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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, 1998
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.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant was approximately $296.8 million as of March 26, 1999 (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 26, 1999, there were 20,413,913 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 12,
1999, which is incorporated into Part III of this Form 10-K.
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TABLE OF CONTENTS
PART I............................................................................................................3
Item 1. Business.............................................................................................3
Item 2. Properties..........................................................................................16
Item 3. Legal Proceedings...................................................................................16
Item 4. Submission of Matters to a Vote of Security Holders.................................................16
Item 4A. Management..........................................................................................17
PART II..........................................................................................................19
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...............................19
Item 6. Selected Consolidated Financial Data................................................................20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...............21
Item 7A. Qualitative and Quantitative Disclosures About Market Risk..........................................33
Item 8. Financial Statements and Supplementary Data.........................................................33
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure................33
PART III.........................................................................................................34
Item 10. Directors and Executive Officers of the Registrant..................................................34
Item 11. Executive Compensation..............................................................................34
Item 12. Security Ownership of Certain Beneficial Owners and Management......................................34
Item 13. Certain Relationships and Related Transactions......................................................34
PART IV..........................................................................................................34
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................34
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PART I
ITEM 1. BUSINESS
GENERAL
Group 1 Automotive, Inc. ("Group 1", the "Company", "we" or "us") is a
leading operator and consolidator in the highly fragmented automotive retailing
industry. Simultaneously with the closing of our initial public offering
("IPO") in November 1997, we acquired four automobile dealership groups, known
as our "founding groups", representing 30 automobile dealership franchises.
During 1998, we acquired 33 additional automobile dealership franchises. Our
automobile dealership franchises are located in Texas, Oklahoma, Florida, New
Mexico, Georgia and Colorado. We sell new and used cars and light trucks,
provide maintenance and repair services, sell replacement parts and arrange
vehicle financing, insurance and service contracts.
BUSINESS STRATEGY
We plan to capitalize on our position as a leading consolidator, while
maintaining our high operating standards in the automotive retailing industry,
by:
(1) emphasizing growth through acquisitions and
(2) implementing an operating strategy of managing our
dealerships on a decentralized basis, rewarding employees
with equity grants and incentive compensation, centralizing
certain administrative functions on a national basis,
expanding our higher margin businesses, continuing our
commitment to customer service and implementing new
technology.
By merging management talent and proven operating capabilities with a
corporate management team that is experienced in achieving and managing
long-term growth in a consolidation environment, we believe that we are in a
strong position to execute this strategy.
GROWTH THROUGH ACQUISITIONS
Under our acquisition program, we pursue:
(1) "platform" acquisitions of large, profitable and well managed
dealerships in large metropolitan and high-growth suburban
geographic markets that we do not currently serve and
(2) smaller "tuck-in" acquisitions to existing platforms that
allow us to increase brand diversity, capitalize on economies
of scale and offer a greater breadth of products and services
in each of the markets in which we operate.
We have used and intend to continue to use our common stock to fund a
portion of our acquisitions. In addition, we have a revolving credit facility,
which will provide us with the ability to borrow up to $110 million for
acquisitions.
ENTERING NEW GEOGRAPHIC MARKETS. We intend to expand into geographic
markets we do not currently serve by acquiring large, profitable and well
established megadealers that are leaders in their regional markets. We pursue
megadealers that have superior operational and financial management personnel,
which we will seek to retain. We believe that by retaining existing high
quality management we will be able to effectively operate acquired megadealers
with management personnel who understand the local market without having to
employ and train new and untested personnel. We believe that we are positioned
to pursue larger, well established acquisition candidates because of our depth
of management, our capital structure and the reputation of our principals as
leaders in the automotive retailing industry.
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EXPANDING WITHIN EXISTING MARKETS. We plan to make tuck-in
acquisitions of additional dealerships in each of the markets in which we
operate, including acquisitions that increase the brands, products and services
offered in these markets. We believe that these acquisitions will increase our
operating efficiencies and cost savings on a regional level in areas such as
advertising, vendor consolidation, data processing and personnel utilization.
RECENT ACQUISITIONS. During 1999, we signed definitive purchase
agreements related to 28 dealership franchise acquisitions. Two of these
acquisitions are new platforms representing 14 dealership franchises in west
Texas and north Florida. The remaining acquisitions are tuck-ins, which will
complement our platform operations in Texas, Oklahoma, New Mexico and Georgia.
Two of the tuck-in acquisitions were closed during January 1999. These
acquisitions will bring our total number of dealership franchises to 83 and the
number of brands represented to 24. The closing of each of these acquisitions
is subject to customary closing conditions, including approval of various
manufacturers, government agencies and the completion of due diligence. The
aggregate consideration paid, or to be paid, in completing these acquisitions,
excluding the assumption of an estimated $63.3 million of inventory financing,
is approximately $91.0 million in cash and 1.3 million shares of our Common
Stock.
In connection with these acquisitions, certain of the former owners
involved in the management of the dealerships will execute long-term employment
agreements 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.
RECENT OFFERINGS. In March 1999, we completed offerings of two million
shares of our common stock and $100 million of our 10-year senior subordinated
notes (the "Notes") with an interest rate of 10 7/8% (the "offerings").
Proceeds before our expenses totaled $138.9 million and were used to
temporarily repay borrowings under our credit facility. We expect to use these
proceeds in the future to complete acquisitions and any such use would result
in an increase in borrowings under the credit facility.
OPERATING STRATEGY
We follow an operating strategy that focuses on decentralized
dealership operations, centralization of certain administrative functions,
expansion of higher margin businesses, customer service and new technology
initiatives.
We formed committees made up of the platform presidents and general
managers of our dealerships in order to identify and share best practices. We
believe that these committees will promote the widespread application of
strategic programs, facilitate the integration of future acquisitions and
improve operating efficiency and customer satisfaction.
DECENTRALIZED DEALERSHIP OPERATIONS. We believe that by managing our
dealerships on a decentralized basis, we provide superior customer service and
a focused, market-specific responsiveness to sales, service, marketing and
inventory control. Local presence and an in-depth knowledge of customers' needs
and preferences are important in generating market share growth. By
coordinating certain operations on a platform basis, we believe that we will
achieve cost savings in such areas as advertising, vendor consolidation, data
processing and personnel utilization. We create incentives for our management
teams and sales forces through the use of stock options and cash bonus
programs. In addition, the management of the dealerships we acquire generally
receive significant equity positions in us as a result of the use of our common
stock in our acquisition program.
NATIONALLY CENTRALIZED ADMINISTRATIVE FUNCTIONS. We believe that by
consolidating the purchasing power of our dealerships on a centralized basis we
have benefited from significant cost savings. For example, since we began
operations, we have reduced the interest rate on our floorplan financing
through our consolidated credit facility. Furthermore, we have benefited from
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the consolidation of administrative functions such as risk management, employee
benefits and employee training.
EXPAND HIGHER MARGIN ACTIVITIES. We focus on expanding our higher
margin businesses such as used vehicle retail sales, parts and service and
arranging vehicle service, finance and insurance contracts. While each of our
platforms operates independently in a manner consistent with its specific
market's characteristics, they also pursue an integrated company-wide strategy
designed to grow each of these higher margin businesses to enhance
profitability and stimulate internal growth. With a competitive advantage in
sourcing and attractive lease financing, new vehicle franchises are especially
well positioned to capitalize on industry growth in used vehicle sales. In
addition, each of our dealerships offers an integrated parts and service
department, which provides an important source of recurring higher margin
revenues. We also have the opportunity on each new or used vehicle sold to
generate incremental revenues from the arranging of vehicle service contracts,
credit insurance policies and finance or lease contracts. Each of these
business areas is a focus of internal growth.
COMMITMENT TO CUSTOMER SERVICE. We focus on providing high quality
customer service to meet the needs of customers. Our dealerships strive to
cultivate lasting relationships with their customers, and we believe these
efforts increase our opportunities for significant repeat and referral
business. For example, the dealerships regard their service and repair
activities as an integral part of their overall approach to customer service.
This approach provides us with an opportunity to foster ongoing relationships
with customers and deepen customer loyalty. In addition, our dealerships
continually review their selling processes in an effort to better meet the
needs of their customers.
DEALERSHIP OPERATIONS
Each of our platforms has an established management structure that
promotes and rewards entrepreneurial spirit, and the achievement of team goals.
The general manager of each dealership is ultimately responsible for the
operation, personnel and financial performance of the dealership. The general
manager is complemented with a management team consisting of a new vehicle
sales manager, used vehicle sales manager, parts and service managers and
finance managers. Each dealership is operated as a distinct profit center, in
which dealership general managers are given a high degree of autonomy. The
general manager and the other members of the dealership management team, as
long-time members of their local communities, are typically best able to judge
how to conduct day-to-day operations based on their experience in and
familiarity with the local market.
NEW VEHICLE SALES. We currently represent 22 American, Asian and
European brands of economy, family, sports and luxury cars, light trucks and
sport utility vehicles. The following table sets forth for the twelve months
ended December 31, 1998, certain information relating to the brands of new
vehicles sold at retail by us on an actual and on a pro forma basis assuming
that all of our dealerships (acquired by December 31, 1998) were acquired on
January 1, 1998. These results may not be indicative of our results after the
acquisition of the dealerships by us:
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PRO FORMA ACTUAL
NUMBER OF NEW VEHICLES PERCENTAGE OF PRO NUMBER OF NEW
MANUFACTURER SOLD FORMA TOTAL VEHICLES SOLD
------------ ---------------------- ----------------- -------------
Ford................ 11,609 25.2% 8,479
Toyota.............. 6,980 15.1 6,980
Chevrolet........... 4,514 9.8 3,331
Nissan.............. 4,248 9.2 4,248
Dodge............... 3,289 7.1 2,649
Honda............... 3,123 6.8 3,123
Lexus............... 2,000 4.3 2,000
Plymouth............ 1,901 4.1 1,391
Chrysler............ 1,708 3.7 1,342
Jeep................ 1,316 2.9 1,141
Acura............... 1,218 2.6 1,218
GMC................. 1,134 2.5 1,134
Isuzu............... 722 1.6 722
Mitsubishi.......... 706 1.5 706
Pontiac............. 701 1.5 544
Oldsmobile.......... 199 0.4 153
Mercury............. 191 0.4 191
Mercedes-Benz....... 118 0.3 118
Suzuki.............. 98 0.2 98
Buick............... 87 0.2 87
Lincoln............. 81 0.2 81
Cadillac............ 48 0.1 1
Volvo............... 30 0.1 30
Other............... 78 0.2 55
---------- --------- --------
Total..... 46,099 100.0% 39,822
========== ========= ========
Our dealerships' new vehicle retail sales include traditional new
vehicle retail lease transactions and lease-type transactions, both of which
are arranged by the dealerships. New vehicle leases generally have short terms,
bringing the customer back to the market sooner than if the purchase were debt
financed. In addition, leases provide our dealerships with a steady source of
late-model, off-lease vehicles for their used vehicle inventory. Generally,
leased vehicles remain under factory warranty for the term of the lease,
allowing the dealerships to provide repair service to the lessee throughout the
lease term.
Our dealerships seek to provide customer-oriented service designed to
meet the needs of its customers and establish lasting relationships that will
result in repeat and referral business. The dealerships continually evaluate
innovative ways to improve the buying experience for their customers. We
believe that our ability to share best practices among our dealerships gives us
an advantage over smaller dealerships. For example, the dealerships strive to:
(1) employ more efficient selling approaches;
(2) utilize computer technology that decreases the time necessary
to purchase a vehicle;
(3) engage in extensive follow-up after a sale in order to
develop long-term relationships with customers; and
(4) extensively train their sales staffs to be able to meet the
needs of the customer.
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Our dealerships acquire substantially all of 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 generally finance their
inventory purchases through revolving credit arrangements, including a portion
of our credit facility, known in the industry as floorplan facilities.
USED VEHICLE SALES. We sell used vehicles at each of our 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. We intend to continue
growing our used vehicle sales operations by maintaining a high quality
inventory, providing competitive prices and vehicle service contracts for our
used vehicles, and continuing to promote used vehicle sales.
Profits from sales of used vehicles depend primarily on the
dealerships' ability to obtain a high quality supply of used vehicles and
effectively manage that inventory. Our new vehicle operations provide the used
vehicle operations with a large supply of high quality trade-ins and off-lease
vehicles, which are the best sources of high quality used vehicles. The
dealerships supplement their used vehicle inventory with used vehicles
purchased at auctions.
Each of the dealerships generally maintains a 35-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 our dealerships to
provide balanced inventories of used vehicles at each of our dealerships. We
believe that the acquisition of additional dealerships will expand our internal
market for transfers of used vehicles among our dealerships and, therefore,
increase the ability of each of our dealerships to offer the same brand of used
vehicles as it sells new and to maintain a balanced inventory of used vehicles.
We intend to develop integrated computer inventory systems that will allow us
to coordinate vehicle transfers between our dealerships, primarily on a
regional basis.
Our dealerships have taken several steps towards building client
confidence in their used vehicle inventory, one of which includes their
participation in the manufacturer certification processes which are available
only to new vehicle franchises. This process makes these used vehicles eligible
for new vehicle benefits such as new vehicle finance rates and extended
manufacturer service contracts. In addition, the dealerships offer vehicle
service contracts covering the used vehicles that they sell.
We believe that our franchised dealerships' strengths in offering used
vehicles include:
(1) access to trade-ins on new vehicle purchases, which are
typically lower mileage and higher quality relative to
trade-ins on used car purchases,
(2) access to late-model, low mileage off-lease vehicles, and
(3) the availability of manufacturer certification programs for
our higher quality used vehicles.
This supply of high quality trade-ins and off-lease vehicles reduces
our dependence on auction vehicles, which are typically a higher cost source of
used vehicles.
PARTS AND SERVICE SALES. We provide parts and service at each of our
franchised dealerships primarily for the vehicle makes sold at that dealership.
We perform both warranty and non-warranty service work. In addition to each of
our dealerships' parts and service businesses, we owned 12 collision service
centers at December 31, 1998.
Historically, the automotive repair industry has been highly
fragmented. However, we believe that the increased use of advanced technology
in vehicles has made it difficult for independent repair shops to retain the
expertise to perform major or technical repairs.
