-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BVT71LgOVWUL55c04HJQaUNEQVLHAV61TnywaeUCWc6MRZfErEevXmhoaxITOQvu oLMSUaZZ+N6xC69qiislSA== 0000950129-99-000410.txt : 19990209 0000950129-99-000410.hdr.sgml : 19990209 ACCESSION NUMBER: 0000950129-99-000410 CONFORMED SUBMISSION TYPE: 424B5 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19990208 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GROUP 1 AUTOMOTIVE INC CENTRAL INDEX KEY: 0001031203 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-AUTO DEALERS & GASOLINE STATIONS [5500] IRS NUMBER: 760506313 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B5 SEC ACT: SEC FILE NUMBER: 333-69693 FILM NUMBER: 99523247 BUSINESS ADDRESS: STREET 1: 950 ECHO LANE STREET 2: STE 350 CITY: HOUSTON STATE: TX ZIP: 77024 BUSINESS PHONE: 7134676268 MAIL ADDRESS: STREET 1: 950 ECHO LANE STREET 2: STE 350 CITY: HOUSTON STATE: TX ZIP: 77024 424B5 1 GROUP 1 AUTOMOTIVE, INC. - COMMON STOCK 1 Filed Pursuant to Rule 424(b)(5) File No. 333-69693 THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT DELIVER THESE SECURITIES UNTIL A FINAL PROSPECTUS SUPPLEMENT IS DELIVERED. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS ARE NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. Subject to Completion. Dated February 5, 1999. Prospectus Supplement to Prospectus Dated January 29, 1999. 2,000,000 Shares GROUP 1 AUTOMOTIVE, INC. Common Stock --------------------- The common stock is listed on the New York Stock Exchange under the symbol "GPI". The last reported sale price of the common stock on February 3, 1999 was $27 13/16 per share. You should read this prospectus supplement and the accompanying prospectus carefully before you invest, including the risk factors which begin on page S-8 of this prospectus supplement. --------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------------
PER SHARE TOTAL --------- ------ Initial public offering price............................... $ $ Underwriting discount....................................... $ $ Proceeds, before expenses, to Group 1....................... $ $
The underwriters may, under certain circumstances, purchase up to an additional 300,000 shares of Group 1 at the initial public offering price less the underwriting discount. --------------------- The underwriters expect to deliver the shares against payment in New York, New York on , 1999. GOLDMAN, SACHS & CO. MERRILL LYNCH & CO. NATIONSBANC MONTGOMERY SECURITIES LLC --------------------- Prospectus Supplement dated , 1999. 2 PROSPECTUS SUPPLEMENT SUMMARY This summary highlights selected information from this document and does not contain all of the information you need to consider in making your investment decision. To understand all of the terms of this offering and for a more complete understanding of the business of Group 1, you should read carefully this entire document, the accompanying prospectus and the documents incorporated by reference in this document and the prospectus. In addition to those described below, we use certain defined terms in this document for ease of reading and to avoid repetition. When we use the terms "Group 1", "we" or "us", we are referring to Group 1 Automotive, Inc. together with its consolidated subsidiaries, unless the context otherwise requires. Unless otherwise specified, all information in this prospectus supplement assumes no exercise of the underwriters' over-allotment option. THE COMPANY OVERVIEW Group 1 is a leading operator and consolidator in the highly fragmented automotive retailing industry. We currently own 63 dealership franchises comprised of 23 different brands of automobiles and 12 collision service centers located in Texas, Oklahoma, Florida, New Mexico, Georgia and Colorado. Our dealerships include the second largest Toyota dealership and the fifth largest Lexus dealership in the United States, as ranked by 1998 new retail unit sales. Through our dealerships, we sell new and used cars and light trucks, provide maintenance and repair services, sell replacement parts and arrange related financing, vehicle service contracts and insurance. Simultaneously with the closing of the initial public offering of our common stock in November 1997, we commenced dealership operations with the acquisition of four automobile dealership groups, known as our "founding groups", representing 30 automobile dealership franchises located in Texas and Oklahoma. In 1998, we acquired an additional 33 automobile dealership franchises in five states in ten separate acquisitions. Four of these acquisitions, consisting of 19 dealership franchises in Florida, Georgia, Texas, New Mexico and Colorado, were of dealership groups that are located in areas in which we had no operations or limited operations prior to the acquisition and serve as platforms for our operations in such areas. The other six acquisitions consisted of 14 dealership franchises acquired as "tuck-ins" to existing platforms. These acquired dealerships (excluding three immaterial tuck-in acquisitions of seven dealership franchises that had revenues of approximately $126 million in 1997) had combined, pro forma revenues of $675.8 million in 1997. In January 1999, we completed two tuck-in acquisitions consisting of four dealership franchises and entered into definitive agreements to acquire an additional 10 dealership franchises, including eight dealership franchises that will collectively serve as a new platform in west Texas. See "-- Recent Developments -- Pending and Recent Acquisitions". We believe that we are one of the ten largest automobile dealership retailers in the country in terms of revenues. We had revenues of $1,630.1 million and diluted earnings per share of $1.16 for the twelve months ended December 31, 1998. We believe that our strengths include: - our senior management's experience in consolidating and operating in highly fragmented industries; - the reputation and experience of our management and our dealership principals as leaders in the automotive retailing industry; - our ability to utilize equity incentives to attract and retain high quality personnel; S-1 3 - our dealerships' established customer base and local name recognition; - our brand and geographic diversity; - our ability to capitalize on economies of scale; - our ability to save costs by centralizing financing and certain administrative functions of our dealerships; and - our dealerships' proven ability to obtain high quality used vehicles at cost-effective prices through trade-ins and off-lease programs. We pursue a growth strategy led by a management team with extensive experience in consolidation and the management of growth companies led by B.B. Hollingsworth, Jr. Mr. Hollingsworth, Chairman of the Board, President and Chief Executive Officer of Group 1, has experience not only in the automotive retailing industry, but also in consolidating a major national industry. Mr. Hollingsworth served in various senior management capacities, including President, of Service Corporation International during its early growth period as the world's leading consolidator of the funeral industry. The U.S. automotive retailing industry is estimated to have annual sales in excess of $600 billion, with the 100 largest automobile dealership groups generating approximately 10% of total sales revenue and controlling approximately 6% of the 22,000 existing automobile dealership locations (representing approximately 49,000 dealership franchises). Sales by franchised automobile dealers are estimated to account for one-fifth of the nation's total retail sales of all products and merchandise. We believe that the enormous size and the fragmentation of the industry, together with the increasing cost of operating automobile dealerships, the lack of a viable exit strategy (especially for larger dealerships) and the aging of dealership owners create an attractive environment for our consolidation program. In addition, many successful and entrepreneurial "megadealers" have expressed interest in expanding their operations, but have been restrained by a lack of capital. We believe that we provide an attractive opportunity for these megadealers due to our origin as a series of similar megadealers, our access to the public capital markets, and the growth opportunities we offer these megadealers. 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 that includes 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 the management talent and proven operating capabilities of our dealership groups 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 dealership groups 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 significant portion of our acquisitions. In addition, we have a revolving credit facility, which, after this offering, will provide us with the ability to borrow up to $110 million for acquisitions. S-2 4 ENTERING NEW GEOGRAPHIC MARKETS. We intend to expand into geographic markets that 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 high quality personnel, and we attempt to retain this personnel. 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 well positioned to pursue larger, well established acquisition candidates because of our management depth, our capital structure and the reputation of our dealership principals as leaders in the automotive retailing industry. 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 facility and personnel utilization, vendor consolidation and advertising. 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 promote the widespread application of our 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 vendor consolidation, data processing, personnel utilization and advertising. 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 Group 1 as a result of our use of 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. Furthermore, we have benefitted from the consolidation of administrative functions such as risk management, employee benefits and employee training. For example, we negotiated insurance coverage that reduced our insurance costs by approximately 30 percent as compared to the annual insurance costs incurred by the founding groups and our acquisitions prior to our acquisition of them. 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, each platform also pursues an integrated, company-wide strategy which is designed to grow these higher margin businesses, enhance profitability and stimulate internal growth. With a competitive advantage in obtaining used vehicles, dealership franchises are especially well positioned to take advantage of 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 S-3 5 generate incremental revenues on each new or used vehicle sold by arranging vehicle service, insurance, finance and lease contracts on these vehicles. We have negotiated and are currently realizing increased commissions on vehicle service contract sales and on vehicle financing arrangements for certain customers. These increases represent revenue enhancements obtained through the consolidation of the dealerships. COMMITMENT TO CUSTOMER SERVICE. We focus on providing high quality customer service to meet the needs of our customers. Our dealerships strive to cultivate lasting relationships with their customers, and we believe these efforts increase our opportunities for significant repeat and referral business. For example, the dealerships regard their service and repair activities as an integral part of their overall approach to customer service. This approach provides us with an opportunity to foster ongoing relationships with customers and deepen customer loyalty. In addition, our dealerships continually review their selling procedures in an effort to better meet the needs of their customers. RECENT DEVELOPMENTS FINANCIAL RESULTS On February 3, 1999, we reported our financial results for the three months and the year ended December 31, 1998. The following table sets forth certain unaudited financial data reported for such periods:
THREE MONTHS ENDED TWELVE MONTHS ENDED DECEMBER 31, DECEMBER 31, -------------------- ---------------------- 1997 1998 1997 1998 -------- -------- -------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Total revenues......................... $213,245 $472,542 $902,295 $1,630,057 Gross profit........................... 29,531 69,173 127,131 236,510 Income from operations................. 5,348 14,366 25,412 52,046 Pretax income.......................... 3,945 9,248 19,380 35,221 Net income............................. 2,311 5,469 11,413 20,719 Basic earnings per share............... $ 0.16 $ 0.30 $ 0.78 $ 1.20 Diluted earnings per share............. 0.15 0.29 0.76 1.16 Gross margin........................... 13.8% 14.6% 14.1% 14.5% Operating margin....................... 2.5% 3.0% 2.8% 3.2% Pretax income margin................... 1.8% 2.0% 2.1% 2.2%
PENDING AND RECENT ACQUISITIONS In January 1999, we entered into definitive agreements to acquire 14 dealership franchises located in seven markets that had aggregate 1998 revenues of approximately $445 million. These acquisitions represent one platform acquisition in west Texas of eight dealership franchises and four tuck-in acquisitions of six other dealership franchises. The total consideration for the 14 dealership franchises will be approximately $59 million in cash and 750,000 shares of our common stock. In January 1999, we closed two of the tuck-in acquisitions consisting of four dealership franchises, as described below (the "Recent Acquisitions"). The other acquisitions that have not been completed (the "Pending Acquisitions") are subject to customary closing conditions, including approval of various manufacturers, government agencies and the completion of due diligence, and there can be no assurance that any of them will be completed. The Pending Acquisitions are expected to close before the end of the second quarter of 1999. S-4 6 Our Recent Acquisitions consist of: - Sunshine Pontiac, Buick and GMC, located in Albuquerque, New Mexico, which has been added to the Johns platform; and - South Pointe Chevrolet in Tulsa, Oklahoma, which has become a part of the Howard Group and will serve as a base to create a Tulsa platform. The following is a description of our Pending Acquisitions: The Messer Group Platform. The Messer Group has operations in Lubbock, Amarillo, and Rockwall, Texas and had 1998 revenues of approximately $270 million. The Messer Group consists of three Ford dealership franchises as well as Toyota, Mitsubishi, Cadillac, Jeep and Volkswagen dealership franchises. Greg Wessels, chief operating officer of the Messer Group, who has been with the Messer organization for over 20 years, will execute a long-term employment contract and his management team will continue to operate the dealerships. Pending Tuck-in Acquisitions. Our pending tuck-in acquisitions consist of: - Tidwell Ford in Atlanta, which will be added to the Carroll Platform; and - a BMW franchise in Beaumont, Texas, which will be added to our Beaumont platform (in exchange for our Lincoln and Mercury dealership franchises in Beaumont, Texas). None of the pro forma information contained in this prospectus supplement gives effect to any of the Recent Acquisitions or the Pending Acquisitions. NOTES OFFERING Concurrently with the offering of common stock being made by this prospectus supplement, we are offering $100 million principal amount of senior subordinated notes (the "Notes"). We expect to receive net proceeds of approximately $96 million from the Notes offering. We intend to use the proceeds from the Notes offering, if any, to reduce our debt outstanding under our credit facility. The Notes offering is being made by means of a separate prospectus supplement and this prospectus supplement does not constitute an offer to sell or the solicitation of an offer to buy the Notes. The consummation of the offering of the common stock made hereby is not conditioned on the completion of our Notes offering and we cannot give you any assurances that the Notes offering will be completed. THE OFFERING(1) Common stock offered by Group 1............................... 2,000,000 shares Common stock to be outstanding after the offering(2)........... 20,230,149 shares Use of proceeds................. To repay outstanding indebtedness under our revolving credit facility. We intend to subsequently reborrow the amounts repaid to fund acquisitions, including the Pending Acquisitions, and for other corporate purposes. NYSE symbol..................... GPI - --------------- (1) Assumes that the underwriters' over-allotment option to purchase up to an additional 300,000 shares is not exercised. (2) Based on the number of shares outstanding as of December 31, 1998. Excludes approximately 1,878,679 shares of common stock issuable upon exercise of outstanding options. S-5 7 SUMMARY PRO FORMA AND HISTORICAL CONSOLIDATED FINANCIAL DATA The following table presents certain pro forma and historical financial data of Group 1 as of and for each of the periods indicated. The founding groups income statement data gives effect to the acquisition of our founding groups in November 1997 and the application of the net proceeds from our initial public offering in November 1997 to repay certain outstanding indebtedness and to pay the cash portion of the purchase price for the founding groups as if such transactions had been consummated as of the beginning of each of the periods presented. The pro forma balance sheet data as adjusted for the common stock offering gives effect to: - the sale and leaseback of seven of our dealership properties consummated after September 30, 1998 and the application of the proceeds therefrom (collectively, the "Sale and Leaseback"); and - the sale of the common stock and the application of the assumed net proceeds of $51.6 million therefrom as described herein (based on an assumed initial public offering price for the common stock of $27 13/16 per share, which was the last reported sale price of the common stock on the New York Stock Exchange on February 3, 1999). The pro forma balance sheet data as adjusted for the common stock and Notes offerings gives effect to: - the Sale and Leaseback; - the sale of the common stock and the application of the assumed net proceeds of $51.6 million therefrom as described herein (based on an assumed initial public offering price for the common stock of $27 13/16 per share, which was the last reported sale price of the common stock on the New York Stock Exchange on February 3, 1999); and - the sale of the Notes and the application of the assumed net proceeds of $96.0 million therefrom as described herein. The following information should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Pro Forma Consolidated Financial Statements and notes thereto, included elsewhere in this prospectus supplement. S-6 8
FOUNDING GROUPS FOUNDING GROUPS HISTORICAL --------------- --------------- ------------- YEAR NINE MONTHS NINE MONTHS ENDED ENDED ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1997 1997 1998 --------------- --------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Revenues: New vehicle sales.................................... $ 513,864 $ 391,928 $ 662,323 Used vehicle sales................................... 288,010 220,735 363,096 Parts & service sales................................ 77,215 58,389 97,264 Other dealership revenue, net........................ 23,206 17,998 34,833 ----------- ----------- ----------- Total revenues................................ 902,295...... 689,050 1,157,516 Cost of sales.......................................... 775,164 591,450 990,179 ----------- ----------- ----------- Gross profit......................................... 127,131 97,600 167,337 Selling, general and administrative expenses........... 98,967 75,492 125,282 Depreciation and amortization.......................... 2,752 2,044 4,375 ----------- ----------- ----------- Income from operations............................... 25,412 20,064 37,680 Other income (expense): Floorplan interest expense........................... (5,194) (3,928) (8,994) Other interest expense, net.......................... (926) (684) (2,705) Other income (expense), net.......................... 88 (17) (8) ----------- ----------- ----------- Income before income taxes......................... 19,380 15,435 25,973 Provision for income taxes............................. 7,967 6,333 10,723 ----------- ----------- ----------- Net income.................................... $ 11,413 $ 9,102 $ 15,250 =========== =========== =========== Earnings per share on net income: Basic................................................ $ 0.78 $ 0.62 $ 0.90 Diluted.............................................. $ 0.76 $ 0.60 $ 0.87 Weighted average shares outstanding: Basic................................................ 14,672,804 14,673,051 16,957,327 Diluted.............................................. 15,098,594 15,101,510 17,538,446 OTHER DATA: Gross margin......................................... 14.1% 14.2% 14.5% Operating margin..................................... 2.8% 2.9% 3.3% Pretax income margin................................. 2.1% 2.2% 2.2%
PRO FORMA PRO FORMA AS ADJUSTED FOR AS ADJUSTED FOR COMMON COMMON STOCK AND HISTORICAL STOCK OFFERING NOTES OFFERINGS ------------------ ------------------ --------------------- AS OF AS OF AS OF SEPTEMBER 30, 1998 SEPTEMBER 30, 1998 SEPTEMBER 30, 1998 ------------------ ------------------ --------------------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital......................... $ 53,632 $ 65,077 $161,077 Total assets............................ 450,036 426,232 430,232 Floorplan debt.......................... 160,316 148,439 52,439 Acquisition debt........................ 56,000 -- -- Senior Subordinated Notes............... -- -- 100,000 Other debt.............................. 10,880 1,632 1,632 -------- -------- -------- Total debt.......................... 227,196 150,071 154,071 Stockholders' equity.................... 130,820 182,445 182,445
S-7 9 RISK FACTORS You should read carefully this entire document, the accompanying prospectus and the documents incorporated by reference in this document and the prospectus before investing in the common stock. MANUFACTURER RESTRICTIONS The following table sets forth the percentage of our new vehicle retail unit sales attributable to the manufacturers we represent:
PERCENTAGE OF OUR NEW VEHICLE PRO FORMA RETAIL UNITS FOR THE NINE MONTHS ENDED MANUFACTURER SEPTEMBER 30, 1998(1) ------------ --------------------- Ford........................................................ 25.7% Toyota/Lexus................................................ 19.3 Chrysler.................................................... 18.1 General Motors.............................................. 14.8 Nissan...................................................... 9.4 Honda/Acura................................................. 9.2 Other....................................................... 3.5 ----- Total....................................................... 100.0% =====
