in obtaining, or fails to obtain,
approvals of the Manufacturers for acquisitions of dealerships, the Company's
growth strategy could be materially adversely affected. In determining whether
to approve an acquisition,
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the Manufacturers may consider many factors, including the moral character,
business experience, financial condition, ownership structure and CSI scores of
the Company. In addition, certain Manufacturers limit the number of such
Manufacturers' dealerships that may be owned by the Company or the number that
may be owned in a particular geographic area. See "Business - Agreements with
Manufacturers".
RISKS RELATING TO FAILURE TO MEET MANUFACTURER CSI SCORES
Many Manufacturers attempt to measure customers' satisfaction with
automobile dealerships through systems generally known as the customer
satisfaction index. These manufacturers may use a dealership's CSI scores as a
factor in evaluating applications for additional dealership acquisitions and
participation by a dealership in incentive programs. Certain of the Company's
dealerships have had difficulty from time to time meeting their Manufacturers'
CSI standards. The components of the various manufacturer CSI scores have been
modified from time to time in the past, and there is no assurance that such
components will not be further modified or replaced by different systems in the
future. The Company's dealerships' CSI scores in the past have not had a
material adverse effect on these dealerships. However, the CSI scores of the
Howard Group's GM dealerships are currently below GM levels as required under
the GM publication Policies for Changes in GM Dealership Ownership/Management
("GM Policies"), and as a result, the acquisition of a Chevrolet dealership in
Tulsa, Oklahoma by Bob Howard East, an affiliate of the Company has been denied
by GM. Under the GM Policies each GM dealership must maintain CSI scores that
are at or above its respective zone/branch average for the overall dealership
purchase/delivery category and the overall dealership service visit category.
Exceptions will be considered if (i) the score in each category is no lower
than 0.2 points below the applicable zone/branch average or 0.12 points below
national divisional 12 month averages; and (ii) a business plan for the
dealership is provided to improve CSI results in the categories to zone/branch
average within two years; and/or (iii) a positive sustaining trend has been
displayed in the dealership's CSI results in the categories. If such CSI
scores fail to reach required levels, the Company's ability to acquire GM
dealerships could be adversely affected. Moreover, failure of the Company's
dealerships to comply with the CSI standards of GM as well as other
Manufacturers at any given time in the future could adversely affect the growth
strategy of the Company.
MANUFACTURERS' LIMITATIONS ON ACQUISITIONS
The Company's acquisition program may be limited to some extent by the
Manufacturers. Under the limitations currently imposed by the Manufacturers,
the Company could acquire no more than five additional Toyota dealerships, two
additional Lexus dealerships, four additional Honda dealerships, one additional
Acura dealership, approximately 400 additional Ford and Lincoln Mercury
dealerships and 10 additional GM dealership locations prior to October 1999,
subject to being increased. The Company owns: two Toyota, one Lexus, three
Honda, two Acura, four Ford, one Lincoln and one Mercury franchise and three GM
dealership locations. The other Manufacturers, which have no such limitations,
accounted for the following estimated number of dealerships in the United
States, as of December 31, 1997: Chrysler Corporation, 13,000 (at 4,600
locations); Nissan, 1,200; Mitsubishi, 500; Isuzu, 500; Suzuki, 300. However,
not all of these existing dealership locations and franchises may be eligible
for acquisition. In addition, all of the Manufacturers, whether or not they
have numerical limitations on the number of dealerships that may be acquired,
will require the Company to obtain the consent of the applicable Manufacturer
prior to the acquisition of any dealership franchises of such Manufacturer, and
may withhold such consents based on other considerations, such as the failure
of existing dealerships to comply with their franchise agreements or to meet
required CSI scores, or the ownership by the Company of dealerships of
competing Manufacturers. Also, as a condition to granting its consent to the
transfer of the three Honda and two Acura dealerships acquired by Group 1 in
November 1997, American Honda imposed additional restrictions on the Company,
including a requirement that more than 50% of the outstanding Common Stock of
the Company be owned at all times by persons approved by American Honda,
restrictions on transfers of the shares of Common Stock acquired by the
stockholders of the Founding Groups pursuant to the acquisitions, and the
requirement that American Honda approve the ownership by any stockholder of 5%
or more of the Common Stock of the Company (other than certain institutional
investors, which may own up to 10%), as well as any future public offering of
Common Stock
28
29
of the Company. All of the foregoing could have the effect of limiting the
Company's ability to implement its acquisition program. In addition, American
Honda's policy on public ownership of Honda and Acura dealerships requires that
individuals or entities that acquire, own or control more than 5% of the Common
Stock of the Company must provide American Honda with copies of all filings
made to the Securities and Exchange Commission, all comparable filings made to
state agencies and annual audited financial statements.
RISKS RELATED TO ACQUISITION FINANCING; FUTURE CAPITAL REQUIREMENTS
The Company currently intends to finance future acquisitions by
issuing shares of Common Stock as full or partial consideration for acquired
dealerships. The extent to which the Company will be able or willing to issue
Common Stock for acquisitions will depend on the market value of the Common
Stock from time to time and the willingness of potential acquisition candidates
to accept Common Stock as part of the consideration for the sale of their
businesses. Since the Company will focus initially on large "platform"
acquisitions, it is possible that the Company will issue a significant number
of additional shares of Common Stock in connection with such acquisitions in
the near future. Such additional shares of Common Stock could be as much as, or
more than, the number of outstanding shares of Common Stock. To the extent
that the Company is unable or unwilling to do so, the Company may be required
to use available cash or other sources of debt or equity financing. The
Company's Credit Facility provides it with a secured revolving line of credit
of up to $125 million, of which $50 million may be used for general corporate
purposes, acquisitions, capital expenditures and working capital and $75
million may be used for floorplan financing. As of December 31, 1997, there
were no amounts drawn under the Credit Facility. The Company currently expects
that available cash, other existing resources and the Credit Facility will be
sufficient to fund the Company's contractual cash needs for at least the next
12 months. But, in order to continue to implement the Company's growth through
acquisition strategy, the Company will need to raise additional funds or
primarily utilize the Company's Common Stock to complete acquisitions.
However, no assurance can be given that the available cash, other existing
resources and the Credit Facility will be sufficient to fund the Company's
contractual cash needs, or that the Company will be able to obtain adequate
additional capital from other sources.
DEPENDENCE ON AUTOMOBILE MANUFACTURERS
The success of each of the Company's dealerships will be highly
dependent upon the overall success of the line of vehicles that each dealership
sells. The Company's business will be affected to varying degrees by the
demand for its Manufacturers' vehicles, and by the financial condition,
management, marketing, production and distribution capabilities of such
Manufacturers. In addition, the timing, structure and amount of Manufacturer
sales incentives and rebates will impact the timing and profitability of the
Company's sales transactions and such incentives and rebates change frequently
based on decisions of the Manufacturers. Events such as labor disputes and
other production disruptions that may adversely affect a Manufacturer may also
adversely affect the Company. Similarly, the delivery of vehicles from
Manufacturers later than scheduled, which may occur particularly during periods
of new product introductions, can lead to reduced sales during such periods.
Moreover, any event that causes adverse publicity involving such Manufacturers
may have an adverse effect on the Company regardless of whether such event
involves any of the Company's dealerships.
The Company will also depend on its Manufacturers to provide it with a
desirable mix of new vehicles. The most popular vehicles generally produce the
highest profit margins and are frequently the most difficult to obtain from the
Manufacturers. If the Company is unable to obtain sufficient quantities of the
most popular models its profitability may be adversely affected. In some
instances, in order to obtain additional allocations of these vehicles, the
Company may elect to purchase a larger number of less desirable models than it
would otherwise purchase. Sales of less desirable models may result in lower
profit margins than sales of the more popular vehicles.
The Company's franchise agreements with its Manufacturers will not
give the Company the exclusive right to sell a Manufacturer's product within a
given geographic area. Accordingly, a Manufacturer could grant another dealer a
franchise to start a new dealership in proximity to one or more
29
30
of the Company's locations or an existing dealer could move its dealership to a
location which would compete directly with the Company, although certain state
laws provide a mechanism for challenging such action in advance through
administrative or legal proceedings. If the Company cannot prevent a
Manufacturer from granting a new franchise near to one of the Company's
dealerships, such grant could have a material adverse effect on the Company and
its operations.
YEAR 2000 CONVERSION
Year 2000 issues result from the inability of computer programs or
computerized equipment to accurately calculate, store or use a date subsequent
to December 31, 1999. The erroneous date can be interpreted in a number of
different ways; typically the year 2000 is represented as the year 1900. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
Group 1 has recognized the need to ensure that its computer systems,
equipment and operations will not be adversely impacted by the change to the
calendar year 2000. As such, the Company has taken steps to identify potential
areas of risk and has begun addressing these in its planning, purchasing and
daily operations. The Company has not set a timetable for completion of its
year 2000 review. The total cost of converting all internal systems, equipment
and operations for the year 2000 has not been fully quantified, but it is not
expected to be material to Group 1. The Company is currently reviewing the
potential adverse impact resulting from the failure of third party service
providers and vendors to prepare for the year 2000. Failure by the Company or
its vendors to address the year 2000 issue could have a material adverse effect
on the Company. The Company is primarily dependent upon the Manufacturers for
the production and delivery of vehicles and parts and is unable to require the
Manufacturers to address the year 2000 issues faced by them. A shortage of
vehicles or other adverse effects on the relationship between the Company and
the Manufacturers caused by the Manufacturers failure to address the year 2000
issue could have a material adverse effect on the Company.
CYCLICALITY
The Company's operations, like the automotive retailing industry in
general, can be impacted by a number of factors relating to general economic
conditions, including consumer business cycles, consumer confidence, economic
conditions, availability of consumer credit and interest rates. Although the
above factors, among others, may impact the Company's business, Group 1
believes the impact on the Company's operations of future negative trends in
such factors will be somewhat mitigated by its (i) strong parts, service and
collision repair services, (ii) variable cost salary structure, (iii)
geographic diversity and (iv) product diversity.
SEASONALITY
The Company's operations are subject to seasonal variations, with the
second and third quarters generally contributing more operating profit than the
first and fourth quarters. This seasonality is driven by three primary forces:
(i) Manufacturer-related factors, primarily the historical timing of major
manufacturer incentive programs and model changeovers, (ii) weather-related
factors and (iii) consumer buying patterns.
ITEM 7A. MARKET RISK DISCLOSURE
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Financial Statements for the information required by this
item.
30
31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 May 28, 1998, which will be filed
with the Securities and Exchange Commission and is incorporated herein by
reference.
31
32
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 December 24, 1997, the Company filed a Current Report on
Form 8-K reporting under Item 5 thereof and including exhibits
under Item 7 thereof.
(c) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 -- Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit
3.1 of the Company's Registration Statement on Form S-1 Registration No. 333-29893)
3.2 -- Certificate of Designation of Series A Junior Participating Preferred Stock (Incorporated by
reference to Exhibit 3.2 of the Company's Registration Statement on Form S-1 Registration
No. 333-29893)
3.3 -- Bylaws of the Company (Incorporated by reference to Exhibit 3.3 of the Company's
Registration Statement on Form S-1 Registration No. 333-29893)
4.1 -- Specimen Common Stock certificate (Incorporated by reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-1 Registration No. 333-29893)
10.1 -- Employment Agreement between the Company and B.B. Hollingsworth, Jr. dated November 3, 1997.
10.2 -- Employment Agreement between the Company and Robert E. Howard II dated November 3, 1997.
10.3 -- Employment Agreement between the Company and Sterling B. McCall, Jr. dated November 3, 1997.
10.4 -- Employment Agreement between the Company and Charles M. Smith dated November 3, 1997.
10.5 -- Employment Agreement between the Company and John T. Turner dated November 3, 1997.
10.6 -- Employment Agreement between the Company and Scott L. Thompson dated November 3, 1997.
10.7 -- Employment Agreement between the Company and Kevin H. Whalen dated November 3, 1997.
10.8 -- Employment Agreement between the Company and James S. Carroll dated March 16, 1998.
10.9 -- 1996 Stock Incentive Plan (Incorporated by reference to Exhibit 10.7 of the Company's
Registration Statement on Form S-1 Registration No. 333-29893)
10.10 -- First Amendment to 1996 Stock Incentive Plan (Incorporated by reference to Exhibit 10.8 of
the Company's Registration Statement on Form S-1 Registration No. 333-29893)
10.11 -- Lease Agreement between Round Rock Nissan and SKLR Round Rock, L.C. (Incorporated by
reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration
No. 333-29893)
10.12 -- Lease Agreement between SMC Luxury Cars and SBM-L F.L.P.(Incorporated by reference to
Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration No. 333-29893)
32
33
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.13 -- Lease Agreement between Southwest Toyota and SBM-T F.L.P. (Incorporated by reference to
Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration No. 333-29893)
10.14 -- Lease Agreement between Southwest Toyota and SBM-T I&E F.L.P. (Incorporated by reference to
Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration No. 333-29893)
10.15 -- Lease Agreement between SMC Luxury Cars and SBM-L I&E F.L.P. (Incorporated by reference to
Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration No. 333-29893)
10.16 -- Lease Agreement between SMC Luxury Cars and SBM-L F.L.P. (Incorporated by reference to
Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration No. 333-29893)
10.17 -- Lease Agreement between Southwest Toyota and SMC Investment, Inc. (Incorporated by reference
to Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration No. 333-
29893)
10.18 -- Lease Agreement between Southwest Toyota and Dodge Financial F.L.P. (Incorporated by
reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration
No. 333-29893)
10.19 -- Lease Agreement between Howard Pontiac GMC and Robert E. Howard II (Incorporated by
reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration
No. 333-29893)
10.20 -- Lease Agreement between Bob Howard Motors and Robert E. Howard II (Incorporated by reference
to Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration No. 333-
29893)
10.21 -- Lease Agreement between Bob Howard Chevrolet and Robert E. Howard II (Incorporated by
reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration
No. 333-29893)
10.22 -- Lease Agreement between Bob Howard Automotive-H and North Broadway Real Estate,
(Incorporated by reference to Exhibit 10.9 of the Company's Registration Statement on Form
S-1 Registration No. 333-29893)
10.23 -- Lease Agreement between Mike Smith Autoplaza and Olds-Honda Realty (Incorporated by
reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration
No. 333-29893)
10.24 -- Rights Agreement between Group 1 Automotive, Inc. and ChaseMellon Shareholder Services,
L.L.C., as rights agent dated October 3, 1997 (Incorporated by reference to Exhibit 10.10 of
the Company's Registration Statement on Form S-1 Registration No. 333-29893)
10.25 -- 1998 Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.11 of the
Company's Registration Statement on Form S-1 Registration No. 333-29893)
10.26 -- Form of Agreement between Toyota Motor Sales, U.S.A., and Group 1 Automotive, Inc.