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Additionally, Manufacturers permit warranty work to be performed only at
franchised dealerships. Hence, unlike independent service operations, our
franchised dealerships are qualified to perform work covered by Manufacturer
warranties. Given the increasing technological complexity of motor vehicles and
the trend toward extended manufacturer and dealer warranty periods for new
vehicles, we believe that an increasing percentage of repair work will be
performed at our franchised dealerships, each of which have the sophisticated
equipment and skilled personnel necessary to perform such repairs and offer
vehicle service contracts.
We attribute our profitability in parts and service to a comprehensive
management system, including the use of variable rate pricing structures,
cultivation of strong customer relationships through an emphasis on preventive
maintenance and the efficient management of 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. We believe that variable
rate pricing helps our dealerships achieve overall gross margins in parts and
service which are superior to those of certain competitors who rely on fixed
labor rates and percentage markups.
Our dealerships seek to retain each vehicle purchaser as a customer of
the dealership's parts and service departments. The dealerships have systems in
place that track their customers' maintenance records and notify owners of
vehicles purchased or serviced at the dealerships when their vehicles are due
for periodic services. The dealerships regard service and repair activities as
an integral part of their overall approach to customer service, providing an
opportunity to foster ongoing relationships with the dealership's customers and
deepen customer loyalty.
The dealerships' parts departments support their respective sales and
service departments. Each of the dealerships sells factory-approved parts for
vehicle makes and models sold by that dealership. These parts are either used
in repairs made by the dealership, sold at retail to its customers or at
wholesale to independent repair shops and other franchised dealerships.
Currently, each of the dealerships employs its own parts manager and
independently controls its parts inventory and sales. Our dealerships that sell
the same new vehicle makes have access to each other's computerized inventories
and frequently obtain unstocked parts from our other dealerships.
OTHER DEALERSHIP REVENUES. Other dealership revenues consist primarily
of finance, vehicle service contract and insurance income. The dealerships
arrange financing for their customers' vehicle purchases, sell vehicle service
contracts and arrange selected types of credit insurance in connection with the
financing of vehicle sales. 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). We do not own a finance company and, generally, do
not retain significant credit risk after a loan is made.
At the time of a new vehicle sale, the dealerships offer vehicle
service contracts to supplement the manufacturer warranty. Additionally, the
dealerships sell primary vehicle service contracts for used vehicles.
Currently, the dealerships primarily sell service contracts of third party
vendors, for which they recognize a commission upon the sale of the contract.
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The dealerships also offer certain types of credit insurance to
customers who arrange the financing of their vehicle purchases through the
dealerships. The dealerships sell credit life insurance policies to these
customers, providing for repayment of the vehicle loan if the obligor dies
while the loan is outstanding. The dealerships also sell accident and
disability insurance policies, which provide payment of the monthly loan
obligations during a period in which the obligor is disabled. Currently, the
dealerships primarily sell such insurance through third party vendors, for
which they recognize a commission upon the sale of the contract.
AGREEMENTS WITH MANUFACTURERS
The following table set forth the percentage of our new vehicle retail
unit sales attributable to the Manufacturers we represented during 1998 on a
pro forma basis giving effect to all of our acquisitions in 1998:
PERCENTAGE OF OUR
NEW VEHICLE
PRO FORMA RETAIL
UNITS FOR THE TWELVE
MONTHS ENDED
MANUFACTURER DECEMBER 31, 1998
------------ -----------------
Ford.......................................... 25.8%
Toyota/Lexus.................................. 19.4
DaimlerChrysler............................... 18.1
General Motors................................ 14.5
Honda/Acura................................... 9.4
Nissan........................................ 9.2
Other......................................... 3.6
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Total ...................................... 100.0%
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FRANCHISE AGREEMENTS. Each of our dealerships operates under a
franchise agreement with one of our Manufacturers (or authorized distributors).
Under our dealership franchise agreements, the Manufacturers exert considerable
influence over the operations of our dealerships. Each of the franchise
agreements may be terminated or not renewed by the Manufacturer for a variety
of reasons, including any unapproved changes of ownership or management. While
we believe that we will be able to renew all of our franchise agreements, we
cannot guarantee that all of our franchise agreements will be renewed or that
the terms of the renewals will be favorable to us.
Our franchise agreements do not give us the exclusive right to sell a
Manufacturer's product within a given geographic area but, generally, our
geographic area is protected by various state franchise laws.
ACQUISITIONS. We must obtain the consent of the Manufacturer prior to
the acquisition of any of its dealership franchises. Delays in obtaining, or
failing to obtain, Manufacturer approvals for dealership acquisitions could
adversely affect our growth strategy. Obtaining the consent of a Manufacturer
for the acquisition of a dealership could take a significant amount of time or
might be rejected entirely. In determining whether to approve an acquisition,
Manufacturers may consider many factors, including the moral character and
business experience of the dealership principals and the financial condition,
ownership structure and customer satisfaction index scores of our dealerships.
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Our Manufacturers attempt to measure customers' satisfaction with
automobile dealerships through systems generally known as the customer
satisfaction index or "CSI". The Manufacturers have modified the components of
their CSI scores from time to time in the past, and they may replace them with
different systems.
In addition, a Manufacturer may limit the number of its dealerships
that we may own or the number that we may own in a particular geographic area.
The following is a summary of the restrictions imposed by our most significant
Manufacturers.
Ford. Ford currently limits the number of dealerships that we may own
to the greater of (1) 15 Ford and 15 Lincoln Mercury dealerships and (2) that
number of Ford and Lincoln Mercury dealerships accounting for 5% of the
preceding year's total Ford, Lincoln and Mercury retail sales of those brands
in the United States. In addition, Ford limits us to one Ford dealership in a
Ford-defined market area having two or less authorized Ford dealerships and
one-third of Ford dealerships in any Ford-defined market area having more than
three authorized Ford dealerships. In many of its dealership franchise
agreements Ford has the right of first refusal to acquire, subject to
applicable state law, the Ford franchised dealership when its ownership
changes.
Toyota. Toyota restricts the number of dealerships that we may own and
the time frame over which they may be acquired. We can acquire no more than two
Toyota dealerships in each semi-annual period from January to June and July to
December until we acquire a total of seven Toyota dealerships. After we acquire
seven Toyota dealerships we can acquire, if we are then qualified, additional
dealerships, over a minimum of seven semi-annual periods, up to a maximum
number of dealerships equal to 5% of Toyota's aggregate national annual retail
sales volume. In addition, Toyota restricts the number of Toyota dealerships
that we may acquire in any Toyota-defined region and "Metro" market, as well as
any contiguous market. We may acquire only three Lexus dealerships nationally
and two Lexus dealerships in any one of the four Lexus geographic areas. While
we recently have been granted a Lexus companion dealership located south of
Houston, this dealership is not considered by Lexus to be a new and separate
Lexus dealership for purposes of the restriction on the number of Lexus
dealerships we may acquire.
Chrysler. Currently, we have no agreement with Chrysler restricting
our ability to acquire Chrysler dealerships. Chrysler has advised us that in
determining whether to approve an acquisition of a Chrysler dealership,
Chrysler considers the number of Chrysler dealerships the acquiring company
already owns. Chrysler currently considers carefully, on a case-by-case basis,
any acquisition that would cause the acquiring company to own more than 10
Chrysler dealerships nationally, six in the same Chrysler-defined zone and two
in the same market.
General Motors. General Motors currently limits the number of GM
dealerships that we may acquire prior to October 1999 to five 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
we may acquire at any time to 50% of the GM dealerships, by franchise line, in
a GM-defined geographic market area. However, our current agreement with GM
does not include Saturn dealerships and our future acquisition of a Saturn
dealership will be subject to GM approval on a case-by-case basis.
Honda. Under our current agreement with Honda, Honda limits the number
of dealerships that we may own to (1) seven Honda and three Acura franchises
nationally, (2) one Honda dealership in a Honda-defined "Metro" market with two
to 10 Honda dealership points, (3) two Honda dealerships in a Metro market
with 11 to 20 Honda dealership points, (4) three Honda dealerships in a Metro
market with 21 or more Honda dealership points, (5) no more than 4% of
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the Honda dealerships in any one of the 10 Honda geographic zones, (6) one
Acura dealership in a Metro market, and (7) two Acura dealerships in any one of
the six Acura geographic zones.
Honda has proposed a new agreement to replace our current agreement.
Honda has proposed that we could acquire Honda dealerships representing up to
6% of total Honda unit sales in the United States by December 31, 2005,
increasing 1% each year beginning January 1, 2002 from the 2% level in effect
through December 31, 2001. Also under the proposed new agreement, we could
acquire no more than two Acura dealerships in a Metro market with four or more
dealer points and one Acura dealership in other Metro markets, three Acura
dealerships in any one of the six Acura geographic zones and five Acura
dealerships nationally.
Nissan. Nissan restricts us from owning Nissan dealerships whose
primary marketing areas ("PMA", as defined by Nissan) competitive segment
registration count comprises more than 5% of Nissan's total national
competitive segment registrations based on the sum of the retail competitive
segment registrations in PMAs associated with us; or 20% of any Nissan region's
total competitive segment registrations contained in all PMAs associated with
us in that region.
We currently own six Ford, 21 Chrysler, two Toyota, one Lexus, three
Honda and two Acura dealership franchises and eight General Motors dealership
locations. Under current restrictions, we may acquire the maximum number of
Toyota dealerships described above based on aggregate national retail sales
volume of Toyota, two additional Lexus dealerships, four additional Honda
dealerships, one additional Acura dealership, approximately 400 additional
Ford, Lincoln and Mercury dealerships and five additional GM dealership
locations prior to October 1999, subject to being increased.
FINANCINGS. Provisions in our agreements with our Manufacturers may
restrict in the future our ability to obtain certain types of financing. Our
current agreement with Honda requires Honda's consent for any equity offering.
Honda's proposed new agreement with us does not contain that requirement.
Honda's proposed new agreement prohibits pledging the stock of Honda
franchised dealerships to secure debt financing, although it allows pledging
the proceeds from the sale of Honda franchised dealership stock. We have not
executed the proposed new agreement.
If we materially breach our agreement with Honda, Honda could purchase
our Honda and Acura dealerships at their fair market value and terminate our
dealer agreements with Honda and Acura.
Our agreement with General Motors contains provisions prohibiting
pledging the stock of our GM franchised dealerships. Our agreement with Ford
permits pledging our Ford franchised dealerships' stock and assets, but only
for Ford dealership-related debt. Moreover, our Ford agreement permits our Ford
franchised dealerships to guarantee, and to use Ford franchised dealership
assets to secure, our debt, but only for Ford dealership-related debt. Ford
waived that requirement with respect to the Notes and the subsidiary guarantees
of the Notes. If, however, we fail to meet certain minimum financial ratios,
Ford can reject any acquisition of Ford franchised dealerships and/or purchase
our Ford franchised dealerships.
OUR OWNERSHIP AND MANAGEMENT. As a condition to granting their consent
to our previous acquisitions and our initial public offering, some
Manufacturers have imposed other restrictions on us.
These restrictions prohibit, among other things:
o any one person, who in the opinion of the Manufacturer is
unqualified to own its franchised dealership or has interests
incompatible with the Manufacturer, from acquiring more than
a specified percentage of our common stock (for example, 5%
in the case of Honda; 20% in the case of General Motors,
Toyota and Nissan, and 50% in the case of Ford);
o certain material changes in us or extraordinary corporate
transactions such as a merger or sale of a material amount of
our assets;
o the removal of a dealership general manager without the
consent of the Manufacturer;
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o the use of dealership facilities to sell or service new
vehicles of other Manufacturers, in certain situations; and
o change in control of our Board of Directors or management.
If we are unable to comply with these restrictions, we generally must
(1) sell the assets of the dealerships to the Manufacturer or to a third party
acceptable to the Manufacturer, or (2) terminate the dealership agreements with
the Manufacturer. The Manufacturers may impose additional restrictions on us in
the future.
Our current agreement with Honda gives Honda the right to approve the
acquisition of more than 5% of our common stock by any individual or entity,
and any subsequent acquisition of more than 10% by such individual, if Honda
determines that such acquisition is reasonably detrimental to its interests.
Honda may determine that such acquisition is reasonably detrimental to its
interests if the acquiring person; competes with Honda, has criminal
affiliations or a criminal record, has inadequate experience in the automotive
sales and service business, has an unacceptable credit rating, has unacceptable
CSI scores or has had prior unsatisfactory relationships with Honda.
An institutional investor may acquire up to 10% of our common stock
without the consent of Honda, unless the institutional investor competes with
Honda, has criminal affiliations or a criminal record, or has acquired, or has
reasonable likelihood of acquiring, a controlling interest in us.
We are required to notify Honda with respect to any such acquisition
or proposed acquisition. If Honda does not approve the acquisition, we are
required to use our best efforts to prevent the acquisition or, if the
acquisition has already occurred, reacquire the shares so transferred. If we
are unable to prevent the acquisition or to reacquire the shares we will be in
material breach of our agreement with Honda.
In addition, under our agreement with Honda, each stockholder of the
founding groups has agreed not to sell, transfer or in any manner encumber any
of the shares of our common stock he acquired in connection with our
acquisition of the founding groups, or enter into any agreement or other
arrangement providing for the voting of such shares of common stock, without
the prior written approval of Honda. If one of these stockholders violates this
restriction, we must inform Honda. If Honda does not approve the transfer, and
we cannot acquire the shares or arrange for the retransfer of such shares to a
person approved by Honda, we will be in breach of our agreement with Honda. The
new agreement by Honda does not contain these restrictions on our stockholders.
Our agreement with Honda also provides that if an entity that Honda
has not approved acquires or threatens to acquire a controlling interest in us
or any of our Honda or Acura dealerships, we will be in breach of our agreement
with Honda.
OPERATIONS. We depend on our Manufacturers for operational support:
o We depend on the Manufacturers to provide us with a desirable
mix of new vehicles. The most popular vehicles usually
produce the highest profit margins and are frequently
difficult to obtain from the Manufacturers. If we cannot
obtain sufficient quantities of the most popular models, our
profitability may be adversely affected. Sales of less
desirable models may reduce our profit margins.
o We depend on the Manufacturers for sales incentives and other
programs that are intended to promote dealership sales or
support dealership profitability. Manufacturers historically
have made many changes to their incentive programs during
each year. A discontinuation or change in Manufacturers'
incentive programs could adversely affect our business.