- --------------- (1) Does not give effect to the Recent Acquisitions or the Pending Acquisitions. The loss of our relationships with one or more of these named manufacturers could have an adverse effect on our business. The term Manufacturers in this prospectus supplement refers to all of the Manufacturers of new vehicles that we sell, including Ford Motor Company ("Ford"), General Motors Corporation ("GM"), DaimlerChrysler ("Chrysler"), Toyota Motor Corp. and Toyota Motor Sales, U.S.A., Inc. (collectively "Toyota"), Honda Motor Co., Ltd. and American Honda Motor Co., Inc. (collectively "Honda"), Nissan Motor Co., Ltd. and Nissan Motor North America, Inc. (collectively "Nissan"), Mitsubishi Motor Sales of America, Inc., American Isuzu Motors, Inc., American Suzuki Motor Corporation and Volvo Cars of North America, Inc. FRANCHISE AGREEMENTS. Each of our dealerships operates under a franchise agreement with one of our Manufacturers or authorized distributors of the Manufacturers. 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 change of ownership or management. While we believe that we will be able to renew all of our franchise agreements, we cannot guarantee that all of our franchise agreements will be renewed or that the terms of the renewals will be favorable to us. Our franchise agreements do not give us the exclusive right to sell a Manufacturer's product within a given geographic area. Accordingly, a Manufacturer may, subject to any protection of state law, grant another dealer a franchise to start a new dealership near one of our locations, or an existing dealer may move its dealership to a location which would compete directly with us. The location of new dealerships near our existing dealerships could adversely affect our operations. 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 S-8 10 Manufacturer for the acquisition of a dealership could take a significant amount of time or might be rejected entirely. Obtaining the approvals of the Manufacturers for the acquisition of our founding groups took almost one year. Although the Manufacturer approvals of our recent acquisitions have taken significantly less time, future approvals may not be prompt and such approvals may not ultimately be obtained. In determining whether to approve an acquisition, Manufacturers may consider many factors, including the moral character and business experience of the dealership principals and the financial condition, ownership structure and customer satisfaction index scores of our dealerships. Our Manufacturers attempt to measure customers' satisfaction with automobile dealerships through systems generally known as the customer satisfaction index or "CSI". The Manufacturers have modified the components of their CSI scores from time to time in the past, and they may replace them with different systems. Failure of our dealerships to comply with a Manufacturer's CSI standards could adversely affect our ability to acquire additional dealerships. In addition, a Manufacturer may limit the total 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 and Lincoln 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 the 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 S-9 11 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. 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. 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 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. The proposed new agreement contains additional restrictions in various geographic markets. We are continuing to negotiate with Honda on these geographic restrictions as well as other restrictions on the number of dealerships that we may acquire. 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. We currently own six Ford, one Lincoln, one Mercury, 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 and Lincoln 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 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. We have not negotiated or executed the proposed new agreement, nor have we obtained Honda's consent for this offering. If Honda were to claim that we breached its existing agreement with us by consummating this offering and seek to enforce its remedies, we could be adversely affected. 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. For the nine-month period ended September 30, 1998, our Honda and Acura dealerships represented approximately 8.9% and 8.4% of our pro forma revenues and operating income, respectively. 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 are continuing to negotiate with Honda on the terms of the proposed new agreement. S-10 12 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 has 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 acquisitions 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: - 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); - certain material changes in us or extraordinary corporate transactions such as a merger or sale of a material amount of our assets; - the removal of a dealership general manager without the consent of the Manufacturer; - the use of dealership facilities to sell or service new vehicles of other Manufacturers in certain situations; and - changes 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 failure to meet these restrictions may adversely affect our business and acquisition strategy. 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 a reasonable likelihood of acquiring, a controlling interest in us. We are required to notify Honda with respect to any such acquisition or proposed acquisition, and if Honda does not approve of the acquisition, we are required to use our best efforts to prevent the acquisition or, if the acquisition has already occurred, to 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 S-11 13 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 proposed 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: - 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. - 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. Our Manufacturer agreements also specify that we cannot operate a dealership franchised by another Manufacturer in the same building as that Manufacturer's franchised dealership in certain situations. 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. DEPENDENCE ON ACQUISITIONS FOR GROWTH Growth in our revenues and earnings depends substantially on our ability to acquire and successfully operate dealerships. We cannot guarantee that we will be able to identify and acquire dealerships in the future. In addition, managing and integrating additional dealerships into our existing mix of dealerships may result in substantial costs, delays or other operational or financial problems. Restrictions by our Manufacturers as well as covenants contained in our debt instruments limit our ability to acquire additional dealerships. In addition, increased competition for acquisition candidates may develop, which could result in fewer acquisition opportunities available to us and higher acquisition prices. Acquisitions involve a number of additional risks, including: - diversion of our resources and our management's attention, - our possible inability to retain key personnel of the acquired dealership, and - unanticipated events or liabilities. S-12 14 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 future acquisitions by issuing shares of common stock as full or partial consideration for acquired dealerships. The extent to which we will be able or willing to issue common stock for acquisitions will depend on the market value of the common stock from time to time and the willingness of potential acquisition candidates to accept common stock as part of the consideration for the sale of their businesses. If potential acquisition candidates are unwilling to accept our common stock, we will be forced to rely solely on available cash or debt or equity financing, which could adversely affect our acquisition program. Accordingly, our ability to make acquisitions could be adversely affected if the price of our common stock declines. 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. RISKS OF IMPORTING PRODUCTS A significant portion of our new vehicle business involves the sale of vehicles, vehicle parts or vehicles composed of parts that are manufactured outside the United States. As a result, our operations are subject to customary risks associated with imported merchandise, including fluctuations in the value of currencies, import duties, exchange controls, trade restrictions, work stoppages and general political and economic conditions in foreign countries. The United States or the countries from which our products are imported may, from time to time, impose new quotas, duties, tariffs or other restrictions, or adjust presently prevailing quotas, duties or tariffs on imported merchandise. Any of those impositions or adjustments could affect our operations and our ability to purchase imported vehicles and parts. This, in turn, could have an adverse effect on our business. FLUCTUATIONS IN PROFITABILITY The automobile industry is cyclical and historically has experienced downturns characterized by oversupply and weak demand. Many factors affect the industry, including general economic conditions, consumer confidence, personal discretionary spending levels, interest rates and credit S-13 15 availability. We cannot guarantee that the industry will not experience sustained periods of decline in vehicle sales in the future. Any such decline could have an adverse effect on our business. The automobile industry also experiences seasonal variations in revenue. Demand for automobiles is generally lower during the winter months than in other seasons, particularly in regions of the United States associated with harsh winters. Accordingly, we expect revenues and operating results generally to be lower in our first and fourth quarters than in our second and third quarters. 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 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. LIMITED COMBINED OPERATING HISTORY We were incorporated in December 1995 and commenced dealership operations in November 1997 with the acquisition of the founding groups. The founding groups had been owned, operated and managed as separate independent entities prior to their acquisition by us. We have made a number of additional acquisitions of automobile dealerships since we acquired the founding groups. We intend to continue to acquire additional dealerships. Our future operating results will depend in part on our ability to integrate the operations of those businesses and manage the combined enterprise. Our management group has been working together since December 1996. We cannot guarantee that our management team will be able to effectively and profitably integrate the founding groups and our other acquisitions or to effectively manage the combined entity. Their inability to do so could adversely affect our business. SUBSTANTIAL COMPETITION The automotive retailing industry is highly competitive with respect to price, service, location and selection. We compete with automobile dealerships (including other public franchised dealership consolidators), private market buyers and sellers of used vehicles, used vehicle dealerships, service center chains and independent service and repair shops. In the new vehicle area, we compete with other franchised dealers. S-14 16 We do not have any cost advantage in purchasing new vehicles from the manufacturers and typically rely on advertising, merchandising, sales expertise, service reputation and dealership location to sell new vehicles. In recent years, our dealerships have also faced competition from non-traditional sources such as companies that sell automobiles on the Internet, automobile rental agencies, independent leasing companies, used-car "superstores" and price clubs associated with established consumer agencies, such as the American Automobile Association. Some of these competitors use non-traditional sales techniques such as one-price shopping. In addition, Ford has begun owning and operating automobile dealerships for the purpose of consolidating Ford dealerships. For example, Ford has acquired dealerships in Tulsa, Oklahoma and has entered into an agreement with Republic Industries, Inc. to jointly acquire Ford dealerships in Rochester, New York. Ford has also announced that it is exploring the possibility of going into business with some of its dealers to create automotive superstores in selected markets. Some of our competitors, including these recent market entrants, may have greater financial, marketing and personnel resources than us and lower overhead and sales costs. In the parts and service area, we also compete with a number of regional or national chains which offer selected parts and services at prices that may be lower than our prices. We cannot guarantee that our strategy will be more effective than the strategies of our competitors. RELIANCE ON KEY PERSONNEL We depend to a large extent upon the abilities and continued efforts of our executive officers, senior management and principals of our dealerships. Furthermore, we will likely be dependent on the senior management of any dealerships acquired in the future. If any of those persons leave or if we fail to attract and retain other qualified employees, our business could be adversely affected. Although we have entered into employment agreements with each of our executive officers and some of the principals of our dealerships, we cannot guarantee that any individual will continue in his present capacity with us for any particular period of time. We currently have no key man insurance for any of our officers or senior management. YEAR 2000 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 interpreted 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 recognize the need to ensure that our computer systems, equipment and operations will not be adversely impacted by the change to the calendar year 2000. In this regard, we have taken steps to identify potential areas of risk and have begun addressing these in our planning, purchasing and daily operations. We have not quantified the total cost of converting all internal systems, equipment and operations for the year 2000, but we do not believe that the cost will be material to our financial position. In connection with acquisitions, we review and address the candidate's year 2000 readiness during the due diligence process. We are currently reviewing the potential adverse impact on us of the failure of our third party service providers or vendors to address any of their year 2000 issues. We are dependent upon our dealerships' computer systems in our daily operations. All our dealerships are, or are S-15 17 expected to be, using a computer system supported by a major automobile dealership computer system provider. We have contacted each of these providers and have received assurance from the providers 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. In addition, we are dependent on our 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. Failure by us, our Manufacturers or our third party service providers and vendors to adequately address the year 2000 issue could have an adverse effect on us. GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL RISKS We are subject to a wide range of federal, state and local laws and regulations, such as local licensing requirements, consumer protection laws and environmental requirements governing, among other things, discharges to the air and water, the storage of petroleum substances and chemicals, the handling and disposal of wastes, and the remediation of contamination arising from spills and releases. The violation of those laws and regulations could result in civil and criminal penalties being levied against us or in a cease and desist order against operations that are not in compliance. Future acquisitions by us may also be subject to governmental regulation, including antitrust reviews. Although we believe that we substantially comply with all applicable laws and regulations relating to our business, future laws and regulations or changes to existing laws or regulations may be more stringent and require us to incur significant additional costs. A TAKEOVER OF GROUP 1 WOULD BE DIFFICULT We have adopted a stockholder rights plan. This plan and certain provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire control of Group 1, even if such change of control would be beneficial to stockholders. These include provisions: - providing for a board of directors with staggered, three-year terms, permitting the removal of a director from office only for cause; - allowing only the board of directors to set the number of directors; - requiring super-majority or class voting to effect certain amendments to our certificate of incorporation and bylaws; - limiting the persons who may call special stockholders' meetings; - limiting stockholder action by written consent; - establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholders' meetings; and - allowing our board of directors to issue shares of preferred stock without stockholder approval. Certain of our dealer agreements prohibit the acquisition of more than a specified percentage of common stock without the consent of the relevant Manufacturer. In addition, the terms of the Notes will require us to offer to purchase the Notes at a price of 101% plus accrued interest to the purchase date in the event of a change of control of Group 1. These terms of our dealer agreements and the Notes could make it more difficult for a third party to acquire control of Group 1. S-16 18 HIGH LEVERAGE As of December 31, 1998, we had $239.2 million of debt outstanding. Giving effect to this offering and the Notes offering, our outstanding debt would have been approximately $191.6 million or approximately 51% of our capitalization. In addition, the indenture for the Notes and our other debt instruments permit us to incur additional debt under certain circumstances. Our ability to meet our debt service obligations depends on our future performance. Our future performance is influenced by general economic conditions and by financial, business and other factors affecting our operations, many of which are beyond our control. If we are unable to service our debt, we may have to: - delay our acquisition program; - sell our equity securities; - sell our assets; or - restructure or refinance our debt. We cannot give you any assurances that, if we are unable to service our debt, we will be able to sell our equity securities, sell our assets or restructure or refinance our debt. Our substantial debt could have important consequences to you. For example, it could: - make it more difficult for us to obtain additional financing in the future for our acquisitions and operations; - require us to dedicate a substantial portion of our cash flows from operations to the repayment of our debt and the interest associated with our debt; - limit our operating flexibility due to financial and other restrictive covenants, including restrictions on incurring additional debt, creating liens on our properties and paying dividends; - subject us to risks that interest rates and our interest expense will increase; - place us at a competitive disadvantage compared to our competitors that have less debt; and - make us more vulnerable in the event of a downturn in our business. CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS This prospectus supplement and the accompanying prospectus contains statements that constitute "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 prospectus supplement and the accompanying prospectus 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: - future acquisitions; - expected future cost savings; - future capital expenditures; - trends affecting our future financial condition or results of operations; and - our business strategy regarding future operations. S-17 19 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: - industry conditions; - future demand for new and used vehicles; - restrictions imposed on us by automobile manufacturers; - the ability to obtain the consents of automobile manufacturers to our acquisitions; - the availability of capital resources; and - the willingness of acquisition candidates to accept our common stock as currency. The information contained in this prospectus supplement and the accompanying prospectus, including the information set forth under the heading "Risk Factors", 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 expressly qualified in their entirety by this cautionary statement. PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY 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 15/16 Third Quarter.......................................... 18 1/2 11 3/8 Fourth Quarter......................................... 26 12 15/16 1999: First Quarter (through February 3, 1999)............... 30 24 7/16
On February 3, 1999, the last reported sale price of the common stock on the New York Stock Exchange was $27 13/16 per share. As of December 31, 1998, there were 18,230,149 shares of common stock outstanding held by approximately 158 holders of record. We have never paid a cash dividend on our common stock. We currently intend to retain earnings to finance the growth and development of our business, including future acquisitions, and do not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, certain provisions of our credit facility and the Notes provide certain restrictions on the payment of dividends on our common stock. Any future change in our dividend policy will be made at the discretion of our board of directors in light of our financial condition, capital requirements, earnings and prospects and any restrictions under credit agreements and the Notes, as well as other factors they may deem relevant. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources". S-18 20 USE OF PROCEEDS We expect to receive approximately $51.6 million of net proceeds from this offering ($59.5 million if the underwriters' over-allotment option is exercised in full) and $96.0 million of net proceeds from the Notes offering (based on an assumed initial public offering price for the common stock of $27 13/16 per share, which was the last reported sale price for the common stock on the New York Stock Exchange on February 3, 1999, and an initial public offering price for the Notes of 100%, less in each case estimated offering expenses and underwriters' discount). We intend to (1) use a portion of these net proceeds to repay all borrowings outstanding under the acquisition portion of our credit facility, which was $42.0 million as of December 31, 1998 and (2) use the remaining net proceeds to reduce our outstanding borrowings under the floorplan portion of our credit facility. At December 31, 1998, the effective interest rates on borrowings under the floorplan portion of our credit facility and the acquisition portion of our credit facility were 7.12%, and 7.37%, respectively. In the event that the Notes offering is not consummated, we intend to (1) use a portion of the net proceeds of the common stock offering to repay all borrowings outstanding under the acquisition portion of our credit facility and (2) use the remaining net proceeds to reduce our outstanding borrowings under the floorplan portion of our credit facility. We intend to pursue acquisitions in the future which will be financed with common stock, cash (including cash obtained from borrowings under our credit facility) or a combination of both common stock and cash. We have identified and held preliminary discussions with numerous potential acquisition candidates. As described above, we have entered into definitive agreements with respect to the Recent Acquisitions (which have been completed) and the Pending Acquisitions to acquire 14 dealership franchises for a total consideration of $59 million in cash and 750,000 shares of common stock. See "Prospectus Supplement Summary -- Recent Developments -- Pending and Recent Acquisitions". We intend to subsequently reborrow the amounts repaid with the net proceeds from this offering and the Notes offering to fund acquisitions, including the Pending Acquisitions, and for other corporate purposes. See "Description of Credit Facility". S-19 21 CAPITALIZATION The following table sets forth, as of September 30, 1998, our short-term debt (including current portion of long-term debt), long-term debt and capitalization (1) on an historical basis, (2) on a pro forma basis to give effect to the Sale and Leaseback, (3) on the pro forma basis described in clause (2) above as adjusted to give effect to the sale of the common stock and the application of the assumed net proceeds therefrom as described herein and (4) on the pro forma basis described in clause (2) above as adjusted to give effect to the sale of the common stock and the Notes and the application of the assumed net proceeds therefrom as described herein.