(Incorporated by reference to Exhibit 10.12 of the Company's Registration Statement on Form
S-1 Registration No. 333-29893)
10.27 -- Form of Supplemental Agreement to General Motors Corporation Dealer Sales and Service
Agreement (Incorporated by reference to Exhibit 10.13 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893)
10.28 -- Approval Letter dated December 11, 1996 from Nissan Motor Corporation U.S.A. (Incorporated
by reference to Exhibit 10.14 of the Company's Registration Statement on Form S-1
Registration No. 333-29893)
10.29 -- Amendment to Approval Letter from Nissan Motor Corporation U.S.A. dated September 29, 1997
(Incorporated by reference to Exhibit 10.15 of the Company's Registration Statement on Form
S-1 Registration No. 333-29893)
33
34
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.30 -- Supplemental Terms and Conditions between Ford Motor Company and Group 1 Automotive, Inc.
dated September 4, 1997 (Incorporated by reference to Exhibit 10.16 of the Company's
Registration Statement on Form S-1 Registration No. 333-29893)
10.31 -- Toyota Dealer Agreement between Gulf States Toyota, Inc. and Southwest Toyota, Inc. dated
April 5, 1993 (Incorporated by reference to Exhibit 10.17 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893)
10.32 -- Lexus Dealer Agreement between Toyota Motor Sales, U.S.A., Inc. and SMC Luxury Cars, Inc.
dated August 21, 1995 (Incorporated by reference to Exhibit 10.18 of the Company's
Registration Statement on Form S-1 Registration No. 333-29893)
10.33 -- Letter Agreement between Mitsubishi Motor Sales of America, Inc. and Group 1 Automotive,
Inc. dated June 20, 1997 (Incorporated by reference to Exhibit 10.20 of the Company's
Registration Statement on Form S-1 Registration No. 333-29893)
10.34 -- Supplemental Agreement to Dealer Sales and Service Agreement (Public Traded Company) among
Foyt Motors, Inc., Group 1 Automotive, Inc. and American Isuzu Motors Inc. (Incorporated by
reference to Exhibit 10.21 of the Company's Registration Statement on Form S-1 Registration
No. 333-29893)
10.35 -- Stock Purchase Agreement Among Howard Pontiac-GMC, Inc., Bob Howard Automotive-East, Inc.
and the Stockholder of Bob Howard Automotive-East, Inc. dated as of September 12, 1997
(Incorporated by reference to Exhibit 10.22 of the Company's Registration Statement on Form
S-1 Registration No. 333-29893)
10.36 -- Agreement between American Honda Motor Co., Inc. and the Dealership Parties dated October
23, 1997 (Incorporated by reference to Exhibit 10.24 of the Company's Registration Statement
on Form S-1 Registration No. 333-29893)
10.37 -- Form of General Motors Corporation U.S.A. Sales and Service Agreement (Incorporated by
reference to Exhibit 10.25 of the Company's Registration Statement on Form S-1 Registration
No. 333-29893)
10.38 -- Form of Nissan Motor Corporation Sales and Service Agreement (Incorporated by reference to
Exhibit 10.26 of the Company's Registration Statement on Form S-1 Registration No. 333-
29893)
10.39 -- Agreement and Plan of Reorganization by and among Group 1 Automotive, Inc., Koons Merger,
Inc., Koons Ford, Inc. and the stockholders of Koons Ford, Inc. dated December 17, 1997.
10.40 -- Agreement and Plan of Reorganization by and among Group 1 Automotive, Inc., PF Merger, Inc.,
Perimeter Ford, Inc. and the stockholders of Perimeter Ford, Inc. dated December 17, 1997.
10.41 -- Agreement and Plan of Reorganization by and among Group 1 Automotive, Inc., Courtesy Merger,
Inc., Courtesy Ford, Inc. and the stockholders of Courtesy Ford, Inc. dated December 17,
1997.
10.42 -- Lease Agreement between World Partner Enterprises Ltd. and Koons Ford, Inc. dated March 16,
1998.
10.43 -- Operations/Lease Agreement between K.C. Partnership and Perimeter Ford, Inc. dated March 16,
1998.
10.44 -- Lease Agreement between K.C. Partnership and Courtesy Ford, Inc. dated March 16, 1998.
10.45 -- Amended and Restated Sublease Agreement between Koons Development Co. and Koons Ford, Inc.
Dated March 16, 1998.
10.46 -- Multi-Party Agreement by and among K.C. Partnership, Ford Leasing Development Company,
Perimeter Ford, Inc., PF Merger, Inc. and Comerica Bank dated March 16, 1998.
10.47 -- Purchase Agreement by and among Group 1 Automotive, Inc., MSAP Merger Corp., the limited partners
of Prestige Chrysler Plymouth South, Ltd. and the stockholders of Prestige Chrysler Plymouth,
Inc. dated December 18, 1997.
10.48 -- Purchase Agreement by and among Group 1 Automotive, Inc., ST Merger Corp., the limited
partners of Maxwell Chrysler Plymouth Dodge Jeep Eagle, Ltd. and the stockholders of Maxwell
Chrysler Plymouth Dodge, Inc. dated December 18, 1997.
34
35
10.49 -- Purchase Agreement by and among Group 1 Automotive, Inc., RRN Merger Corp., the limited
partners of Prestige Chrysler Plymouth Northwest, Ltd. and the stockholders of MMK
Interests, Inc. dated December 18, 1997.
10.50 -- Asset Purchase Agreement by and among Group 1 Automotive, Inc., Casa Chevrolet Inc., United
Management, Inc. and the stockholders of United Management, Inc. dated February 25, 1998.
10.51 -- Asset Purchase Agreement by and among Group 1 Automotive, Inc., Casa Chrysler
Plymouth Jeep Inc., United Management, Inc. and the stockholders of United Management, Inc.,
dated February 25, 1998.
10.52 -- Purchase Agreement by and among Group 1 Automotive, Inc. and the stockholder of
Bob Howard Nissan, Inc. dated December 30, 1997.
10.53 -- Revolving Credit Agreement dated December 31, 1997.
10.54 -- Stock Pledge Agreement dated December 19, 1997.
10.55 -- Swap Transaction Letter Agreement dated January 23, 1998.
21.1 -- Group 1 Automotive, Inc. Subsidiary List.
23.1 -- Consent of Arthur Andersen LLP.
27.1 -- Financial Data Schedule.
35
36
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 30th day of March, 1998.
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 30th day of March, 1998.
SIGNATURE TITLE
--------- -----
/s/ B.B. HOLLINGSWORTH, JR. Chairman, President and Chief Executive
- ------------------------------------------------------- Officer and Director (Principal Executive Officer)
B.B. Hollingsworth, Jr.
/s/ SCOTT L. THOMPSON Senior Vice President, Chief Financial
- ------------------------------------------------------- Officer and Treasurer (Chief Financial and Accounting
Scott L. Thompson Officer)
/s/ ROBERT E. HOWARD II Director
- -------------------------------------------------------
Robert E. Howard II
/s/ STERLING B. MCCALL, JR. Director
- -------------------------------------------------------
Sterling B. McCall, Jr.
/s/ CHARLES M. SMITH Director
- -------------------------------------------------------
Charles M. Smith
/s/ JOHN DUNCAN Director
- -------------------------------------------------------
John H. Duncan
/s/ BENNETT E. BIDWELL Director
- -------------------------------------------------------
Bennett E. Bidwell
36
37
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
McCall Group -- Combined Financial Statements
Report of Independent Public Accountants............................................................ F-17
Combined Balance Sheet.............................................................................. F-18
Combined Statements of Operations................................................................... F-19
Combined Statements of Stockholders' Equity (Deficit)............................................... F-20
Combined Statements of Cash Flows................................................................... F-21
Notes to Combined Financial Statements.............................................................. F-22
Smith Group -- Combined Financial Statements
Report of Independent Public Accountants............................................................ F-30
Combined Balance Sheet.............................................................................. F-31
Combined Statements of Operations................................................................... F-32
Combined Statements of Stockholders' Equity......................................................... F-33
Combined Statements of Cash Flows................................................................... F-34
Notes to Combined Financial Statements.............................................................. F-35
F-1
38
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. and Subsidiaries (a Delaware corporation) (the Company) as of
December 31, 1996 and 1997 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1996 and 1997, and the results of its operations and cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Houston, Texas
March 6, 1998
F-2
39
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------
1996 1997
ASSETS ------------ -----------
CURRENT ASSETS:
Cash and cash equivalents ............................ $11,679,050 $ 35,091,188
Accounts receivable, net ............................ 5,898,736 9,748,947
Inventories .......................................... 47,674,462 105,421,371
Notes receivable, net ................................ - 861,823
Prepaid expenses .................................... 858,886 1,865,883
Deferred income taxes ................................ - 8,692,447
----------- ------------
Total current assets ............................ 66,111,134 161,681,659
----------- ------------
PROPERTY AND EQUIPMENT, net ................................ 4,128,880 21,586,401
NOTES RECEIVABLE, net ...................................... 417,675 1,336,738
GOODWILL, net .............................................. 1,456,833 27,077,875
OTHER ASSETS .............................................. 759,714 1,466,480
----------- ------------
Total assets .................................... $72,874,236 $213,149,153
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Floorplan notes payable .............................. $42,543,902 $ 58,487,845
Current maturities of long-term debt ................ 33,685 2,316,432
Deferred income taxes ................................ 357,172 -
Accounts payable and accrued expenses ................ 16,740,525 50,668,326
----------- ------------
Total current liabilities ...................... 59,675,284 111,472,603
----------- ------------
LONG-TERM DEBT, net of current maturities .................. 309,779 7,053,467
LONG-TERM DEFERRED INCOME TAXES ............................ 58,604 3,698,838
OTHER LONG-TERM LIABILITIES ................................ 620,896 1,552,739
COMMITMENTS AND CONTINGENCIES ..............................