Moreover, some Manufacturers use a dealership's CSI scores as
a factor for participating in incentive programs. Failure to
comply with the CSI standards could adversely affect our
participation in dealership incentive programs, which could
have a material adverse effect on us.
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Our Manufacturer agreements also specify that, in certain situations,
we cannot operate a dealership franchised by another Manufacturer in the same
building as that Manufacturer's franchised dealership. In addition, some
Manufacturers, like GM, are in the process of realigning their franchised
dealerships along defined "channels", such as combining Pontiac, Buick and GMC
in one dealership location. As a result, GM may require us to move or sell some
dealerships. Moreover, our Manufacturers generally require that the dealership
premises meet defined image standards. All of these requirements could impose
significant capital expenditures on us in the future.
COMPETITION
The automotive retailing industry is highly competitive. In large
metropolitan areas consumers have a number of choices in deciding where to
purchase a new or used vehicle and where to have such vehicle serviced.
In the new vehicle area, our dealerships compete with other franchised
dealerships 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 the dealership 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 addition, Ford has started to acquire and subsequently
operate automobile dealerships for the purpose of consolidating Ford
dealerships. For example, Ford acquired dealerships in Tulsa, Oklahoma and
entered into an agreement with Republic Industries, Inc. to jointly acquire
Ford dealerships in Rochester, New York. Ford also announced that it is
exploring the possibility of going into business with some of its dealers to
create automotive superstores in selected markets.
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 our
dealerships compete. We believe that additional used car "superstores" will
open in other markets in which we will operate.
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We believe that the principal competitive factors in vehicle sales
are:
o the marketing campaigns conducted by Manufacturers,
o the ability of dealerships to offer a wide selection of the
most popular vehicles,
o the location of dealerships, and
o 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. We believe that our dealerships are competitive
in all of these areas that they control.
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. We
believe 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.
GOVERNMENTAL REGULATIONS
A number of regulations affect our business of marketing, selling,
financing and servicing automobiles. We are also subject to laws and
regulations relating to business corporations generally.
Generally, we must obtain a license in order to establish, operate or
relocate a dealership or provide certain automotive repair services. These laws
also regulate the way we conduct our business, including our advertising and
sales practices.
Our financing activities with our customers are subject to federal
truth in lending, consumer leasing and equal credit opportunity regulations as
well as state and local motor vehicle finance laws, installment finance laws,
insurance laws, usury laws and other installment sales laws. Some states
regulate finance fees that may be paid as a result of vehicle sales. Penalties
for violation of any of these laws or regulations may include revocation of
certain licenses, assessment of criminal and civil fines and penalties, and in
certain instances, create a private cause of action for individuals. We believe
that our dealerships comply substantially with all laws and regulations
affecting their business and do not have any material liabilities under such
laws and regulations and that compliance with all such laws and regulations
will not, individually or in the aggregate, have a material adverse effect on
its capital expenditures, earnings, or competitive position.
ENVIRONMENTAL MATTERS
We are subject to a wide range of federal, state, and local
environmental laws and regulations, including those governing discharges into
the air and water, the storage of petroleum substances and chemicals, the
handling and disposal of wastes, and the remediation of contamination arising
from spills and releases. As with automobile dealerships generally, and parts,
service and collision service center operations in particular, our business
involves the generation, use, handling, storage, transport and disposal of
hazardous or toxic substances or wastes. Operations involving the management of
hazardous and nonhazardous wastes are subject to requirements of the federal
Resource Conservation and Recovery Act and comparable state statutes. Pursuant
to these laws, federal and state environmental agencies have established
approved methods for storage, treatment, and disposal of regulated wastes with
which we must comply.
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Our business involves the use of aboveground and underground storage
tanks. Under applicable laws and regulations, we are responsible for the proper
use, maintenance and abandonment of regulated storage tanks which we own or
operate, and for remediation of subsurface soils and groundwater impacted by
releases from such existing or abandoned aboveground or underground storage
tanks. In addition to these regulated tanks, we own, operate, or have otherwise
abandoned, other underground and aboveground devices or containers (e.g.,
automotive lifts and service pits) that may not be classified as regulated
tanks, but which are capable of releasing stored materials into the
environment, thereby potentially obligating us to remediate any soils or
groundwater resulting from such releases.
We are also subject to laws and regulations governing remediation of
contamination at facilities we operate or to which we send hazardous or toxic
substances or wastes for treatment, recycling or disposal. The Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), also known
as the "Superfund" law, 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 comparable state laws prohibit discharges of pollutants
into regulated waters without authorized National Pollution Discharge
Elimination System (NPDES) and similar state permits, require containment of
potential discharges of oil or hazardous substances, and require preparation of
spill contingency plans.
Environmental laws and regulations have become very complex and
stringent over the years, and the task of achieving and maintaining full
compliance with all applicable environmental laws and regulations has become
much more rigorous. We currently own or lease, and in connection with our
acquisition program will in the future own or lease, properties that in some
instances have been used for auto retailing and servicing for many years.
Although we have utilized operating and disposal practices that were standard
in the industry at the time, it is possible that environmentally sensitive
materials such as new and used motor oil, transmission fluids, antifreeze,
lubricants, solvents and motor fuels may have been spilled or released on or
under the properties owned or leased by us or on or under other locations where
such materials were taken for disposal. Further, we believe that structures
found on some of these properties may contain suspect asbestos-containing
materials, albeit in nonfriable, undisturbed condition. In addition, many of
these properties have been operated by third parties whose use, handling and
disposal of such environmentally sensitive materials were not under the
Company's control.
These properties and the waste materials spilled, released or
otherwise found thereon may be subject to RCRA, CERCLA, the federal Clean Air
Act and analogous state laws. Under such laws, we could be required to remove
or remediate previously spilled or released waste materials (including such
materials spilled or released by prior owners or operators), or property
contamination (including groundwater contamination caused by prior owners or
operators), or to perform monitoring or remedial activities to prevent future
contamination (including asbestos found to be in a friable and disturbed
condition). However, we believe that we are not subject to any material
environmental liabilities and that compliance with environmental laws and
regulations does not have a material adverse effect on our operations, earnings
or competitive position. Moreover, we generally obtain environmental studies on
dealerships to be acquired and, as necessary, implement environmental
management or remedial activities to reduce the risk of noncompliance with
environmental laws and regulations.
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EMPLOYEES
As of December 31, 1998, we employed 3,101 people, of whom
approximately 379 were employed in managerial positions, 1,001 were employed in
non-managerial sales positions, 1,289 were employed in non-managerial parts and
service positions and 432 were employed in administrative support positions.
We believe that our relationships with our employees are favorable.
None of our employees are represented by a labor union, however, because of our
dependence on the Manufacturers we may be affected by labor strikes, work
slowdowns and walkouts at the Manufacturers' manufacturing facilities.
ITEM 2. PROPERTIES
We use a number of facilities to conduct our dealership operations.
Each of our dealerships may include facilities for (1) new and used vehicle
sales, (2) vehicle service operations, (3) retail and wholesale parts
operations, (4) collision service operations, (5) storage and (6) general
office use. We try to structure our operations so as to avoid the ownership of
real property. In connection with our acquisitions, we generally seek to lease
rather than acquire the facilities on which the acquired dealerships are
located. We generally enter into lease agreements with respect to such
facilities that have 30-year terms and are cancelable at our option after an
initial 10-year period and at the end of each subsequent five-year period. As a
result, we lease the majority of our facilities, and these facilities are
subject to long-term leases.
ITEM 3. LEGAL PROCEEDINGS
From time to time, our dealerships are named in claims involving the
manufacture of automobiles, contractual disputes and other matters arising in
the ordinary course of business. Currently, no legal proceedings are pending
against or involve us that, in our opinion, could be expected to have a
material adverse effect on our business, financial condition or results of
operations.
Because of their vehicle inventory and nature of business, automobile
dealerships generally require significant levels of insurance covering a broad
variety of risks. Our insurance includes an umbrella policy with a $50 million
per occurrence limit as well as insurance on real property, comprehensive
coverage for vehicle inventory, general liability insurance, employee
dishonesty coverage and errors and omissions insurance in connection with
vehicle sales and financing activities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the May 28, 1998 Annual Meeting of Stockholders, our stockholders
voted on two matters.
(1) Election of two Directors:
The stockholders elected the two nominees as directors for
three-year terms based on the following voting results:
VOTES CAST
--------------------------------------
AGAINST OR
NOMINEE ELECTED FOR WITHHELD
---------------------------- --------------- ------------------
Bennett E. Bidwell 11,241,977 8,800
Sterling B. McCall, Jr. 11,241,977 8,800
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The other directors whose terms of office continued after the
meeting are; B.B. Hollingsworth, Jr., Robert E. Howard, II,
Charles M. Smith and John H. Duncan.
(2) Appointment of Independent Public Accountants:
The stockholders ratified the appointment of Arthur Andersen
LLP as our independent public accountants for 1998. The
results of the voting were as follows:
For 10,936,488
Against 280,255
Abstain 34,034
ITEM 4A. MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below are our executive officers and directors, together
with their positions and ages.
EXPIRATION OF TERM
NAME AGE POSITION AS DIRECTOR
- ---------------------------- -------- ------------------------------------------ ---------------------
B.B. Hollingsworth, Jr...... 56 Chairman, President and Chief 2000
Executive Officer
John S. Bishop.............. 52 Senior Vice President - Operations
Charles M. Smith............ 53 Senior Vice President - Industry 1999
Relations; Director
Scott L. Thompson........... 40 Senior Vice President - Chief Financial
- Officer and Treasurer
John T. Turner.............. 55 Senior Vice President - Corporate
Development
Bennett E. Bidwell.......... 71 Director 2001
John H. Duncan.............. 71 Director 1999
Robert E. Howard, II........ 52 Director; President of Howard Group 2000
Sterling B. McCall, Jr...... 64 Director; Chairman, Sterling McCall 2001
Toyota and Lexus
Set forth below is a brief description of the business experience of
our executive officers and directors.
B.B. HOLLINGSWORTH, JR. has served as our Chairman since March 1997
and as President, Chief Executive Officer and Director since August 1996. Prior
to joining us, Mr. Hollingsworth spent nineteen years with Service Corporation
International ("SCI"), where he directed an acquisition program that
established SCI as the world's leading consolidator of the funeral industry. He
joined SCI in 1967, was then named Vice President for Corporate Development,
was named Vice President and Chief Financial Officer in 1972, and was elected
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President and named director in 1975. He served as President and director of
SCI from 1975 until retirement in 1986. From 1986 to 1996, Mr. Hollingworth
served as a consultant to SCI. Prior to November 1997, Mr. Hollingsworth was a
shareholder and director of Foyt Motors, Inc. a subsidiary of ours that was
acquired by us in November 1997. He has served as a director of several public
and private companies.
JOHN T. TURNER has served as our Senior Vice President - Corporate
Development since December 1996. Prior to joining us, Mr. Turner functioned as
Managing Director - Corporate Development, Europe for SCI. From 1990 to 1993,
Mr. Turner served as Senior Vice President - Operations and Director of the
Loewen Group, Inc. From 1986 to 1990, he served as President and director of
Paragon Family Services, Inc. From 1981 to 1986, he served as Senior Vice
President - Corporate Development for SCI. Mr. Turner was a partner in Arthur
Young & Company from 1977 to 1981. Currently, he is a director of Metamor
Worldwide, Inc.
SCOTT L. THOMPSON has served as our Senior Vice President - Chief
Financial Officer and Treasurer since December 1996. From 1991 to 1996, Mr.
Thompson served as Executive Vice President, Operations and Finance for KSA
Industries, Inc., a diversified enterprise with interests in automotive
retailing, energy and professional sports. Among Mr. Thompson's other
responsibilities within the KSA group of companies, he served as a Vice
President and director of three automobile dealerships with aggregate annual
revenues of $180 million. Additionally, in connection with his position at KSA
Industries, Inc. he served as director of Adams Resources Energy, Inc. a public
oil and gas company. He is a Certified Public Accountant, and from 1980 to 1991
he held various positions with Arthur Andersen LLP.
JOHN S. BISHOP has served as our Senior Vice President - Operations
since October 1998. From 1981 until 1998, he served as Group Vice President of
Sales and Marketing of Gulf States Toyota, an independent distributor of Toyota
vehicles, parts and accessories serving approximately 140 dealers in a
five-state area. Before joining Gulf States Toyota, Mr. Bishop was employed at
both Ford Motor Company and Chrysler Corporation for a combined 8 years.
BENNETT E. BIDWELL has served as one of our Directors since June 1997.
Mr. Bidwell joined Chrysler Corporation as Executive Vice President in 1983 and
was elected to its board of directors in that same year. He was named Vice
Chairman of Chrysler Corporation in 1985, Vice Chairman of Chrysler Motors
Corporation in 1987 and President - Product and Marketing of Chrysler Motors
Corporation in 1988. From 1988 to 1990, Mr. Bidwell served as Chairman of
Chrysler Motors Corporation. Mr. Bidwell retired from Chrysler Corporation in
1993. Prior to joining Chrysler, Mr. Bidwell spent 27 years with Ford Motor
Company, and from 1981 to 1983 he was President and Chief Operating Officer of
The Hertz Corporation. His past directorships include National Steel
Corporation (1981-1983), McDonald & Company Securities, Inc. (1992-1995) and
Kerr-McGee Corporation (1985-1998). Mr. Bidwell currently serves as a director
for International Management Group, Budd Company and Kelly Management Group.
JOHN H. DUNCAN has served as one of our Directors since June 1997.
Since 1988, Mr. Duncan has been a private investor with holdings in the
automotive, oil and gas and real estate industries. From 1958 to 1968, Mr.
Duncan served as President of Gulf & Western Industries, a company he
co-founded. Mr. Duncan currently serves as a director, Chairman of the
Executive Committee and member of the Compensation Committee of Enron
Corporation, a director and Chairman of the Compensation Committee of Enron Oil
Trading & Transportation and a director of Enron Oil and Gas Company. Mr.
Duncan also serves on the Board of Trustees of Southwestern University, the
Board of Trustees of the Texas Heart Institute and the Board of Visitors of the
University of Texas (M.D. Anderson) Cancer Foundation.