AS OF SEPTEMBER 30, 1998 ---------------------------------------------------------- PRO FORMA PRO FORMA AS ADJUSTED FOR AS ADJUSTED FOR COMMON STOCK COMMON STOCK AND NOTES HISTORICAL PRO FORMA OFFERING OFFERINGS ---------- --------- --------------- --------------- (IN THOUSANDS) Short-term debt: Current portion of long-term debt....... $ 1,487 $ 223 $ 223 $ 223 Floorplan facility...................... 160,316 160,316 148,439 52,439 -------- -------- -------- -------- Total short-term debt........... 161,803 160,539 148,662 52,662 Long-term debt: Acquisition facility.................... 56,000 39,748 -- -- Other long-term debt.................... 9,393 1,409 1,409 1,409 Notes................................... -- -- -- 100,000 -------- -------- -------- -------- Total long-term debt................. 65,393 41,157 1,409 101,409 -------- -------- -------- -------- Total debt...................... 227,196 201,696 150,071 154,071 Stockholders' equity: Preferred stock, par value $.01 per share, 1,000,000 shares authorized; no shares issued and outstanding..... -- -- -- -- Common stock, par value $.01 per share, 50,000,000 shares authorized; 18,240,795 shares issued and outstanding, actual; 20,240,795 shares issued and outstanding, pro forma as adjusted for the common stock offering(1).................... 182 182 202 202 Additional paid-in capital.............. 118,509 118,509 170,114 170,114 Treasury stock.......................... (592) (592) (592) (592) Retained earnings....................... 12,721 12,721 12,721 12,721 -------- -------- -------- -------- Total stockholders' equity........... 130,820 130,820 182,445 182,445 -------- -------- -------- -------- Total capitalization............ $358,016 $332,516 $332,516 $336,516 ======== ======== ======== ========
- --------------- (1) Excludes (a) an aggregate of 1,878,679 shares of common stock subject to options granted pursuant to our 1996 Stock Incentive Plan and (b) an additional 72,601 shares of common stock reserved for issuance under the 1996 Stock Incentive Plan. S-20 22 PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS The following pro forma consolidated financial statements present certain pro forma financial information of Group 1 as of and for each of the periods indicated. The pro forma statements of operations data give effect to the following transactions that occurred after the beginning of the period presented as if they had occurred as of the beginning of such period: - the acquisitions of our founding groups in November 1997; - the application of the net proceeds from our initial public offering in November 1997 to repay certain indebtedness and pay the cash portion of the purchase price of the founding groups; - all of the dealership acquisitions that we have completed since our initial public offering except for three immaterial tuck-in acquisitions of seven dealership franchises completed in 1998 and the Recent Acquisitions; - the Sale and Leaseback; - the sale of the common stock in this offering and the application of the assumed net proceeds of $51.6 million therefrom as described herein (based on an assumed initial public offering price for the common stock of $27 13/16 per share, which was the last reported sale price of the common stock on the New York Stock Exchange on February 3, 1999); and - the sale of the Notes and the application of the assumed net proceeds of $96.0 million therefrom as described herein. The pro forma balance sheet data gives effect to the following transactions as if they had occurred as of September 30, 1998: - the Sale and Leaseback; - the sale of the common stock in this offering and the application of the assumed net proceeds of $51.6 million therefrom as described herein (based on an assumed initial public offering price for the common stock of $27 13/16 per share, which was the last reported sale price of the common stock on the New York Stock Exchange on February 3, 1999); and - the sale of the Notes and the application of the assumed net proceeds of $96.0 million therefrom as described herein. Neither the pro forma statements of operations data nor the pro forma balance sheet data give effect to the Recent Acquisitions or the Pending Acquisitions. The pro forma financial information referred to above will not be comparable to and may not be indicative of our financial position or results of operations for any future period since the founding groups and the other dealerships we have acquired were not under common control of management. S-21 23 PRO FORMA STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1997 --------------------------------------------------------------------------- ACQUISITIONS COMMON PRO FORMA AND SALE- STOCK AS LEASEBACK FINANCING REPORTED(1) ACQUISITIONS(2) ADJUSTMENTS PRO FORMA ADJUSTMENTS ----------- --------------- ------------ ----------- ----------- Revenues: New vehicle sales.............. $ 513,864 $388,312 $ -- $ 902,176 $ -- Used vehicle sales............. 288,010 193,296 -- 481,306 -- Parts & service sales.......... 77,215 73,213 -- 150,428 -- Other dealership revenues, net.......................... 23,206 17,772 3,253(a) 44,231 -- ---------- -------- ------- ---------- ------- Total revenues........... 902,295 672,593 3,253 1,578,141 -- Cost of sales................... 775,164 570,976 (548)(b) 1,345,592 -- ---------- -------- ------- ---------- ------- Gross profit................... 127,131 101,617 3,801 232,549 -- Selling general and administrative expenses........ 98,967 79,432 (2,039)(c)(d) 176,360 -- Depreciation and amortization... 2,752 1,852 1,671(d)(e) 6,275 -- ---------- -------- ------- ---------- ------- Income from operations... 25,412 20,333 4,169 49,914 -- Other income (expense): Floorplan interest expense..... (5,194) (8,547) (921)(f) (14,662) 678(i) Other interest expense, net.... (926) (667) (2,532)(d)(g) (4,125) 3,145(i) Other income, net.............. 88 6 -- 94 -- ---------- -------- ------- ---------- ------- Income before taxes............ 19,380 11,125 716 31,221 3,823 Provision for income taxes...... 7,967 407 4,364(h) 12,738 1,510(k) ---------- -------- ------- ---------- ------- Net income............... $ 11,413 $ 10,718 $(3,648) $ 18,483 $ 2,313 ========== ======== ======= ========== ======= Earnings per share: Basic.......................... $ 0.78 $ 1.02 Diluted........................ $ 0.76 $ 0.99 Weighted average shares outstanding: Basic.......................... 14,672,804 18,132,991 Diluted........................ 15,098,594 18,693,171 YEAR ENDED DECEMBER 31, 1997 ----------------------------------------- PRO FORMA PRO FORMA AS ADJUSTED AS ADJUSTED FOR FOR NOTES COMMON STOCK COMMON STOCK FINANCING AND NOTES OFFERING ADJUSTMENTS OFFERINGS ------------ ----------- ------------ Revenues: New vehicle sales.............. $ 902,176 $ $ 902,176 Used vehicle sales............. 481,306 -- 481,306 Parts & service sales.......... 150,428 -- 150,428 Other dealership revenues, net.......................... 44,231 -- 44,231 ---------- -------- ---------- Total revenues........... 1,578,141 -- 1,578,141 Cost of sales................... 1,345,592 -- 1,345,592 ---------- -------- ---------- Gross profit................... 232,549 -- 232,549 Selling general and administrative expenses........ 176,360 -- 176,360 Depreciation and amortization... 6,275 -- 6,275 ---------- -------- ---------- Income from operations... 49,914 -- 49,914 Other income (expense): Floorplan interest expense..... (13,984) 6,912(i) (7,072) Other interest expense, net.... (980) (10,500)(j) (11,480) Other income, net.............. 94 -- 94 ---------- -------- ---------- Income before taxes............ 35,044 (3,588) 31,456 Provision for income taxes...... 14,248 (1,417)(k) 12,831 ---------- -------- ---------- Net income............... $ 20,796 $ (2,171) $ 18,625 ========== ======== ========== Earnings per share: Basic.......................... $ 1.03 $ 0.93 Diluted........................ $ 1.00 $ 0.90 Weighted average shares outstanding: Basic.......................... 20,132,991 20,132,991 Diluted........................ 20,693,171 20,693,171
- --------------- (1) Represents the Pro Forma Statement of Operations for the acquisition of our founding groups and the application of the net proceeds from our initial public offering as presented in our December 31, 1997 Annual Report on Form 10-K. (2) Represents the pre-acquisition operations of all of the dealerships that we have acquired since our initial public offering except for three immaterial tuck-in acquisitions completed in 1998 and the Recent Acquisitions. We do not have sufficiently detailed financial information to include their results in the pro forma financial information. These excluded acquisitions had estimated aggregate revenues of approximately $215 million for the year ended December 31, 1997. S-22 24 PRO FORMA STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30, 1997 ---------------------------------------------------------------------------- ACQUISITIONS COMMON PRO FORMA AND SALE- STOCK AS LEASEBACK FINANCING REPORTED(1) ACQUISITIONS(2) ADJUSTMENTS PRO FORMA ADJUSTMENTS ----------- --------------- ------------ ------------ ----------- Revenues: New vehicle sales................... $ 391,928 $295,523 $ -- $ 687,451 $ -- Used vehicle sales.................. 220,735 149,042 -- 369,777 -- Parts & service sales............... 58,389 54,919 -- 113,308 -- Other dealership revenues, net...... 17,998 13,389 2,416(a) 33,803 -- ---------- -------- ------- ---------- ------ Total revenues................ 689,050 512,873 2,416 1,204,339 -- Cost of sales........................ 591,450 436,309 -- 1,027,759 -- ---------- -------- ------- ---------- ------ Gross profit........................ 97,600 76,564 2,416 176,580 -- Selling general and administrative expenses............................ 75,492 59,816 (1,558)(c)(d) 133,750 -- Depreciation and amortization........ 2,044 1,308 1,254(d)(e) 4,606 -- ---------- -------- ------- ---------- ------ Income from operations............ 20,064 15,440 2,720 38,224 -- Other income (expense): Floorplan interest expense.......... (3,928) (6,529) (689)(f) (11,146) 679(i) Other interest expense, net......... (684) (319) (2,091)(d)(g) (3,094) 2,358(i) Other income (expense), net......... (17) 12 -- (5) -- ---------- -------- ------- ---------- ------ Income before taxes............... 15,435 8,604 (60) 23,979 3,037 Provision for income taxes........... 6,333 201 3,249(h) 9,783 1,199(k) ---------- -------- ------- ---------- ------ Net income........................ $ 9,102 $ 8,403 $(3,309) $ 14,196 $1,838 ========== ======== ======= ========== ====== Earnings per share: Basic............................... $ 0.62 $ 0.78 Diluted............................. $ 0.60 $ 0.76 Weighted average shares outstanding: Basic............................... 14,673,051 18,133,238 Diluted............................. 15,101,510 18,696,087 NINE MONTHS ENDED SEPTEMBER 30, 1997 ----------------------------------------- PRO FORMA PRO FORMA AS AS ADJUSTED ADJUSTED FOR FOR COMMON COMMON NOTES STOCK AND STOCK FINANCING NOTES OFFERING ADJUSTMENTS OFFERINGS ------------ ----------- ------------ Revenues: New vehicle sales................... $ 687,451 $ -- $ 687,451 Used vehicle sales.................. 369,777 -- 369,777 Parts & service sales............... 113,308 -- 113,308 Other dealership revenues, net...... 33,803 -- 33,803 ---------- ------- ---------- Total revenues................ 1,204,339 -- 1,204,339 Cost of sales........................ 1,027,759 -- 1,027,759 ---------- ------- ---------- Gross profit........................ 176,580 -- 176,580 Selling general and administrative expenses............................ 133,750 -- 133,750 Depreciation and amortization........ 4,606 -- 4,606 ---------- ------- ---------- Income from operations............ 38,224 -- 38,224 Other income (expense): Floorplan interest expense.......... (10,467) 5,015(i) (5,452) Other interest expense, net......... (736) (7,875)(j) (8,611) Other income (expense), net......... (5) -- (5) ---------- ------- ---------- Income before taxes............... 27,016 (2,860) 24,156 Provision for income taxes........... 10,982 (1,130)(k) 9,852 ---------- ------- ---------- Net income........................ $ 16,034 $(1,730) $ 14,304 ========== ======= ========== Earnings per share: Basic............................... $ 0.80 $ 0.71 Diluted............................. $ 0.77 $ 0.69 Weighted average shares outstanding: Basic............................... 20,133,238 20,133,238 Diluted............................. 20,696,087 20,696,087
- --------------- (1) Represents the Pro Forma Statement of Operations for the acquisition of our founding groups and the application of the net proceeds from our initial public offering as presented in our September 30, 1998 Quarterly Report on Form 10-Q. (2) Represents the pre-acquisition operations of all of the dealerships that we have acquired since our initial public offering except for three immaterial tuck-in acquisitions completed in 1998 and the Recent Acquisitions. We do not have sufficiently detailed financial information to include their results in the pro forma financial information. These excluded acquisitions had estimated aggregate revenues of approximately $215 million for the year ended December 31, 1997. S-23 25 PRO FORMA STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30, 1998 ------------------------------------------------------------------------------ COMMON ACQUISITIONS AND STOCK SALE-LEASEBACK FINANCING HISTORICAL(1) ACQUISITIONS(2) ADJUSTMENTS PRO FORMA ADJUSTMENTS ------------- --------------- ---------------- ---------- ----------- Revenues: New vehicle sales.................. $ 662,323 $123,009 $ -- $ 785,332 $ -- Used vehicle sales................. 363,096 68,948 -- 432,044 -- Parts & service sales.............. 97,264 24,001 -- 121,265 -- Other dealership revenues, net..... 34,833 6,702 976(a) 42,511 -- ---------- -------- ------- ---------- ------- Total revenues............... 1,157,516 222,660 976 1,381,152 -- Cost of sales....................... 990,179 188,568 -- 1,178,747 -- ---------- -------- ------- ---------- ------- Gross profit..................... 167,337 34,092 976 202,405 -- Selling, general and administrative expenses........................... 125,282 26,084 1,218 (c)(d 152,584 -- Depreciation and amortization....... 4,375 601 399 (d)(e 5,375 -- ---------- -------- ------- ---------- ------- Income from operations....... 37,680 7,407 (641) 44,446 -- Other income (expense): Floorplan interest expense......... (8,994) (2,940) (116)(f) (12,050) 855(i) Other interest expense, net........ (2,705) (150) 15 (d)(g (2,840) 2,221(i) Other income (expense), net........ (8) 24 -- 16 -- ---------- -------- ------- ---------- ------- Income before taxes.......... 25,973 4,341 (742) 29,572 3,076 Provision for income taxes.......... 10,723 267 1,075(h) 12,065 1,215(k) ---------- -------- ------- ---------- ------- Net income................... $ 15,250 $ 4,074 $(1,817) $ 17,507 $ 1,861 ========== ======== ======= ========== ======= Earnings per share: Basic.............................. $ 0.90 $ 0.96 Diluted............................ $ 0.87 $ 0.93 Weighted average shares outstanding: Basic.............................. 16,957,327 18,167,654 Diluted............................ 17,538,446 18,777,924 NINE MONTHS ENDED SEPTEMBER 30, 1998 ----------------------------------------------- PRO FORMA PRO FORMA AS ADJUSTED FOR AS ADJUSTED FOR NOTES COMMON STOCK COMMON STOCK FINANCING AND NOTES OFFERING ADJUSTMENTS OFFERINGS --------------- ----------- --------------- Revenues: New vehicle sales.................. $ 785,332 $ -- $ 785,332 Used vehicle sales................. 432,044 -- 432,044 Parts & service sales.............. 121,265 -- 121,265 Other dealership revenues, net..... 42,511 -- 42,511 ---------- ------- ---------- Total revenues............... 1,381,152 -- 1,381,152 Cost of sales....................... 1,178,747 -- 1,178,747 ---------- ------- ---------- Gross profit..................... 202,405 -- 202,405 Selling, general and administrative expenses........................... 152,584 -- 152,584 Depreciation and amortization....... 5,375 -- 5,375 ---------- ------- ---------- Income from operations....... 44,446 -- 44,446 Other income (expense): Floorplan interest expense......... (11,195) 4,971(i) (6,224) Other interest expense, net........ (619) (7,875)(j) (8,494) Other income (expense), net........ 16 -- 16 ---------- ------- ---------- Income before taxes.......... 32,648 (2,904) 29,744 Provision for income taxes.......... 13,280 (1,147)(k) 12,133 ---------- ------- ---------- Net income................... $ 19,368 $(1,757) $ 17,611 ========== ======= ========== Earnings per share: Basic.............................. $ 0.96 $ 0.87 Diluted............................ $ 0.93 $ 0.85 Weighted average shares outstanding: Basic.............................. 20,167,654 20,167,654 Diluted............................ 20,777,924 20,777,924
- --------------- (1) Represents the Historical Statement of Operations for Group 1 as presented in our September 30, 1998 Quarterly Report on Form 10-Q, including the results of operations from the date of acquisition of all acquisitions completed during the nine months ended September 30, 1998. (2) Represents the pre-acquisition operations of all of the dealerships that we have acquired since our initial public offering except for three immaterial tuck-in acquisitions completed in 1998 and the Recent Acquisitions. We do not have sufficiently detailed financial information to include their results in the pro forma financial information. These excluded acquisitions had estimated aggregate revenues of approximately $215 million for the year ended December 31, 1997. S-24 26 PRO FORMA CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS)
PRO FORMA AS ADJUSTED COMMON FOR STOCK COMMON NOTES PRO FORMA FINANCING STOCK FINANCING HISTORICAL ADJUSTMENTS(1) PRO FORMA ADJUSTMENTS OFFERING ADJUSTMENTS ---------- -------------- --------- ----------- ------------ ----------- Current assets: Cash and cash equivalents.... $ 55,403 $ -- $ 55,403 $ -- $ 55,403 $ -- Accounts receivable, net..... 22,233 -- 22,233 -- 22,233 -- Inventories.................. 193,324 -- 193,324 -- 193,324 -- Deferred taxes............... 14,627 -- 14,627 -- 14,627 -- Other current assets......... 3,265 -- 3,265 -- 3,265 -- -------- -------- -------- -------- -------- -------- Total current assets... 288,852 -- 288,852 -- 288,852 -- Property & equipment, net...... 44,741 (24,229)(a) 20,512 -- 20,512 -- Goodwill, net.................. 112,884 -- 112,884 -- 112,884 -- Other assets................... 3,559 425(a) 3,984 -- 3,984 4,000(c) -------- -------- -------- -------- -------- -------- Total assets........... $450,036 $(23,804) $426,232 $ -- $426,232 $ 4,000 ======== ======== ======== ======== ======== ======== Current liabilities: Floorplan Facility........... $160,316 $ -- $160,316 $(11,877)(b) $148,439 $(96,000)(c) Current maturities of long- term debt.................. 1,487 (1,264)(a) 223 -- 223 -- Accounts payable and accrued expenses................... 73,417 1,696(a) 75,113 -- 75,113 -- -------- -------- -------- -------- -------- -------- Total current liabilities.......... 235,220 432 235,652 (11,877) 223,775 (96,000) Debt, net of current maturities................... 9,393 (7,984)(a) 1,409 -- 1,409 -- Acquisition Facility........... 56,000 (16,252)(a) 39,748 (39,748)(b) -- -- Senior Subordinated Notes...... -- -- -- -- -- 100,000(c) Deferred taxes................. 4,282 -- 4,282 -- 4,282 -- Other liabilities.............. 14,321 -- 14,321 -- 14,321 -- Stockholders' equity: Common stock................. 182 -- 182 20(b) 202 -- Additional paid-in capital... 118,509 -- 118,509 51,605(b) 170,114 -- Treasury stock, at cost...... (592) -- (592) -- (592) -- Retained earnings............ 12,721 -- 12,721 -- 12,721 -- -------- -------- -------- -------- -------- -------- Total stockholders' equity............... 130,820 -- 130,820 51,625 182,445 -- -------- -------- -------- -------- -------- -------- Total liabilities and stockholders' equity............... $450,036 $(23,804) $426,232 $ -- $426,232 $ 4,000 ======== ======== ======== ======== ======== ======== PRO FORMA AS ADJUSTED FOR COMMON STOCK AND NOTES OFFERINGS --------------- Current assets: Cash and cash equivalents.... $ 55,403 Accounts receivable, net..... 22,233 Inventories.................. 193,324 Deferred taxes............... 14,627 Other current assets......... 3,265 -------- Total current assets... 288,852 Property & equipment, net...... 20,512 Goodwill, net.................. 112,884 Other assets................... 7,984 -------- Total assets........... $430,232 ======== Current liabilities: Floorplan Facility........... $ 52,439 Current maturities of long- term debt.................. 223 Accounts payable and accrued expenses................... 75,113 -------- Total current liabilities.......... 127,775 Debt, net of current maturities................... 1,409 Acquisition Facility........... -- Senior Subordinated Notes...... 100,000 Deferred taxes................. 4,282 Other liabilities.............. 14,321 Stockholders' equity: Common stock................. 202 Additional paid-in capital... 170,114 Treasury stock, at cost...... (592) Retained earnings............ 12,721 -------- Total stockholders' equity............... 182,445 -------- Total liabilities and stockholders' equity............... $430,232 ========
- --------------- (1) Reflects the Sale and Leaseback. S-25 27 NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS 1. PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (UNAUDITED) (a) Records increases in revenues related to certain third-party products sold by the dealerships as a result of (1) negotiated increases in the commission revenues received by the dealerships for the sale of various finance and insurance products and (2) the termination of agreements of the owners of certain of the acquired dealerships that withheld fees and commissions from the payments to the dealerships for sales of certain finance and insurance products and paid the withheld amounts to affiliates of the prior owners. (b) Adjusts cost of sales to the specific identification method of inventory accounting from the last-in, first-out basis. (c) Adjusts pre-acquisition compensation expense and management fees to the level that certain management employees and owners of the acquired dealerships will contractually receive subsequent to the closing of the acquisitions. Additionally, adjusts insurance expense to the level the dealerships will contractually pay subsequent to the closing of the acquisitions. (d) Reflects the impact of our Sale and Leaseback. We entered into a definitive agreement for the sale and leaseback of nine of our dealership properties on December 21, 1998. On December 30, 1998, the sale and leaseback of six of the properties was closed. One additional property is expected to close during the first quarter of 1999. The two properties anticipated to close after the first quarter of 1999 have not been included in this adjustment. Records the reduction of depreciation expense due to the sale of the dealership properties and the increase in lease expense due to the leaseback of such dealership properties. Additionally, it records the reduction of interest expense related to the payoff of existing mortgages on the dealership properties sold and reduction of borrowings under the acquisition portion of our credit facility with the proceeds from the sale. (e) Records the pro forma goodwill amortization expense over an estimated useful life of 40 years. (f) Records the incremental floorplan interest expense resulting from our increased debt balances due to borrowings used to fund the cash portion of the purchase price paid for the acquisitions, offset by decreases in floorplan interest expense with respect to the dealerships we acquired resulting from our ability to borrow at a lower interest rate than the dealership acquired. (g) Records the incremental interest expense resulting from borrowings used to fund the cash portion of the purchase price paid for the acquisitions, net of reduced interest expense attributable to long-term debt not assumed in the acquisition of the Carroll Group. (h) Records the incremental provision for federal and state income taxes relating to the compensation differential, S corporation income and other pro forma adjustments. (i) Records the reduction of interest expense related to the repayment of borrowings under the floorplan and acquisition portions of our credit facility, with the net proceeds from the sale of common stock and the Notes. (j) Records the incremental other interest expense related to the sale of the Notes assuming an interest rate of 10.5%. (k) Records the provision for federal and state income taxes related to the change in interest expense resulting from (i) and (j) above. S-26 28 NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENTS (a) Represents the impact of our Sale and Leaseback. We entered into a definitive agreement for the sale and leaseback of nine of the dealership properties on December 21, 1998. On December 30, 1998, the sale and leaseback of six of the properties was closed. One additional property is expected to close during the first quarter of 1999. The two properties not anticipated to close during the first quarter of 1999 have not been included in this adjustment. (b) Records the issuance of common stock in this offering and the use of the assumed net proceeds from the sale thereof to reduce outstanding borrowings under the credit facility, net of estimated offering costs of $4.0 million. (c) Records the issuance of the Notes, and the use of the assumed net proceeds from the sale thereof to reduce outstanding borrowings under the credit facility, net of estimated offering costs of $4.0 million. S-27 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Group 1 is 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. Additionally, we provide maintenance and repair services at all of our dealerships and operate 12 collision service centers. We expect that a significant portion of our future growth will be derived from acquisitions of additional dealerships. 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 sales, documentary fees and after-market product sales. Sales revenues from new and used vehicles sales and parts and service sales include sales to retail customers, other dealers and wholesalers. Other dealership revenue includes revenue from arranging financing and selling vehicle service contracts and insurance, net of a provision for anticipated chargebacks and documentary fees. Our gross margin 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 our 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 revenues generally resulting in the highest gross margin. When our new vehicle sales increase or decrease at a rate greater than our other revenue sources, our gross margin responds inversely. Factors such as seasonality, weather, cyclicality and Manufacturers' advertising and incentives may impact our merchandise mix and, therefore, influence our gross margin. We believe that more than 90% of our costs, including costs of goods sold, are variable in nature and can be adjusted in times of depressed sales. 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. Before Group 1 acquired them, the founding groups were managed as independent private companies. As a consequence their operating results reflect different tax structures (S Corporations and C Corporations), which influenced, among other things, their historical levels of owners' compensation. The owners and certain key employees of the founding groups agreed to certain reductions in their compensation and benefits in connection with the organization of Group 1. We have implemented a "best practices" program that involves the installation of practices that have been successful at other franchises and in other retail segments. 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 with and not indicative of, future performance. PRO FORMA COMBINED FOUNDING GROUPS' DATA The following tables set forth certain financial data for 1995, 1996, 1997 and for the nine months ended September 30, 1997 on a pro forma basis giving effect to the combination of the founding groups. The pro forma combined founding groups' data presented below for 1995, 1996 and 1997 and for the nine months ended September 30, 1997 do not purport to present the combined founding groups in accordance with generally accepted accounting principles, but S-28 30 represent a summation of certain data of the individual founding groups on an 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 (S Corporations and C Corporations) 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 nine months ended September 30, 1998 reflects the historical results of our operations and includes acquisitions made during such period commencing on the effective date, for accounting purposes, of such acquisitions. OPERATIONS DATA