STOCKHOLDERS' EQUITY:
Preferred stock, 1,000,000 shares authorized, none
issued or outstanding ................................ - -
Common stock, $.01 par value, 50,000,000 shares
authorized, 3,570,302 and 14,673,051 issued
and outstanding ...................................... 35,703 146,730
Additional paid-in capital .......................... 6,269,801 91,846,257
Retained earnings (deficit) .......................... 5,904,169 (2,529,006)
Treasury stock, at cost, 10,000 shares .............. - (92,475)
----------- ------------
Total stockholders' equity ...................... 12,209,673 89,371,506
----------- ------------
Total liabilities and stockholders'
equity .................................... $72,874,236 $213,149,153
=========== ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
40
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Pro Forma
Year Ended December 31, Year Ended
----------------------------------------- December 31,
1995 1996 1997 1997
------------ ------------ ---------- ------------
(unaudited)
REVENUES:
New vehicle sales .................. $151,226,737 $164,978,710 $228,043,546 $513,863,494
Used vehicle sales ................. 79,447,701 88,477,330 135,507,523 288,010,274
Parts and service sales............. 16,940,622 20,648,962 30,005,678 77,215,320
Other dealership revenues, net ..... 6,388,131 7,386,747 10,410,150 23,205,754
------------ ------------ ------------ ------------
Total revenues ........... 254,003,191 281,491,749 403,966,897 902,294,842
------------ ------------ ------------ ------------
COST OF SALES:
New vehicle sales .................. 140,086,087 152,708,620 212,349,242 471,664,355
Used vehicle sales ................. 71,553,967 78,911,645 123,931,626 266,975,770
Parts and service sales ............ 8,266,771 10,277,097 13,085,450 36,524,219
------------ ------------ ------------ ------------
Total cost of sales ...... 219,906,825 241,897,362 349,366,318 775,164,344
------------ ------------ ------------ ------------
GROSS PROFIT ............................ 34,096,366 39,594,387 54,600,579 127,130,498
GOODWILL AMORTIZATION ................... 27,152 36,982 170,267 790,414
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ................ 26,138,383 30,731,251 44,209,231 100,928,222
------------ ------------ ------------ ------------
Income from operations ... 7,930,831 8,826,154 10,221,081 25,411,862
OTHER INCOME AND EXPENSES:
Interest expense, net .................. (3,470,879) (3,168,086) (3,985,621) (6,120,396)
Other income (expense), net ............ (80,446) (69,328) 155,510 88,497
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES .............. 4,379,506 5,588,740 6,390,970 19,379,963
PROVISION FOR INCOME TAXES .............. 744,316 381,752 573,254 7,967,299
------------ ------------ ------------ ------------
NET INCOME .............................. $3,635,190 $5,206,988 $5,817,716 $11,412,664
============ ============ =========== ============
S Corporation pro forma income
taxes (unaudited) ...................... 989,968 1,831,389 1,464,834
------------ ------------ ------------
Pro forma net income (unaudited)......... $2,645,222 $3,375,599 $4,352,882
============ ============ ============
Earnings per share on pro forma net
Income:
Basic ................................. $0.78
Diluted ................................ $0.76
Weighted average shares outstanding:
Basic .................................. 14,672,804
Diluted ................................ 15,098,594
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
41
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional Retained
------------------------- Paid-In Earnings Treasury
Shares Amounts Capital (Deficit) Stock Total
----------- -------- ----------- ----------- -------- ----------
BALANCE, December 31, 1994.... 3,353,461 $ 33,535 $3,046,969 $2,265,774 $ - $ 5,346,278
Net income .................. - - - 3,635,190 - 3,635,190
Capital contribution ........ - - 1,725,000 - - 1,725,000
Dividends ................... - - - (2,086,181) - (2,086,181)
----------- -------- ----------- ----------- -------- -----------
BALANCE, December 31, 1995.... 3,353,461 33,535 4,771,969 3,814,783 - 8,620,287
Net income................... - - - 5,206,988 - 5,206,988
Issuance of common
stock ...................... 216,841 2,168 1,497,832 - - 1,500,000
Dividends .................... - - - (3,117,602) - (3,117,602)
----------- -------- ----------- ----------- -------- -----------
BALANCE, December 31, 1996..... 3,570,302 35,703 6,269,801 5,904,169 - 12,209,673
Acquisition of founding
companies................... 5,954,613 59,546 33,294,322 - - 33,353,868
Initial public offering,
net ........................ 5,148,136 51,481 51,707,134 - - 51,758,615
Purchase of treasury stock.... - - - - (92,475) (92,475)
Stock transfer by
shareholder, net of tax .... - - 575,000 - - 575,000
Net income ................... - - - 5,817,716 - 5,817,716
Dividends ................... - - - (14,250,891) - (14,250,891)
----------- -------- ----------- ----------- -------- -----------
BALANCE, December 31, 1997.... 14,673,051 $146,730 $91,846,257 $(2,529,006) $(92,475) $89,371,506
=========== ======== =========== =========== ======== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
42
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------------------
1995 1996 1997
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................. $3,635,190 $5,206,988 $5,817,716
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities -
Depreciation and amortization.......................... 538,493 740,811 1,020,073
Non-cash compensation, net of tax...................... - - 575,000
Deferred income taxes.................................. 190,787 (315,631) (1,014,705)
Provision for doubtful accounts and uncollectible
notes............................................ 84,833 108,068 270,047
Loss (gain) on sale of assets.......................... 15,313 18,350 (111,637)
Changes in assets and liabilities -
Accounts receivable ................................... 197,696 294,888 1,563,713
Inventories............................................ (4,873,611) (6,106,872) 5,686,292
Prepaid expenses and other assets...................... 196,943 (514,167) 3,608,725
Due from affiliates, net............................... - - 491,475
Floorplan notes payable................................ 3,876,738 5,508,254 (38,896,004)
Accounts payable and accrued expenses.................. 3,334,511 2,391,588 (5,611,583)
----------- ----------- -----------
Total adjustments................................... 3,561,703 2,125,289 (32,418,604)
----------- ----------- -----------
Net cash provided by (used in) operating
activities.................................. 7,196,893 7,332,277 (26,600,888)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable........................... (374,826) (235,054) (362,422)
Collections on notes receivable........................ - 192,205 87,787
Purchases of property and equipment.................... (928,017) (1,977,075) (2,163,793)
Proceeds from sale of property and equipment........... - - 1,935,346
Cash received in acquisitions, net of cash paid........ - (2,594,994) 11,163,785
----------- ----------- -----------
Net cash provided by (used in) investing
activities.................................. (1,302,843) (4,614,918) 10,660,703
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt.................... (171,910) (152,807) (470,612)
Borrowings of long-term debt............................ 13,111 212,329 108,488
Issuance of common stock................................ - 1,500,000 -
Initial public offering, net............................ - - 51,758,615
Purchase of treasury stock.............................. - - (92,475)
Contribution from stockholders.......................... 1,725,000 - -
Dividends paid in cash.................................. (2,086,181) (3,117,602) (11,951,693)
----------- ----------- -----------
Net cash provided by (used in) financing
activities.................................. (519,980) (1,558,080) 39,352,323
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................ 5,374,070 1,159,279 23,412,138
CASH AND CASH EQUIVALENTS, beginning of period........... 5,145,701 10,519,771 11,679,050
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of Period................. $10,519,771 $11,679,050 $35,091,188
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for -
Interest................................................ $3,427,813 $3,117,601 $4,199,664
Taxes................................................... 475,000 924,456 130,991
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
43
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Group 1 Automotive, Inc. and subsidiaries (Group 1 or the Company) was
founded in December 1995 to become a leading consolidator in the highly
fragmented automobile retailing industry. In October 1997, Group 1 acquired
four separate dealership groups (the Founding Groups), consisting of 30
dealership franchises and related businesses, in exchange for consideration
consisting of a combination of cash and common stock. Concurrent with the
acquisition of the Founding Groups, Group 1 completed an initial public
offering of 5,520,000 shares of common stock. The Company is primarily engaged
in the retail sale of new and used vehicles and the sale of related finance,
insurance and service contracts thereon. In addition, the Company sells
automotive parts and provides vehicle servicing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
For financial statement presentation purposes, Howard Group, one of the
Founding Groups, has been identified as the accounting acquiror. The
acquisition of the remaining Founding Groups was accounted for using the
purchase method of accounting. The operations of Group 1 Automotive, Inc., the
parent company, and the Founding Groups, excluding the Howard Group, are
included in the results of operations beginning October 31, 1997, the effective
closing date of the acquisitions for accounting purposes. The results of
operations of the Howard Group are included for the full year for all periods
presented. The allocation of purchase price to the assets acquired and
liabilities assumed has 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.
Revenue Recognition
Revenue from vehicle sales, parts sales and vehicle service is recognized
upon delivery to the customer.
Finance, Insurance and Service Contract Income Recognition
The Company arranges financing for customers through various institutions
and receives financing fees equal to the difference between the loan rates
charged to customers over the predetermined financing rates set by the financing
institution. In addition, the Company receives commissions from the sale of
credit life and disability insurance and extended service contracts to
customers.
The Company may be charged back (chargebacks) for unearned financing fees,
insurance or service contract commissions in the event of early termination of
the contracts by customers. The revenues from financing fees and commissions
are recorded at the time of the sale of the vehicles and a reserve for future
chargebacks is established based on historical operating results and the
termination provisions of the applicable contracts. Finance, insurance and
service contract income, net of estimated chargebacks, are included in other
dealership revenue in the accompanying combined financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments that have an
original maturity of three months or less at the date of purchase and contracts
in transit. Contracts in transit represent contracts on vehicles sold, for
which the proceeds are in transit from financing institutions.
F-7
44
Inventories
New, used and demonstrator vehicles are stated at the lower of cost or
market, determined on a specific-unit basis. Parts and accessories are stated
at the lower of cost (determined on a first-in, first-out basis) or market.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated useful life of the asset.
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in current
operations.
Goodwill
Goodwill represents the excess of the purchase price of dealerships
acquired over the fair value of tangible assets acquired at the date of
acquisition. Goodwill is amortized on a straight-line basis over 40 years.
Amortization expense charged to operations totaled approximately $27,000,
$37,000 and $170,000 for the years ended December 31, 1995, 1996 and 1997,
respectively. Accumulated amortization totaled approximately $129,000 and
$299,000 as of December 31, 1996 and 1997, respectively.
Income Taxes
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets are 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.
Prior to acquisition of the Founding Groups, certain entities of the
Howard Group elected S Corporation status, as defined by the Internal Revenue
Code, whereby the companies were not subject to taxation for federal purposes.
Under S Corporation status, the stockholders report their share of these
companies' taxable earnings or losses in their personal tax returns. All S
Corporation elections were terminated in conjunction with the acquisitions.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of floorplan notes
payable and long-term debt. The carrying amount of these financial instruments
approximates fair value due either to length of maturity or existence of
variable interest rates that approximate market rates.
In January 1998, the Company entered into a three-year interest rate swap
agreement with a bank. The effect of this swap will be to convert the interest
rate on $75 million of debt to a fixed rate of approximately 7.16%.
Advertising
The Company expenses production and other costs of advertising as
incurred. Advertising expense for the years ended December 31, 1995, 1996 and
1997 totaled $3.4, $3.2 and $5.9 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
F-8
45
significant estimates made by management in the accompanying financial
statements relate to reserves for used vehicle valuations, retail loan
guarantees and future chargebacks on finance, insurance and service contract
income. 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 one month.
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.
Earnings Per Share
SFAS No. 128 requires the presentation of basic earnings per share and
diluted earnings per share in financial statements of public enterprises rather
than primary and fully diluted earnings per share as previously required. Under
the provisions of this statement, basic earnings per share is computed based on
weighted average shares outstanding and excludes dilutive securities. Diluted
earnings per share is computed including the impacts of all potentially
dilutive securities. As the Company was not a public enterprise until October
1997, and the companies included in the statements of operations were under
different tax structures (S Corporations and C Corporations), no earnings per
share data has been presented for the historical results of operations for the
years ended December 31, 1995, 1996 and 1997. The following table sets forth
the shares outstanding for the pro forma earnings per share calculations:
Pro Forma
Year Ended
December 31,
1997
-------------
Common stock outstanding 14,673,051
Less: weighted average treasury shares repurchased.............................. (247)
------------
Shares used in computing basic earnings per share............................. 14,672,804
Dilutive effect of stock options, net of assumed repurchase of treasury
stock........................................................................... 425,790
------------
Shares used in computing diluted earnings per share........................... 15,098,594
============
Recent Accounting Pronouncements
During June 1997, Statement of Financial Accounting Standards ("SFAS") No.
131, " Disclosures About Segments of an Enterprise and Related Information" was
issued. SFAS No. 131 requires that segment reporting for public reporting
purposes be conformed to the segment reporting used by management for internal
purposes. Additionally, it adds a requirement for the presentation of certain
segment data on a quarterly basis starting in 1999. Management is currently
evaluating the impact of this standard on the Company's future financial
reporting.
Reclassifications
Certain reclassifications have been made to prior year financial
statements to conform them with the current year presentation.
3. ACQUISITION OF FOUNDING GROUPS
The accompanying consolidated balance sheet includes preliminary
allocations of the purchase price of the Founding Groups which are subject to
final adjustment.
The following pro forma financial information consists of income statement
data from continuing operations as presented in the consolidated financial
statements plus (1) the acquisition of the Founding Groups assuming the
acquisitions occurred on January 1, 1996 and 1997, respectively, (2) the
completion of the IPO as of the beginning of the respective periods and (3)
certain pro forma adjustments discussed below.
1996 1997
--------- ----------
(in thousands, except share amounts)
F-9
46
(unaudited)
Revenues........................ $821,913 $902,295
Gross profit.................... 116,130 127,131
Income from operations.......... 21,822 25,412
Net income...................... 9,447 11,413
Basic earnings per share........ 0.64 0.78
Diluted earnings per share...... $0.63 $0.76
Pro forma adjustments included in the amounts above primarily relate to:
(a) increases in revenues and decreases in cost of sales related to commission
arrangements on certain third-party products sold by the dealerships which
previously benefited the stockholders and such agreements were terminated in
conjunction with the acquisitions and the companies will realize the benefits
thereafter; (b) pro forma goodwill amortization expense over an estimated
useful life of 40 years; (c) reductions in compensation expense and management
fees to the level that certain management employees and owners of the Founding
Groups will contractually receive; (d) incremental corporate overhead costs
related to personnel costs, rents, professional service fees and directors and
officers liability insurance premiums; (e) decreases in interest expense
resulting from the repayment of floorplan obligations with proceeds from the
offering; and (f) incremental provisions for federal and state income taxes
relating to the compensation differential, S Corporation income and other pro
forma adjustments.
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following:
December 31,
------------------------------------
1996 1997
----------- ------------
Amounts due from manufacturers................ $3,574,953 $3,888,501
Due from finance companies.................... 1,002,153 3,217,205
Parts and service receivables................. 652,222 2,273,045
Other......................................... 777,329 890,403
------------ ------------
Total accounts receivable..................... 6,006,657 10,269,154
Less - Allowance for doubtful accounts........ (107,921) (520,207)
------------ ------------
Accounts receivable, net...................... $5,898,736 $9,748,947
============ ============
Inventories consist of the following:
December 31,
------------------------------------
1996 1997
----------- ------------
New vehicles................................ $36,973,347 $70,574,596
Used vehicles............................... 8,612,757 25,690,062
Rental vehicles............................. - 2,495,113
Parts, accessories and other................ 2,088,358 6,661,600
------------ ------------
Total inventories........................... $47,674,462 $105,421,371
=========== ============
Accounts payable and accrued expenses consist of the following:
December 31,
------------------------------------
1996 1997
----------- ------------
Account payable, trade....................... $ 6,135,880 $18,510,907
Reserve for finance, insurance and
service contract chargebacks.............. 5,782,600 10,530,250
Reserve for retail loan guarantees........... - 2,009,638
Other accrued expenses....................... $ 4,822,045 19,617,531
------------ ------------
Total accounts payable and accrued
expenses............................. $16,740,525 $50,668,326
=========== ===========
F-10
47
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
Estimated December 31,
Useful Lives ------------------------------------
in Years 1996 1997
----------- ------------ --------------
Land............................... - $- $7,665,229
Buildings.......................... 20 to 35 32,058 5,402,916
Leasehold improvements............. 7 to 15 1,086,129 3,807,625
Machinery and equipment............ 3 to 7 2,460,465 2,995,035
Furniture and fixtures............. 5 to 7 1,387,095 4,590,538
Company vehicles................... 5 2,146,377 528,166
------------ -------------
Total......................... 7,112,124 24,989,509
Less -- Accumulated depreciation... (2,983,244) (3,403,108)
------------ -------------
Property and equipment, net........ $4,128,880 $21,586,401
============ =============
6. FLOORPLAN NOTES PAYABLE:
Floorplan notes payable reflect amounts payable for the purchase of
specific vehicle inventory and consist of the following:
December 31,
-----------------------------------
1996 1997
----------- ------------
New vehicles................................ $38,677,985 $42,918,279
Used vehicles............................... 3,865,917 13,173,880
Rental vehicles............................. - 2,395,686
------------ ------------
Total floorplan notes payable.......... $42,543,902 $58,487,845
============ ============
Floorplan notes payable are due to various floorplan lenders, bearing
interest at rates ranging from prime minus 100 basis points to prime plus 175
basis points. As of December 31, 1996 and 1997 the weighted average interest
rate on floorplan notes payable outstanding was 7.75% and 7.93%. Interest
expense on floorplan notes payable totaled approximately $3.4, $3.1 and $3.9
million for the years ended December 31, 1995, 1996 and 1997, respectively. The
floorplan arrangements permit the Company to borrow up to $150.4 million,
dependent upon new and used vehicle sales and inventory levels. As of December
31, 1997, total available borrowings under floorplan agreements were
approximately $91.9 million. Vehicle payments on the notes are due when the
related vehicles are sold. The notes are collateralized by substantially all of
the inventories of the Company.