ROBERT E. HOWARD, II has served as one of our Directors since April
1997. Mr. Howard has served as President of Howard Group since November 1997.
Mr. Howard has more than 28 years experience in the automotive retailing
industry. From 1969 to 1977, he served in various management positions at
franchised dealerships. From 1978 to November 1997, he served as Chairman of
Howard Pontiac-GMC, Inc. a franchised dealership acquired by us in November
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1997. Prior to November 1997, Mr. Howard was also Chairman of the following
companies acquired by the Company in November 1997: Bob Howard Chevrolet, Bob
Howard Honda/Acura, Bob Howard Toyota and Bob Howard Dodge. He was a recipient
of the 1997 Time Magazine Quality Dealer Award and presently serves as Chairman
of the Oklahoma Motor Vehicle Commission and as a director of the Oklahoma City
Metropolitan Automobile Dealers Association.
STERLING B. MCCALL JR. has served as one of our Directors since August
1996. Mr. McCall has over 29 years experience in the automotive retailing
industry and, is Chairman of Sterling McCall Toyota and Sterling McCall Lexus,
both subsidiaries of ours that were acquired by us in November 1997. He served
as President or Chairman of Sterling McCall Toyota and Sterling McCall Lexus
since their inception in 1969 and 1989, respectively. He is a former Director
of the American International Automobile Dealers Association, a former director
and Chairman of the Houston Automobile Dealers Association, a former Chairman
of the Gulf States Toyota Dealer Council and a former director of the Texas
Automobile Dealers Association. Mr. McCall has won the Time Magazine Quality
Dealer Award and the Sports Illustrated Dealer of Distinction Award.
CHARLES M. SMITH has served as one of our Directors since our
formation in December 1995. He has served as our Senior Vice President -
Industry Relations since January 1, 1999. Mr. Smith has more than 29 years
experience in the automotive retailing industry. From 1968 to 1980, he served
in various capacities in dealerships owned and operated by the Smith family.
From 1980 to 1985, he owned and operated his own automobile dealership. From
1985 to November 1997, he served as managing partner of Smith & Liu Management
Company, the management entity for the Smith Group dealerships that were
acquired by us in November 1997. He is the former Chairman of the American
International Automobile Dealers Association and is Vice Chairman of the Texas
Automobile Dealers Association. He has won the Time Magazine Quality Dealer
Award and the Sports Illustrated All-Star Dealer Award.
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 152 holders of record of our Common Stock as
of March 22, 1999.
The following table presents the quarterly high and low sales prices
for our common stock since our initial public offering, as reported on the New
York Stock Exchange Composite Tape under the symbol "GPI".
HIGH LOW
--------- --------
1997:
Fourth Quarter (commencing October 30, 1997) $13 15/16 $ 7 3/4
1998:
First Quarter 11 1/2 8 5/8
Second Quarter 18 1/2 10 5/16
Third Quarter 18 1/2 11 3/8
Fourth Quarter 26 12 15/16
1999:
First Quarter (through March 26, 1999) 30 18 5/16
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We have never declared or paid dividends on our Common Stock. We
intend to retain future earnings, if any, to finance the development and
expansion of our business and, therefore, do not anticipate paying any cash
dividends on our Common Stock in the foreseeable future. The decision whether
to pay dividends will be made by our Board of Directors after considering our
results of operations, financial condition, capital requirements, general
business conditions and other factors.
Certain provisions of the Credit Facility and the Notes require us to
maintain a certain minimum working capital and a certain aggregate net worth
and prohibit us from making substantial disbursements outside the ordinary
course of business, including limitations on the payment of cash dividends. In
addition, pursuant to the automobile franchise agreements to which our
dealerships are subject, all dealerships are required to maintain a certain
minimum working capital.
We have 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 our Common Stock. The
following is a summary of the transactions in which stock has been or is to be
issued:
DATE SECURITIES
DATE OF AGREEMENT ISSUED ACQUISITION SHARES
----------------- --------------- ----------- ------
December 17, 1997 March 16, 1998 Carroll Automotive Group 1,428,158
December 17, 1997 March 24, 1999 Carroll Automotive Group 20,981
December 18, 1997 April 1, 1998 Maxwell Automotive Group 805,929
February 25, 1998 May 6, 1998 Johns Automotive Group 875,000
February 25, 1998 March 15, 1999 Johns Automotive Group 151,260
March 11, 1998 July 7, 1998 Luby Chevrolet 341,100
May 11, 1998 May 11, 1998 Flamingo Ford 10,000
May 16, 1998 July 20, 1998 McKinney Dodge 56,618
November 20, 1998 February 4, 1999 Sunshine Buick, Pontiac, GMC 17,826
November 25, 1998 Pending closing Tidwell Ford 371,250
We are 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. We believe we are justified in relying on such exemption
since all but one stockholder of the groups who will receive shares of our
Common Stock are "accredited investors" under Regulation D, and we have
otherwise complied with Regulation D.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
We 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, 1996, 1995 and 1994, and for each of the three 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 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. The financial data as of and for the year ended December 31,
1998, includes the operations of Group 1 and the founding groups from January
1, 1998 and the dealerships acquired during 1998, from the effective dates of
the acquisitions. The following selected historical financial data as of
December 31, 1998, 1997, 1996 and 1995, and for each of the five years in the
period ended December 31, 1998, have been
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derived from audited financial statements. The following selected historical
financial data as of December 31, 1994, has been derived from unaudited
financial statements, which have been prepared on the same basis as the audited
financial statements, and in our opinion, reflect all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of such
data.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- -------- -------- -------- --------
(dollars in thousands, except per share amounts)
INCOME STATEMENT DATA:
Revenues............................ $1,630,057 $403,967 $281,492 $254,003 $227,259
Cost of sales....................... 1,393,547 349,366 241,898 219,907 197,642
---------- -------- -------- -------- --------
Gross profit...................... 236,510 54,601 39,594 34,096 29,617
Selling, general and
administrative expenses........... 178,038 43,360 30,027 25,628 23,823
Depreciation and amortization....... 6,426 1,020 741 538 430
---------- -------- -------- -------- --------
Income from operations............ 52,046 10,221 8,826 7,930 5,364
Other income (expense):
Floorplan interest expense........ (12,837) (3,810) (3,112) (3,410) (2,408)
Other interest expense, net....... (4,027) (176) (56) (61) (44)
Other income (expense), net....... 39 156 (69) (80) 9
---------- -------- -------- -------- --------
Income before income taxes........ 35,221 6,391 5,589 4,379 2,921
Provision for income taxes.......... 14,502 573 382 744 768
---------- -------- -------- -------- --------
Net income........................ $20,719 $5,818 $5,207 $3,635 $2,153
========== ======== ======== ======== ========
Earnings per share:
Basic............................. $1.20 - - - -
Diluted........................... $1.16 - - - -
Weighted average shares outstanding:
Basic............................. 17,281,165 - - - -
Diluted........................... 17,904,878 - - - -
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- ------- ------- -------
(in thousands)
BALANCE SHEET DATA:
Working capital......................... $ 48,251 $ 55,475 $ 9,327 $ 7,538 $ 4,891
Inventories............................. 219,176 105,421 47,674 39,573 34,699
Total assets............................ 477,710 213,149 72,874 61,641 51,124
Total debt, including current portion... 239,192 67,857 42,887 37,320 31,601
Stockholders' equity.................... 136,184 89,372 12,210 8,620 5,346
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a leading operator and consolidator in the highly fragmented
automotive retailing industry. We own automobile dealership franchises located
in Texas, Oklahoma, Florida, New Mexico, Georgia and Colorado. We sell new and
used cars and light trucks, provide maintenance and repair services at all of
our dealerships, and operate 12 collision service centers. We expect a
significant portion of our future growth to come from acquisitions of
additional dealerships.
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We have diverse sources of revenues, including: new car sales, new
truck sales, used car sales, used truck sales, manufacturer remarketed vehicle
sales, parts sales, service sales, collision repair services, finance fees,
insurance commissions, vehicle service contract commissions, documentary fees
and after-market product sales. Sales revenues from new and used vehicle sales
and parts and service sales include sales to retail customers, other
dealerships and wholesalers. Other dealership revenue includes revenue from
arranging financing, insurance and vehicle service contracts, net of a
provision for anticipated chargebacks, and documentary fees.
Our gross profit varies as our merchandise mix (the mix between new
vehicle sales, used vehicle sales, parts and service sales, collision repair
services and other dealership revenues) changes. Our gross margin on the sale
of products and services generally varies between approximately 8.0% and 85.0%,
with new vehicle sales generally resulting in the lowest gross margin and other
dealership revenue sales generally resulting in the highest gross margin. When
our new vehicle sales increase or decrease at a rate greater than our other
revenue sources, our gross margin responds inversely. Factors such as
seasonality, weather, cyclicality and manufacturers' advertising and incentives
may impact our merchandise mix, and therefore influence our gross margin.
Selling, general and administrative expenses consist primarily of
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. Until we acquired them, all of the
dealerships had been managed 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. Certain of these owners and key employees agreed to
reductions in their compensation and benefits in connection with their
acquisition by us.
We are 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 our acquisition strategy. These
various costs and possible cost-savings and revenue enhancements may make
historical operating results difficult to compare to and not indicative of,
future performance.
PRO FORMA COMBINED FOUNDING GROUPS' DATA
The pro forma combined founding groups' data presented below for 1997
and 1996 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 a historical basis, including
the effects of the pro forma adjustments. Such information does not give effect
to any other acquisitions that were made by us other than the founding groups.
This data will not be comparable to and may not be indicative of our
post-combination results of operations because (i) the founding groups were not
under common control of management and had different tax structures during the
periods presented and (ii) we used the purchase method to establish a new basis
of accounting to record the acquisitions.
The financial information presented below for the year ended December
31, 1998 reflects the historical results of our operations and includes
acquisitions made during such period, from the effective dates, for accounting
purposes, of the acquisitions.
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OPERATIONS DATA
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1998 1997 1996
---------------------- ------------------------ ------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- --------- ------------ --------- ----------- --------
(dollars in thousands)
Revenues
New vehicle sales......... $931,205 57.1% $513,864 56.9% $469,318 57.1%
Used vehicle sales........ 510,192 31.3 288,010 31.9 258,027 31.4
Parts and service sales... 139,144 8.5 77,215 8.6 73,451 8.9
Other dealership
revenues, net........... 49,516 3.1 23,206 2.6 21,117 2.6
---------- --------- ------------ --------- ----------- -------
Total revenues...... 1,630,057 100.0 902,295 100.0 821,913 100.0
Cost of sales............. 1,393,547 85.5 775,164 85.9 705,783 85.9
---------- --------- ------------ --------- ----------- -------
Gross profit.............. $236,510 14.5% $127,131 14.1% $116,130 14.1%
========== ========= =========== ========= =========== =======
NEW VEHICLE DATA
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996
-------- -------- --------
(dollars in thousands, except gross profit per unit)
Retail unit sales ........................................ 39,822 23,201 21,378
Retail sales revenue ..................................... $931,205 $513,864 $469,318
Gross profit ............................................. $ 74,096 $ 42,199 $ 37,677
Gross margin ............................................. 8.0% 8.2% 8.0%
Gross profit per retail unit sold ........................ $ 1,861 $ 1,819 $ 1,762
USED VEHICLE DATA
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1997 1996
-------- -------- --------
(dollars in thousands, except gross profit per unit)
Retail unit sales .............................................. 31,248 18,130 17,220
Retail sales revenue (1) ....................................... $411,065 $235,353 $219,183
Gross profit ................................................... $ 38,282 $ 21,035 $ 21,358
Gross margin ................................................... 9.3% 8.9% 9.7%
Gross profit per retail unit sold .............................. $ 1,225 $ 1,160 $ 1,240
- ---------------------
(1) Excludes wholesale revenues.
PARTS AND SERVICE DATA
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------ ----------- -------------
(dollars in thousands)
Sales revenue.................... $139,144 $77,215 $73,451
Gross profit..................... $74,616 $40,691 $35,978
Gross margin..................... 53.6% 52.7% 49.0%
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OTHER DEALERSHIP REVENUES, NET
YEAR ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
-------- --------- ---------
(dollars in thousands, except revenues per unit)
Retail new and used unit sales .............................. 71,070 41,331 38,598
Retail sales revenue ........................................ $49,516 $23,206 $21,117
Net revenues per retail unit sold ........................... $ 697 $ 561 $ 547
HISTORICAL YEAR ENDED DECEMBER 31, 1998 COMPARED WITH PRO FORMA COMBINED
FOUNDING GROUPS YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues increased $727.8 million, or 80.7%, from $902.3
million for the year ended December 31, 1997 to $1,630.1 million for the year
ended December 31, 1998. New vehicle revenues increased $417.3 million, or
81.2%, from $513.9 million for the year ended December 31, 1997 to $931.2
million for the year ended December 31, 1998. This increase in revenue was
primarily attributable to strong customer acceptance of our products,
particularly Toyota, Lexus, Honda and Acura, and the acquisition of additional
dealership operations during 1998. The increase was partially offset by reduced
sales at our Nissan franchises, which declined due to reduced manufacturer
sales incentives as compared to the prior year. Used vehicle revenues increased
$222.2 million, or 77.2%, from $288.0 million for the year ended December 31,
1997 to $510.2 million for the year ended December 31, 1998. The increase was
primarily attributable to an emphasis on used vehicle sales in the Oklahoma and
Houston, Texas markets and the additional dealership operations acquired. Parts
and service sales increased $61.9 million, or 80.2%, from $77.2 million for the
year ended December 31, 1997 to $139.1 million for the year ended December 31,
1998. The increase was primarily attributable to the additional dealership
operations acquired. Other dealership revenues increased $26.3 million or
113.4% from $23.2 million for the year ended December 31, 1997 to $49.5 million
for the year ended December 31, 1998. The increase was due primarily to the
implementation of our vehicle service contract and insurance programs, which
resulted in improved revenues per unit, and an increase in the number of retail
new and used vehicles sold.
GROSS PROFIT. Gross profit increased $109.4 million, or 86.1%, from
$127.1 million for the year ended December 31, 1997 to $236.5 million for the
year ended December 31, 1998. The increase was attributable to increased
revenues and an increase in gross margin from 14.1% for the year ended December
31, 1997 to 14.5% for the year ended December 31, 1998. This increase was
caused by improvements in the gross margin earned on used vehicle sales and
parts and service sales, and a change in the merchandising mix, as higher
margin other dealership revenues increased as a percentage of total revenues.