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------------------ ----------------------------------------- 1995 1996 1997 1997 1998 ------------------ ------------------ ------------------ ------------------ -------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT -------- ------- -------- ------- -------- ------- -------- ------- ---------- ------- (DOLLARS IN THOUSANDS) Revenues New vehicle sales..... $422,348 57.9% $469,318 57.1% $513,864 56.9% $391,928 56.9% $ 662,323 57.2% Used vehicle sales.... 222,373 30.5 258,027 31.4 288,010 31.9 220,735 32.0 363,096 31.4 Parts and service sales............. 65,599 9.0 73,451 8.9 77,215 8.6 58,389 8.5 97,264 8.4 Other dealership revenues, net....... 19,033 2.6 21,117 2.6 23,206 2.6 17,998 2.6 34,833 3.0 -------- ----- -------- ----- -------- ----- -------- ----- ---------- ----- Total revenues.. 729,353 100.0 821,913 100.0 902,295 100.0 689,050 100.0 1,157,516 100.0 Cost of sales.......... 629,305 86.3 705,783 85.9 775,164 85.9 591,450 85.8 990,179 85.5 -------- ----- -------- ----- -------- ----- -------- ----- ---------- ----- Gross profit........... $100,048 13.7% $116,130 14.1% $127,131 14.1% $ 97,600 14.2% $ 167,337 14.5% ======== ===== ======== ===== ======== ===== ======== ===== ========== =====
NEW VEHICLE DATA
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------ ------------------- 1995 1996 1997 1997 1998 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Retail unit sales................... 20,357 21,378 23,201 17,923 28,640 Retail sales revenue................ $422,348 $469,318 $513,864 $391,928 $662,323 Gross profit........................ $ 32,047 $ 37,677 $ 42,199 $ 32,765 $ 52,405 Gross margin........................ 7.6% 8.0% 8.2% 8.4% 7.9% Average gross profit per retail unit sold.............................. $ 1,574 $ 1,762 $ 1,819 $ 1,828 $ 1,830
USED VEHICLE DATA
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------ ------------------- 1995 1996 1997 1997 1998 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Retail unit sales................... 15,358 17,220 18,130 13,923 22,431 Retail sales revenue(1)............. $185,665 $219,183 $235,353 $180,350 $298,817 Gross profit........................ $ 17,560 $ 21,358 $ 21,035 $ 16,181 $ 27,916 Gross margin........................ 9.5% 9.7% 8.9% 9.0% 9.3% Average gross profit per retail unit sold.............................. $ 1,143 $ 1,240 $ 1,160 $ 1,162 $ 1,245
- --------------- (1) Excludes wholesale revenues. S-29 31 PARTS AND SERVICE DATA
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, --------------------------- ----------------- 1995 1996 1997 1997 1998 ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Sales revenue............................ $65,599 $73,451 $77,215 $58,389 $97,264 Gross profit............................. $31,408 $35,978 $40,691 $30,656 $52,183 Gross margin............................. 47.9% 49.0% 52.7% 52.5% 53.7%
HISTORICAL NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH PRO FORMA COMBINED FOUNDING GROUPS NINE MONTHS ENDED SEPTEMBER 30, 1997 REVENUES. Revenues increased $468.4 million, or 68.0%, from $689.1 million for the nine months ended September 30, 1997 to $1,157.5 million for the nine months ended September 30, 1998. New vehicle revenues increased $270.4 million, or 69.0% from $391.9 million for the nine months ended September 30, 1997 to $662.3 million for the nine months ended September 30, 1998. The increase in revenue was primarily attributable to strong customer acceptance of our products, particularly Toyota and Lexus, 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 $142.4 million, or 64.5%, from $220.7 million for the nine months ended September 30, 1997 to $363.1 million for the nine months ended September 30, 1998. The increase was primarily attributable to an emphasis on used vehicle sales in the Oklahoma market and the additional franchise operations acquired. Parts and service sales increased $38.9 million, or 66.6%, from $58.4 million for the nine months ended September 30, 1997 to $97.3 million for the nine months ended September 30, 1998. The increase was primarily attributable to the additional dealership operations acquired. Other dealership revenues increased $16.8 million or 93.3% from $18.0 million for the nine months ended September 30, 1997 to $34.8 million for the nine months ended September 30, 1998. The increase was due primarily to an increase in the number of retail new and used vehicle sales and the implementation of our vehicle service contract and insurance programs, which resulted in improved revenues per unit. GROSS PROFIT. Gross profit increased $69.7 million, or 71.4%, from $97.6 million for the nine months ended September 30, 1997 to $167.3 million for the nine months ended September 30, 1998. The increase was attributable to increased revenues and an increased gross margin from 14.2% for the nine months ended September 30, 1997 to 14.5% for the nine months ended September 30, 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 8.4% for the nine months ended September 30, 1997 to 7.9% for the nine months ended September 30, 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 for used retail vehicle sales increased from 9.0% for the nine months ended September 30, 1997 to 9.3% for the nine months ended September 30, 1998. The increase was primarily attributable to an emphasis on the used vehicle operations in the Oklahoma platform. Parts and service gross margin increased from 52.5% for the nine months ended September 30, 1997 to 53.7% for the nine months ended September 30, 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $49.8 million, or 66.0%, from $75.5 million for the nine months ended September 30, 1997 to $125.3 million for the nine months ended September 30, 1998. The increase was primarily attributable to the additional dealership operations acquired and increased variable expenses, particularly incentive pay to employees, which increased as revenues and gross profit S-30 32 increased. Selling, general and administrative expenses declined as a percentage of revenues from 11.0% for the nine months ended September 30, 1997 to 10.8% for the nine months ended September 30, 1998. The decline is primarily attributable to maintaining total expenses at a constant level by offsetting increased variable expenses with cost reductions, such as our risk management program. Additionally, by implementing our budgeting process, the dealerships have improved their operating expense leverage. INTEREST EXPENSE. Floorplan and other interest expense, net, increased $7.1 million, or 154.3%, from $4.6 million for the nine months ended September 30, 1997 to $11.7 million for the nine months ended September 30, 1998. The increase was primarily attributable to the interest expense of the additional dealership operations acquired, reduced interest earnings due to the utilization of cash in completing the acquisitions and additional interest expense due to borrowings on our credit facility to complete acquisitions. Partially offsetting the increases were cost reductions realized due to the lower interest rates on floorplan notes payable obtained through our credit facility. 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 used retail vehicle sales declined from 9.7% for the year ended December 31, 1996 to 8.9% for the year ended December 31, 1997. The decline was primarily attributable to efforts to increase market share in the Oklahoma market while customer demand for new vehicles was not as strong as in prior years. Parts and service gross margin increased from 49.0% for the year ended December 31, 1996 to 52.7% for the year ended December 31, 1997. PRO FORMA COMBINED FOUNDING GROUPS YEAR ENDED DECEMBER 31, 1996 COMPARED WITH PRO FORMA COMBINED FOUNDING GROUPS YEAR ENDED DECEMBER 31, 1995 REVENUES. Revenues increased $92.5 million, or 12.7%, from $729.4 million for the year ended December 31, 1995 to $821.9 million for the year ended December 31, 1996. New vehicle revenues increased $47.0 million, or 11.1%, from $422.3 million for the year ended December 31, S-31 33 1995 to $469.3 million for the year ended December 31, 1996. This increase was primarily attributable to increased sales at all but one of the founding groups with the McCall Group accounting for $40.6 million of the increase. New and expanded franchise operations, primarily the Howard Group's new Dodge franchise, successful marketing efforts and strong customer acceptance of the founding groups' products, particularly Toyota, Lexus and Chevrolet, contributed to the increase. The Smith Group had an $8.0 million decline in new vehicle revenues caused by reduced unit sales at its Dallas Nissan franchise. Used vehicle revenues increased $35.6 million, or 16.0%, from $222.4 million for the year ended December 31, 1995 to $258.0 million for the year ended December 31, 1996. All of the founding groups had increases in used vehicle revenues with the McCall Group accounting for $22.6 million of the increase. The increase was attributable primarily to a strong used vehicle market and successful marketing efforts. Parts and service sales increased $7.9 million, or 12.0%, from $65.6 million for the year ended December 31, 1995 to $73.5 million for the year ended December 31, 1996. The increase was primarily attributable to new and expanded operations at McCall Lexus, and increased vehicle sales. Other dealership revenues increased $2.1 million or 11.1% from $19.0 million for the year ended December 31, 1995 to $21.1 million for the year ended December 31, 1996. The increase was due primarily to an increase in the number of retail new and used vehicle sales. GROSS PROFIT. Gross profit increased $16.1 million, or 16.1%, from $100.0 million for the year ended December 31, 1995 to $116.1 million for the year ended December 31, 1996. The increase was attributable to increased revenues and an increase in gross margin from 13.7% for the year ended December 31, 1995 to 14.1% for the year ended December 31, 1996. The increase in gross margin was primarily due to a change in the merchandise mix as used vehicle sales became a greater percentage of total revenues and margins on vehicle and parts and service sales grew. The gross margin on new retail vehicle sales increased from 7.6% for the year ended December 31, 1995 to 8.0% for the year ended December 31, 1996. The gross margin on used retail vehicle sales increased from 9.5% for the year ended December 31, 1995 to 9.7% for the year ended December 31, 1996. The gross margin on parts and service sales increased from 47.9% for the year ended December 31, 1995 to 49.0% for the year ended December 31, 1996. LIQUIDITY AND CAPITAL RESOURCES Our principal sources of liquidity are cash on hand, cash from operations, floorplan financing and our credit facility (which includes the floorplan facility and the acquisition facility). The following table sets forth historical selected information from our statements of cash flows:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, --------------------------- ------------------ 1995 1996 1997 1997 1998 ------- ------- ------- ------- -------- (DOLLARS IN THOUSANDS) Net cash provided by operating activities............................... $ 7,197 $ 7,332 $ 6,922 $ 2,241 $ 9,816 Net cash provided by (used in) investing activities............................... (1,303) (4,615) 10,661 (676) (76,001) Net cash provided by (used in) financing activities............................... (520) (1,558) 5,830 (4,656) 86,496 ------- ------- ------- ------- -------- Net increase in (decrease in) cash and cash equivalents.............................. $ 5,374 $ 1,159 $23,413 $(3,091) $ 20,311 ======= ======= ======= ======= ========
CASH FLOW Total cash and cash equivalents at September 30, 1998 were $55.4 million. S-32 34 OPERATING ACTIVITIES. For the three-year period ended December 31, 1997, we generated $21.5 million in net cash from operating activities, primarily driven by net income plus depreciation and amortization. During the first nine months of 1998, we generated cash flow from net income plus depreciation and amortization of approximately $19.6 million, of which a portion was utilized to temporarily pay down floorplan notes payable, resulting in net cash flow from operating activities of approximately $9.8 million. 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 $76.0 million of cash used for investing activities in the first nine months of 1998 was primarily attributable to cash paid in completing acquisitions offset by the cash balances obtained in the acquisitions and purchases of property and equipment. Of the $7.2 million used in purchasing property and equipment, approximately $4.6 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. FINANCING ACTIVITIES. We obtained approximately $5.8 million and $86.5 million from financing activities in 1997 and the nine months ended September 30, 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 cash attributable to the nine months ended September 30, 1998 was generated primarily from drawings on our credit facility and was utilized in completing acquisitions and supporting increased sales volume. WORKING CAPITAL. At September 30, 1998, we had working capital of $53.6 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 the existing dealerships, borrowings under our credit facility, 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. CREDIT FACILITY In November 1998, we amended our credit facility to increase the commitment from $345 million to $425 million (which will be reduced to $405 million upon consummation of this offering) and to extend the term of the credit facility from December 2000 to December 2001. The credit facility provides for a floorplan facility of $295 million for the financing of vehicle inventories and an acquisition facility of $130 million (which will be reduced to $110 million upon consummation of this offering), for the financing of acquisitions, general corporate purposes and capital expenditures. As of December 31, 1998, there was $193.4 million drawn on the floorplan facility and $42.0 million drawn on the acquisition facility. The amount of funds available under the acquisition facility is dependent upon a calculation based on our cash flow and the maintenance of certain financial ratios. Upon consummation of the offering and the application of the proceeds therefrom, $110 million will be available to be drawn under the acquisition facility, subject to compliance with 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. S-33 35 In January 1998, we entered into a three-year interest rate swap agreement with a bank. The effect of this swap is to convert the interest rate on $75 million of floorplan financing under the credit facility to a fixed rate of approximately 7.16%. SALE OF DEALERSHIP PROPERTIES TO CAPITAL AUTOMOTIVE REIT On December 21, 1998, we entered into an agreement with Capital Automotive 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 lease back the properties under leases with terms of 30 years, with termination options after 15, 20 and 25 years. As of December 31, 1998, we had closed the sale of six properties to Capital Automotive REIT pursuant to the terms of the agreement for approximately $20.0 million. 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. 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 (1) strong parts, service and collision repair services, (2) variable cost salary structure, (3) geographic diversity and (4) 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: (1) Manufacturer-related factors, primarily the historical timing of major Manufacturer incentive programs and model changeovers, (2) weather-related factors and (3) consumer buying patterns. 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 recognize the need to ensure that our computer systems, equipment and operations will not be adversely impacted by the change to the calendar year 2000. In this regard, we have taken steps to identify potential areas of risk and have begun addressing these in our planning, purchasing and daily operations. We have not quantified the total cost of converting all internal systems, equipment and operations for the year 2000, but we do not expect the cost to be material to our financial position. In connection with acquisitions, we review and address the candidates year 2000 readiness during the due diligence process. S-34 36 We are currently reviewing the potential adverse impact resulting from the failure of third party service providers and vendors to address any of their year 2000 issues. 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 provider. We have contacted each of these providers and have received assurance from the providers 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 issue. 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 the Manufacturers are not year 2000 ready, we have been unable to obtain written assurance from them that their systems are year 2000 ready. Failure by us, the Manufacturers or our third party service providers and vendors to adequately address the year 2000 issue could have an adverse effect on us. S-35 37 BUSINESS OVERVIEW Group 1 is a leading operator and consolidator in the highly fragmented automotive retailing industry. We currently own 63 dealership franchises comprised of 23 different brands of automobiles, and 12 collision service centers located in Texas, Oklahoma, Florida, New Mexico, Georgia and Colorado. Our dealerships include the second largest Toyota dealership and the fifth largest Lexus dealership in the United States, as ranked by 1998 new retail unit sales. Through our dealerships, we sell new and used cars and light trucks, provide maintenance and repair services, sell replacement parts and arrange related financing, vehicle service contracts and insurance. Simultaneously with the closing of our initial public offering in November 1997, we commenced dealership operations with the acquisition of four automobile dealership groups, known as our "founding groups", representing 30 automobile dealership franchises located in Texas and Oklahoma. In 1998, we acquired an additional 33 automobile dealership franchises in five states in ten separate acquisitions. Four of these acquisitions, consisting of 19 dealership franchises in Florida, Georgia, Texas, New Mexico and Colorado, were of dealership groups that are located in areas in which we had no operations or limited operations prior to the acquisition and serve as Platforms for our operations in such areas. The other six acquisitions consisted of 14 individual dealership franchises acquired as "tuck-ins" to existing platforms. During 1998 we sold one Subaru franchise and returned one Kia franchise to the Manufacturer. In addition, Chrysler ceased operation of the Eagle brand nationally, of which we had four franchises. These six franchises were insignificant to our operations. Additionally, we obtained two franchises through Manufacturer grants in December 1998 in areas of existing operations. In January 1999, we completed the Recent Acquisitions and entered into definitive agreements to acquire the Pending Acquisitions. See "Prospectus Supplement Summary -- Recent Developments -- Pending and Recent Acquisitions". We believe that we are one of the ten largest automobile dealership retailers in the country in terms of revenues. We believe that our strengths include: - our senior management's experience in consolidating and operating in highly fragmented industries; - the reputation and experience of our management and our dealership principals as leaders in the automotive retailing industry; - our ability to utilize equity incentives to attract and retain high quality personnel; - our dealerships' established customer base and local name recognition; - our brand and geographic diversity; - our ability to capitalize on economies of scale; - our ability to save costs by centralizing financing and certain administrative functions of our dealerships; and - our dealerships' proven ability to obtain high quality used vehicles at cost-effective prices through trade-ins and off-lease programs. We pursue a growth strategy led by a management team with extensive experience in consolidation and the management of growth companies led by B.B. Hollingsworth, Jr. Mr. Hollingsworth, Chairman of the Board, President and Chief Executive Officer of Group 1, has experience not only in the automotive retailing industry, but also in consolidating a major national S-36 38 industry. Mr. Hollingsworth served in various senior management capacities, including President, of Service Corporation International during its early growth period as the world's leading consolidator of the funeral industry. 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 that includes 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 the management talent and proven operating capabilities of our dealership groups 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 significant portion of our acquisitions. In addition, we have a revolving credit facility, which, after this offering, 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 that 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 high quality personnel, and we attempt to retain this personnel. 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 dealership principals as leaders in the automotive retailing industry. 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 facility and personnel utilization, vendor consolidation and advertising. 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 promote the widespread application of our strategic programs, facilitate the integration of future acquisitions and improve operating efficiency and customer satisfaction. S-37 39 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 vendor consolidation, data processing, personnel utilization and advertising. 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 our use of 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. Furthermore, we have benefitted from the consolidation of administrative functions such as risk management, employee benefits and employee training. For example, we negotiated insurance coverage that reduced our annual insurance costs by 30 percent as compared to the annual insurance costs incurred by the founding groups and our acquisitions prior to their being acquired by us. 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, each platform also pursues an integrated company-wide strategy which is designed to grow each of these higher margin businesses, enhance profitability and stimulate internal growth. With a competitive advantage in obtaining used vehicles, dealership franchises are especially well positioned to take advantage of 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 generate incremental revenues on each new or used vehicle sold by arranging vehicle service, insurance, finance and lease contracts on these vehicles. We have negotiated and are currently realizing increased commissions on vehicle service contracts sales and on vehicle financing arrangements for certain customers. These increases represent revenue enhancements obtained through the consolidation of the dealerships. COMMITMENT TO CUSTOMER SERVICE. We focus on providing high quality customer service to meet the needs of our customers. Our dealerships strive to cultivate lasting relationships with their customers, and we believe these efforts increase our opportunities for significant repeat and referral business. For example, the dealerships regard their service and repair activities as an integral part of their overall approach to customer service. This approach provides us with an opportunity to foster ongoing relationships with customers and deepen customer loyalty. In addition, our dealerships continually review their selling processes in an effort to better meet the needs of their customers. ACQUISITIONS COMPLETED AFTER OUR INITIAL PUBLIC OFFERING In 1998, we acquired 33 additional automobile dealership franchises located in five states. These acquisitions consist of four platform acquisitions representing 19 dealership franchises in Florida, Georgia, Texas, New Mexico and Colorado and six tuck-in acquisitions of 14 individual dealership franchises in our existing areas of operation. These acquired dealerships (excluding three immaterial tuck-in acquisitions described in the table below) had combined pro forma revenues of $675.8 million in 1997. The total consideration paid for all of these acquisitions, including the three immaterial excluded tuck-in acquisitions and certain related real estate acquired, excluding the assumption of approximately $103.1 million of inventory financing, was $68.1 million in cash (net of cash received), the assumption of approximately $2.9 million in S-38 40 mortgage financing and 3,516,805 shares of our common stock. In addition, we obtained two franchises through manufacturer grants in areas of existing operations. In January 1999, we completed the Recent Acquisitions and entered into definitive agreements to acquire the Pending Acquisitions. See "Prospectus Supplement Summary -- Recent Developments -- Pending and Recent Acquisitions". The following is a summary of our platform acquisition history:
1997 DATE PRO FORMA PLATFORM FRANCHISE LOCATION ACQUIRED REVENUES(1) -------- --------- -------- -------- -------------- (IN MILLIONS) Carroll.............. Ford Hollywood, Florida March 1998 $245.8 Ford Miami, Florida Ford Atlanta, Georgia Maxwell.............. Chrysler (3 franchises) Austin, Texas April 1998 106.6 Plymouth (3 franchises) Jeep Dodge Eagle(2) Subaru(3) Johns................ Chrysler Albuquerque, New Mexico May 1998 117.2 Plymouth Jeep Eagle(2) Chevrolet Luby................. Chevrolet Denver, Colorado July 1998 63.2
- --------------- (1) Pro forma revenues gives effect to certain adjustments made to the historical revenues of the acquired dealerships. (2) The Eagle brand ceased operations after the 1998 model year. These franchises were not significant to our platform operations. (3) This franchise was sold post-closing and was not significant to the operations of the Maxwell Group. The following table summarizes our tuck-in acquisitions and the platforms into which such acquisitions were incorporated:
PLATFORM FRANCHISE LOCATION DATE ACQUIRED -------- --------- -------- ------------- Austin................... Ford(1) Austin, Texas February 1998 Beaumont................. Mercedes Benz(1) Beaumont, Texas April 1998 Volvo(1) Dodge(1) Buick(1) Nissan(1) Maxwell.................. Chrysler Austin, Texas May 1998 Dodge Plymouth Jeep Eagle(2) Carroll.................. Ford Homestead, Florida May 1998 Dallas................... Dodge(1) Dallas, Texas July 1998 Maxwell.................. Ford Austin, Texas August 1998 Johns.................... Pontiac(1) Albuquerque, New Mexico January 1999 Buick(1) GMC(1) Howard................... Chevrolet(1) Tulsa, Oklahoma January 1999
S-39 41 - --------------- (1) Except as expressly provided otherwise, the financial results of operations of these dealerships, prior to their acquisition by us, are not included in the pro forma financial information contained in this prospectus supplement, including the Pro Forma Consolidated Financial Statements. The historical financial information of these dealerships were not available in sufficient detail to accurately include them in the pro forma financial information in this prospectus supplement. These dealerships had aggregate revenues of approximately $215 million in 1997. (2) The Eagle brand ceased operations nationally after the 1998 model year. These franchises were not significant to our platform's operations. In addition, we were granted Cadillac and Pontiac dealerships by General Motors in December 1998. The two dealership franchises will be located at our Beaumont automall. INDUSTRY OVERVIEW With more than $600 billion in 1997 sales, automotive retailing is the largest retail trade sector in the United States. The industry is highly fragmented and largely privately held with approximately 22,000 automobile dealership locations representing more than 49,000 franchised dealerships. In 1997, U.S. franchised automobile dealers sold 15.2 million new vehicles and 18.9 million used vehicles for sales of approximately $342.1 billion and $174.8 billion, respectively. It is estimated that these sales by franchised automobile dealers account for one-fifth of the nation's total retail sales of all products and merchandise. Since 1993, new vehicle revenues have grown at a 7.8% compound annual rate. Over the same period, used vehicle revenues have grown at a 11.0% compound annual rate. Slower unit volume growth over this time period has been offset by the rising prices associated with new vehicles and, on average, the higher prices paid for later model high quality used vehicles which now comprise a significant part of the used vehicle market. Automobile sales are affected by many factors, including rates of employment, income growth, interest rates, weather patterns and other national and local economic conditions, automotive innovations and general consumer sentiment. The following table sets forth new and used vehicle sales by franchised automobile dealers in the United States for each of the five years ended December 31, 1997. New vehicles can only be sold at retail by franchised dealerships. The following table excludes sales of used vehicles by nonfranchised dealerships and casual sales by individuals.