F-11
48
7. LONG-TERM DEBT:
December 31,
--------------------------------------
1996 1997
--------------- --------------
Note payable to a bank with
monthly principal payments of
$41,892, due through March 2004,
bearing interest at 7.5%
payable monthly.................... $ -- $ 3,138,386
Note payable to a bank, with
monthly principal payments of
$13,740 due through August 2006,
bearing interest at prime rate
(8.50% at December 31, 1997)....... -- 2,082,893
Mortgage loan to a bank, with
monthly principal payments of
$15,000, due through May 2005,
bearing interest at prime plus 25
basis points (8.75% at December
31, 1997), payable monthly......... -- 1,314,290
Revolving line of credit with a
bank, due on demand, bearing
interest at prime plus 100 basis
points (9.5% at December 31, 1997) -- 985,448
Note payable to a bank, with
monthly principal and interest
payments of $5,831 due through
February 2006, bearing interest at
8.20%.............................. -- 568,399
Other notes payable, maturing in
varying amounts through August
2001 with interest ranging from
7.0% to 13.7%...................... 343,464 1,280,483
--------------- --------------
Total long-term debt.................. 343,464 9,369,899
--------------- --------------
Less - Current portion............. (33,685) (2,316,432)
--------------- --------------
Long-term portion.................. $ 309,779 $ 7,053,467
=============== ==============
The notes payable are secured by the land, buildings or other assets
for which the debt was incurred. On December 31, 1997, Group 1 entered into a
$125 million, three-year revolving Credit Agreement with a bank group (the
"Credit Facility"). There were no amounts drawn on the Credit Facility as of
December 31, 1997. The Credit Facility provides for a floorplan line of credit
of $75 million for the financing of vehicle inventories and an acquisition line
of credit of $50 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. At Group 1's option the
acquisition line of credit of the Credit Facility may bear interest based on
the London Interbank Offered Rate plus a margin varying from 150 to 275 basis
points, dependent upon certain financial ratios. Additionally, the loan
agreement contains various covenants including financial ratios and other
requirements which must be maintained by the Company. The agreements also limit
the amount the Company may pay as cash dividends.
Total interest expense on long-term debt was approximately $56,000 and
$176,000 for the years ended December 31, 1996 and 1997, respectively.
F-12
49
The aggregate maturities of long-term debt as of December 31, 1997 are as
follows:
1998........................ $2,316,432
1999........................ 1,206,616
2000........................ 1,138,898
2001........................ 1,055,680
2002........................ 897,017
Thereafter.................. 2,755,256
-------------
Total long-term debt........ $9,369,899
=============
8. CAPITAL STOCK AND STOCK OPTIONS:
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 officers and other key employees and directors.
The number of shares authorized and reserved for issuance under the Plan is
2,000,000 shares of which 752,550 are available for future issuance. In
general, the terms of the option awards (including vesting schedules) are
established by the Compensation Committee of the Company's Board of Directors.
As of December 31, 1997, the Company has granted options to employees and
directors covering an aggregate of 1,247,450 shares of common stock. All
outstanding options are exercisable over a period not to exceed 10 years and
vest over a five- or six-year period.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which, if fully adopted, requires the Company to record
stock-based compensation at fair value. The Company has adopted the disclosure
requirements of SFAS No. 123 and has elected to record employee compensation
expense in accordance with Accounting Principles Board (APB) Opinion No. 25.
Accordingly, compensation expense is recorded for stock options based on the
excess of the fair market value of the common stock on the date the options
were granted over the aggregate exercise price of the options. As the exercise
price of options granted under the Plan has been equal to or greater than the
market price of the Company's stock on the date of grant, no compensation
expense related to the Plan has been recorded.
Had compensation expense for the Plan been determined based on the
provisions of SFAS No. 123, the impact on the Company's net income would have
been as follows for the year ended December 31, 1997:
Net income as reported ........................................ $5,817,716
Pro forma net income under FAS 123 ............................ $5,451,048
The following table summarizes the Company's outstanding stock options:
YEAR ENDED DECEMBER 31, 1997
--------------------------------
WEIGHTED
AVERAGE
NUMBER EXERCISE PRICE
-------------- --------------
Options outstanding, beginning of year........ 205,000 $ 2.90
Grants:
First quarter 1997 (all at $2.90 per share).. 360,000 2.90
Fourth quarter 1997 (all at $12.00 per share) 682,450 12.00
-------------- --------------
Options outstanding, end of year.............. 1,247,450 $ 7.88
============== ==============
At December 31, 1997, 129,843 options were exercisable at a weighted
average exercise price of $6.56. The weighted average exercise price of options
granted during the year ended December 31, 1997 was $8.86. The weighted average
remaining contractual life of options outstanding is 9.5 years. The weighted
average fair value per share of options granted during the years ended December
31, 1996 and 1997 is $0.45 and $5.94, respectively. The fair value of the
options granted prior to the initial public offering were estimated on the date
of the grant using the minimum value method as the Company was not a public
entity and was not able to use the Black-Scholes model because estimating the
expected
F-13
50
volatility was not feasible. The fair value of options granted at or subsequent
to the initial public offering 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, 1996 and 1997:
1996 1997
---- ----
Weighted average risk-free interest rate ........ 5.0% 5.9%
Weighted average expected life of options........ 6 years 10 years
Weighted average expected volatility............. N/A 58.1%
Weighted average expected dividends.............. --- ----
In September 1997, Group 1 adopted Group 1 Automotive's 1998 Employee Stock
Purchase Plan (the "Purchase Plan"). The Purchase Plan authorizes the issuance
of up to 200,000 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. At
the end of each fiscal quarter ("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.
9. RELATED-PARTY TRANSACTIONS:
The principals of the Founding Groups lease certain of the dealership
facilities to Group 1 under long-term operating leases. Additional information
regarding the terms of these leases is contained in Note 10, "Operating Leases."
In connection with the acquisitions the principal stockholder of the Howard
Group acquired certain non-operating assets (recreational vehicles and
properties) owned by the Howard Group. The purchase price, which approximated
fair market value, was approximately $2.0 million.
10. OPERATING LEASES:
The Company leases various facilities and equipment under long-term
operating lease agreements, including leases with related parties. The
related-party leases expire on December 31, 2027 and are cancelable, at the
Company's option, every five years beginning in 2007. The third-party leases are
non-cancelable and expire on various dates through August 2013.
Future minimum lease payments for operating leases are as follows:
Related
Year ended December 31, Parties Third Parties Total
------------------------------ ------------- ------------------ -----------
1998.......................... $5,022,608 $2,025,394 $7,048,002
1999.......................... 5,076,161 1,730,511 6,806,672
2000.......................... 5,043,672 1,671,049 6,714,721
2001.......................... 5,043,672 988,422 6,032,094
2002.......................... 4,909,232 570,000 5,479,232
Thereafter.................... 24,411,720 5,038,367 29,450,087
----------- ----------- -----------
Total......................... $49,507,065 $12,023,743 $61,530,808
=========== =========== ===========
Total rent expense under all operating leases, including operating leases
with related parties, was approximately $2.2, $2.3 and $3.3 million for the
years ended December 31, 1995, 1996 and 1997, respectively. Total rental expense
for the year ending December 31, 1998 is not anticipated to be materially
different than the total rental expense incurred by all of the companies for the
year ended December 31, 1997. Rental expense on related-party leases, which is
included in the above amounts, totaled approximately $1.8, $1.9 and $2.6 million
for the years ended December 31, 1995, 1996 and 1997, respectively.
F-14
51
11. INCOME TAXES:
Federal and state income taxes are as follows:
DECEMBER 31,
-------------------------------------------
1995 1996 1997
-------- --------- ----------
Federal -
Current............ $476,615 $586,642 $1,290,857
Deferred........... 160,631 (261,857) (761,726)
State -
Current............ 76,914 110,741 297,102
Deferred........... 30,156 (53,774) (252,979)
-------- -------- --------
Provision for
income taxes....... $744,316 $381,752 $573,254
======== ======== ========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:
DECEMBER 31,
-----------------------------------------------
1995 1996 1997
---------- ---------- ----------
Provision at the statutory rate...... $1,489,032 $1,900,172 $2,172,930
Increase (decrease) resulting
from --............................. (877,106) (1,584,686) (1,269,151)
Income of S Corporations
State income tax, net of
benefit for federal deduction...... 70,666 37,598 29,121
Deferred tax assets realized on
conversion of S Corporations to
C Corporations..................... - - (402,524)
Other............................... 61,724 28,668 42,878
-------- -------- --------
Provision for income taxes........... $744,316 $381,752 $573,254
======== ======== ========
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for
financial reporting purposes and for tax purposes. The tax effects of these
temporary differences representing deferred tax assets and (liabilities) result
principally from the following:
December 31,
------------------------------
1996 1997
------------ ------------
Inventory ................................ $(2,637,029) $(3,166,360)
Reserves and accruals not deductible
until paid ............................ 2,175,732 8,639,072
Depreciation ............................. (58,604) (644,607)
Other .................................... 104,125 165,504
----------- -----------
Net deferred tax asset (liability)........ $ (415,776) $ 4,993,609
=========== ===========
The net deferred tax assets and (liabilities) are comprised of the
following:
December 31,
--------------------------------
1996 1997
----------- ------------
Deferred tax assets -
Current .................. $2,144,789 $ 10,219,562
Deferred tax liabilities -
Current .................. (2,501,961) (1,527,115)
Long-term ................ (58,604) (3,698,838)
---------- ------------
Net deferred tax
asset (liability)......... $ (415,776) $ 4,993,609
========== ============
F-15
52
12. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is a defendant in several lawsuits arising from normal
business activities. Management has reviewed pending litigation with legal
counsel and believes that the ultimate liability, if any, resulting from such
actions will not have a material adverse effect on the Companies' financial
position or results of operations.
Insurance
Because of their vehicle inventory and nature of business, automobile
retail dealerships generally require significant levels of insurance covering a
broad variety of risks. The Company's insurance includes an umbrella policy
with a $50 million per occurrence limit as well as insurance on its real
property, comprehensive coverage for its vehicle inventory, general liability
insurance, employee dishonesty coverage and errors and omissions insurance in
connection with its vehicle sales and financing activities.
Loan Guarantees
Two of the Company's dealerships provide financing for certain customers
through a third-party lender. Under the terms of this financing contract,
customers execute installment contracts which are guaranteed with full recourse
to the dealerships. The dealerships transfer the rights to the future economic
benefits related to the receivables; however, in the event that the customer
defaults on the note, the lender may require repayment of the principal amount
of the note plus earned interest through the date of default, with collection
efforts to be performed by the dealership. As of December 31, 1997, total
customer notes outstanding guaranteed by the two dealerships were approximately
$10.1 million. The dealerships have provided reserves for estimated future
loan losses based on historical loss trends and total guarantees outstanding
(see Note 4). This financing arrangement represents approximately 1.3% of the
Company's total financing arranged.
13. RETIREMENT PLANS:
Effective April 1, 1996, one of the Founding Groups established a 401(k)
salary deferral/savings plan for the benefit of all employees. Employees
electing to participate in the plan may contribute up to 15% of annual
compensation, limited to the maximum amount that can be deducted for income tax
purposes each year.
The Founding Group, at its discretion, has the option to match each
employee's contribution up to a maximum of 6% of annual compensation each plan
year. The Founding Group elected to make contributions totaling approximately
$178,000 and $306,000 for the years ended December 31, 1996 and 1997,
respectively.
14. PENDING ACQUISITIONS(UNAUDITED)
The Company has signed definitive purchase agreements related to eight
dealership acquisitions. Three of these acquisitions are new platforms and will
expand the Company's geographic diversity to include Georgia, New Mexico and
South Florida. Certain of the remaining acquisitions are tuck-ins which will
complement the Company's platform operations in Austin and Beaumont, Texas and
in South Florida. These acquisitions will bring the Company's total number of
dealership franchises to 58 and the number of brands represented to 24. The
closing of each of these acquisitions is subject to customary closing
conditions, including manufacturer approval and the completion of due diligence.
The aggregate consideration paid, or to be paid, in completing these
acquisitions, including real estate acquired and excluding the assumption of an
estimated $92.5 million of inventory financing, is $80.2 million in cash and
3,450,358 shares of Group 1 Common Stock. As part of certain of the
acquisitions, the Company may be obligated for additional purchase consideration
dependent upon the Company's future stock price and earnings before taxes of
certain of the dealership operations.
F-16
53
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To McCall Group:
We have audited the accompanying combined balance sheet of the companies
identified in Note 1 (the Companies) as of December 31, 1996, and the related
combined statements of operations, stockholders' equity (deficit) and cash
flows for the ten month period ended October 31, 1997, and for the years ended
December 31, 1996 and 1995. These financial statements are the responsibility
of the Companies' management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Companies as of
December 31, 1996, and the results of their operations and their cash flows for
the ten month period ended October 31, 1997 and for the years ended December
31, 1996 and 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 6, 1998
F-17
54
MCCALL GROUP
COMBINED BALANCE SHEET
December 31,
ASSETS 1996
------------
CURRENT ASSETS:
Cash and cash equivalents............................ $14,093,483
Accounts receivable, net............................. 4,407,835
Due from affiliates.................................. 1,397,454
Inventories.......................................... 23,720,965
Notes receivable, net................................ 237,547
Prepaid expenses..................................... 294,044
Deferred income taxes................................ 1,769,529
-----------
Total current assets.............................. 45,920,857
-----------
PROPERTY AND EQUIPMENT, net........................... 3,147,017
LONG-TERM DEFERRED INCOME TAXES....................... 104,882
OTHER ASSETS.......................................... 1,300,432
-----------
Total assets...................................... $50,473,188
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Floorplan notes payable.............................. $32,219,713
Current maturities of long-term debt................. 146,303
Due to affiliates.................................... 798,413
Accounts payable and accrued expenses................ 18,176,922
-----------
Total current liabilities......................... 51,341,351
-----------
LONG-TERM DEBT, net of current maturities............. 410,805
OTHER LONG-TERM LIABILITIES........................... 427,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock......................................... 71,278
Additional paid-in capital........................... 3,222,043
Retained deficit..................................... (4,999,289)
-----------
Total stockholders' deficit....................... (1,705,968)
-----------
Total liabilities and stockholders'
deficit.......................................... $50,473,188
===========
The accompanying notes are an integral part of these combined financial
statements.