Partially offsetting the gross margin increases, the gross margin on new retail
vehicle sales declined from 8.2% for the year ended December 31, 1997 to 8.0%
for the year ended December 31, 1998. The decline is attributable primarily to
reduced margins in the Nissan product line due to reduced manufacturer sales
incentives in 1998. The gross margin on used retail vehicle sales increased
from 8.9% for the year ended December 31, 1997 to 9.3% for the year ended
December 31, 1998. The increase was primarily attributable to an emphasis on
used vehicle operations in the Oklahoma platform.
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PRO FORMA COMBINED FOUNDING GROUPS YEAR ENDED DECEMBER 31, 1997 COMPARED WITH
PRO FORMA COMBINED FOUNDING GROUPS 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 retail used 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.
HISTORICAL RESULTS OF OPERATIONS - GROUP 1 AUTOMOTIVE, INC.
The historical results of operations for the years ended December 31,
1998, 1997 and 1996 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 year ended December 31, 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. The financial data for the year ended December 31, 1998,
includes the operations of Group 1 and the founding groups from January 1,
1998, and the dealerships acquired during 1998, from the effective dates of the
acquisitions. During the two-year period ended December 31, 1997, the companies
within the Howard Group operated under different tax structures. All S
Corporation entities were converted to C Corporations as of October 31, 1997.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues increased by $1,226.1 million, or 303.5%, from
$404.0 million for the year ended December 31, 1997 to $1,630.1 million for the
year ended December 31, 1998. New vehicle sales increased $703.2 million, or
308.4%, from $228.0 million for the year ended December 31, 1997 to $931.2
million for the year ended December 31, 1998. Used vehicle
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revenues increased $374.7 million, or 276.5%, from $135.5 million for the year
ended December 31, 1997 to $510.2 million for the year ended December 31, 1998.
Parts and service sales increased $109.1 million, or 363.7%, from $30.0 million
for the year ended December 31, 1997 to $139.1 million for the year ended
December 31, 1998. Other dealership revenues increased $39.1 million, or
376.0%, from $10.4 million for the year ended December 31, 1997 to $49.5
million for the year ended December 31, 1998. The increases were due primarily
to the inclusion of the dealership operations acquired since October 31, 1997
and our focus on higher margin activities.
GROSS PROFIT. Gross profit increased by $181.9 million, or 333.2%,
from $54.6 million for the year ended December 31, 1997 to $236.5 million for
the year ended December 31, 1998. The increase was attributable to the
inclusion of dealership operations acquired since October 31, 1997 and
improvement in our gross profit margin from 13.5% for the year ended December
31, 1997 to 14.5% for the year ended December 31, 1998. This improvement was
the result of an increase in revenues from parts and service and other
dealership revenues as a percentage of total revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $134.6 million, or 310.1%, from $43.4 million
for the year ended December 31, 1997 to $178.0 million for the year ended
December 31, 1998. The increase was primarily attributable to the inclusion of
the dealership operations acquired since October 31, 1997.
INTEREST EXPENSE, NET. Floorplan and other interest expense, net,
increased $12.9 million, or 322.5%, from $4.0 million for the year ended
December 31, 1997 to $16.9 million for the year ended December 31, 1998. The
increase was primarily attributable to the floorplan interest expense of our
additional dealership operations acquired and additional interest expense due
to borrowings on our credit facility to complete acquisitions. Partially
offsetting the increases were expense reductions realized due to lower interest
rates on floorplan notes payable obtained through our credit facility.
PRO FORMA NET INCOME. Pro forma net income increased $16.3 million, or
370.5%, from $4.4 million for the year ended December 31, 1997 to $20.7 million
for the year ended December 31, 1998. Excluding the impact of an $825,000
non-cash compensation charge in 1997, pro forma net income as a percentage of
revenues increased from 1.2% for the year ended December 31, 1997 to 1.3% for
the year ended December 31, 1998. The non-cash compensation charge related to
grants of equity to certain key employees of the Howard Group, prior to our
acquisition of the Howard Group.
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
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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 44.7%, from $30.0 million
for the year ended December 31, 1996 to $43.4 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 10.7%
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 10.5% of revenues for the year
ended December 31, 1997.
INTEREST EXPENSE, NET. Floorplan and other 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.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash on hand, cash from
operations, our credit facility (which includes the floorplan facility and the
acquisition facility) and equity and debt offerings.
The following table sets forth historical selected information from
our statements of cash flows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
Net cash provided by operating
activities ................................ $ 24,277 $ 6,922 $ 7,332
Net cash provided by (used in)
investing activities ...................... (58,225) 10,661 (4,615)
Net cash provided by (used in)
financing activities ...................... 65,299 5,830 (1,558)
-------- -------- --------
Net increase in cash and cash
equivalents ............................... $ 31,351 $ 23,413 $ 1,159
======== ======== ========
CASH FLOWS
Total cash and cash equivalents at December 31, 1998, were $66.4
million.
OPERATING ACTIVITIES. For the three-year period ended December 31,
1998, we generated $38.5 million in net cash from operating activities,
primarily driven by net income plus depreciation and amortization. Cash flow
provided by operating activities increased $17.4 million
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from $6.9 million for the year-ended December 31, 1997 to $24.3 million for the
year-ended December 31, 1998. This increase is primarily attributable to the
inclusion of the dealership operations acquired since October 31, 1997.
INVESTING ACTIVITIES. We obtained approximately $10.7 million from
investing activities in 1997, primarily from the cash balances obtained in the
acquisitions of the founding groups. The $58.2 million of cash used for
investing activities during 1998 was primarily attributable to cash paid in
completing acquisitions, net of cash balances obtained in the acquisitions, and
purchases of property and equipment, partially offset by sales of property and
equipment. Of the $9.7 million used in purchasing property and equipment,
approximately $5.6 million related to the purchase of land and construction of
facilities for new or expanded operations, including a new Lexus companion
dealership located in south Houston, which we expect to be opened by the third
quarter of 1999. During December 1998, we completed the sale and leaseback of
six dealership properties and received $20.0 million in gross proceeds from the
sale.
FINANCING ACTIVITIES. We obtained approximately $5.8 million and $65.3
million from financing activities in 1997 and 1998, respectively. The net cash
provided by financing activities for 1997 was primarily attributable to the net
proceeds of our initial public offering of approximately $51.8 million offset
primarily by the pay down of floorplan debt in the amount of $33.5 million. The
net cash provided during 1998 was generated primarily from drawings on our
credit facility and was utilized in completing acquisitions and supporting
increased sales volumes. Partially offsetting the $75.5 million in borrowings
was $10.0 million in principal payments on long-term debt, of which $6.6
million was related to the payoff of mortgages in connection with the sale and
leaseback transaction completed in December 1998.
WORKING CAPITAL. At December 31, 1998, we had working capital of $48.3
million. Historically, we have funded our operations with internally generated
cash flow and borrowings. While we cannot guarantee it, based on current facts
and circumstances, management believes we have adequate cash flow coupled with
borrowings under our credit facility to fund our current operations.
ACQUISITION FINANCING
We anticipate that our primary use of cash will be for the completion
of acquisitions. We expect the cash needed to complete our acquisitions will
come from the operating cash flows of our existing dealerships, borrowings
under our current credit facilities, other borrowings or equity or debt
offerings. Although we believe that we will be able to obtain sufficient
capital to fund acquisitions, we cannot guarantee that such capital will be
available to us at the time it is required or on terms acceptable to us. See
"Cautionary Statement About Forward-Looking Statements".
RECENT OFFERINGS. In March 1999, we completed offerings, in which we
sold two million shares of common stock and $100 million of 10-year senior
subordinated notes with an interest rate of 10 7/8%. We received proceeds,
before our expenses, of $138.9 million. All of the proceeds were used to
temporarily repay borrowings under our credit facility. These proceeds are
expected to be used in the future to complete acquisitions, resulting in
increased borrowings under the credit facility.
CREDIT FACILITY
In November 1998, we amended our credit facility to increase the
commitment from $345 million to $425 million (which was reduced to $405 million
upon consummation of the offerings) and to extend the term of the credit
facility from December 2000 to December 2001. The credit facility provides a
floorplan facility of $295 million for financing vehicle inventories and an
acquisition facility of $130 million (which was reduced to $110 million upon
consummation of the offerings), for financing acquisitions, general corporate
purposes and capital expenditures. Currently, $110 million is available to be
drawn under the acquisition facility, subject to a cash flow
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calculation and the maintenance of certain financial ratios. Additionally, the
credit facility contains various covenants, including financial ratios and
other requirements, which must be maintained by us. The credit facility also
limits the amount we may pay as cash dividends.
In January 1998, we entered into a three-year interest rate swap
agreement to hedge our exposure to changes in interest rates. This swap
converts the interest rate on $75 million of debt to a fixed rate of
approximately 7.16%.
FLOORPLAN FINANCING
We currently obtain floorplan financing for vehicle inventory through
our credit facility. This debt bears interest at the rate of LIBOR plus 150
basis points.
SALE OF DEALERSHIP PROPERTIES TO A REIT.
On December 21, 1998, we entered into an agreement with a REIT to sell
nine of our dealership properties for approximately $32.3 million in cash. In
connection with the sale of the properties, we have agreed to leaseback the
properties under leases with terms of 30 years, with tenant termination options
after 15, 20 and 25 years. As of December 31, 1998, we had closed the sale of
six properties to the REIT, pursuant to the terms of the agreement, for
approximately $20.0 million.
We generally seek to avoid the ownership of real property. Accordingly
we intend to continue to enter into sale and leaseback transactions in order to
minimize our investment in acquired and constructed facilities.
LEASES
We lease 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 our option ten years from execution of the lease and at the end
of each subsequent five-year period.
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
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. These statements appear in
a number of places in this annual report and include statements regarding our
plans, beliefs or current expectations, including those plans, beliefs and
expectations of our officers and directors with respect to, among other things:
o future acquisitions;
o expected future cost savings;
o future capital expenditures;
o trends affecting our future financial condition or results of
operations; and
o our business strategy regarding future operations.
Any such forward-looking statements are not assurances of future
performance and involve risks and uncertainties. Actual results may differ
materially from anticipated results for a number of reasons, including:
o industry conditions;
o future demand for new and used vehicles;
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30
o restrictions imposed on us by automobile manufacturers;
o the ability to obtain the consents of automobile
manufacturers to our acquisitions;
o the availability of capital resources; and
o the willingness of acquisition candidates to accept our
common stock as currency.
The information contained in this annual report, including the
information set forth below and under the heading "Business", identifies
additional factors that could affect our operating results and performance. We
urge you to carefully consider those factors.
All forward-looking statements attributable to us are qualified in
their entirety by this cautionary statement.
DEPENDENCE ON ACQUISITIONS FOR GROWTH
Growth in our revenues and earnings will depend significantly on our
ability to acquire and successfully operate dealerships. There can be no
assurance that we will be able to identify and acquire dealerships in the
future. In addition, managing and integrating additional dealerships into our
existing mix of dealerships may result in substantial costs, delays or other
operational or financial problems.
Restrictions by our Manufacturers as well as covenants contained in
our debt instruments limit our ability to acquire additional dealerships.
In addition, increased competition for acquisition candidates may
develop, which could result in fewer acquisition opportunities available to us
and/or higher acquisition prices.
Further, acquisitions involve a number of special risks, including
possible diversion of resources and management's attention, inability to retain
key acquired personnel and risks associated with unanticipated events or
liabilities, some or all of which could have a material adverse effect on our
business, financial condition and results of operations.
We will continue to need substantial capital in order to acquire
additional automobile dealerships. In the past, we have financed these
acquisitions with a combination of cash flow from operations, proceeds from
borrowings under our credit facilities with banks and issuances of our common
stock. We cannot guarantee that these sources of funds will be sufficient to
fund our acquisition program and other cash needs, or that we will be able to
obtain adequate additional capital from other sources.
We expect to utilize our current credit facility to borrow a portion
of the funds required for acquisitions. If funds under the credit facility are
insufficient to fund our acquisition program, we will be required to obtain
alternative financing such as from the issuance of additional debt or equity
securities or an expansion or replacement of the credit facility.
We currently intend to finance acquisitions by issuing shares of
common stock as full or partial consideration for acquired dealerships. The
extent to which we will be able or willing to issue common stock for
acquisitions will depend on the market value of the common stock from time to
time and the willingness of potential acquisition candidates to accept common
stock as part of the consideration for the sale of their businesses. If
potential acquisition candidates are unwilling to accept our common stock, we
will be forced to rely solely on available cash or debt or equity financing,
which could adversely affect our acquisition program. Accordingly, our ability
to make acquisitions could be adversely affected if the price of our common
stock declines.
CONTINGENT ACQUISITION PAYMENTS
In our early acquisitions in which we issued shares of our common
stock as consideration, we guaranteed to the recipients of the shares that they
will receive a minimum price for their shares if they sell the shares in the
market. In the event that they do not receive the
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31
guaranteed price in a sale, we are required to pay them the difference between
the price they received and the guaranteed price. As of December 31, 1998,
there were 3,450,187 shares of common stock subject to our guarantee with a
weighted average guarantee price of approximately $13.49 per share. These
guarantees have terms of three years to ten years with a weighted average term
of approximately 6.5 years. If the price of our common stock declines
substantially and we are required to perform on our guarantees, our liquidity
and ability to finance our acquisition program could be adversely affected.
In addition, in many of our acquisitions, we may be required to pay
contingent consideration to the former stockholders of the acquired dealerships
based on an increase in earnings before taxes of their operations during
certain periods of time. We cannot determine whether or how much we will have
to pay under these contingent payment arrangements. If we are required to make
any of these contingent payments, we will have to pay approximately one-half of
each payment in common stock and one-half in cash. If these contingent payments
must be paid in full, our liquidity and ability to finance our acquisition
program could be adversely affected.
DEPENDENCE ON THE SUCCESS OF OUR MANUFACTURERS
Our success depends upon the overall success of the line of vehicles
that each of our dealerships sells. Demand for our Manufacturers' vehicles as
well as the financial condition, management, marketing, production and
distribution capabilities of our Manufacturers affect our business.