UNITED STATES FRANCHISED DEALERS' VEHICLE SALES ----------------------------------------------- 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------- (UNITS IN MILLIONS; DOLLARS IN BILLIONS) New vehicle unit sales......................... 13.9 15.1 14.8 15.1 15.2 New vehicle sales.............................. $253.0 $289.9 $302.7 $328.4 $342.1 Used vehicle unit sales........................ 16.3 17.8 18.5 19.2 18.9 Used vehicle sales............................. $115.0 $138.6 $157.0 $171.8 $174.8 Total vehicle sales............................ $368.0 $428.5 $459.7 $500.2 $516.9 Annual growth in total vehicle sales........... 15.0% 16.5% 7.3% 8.8% 3.3%
Manufacturers originally established franchised dealer networks for the distribution of their vehicles as single-dealership, single-owner operations. In return for distribution rights within specified territories, Manufacturers exerted significant influence over such matters as a dealer's location, inventory size and composition and merchandising programs, as well as the identity of owners and managers. This strict control contributed to the proliferation of small dealerships, which at their peak in the late 1940s numbered in excess of 46,000 dealership locations. Several Manufacturers went out of business in the 1950s, and the number of dealership locations decreased to 36,000 by 1960. Significant industry changes took place in the 1970s when fuel shortages forced dramatic increases in gasoline prices and foreign Manufacturers increased their penetration of the U.S. market with fuel-efficient, low-cost vehicles. As a result of these competitive pressures, S-40 42 dealers were able to negotiate significant changes in the traditional distribution system with Manufacturers. Dealers began to add foreign franchises and the phenomenon of the multi-franchise automobile dealer, or megadealer, emerged, prompting the significant acquisition and consolidation activities of the 1980s. The easing of restrictions against megadealers, competitive pressures upon undercapitalized dealerships and the aging of dealership owners has led to further consolidation of the industry. Since 1960, the number of dealership locations has declined 39% to the current 22,000 level. As the industry has evolved, so has the dealership profile. Over the past three decades, there has been a trend toward fewer, but larger, dealerships. In 1997, each of the largest 100 dealer groups had more than $170 million in revenues. Although significant consolidation has taken place since its inception, today the industry remains highly fragmented, with the largest 100 dealer groups generating approximately 10% of total sales revenues and controlling approximately 6% of all franchised dealerships. We believe that these factors, together with increasing capital requirements for operating automobile dealerships, lack of a viable exit strategy (especially for larger dealerships) and the aging of dealership owners provide an attractive environment for our consolidation program. As with retailers generally, automobile dealership profitability varies widely and depends in part on the effective management of inventory, marketing, quality control and responsiveness to customers. Since 1991, retail automobile dealerships in the United States have earned on average between 12.7% and 14.1% total gross margin on sales with smaller dealerships generally realizing a higher gross margin than larger dealerships. New vehicle sales were the smallest proportionate contributors to dealers' gross profits during this period, most recently earning an average gross margin of 6.4% in 1997. Used vehicles provided higher gross margins than new vehicles during this period, with an average used vehicle gross margin of 10.8% in 1997. Dealerships also offer a range of other services and products, including repair and warranty work, replacement parts, extended service contracts, financing and credit insurance. S-41 43 DEALERSHIP OPERATIONS The following is a list of our 63 automobile dealership franchises:
STATE DEALERSHIP/FRANCHISE METROPOLITAN AREA ----- -------------------- ----------------- Texas............. Acura Southwest Houston Sterling McCall Lexus Houston Sterling McCall Toyota Houston A.J. Foyt Honda, Isuzu Houston Mike Smith Autoplaza -- Cadillac, GMC, Honda, Beaumont Lincoln, Mercury, Mitsubishi, Oldsmobile, Pontiac Autoplex 2000 -- Buick, Dodge, Mercedes-Benz, Beaumont Nissan, Volvo Town North Nissan, Mitsubishi, Suzuki Austin Round Rock Nissan Austin Elgin Ford Austin Prestige Chrysler Plymouth Northwest Austin Prestige Chrysler Plymouth South Austin Maxwell Chrysler Plymouth Jeep Dodge Austin Highland Autoplex -- Chrysler, Dodge, Jeep, Plymouth Austin Maxwell Ford Austin Courtesy Nissan Dallas McKinney Dodge Dallas Oklahoma.......... Bob Howard Automall -- Chrysler, GMC, Isuzu, Jeep, Oklahoma City Plymouth, Pontiac Bob Howard Chevrolet Oklahoma City Bob Howard Toyota Oklahoma City Bob Howard Dodge Oklahoma City Bob Howard Honda, Acura Oklahoma City Bob Howard Nissan Oklahoma City South Pointe Chevrolet Tulsa Florida........... World Ford Hollywood Hollywood World Ford Kendall Miami World Ford Homestead Homestead Georgia........... Perimeter Ford Atlanta New Mexico........ Casa Chevrolet Albuquerque Westside Chrysler, Plymouth, Jeep Albuquerque Sunshine Pontiac, Buick and GMC Albuquerque Colorado.......... Luby Chevrolet Denver
Each of our platforms has an established management structure that promotes and rewards entrepreneurial spirit, individual pride and responsibility and the achievement of team goals. The general manager of each dealership is ultimately responsible for the operation, personnel and financial performance of the dealership. The general manager is complemented with a management team consisting of a new vehicle sales manager, used vehicle sales manager, parts and service managers and finance managers. Each dealership is operated as a distinct profit center, in which dealership general managers are given a high degree of autonomy. The general manager and the other members of the dealership management team, as long-time members of their local communities, are typically best able to judge how to conduct day-to-day operations based on the team's experience in and familiarity with its local market. S-42 44 NEW VEHICLE SALES We currently represent 23 American, Asian and European brands of economy, family, sports and luxury cars and light trucks and sport utility vehicles. The following table sets forth for the nine months ended September 30, 1998, certain information relating to the brands of new vehicles sold at retail by Group 1 on a pro forma basis assuming that all of our dealerships (other than the Recent Acquisitions and the Pending Acquisitions) were acquired on January 1, 1998. These results may not be indicative of our results after the acquisition of the dealerships by us:
NUMBER OF NEW VEHICLES PERCENTAGE ---------------------- ---------- Ford............................................... 8,797 25.2% Toyota............................................. 5,293 15.2 Chevrolet.......................................... 3,404 9.8 Nissan............................................. 3,261 9.4 Dodge.............................................. 2,404 6.9 Honda.............................................. 2,332 6.7 Plymouth........................................... 1,557 4.5 Lexus.............................................. 1,421 4.1 Chrysler........................................... 1,321 3.8 Jeep............................................... 999 2.9 GMC................................................ 865 2.5 Acura.............................................. 854 2.5 Pontiac............................................ 589 1.7 Mitsubishi......................................... 571 1.6 Isuzu.............................................. 530 1.5 Oldsmobile......................................... 161 0.5 Mercury............................................ 156 0.4 Suzuki............................................. 77 0.2 Mercedes-Benz...................................... 73 0.2 Buick.............................................. 61 0.2 Lincoln............................................ 53 0.1 Cadillac........................................... 47 0.1 Other(1)........................................... 22 0.0 ------ ----- Total.................................... 34,848 100.0% ====== =====
- --------------- (1) Includes Volvo and Eagle. In 1998, Chrysler discontinued the Eagle line of vehicles. As a result, we no longer sell the Eagle line of vehicles. 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, which brings the consumer 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, which allows 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. For example, the dealerships strive to: - employ more efficient selling approaches; - utilize computer technology that decreases the time necessary to purchase a vehicle; S-43 45 - engage in extensive follow-up after a sale in order to develop long-term relationships with customers; and - extensively train their sales staffs to be able to meet the needs of the customer. The dealerships continually evaluate innovative ways to improve the buying experience for their customers. We believe that our ability to share best practices among our dealerships gives us an advantage over smaller dealerships. Our dealerships acquire substantially all their new vehicle inventory from the Manufacturers. Manufacturers allocate a limited inventory among their franchised dealers based primarily on sales volume and input from dealers. 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 extended service contracts for our used vehicles and continuing to promote used vehicle sales. Profits from sales of used vehicles depend primarily on the dealerships' ability to obtain a high quality supply of used vehicles and effectively manage that inventory. Our new vehicle operations provide the used vehicle operations with a large supply of high quality trade-ins and off-lease vehicles, which are the best sources of high quality used vehicles. The dealerships supplement their used vehicle inventory with used vehicles purchased at auctions. Each of our dealerships generally maintains a 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 acquisitions 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 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 warranties. In addition, the dealerships offer extended 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. S-44 46 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 own 12 collision service centers which are located at certain of our dealerships. Historically, the automotive repair industry has been highly fragmented. However, we believe that the increased use of advanced technology in vehicles has made it difficult for independent repair shops to retain the expertise to perform major or technical repairs. Additionally, Manufacturers permit warranty work to be performed only at franchised dealerships. Hence, unlike independent service stations, or independent and superstore used car dealerships with 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 extended 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 which 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, which provides an opportunity to foster ongoing relationships with the dealership's customers and deepen customer loyalty. The dealerships' parts departments support their respective sales and service departments. Each of the dealerships sells factory-approved parts for vehicle makes and models sold by that dealership. These parts are either used in repairs made by the dealership or sold at retail to its customers or at wholesale to independent repair shops and other franchised dealerships. Currently, each of the dealerships employs its own parts manager and independently controls its parts inventory and sales. 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 and insurance income. The dealerships arrange financing for their customers' vehicle purchases, sell extended service contracts and arrange selected types of credit insurance in connection with the financing of vehicle sales. The dealerships place heavy emphasis on finance and insurance ("F&I") and offer advanced F&I training to their finance and insurance managers. Typically, the dealerships forward proposed financing contracts to Manufacturers' captive finance companies, selected commercial banks or other financing parties. The dealerships receive a financing fee from the lender for S-45 47 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 extended service contracts to supplement the manufacturer warranty. Additionally, the dealerships sell primary service contracts for used vehicles. Currently, the dealerships sell service contracts of third party vendors, for which they recognize a commission upon the sale of the contract. The dealerships also offer certain types of credit insurance to customers who arrange the financing of their vehicle purchases through the dealerships. The dealerships sell credit life insurance policies to these customers, which policies provide for repayment of the vehicle loan if the obligor dies while the loan is outstanding. The dealerships also sell accident and 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. FACILITIES 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 a substantial majority of our facilities, and most of our facilities are subject to long term leases. AGREEMENTS WITH MANUFACTURERS The following table sets forth the percentage of our new vehicle retail unit sales attributable to the Manufacturers we represent:
PERCENTAGE OF OUR NEW VEHICLE PRO FORMA RETAIL UNITS FOR THE NINE MONTHS ENDED MANUFACTURER SEPTEMBER 30, 1998(1) - ------------ --------------------- Ford........................................................ 25.7% Toyota/Lexus................................................ 19.3 Chrysler.................................................... 18.1 General Motors.............................................. 14.8 Nissan...................................................... 9.4 Honda/Acura................................................. 9.2 Other....................................................... 3.5 ----- Total............................................. 100.0% =====
- --------------- (1) Does not give effect to the Recent Acquisitions or the Pending Acquisitions. FRANCHISE AGREEMENTS. Each of our dealerships operates under a franchise agreement with one of our Manufacturers (or authorized distributors). Under our dealership franchise S-46 48 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 change of ownership or management. While we believe that we will be able to renew all of our franchise agreements, we cannot guarantee that all of our franchise agreements will be renewed or that the terms of the renewals will be favorable to us. Our franchise agreements do not give us the exclusive right to sell a Manufacturer's product within a given geographic area. Accordingly, a Manufacturer may, subject to any protection of state law, grant another dealer a franchise to start a new dealership near one of our locations, or an existing dealer may move its dealership to a location which would compete directly with us. ACQUISITIONS. We must obtain the consent of the Manufacturer prior to the acquisition of any of its dealership franchises. Delays in obtaining, or failing to obtain, Manufacturer approvals for dealership acquisitions could adversely affect our 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. Obtaining the approvals of the Manufacturers for the acquisition of our founding groups took almost one year. In determining whether to approve an acquisition, Manufacturers may consider many factors, including the moral character and business experience of the dealership principals and the financial condition, ownership structure and customer satisfaction index scores of our dealerships. Our Manufacturers attempt to measure customers' satisfaction with automobile dealerships through systems generally known as the customer satisfaction index or "CSI". The Manufacturers have modified the components of their CSI scores from time to time in the past, and they may replace them with different systems. In addition, a Manufacturer may limit the total 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 and Lincoln 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 the 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. S-47 49 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. 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. 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 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. We currently own six Ford, one Lincoln, one Mercury, 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 and Lincoln 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 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. We have not negotiated or executed the proposed new agreement, nor have we obtained Honda's consent for this offering. If Honda were to claim that we breached its existing agreement with us by consummating this offering and seek to enforce its remedies, we could be adversely affected. 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 S-48 50 Acura. For the nine-month period ended September 30, 1998, our Honda and Acura dealerships represented approximately 8.9% and 8.4% of our pro forma revenues and operating income, respectively. 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 are continuing to negotiate with Honda on the terms of the proposed new agreement. 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 has 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 acquisitions 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: - 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); - certain material changes in us or extraordinary corporate transactions such as a merger or sale of a material amount of our assets; - the removal of a dealership general manager without the consent of the Manufacturer - the use of dealership facilities to sell or service new vehicles of other Manufacturers in certain situations; and - changes 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 a reasonable likelihood of acquiring, a controlling interest in us. S-49 51 We are required to notify Honda with respect to any such acquisition or proposed acquisition, and if Honda does not approve of the acquisition, we are required to use our best efforts to prevent the acquisition or, if the acquisition has already occurred, to 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 proposed 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: - 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. - 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. Our Manufacturer agreements also specify that we cannot operate a dealership franchised by another Manufacturer in the same building as that Manufacturer's franchised dealership in certain situations. 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 dealers in their marketing areas. The dealerships do not have any cost advantage in purchasing new vehicles from 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 S-50 52 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 the dealerships compete. We believe that additional used car "superstores" will open in other markets in which we operate. We believe that the principal competitive factors in vehicle sales are the marketing campaigns conducted by Manufacturers, the ability of dealerships to offer a wide selection of the most popular vehicles, the location of dealerships and the quality of customer service. Other competitive factors include customer preference for particular brands of automobiles, pricing (including Manufacturer rebates and other special offers) and warranties. 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 in which 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, may 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 S-51 53 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. 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 hydraulic 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 transported or disposed, or arranged for the transport or 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 more 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. S-52 54 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. Of course, environmental laws and regulations and their interpretation and enforcement are subject to frequent change and we believe that the trend of more expansive and more strict environmental legislation and regulations will likely continue. Hence, we cannot guarantee that future compliance with environmental laws or regulations or the future discovery of unknown environmental conditions will not require additional expenditures by us, or that such expenditures would not be material. EMPLOYEES As of December 31, 1998, Group 1 employed 3,101 people, of whom 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. Because of our dependence on our Manufacturers, however, we may be affected by labor strikes, work slowdowns and walkouts at the manufacturers' manufacturing facilities. 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 Group 1 that, in the opinion of management, could reasonably 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 our real property, comprehensive coverage for our vehicle inventory, general liability insurance, employee dishonesty coverage and errors and omissions insurance in connection with its vehicle sales and financing activities. S-53 55 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS Set forth below are the Company's executive officers and directors, together with their positions and ages.