F-18
55
MCCALL GROUP
COMBINED STATEMENTS OF OPERATIONS
Ten Month
Year Ended December 31, Period Ended
------------------------------- October 31,
1995 1996 1997
------------ ------------ ------------
REVENUES:
New vehicle sales............... $125,809,681 $166,381,686 $138,435,720
Used vehicle sales.............. 68,332,375 90,895,516 77,240,103
Parts and service sales......... 19,431,385 21,244,959 21,004,450
Other dealership revenues, net.. 5,314,141 6,810,908 5,360,216
------------ ------------ ------------
Total revenues............. 218,887,582 285,333,069 242,040,489
COST OF SALES:
New vehicle sales............... 115,413,170 152,054,592 125,123,613
Used vehicle sales.............. 64,157,498 84,806,452 73,522,958
Parts and service sales......... 9,069,093 9,354,112 8,671,416
------------ ------------ ------------
Total cost of sales........ 188,639,761 246,215,156 207,317,987
------------ ------------ ------------
Gross profit............... 30,247,821 39,117,913 34,722,502
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES......... 27,751,831 35,072,460 29,233,094
------------ ------------ ------------
Income from
operations............... 2,495,990 4,045,453 5,489,408
OTHER INCOME AND EXPENSE:
Interest expense, net........... (3,305,891) (2,883,395) (1,720,557)
Other expense, net.............. (43,735) (45,094) (42,020)
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME
TAXES........................... (853,636) 1,116,964 3,726,831
PROVISION FOR INCOME TAXES....... 282,887 177,772 1,045,383
------------ ------------ ------------
NET INCOME (LOSS)................ $(1,136,523) $939,192 $2,681,448
============ ============ ============
The accompanying notes are an integral part of these combined financial
statements.
F-19
56
MCCALL GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Additional
Common Paid-In Subscription Retained
Stock Capital Receivable (Deficit) Total
--------- ---------- ------------ ------------ -------------
BALANCE, December 31, 1994................ 125,800 $2,930,419 $(838,683) $(2,347,263) $(129,727)
Net loss................................. - - - (1,136,523) (1,136,523)
Payments on subscriptions receivable..... - - 270,272 - 270,272
Settlement of subscriptions
receivable.............................. - - 568,411 - 568,411
------- ---------- ---------- ----------- -----------
BALANCE, December 31, 1995................ 125,800 2,930,419 - (3,483,786) (427,567)
Net income............................... - - - 939,192 939,192
Dividend to parent under tax sharing
agreement............................... - - - (323,590) (323,590)
Purchase and retirement of treasury
stock................................... (57,898) - - (2,131,105) (2,189,003)
Stock issued to employees................ 3,376 291,624 - - 295,000
------- ---------- ---------- ----------- -----------
BALANCE, December 31, 1996................ 71,278 3,222,043 - (4,999,289) (1,705,968)
Net income............................... - - - 2,681,448 2,681,448
Dividend to parent under tax sharing
agreement................................ - - - (445,349) (445,349)
------- ---------- ---------- ----------- -----------
BALANCE, October 31, 1997................. $71,278 $3,222,043 $ - $(2,763,190) $530,131
======= ========== ========== =========== ===========
The accompanying notes are an integral part of these combined financial
statements.
F-20
57
MCCALL GROUP
COMBINED STATEMENTS OF CASH FLOWS
Ten Month
Year Ended December 31, Period Ended
------------------------------ October 31,
1995 1996 1997
------------ ----------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................. $(1,136,523) $ 939,192 2,681,448
Adjustments to reconcile net income (loss) to net cash
Provided by (used in) operating activities -
Depreciation and amortization.................................... 439,402 598,278 485,153
LIFO reserve..................................................... (305,000) 9,000 (99,474)
Deferred income taxes............................................ (514,187) (14,313) 133,250
Provision for doubtful accounts and uncollectible notes.......... 208,972 357,860 240,682
Loss (gain) on sale of assets.................................... (23,259) 32,632 63
Non-cash compensation............................................ - 295,000 -
Tax carryforward benefited....................................... - (323,590) (445,349)
Changes in assets and liabilities -
Accounts receivable............................................. 2,651,367 (1,059,288) (65,337)
Inventories..................................................... (2,780,245) (1,239,076) 7,733,229
Due from affiliates, net........................................ (1,565,588) 132,341 107,566
Prepaid expenses................................................ (25,720) (170,068) 260,068
Other assets.................................................... (9,546) (874,771) 493,050
Floorplan notes payable......................................... (2,058,861) (3,720,448) (15,304,404)
Accounts payable and accrued expenses........................... 7,695,141 (655,658) (2,738,901)
Other long term liabilities..................................... - 277,000 (34,505)
----------- ----------- ----------
Total adjustments.............................................. 3,712,476 (6,355,101) (9,234,909)
----------- ----------- ----------
Net cash provided by (used in) operating activities............ 2,575,953 (5,415,909) (6,553,461)
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable...................................... (909,260) (1,151,783) (1,825,293)
Collections on notes receivable................................... 1,271,071 969,767 1,003,856
Purchases of property and equipment............................... (613,890) (1,285,276) (1,129,274)
----------- ----------- ----------
Net cash used in investing activities.......................... (252,079) (1,467,292) (1,950,711)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt.............................. (54,555) (164,694) (228,994)
Borrowings of long-term debt...................................... 110,168 512,594 127,069
Payments on subscriptions receivable.............................. 270,272 - -
----------- ----------- ----------
Net cash provided by (used in) financing activities............... 325,885 347,900 (101,925)
----------- ----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............... 2,649,759 (6,535,301) (8,606,097)
CASH AND CASH EQUIVALENTS, beginning of period..................... 17,979,025 20,628,784 14,093,483
----------- ----------- ----------
CASH AND CASH EQUIVALENTS, end of period........................... $20,628,784 $14,093,483 $5,487,386
=========== =========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for -
Interest.......................................................... $3,253,486 $ 2,808,993 $1,725,577
Taxes............................................................. 227,090 818,962 513,262
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Receivables from stockholder forgiven in conjunction
with purchase of treasury stock.................................. - 2,189,003 -
Settlement of subscriptions receivable from
stockholder in lieu of bonus..................................... 568,411 - -
The accompanying notes are an integral part of these combined financial
statements.
F-21
58
MCCALL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
McCall Group (the Companies) is primarily engaged in the retail sale of
new and used automobiles and the sale of the related finance, insurance and
service contracts thereon. In addition, the Companies sell automotive parts,
provide vehicle servicing and sell wholesale used vehicles.
The following companies are included within the combined group:
Southwest Toyota, Inc. (d.b.a. Sterling McCall Toyota) (SMT) - SMT is a
Toyota dealership located in Houston, Texas.
SMC Luxury Cars, Inc. (d.b.a. Sterling McCall Lexus) (SML) - SML is a
Lexus dealership located in Houston, Texas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying combined financial statements include the accounts of SMT
and SML. The Companies have been presented on a combined basis due to their
related operations, common ownership and common management control. All
significant intercompany balances and transactions have been eliminated in
combination. SMC Investments, Inc. (SMC) owns 100% of the issued and
outstanding stock of SML and approximately 51% of the stock of SMT. SMC is a
separate holding company which does not operate in the automobile retailing
industry and has not been included in the accompanying combined financial
statements as it will not be acquired by Group 1.
Revenue Recognition
Revenue from vehicle sales, parts sales and vehicle service is recognized
upon delivery to the customer.
Fleet Sales
SMT periodically supplies vehicles to various rental car companies as an
accommodation to the manufacturer and to better utilize dealership capacity.
These transactions generate nominal gross profit, and in management's opinion,
do not represent sales in the normal course of business. Accordingly, sales of
approximately $7.7 million, $10.8 million and $12.6 million and cost of sales of
approximately $7.5 million, $10.7 million and $12.5 million have been excluded
from the accompanying statements of operations for the years ended December 31,
1995 and 1996 and the ten month period ended October 31, 1997, respectively, as
management believes excluding such amounts represents a more appropriate basis
of presentation. The net profit on these wholesale fleet transactions is
recorded as other dealership revenues in the accompanying statements of
operations.
Finance, Insurance and Service Contract Income Recognition
The Companies arrange financing for customers through various institutions
and receive financing fees equal to the difference between the loan rates
charged to customers over the predetermined financing rates set by the financing
institution. In addition, the Companies receive commissions from the sale of
credit life and disability insurance and extended service contracts to
customers.
The Companies may be charged back (chargebacks) for unearned financing
fees, insurance or service contract commissions in the event of early
termination of the contracts by customers. The revenues from financing fees and
commissions are recorded at the time of the sale of the vehicles and a reserve
for future chargebacks is established based on historical operating results and
the termination provisions of the applicable contracts. Finance, insurance and
service contract income, net of estimated chargebacks, are included in other
dealership revenue in the accompanying combined financial statements.
F-22
59
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments that have an
original maturity of three months or less at the date of purchase and contracts
in transit. Contracts in transit represent contracts on vehicles sold, for
which the proceeds are in transit from financing institutions.
Inventories
New and demonstrator vehicles are stated at cost, determined on the
last-in, first-out (LIFO) basis, which is not in excess of market. Used
vehicles are stated at lower of cost or market, determined on a specific unit
basis. Parts and accessories are stated at the lower of cost (determined on a
first-in, first-out basis) or market.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated life of the asset.
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in current
operations.
Income Taxes
The Companies follow the liability method of accounting for income taxes
in accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets are realized or liabilities are settled.
SML is a member of a consolidated group for tax reporting purposes. In
accordance with SFAS No. 109, SML reports current and deferred tax expense
using the separate return method, resulting in tax expense being recorded as if
SML filed a separate company return for tax purposes. Under this method, SML
does not recognize benefits for net operating losses (NOL's) as such amounts
will not be refunded to SML by the consolidated group. These NOL carryforwards
are offset against the provision for taxes in subsequent profitable years and
treated as dividends to the parent when benefited. SMT is a separate tax
paying entity and is not a member of a consolidated group.
Fair Value of Financial Instruments
The Companies' financial instruments consist primarily of floorplan notes
payable, notes receivable and long-term debt. The carrying amount of these
financial instruments approximates fair value due either to length of maturity
or existence of variable interest rates that approximate market rates.
Advertising
The Company expenses production and other costs of advertising as
incurred. Advertising expense for the years ended December 31, 1995 and 1996
and the ten month period ended October 31, 1997 totaled approximately $2.8,
$4.0 and $2.5 million, respectively.
Concentration of Credit Risk
Financial instruments which potentially subject the Companies to a
concentration of credit risk consist principally of cash, cash equivalents,
contracts in transit and accounts receivable. The Company maintains cash
balances at financial institutions which may at times be in excess of federally
insured levels. The Companies grant credit to local companies in various
businesses. The Companies perform ongoing credit evaluations of their customers
and generally do not require collateral. The Companies maintain an allowance
for doubtful accounts at a level which management believes is sufficient to
cover potential credit losses. The Companies have not incurred significant
losses related to these financial instruments to date.
F-23
60
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in determining the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The significant estimates made by management in the
accompanying financial statements relate to reserves for used vehicle
valuations, future chargebacks on finance, insurance and service contract
income and reserves for retail loan guarantees (Notes 2 and 11, respectively).
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 one month or
less. 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.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following:
December 31,
1996
------------
Amounts due from manufacturers.......... $1,192,275
Parts and service receivables........... 870,209
Warranty receivables.................... 259,826
Due from finance companies.............. 1,204,624
Other................................... 1,180,201
----------
Total accounts receivable............... 4,707,135
Less - Allowance for doubtful
accounts................................ (299,300)
----------
Accounts receivable, net................ $4,407,835
==========
Activity in the Companies' allowance for doubtful accounts consists of the
following:
December 31,
1996
------------
Balance, beginning of year..................................... $159,972
Additions charged to expense................................... 187,278
Deductions for uncollectible receivables
written off................................................... (47,950)
--------
Balance, end of year........................................... $299,300
========
Inventories consist of the following:
December 31,
1996
------------
New vehicles......................... $13,918,424
Used vehicles........................ 11,050,657
Parts, accessories and other......... 1,566,156
Rental vehicles...................... 1,674,747
Accumulated LIFO Reserve............. (4,489,019)
-----------
Total inventories, net............... $23,720,965
===========
If the specific unit method of inventory were used, income before taxes
would have increased (decreased) by approximately $305,000, $(9,000) and
$(99,000) for the years ended December 31, 1995 and 1996 and for the ten month
period ended October 31, 1997, respectively.
Activity in the Companies' allowance for uncollectible notes consists of
the following:
F-24
61
DECEMBER 31,
1996
---------
Balance, beginning of year.................................... $240,000
Additions charged to expense.................................. 170,580
Transfers from loan guarantee reserve ........................ -
Deductions for uncollectible notes written off................ (196,580)
--------
Balance, end of year.......................................... $214,000
========
Accounts payable and accrued expenses consist of the following:
DECEMBER 31,
1996
-----------
Accounts payable, trade........................... $ 7,452,034
Reserve for finance, insurance and service
contract chargebacks............................. 3,011,354
Reserve for retail loan guarantees................ 1,965,000
Other accrued expenses............................ 5,748,534
-----------
Total accounts payable and accrued expenses....... $18,176,922
===========
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED
USEFUL LIVES DECEMBER 31,
IN YEARS 1996
------------ -----------
Leasehold improvements.................... 20 $ 2,470,037
Machinery and equipment................... 7 1,136,461
Furniture and fixtures.................... 7 2,622,636
Autos and trucks.......................... 5 380,626
-----------
Total.............................. 6,609,760
Less - Accumulated depreciation........... (3,462,743)
-----------
Property and equipment, net............... $ 3,147,017
===========
5. FLOORPLAN NOTES PAYABLE:
Floorplan notes payable reflect amounts payable for the purchase of
specific vehicle inventory and consist of the following:
1996
-----------
New vehicles............................... $24,398,255
Used vehicles.............................. 6,212,001
Rental vehicles............................ 1,609,457
-----------
Total floorplan notes payable........ $32,219,713
===========
Floorplan notes payable are due to various floorplan lenders, bearing
interest at rates ranging from prime minus 75 basis points to prime minus 100
basis points. As of 1996, the weighted average interest rate on floorplan notes
payable outstanding was 8.99%. Interest expense on floorplan notes payable
totaled approximately $3.1, $2.5 and $1.5 million for the years ended December
31, 1995 and 1996 and the ten month period ended October 31, 1997. The flooring
arrangements permit the Companies to borrow up to $38.3 million dependent upon
new and used vehicle sales and inventory levels. As of December 31, 1996, total
available borrowings under the floorplan agreements were approximately $6.1
million. Payments on the notes are due when the related vehicles are sold and
are collateralized by substantially all new and used vehicles.