Although we have attempted to lessen our dependence on any one
Manufacturer by buying dealerships representing a number of different domestic
and foreign Manufacturers, events such as labor disputes and other production
disruptions that may adversely affect a Manufacturer may also adversely affect
us. Similarly, the late delivery of vehicles from Manufacturers, which
sometimes occurs during periods of new product introductions, can lead to
reduced sales during those periods. Moreover, any event that causes adverse
publicity involving any of our Manufacturers may have an adverse effect on us
regardless of whether such event involves any of our dealerships.
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.
We have recognized the need to ensure that our computer systems,
equipment and operations will not be adversely impacted by the change to the
calendar year 2000. As such, we have taken steps to identify potential areas of
risk and are addressing these in our planning, purchasing and daily operations.
We have conducted a third party survey of all of the individual dealership
systems, equipment and operations and are in the process of developing an
action plan to correct deficiencies before year-end. 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 our
financial position. In connection with acquisitions, we review and address each
candidate's year 2000 readiness during the due diligence process.
We are currently reviewing the potential adverse impact resulting from
the failure of third party service providers and vendors to prepare for the
year 2000. We are dependent upon our dealerships' computer systems in our daily
operations. All of our dealerships are, or are expected to be, using a computer
system supported by a major automobile dealership computer system
31
32
provider. We have contacted each of our providers and have received written
assurance from them that their systems are, or will be, year 2000 ready. We are
dependent upon these providers, as are most dealerships in the United States, to
address the year 2000 issues.
We are primarily dependent upon the Manufacturers for the production
and delivery of new vehicles and parts. Although we have no reason to believe
that our Manufacturers will not be year 2000 ready, we have been unable to
obtain written assurance from them that their systems are year 2000 ready.
While we are in the process of developing contingency plans, failure
by us, our Manufacturers or third party service providers and vendors to
adequately address the year 2000 issue could have an adverse effect on us. If
we or our third party service providers do not adequately address the year 2000
issue, we may be required to handle all business on a handwritten basis. While
this would reduce operational efficiency, we would still be able to continue
our operations. If our Manufacturers fail to adequately address the year 2000
issue, and do not correct the problems timely, we may experience shortages in
new vehicle and parts inventories.
CYCLICALITY
Our operations, like the automotive retailing industry in general, can
be impacted by a number of factors relating to general economic conditions,
including consumer business cycles, consumer confidence, economic conditions,
availability of consumer credit and interest rates. Although the above factors,
among others, may impact our business, we believe the impact on our operations
of future negative trends in such factors will be somewhat mitigated by our (i)
strong parts, service and collision repair services, (ii) variable cost salary
structure, (iii) geographic diversity and (iv) product diversity.
SEASONALITY
Our 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.
32
33
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about our market sensitive
financial instruments and constitutes a "forward-looking statement". Our major
market risk exposure is changing interest rates. Our policy is to manage
interest rates through use of a combination of fixed and floating rate debt.
Interest rate swaps may be used to adjust interest rate exposures when
appropriate, based upon market conditions. These swaps are entered into with
financial institutions with investment grade credit ratings, thereby minimizing
the risk of credit loss. All items described are non-trading.
EXPECTED MATURITY DATE
-----------------------------------------------------
(dollars in millions) 1999 2000 2001 2002
--------- --------- --------- ---------
VARIABLE RATE DEBT
Current ................................ $ 0.1 $ -- $ 193.4 $ --
Average interest rates ............... 7.12% -- 7.12% --
Non-current ............................ $ -- $ 0.3 $ 42.0 --
Average interest rates ............... -- 7.12% 7.37% --
--------- --------- --------- ---------
Total variable rate debt ............... $ 0.1 $ 0.3 $ 235.4 $ --
Interest rate swap ..................... $ -- $ -- $ 75.0 $ --
Average pay rate (fixed) ............. -- -- 5.66% --
Average receive rate .................
(variable) -- -- 5.62% --
--------- --------- --------- ---------
Net variable rate debt ................. $ 0.1 $ 0.3 $ 160.4 $ --
========= ========= ========= =========
EXPECTED MATURITY DATE
-------------------------------------- Fair Value
2003 Thereafter Total December 31, 1998
--------- ---------- -------- -----------------
VARIABLE RATE DEBT
Current ................................ $ -- $ -- $ 193.5 $ 193.5
Average interest rates ............... -- --
Non-current ............................ -- -- $ 42.3 $ 42.3
Average interest rates ............... -- --
--------- --------- ---------
Total variable rate debt ............... $ -- $ -- $ 235.8
Interest rate swap ..................... $ -- $ -- $ 75.0 $ 0.6
Average pay rate (fixed) ............. -- --
Average receive rate .................
(variable) -- --
--------- --------- ---------
Net variable rate debt ................. $ -- $ -- $ 160.8
========= ========= =========
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Financial Statements for the information required by this
item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
33
34
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 12, 1999, which will be filed
with the Securities and Exchange Commission and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
The financial statements listed in the accompanying Index to Financial
Statements are filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K
On December 11, 1998, the Company filed a Current Report on Form 8-K
reporting under Item 5 thereof and including exhibits under Item 7
thereof.
On January 25, 1999, the Company filed a Current Report of Form 8-K
reporting under Item 5 thereof and including exhibits under Item 7
thereof.
On January 26, 1999, the Company filed a Current Report of Form 8-K
reporting under Item 5 thereof and including exhibits under Item 7
thereof.
On February 5, 1999, the Company filed a Current Report of Form 8-K
reporting under Item 5 thereof and including exhibits under Item 7
thereof.
On February 24, 1999, the Company filed a Current Report of Form 8-K
reporting under Item 5 thereof and including exhibits under Item 7
thereof.
On March 5, 1999, the Company filed a Current Report of 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).
34
35
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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).
4.2 -- Form of Subordinated Indenture (Incorporated by reference to Exhibit 4.5 of the Company's
Registration Statement on Form S-3 Registration No. 333-69693).
4.3 -- Form of Subordinated Debt Securities (included in Exhibit 4.2).
4.4 -- First Supplemental Indenture dated as of March 5, 1999 among Group 1 Automotive, Inc., the
Subsidiary Guarantors named therein and IBJ Whitehall Bank & Trust Company (Incorporated by
reference to Exhibit 4.1 of the Company's current report of Form 8-K dated March 5, 1999).
4.5 -- Form of 10 7/8% Senior Subordinated Note due March 1, 2009 (included in Exhibit 4.4).
10.1 -- Employment Agreement between the Company and B.B. Hollingsworth, Jr. dated November 3, 1997
(Incorporated by reference to Exhibit 10.1 of the Company's Annual Report on Form 10-K for the
year-ended December 31, 1997).
10.2 -- Employment Agreement between the Company and Robert E. Howard II dated November 3, 1997
(Incorporated by reference to Exhibit 10.2 of the Company's Annual Report on Form 10-K for the
year-ended December 31, 1997).
10.3 -- Employment Agreement between the Company and Sterling B. McCall, Jr. dated November 3, 1997
(Incorporated by reference to Exhibit 10.3 of the Company's Annual Report on Form 10-K for the
year-ended December 31, 1997).
10.4 -- Employment Agreement between the Company and Charles M. Smith dated November 3, 1997
(Incorporated by reference to Exhibit 10.4 of the Company's Annual Report on Form 10-K for the
year-ended December 31, 1997).
10.5 -- Employment Agreement between the Company and John T. Turner dated November 3, 1997
(Incorporated by reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K for the
year-ended December 31, 1997).
10.6 -- Employment Agreement between the Company and Scott L. Thompson dated November 3, 1997
(Incorporated by reference to Exhibit 10.6 of the Company's Annual Report on Form 10-K for the
year-ended December 31, 1997).
10.7 -- Employment Agreement between the Company and James S. Carroll dated March 16, 1998
(Incorporated by reference to Exhibit 10.8 of the Company's Annual Report on Form 10-K for the
year-ended December 31, 1997).
10.8 -- 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).
10.9 -- 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).
10.10 -- 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).
10.11 -- 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).
10.12 -- 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).
10.13 -- 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).
10.14 -- 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).
35
36
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.15 -- 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).
10.16 -- 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).
10.17 -- 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).
10.18 -- 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).
10.19 -- 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).
10.20 -- 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).
10.21 -- 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).
10.22 -- 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).
10.23 -- 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.
10.24 -- 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).
10.25 -- 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).
10.26 -- 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).
10.27 -- Lease Agreement between World Partner Enterprises Ltd. and Koons Ford, Inc. dated March 16,
1998 (Incorporated by reference to Exhibit 10.42 of the Company's Annual Report on Form 10-K
for the year-ended December 31, 1997).
10.28 -- Operations/Lease Agreement between K.C. Partnership and Perimeter Ford, Inc. dated March 16,
1998 (Incorporated by reference to Exhibit 10.43 of the Company's Annual Report on Form 10-K
for the year-ended December 31, 1997).
36
37
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.29 -- Lease Agreement between K.C. Partnership and Courtesy Ford, Inc. dated March 16, 1998
(Incorporated by reference to Exhibit 10.44 of the Company's Annual Report on Form 10-K for
the year-ended December 31, 1997).
10.30 -- Amended and Restated Sublease Agreement between Koons Development Co. and Koons Ford, Inc.
dated March 16, 1998 (Incorporated by reference to Exhibit 10.45 of the Company's Annual
Report on Form 10-K for the year-ended December 31, 1997).
10.31 -- 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 (Incorporated by
reference to Exhibit 10.46 of the Company's Annual Report on Form 10-K for the year-ended
December 31, 1997).
10.32 -- Second Amended and Restated Revolving Credit Agreement, dated as of November 10, 1998
(Incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K dated
December 11, 1998).
10.33 -- Stock Pledge Agreement dated December 19, 1997 (Incorporated by reference to Exhibit 10.54 of
the Company's Annual Report on Form 10-K for the year-ended December 31, 1997).
10.34 -- Swap Transaction Letter Agreement dated January 23, 1998 (Incorporated by reference to Exhibit
10.55 of the Company's Annual Report on Form 10-K for the year-ended December 31, 1997).
10.35 -- First Amendment to Group 1 Automotive, Inc. 1998 Employee Stock Purchase Plan.
10.36 -- Agreement between Nissan Motor Corporation in USA and Group 1 Automotive, Inc. dated April 28, 1998.
10.37 -- Employment Agreement between the Company and John S. Bishop dated October 7, 1998.
10.38 -- Form of Ford Motor Company Sales and Service Agreement.
10.39 -- Form of Chrysler Corporation Sales and Service Agreement.
11.1 -- Statement re: computation of earnings per share is included under Note 2 to the financial statements.
21.1 -- Group 1 Automotive, Inc. Subsidiary List.
23.1 -- Consent of Arthur Andersen LLP.
27.1 -- Financial Data Schedule.
37
38
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 31st day of March, 1999.
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 31st day of March, 1999.