EXPIRATION OF TERM AS NAME AGE POSITION DIRECTOR - ---- --- -------- ---------- B.B. Hollingsworth, Jr............ 56 Chairman, President and Chief Executive Officer 2000 John T. Turner.................... 55 Senior Vice President -- Corporate Development Scott L. Thompson................. 40 Senior Vice President -- Chief Financial Officer and Treasurer John S. Bishop.................... 52 Senior Vice President -- Operations Charles M. Smith.................. 53 Senior Vice President -- Industry Relations; 1999 Director Bennett E. Bidwell................ 71 Director 2001 John H. Duncan.................... 71 Director 1999 Robert E. Howard, II.............. 51 Director; President of Howard Group 2000 Sterling B. McCall, Jr. .......... 63 Director; President of McCall Group 2001
Set forth below is a brief description of the business experience of the executive officers and directors of the Company. B.B. HOLLINGSWORTH, JR. has served as Chairman of Group 1 since March 1997 and as President and Chief Executive Officer of the Company since August 1996. Mr. Hollingsworth has been a director of Group 1 since August 1996. Prior to joining Group 1, 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 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. Hollingsworth served as a consultant to SCI. Prior to November 1997, Mr. Hollingsworth was a shareholder and director of Foyt Motors, Inc., a subsidiary of Group 1 that was acquired by Group 1 in November 1997. He has served as a director of several public and private companies. JOHN T. TURNER has served as Group 1's 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 Senior Vice President -- Chief Financial Officer and Treasurer of Group 1 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 Houston-area automobile dealerships with aggregate annual S-54 56 revenues of $180 million. Additionally, in connection with his position at KSA Industries, Inc. he served as a 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 Senior Vice President -- Operations since October 1998. From 1981 until 1998, he served as Group Vice President of Sales and Marketing for 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 Director of Group 1 since June 1997. Mr. Bidwell joined Chrysler 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 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 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) and McDonald & Company Securities, Inc. (1992-1995). Mr. Bidwell currently serves as a director for International Management Group, Budd Company and Kelly Management Group. JOHN H. DUNCAN has served as Director of Group 1 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 which he co-founded. Mr. Duncan currently serves as a director, Chairman of the Executive Committee and member of the Compensation Committee of Enron Corporation and a director and Chairman of the Compensation Committee of Enron Oil Trading & Transportation. 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 a Director of Group 1 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 the Company in November 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 Director of Group 1 since August 1996. Mr. McCall has served as President of McCall Group since November 1997. Mr. McCall has over 29 years experience in the automotive retailing industry and, prior to November 1997, was Chairman of Sterling McCall Toyota and Sterling McCall Lexus, both subsidiaries of Group 1 that were acquired by the Company 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 and a former Chairman of the Gulf States Toyota Dealer Council, and is 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. S-55 57 CHARLES M. SMITH has served as Senior Vice President -- Industry Relations of Group 1 since January 1, 1999. Mr. Smith has served as a Director of the Company since its formation in December 1996. From November 1997 to December 1998 Mr. Smith served as President of Smith Group. 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, which were acquired by the Company 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. S-56 58 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of Common Stock as of December 31, 1998 by (1) each person known by Group 1 to own beneficially more than five percent of its outstanding Common Stock, (2) Group 1's Chief Executive Officer and certain of the Company's other executive officers, (3) each of Group 1's directors and (4) all executive officers and directors as a group. All persons listed have an address c/o of Group 1's principal executive offices and have sole voting and dispositive power over the shares of common stock indicated as owned by such person unless otherwise indicated.
BENEFICIAL OWNERSHIP(1) ----------------------- NAME OF BENEFICIAL OWNERS SHARES PERCENT - ------------------------- ---------- -------- B.B. Hollingsworth, Jr...................................... 613,135 3.4% John T. Turner.............................................. 114,645 * Scott L. Thompson........................................... 83,086 * John S. Bishop.............................................. -- * Charles M. Smith............................................ 714,492 3.9 Robert E. Howard, II........................................ 2,998,805(2) 16.5 Sterling B. McCall, Jr. .................................... 1,472,001(3) 8.1 John H. Duncan.............................................. 201,701 1.1 Bennett E. Bidwell.......................................... 3,333 * James S. Carroll............................................ 1,052,667(4) 5.8 All directors and executive officers as a group (9 persons including the directors and executive officers named above).................................................... 6,201,198 33.6
- --------------- * Less than 1%. (1) Under the regulations of the Securities Exchange Commission (the "Commission"), shares are deemed to be "beneficially owned" by a person if he directly or indirectly has or shares the power to vote or dispose of such shares, whether or not he has any pecuniary interest in such shares, or if he has the right to acquire the power to vote or dispose of such shares within 60 days, including any right to acquire such power through the exercise of any option, warrant or right. The shares beneficially owned by Messrs. Hollingsworth, Turner, Thompson, Bishop and Smith include 54,667, 100,000, 53,280, 0 and 0 shares, respectively, that may be acquired by such person within 60 days through the exercise of stock options. The shares owned by the executive officers and directors as a group include 214,613 shares that may be acquired by such persons within 60 days through the exercise of stock options. (2) Includes (1) 592,303 shares held in escrow with Chase Bank of Texas pending release to Mr. Howard upon completion of authorizing documentation, (2) 780,000 shares held by Howard Investments, L.L.C., which is controlled by Mr. Howard and (3) 25,450 shares held by Century Reinsurance Company, Inc., which is controlled by Mr. Howard. (3) Includes (1) 637,475 shares owned by SMC Investment, Inc., which is controlled by Mr. McCall; (2) 250,248 shares owned by Gulf Coast Family Limited Partnership, which is controlled by Mr. McCall, (3) 106,041 shares owned by SBM-T Family Limited Partnership, which is controlled by Mr. McCall and (4) 30,629 shares owned by Mr. McCall's spouse. (4) Includes 1,052,267 shares held by J. C. World Limited Partnership, which is indirectly controlled by Mr. Carroll and 400 shares owned by his children. S-57 59 DESCRIPTION OF CREDIT FACILITY GENERAL The credit facility is among Group 1, our subsidiaries, Chase Bank of Texas, National Association, as administrative agent (the "Agent"), Comerica Bank, as floorplan agent, NationsBank, N.A., as documentation agent, U.S. Bank National Association, Bank of America National Trust & Savings Association, Bank One, N.A. and BankBoston, N.A., as co-agents, and other lending institutions party thereto (the "Lenders"). The credit facility generally provides for an acquisition facility equal to $130 million (which will be reduced to $110 million upon consummation of the Notes offering) and a floorplan facility equal to $295 million, subject to certain advance limitations on used and program vehicles, demonstrator vehicles and rental vehicles. Group 1 and our subsidiaries, which are co-borrowers under the credit facility, are generally jointly and severally liable for all obligations. SECURITY Our indebtedness under the credit facility is secured by (1) the pledge of most of the capital stock of all of our subsidiaries (other than the stock of subsidiaries owning General Motors dealerships) and (2) liens on substantially all of our other material property. INTEREST Acquisition loans under the credit facility bear interest at a floating rate based (at our option) upon (1) the base rate with respect to base rate loans, plus a margin percentage or (2) LIBOR, plus a margin percentage. The base rate is the greater of (a) the prime rate or (b) the federal funds rate plus 0.50%. The margin percentage for base rate loans varies from 0.25% to 1.75% depending on our leverage ratio. The margin percentage for acquisition loans that are Eurodollar loans varies from 1.75% to 3.25% depending on our leverage ratio. Our leverage ratio is generally defined as the ratio of: (1) our indebtedness minus the sum of (a) retail loan guarantees, (b) floorplan loans and (c) subordinated indebtedness to (2) our consolidated pro forma EBITDA minus pro forma floorplan interest expense. Floorplan loans under the credit facility bear interest at a floating rate based (at our option) upon either (1) the greater of (a) the Comerica prime rate minus 0.50% or (b) the federal funds rate minus 0.50% or (2) LIBOR plus 1.50%. MATURITY The credit facility matures on December 31, 2001. The credit facility provides that the loans may be borrowed, repaid and reborrowed from time to time until such termination date, subject to the satisfaction of certain conditions on the date of any such borrowing and, in the case of repayment of Eurodollar loans, compliance with certain yield protection provisions. SCHEDULED PAYMENTS AND PREPAYMENTS The credit facility does not require any scheduled payments of principal. Amounts under the credit facility may be voluntarily prepaid without premium or penalty, subject to certain notice requirements, certain required minimum prepayment amounts and in the case of Eurodollar loans, certain yield protection provisions. CONDITIONS TO EXTENSIONS OF CREDIT The obligation of the Lenders to make subsequent loans or extend letters of credit is subject S-58 60 to the satisfaction of certain customary conditions including, but not limited to, the absence of a default or event of default under the credit facility, all representations and warranties under the credit facility and the other related loan documents being true and correct in all material respects, and that there has been no material adverse change in our properties or business. COVENANTS The credit facility requires us to meet certain financial tests, including meeting a minimum net worth test and minimum fixed charge coverage ratio, interest coverage ratio and current ratio tests. The credit facility also contains covenants which, among other things, limit the incurrence of additional indebtedness, the nature of our business, investments, leases of assets, creation and ownership of subsidiaries, dividends, transactions with affiliates, mergers, consolidations and acquisitions and dispositions of assets, liens and encumbrances and other matters customarily restricted in credit agreements of this type. The credit facility also contains additional covenants that require us to maintain our properties, together with insurance thereon, to provide certain information to the Agent and the Lenders, including financial statements, notices and reports, to permit inspections of our books and records and to comply with applicable laws. EVENTS OF DEFAULT The credit facility contains customary events of default, including payment defaults, breach of representations, warranties and covenants (subject to certain cure periods), cross-defaults to certain other indebtedness, certain events of bankruptcy and insolvency, judgment defaults in excess of $5 million and the failure of any of the loan documents to be in full force and effect. S-59 61 VALIDITY OF THE COMMON STOCK The validity of the common stock will be passed upon for Group 1 by Vinson & Elkins L.L.P., 1001 Fannin, Houston, Texas 77002-6760, and for the underwriters by Sullivan & Cromwell, 125 Broad Street, New York, New York 10004. John S. Watson, the Secretary of Group 1, is a partner of Vinson & Elkins L.L.P. EXPERTS The audited financial statements of Group 1 included in this prospectus supplement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said reports. S-60 62 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 63 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Group 1 Automotive, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of Group 1 Automotive, Inc. and Subsidiaries (a Delaware corporation) (the Company) as of December 31, 1996 and 1997 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1996 and 1997, and the results of its operations and cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas March 6, 1998 F-2 64 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, ------------------ SEPTEMBER 30, 1996 1997 1998 ------- -------- ------------- (UNAUDITED) (DOLLARS IN THOUSANDS) CURRENT ASSETS: Cash and cash equivalents.............................. $11,679 $ 35,092 $ 55,403 Accounts receivable, net............................... 5,899 9,749 22,233 Inventories............................................ 47,674 105,421 193,324 Deferred income taxes.................................. -- 8,692 14,627 Other assets........................................... 859 2,728 3,265 ------- -------- -------- Total current assets........................... 66,111 161,682 288,852 ------- -------- -------- PROPERTY AND EQUIPMENT, net.............................. 4,129 21,586 44,741 GOODWILL, net............................................ 1,457 27,078 112,884 OTHER ASSETS............................................. 1,177 2,803 3,559 ------- -------- -------- Total assets................................... $72,874 $213,149 $450,036 ======= ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Floorplan notes payable................................ $42,544 $ 58,488 $160,316 Current maturities of long-term debt................... 34 2,316 1,487 Deferred income taxes.................................. 357 -- -- Accounts payable and accrued expenses.................. 13,849 45,403 73,417 ------- -------- -------- Total current liabilities...................... 56,784 106,207 235,220 ------- -------- -------- DEBT, net of current maturities.......................... 310 7,053 65,393 DEFERRED INCOME TAXES.................................... 58 3,699 4,282 OTHER LIABILITIES........................................ 3,512 6,818 14,321 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, 1,000,000 shares authorized, none issued or outstanding............................... -- -- -- Common stock, $.01 par value, 50,000,000 shares authorized, 3,570,302, 14,673,051 and 18,240,795 issued and outstanding.............................. 36 147 182 Additional paid-in capital............................. 6,270 91,846 118,509 Retained earnings (deficit)............................ 5,904 (2,529) 12,721 Treasury stock, at cost, 0, 10,000 and 40,000 shares... -- (92) (592) ------- -------- -------- Total stockholders' equity..................... 12,210 89,372 130,820 ------- -------- -------- Total liabilities and stockholders' equity..... $72,874 $213,149 $450,036 ======= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 65 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
PRO FORMA NINE MONTHS ENDED YEAR ENDED DECEMBER 31, YEAR ENDED SEPTEMBER 30, ------------------------------ DECEMBER 31, ------------------------ 1995 1996 1997 1997 1997 1998 -------- -------- -------- ------------ ----------- ---------- (UNAUDITED) (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) REVENUES: New vehicle sales................ $151,227 $164,979 $228,044 $ 513,864 $131,521 $ 662,323 Used vehicle sales............... 79,448 88,477 135,507 288,010 82,028 363,096 Parts and service sales.......... 16,940 20,649 30,006 77,215 16,186 97,264 Other dealership revenues, net... 6,388 7,387 10,410 23,206 6,381 34,833 -------- -------- -------- ---------- -------- ---------- Total revenues........... 254,003 281,492 403,967 902,295 236,116 1,157,516 COST OF SALES: New vehicle sales................ 140,086 152,709 212,349 471,664 123,027 609,918 Used vehicle sales............... 71,554 78,912 123,932 266,976 74,449 335,180 Parts and service sales.......... 8,267 10,277 13,085 36,524 6,828 45,081 -------- -------- -------- ---------- -------- ---------- Total cost of sales...... 219,907 241,898 349,366 775,164 204,304 990,179 -------- -------- -------- ---------- -------- ---------- GROSS PROFIT....................... 34,096 39,594 54,601 127,131 31,812 167,337 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES......................... 25,628 30,027 43,360 98,967 24,382 125,282 DEPRECIATION AND AMORTIZATION...... 538 741 1,020 2,752 541 4,375 -------- -------- -------- ---------- -------- ---------- Income from operations... 7,930 8,826 10,221 25,412 6,889 37,680 OTHER INCOME AND EXPENSES: Floorplan interest expense....... (3,410) (3,112) (3,810) (5,194) (2,632) (8,994) Other interest expense, net...... (61) (56) (176) (926) (21) (2,705) Other income (expense), net...... (80) (69) 156 88 43 (8) -------- -------- -------- ---------- -------- ---------- INCOME BEFORE INCOME TAXES......... 4,379 5,589 6,391 19,380 4,279 25,973 PROVISION FOR INCOME TAXES......... 744 382 573 7,967 256 10,723 -------- -------- -------- ---------- -------- ---------- NET INCOME......................... $ 3,635 $ 5,207 $ 5,818 $ 11,413 $ 4,023 $ 15,250 ======== ======== ======== ========== ======== ========== S Corporation pro forma income taxes (unaudited)................ 990 1,831 1,465 1,434 -------- -------- -------- -------- Pro forma net income (unaudited)... $ 2,645 $ 3,376 $ 4,353 $ 2,589 ======== ======== ======== ======== Earnings per share on pro forma net income: Basic............................ $ 0.78 $ 0.90 Diluted.......................... $ 0.76 $ 0.87 Weighted average shares outstanding: Basic............................ 14,672,804 16,957,327 Diluted.......................... 15,098,594 17,538,446
The accompanying notes are an integral part of these consolidated financial statements. F-4 66 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL RETAINED -------------------- PAID-IN EARNINGS TREASURY SHARES AMOUNTS CAPITAL (DEFICIT) STOCK TOTAL ---------- ------- ---------- --------- -------- -------- (DOLLARS IN THOUSANDS) BALANCE, December 31, 1994.................... 3,353,461 $ 34 $ 3,047 $ 2,266 $ -- $ 5,347 Net income.............. -- -- -- 3,635 -- 3,635 Capital contribution.... -- -- 1,725 -- -- 1,725 Dividends............... -- -- -- (2,086) -- (2,086) ---------- ---- -------- -------- ------- -------- 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............... -- -- -- (3,118) -- (3,118) ---------- ---- -------- -------- ------- -------- BALANCE, December 31, 1996.................... 3,570,302 36 6,270 5,904 -- 12,210 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 Net income.............. -- -- -- 5,818 -- 5,818 Dividends............... -- -- -- (14,251) -- (14,251) ---------- ---- -------- -------- ------- -------- BALANCE, December 31, 1997.................... 14,673,051 147 91,846 (2,529) (92) 89,372 Net income.............. -- -- -- 15,250 -- 15,250 Issuance of common stock in acquisitions...... 3,516,805 35 26,770 -- -- 26,805 Proceeds from sales of stock under employee benefit plans........ 50,939 -- 1,130 -- -- 1,130 Issuance of treasury stock to employee benefit plans........ -- -- (1,237) -- 1,237 -- Purchase of treasury stock................ -- -- -- -- (1,737) (1,737) ---------- ---- -------- -------- ------- -------- BALANCE, September 30, 1998 (unaudited)........ 18,240,795 $182 $118,509 $ 12,721 $ (592) $130,820 ========== ==== ======== ======== ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 67 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------- ------------------ 1995 1996 1997 1997 1998 ------- ------- -------- -------- ------- (UNAUDITED) (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 3,635 $ 5,207 $ 5,818 $ 4,023 $15,250 Adjustments to reconcile net income to net cash provided by (used in) operating activities -- Depreciation and amortization........................... 538 741 1,020 541 4,375 Non-cash compensation, net of tax....................... -- -- 575 -- -- Deferred income taxes................................... 191 (316) (1,015) 45 (6,127) Provision for doubtful accounts and uncollectible notes................................................. 85 108 270 69 219 Loss (gain) on sale of assets........................... 15 18 (112) (18) (123) Changes in assets and liabilities -- Accounts receivable................................... 198 295 1,564 485 (6,210) Inventories........................................... (4,874) (6,107) 5,686 12,533 25,864 Other assets.......................................... 197 (514) 3,609 (773) (821) Due from affiliates, net.............................. -- -- 491 -- -- Floorplan notes payable............................... 3,877 5,508 (5,374) (13,539) (34,819) Accounts payable and accrued expenses................. 3,335 2,392 (5,610) (1,125) 12,208 ------- ------- -------- -------- ------- Total adjustments.................................. 3,562 2,125 1,104 (1,782) (5,434) ------- ------- -------- -------- ------- Net cash provided by operating activities.......... 7,197 7,332 6,922 2,241 9,816 ------- ------- -------- -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Increase in notes receivable.............................. (375) (235) (362) (98) (1,760) Collections on notes receivable........................... -- 192 88 29 947 Purchases of property and equipment....................... (928) (1,977) (2,164) (886) (7,218) Proceeds from sale of property and equipment.............. -- -- 1,935 279 152 Cash received in acquisitions, net of cash paid........... -- (2,595) 11,164 -- (68,122) ------- ------- -------- -------- ------- Net cash provided by (used in) investing activities....................................... (1,303) (4,615) 10,661 (676) (76,001) ------- ------- -------- -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under floorplan facilities for acquisition financing............................................... -- -- (33,523) -- 33,523 Principal payments of long-term debt...................... (172) (153) (471) (205) (2,632) Borrowings of long-term debt.............................. 13 212 109 -- 56,214 Issuance of common stock.................................. -- 1,500 -- -- 1,128 Initial public offering, net.............................. -- -- 51,759 -- -- Purchase of treasury stock................................ -- -- (92) -- (1,737) Contribution from stockholders............................ 1,725 -- -- -- -- Dividends paid in cash, prior to the initial public offering................................................ (2,086) (3,117) (11,952) (4,451) -- ------- ------- -------- -------- ------- Net cash provided by (used in) financing activities....................................... (520) (1,558) 5,830 (4,656) 86,496 ------- ------- -------- -------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS................... 5,374 1,159 23,413 (3,091) 20,311 CASH AND CASH EQUIVALENTS, beginning of period.............. 5,146 10,520 11,679 11,679 35,092 ------- ------- -------- -------- ------- CASH AND CASH EQUIVALENTS, end of period.................... $10,520 $11,679 $ 35,092 $ 8,588 $55,403 ======= ======= ======== ======== ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for -- Interest................................................ $ 3,428 $ 3,118 $ 4,200 $ 2,814 $10,702 Taxes................................................... 475 924 131 41 12,293