6. LONG-TERM DEBT:
Long-term debt consists of the following:
DECEMBER 31,
1996
------------
Note payable to floorplan institution, principal payable in.
monthly installments of $5,000 through August 2001, interest
F-25
62
payable monthly at lender's available financing rate plus
150 basis points (9.3% at December 31, 1996)
Other notes payable, maturing in varying amounts through.............. $275,000
April 2001, with interest ranging from 5.5% to 9.6% at
December 31, 1996..................................................... 282,108
--------
Total long-term debt.................................................. 557,108
Less - Current portion................................................ (146,303)
--------
Long-term portion..................................................... $410,805
========
Interest expense on long-term debt totaled approximately $210,000,
$385,000 and $221,000 for the years ended December 31, 1995 and 1996 and for
the ten month period ended October 31, 1997.
The aggregate maturities of long-term debt as of December 31, 1996, are as
follows:
YEAR ENDING
DECEMBER 31,
------------------
1997............. $146,303
1998............. 141,666
1999............. 124,378
2000............. 103,906
2001............. 40,855
--------
$557,108
========
7. STOCKHOLDERS' EQUITY:
Capital stock consists of the following as of December 31, 1996:
PAR
AUTHORIZED ISSUED OUTSTANDING VALUE
---------- ------ ----------- -----
Sterling McCall Toyota.. 500,000 70,278 70,278 $1.00
Sterling McCall Lexus... 1,000,000 100,000 100,000 .01
During 1996, SMT and its principal stockholder entered into a series of
treasury stock transactions in which SMT repurchased 57,898 shares of common
stock from its principal stockholder. In conjunction with these transactions,
SMT forgave approximately $2.2 million of related party receivables due from
various entities owned by the principal stockholder. As part of these
transactions, SMT has agreed to repurchase in certain instances, up to 4,502
additional shares of stock from its principal stockholder in exchange for a
note payable in the amount of $2.0 million. This repurchase provision will be
cancelled concurrently with an initial public offering of stock by the
Companies. The shares repurchased by SMT have been constructively retired for
financial reporting purposes.
During December 1996, the Companies granted 3,376 shares of stock to two
employees as compensation for prior services. The shares were issued as of the
grant date and the Companies recorded compensation expense of $295,000 related
to these shares based on the estimated fair market value of the shares as of
the grant date. The shares issued are subject to various restrictions relating
to transferability and resale, and contain a right of first refusal for
repurchase by the Companies.
8. RELATED-PARTY TRANSACTIONS:
SMT and SML lease land, facilities and equipment from limited partnerships
and other entities controlled by the majority stockholder of the Companies
under long-term operating leases. Additional information regarding the terms of
these leases is contained in Note 9 "Operating Leases".
The principal stockholder of the Companies has provided personal
guarantees relating to the repayment of long term debt and floorplan
obligations incurred by the Companies. As of December 31, 1996, floorplan
obligations guaranteed by the principal stockholder totaled approximately $32.2
million, and long-term debt obligations totaled approximately $300,000. In
addition to the above guarantees, the principal stockholder has also provided a
personal guarantee related to loan guarantees on second chance finance
customers (see Note 11). As of December 31, 1996, customer notes outstanding
which were guaranteed by the Companies and the stockholder totaled
approximately $10.4 million.
The Companies sell credit life and disability insurance policies and
extended service contracts
F-26
63
which are underwritten by three companies owned by the principal stockholders
of the Companies, as well as similar products provided by third parties. The
Companies also sell various aftermarket products from certain companies owned
by the principal stockholders of the Companies. The principal stockholders
currently have agreements in place with these entities which decrease the fees
and commissions paid to the dealerships for the sale of credit life and
disability insurance policies and extended service contracts, and increase the
cost of aftermarket products. The amounts withheld under these agreements are
paid directly to the principal stockholders. Approximately $1.1, $1.6 and $1.4
million was withheld and paid to the stockholders under the agreements
described above, during the years ended December 31, 1995 and 1996 and the ten
month period ended October 31, 1997, respectively.
The Companies pay management fees plus certain allocated and out of pocket
expenses to an entity owned by the principal stockholder of the Companies for
consultation and direct management assistance with respect to operations and
strategic planning. Management fee expense totaled approximately $1.3 million,
$1.4 million and $807,000 for the years ended December 31, 1995, 1996 and the
ten month period ended October 31, 1997, respectively.
9. OPERATING LEASES:
The Companies lease various facilities and equipment under long-term
operating lease agreements, including leases with related parties. These leases
are non-cancelable and expire on various dates through 2006. The lease
agreements are subject to renewal under essentially the same terms and
conditions as the original leases.
Future minimum lease payments for operating leases are as follows:
Year ending Related Third
December 31, Parties Parties Total
------------ ---------- ---------- ----------
1997.............. $1,842,000 $411,556 $2,253,556
1998.............. 1,842,000 354,084 2,196,084
1999.............. 1,842,000 234,590 2,076,590
2000.............. 1,842,000 161,908 2,003,908
2001.............. 1,282,000 73,982 1,355,982
Thereafter........ 648,000 - 648,000
---------- ---------- -----------
Total............. $9,298,000 $1,236,120 $10,534,120
========== ========== ===========
Total rent expense under all operating leases, including operating leases
with related parties, was approximately $1.9, $2.0 and $1.8 million for the
years ended December 31, 1995 and 1996 and the ten month period ended October
31, 1997, respectively. Rental expense on related-party leases, which is
included in the above amounts, totaled $1.5, $1.6 and $1.6 million for the
years ended December 31, 1995 and 1996 and the ten month period ended October
31, 1997, respectively.
10. INCOME TAXES:
The Companies are subject to a Texas franchise tax which is an income
based tax. Federal and state income taxes are as follows:
December 31,
------------------------- October 31,
1995 1996 1997
--------- --------- ----------
Federal -
Current.......... $695,074 $168,053 $1,204,955
Deferred......... (466,528) (12,618) (276,544)
State -
Current.......... 102,000 24,032 152,527
Deferred ......... (47,659) (1,695) (35,555)
-------- -------- ----------
Provision for
income taxes..... $282,887 $177,772 $1,045,383
======== ======== ==========
F-27
64
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:
December 31,
--------------------------- October 31,
1995 1996 1997
--------- --------- -----------
Provision (benefit) at
the statutory rate....... $(290,236) $379,768 $1,267,123
Increase (decrease)
resulting from -
State income tax, net of
benefit for federal
deduction.............. 35,865 14,742 77,202
SML NOL (benefited) not
benefited.............. 584,795 (323,590) (445,349)
Other.................... (47,537) 106,852 146,407
-------- -------- ----------
Provision for income....... $282,887 $177,772 $1,045,383
======== ======== ==========
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
December 31,
1996
------------
Reserves and accruals not deductible until
paid........................................ $1,779,755
Other.......................................... 94,656
----------
Net deferred tax asset......................... $1,874,411
==========
The net deferred tax assets and liabilities are comprised of the
following:
December 31,
1996
------------
Deferred tax assets -
Current..................................... $1,773,229
Long-term................................... 182,711
----------
Total..................................... 1,955,940
Deferred tax liabilities -
Current..................................... (6,836)
Long-term................................... (74,693)
----------
Total..................................... (81,529)
----------
Net deferred tax asset........... $1,874,411
==========
As discussed in Note 2, SML is a member of a consolidated group for tax
reporting purposes and reports income taxes under the separate return method.
During 1994 and 1995, SML did not record tax benefits of approximately $184,000
and $585,000 related to net operating losses as such amounts would not be
reimbursed by the consolidated group. During 1996 and 1997, approximately
$323,600 and $445,349 of these benefits were offset against the provision for
taxes and accounted for as a dividend in the accompanying statement of
stockholders' equity.
11. COMMITMENTS AND CONTINGENCIES:
The Companies are defendants in several lawsuits arising from normal
business activities. Management has reviewed pending litigation with legal
counsel and believes that the ultimate liability, if any, resulting from such
action will not have a material adverse effect on the Companies' financial
position or results of operations.
The Companies carry insurance coverage, including general and business
auto liability, commercial property, workers' compensation and excess liability
coverage. The Companies have not incurred significant claims or losses on any
of their insurance policies.
F-28
65
Loan Guarantees Provided on Second Chance Financing
The Companies provide financing for certain customers through a third party
lender. Under the terms of this financing contract, customers execute
installment contracts which are guaranteed with full recourse by the Companies.
The Companies transfer all rights to the future economic benefits related to the
receivables; however, in the event that the customer defaults on the note, the
lender may require repayment of the principal amount of the note plus earned
interest through the date of default, with collection efforts to be performed by
the dealership. Total customer notes outstanding guaranteed by the dealership at
December 31, 1995 and 1996 and October 31, 1997 were approximately $7.4, $10.4
and $10.2 million, respectively. The principal stockholder of the Companies has
also provided a personal guarantee to the lender related to repayment of these
customer notes. The Companies have provided reserves for estimated future loan
losses based on historical loss trends and total guarantees outstanding.
Activity in the Companies' reserve account consists of the following:
December 31,
1996
------------
Balance, beginning of year...................... $1,471,000
Additions charged to expense.................... 1,033,000
Deductions for loans written off................ (539,000)
----------
Balance, end of year............................ $1,965,000
==========
12. ACQUISITION BY GROUP 1 AUTOMOTIVE, INC.:
In November 1997, the McCall Group was acquired by Group 1 in exchange for
2,318,826 shares of common stock of Group 1. In conjunction with the acquisition
of the Companies by Group 1, and all existing operating leases with related
parties were restructured under new lease agreements. In addition, all amounts
due to/from affiliates and related parties were settled in connection with the
acquisition.
F-29
66
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Smith Group:
We have audited the accompanying combined balance sheet of the companies
identified in Note 1 (the Companies) as of December 31, 1996, and the related
combined statements of operations, stockholders' equity and cash flows for the
ten month period ended October 31, 1997 and for the years ended December 31,
1996 and 1995. These financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Companies as of
December 31, 1996, and the results of their operations and their cash flows for
the ten month period ended October 31, 1997 and for the years ended December
31, 1996 and 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 6, 1998
F-30
67
SMITH GROUP
COMBINED BALANCE SHEET
December 31,
1996
------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $9,069,829
Accounts receivable, net.............................. 4,467,590
Due from affiliates................................... 14,580
Inventories........................................... 30,637,433
Prepaid expenses...................................... 185,218
Deferred income tax benefit........................... 182,081
-----------
Total current assets............................. 44,556,731
-----------
PROPERTY AND EQUIPMENT, net................................ 9,819,994
GOODWILL, net.............................................. 2,322,307
OTHER ASSETS............................................... 689,453
-----------
Total assets..................................... $57,388,485
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Floorplan notes payable............................... $30,676,725
Current maturities of long-term debt.................. 949,565
Accounts payable and accrued expenses................. 8,509,815
-----------
Total current liabilities........................ 40,136,105
-----------
LONG-TERM DEBT, net of current maturities.................. 5,006,474
LONG-TERM DEFERRED INCOME TAXES............................ 217,611
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock.......................................... 3,090
Additional paid-in capital............................ 6,369,228
Retained earnings..................................... 6,051,274
Treasury stock, at cost............................... (395,297)
-----------
Total stockholders' equity....................... 12,028,295
-----------
Total liabilities and stockholders' equity....... $57,388,485
===========
The accompanying notes are an integral part of these combined
financial statements.
F-31
68
SMITH GROUP
COMBINED STATEMENTS OF OPERATIONS
Ten Month
Year Ended December 31, Period Ended
------------------------------ October 31,
1995 1996 1997
------------ ------------ ------------
REVENUES:
New vehicle sales................... $132,149,669 $124,173,950 $127,870,773
Used vehicle sales.................. 57,363,332 60,579,545 60,486,072
Parts and service sales............. 26,237,774 28,630,577 23,936,260
Other dealership revenues, net...... 5,506,759 4,895,329 5,152,307
------------ ------------ ------------
Total revenues............ 221,257,534 218,279,401 217,445,412
COST OF SALES:
New vehicle sales................... 123,391,332 114,982,383 116,853,172
Used vehicle sales.................. 53,162,956 56,247,629 55,931,779
Parts and service sales............. 15,234,938 16,684,932 13,803,578
------------ ------------ ------------
Total cost of sales....... 191,789,226 187,914,944 186,588,529
------------ ------------ ------------
Gross profit.............. 29,468,308 30,364,457 30,856,883
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................... 22,823,685 23,710,904 23,242,452
------------ ------------ ------------
Income from operations......... 6,644,623 6,653,553 7,614,431
OTHER INCOME AND EXPENSE:
Interest expense, net............... (3,831,372) (2,964,476) (3,011,873)
Other income (expense), net......... 202,134 222,470 (25,389)
------------ ------------ ------------
INCOME BEFORE INCOME TAXES................ 3,015,385 3,911,547 4,577,169
PROVISION FOR INCOME TAXES................ 562,415 677,751 882,088
------------ ------------ ------------
NET INCOME................................ $2,452,970 $3,233,796 $3,695,081
============ ============ ============
S-Corporation pro forma income
taxes (unaudited)................... 598,508 828,195 880,122
------------ ------------ ------------
Pro forma net income (unaudited).......... $1,854,462 $2,405,601 $2,814,959
============ ============ ============
The accompanying notes are an integral part of these combined financial
statements.