SIGNATURE TITLE
--------- -----
/s/ B.B. Hollingsworth, Jr. Chairman, President and Chief
- ------------------------------------------------- Executive Officer and Director (Principal
B.B. Hollingsworth, Jr. Executive Officer)
/s/ Scott L. Thompson Senior Vice President - Chief Financial
- ------------------------------------------------- Officer and Treasurer (Chief Financial and
Scott L. Thompson Accounting 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 H. Duncan Director
- -------------------------------------------------
John H. Duncan
/s/ Bennett E. Bidwell Director
- -------------------------------------------------
Bennett E. Bidwell
39
INDEX TO FINANCIAL STATEMENTS
Group 1 Automotive, Inc. and Subsidiaries -- Consolidated Financial Statements
Report of Independent Public Accountants...................................................................F-2
Consolidated Balance Sheets................................................................................F-3
Consolidated Statements of Operations......................................................................F-4
Consolidated Statements of Stockholders' Equity............................................................F-5
Consolidated Statements of Cash Flows......................................................................F-6
Notes to Consolidated Financial Statements.................................................................F-7
F-1
40
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, 1998 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, 1998. 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, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Houston, Texas
February 3, 1999
F-2
41
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------
ASSETS 1998 1997
--------- ---------
CURRENT ASSETS: (in thousands)
Cash and cash equivalents .......................................... $ 66,443 $ 35,092
Accounts and notes receivable, net ................................. 21,373 10,611
Inventories ........................................................ 219,176 105,421
Deferred income taxes .............................................. 11,212 8,693
Other assets ....................................................... 8,718 1,865
--------- ---------
Total current assets ............................................ 326,922 161,682
--------- ---------
PROPERTY AND EQUIPMENT, net .......................................... 21,960 21,586
GOODWILL, net ........................................................ 123,587 27,078
OTHER ASSETS ......................................................... 5,241 2,803
--------- ---------
Total assets .................................................... $ 477,710 $ 213,149
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Floorplan notes payable ............................................ $ 193,405 $ 58,488
Current maturities of long-term debt ............................... 2,966 2,316
Accounts payable and accrued expenses .............................. 82,300 45,403
--------- ---------
Total current liabilities ....................................... 278,671 106,207
--------- ---------
DEBT, net of current maturities ...................................... 42,821 7,053
DEFERRED INCOME TAXES ................................................ -- 3,699
OTHER LIABILITIES .................................................... 20,034 6,818
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,
18,267,515 and 14,673,051 issued ................................ 183 147
Additional paid-in capital ......................................... 118,469 91,846
Retained earnings (deficit) ........................................ 18,190 (2,529)
Treasury stock, at cost, 37,366 and 10,000 shares .................. (658) (92)
--------- ---------
Total stockholders' equity ...................................... 136,184 89,372
--------- ---------
Total liabilities and stockholders' equity ...................... $ 477,710 $ 213,149
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
42
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
------------ ------------ ------------
(dollars in thousands, except per share amounts)
REVENUES:
New vehicle sales ......................... $ 931,205 $ 228,044 $ 164,979
Used vehicle sales ........................ 510,192 135,507 88,477
Parts and service sales ................... 139,144 30,006 20,649
Other dealership revenues, net ............ 49,516 10,410 7,387
------------ ------------ ------------
Total revenues ......................... 1,630,057 403,967 281,492
COST OF SALES:
New vehicle sales ......................... 857,109 212,349 152,709
Used vehicle sales ........................ 471,910 123,932 78,912
Parts and service sales ................... 64,528 13,085 10,277
------------ ------------ ------------
Total cost of sales .................... 1,393,547 349,366 241,898
------------ ------------ ------------
GROSS PROFIT ................................ 236,510 54,601 39,594
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES .................. 178,038 43,360 30,027
DEPRECIATION AND AMORTIZATION ............... 6,426 1,020 741
------------ ------------ ------------
Income from operations ................. 52,046 10,221 8,826
OTHER INCOME AND EXPENSES:
Floorplan interest expense ................ (12,837) (3,810) (3,112)
Other interest expense, net ............... (4,027) (176) (56)
Other income (expense), net ............... 39 156 (69)
------------ ------------ ------------
INCOME BEFORE INCOME TAXES .................. 35,221 6,391 5,589
PROVISION FOR INCOME TAXES .................. 14,502 573 382
------------ ------------ ------------
NET INCOME .................................. $ 20,719 $ 5,818 $ 5,207
============ ============ ============
S Corporation pro forma income taxes
(unaudited) .............................. 1,465 1,831
------------ ------------
Pro forma net income
(unaudited) .............................. $ 4,353 $ 3,376
============ ============
Earnings per share:
Basic ..................................... $ 1.20
Diluted ................................... $ 1.16
Weighted average shares outstanding:
Basic ..................................... 17,281,165
Diluted ................................... 17,904,878
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
43
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL RETAINED
-------------------------- PAID-IN EARNINGS TREASURY
SHARES AMOUNT CAPITAL (DEFICIT) STOCK TOTAL
----------- --------- ----------- ----------- --------- -----------
(dollars in thousands)
BALANCE, December 31, 1995 ....... 3,353,461 $ 34 $ 4,772 $ 3,815 $ -- $ 8,621
Net income ..................... -- -- -- 5,207 -- 5,207
Issuance of common
stock ....................... 216,841 2 1,498 -- -- 1,500
Dividends, prior to the
initial public offering ..... -- -- -- (3,118) -- (3,118)
----------- --------- ----------- ----------- --------- -----------
BALANCE, December 31, 1996 ....... 3,570,302 36 6,270 5,904 -- 12,210
Net income ..................... -- -- -- 5,818 -- 5,818
Acquisition of founding
companies ................... 5,954,613 60 33,294 -- -- 33,354
Initial public offering, net ... 5,148,136 51 51,707 -- -- 51,758
Purchase of treasury stock ..... -- -- -- -- (92) (92)
Stock transfer by
shareholder, net of tax ..... -- -- 575 -- -- 575
Dividends, prior to the
initial public offering ..... -- -- -- (14,251) -- (14,251)
----------- --------- ----------- ----------- --------- -----------
BALANCE, December 31, 1997 ....... 14,673,051 147 91,846 (2,529) (92) 89,372
Net Income ................... -- -- -- 20,719 -- 20,719
Issuance of common stock in
acquisitions ................ 3,516,805 35 26,770 -- -- 26,805
Proceeds from sales of
common stock under
employee benefit plans ...... 234,650 1 2,063 -- -- 2,064
Issuance of treasury stock
to employee benefit plan .... (156,991) -- (2,210) -- 2,210 --
Purchase of treasury stock ..... -- -- -- -- (2,776) (2,776)
----------- --------- ----------- ----------- --------- -----------
BALANCE, December 31, 1998 ....... 18,267,515 $ 183 $ 118,469 $ 18,190 $ (658) $ 136,184
=========== ========= =========== =========== ========= ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
44
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- --------
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................... $ 20,719 $ 5,818 $ 5,207
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization ................................... 6,426 1,020 741
Non-cash compensation, net of tax ............................... -- 575 --
Deferred income taxes ........................................... (4,201) (1,015) (316)
Provision for doubtful accounts and uncollectible notes ......... 356 270 108
Loss (gain) on sale of assets ................................... (115) (112) 18
Changes in assets and liabilities -
Accounts receivable ............................................. (4,544) 1,564 295
Inventories ..................................................... 44 5,686 (6,107)
Prepaid expenses and other assets ............................... (2,661) 3,609 (514)
Due from affiliates, net ........................................ -- 491 --
Floorplan notes payable ......................................... (1,730) (5,374) 5,508
Accounts payable and accrued expenses ........................... 9,983 (5,610) 2,392
-------- -------- --------
Total adjustments ........................................... 3,558 1,104 2,125
-------- -------- --------
Net cash provided by operating activities ................... 24,277 6,922 7,332
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable .................................... (2,276) (362) (235)
Collections on notes receivable ................................. 1,630 88 192
Purchases of property and equipment ............................. (9,695) (2,164) (1,977)
Proceeds from sale of property and equipment .................... 20,238 1,935 --
Cash paid in acquisitions, net of cash received ................. (68,122) 11,164 (2,595)
-------- -------- --------
Net cash provided by (used in) investing activities ......... (58,225) 10,661 (4,615)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under floorplan facility for acquisition financing ... 33,523 (33,523) --
Net borrowings on revolving credit facility ..................... 42,000 -- --
Principal payments of long-term debt ............................ (10,001) (471) (153)
Borrowings of long-term debt .................................... 490 109 213
Issuance of common stock to benefit plans ....................... 2,063 -- 1,500
Initial public offering, net .................................... -- 51,759 --
Purchase of treasury stock ...................................... (2,776) (92) --
Dividends paid in cash, prior to the initial public offering .... -- (11,952) (3,118)
-------- -------- --------
Net cash provided by (used in) financing activities ......... 65,299 5,830 (1,558)
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............................ 31,351 23,413 1,159
CASH AND CASH EQUIVALENTS, beginning of period ....................... 35,092 11,679 10,520
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period ............................. $ 66,443 $ 35,092 $ 11,679
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for -
Interest ........................................................ $ 15,218 $ 4,200 $ 3,118
Taxes ........................................................... $ 17,832 $ 131 $ 924
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
45
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDARIES
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 engaged in the retail sale of new and
used vehicles and the arranging of vehicle finance, insurance and service
contracts. In addition, the Company sells automotive parts and provides vehicle
servicing and collision repair.
During 1998, the Company acquired an additional 33 automobile
dealership franchises in exchange for a combination of restricted common stock
and cash.
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 and the subsequent acquisitions were accounted
for using the purchase method of accounting. The results of operations of the
Howard Group are included for all periods presented. 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 all acquisitions subsequent to October 31, 1997 are
included from the effective dates of the closings of the acquisitions. 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 predetermined financing rates set by the
financing institution. In addition, the Company receives commissions from the
sale of credit life and disability insurance and vehicle service contracts to
customers.
The Company may be charged back (chargebacks) for unearned financing
fees, insurance or vehicle 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
vehicle service contract revenues, net of estimated chargebacks, are included in
other dealership revenue in the accompanying consolidated 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, as well as
contracts in transit. Contracts in transit represent contracts on vehicles sold,
for which the proceeds are in transit from financing institutions.
F-7
46
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 lives 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 $2.2 million,
$170,000 and $37,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. Accumulated amortization totaled approximately $2.5 million and
$299,000 as of December 31, 1998 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 to hedge its exposure to changes in interest rates. The effect of
this swap is 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, 1998, 1997 and
1996 totaled $16.8, $5.9 and $3.2 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
47
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
significant estimates made by management in the accompanying financial
statements relate to reserves for 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. 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 31,1997 and 1996. The following table sets forth the shares outstanding
for the earnings per share calculations for the year ended December 31, 1998:
YEAR ENDED
DECEMBER 31, 1998
-----------------
Common stock outstanding, beginning of period ............................. 14,673,051
Weighted average common stock issued in acquisitions ................. 2,591,834
Weighted average common stock issued to employee stock
purchase plan ........................................................ 90,123
Weighted average common stock issued in stock option exercise ........ 15,953
Less: Weighted average treasury shares repurchased ................... (89,796)
-----------
Shares used in computing basic earnings per share ......................... 17,281,165
Dilutive effect of stock options, net of assumed repurchase
of treasury stock .................................................... 623,713
-----------
Shares used in computing diluted earnings per share ....................... 17,904,878
===========
Recent Accounting Pronouncements
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was
issued. SFAS No.130 requires the reporting of comprehensive income and its
components to be displayed with the same prominence as other financial
statements. This statement requires a company to classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the statement
of financial position. The Company adopted this statement for its fiscal year
ended December 31, 1998.
In June 1997, 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. The Company currently operates in only one segment.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments,
F-9
48
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires that an entity recognizes all derivatives as either assets or
liabilities in the statement of financial position and measures those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security or a
foreign currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative (that is, gains or losses) depends on the
intended use of the derivative and the resulting designation. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Management does not believe that the adoption of this statement will have a
material impact on the financial position or results of operations of the
Company.
Reclassifications
Certain reclassifications have been made to prior year financial
statements to conform them to the current year presentation.
3. BUSINESS COMBINATIONS:
During 1998, the Company acquired 33 automobile dealership franchises.
These acquisitions were accounted for as purchases. The consideration paid in
completing these acquisitions, including real estate acquired, included
approximately $68.1 million in cash, net of cash received, approximately 3.5
million shares of restricted common stock and the assumption of an estimated
$103.1 million in inventory financing and $2.9 million of mortgage financing.
Additional consideration may be paid based on the financial performance of
certain dealerships, over specified periods. Additional consideration, if any,
will be payable in cash and common stock and will result in an increase in
goodwill on the balance sheet of the Company. The accompanying consolidated
balance sheet includes preliminary allocations of the purchase price of the
acquisitions, which are subject to final adjustment. The preliminary allocations
resulted in recording approximately $98.7 million of goodwill, which is being
amortized over 40 years.
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 and the
subsequent acquisitions assuming the acquisitions occurred on January 1, 1998
and 1997, respectively, (2) the completion of the IPO as of January 1, 1997 and
(3) certain pro forma adjustments discussed below.
1998 1997
---------- ----------
(in thousands, except per share amounts)
(unaudited)
Revenues ......................... $1,853,693 $1,578,141
Gross profit ..................... 271,578 232,549
Income from operations ........... 60,599 51,817
Net income ....................... 23,195 18,617
Basic earnings per share ......... 1.28 1.03
Diluted earnings per share ....... 1.23 1.00
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 directly benefited the stockholders, and which were terminated
in conjunction with the acquisitions allowing the dealerships to 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
acquired companies will contractually receive; (d) incremental corporate
overhead costs related to personnel costs, rents, professional service fees and
directors and officers liability insurance premiums; (e) net increases in
interest expense resulting from net cash borrowings utilized to complete
acquisitions, partially offset by interest rate reductions received; and (f)
incremental provisions for federal and state income taxes relating to the
compensation differential, S Corporation income and other pro forma adjustments.
F-10
49
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts and notes receivable consist of the following:
DECEMBER 31,
----------------------
1998 1997
-------- --------
(in thousands)
Amounts due from manufacturers .............. $ 9,522 $ 3,889
Due from finance companies .................. 4,452 3,217
Parts and service receivables ............... 3,733 2,273
Other ....................................... 4,405 1,752
-------- --------
Total accounts and notes receivable ...... 22,112 11,131
Less - Allowance for doubtful accounts ...... (739) (520)
-------- --------
Accounts and notes receivable, net ....... $ 21,373 $ 10,611
======== ========
Inventories, net of valuation reserves, consist of the following:
DECEMBER 31,
----------------------
1998 1997
-------- --------
(in thousands)
New vehicles ................................ $155,088 $ 70,574
Used vehicles ............................... 44,384 25,690
Rental vehicles ............................. 7,228 2,495
Parts, accessories and other ................ 12,476 6,662
-------- --------
Total inventories ........................ $219,176 $105,421
======== ========
Accounts payable and accrued expenses consist of the following:
DECEMBER 31,
-------------------
1998 1997
------- -------
(in thousands)
Accounts payable, trade ..................... $31,362 $18,511
Accrued expenses ............................ 50,938 26,892
------- -------
Total accounts payable and accrued
expenses ............................ $82,300 $45,403
======= =======
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED DECEMBER 31,
USEFUL LIVES -----------------------------
IN YEARS 1998 1997
-------- ------- -------
(in thousands)
Land.................................. -- $2,130 $7,665
Buildings............................. 30 to 40 1,086 5,403
Leasehold improvements................ 7 to 15 6,940 3,808
Machinery and equipment............... 3 to 7 8,186 2,995
Furniture and fixtures................ 5 to 7 8,104 4,590
Company vehicles...................... 5 1,556 528
------- -------
Total 28,002 24,989
Less-- Accumulated depreciation....... (6,042) (3,403)
------- -------
Property and equipment, net......... $21,960 $21,586
======= =======
F-11
50
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FLOORPLAN NOTES PAYABLE:
Floorplan notes payable reflect amounts payable for the purchase of
specific vehicle inventory and consist of the following:
DECEMBER 31,
---------------------
1998 1997
-------- --------
(in thousands)
New vehicles ................................ $166,650 $ 42,918
Used vehicles ............................... 19,452 13,174
Rental vehicles ............................. 7,303 2,396
-------- --------
Total floorplan notes payable ...... $193,405 $ 58,488
======== ========
During 1998, the Company consolidated its floorplan notes payable under
its Revolving Credit Agreement with a bank group, maturing December 31, 2001
(the "Credit Facility"). These notes payable bear interest at the London
Interbank Offered Rate ("LIBOR") plus 150 basis points.
As of December 31, 1998 and 1997 the weighted average interest rate on
floorplan notes payable outstanding was 7.12% and 7.93%, respectively. The
floorplan arrangement permits the Company to borrow up to $295.0 million,
dependent upon new and used vehicle inventory levels. As of December 31, 1998,
total available borrowings under floorplan agreements were approximately $101.6
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.
7. LONG-TERM DEBT:
DECEMBER 31,
----------------------
1998 1997
-------- --------
(in thousands)
Credit Facility (described below) ..................... $ 42,000 $ --
Note payable to a bank with monthly principal
payments of $41,892, due through March
2004, bearing interest at 7.5%, payable
monthly ............................................. 2,592 3,138
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) ........................ -- 2,083
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
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
Note payable to a bank, with monthly
principal and interest payments of $5,831
due through February 2006, bearing interest
at 8.20% ............................................ -- 568
Other notes payable, maturing in varying
amounts through October 2004 with weighted
a average interest rate of 7.93% .................... 1,195 1,281
-------- --------
Total long-term debt .................................. 45,787 9,369
Less - Current portion .............................. (2,966) (2,316)
-------- --------
Long-term portion ..................................... $ 42,821 $ 7,053
======== ========
F-12
51
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The notes payable are secured by the land, buildings or other assets
for which the debt was incurred. In addition to floorplan notes payable, the
Credit Facility provides an acquisition line of credit of up to $130 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 the Company's option the acquisition line of credit
of the Credit Facility may bear interest based on the LIBOR 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. At
December 31, 1998, the interest rate on borrowings under the acquisition line of
credit of the Credit Facility was 7.37%.