The accompanying notes are an integral part of these consolidated financial statements. F-6 68 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION: Group 1 Automotive, Inc. and subsidiaries (Group 1 or the Company) was founded in December 1995 to become a leading consolidator in the highly fragmented automobile retailing industry. In October 1997, Group 1 acquired four separate dealership groups (the Founding Groups), consisting of 30 dealership franchises and related businesses, in exchange for consideration consisting of a combination of cash and common stock. Concurrent with the acquisition of the Founding Groups, Group 1 completed an initial public offering of 5,520,000 shares of common stock. The Company is primarily engaged in the retail sale of new and used vehicles and the sale of related finance, insurance and service contracts thereon. In addition, the Company sells automotive parts and provides vehicle servicing. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Presentation For financial statement presentation purposes, Howard Group, one of the Founding Groups, has been identified as the accounting acquiror. The acquisition of the remaining Founding Groups was accounted for using the purchase method of accounting. The operations of Group 1 Automotive, Inc., the parent company, and the Founding Groups, excluding the Howard Group, are included in the results of operations beginning October 31, 1997, the effective closing date of the acquisitions for accounting purposes. The results of operations of the Howard Group are included for the full year for all periods presented. The allocation of purchase price to the assets acquired and liabilities assumed has been initially assigned and recorded based on preliminary estimates of fair value and may be revised as additional information concerning the valuation of such assets and liabilities becomes available. All significant intercompany balances and transactions have been eliminated in consolidation. Interim Financial Information The interim financial statements as of September 30, 1998, and for the nine months ended September 30, 1997 and 1998, are unaudited, and certain information normally included in financial statements prepared in accordance with generally accepted accounting principles has not been included herein. In the opinion of management, all adjustments necessary to fairly present the financial position, results of operations and cash flows with respect to the interim financial statements, have been properly included. Due to seasonality and other factors, the results of operations for the interim periods are not necessarily indicative of the results that will be realized for the entire fiscal year. Revenue Recognition Revenue from vehicle sales, parts sales and vehicle service is recognized upon delivery to the customer. Finance, Insurance and Service Contract Income Recognition The Company arranges financing for customers through various institutions and receives financing fees equal to the difference between the loan rates charged to customers over the predetermined financing rates set by the financing institution. In addition, the Company receives commissions from the sale of credit life and disability insurance and extended service contracts to customers. F-7 69 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company may be charged back (chargebacks) for unearned financing fees, insurance or service contract commissions in the event of early termination of the contracts by customers. The revenues from financing fees and commissions are recorded at the time of the sale of the vehicles and a reserve for future chargebacks is established based on historical operating results and the termination provisions of the applicable contracts. Finance, insurance and service contract income, net of estimated chargebacks, are included in other dealership revenue in the accompanying combined financial statements. Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments that have an original maturity of three months or less at the date of purchase and contracts in transit. Contracts in transit represent contracts on vehicles sold, for which the proceeds are in transit from financing institutions. Inventories New, used and demonstrator vehicles are stated at the lower of cost or market, determined on a specific-unit basis. Parts and accessories are stated at the lower of cost (determined on a first-in, first-out basis) or market. Property and Equipment Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are capitalized and amortized over the lesser of the life of the lease or the estimated useful life of the asset. Expenditures for major additions or improvements which extend the useful lives of assets are capitalized. Minor replacements, maintenance and repairs which do not improve or extend the life of such assets are charged to operations as incurred. Disposals are removed at cost less accumulated depreciation, and any resulting gain or loss is reflected in current operations. Goodwill Goodwill represents the excess of the purchase price of dealerships acquired over the fair value of tangible assets acquired at the date of acquisition. Goodwill is amortized on a straight-line basis over 40 years. Amortization expense charged to operations totaled approximately $27,000, $37,000 and $170,000 for the years ended December 31, 1995, 1996 and 1997, respectively. Accumulated amortization totaled approximately $129,000 and $299,000 as of December 31, 1996 and 1997, respectively. Income Taxes The Company follows the liability method of accounting for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109. Under this method, deferred income taxes are recorded based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the underlying assets are realized or liabilities are settled. A valuation allowance reduces deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized. Prior to acquisition of the Founding Groups, certain entities of the Howard Group elected S Corporation status, as defined by the Internal Revenue Code, whereby the companies were not F-8 70 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) subject to taxation for federal purposes. Under S Corporation status, the stockholders report their share of these companies' taxable earnings or losses in their personal tax returns. All S Corporation elections were terminated in conjunction with the acquisitions. Fair Value of Financial Instruments The Company's financial instruments consist primarily of floorplan notes payable and long-term debt. The carrying amount of these financial instruments approximates fair value due either to length of maturity or existence of variable interest rates that approximate market rates. In January 1998, the Company entered into a three-year interest rate swap agreement with a bank. The effect of this swap will be to convert the interest rate on $75 million of debt to a fixed rate of approximately 7.16%. Advertising The Company expenses production and other costs of advertising as incurred. Advertising expense for the years ended December 31, 1995, 1996 and 1997 totaled $3.4, $3.2 and $5.9 million, respectively. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The significant estimates made by management in the accompanying financial statements relate to reserves for used vehicle valuations, retail loan guarantees and future chargebacks on finance, insurance and service contract income. Actual results could differ from those estimates. Statements of Cash Flows For purposes of the statements of cash flows, cash and cash equivalents include contracts in transit which are typically collected within one month. Additionally, the net change in floorplan financing of inventory, which is a customary financing technique in the industry, is reflected as an operating activity in the statements of cash flows. Earnings Per Share SFAS No. 128 requires the presentation of basic earnings per share and diluted earnings per share in financial statements of public enterprises rather than primary and fully diluted earnings per share as previously required. Under the provisions of this statement, basic earnings per share is computed based on weighted average shares outstanding and excludes dilutive securities. Diluted earnings per share is computed including the impacts of all potentially dilutive securities. As the Company was not a public enterprise until October 1997, and the companies included in the statements of operations were under different tax structures (S Corporations and C Corporations), no earnings per share data has been presented for the historical results of F-9 71 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) operations for the years ended December 31, 1995, 1996 and 1997. The following table sets forth the shares outstanding for the earnings per share calculations:
PRO FORMA NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, 1997 1998 ------------ ------------- Common stock outstanding, beginning of period............ 14,673,051 14,673,051 Weighted average common stock issued in acquisitions... -- 2,280,121 Weighted average common stock issued to Employee Stock Purchase Plan....................................... -- 58,259 Weighted average common stock issued in stock option exercises........................................... -- 4,731 Less: Weighted average treasury repurchased............ (247) (58,835) ---------- ---------- Shares used in computing basic earnings per share........ 14,672,804 16,957,327 Dilutive effect of stock options, net of assumed repurchase of treasury stock........................ 425,790 581,119 ---------- ---------- Shares used in computing diluted earnings per share...... 15,098,594 17,538,446 ========== ==========
Recent Accounting Pronouncements During June 1997, Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of an Enterprise and Related Information" was issued. SFAS No. 131 requires that segment reporting for public reporting purposes be conformed to the segment reporting used by management for internal purposes. Additionally, it adds a requirement for the presentation of certain segment data on a quarterly basis starting in 1999. Management is currently evaluating the impact of this standard on the Company's future financial reporting. Reclassifications Certain reclassifications have been made to prior year financial statements to conform them with the current year presentation. 3. BUSINESS COMBINATIONS: The accompanying consolidated balance sheet includes preliminary allocations of the purchase price of the Founding Groups which are subject to final adjustment. Founding Groups The following pro forma financial information consists of income statement data from continuing operations as presented in the consolidated financial statements plus (1) the acquisition of the Founding Groups assuming the acquisitions occurred on January 1, 1996 and F-10 72 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1997, respectively, (2) the completion of the IPO as of the beginning of the respective periods and (3) certain pro forma adjustments discussed below.
1996 1997 --------- --------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED) Revenues.................................................... $821,913 $902,295 Gross profit................................................ 116,130 127,131 Income from operations...................................... 21,822 25,412 Net income.................................................. 9,447 11,413 Basic earnings per share.................................... 0.64 0.78 Diluted earnings per share.................................. $ 0.63 $ 0.76
Acquisitions (unaudited): During the first nine months of 1998, the Company acquired thirty-three 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 of 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 $87.3 million of goodwill, which is being amortized over 40 years. The following unaudited pro forma financial information consists of income statement data from continuing operations as presented in the consolidated financial statements plus (1) unaudited income statement data for all acquisitions, completed before September 30, 1998, assuming that they occurred on January 1, 1997, (2) the completion of the initial public offering as of January 1, 1997 and (3) certain pro forma adjustments discussed below.
NINE MONTHS ENDED SEPTEMBER 30, -------------------------- 1998 1997 ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues.................................................. $1,381,152 $1,204,339 Gross profit.............................................. 202,405 176,580 Income from operations.................................... 46,233 39,651 Net income................................................ 17,079 14,300 Basic earnings per share.................................. 0.94 0.79 Diluted earnings per share................................ 0.91 0.77
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 F-11 73 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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; and (f) incremental provisions for federal and state income taxes relating to the compensation differential, S Corporation income and other pro forma adjustments. 4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS: Accounts receivable consist of the following:
DECEMBER 31, ----------------------- 1996 1997 --------- ---------- (DOLLARS IN THOUSANDS) Amounts due from Manufacturers.............................. $3,575 $ 3,889 Due from finance companies.................................. 1,002 3,217 Parts and service receivables............................... 652 2,273 Other....................................................... 778 890 ------ ------- Total accounts receivable......................... 6,007 10,269 Less -- Allowance for doubtful accounts..................... (108) (520) ------ ------- Accounts receivable, net.......................... $5,899 $ 9,749 ====== =======
Inventories consist of the following:
DECEMBER 31, ----------------------- 1996 1997 --------- ---------- (DOLLARS IN THOUSANDS) New vehicles................................................ $36,973 $ 70,574 Used vehicles............................................... 8,613 25,690 Rental vehicles............................................. -- 2,495 Parts, accessories and other................................ 2,088 6,662 ------- -------- Total inventories................................. $47,674 $105,421 ======= ========
Accounts payable and accrued expenses consist of the following:
DECEMBER 31, ---------------------- 1996 1997 --------- --------- (DOLLARS IN THOUSANDS) Account payable, trade...................................... $ 6,136 $18,511 Reserve for finance, insurance and service contract chargebacks............................................... 2,891 5,265 Reserve for retail loan guarantees.......................... -- 2,010 Other accrued expenses...................................... 4,822 19,617 ------- ------- Total accounts payable and accrued expenses....... $13,849 $45,403 ======= =======
F-12 74 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. PROPERTY AND EQUIPMENT: Property and equipment consist of the following:
ESTIMATED DECEMBER 31, USEFUL LIVES ----------------------- IN YEARS 1996 1997 ------------ ---------- ---------- (DOLLARS IN THOUSANDS) Land................................................ -- $ -- $ 7,665 Buildings........................................... 20 to 35 32 5,403 Leasehold improvements.............................. 7 to 15 1,086 3,808 Machinery and equipment............................. 3 to 7 2,461 2,995 Furniture and fixtures.............................. 5 to 7 1,387 4,590 Company vehicles.................................... 5 2,146 528 ------- ------- Total..................................... 7,112 24,989 Less -- Accumulated depreciation.................... (2,983) (3,403) ------- ------- Property and equipment, net............... $ 4,129 $21,586 ======= =======
6. FLOORPLAN NOTES PAYABLE: Floorplan notes payable reflect amounts payable for the purchase of specific vehicle inventory and consist of the following:
DECEMBER 31, ----------------------- 1996 1997 ---------- ---------- (DOLLARS IN THOUSANDS) New vehicles................................................ $38,678 $42,918 Used vehicles............................................... 3,866 13,174 Rental vehicles............................................. -- 2,396 ------- ------- Total floorplan notes payable..................... $42,544 $58,488 ======= =======
Floorplan notes payable are due to various floorplan lenders, bearing interest at rates ranging from prime minus 100 basis points to prime plus 175 basis points. As of December 31, 1996 and 1997 the weighted average interest rate on floorplan notes payable outstanding was 7.75% and 7.93%. Interest expense on floorplan notes payable totaled approximately $3.4, $3.1 and $3.9 million for the years ended December 31, 1995, 1996 and 1997, respectively. The floorplan arrangements permit the Company to borrow up to $150.4 million, dependent upon new and used vehicle sales and inventory levels. As of December 31, 1997, total available borrowings under floorplan agreements were approximately $91.9 million. Vehicle payments on the notes are due when the related vehicles are sold. The notes are collateralized by substantially all of the inventories of the Company. F-13 75 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. LONG-TERM DEBT:
DECEMBER 31, ----------------------- 1996 1997 ------- ---------- (DOLLARS IN THOUSANDS) Note payable to a bank with monthly principal payments of $41,892, due through March 2004, bearing interest at 7.5%, payable monthly........................................... $ -- $ 3,138 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 August 2001 with interest ranging from 7.0% to 13.7%...... 344 1,281 ---- ------- Total long-term debt.............................. 344 9,369 Less -- Current portion..................................... (34) (2,316) ---- ------- Long-term portion................................. $310 $ 7,053 ==== =======
The notes payable are secured by the land, buildings or other assets for which the debt was incurred. On December 31, 1997, Group 1 entered into a $125 million, three-year revolving Credit Agreement with a bank group (the "Credit Facility"). There were no amounts drawn on the Credit Facility as of December 31, 1997. The Credit Facility provides for a floorplan line of credit of $75 million for the financing of vehicle inventories and an acquisition line of credit of $50 million, for the financing of acquisitions, general corporate purposes or capital expenditures. The amount of funds available under the acquisition line is dependent upon a calculation based on the Company's cash flow and maintaining certain financial ratios. At Group 1's option the acquisition line of credit of the Credit Facility may bear interest based on the London Interbank Offered Rate plus a margin varying from 150 to 275 basis points, dependent upon certain financial ratios. Additionally, the loan agreement contains various covenants including financial ratios and other requirements which must be maintained by the Company. The agreements also limit the amount the Company may pay as cash dividends. Total interest expense on long-term debt was approximately $56,000 and $176,000 for the years ended December 31, 1996 and 1997, respectively. F-14 76 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The aggregate maturities of long-term debt as of December 31, 1997 are as follows:
(DOLLARS IN THOUSANDS) 1998........................................................ $2,316 1999........................................................ 1,206 2000........................................................ 1,139 2001........................................................ 1,056 2002........................................................ 897 Thereafter.................................................. 2,755 ------ Total long-term debt.............................. $9,369 ======
8. CAPITAL STOCK AND STOCK OPTIONS: In 1996, Group 1 adopted the 1996 Stock Incentive Plan (the Plan), which provides for the granting or awarding of stock options, stock appreciation rights and restricted stock to officers and other key employees and directors. The number of shares authorized and reserved for issuance under the Plan is 2,000,000 shares of which 752,550 are available for future issuance. In general, the terms of the option awards (including vesting schedules) are established by the Compensation Committee of the Company's Board of Directors. As of December 31, 1997, the Company has granted options to employees and directors covering an aggregate of 1,247,450 shares of common stock. All outstanding options are exercisable over a period not to exceed 10 years and vest over a five- or six-year period. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," which, if fully adopted, requires the Company to record stock-based compensation at fair value. The Company has adopted the disclosure requirements of SFAS No. 123 and has elected to record employee compensation expense in accordance with Accounting Principles Board (APB) Opinion No. 25. Accordingly, compensation expense is recorded for stock options based on the excess of the fair market value of the common stock on the date the options were granted over the aggregate exercise price of the options. As the exercise price of options granted under the Plan has been equal to or greater than the market price of the Company's stock on the date of grant, no compensation expense related to the Plan has been recorded. Had compensation expense for the Plan been determined based on the provisions of SFAS No. 123, the impact on the Company's net income would have been as follows for the year ended December 31, 1997: Net income as reported (in thousands)....................... $5,818 Pro forma net income under FAS 123 (in thousands)........... $5,451
F-15 77 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes the Company's outstanding stock options:
YEAR ENDED DECEMBER 31, 1997 -------------------------- WEIGHTED AVERAGE NUMBER EXERCISE PRICE --------- -------------- Options outstanding, beginning of year..................... 205,000 $2.90 Grants: First quarter 1997 (all at $2.90 per share).............. 360,000 2.90 Fourth quarter 1997 (all at $12.00 per share)............ 682,450 12.00 --------- ----- Options outstanding, end of year........................... 1,247,450 $7.88 ========= =====
At December 31, 1997, 129,843 options were exercisable at a weighted average exercise price of $6.56. The weighted average exercise price of options granted during the year ended December 31, 1997 was $8.86. The weighted average remaining contractual life of options outstanding is 9.5 years. The weighted average fair value per share of options granted during the years ended December 31, 1996 and 1997 is $0.45 and $5.94, respectively. The fair value of the options granted prior to the initial public offering were estimated on the date of the grant using the minimum value method as the Company was not a public entity and was not able to use the Black-Scholes model because estimating the expected volatility was not feasible. The fair value of options granted at or subsequent to the initial public offering is estimated on the date of grant using the Black-Scholes option pricing model. The following table summarizes the weighted average information used in determining the fair value of the options granted during the years ended December 31, 1996 and 1997:
1996 1997 ---- ---- Weighted average risk-free interest rate.................... 5.0% 5.9% Weighted average expected life of options................... 6 years 10 years Weighted average expected volatility........................ N/A 58.1% Weighted average expected dividends......................... -- --
In September 1997, Group 1 adopted Group 1 Automotive's 1998 Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan authorizes the issuance of up to 200,000 shares of Common Stock and provides that no options may be granted under the Purchase Plan after June 30, 2007. The Purchase Plan is available to all employees of the Company and its participating subsidiaries. At the end of each fiscal quarter ("Option Period") during the term of the Purchase Plan, the employee contributions are used to acquire shares of Common Stock at 85% of the fair market value of the Common Stock on the first or the last day of the Option Period, whichever is lower. 9. RELATED-PARTY TRANSACTIONS: The principals of the Founding Groups lease certain of the dealership facilities to Group 1 under long-term operating leases. Additional information regarding the terms of these leases is contained in Note 10, "Operating Leases." In connection with the acquisitions the principal stockholder of the Howard Group acquired certain non-operating assets (recreational vehicles and properties) owned by the Howard Group. The purchase price, which approximated fair market value, was approximately $2.0 million. F-16 78 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. OPERATING LEASES: The Company leases various facilities and equipment under long-term operating lease agreements, including leases with related parties. The related-party leases expire on December 31, 2027 and are cancelable, at the Company's option, every five years beginning in 2007. The third-party leases are non-cancelable and expire on various dates through August 2013. Future minimum lease payments for operating leases are as follows:
YEAR ENDED DECEMBER 31, RELATED PARTIES THIRD PARTIES TOTAL ----------------------- --------------- ------------- ------- (DOLLARS IN THOUSANDS) 1998........................................... $ 5,022 $ 2,025 $ 7,048 1999........................................... 5,076 1,731 6,807 2000........................................... 5,044 1,671 6,715 2001........................................... 5,044 989 6,032 2002........................................... 4,909 570 5,479 Thereafter..................................... 24,412 5,038 29,450 ------- ------- ------- Total................................ $49,507 $12,024 $61,531 ======= ======= =======
Total rent expense under all operating leases, including operating leases with related parties, was approximately $2.2, $2.3 and $3.3 million for the years ended December 31, 1995, 1996 and 1997, respectively. Total rental expense for the year ending December 31, 1998 is not anticipated to be materially different than the total rental expense incurred by all of the companies for the year ended December 31, 1997. Rental expense on related-party leases, which is included in the above amounts, totaled approximately $1.8, $1.9 and $2.6 million for the years ended December 31, 1995, 1996 and 1997, respectively. 11. INCOME TAXES: Federal and state income taxes are as follows:
DECEMBER 31, ------------------------ 1995 1997 1996 ----- ------ ------- (DOLLARS IN THOUSANDS) Federal -- Current.................................................. $476 $ 587 $1,291 Deferred................................................. 161 (262) (762) State -- Current.................................................. 77 111 297 Deferred................................................. 30 (54) (253) ---- ----- ------ Provision for income taxes................................. $744 $ 382 $ 573 ==== ===== ======
F-17 79 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Actual income tax expense differs from income tax expense computed by applying the U.S. federal statutory corporate tax rate of 34 percent to income before income taxes as follows:
DECEMBER 31, -------------------------- 1995 1996 1997 ------ ------- ------- (DOLLARS IN THOUSANDS) Provision at the statutory rate........................ $1,489 $ 1,900 $ 2,173 Increase (decrease) resulting from -- Income of S Corporations............................. (877) (1,585) (1,269) State income tax, net of benefit for federal deduction......................................... 70 38 29 Deferred tax assets realized on conversion of S Corporations to C Corporations.................... -- -- (403) Other................................................ 62 29 43 ------ ------- ------- Provision for income taxes............................. $ 744 $ 382 $ 573 ====== ======= =======
Deferred income tax provisions result from temporary differences in the recognition of income and expenses for financial reporting purposes and for tax purposes. The tax effects of these temporary differences representing deferred tax assets and (liabilities) result principally from the following:
DECEMBER 31, ----------------------- 1996 1997 ---------- ---------- (DOLLARS IN THOUSANDS) Inventory................................................... $(2,637) $(3,166) Reserves and accruals not deductible until paid............. 2,176 8,639 Depreciation................................................ (59) (645) Other....................................................... 104 166 ------- ------- Net deferred tax asset (liability).......................... $ (416) $ 4,994 ======= =======
The net deferred tax assets and (liabilities) are comprised of the following:
DECEMBER 31, ----------------------- 1996 1997 ---------- ---------- (DOLLARS IN THOUSANDS) Deferred tax assets -- Current................................................... $ 2,145 $10,220 Deferred tax liabilities -- Current................................................... (2,502) (1,527) Long-term................................................. (59) (3,699) ------- ------- Net deferred tax asset (liability).......................... $ (416) $ 4,994 ======= =======
12. COMMITMENTS AND CONTINGENCIES: Litigation The Company is a defendant in several lawsuits arising from normal business activities. Management has reviewed pending litigation with legal counsel and believes that the ultimate liability, if any, resulting from such actions will not have a material adverse effect on the Companies' financial position or results of operations. F-18 80 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Insurance Because of their vehicle inventory and nature of business, automobile retail dealerships generally require significant levels of insurance covering a broad variety of risks. The Company's insurance includes an umbrella policy with a $50 million per occurrence limit as well as insurance on its real property, comprehensive coverage for its vehicle inventory, general liability insurance, employee dishonesty coverage and errors and omissions insurance in connection with its vehicle sales and financing activities. Loan Guarantees Two of the Company's dealerships provide financing for certain customers through a third-party lender. Under the terms of this financing contract, customers execute installment contracts which are guaranteed with full recourse to the dealerships. The dealerships transfer the rights to the future economic benefits related to the receivables; however, in the event that the customer defaults on the note, the lender may require repayment of the principal amount of the note plus earned interest through the date of default, with collection efforts to be performed by the dealership. As of December 31, 1997, total customer notes outstanding guaranteed by the two dealerships were approximately $10.1 million. The dealerships have provided reserves for estimated future loan losses based on historical loss trends and total guarantees outstanding (see Note 4). This financing arrangement represents approximately 1.3% of the Company's total financing arranged. 13. RETIREMENT PLANS: Effective April 1, 1996, one of the Founding Groups established a 401(k) salary deferral/savings plan for the benefit of all employees. Employees electing to participate in the plan may contribute up to 15% of annual compensation, limited to the maximum amount that can be deducted for income tax purposes each year. The Founding Group, at its discretion, has the option to match each employee's contribution up to a maximum of 6% of annual compensation each plan year. The Founding Group elected to make contributions totaling approximately $178,000 and $306,000 for the years ended December 31, 1996 and 1997, respectively. F-19 81 UNDERWRITING Group 1 and the underwriters for the offering (the "Underwriters") named below have entered into an underwriting agreement and a pricing agreement with respect to the common stock offered hereby. Subject to certain conditions, each Underwriter has severally agreed to purchase the number of shares of common stock indicated in the following table. Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and NationsBanc Montgomery Securities LLC are the representatives of the Underwriters.