F-32
69
SMITH GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Common Paid-In Retained Treasury
Stock Capital Earnings Stock Total
----------- ----------- ----------- ---------- -----------
BALANCE, December 31, 1994...... $2,090 $5,890,228 $4,316,871 $(395,297) $9,813,892
Net income................. - - 2,452,970 - 2,452,970
Dividends.................. - - (1,557,239) - (1,557,239)
----------- ----------- ----------- ---------- -----------
BALANCE, December 31, 1995...... 2,090 5,890,228 5,212,602 (395,297) 10,709,623
Net income................. - - 3,233,796 - 3,233,796
Issuance of common stock... 1,000 479,000 - - 480,000
Dividends.................. - - (2,395,124) - (2,395,124)
----------- ----------- ----------- ---------- -----------
BALANCE, December 31, 1996...... 3,090 6,369,228 6,051,274 (395,297) 12,028,295
Net income................. - - 3,695,081 - 3,695,081
Dividends.................. - - (3,955,187) - (3,955,187)
----------- ----------- ----------- ---------- -----------
BALANCE, October 31, 1997....... $3,090 $6,369,228 $5,791,168 $(395,297) $11,768,189
=========== =========== =========== ========== ============
The accompanying notes are an integral part of these combined financial
statements.
F-33
70
SMITH GROUP
COMBINED STATEMENTS OF CASH FLOWS
Ten Month
Year Ended December 31, Period Ended
---------------------------- October 31,
1995 1996 1997
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $2,452,970 $ 3,233,796 $ 3,695,081
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization................ 669,312 719,991 493,999
LIFO reserve................................. 78,061 35,489 (329,943)
Deferred income taxes........................ 29,389 35,839 (10,000)
Provision for doubtful accounts.............. 61,460 49,729 50,197
Loss (gain) on sale of assets................ (74,258) 65,088 -
Changes in assets and liabilities -
Accounts receivable..................... (1,207,158) (31,960) 1,348,321
Inventories............................. (4,323) (2,726,301) (4,294,534)
Due from affiliates, net................ (136,650) 31,427 14,580
Prepaid expenses........................ 264,974 15,367 (53,446)
Other assets............................ (12,073) (493,584) 722,704
Floorplan notes payable................. 2,175,223 3,252,493 1,498,531
Accounts payable and accrued expenses... 678,372 346,332 (825,189)
----------- ----------- -----------
Total adjustments.................. 2,522,329 1,299,910 (1,384,780)
----------- ----------- -----------
Net cash provided by
operating activities.............. 4,975,299 4,533,706 2,310,301
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............... (699,792) (858,245) (517,936)
----------- ----------- -----------
Net cash used in investing activities........ (699,792) (858,245) (517,936)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt.............. (899,623) (961,108) (778,176)
Borrowings of long-term debt...................... 375,071 533,722 -
Issuance of common stock.......................... - 480,000 -
Dividends......................................... (1,557,239) (2,395,124) (1,928,117)
----------- ----------- -----------
Net cash used in financing activities........ (2,081,791) (2,342,510) (2,706,293)
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............. 2,193,716 1,332,951 (913,928)
CASH AND CASH EQUIVALENTS,
beginning of period............................... 5,543,162 7,736,878 9,069,829
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
end of period..................................... $7,736,878 $ 9,069,829 $ 8,155,901
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for -
Interest..................................... $3,743,310 $ 2,818,402 $ 3,021,083
Taxes........................................ 522,565 543,401 574,481
The accompanying notes are an integral part of these combined financial
statements.
F-34
71
SMITH GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Smith Group (the Companies) is primarily engaged in the retail sale of new
and used automobiles and the sale of the related finance, insurance and service
contracts thereon. In addition, the Companies sell automotive parts, provide
vehicle servicing and sell wholesale used vehicles.
The following companies are included within the combined group:
Mike Smith Autoplaza, Inc. (MSAP)
MSAP consists of several franchises which conduct business at contiguous
locations in Beaumont, Texas. The franchises operated in this location include
Oldsmobile, Lincoln, Mercury, GMC, Mitsubishi, and Honda.
Smith, Liu & Kutz, Inc. (Town North)
Town North consists of three companies operating several franchises which
conduct business at contiguous locations in Austin, Texas. The franchises
operated in this location include Nissan, Mitsubishi and Suzuki.
Courtesy Nissan, Inc. (Courtesy)
Courtesy is a Nissan dealership located in Richardson, Texas.
Smith, Liu & Corbin, Inc. (d.b.a. Acura Southwest) (Acura)
Acura is an Acura dealership located in Houston, Texas.
Round Rock Nissan, Inc. (Round Rock)
Round Rock is a Nissan dealership located in Round Rock, Texas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying combined financial statements include the accounts of the
Companies listed above. The Companies have been presented on a combined basis
due to their related operations, common ownership and common management
control. All significant intercompany balances and transactions have been
eliminated in combination.
Revenue Recognition
Revenue from vehicle sales, parts sales and vehicle service is recognized
upon delivery to the customer. Finance, Insurance and Service Contract Income
Recognition
The Companies arrange financing for customers through various institutions
and receive financing fees equal to the difference between the loan rates
charged to customers over the predetermined financing rates set by the
financing institution. In addition, the Companies receive commissions from the
sale of credit life and disability insurance and extended service contracts to
customers.
The Companies may be charged back (chargebacks) for unearned financing
fees, insurance or service contract commissions in the event of early
termination of the contracts by customers. The revenues from financing fees and
commissions are recorded at the time of the sale of the vehicles and a reserve
for future chargebacks is established based on historical operating results and
the termination provisions of the applicable contracts. Finance, insurance and
service contract income, net of estimated chargebacks, are included in other
dealership revenue in the accompanying combined financial
F-35
72
statements.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments that have an
original maturity of three months or less at the date of purchase and contracts
in transit. Contracts in transit represent contracts on vehicles sold, for
which the proceeds are in transit from financing institutions.
Inventories
New and demonstrator vehicles are stated at cost, determined on the
last-in, first-out (LIFO) basis, which is not in excess of market. Used
vehicles are stated at the lower of cost or market, determined on a
specific-unit basis. Parts and accessories are stated at the lower of cost
(determined on a first-in, first-out basis) or market.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated life of the asset.
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in current
operations.
Goodwill
Goodwill represents the excess of the purchase price of dealerships
acquired (Town North Nissan, Courtesy Nissan and Mike Smith Auto Plaza) over
the fair value of tangible assets acquired at the date of acquisition. Goodwill
is amortized on a straight-line basis over 40 years and amortization expense
charged to operations totaled approximately $55,000 for the ten month period
ended October 31, 1997 and $67,000 for each of the two years ended December 31,
1996 and 1995. Accumulated amortization totaled approximately $956,000 as of
December 31, 1996.
Income Taxes
The Companies follow the liability method of accounting for income taxes
in accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets are realized or liabilities are settled.
Certain of the Companies have elected S Corporation status, as defined by
the Internal Revenue Code, whereby the companies are not subject to taxation
for federal purposes. Under S Corporation status, the stockholders report their
share of these companies' taxable earnings or losses in their personal tax
returns.
Fair Value of Financial Instruments
The Companies' financial instruments consist primarily of floorplan notes
payable and long-term debt. The carrying amount of these financial instruments
approximates fair value due either to length of maturity or existence of
variable interest rates that approximate market rates.
Advertising
The Company expenses production and other costs of advertising as
incurred. Advertising expense for the years ended December 31, 1995, 1996 and
the ten month period ended October 31, 1997 totaled approximately $2.1, $1.9
and $2.9 million, respectively.
F-36
73
Concentration of Credit Risk
Financial instruments which potentially subject the Companies to a
concentration of credit risk consist principally of cash, cash equivalents,
contracts in transit and accounts receivable. The Company maintains cash
balances at financial institutions which may at times be in excess of federally
insured levels. The Companies grant credit to local companies in various
businesses. The Companies perform ongoing credit evaluations of its customers
and generally do not require collateral. The Companies maintain an allowance
for doubtful accounts at a level which management believes is sufficient to
cover potential credit losses. The Companies have not incurred significant
losses related to these financial instruments to date.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in determining the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The significant estimates made by management in the
accompanying financial statements relate to reserves for used vehicle
valuations and future chargebacks on finance, insurance and service contract
income. 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 one month or
less. 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.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following:
December 31,
1996
------------
Vehicle receivables..................... $1,082,909
Amounts due from manufacturers.......... 1,670,776
Parts and service receivables........... 949,874
Warranty receivables.................... 314,391
Due from finance companies.............. 392,192
Other................................... 138,948
----------
Total accounts receivable............... 4,549,090
Less - Allowance for doubtful accounts.. (81,500)
----------
Accounts receivable, net................ $4,467,590
==========
Activity in the Companies' allowance for doubtful accounts consists of the
following:
December 31,
1996
------------
Balance, beginning of year..................... $131,500
Additions charged to expense................... 49,729
Deductions for uncollectible receivables
written off.................................. (99,729)
-------
Balance, end of year........................... $81,500
=======
F-37
74
Inventories consist of the following:
December 31,
1996
------------
New vehicles............................ $24,302,689
Used vehicles........................... 6,936,348
Parts, accessories and other............ 3,102,812
Accumulated LIFO reserve................ (3,704,416)
-----------
Inventories, net........................ $30,637,433
===========
If the specific-unit method of inventory were used, income before taxes
would have increased (decreased) by approximately $78,000, $35,000 and
($261,000), for the years ended December 31, 1995 and 1996 and the ten month
period ended October 31, 1997, respectively.
Accounts payable and accrued expenses consist of the following:
December 31,
1996
-----------
Accounts payable, trade ............................... $3,696,293
Reserve for finance, insurance and service
contract chargebacks................................. 1,374,780
Other accrued expenses................................. 3,438,742
----------
Total accounts payable and accrued expenses............ $8,509,815
==========
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
Estimated
Useful Lives December 31,
in Years 1996
------------ ------------
Land................................ - $4,789,177
Buildings........................... 35 4,858,250
Leasehold improvements.............. 15 1,367,199
Machinery and equipment............. 7 1,720,940
Furniture and fixtures.............. 7 2,535,075
Autos and trucks.................... 5 321,316
Rental vehicles..................... - 124,023
----------
Total.................... 15,715,980
Less - Accumulated depreciation.... (5,895,986)
----------
Property and equipment, net.... $9,819,994
==========
5. FLOORPLAN NOTES PAYABLE:
Floorplan notes payable reflect amounts payable for the purchase of
specific vehicle inventory and consist of the following:
December 31,
1996
------------
New vehicles.............................. $27,712,804
Used vehicles............................. 2,963,921
-----------
Total floorplan notes payable............. $30,676,725
===========
Floorplan notes payable are due to various floorplan lenders, bearing
interest at rates ranging from prime (adjusted for volume with lender (8.0% at
December 31, 1996)) to prime plus 175 basis points. As of December 31, 1996,
the weighted average interest rate on floorplan notes payable outstanding was
8.66%, respectively. Interest expense on floorplan notes payable totaled
approximately $3.2, $2.5 and $2.6 million for the years ended December 31, 1995
and 1996 and for the ten month period ended October 31, 1997, respectively. The
flooring arrangements permit the Companies to borrow up to $37.0 million
dependent upon new and used vehicle sales and inventory levels. As of December
31, 1996, total
F-38
75
available borrowings under floorplan agreements were approximately $6.5
million. Payments on the notes are due when the related vehicles are sold and
are collateralized by substantially all new and used vehicles.
6. LONG-TERM DEBT:
Long-term debt consists of the following:
DECEMBER 31,
1996
------------
Note payable to a bank, with monthly principal payments of
$41,892, due through March 2004, bearing interest at
7.5%, payable monthly.......................................... $3,641,136
Mortgage loan to a bank, with monthly principal payments of
$15,000, due through May 2005, bearing interest at prime
plus 25 basis points (8.50% at December 31, 1996),
payable monthly................................................ 1,494,291
Note payable to a finance company, with monthly principal
payments of $7,500, due through January 2002, bearing
interest at prime plus 175 basis points (10.0% at
December 31, 1996), payable monthly............................ 450,000
Other notes payable, maturing in varying amounts through
November 2000 with interest ranging from prime plus 25
basis points to prime plus 150 basis points.................... 370,612
----------
Total long-term debt............................................. 5,956,039
Less - current portion........................................... (949,565)
----------
Long-term portions............................................... $5,006,474
==========
The Note payable due March 2004 is secured by a first priority lien on the
land and buildings of Town North. The note payable due May 2005 is secured by
substantially all property, improvements and equipment of Acura.
Interest expense on long-term debt totaled approximately $626,000,
$490,000 and $451,000 for the years ended December 31, 1995 and 1996 and for
the ten month period ended October 31, 1997.
The aggregate maturities of long-term debt as of December 31, 1996, are as
follows:
YEAR ENDING
DECEMBER 31,
--------------------
1997........... $949,565
1998........... 839,644
1999........... 846,513
2000........... 807,428
2001........... 771,704
Thereafter ....... 1,741,185
----------
Total.......... $5,956,039
7. STOCKHOLDERS' EQUITY:
Capital stock consists of the following:
AUTHORIZED ISSUED OUTSTANDING PAR VALUE
---------- ------ ----------- ---------
Common stock -
MSAP......................... 10,000 1,000 800 $1.00
Town North Nissan............ 1,000 1,000 1,000 .01
Town North Suzuki............ 1,000 1,000 1,000 .01
Town North Mitsubishi........ 1,000 1,000 1,000 1.00
Courtesy..................... 1,000 1,000 1,000 .05
Acura........................ 2,000 2,000 2,000 .01
Round Rock................... 1,000 1,000 1,000 1.00
Treasury stock consists of 200 shares of the common stock of MSAP at a
cost of approximately
F-39
76
$395,000 at December 31, 1995 and 1996.
8. RELATED-PARTY TRANSACTIONS:
MSAP and Round Rock lease land and facilities from entities owned by
various stockholders of the Companies. Additional information regarding the
terms of these leases is contained in Note 9 "Operating Leases".