Total interest expense on long-term debt was approximately $4.5
million, $176,000 and $56,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
The aggregate maturities of long-term debt as of December 31, 1998 are
as follows:
(in thousands)
1999 $ 2,966
2000 ...................... 693
2001 ...................... 42,078
2002 ...................... 18
2003 ...................... 17
Thereafter ................ 15
-------
Total long-term debt.... $45,787
=======
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 71,348 are available for future issuance as of
December 31, 1998. 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, 1998, the Company has granted options to
employees and directors covering an aggregate of 1,928,652 shares of common
stock. All outstanding options are exercisable over a period not to exceed 10
years and vest over three to six-year periods.
The following table summarizes the Company's outstanding stock options:
WEIGHTED
AVERAGE
NUMBER EXERCISE PRICE
--------- --------------
Options outstanding, December 31, 1996 ..................... 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, December 31, 1997 ..................... 1,247,450 7.88
Grants (exercise prices between $12.00 and $17.88
per share) ............................................ 780,850 16.16
Exercised ................................................ (49,973) 3.13
Forfeited ................................................ (99,648) 13.27
--------- ---------
Options outstanding, December 31, 1998 ..................... 1,878,679 $ 11.15
========== =========
At December 31, 1998, 208,460 options were exercisable at a weighted
average exercise price of $7.35. The weighted average exercise price of options
granted during the year ended December 31, 1997
F-13
52
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
was $8.86. The weighted average remaining contractual life of options
outstanding at December 31, 1998 is 9.0 years. The weighted average fair value
per share of options granted during the years ended December 31, 1998, 1997 and
1996 is $9.18, $5.94 and $0.45 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
not able to use the Black-Scholes model because estimating the expected
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, 1998, 1997 and 1996:
1998 1997 1996
---- ---- ----
Weighted average risk-free interest rate... 5.5% 5.9% 5.0%
Weighted average expected life of options.. 10 years 10 years 6 years
Weighted average expected volatility....... 42.8% 58.1% N/A
Weighted average expected dividends........ -- -- --
In September 1997, Group 1 adopted the Group 1 Automotive, Inc. 1998
Employee Stock Purchase Plan (the Purchase Plan). The Purchase Plan authorizes
the issuance of up to 200,000 shares of Common Stock and provides that no
options may be granted under the Purchase Plan after June 30, 2007. Effective as
of October 1, 1998, the Purchase Plan was amended to increase the number of
shares that may be issued under the Purchase Plan, subject to stockholder
approval, from 200,000 to 1,000,000. The Purchase Plan is available to all
employees of the Company and its participating subsidiaries and is a qualified
plan as defined by Section 423 of the Internal Revenue Code. At the end of each
fiscal quarter (Option Period) during the term of the Purchase Plan, the
employee contributions are used to acquire shares of Common Stock at 85% of the
fair market value of the Common Stock on the first or the last day of the Option
Period, whichever is lower. During 1998, the Company issued 184,677 shares of
Common Stock to employees participating in the Purchase Plan.
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which, if fully adopted,
requires the Company to record stock-based compensation at fair value. The
Company has adopted the disclosure requirements of SFAS No. 123 and has elected
to record employee compensation expense in accordance with 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. Additionally, no
compensation expense is recorded for shares issued pursuant to the Purchase Plan
as it is a qualified plan.
Had compensation expense for the 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,
-------------------------------
1998 1997
------- ------
(in thousands, except per
share amounts)
Net income as reported.......................... $20,719 $5,818
Pro forma net income under SFAS 123............. 19,519 5,451
Pro forma basic earnings per share.............. 1.13 --
Pro forma diluted earnings per share............ 1.09 --
F-14
53
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. 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 various dates through May 2028 and are
cancelable, at the Company's option, at various times during the lease term. In
general, the third-party leases are cancelable at the Company's option, at
various times during the lease term, and expire on various dates through January
2029.
During 1998 the Company entered into a sale and leaseback transaction
related to nine of its owned dealerships properties. As of December 31, 1998,
the transaction had been completed with respect to six of the nine properties.
Future minimum lease payments for operating leases are as follows:
RELATED
YEAR ENDED DECEMBER 31, PARTIES THIRD PARTIES TOTAL
----------------------- ------- ------------- --------
(in thousands)
1999................... $ 7,055 $ 7,643 $ 14,698
2000................... 6,826 7,492 14,318
2001................... 6,818 6,896 13,714
2002................... 6,820 6,589 13,409
20023.................. 6,980 6,280 13,260
Thereafter............. 38,340 52,994 91,334
-------- ------- --------
Total.................. $72,839 $87,894 $160,733
======== ======= ========
Total rent expense under all operating leases, including operating
leases with related parties, was approximately $11.1, $3.3 and $2.3 million for
the years ended December 31, 1998, 1997 and 1996, respectively. Rental expense
on related-party leases, which is included in the above amounts, totaled
approximately $8.3, $2.6 and $1.9 million for the years ended December 31, 1998,
1997 and 1996, respectively.
10. INCOME TAXES:
Federal and state income taxes are as follows:
DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
Federal -
Current .......... $ 15,478 $ 1,291 $ 587
Deferred ......... (3,465) (762) (262)
State -
Current .......... 3,225 297 111
Deferred ......... (736) (253) (54)
-------- -------- --------
Provision for
income taxes ....... $ 14,502 $ 573 $ 382
======== ======== ========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 35% in 1998 and 34% in
1996 and 1997 to income before income taxes as follows:
F-15
54
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,
--------------------------------
1998 1997 1996
------- ------- -------
(in thousands)
Provision at the statutory rate ........ $12,327 $ 2,173 $ 1,900
Increase (decrease) resulting
from --
Income of S Corporations ............. -- (1,269) (1,585)
State income tax, net of benefit
for federal deduction ............. 1,618 29 38
Deferred tax assets realized on
conversion of S Corporations
to C Corporations ................. -- (403) --
Non-deductible portion of
goodwill amortization ............. 339 -- --
Other ................................ 218 43 29
------- ------- -------
Provision for income taxes ............. $14,502 $ 573 $ 382
======= ======= =======
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets (liabilities) result principally from the following:
DECEMBER 31,
----------------------
1998 1997
-------- --------
(in thousands)
Inventory (LIFO conversion) ............... $ (2,981) $ (3,166)
Reserves and accruals not deductible
until paid ............................ 17,828 8,639
Depreciation .............................. (1,082) (645)
Goodwill .................................. (584) --
Other ..................................... (186) 166
-------- --------
Net deferred tax asset ................. $ 12,995 $ 4,994
======== ========
The net deferred tax assets (liabilities) are comprised of the
following:
DECEMBER 31,
----------------------
1998 1997
-------- --------
(in thousands)
Deferred tax assets -
Current ................................ $ 11,238 $ 10,220
Long-term .............................. 7,154 --
Deferred tax liabilities -
Current ................................ (26) (1,527)
Long-term .............................. (5,371) (3,699)
-------- --------
Net deferred tax asset .................. $ 12,995 $ 4,994
======== ========
11. 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 Company's financial
position or results of operations.
Insurance
Because of their vehicle inventory and nature of business, automobile
dealerships generally require significant levels of insurance covering a broad
variety of risks. The Company's insurance includes 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.
F-16
55
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loan Guarantees
One of the Company's dealerships provides 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 dealership. The dealership transfers the rights to the
future economic benefits related to the receivables; however, in the event that
the customer defaults on the note, the lender requires 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,
1998, total customer notes outstanding under this program were approximately
$12.3 million. Under the terms of the agreement with the lender, the total
customer notes outstanding may not exceed $12.5 million. The Company has
provided reserves for estimated future loan losses based on historical loss
trends, current economic conditions and total guarantees outstanding. This
financing arrangement represents approximately 1.0% of the Company's total
financing arranged.
12. SUBSEQUENT EVENTS (UNAUDITED):
Recent Acquisitions.
During 1999, the Company signed definitive purchase agreements related
to 28 dealership franchise acquisitions with revenues of approximately $700
million. Two of these acquisitions are new platforms representing 14 dealership
franchises in west Texas and north Florida. The remaining acquisitions are
tuck-ins, which will complement platform operations in Texas, Oklahoma, New
Mexico and Georgia. Two of the tuck-in acquisitions were closed during January
1999. These acquisitions will bring the total number of dealership franchises to
83 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, excluding the assumption of an
estimated $63.3 million of inventory financing, is approximately $91.0 million
in cash and 1.3 million shares of restricted common stock.
Recent Offerings.
In March 1999, the Company completed offerings of two million shares
of common stock and $100 million of 10-year senior subordinated notes carrying
an interest rate of 10 7/8%. Proceeds to the Company, before expenses, totaled
$138.9 million and were used to temporarily repay borrowings under the Credit
Facility. These proceeds are expected to be used in the future to complete
acquisitions, resulting in increased borrowings under the credit facility.
F-17
56
EXHIBIT INDEX
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).
4.2 -- Form of Subordinated Indenture (Incorporated by reference to Exhibit 4.5 of the Company's
Registration Statement on Form S-3 Registration No. 333-69693).
4.3 -- Form of Subordinated Debt Securities (included in Exhibit 4.2).
4.4 -- First Supplemental Indenture dated as of March 5, 1999 among Group 1 Automotive, Inc., the
Subsidiary Guarantors named therein and IBJ Whitehall Bank & Trust Company (Incorporated by
reference to Exhibit 4.1 of the Company's current report of Form 8-K dated March 5, 1999).
4.5 -- Form of 10 7/8% Senior Subordinated Note due March 1, 2009 (included in Exhibit 4.4).
10.1 -- Employment Agreement between the Company and B.B. Hollingsworth, Jr. dated November 3, 1997
(Incorporated by reference to Exhibit 10.1 of the Company's Annual Report on Form 10-K for the
year-ended December 31, 1997).
10.2 -- Employment Agreement between the Company and Robert E. Howard II dated November 3, 1997
(Incorporated by reference to Exhibit 10.2 of the Company's Annual Report on Form 10-K for the
year-ended December 31, 1997).
10.3 -- Employment Agreement between the Company and Sterling B. McCall, Jr. dated November 3, 1997
(Incorporated by reference to Exhibit 10.3 of the Company's Annual Report on Form 10-K for the
year-ended December 31, 1997).
10.4 -- Employment Agreement between the Company and Charles M. Smith dated November 3, 1997
(Incorporated by reference to Exhibit 10.4 of the Company's Annual Report on Form 10-K for the
year-ended December 31, 1997).
10.5 -- Employment Agreement between the Company and John T. Turner dated November 3, 1997
(Incorporated by reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K for the
year-ended December 31, 1997).
10.6 -- Employment Agreement between the Company and Scott L. Thompson dated November 3, 1997
(Incorporated by reference to Exhibit 10.6 of the Company's Annual Report on Form 10-K for the
year-ended December 31, 1997).
10.7 -- Employment Agreement between the Company and James S. Carroll dated March 16, 1998
(Incorporated by reference to Exhibit 10.8 of the Company's Annual Report on Form 10-K for the
year-ended December 31, 1997).
10.8 -- 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).
10.9 -- 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).
10.10 -- 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).
10.11 -- 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).
10.12 -- 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).
10.13 -- 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).
10.14 -- 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).
10.15 -- 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).
10.16 -- 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).
10.17 -- 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).
10.18 -- 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).
10.19 -- 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).
10.20 -- 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).
10.21 -- 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).
10.22 -- 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).
10.23 -- 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.
10.24 -- 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).
10.25 -- 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).
10.26 -- 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).
10.27 -- Lease Agreement between World Partner Enterprises Ltd. and Koons Ford, Inc. dated March 16,
1998 (Incorporated by reference to Exhibit 10.42 of the Company's Annual Report on Form 10-K
for the year-ended December 31, 1997).
10.28 -- Operations/Lease Agreement between K.C. Partnership and Perimeter Ford, Inc. dated March 16,
1998 (Incorporated by reference to Exhibit 10.43 of the Company's Annual Report on Form 10-K
for the year-ended December 31, 1997).
10.29 -- Lease Agreement between K.C. Partnership and Courtesy Ford, Inc. dated March 16, 1998
(Incorporated by reference to Exhibit 10.44 of the Company's Annual Report on Form 10-K for
the year-ended December 31, 1997).
10.30 -- Amended and Restated Sublease Agreement between Koons Development Co. and Koons Ford, Inc.
dated March 16, 1998 (Incorporated by reference to Exhibit 10.45 of the Company's Annual
Report on Form 10-K for the year-ended December 31, 1997).
10.31 -- 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 (Incorporated by
reference to Exhibit 10.46 of the Company's Annual Report on Form 10-K for the year-ended
December 31, 1997).
10.32 -- Second Amended and Restated Revolving Credit Agreement, dated as of November 10, 1998
(Incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K dated
December 11, 1998).
10.33 -- Stock Pledge Agreement dated December 19, 1997 (Incorporated by reference to Exhibit 10.54 of
the Company's Annual Report on Form 10-K for the year-ended December 31, 1997).
10.34 -- Swap Transaction Letter Agreement dated January 23, 1998 (Incorporated by reference to Exhibit
10.55 of the Company's Annual Report on Form 10-K for the year-ended December 31, 1997).
10.35 -- First Amendment to Group 1 Automotive, Inc. 1998 Employee Stock Purchase Plan.
10.36 -- Agreement between Nissan Motor Corporation in USA and Group 1 Automotive, Inc. dated April 28, 1998.
10.37 -- Employment Agreement between the Company and John S. Bishop dated October 7, 1998.
10.38 -- Form of Ford Motor Company Sales and Service Agreement.
10.39 -- Form of Chrysler Corporation Sales and Service Agreement.
11.1 -- Statement re: computation of earnings per share is included under Note 2 to the financial statements.
21.1 -- Group 1 Automotive, Inc. Subsidiary List.
23.1 -- Consent of Arthur Andersen LLP.
27.1 -- Financial Data Schedule.