9. OPERATING LEASES:
The Companies lease various facilities and equipment under long-term
operating lease agreements, including leases with related parties. These leases
are noncancelable and expire on various dates through August 2013. The lease
agreements are subject to renewal under essentially the same terms and
conditions as the original leases.
Future minimum lease payments for operating leases are as follows:
Year Ending Related Third
December 31, Parties Parties Total
----------- ---------- ----------- -----------
1997................ $918,000 $ 500,681 $1,418,681
1998................ 918,000 479,876 1,397,876
1999................ 918,000 472,655 1,390,655
2000................ 499,500 453,149 952,649
2001................ 360,000 433,387 793,387
Thereafter............ 4,440,000 4,896,000 9,336,000
---------- ---------- -----------
Total............... $8,053,500 $7,235,748 $15,289,248
========== ========== ===========
Total rent expense under all operating leases, including operating leases
with related parties, was approximately $1.1, $1.2 and $1.2 million for the
years ended December 31, 1995, 1996 and for the ten months ended October 31,
1997, respectively. Rental expense on related-party leases, which is included
in the above amounts, totaled approximately $558,000, $591,000 and $785,000 for
the years ended December 31, 1995, 1996 and for the ten month period ended
October 31, 1997, respectively.
10. INCOME TAXES:
The S Corporations will terminate S Corporation status concurrent with the
effective date of the offering. The Companies are subject to a Texas franchise
tax which is an income based tax. Federal and state income taxes are as
follows:
December 31,
----------------------- October 31,
1995 1996 1997
-------- -------- -----------
Federal -
Current......... $382,865 $460,166 $684,916
Deferred........ 36,310 29,304 (8,800)
State -
Current......... 150,161 181,746 207,172
Deferred........ (6,921) 6,535 (1,200)
-------- -------- --------
Provision for
income taxes.... $562,415 $677,751 $882,088
======== ======== ========
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77
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:
DECEMBER 31,
--------------------------- OCTOBER 31,
1995 1996 1997
---------- ---------- ----------
Provision at the statutory rate............ $1,025,231 $1,329,926 $1,556,237
Increase (decrease) resulting from -
Income of S Corporations.............. (619,972) (888,533) (979,979)
State income tax, net of benefit
for federal deduction............... 123,800 165,900 180,041
Other................................. 33,356 70,458 125,789
--------- -------- ---------
Provision for income taxes................. $562,415 $677,751 $882,088
========= ======== =========
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
DECEMBER 31,
1996
------------
Reserves and accruals not deductible until
paid.......................................... $191,862
Depreciation.................................... (217,611)
Other........................................... (9,781)
--------
Net deferred tax liability...................... $(35,530)
========
The net deferred tax assets and liabilities are comprised of the
following:
DECEMBER 31,
1996
------------
Deferred tax assets -
Current.................................................. $191,862
Long-term ............................................... -
--------
Total............................................... 191,862
--------
Deferred tax liabilities -
Current ................................................. 9,781
Long-term................................................ 217,611
--------
Total............................................... 227,392
--------
Net deferred income tax assets (liabilities)....... $(35,530)
========
11. COMMITMENTS AND CONTINGENCIES:
The Companies are defendants in several lawsuits arising from normal
business activities. Management has reviewed pending litigation with legal
counsel and believes that the ultimate liability, if any, resulting from such
actions will not have a material adverse effect on the Companies' financial
position or results of operations.
The Companies carry insurance coverage, including general and business
auto liability, commercial property, workers' compensation and excess liability
coverage. The Companies have not incurred significant claims or losses on any
of their insurance policies.
12. ACQUISITION BY GROUP 1 AUTOMOTIVE, INC.:
In November 1997, the Smith Group was acquired by Group 1 in exchange for
2,725,933 shares of common stock of Group 1. In conjunction with the
acquisition of the Companies by Group 1, all existing operating leases with
related parties were restructured under new lease agreements.
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78
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 __ Restated Certificate of Incorporation of the Company (Incorporated by reference to
Exhibit 3.1 of the Company's Registration Statement on Form S-1 Registration No. 333-29893)
3.2 __ Certificate of Designation of Series A Junior Participating Preferred Stock (Incorporated
by reference to Exhibit 3.2 of the Company's Registration Statement on Form S-1
Registration No. 333-29893)
3.3 __ Bylaws of the Company (Incorporated by reference to Exhibit 3.3 of the Company's
Registration Statement on Form S-1 Registration No. 333-29893)
4.1 __ Specimen Common Stock certificate (Incorporated by reference to Exhibit 4.1 of the
Company's Registration Statement on Form S-1 Registration No. 333-29893)
10.1 __ Employment Agreement between the Company and B.B. Hollingsworth, Jr. dated November 3, 1997.
10.2 __ Employment Agreement between the Company and Robert E. Howard II dated November 3, 1997.
10.3 __ Employment Agreement between the Company and Sterling B. McCall, Jr. dated November 3, 1997.
10.4 __ Employment Agreement between the Company and Charles M. Smith dated November 3, 1997.
10.5 __ Employment Agreement between the Company and John T. Turner dated November 3, 1997.
10.6 __ Employment Agreement between the Company and Scott L. Thompson dated November 3, 1997.
10.7 __ Employment Agreement between the Company and Kevin H. Whalen dated November 3, 1997.
10.8 __ Employment Agreement between the Company and James S. Carroll dated March 16, 1998.
10.9 __ 1996 Stock Incentive Plan (Incorporated by reference to Exhibit 10.7 of the Company's
Registration Statement on Form S-1 Registration No. 333-29893)
10.10 __ First Amendment to 1996 Stock Incentive Plan (Incorporated by reference to Exhibit 10.8
of the Company's Registration Statement on Form S-1 Registration No. 333-29893)
10.11 __ Lease Agreement between Round Rock Nissan and SKLR Round Rock, L.C. (Incorporated by
reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration
No. 333-29893)
10.12 __ Lease Agreement between SMC Luxury Cars and SBM-L F.L.P.(Incorporated by reference to
Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration No.
333-29893)
10.13 __ Lease Agreement between Southwest Toyota and SBM-T F.L.P. (Incorporated by reference to
Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration No. 333-29893)
10.14 __ Lease Agreement between Southwest Toyota and SBM-T I&E F.L.P. (Incorporated by reference
to Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration No.
333-29893)
10.15 __ Lease Agreement between SMC Luxury Cars and SBM-L I&E F.L.P. (Incorporated by reference
to Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration No.
333-29893)
10.16 __ Lease Agreement between SMC Luxury Cars and SBM-L F.L.P. (Incorporated by reference to
Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration No.
333-29893)
10.17 __ Lease Agreement between Southwest Toyota and SMC Investment, Inc. (Incorporated by
reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1
Registration No. 333-29893)
79
INDEX TO EXHIBITS
10.18 __ Lease Agreement between Southwest Toyota and Dodge Financial F.L.P. (Incorporated by
reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1
Registration No. 333-29893)
10.19 __ Lease Agreement between Howard Pontiac GMC and Robert E. Howard II (Incorporated by
reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration
No. 333-29893)
10.20 __ Lease Agreement between Bob Howard Motors and Robert E. Howard II (Incorporated by
reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1
Registration No. 333-29893)
10.21 __ Lease Agreement between Bob Howard Chevrolet and Robert E. Howard II (Incorporated by
reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration No.
333-29893)
10.22 __ Lease Agreement between Bob Howard Automotive-H and North Broadway Real Estate,
(Incorporated by reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1
Registration No. 333-29893)
10.23 __ Lease Agreement between Mike Smith Autoplaza and Olds-Honda Realty (Incorporated by
reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration No.
333-29893)
10.24 __ Rights Agreement between Group 1 Automotive, Inc. and ChaseMellon
Shareholder Services, L.L.C., as rights agent dated October 3, 1997 (Incorporated by reference to
Exhibit 10.10 of the Company's Registration Statement on Form S-1 Registration No. 333-29893)
10.25 __ 1998 Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.11 of the
Company's Registration Statement on Form S-1 Registration No. 333-29893)
10.26 __ Form of Agreement between Toyota Motor Sales, U.S.A., and Group 1 Automotive, Inc.
(Incorporated by reference to Exhibit 10.12 of the Company's Registration Statement on Form S-1
Registration No. 333-29893)
10.27 __ Form of Supplemental Agreement to General Motors Corporation Dealer Sales and Service
Agreement (Incorporated by reference to Exhibit 10.13 of the Company's Registration Statement
on Form S-1 Registration No. 333-29893)
10.28 __ Approval Letter dated December 11, 1996 from Nissan Motor Corporation U.S.A.
(Incorporated by reference to Exhibit 10.14 of the Company's Registration Statement on Form S-1
Registration No. 333-29893)
10.29 __ Amendment to Approval Letter from Nissan Motor Corporation U.S.A. dated September 29,
1997 (Incorporated by reference to Exhibit 10.15 of the Company's Registration Statement on Form S-1
Registration No. 333-29893)
10.30 __ Supplemental Terms and Conditions between Ford Motor Company and Group 1 Automotive, Inc.
dated September 4, 1997 (Incorporated by reference to Exhibit 10.16 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893)
10.31 __ Toyota Dealer Agreement between Gulf States Toyota, Inc. and Southwest Toyota, Inc. dated
April 5, 1993 (Incorporated by reference to Exhibit 10.17 of the Company's Registration Statement
on Form S-1 Registration No. 333-29893)
10.32 __ Lexus Dealer Agreement between Toyota Motor Sales, U.S.A., Inc. and SMC Luxury Cars, Inc.
dated August 21, 1995 (Incorporated by reference to Exhibit 10.18 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893)
10.33 __ Letter Agreement between Mitsubishi Motor Sales of America, Inc. and Group 1 Automotive,
Inc. dated June 20, 1997 (Incorporated by reference to Exhibit 10.20 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893)
80
INDEX TO EXHIBITS
10.34 __ Supplemental Agreement to Dealer Sales and Service Agreement (Public Traded Company)
among Foyt Motors, Inc., Group 1 Automotive, Inc. and American Isuzu Motors Inc. (Incorporated by
reference to Exhibit 10.21 of the Company's Registration Statement on Form S-1 Registration No.
333-29893)
10.35 __ Stock Purchase Agreement Among Howard Pontiac-GMC, Inc., Bob Howard Automotive-East, Inc.
and the Stockholder of Bob Howard Automotive-East, Inc. dated as of September 12, 1997
(Incorporated by reference to Exhibit 10.22 of the Company's Registration Statement on Form S-1
Registration No. 333-29893)
10.36 __ Agreement between American Honda Motor Co., Inc. and the Dealership Parties dated October
23, 1997 (Incorporated by reference to Exhibit 10.24 of the Company's Registration Statement
on Form S-1 Registration No. 333-29893)
10.37 __ Form of General Motors Corporation U.S.A. Sales and Service Agreement (Incorporated by
reference to Exhibit 10.25 of the Company's Registration Statement on Form S-1 Registration No.
333-29893)
10.38 __ Form of Nissan Motor Corporation Sales and Service Agreement (Incorporated by reference
to Exhibit 10.26 of the Company's Registration Statement on Form S-1 Registration No. 333-29893)
10.39 -- Agreement and Plan of Reorganization by and among Group 1 Automotive, Inc., Koons Merger, Inc., Koons
Ford, Inc. and the stockholders of Koons Ford, Inc. dated December 17, 1997.
10.40 -- Agreement and Plan of Reorganization by and among Group 1 Automotive, Inc., PF Merger, Inc., Perimeter
Ford, Inc. and the stockholders of Perimeter Ford, Inc. dated December 17, 1997.
10.41 -- Agreement and Plan of Reorganization by and among Group 1 Automotive, Inc., Courtesy Merger, Inc.,
Courtesy Ford, Inc. and the stockholders of Courtesy Ford, Inc. dated December 17, 1997.
10.42 -- Lease Agreement between World Partner Enterprises Ltd. and Koons Ford, Inc. dated March 16, 1998.
10.43 -- Operations/Lease Agreement between KC Partnership and Perimeter Ford, Inc. dated March 16, 1998.
10.44 -- Lease Agreement between K.C. Partnership and Courtesy Ford, Inc. dated March 16, 1998.
10.45 -- Amended and Restated Sublease Agreement between Koons Development Co. and Koons Ford, Inc. dated
March 16, 1998.
10.46 -- Multi-Party Agreement by and among KC Partnership, Ford Leasing Development Company, Perimeter Ford,
Inc., PF Merger, Inc. and Comerica Bank dated March 16, 1998.
10.47 -- Purchase Agreement by and among Group 1 Automotive, Inc., MSAP Merger Corp., the limited partners of
Prestige Chrysler Plymouth South, Ltd. and the stockholders of Prestige Chrysler Plymouth, Inc. dated
December 18, 1997.
10.48 -- Purchase Agreement by and among Group 1 Automotive, Inc., ST Merger Corp., the limited partners of
Maxwell Chrysler Plymouth Dodge Jeep Eagle, Ltd. and the stockholders of Maxwell Chrysler Plymouth
Dodge, Inc. dated December 18, 1997.
10.49 -- Purchase Agreement by and among Group 1 Automotive, Inc., RRN Merger Corp., the limited partners of
Prestige Chrysler Plymouth Northwest, Ltd. and the stockholders of MMK Interests, Inc. dated December
18, 1997.
10.50 -- Asset Purchase Agreement by and among Group 1 Automotive, Inc., Casa Chevrolet Inc., United
Management, Inc. and the stockholders of United Management, Inc. dated February 25, 1998.
10.51 -- Asset Purchase Agreement by and among Group 1 Automotive, Inc., Casa Chrysler Plymouth Jeep Inc.,
United Management, Inc. and the stockholders of United Management, Inc. dated February 25, 1998.
10.52 -- Purchase Agreement between Group 1 Automotive, Inc. and the sole stockholder of Bob Howard Nissan, Inc.
dated as of December 30, 1997.
10.53 -- Revolving Credit Agreement dated December 31, 1997.
10.54 -- Stock Pledge Agreement dated December 19, 1997.
10.55 -- Swap Transaction Letter Agreement dated January 23, 1998.
21.1 -- Group 1 Automotive, Inc. Subsidiary List.
23.1 __ Consent of Arthur Andersen LLP
27.1 __ Financial Data Schedule