Shares of Underwriters Common Stock - ------------ ------------ Goldman, Sachs & Co. ....................................... Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... NationsBanc Montgomery Securities LLC ...................... --------- Total............................................. 2,000,000 =========
If the Underwriters sell more shares than the total number set forth in the table above, the Underwriters have an option to buy up to an additional 300,000 shares from Group 1 to cover such sales. They may exercise that option for 30 days. If any shares are purchased pursuant to this option, the Underwriters will severally purchase shares in approximately the same proportion as set forth in the table above. The following tables show the per share and total underwriting discounts and commissions to be paid to the Underwriters by Group 1. Such amounts are shown assuming both no exercise and full exercise of the Underwriters' option to purchase additional shares.
PAID BY GROUP 1 ----------------------------- NO EXERCISE FULL EXERCISE ----------- ------------- Per Share.................................... $ $ Total........................................ $ $
Shares of Common Stock sold by the Underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus supplement. Any shares of common stock sold by the Underwriters to securities dealers may be sold at a discount from the initial public offering price of up to $ per share. Any such securities dealers may resell any shares purchased from the Underwriters to certain other brokers or dealers at a discount of up to $ per share from the initial public offering price. If all the shares of common stock are not sold at the initial offering price, the Underwriters may change the offering price and the other selling terms. Group 1 has agreed with the Underwriters not to dispose of any of its common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus supplement continuing through the date 90 days after the date of this U-1 82 prospectus supplement except with the prior written consent of the representatives. The agreement does not apply to any existing employee benefit plans or to any shares issued as consideration for acquisitions of automobile dealerships (provided, in the case of acquisitions, that the recipients agree to be bound by the restriction described above). In connection with the offering, the Underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the Underwriters of a greater number of shares of common stock than they are required to purchase in the offering. Stabilizing transactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the market price of the common stock while the offering is in progress. The Underwriters also may impose a penalty bid. This occurs when a particular Underwriter repays to the Underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares of common stock sold by or for the account of such Underwriter in stabilizing or short covering transactions. These activities by the Underwriters may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. These transactions may be effected on the New York Stock Exchange in the over-the-counter market or otherwise. Group 1 has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. Group 1 estimates that its expenses of the offering, excluding underwriting discounts and commissions, will be approximately $800,000. Certain of the Underwriters and their affiliates perform various investment banking and commercial banking services for us from time to time. U-2 83 PROSPECTUS Group 1 Automotive, Inc. 950 Echo Lane, Suite 350 Houston, Texas 77024 (713) 467-6268 DEBT SECURITIES PREFERRED STOCK COMMON STOCK --------------------- We may offer and sell the securities listed above with an aggregate offering price up to $250 million in connection with this prospectus. We will provide specific terms of these offerings and securities in supplements to this prospectus, including whether the debt securities are guaranteed by all of our subsidiaries. YOU SHOULD READ THIS PROSPECTUS AND ANY SUPPLEMENT TO THIS PROSPECTUS CAREFULLY BEFORE YOU INVEST, INCLUDING THE RISK FACTORS WHICH BEGIN ON PAGE 4 OF THIS PROSPECTUS. --------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------- This prospectus may not be used to consummate sales of securities unless accompanied by a prospectus supplement. This prospectus is dated January 29, 1999. 84 TABLE OF CONTENTS
PAGE ---- About This Prospectus....................................... 2 Where You Can Find More Information......................... 2 Cautionary Statement About Forward-Looking Statements....... 3 Disclaimer.................................................. 4 The Company................................................. 4 Risk Factors................................................ 4 Use of Proceeds............................................. 12 Ratios of Earnings to Fixed Charges and Earnings to Fixed Charges plus Dividends.................................... 12 Description of Debt Securities.............................. 12 Description of Capital Stock................................ 21 Depositary Shares........................................... 26 Plan of Distribution........................................ 27 Legal Matters............................................... 28 Experts..................................................... 28
ABOUT THIS PROSPECTUS This prospectus is part of a registration statement that we filed with the Securities and Exchange Commission (the "SEC") utilizing a "shelf" registration process. Under this shelf registration process, we may sell any combination of the securities described in this prospectus in one or more offerings up to a total dollar amount of $250 million. This prospectus provides you with a general description of the securities we may offer. Each time we sell securities we will provide a prospectus supplement that will contain specific information about the terms of the offering and the securities. The prospectus supplement may also add, update or change information contained in this prospectus. Any statement that we make in this prospectus will be modified or superseded by any inconsistent statement made by us in a prospectus supplement. You should read both this prospectus and any prospectus supplement together with additional information described under the heading "Where You Can Find More Information." WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and special reports, proxy statements and other information with the SEC. Our SEC filings are available to the public over the Internet at the SEC's web site at http://www.sec.gov. You may also read and copy any document we file at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC located at 7 World Trade Center, Suite 1300, New York, New York 10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may obtain information on the operation of the SEC's public reference room in Washington, D.C. by calling the SEC at 1-800-SEC-0330. We also file such information with the New York Stock Exchange. Such reports, proxy statements and other information may be read and copied at 30 Broad Street, New York, New York 10005. The SEC allows us to "incorporate by reference" the information we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this prospectus, and information that we file later with the SEC will automatically update and supersede this information. We incorporate by reference the documents listed below and any further filings made with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") until we sell all of the securities or we terminate this offering: - Our Annual Report on Form 10-K for the year ended December 31, 1997 (as amended on April 15, 1998); 2 85 - Our Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998, June 30, 1998 (as amended on September 22, 1998) and September 30, 1998; - Our Current Reports on Form 8-K, filed March 31, 1998 (as amended on May 28, 1998), April 15, 1998, (as amended on June 11, 1998), December 11, 1998, January 25, 1999 and January 26, 1999; and - The description of the common stock contained in our Form 8-A dated October 7, 1997. You may request a copy of these filings at no cost, by writing or telephoning us at the following address: Scott L. Thompson Senior Vice President -- Chief Financial Officer & Treasurer Group 1 Automotive, Inc. 950 Echo Lane, Suite 350 Houston, Texas 77024 (713) 467-6268 You should rely only on the information incorporated by reference or provided in this prospectus or any prospectus supplement. We have not authorized anyone else to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information in this prospectus or any prospectus supplement is accurate as of any date other than the date on the front of those documents. CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS This prospectus contains statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act (the "Securities Act") and Section 21E of the Securities Exchange Act (the "Exchange Act"). These statements appear in a number of places in this prospectus 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: - future acquisitions, - expected future cost savings, - future capital expenditures, - trends affecting our future financial condition or results of operations, and - 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: - industry conditions, - future demand for new and used vehicles, - restrictions imposed on us by automobile manufacturers, - the ability to obtain the consents of automobile manufacturers to our acquisitions, - the availability of capital resources, and - the willingness of acquisition candidates to accept our common stock as currency. The information contained in this prospectus, including the information set forth under the heading "Risk Factors," 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 expressly qualified in their entirety by this cautionary statement. 3 86 DISCLAIMER No Manufacturer or Distributor (as defined in this prospectus) has been involved, directly or indirectly, in the preparation of this prospectus or in any offering made hereby. No Manufacturer or Distributor has made any statements or representations in connection with the offering or has provided any information or materials that were used in connection with the offering, and no Manufacturer or Distributor has any responsibility for the accuracy or completeness of this prospectus. THE COMPANY We are a leading operator and consolidator in the highly fragmented automotive retailing industry. We currently own 59 automobile dealership franchises representing 23 different brands of automobiles and 12 collision service centers located in Texas, Oklahoma, Florida, New Mexico, Georgia and Colorado. Through our dealerships, we sell new and used cars and light trucks, provide maintenance and repair services, sell replacement parts and arrange related financing, vehicle service contracts and insurance. We were incorporated in Delaware in December 1995. We began operating automobile dealerships in November 1997 when we acquired our four "founding groups" in four separate simultaneous transactions. Our founding groups owned 30 dealership franchises, and, since then, we have acquired an additional 33 dealership franchises in 10 separate acquisitions. Additionally, we acquired two franchises through manufacturer grants. During 1998, we sold one Subaru franchise and returned one Kia franchise to the manufacturer. In addition, Chrysler ceased operation of the Eagle brand nationally, of which we had four franchises. These six franchises were insignificant to our operations. Our corporate headquarters is located in Houston, Texas at 950 Echo Lane, Suite 350, Houston, Texas 77024 (telephone: (713) 467-6268). RISK FACTORS You should carefully consider and evaluate all of the information in this prospectus, including the risk factors set forth below, before investing. MANUFACTURER RESTRICTIONS The following table sets forth the percentage of our new vehicle retail unit sales attributable to the manufacturers we represent:
PERCENTAGE OF OUR NEW VEHICLE PRO FORMA RETAIL UNITS FOR THE NINE MONTHS ENDED MANUFACTURER SEPTEMBER 30, 1998 ------------ ------------------ Ford........................................................ 25.7% Toyota/Lexus................................................ 19.3 Chrysler.................................................... 18.1 General Motors.............................................. 14.8 Nissan...................................................... 9.4 Honda/Acura................................................. 9.2 Other....................................................... 3.5 ----- Total....................................................... 100.0% =====
The loss of our relationships with one or more of these named manufacturers could have an adverse effect on our business. The term Manufacturers refers to all of the manufacturers of new cars that we sell, including Ford Motor Company ("Ford"), General Motors Corporation ("GM"), DaimlerChrysler ("Chrysler"), Toyota Motor Corp. and Toyota Motor Sales, U.S.A., Inc. (collectively "Toyota"), Honda Motor Co., Ltd. and American Honda Motor Co., Inc. (collectively "Honda"), Nissan Motor Co., Ltd. and Nissan Motor 4 87 North America, Inc. (collectively "Nissan"), Mitsubishi Motor Sales of America, Inc., American Isuzu Motors, Inc., American Suzuki Motor Corporation and Volvo Cars of North America, Inc. FRANCHISE AGREEMENTS. Each of our dealerships operates under a franchise agreement with one of our Manufacturers (or authorized distributors ("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 change of ownership or management. While we believe that we will be able to renew all of our franchise agreements, we cannot guarantee that all of our franchise agreements will be renewed or that the terms of the renewals will be favorable to us. Our franchise agreements do not give us the exclusive right to sell a Manufacturer's product within a given geographic area. Accordingly, a Manufacturer may, subject to any protection of state law, grant another dealer a franchise to start a new dealership near one of our locations, or an existing dealer may move its dealership to a location which would compete directly with us. The location of new dealerships near our existing dealerships could adversely affect our operations. 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. Obtaining the approvals of the Manufacturers for the acquisition of our founding groups took almost one year. Although the Manufacturer approvals of our recent acquisitions have taken significantly less time, future approvals may not be prompt and such approvals may not be ultimately obtained. In determining whether to approve an acquisition, Manufacturers may consider many factors, including the moral character and business experience of the dealership principals and the financial condition, ownership structure and customer satisfaction index scores of our dealerships. Our Manufacturers attempt to measure customers' satisfaction with automobile dealerships through systems generally known as the customer satisfaction index or "CSI". The Manufacturers have modified the components of their CSI scores from time to time in the past, and they may replace them with different systems. Failure of our dealerships to comply with a Manufacturer's CSI standards could adversely affect our ability to acquire additional dealerships. In addition, a Manufacturer may limit the total 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 and Lincoln 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 the 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 5 88 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 seven 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. 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. 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 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. The proposed new agreement contains additional restrictions in various geographic markets. We are continuing to negotiate with Honda on these geographic restrictions as well as other restrictions on the number of dealerships that we may acquire. 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. We currently own six Ford, one Lincoln, one Mercury, 21 Chrysler, two Toyota, one Lexus, three Honda and two Acura dealership franchises and six 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 and Lincoln Mercury dealerships and seven 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 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. We have not negotiated or executed the proposed new agreement, nor have we obtained Honda's consent for any offering in connection with this prospectus. If Honda were to claim that we breached its existing agreement with us and seek to enforce its remedies, we could be adversely affected. 6 89 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. For the nine-month period ended September 30, 1998, our Honda and Acura dealerships represented approximately 8.9% and 8.4% of our pro forma revenues and operating income, respectively. 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 are continuing to negotiate with Honda on the terms of the proposed new agreement. 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 has waived that requirement for the offering of Debt Securities covered by this prospectus. If, however, we fail to meet certain minimum financial ratios Ford can reject any acquisitions 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: - 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 (5% in the case of Honda; 20% in the case of General Motors, Toyota and Nissan, and 50% in the case of Ford; - certain material changes in us or extraordinary corporate transactions such as a merger or sale of a material amount of our assets; - the removal of a dealership general manager without the consent of the Manufacturer; - the use of dealership facilities to sell or service new vehicles of other Manufacturers in certain situations; and - changes 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 failure to meet these restrictions may adversely affect, our business and acquisition strategy. 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 a reasonable likelihood of acquiring, a controlling interest in us. We are required to notify Honda with respect to any such acquisition or proposed acquisition, and if Honda does not approve of the acquisition, we are required to use our best efforts to prevent the acquisition or, if the acquisition has already occurred, to 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. 7 90 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 proposed 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: - 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. - 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. Our Manufacturer agreements also specify that we cannot operate a dealership franchised by another Manufacturer in the same building as that Manufacturer's franchised dealership in certain situations. 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. DEPENDENCE ON ACQUISITIONS FOR GROWTH Growth in our revenues and earnings depends substantially on our ability to acquire and successfully operate dealerships. We cannot guarantee that we will be able to identify and acquire dealerships in the future. In addition, managing and integrating additional dealerships into our existing mix of dealerships may result in substantial costs, delays or other operational or financial problems. Restrictions by our Manufacturers as well as covenants contained in our debt instruments limit our ability to acquire additional dealerships. In addition, increased competition for acquisition candidates may develop, which could result in fewer acquisition opportunities available to us and higher acquisition prices. Acquisitions involve a number of additional risks, including: - diversion of our resources and our management's attention, - our possible inability to retain key personnel of the acquired dealership, and - unanticipated events or liabilities. 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 8 91 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 future acquisitions by issuing shares of common stock as full or partial consideration for acquired dealerships. The extent to which we will be able or willing to issue common stock for acquisitions will depend on the market value of the common stock from time to time and the willingness of potential acquisition candidates to accept common stock as part of the consideration for the sale of their businesses. If potential acquisition candidates are unwilling to accept our common stock, we will be forced to rely solely on available cash or debt or equity financing, which could adversely affect our acquisition program. Accordingly, our ability to make acquisitions could be adversely affected if the price of our common stock declines. 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. RISKS OF IMPORTING PRODUCTS A significant portion of our new vehicle business involves the sale of vehicles, vehicle parts or vehicles composed of parts that are manufactured outside the United States. As a result, our operations are subject to customary risks associated with imported merchandise, including fluctuations in the value of currencies, import duties, exchange controls, trade restrictions, work stoppages and general political and economic conditions in foreign countries. The United States or the countries from which our products are imported may, from time to time, impose new quotas, duties, tariffs or other restrictions, or adjust presently prevailing quotas, duties or tariffs on imported merchandise. Any of those impositions or adjustments could affect our operations and our ability to purchase imported vehicles and parts. This, in turn, could have an adverse effect on our business. FLUCTUATIONS IN PROFITABILITY The automobile industry is cyclical and historically has experienced downturns characterized by oversupply and weak demand. Many factors affect the industry, including general economic conditions, consumer confidence, personal discretionary spending levels, interest rates and credit availability. We cannot guarantee that the industry will not experience sustained periods of decline in vehicle sales in the future. Any such decline could have an adverse effect on our business. The automobile industry also experiences seasonal variations in revenue. Demand for automobiles is generally lower during the winter months than in other seasons, particularly in regions of the United States associated with harsh winters. Accordingly, we expect revenues and operating results generally to be lower in our first and fourth quarters than in our second and third quarters. 9 92 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 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 6.3 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. LIMITED COMBINED OPERATING HISTORY We were incorporated in December 1995 and commenced dealership operations in November 1997 with the acquisition of the founding groups. The founding groups had been owned, operated and managed as separate independent entities prior to their acquisition by us. We have made a number of additional acquisitions of automobile dealerships since we acquired the founding groups. We intend to continue to acquire additional dealerships. Our future operating results will depend in part on our ability to integrate the operations of those businesses and manage the combined enterprise. Our management group has been working together since December 1996. We cannot guarantee that our management team will be able to effectively and profitably integrate the founding groups and our other acquisitions or to effectively manage the combined entity. Their inability to do so could adversely affect our business. SUBSTANTIAL COMPETITION The automotive retailing industry is highly competitive with respect to price, service, location and selection. We compete with automobile dealerships (including other public franchised dealership consolidators), private market buyers and sellers of used vehicles, used vehicle dealerships, service center chains and independent service and repair shops. In the new vehicle area, we compete with other franchised dealers. We do not have any cost advantage in purchasing new vehicles from the manufacturers and typically rely on advertising, merchandising, sales expertise, service reputation and dealership location to sell new vehicles. In recent years, our dealerships have also faced competition from non-traditional sources such as companies that sell automobiles on the Internet, automobile rental agencies, independent leasing companies, used-car "superstores" and price clubs associated with established consumer agencies, such as the American Automobile Association. Some of these competitors use non-traditional sales techniques such as one-price shopping. In addition, Ford has begun owning and operating automobile dealerships for the purpose of consolidating Ford dealerships. For example, Ford has acquired dealerships in Tulsa, Oklahoma and has entered into an agreement with Republic Industries, Inc. to jointly acquire Ford dealerships in Rochester, New York. Ford has also announced that it is exploring the possibility of going into business with some of its dealers to create automotive superstores in selected markets. 10 93 Some of our competitors, including these recent market entrants, may have greater financial, marketing and personnel resources than us and lower overhead and sales costs. In the parts and service area, we also compete with a number of regional or national chains which offer selected parts and services at prices that may be lower than our prices. We cannot guarantee that our strategy will be more effective than the strategies of our competitors. RELIANCE ON KEY PERSONNEL We depend to a large extent upon the abilities and continued efforts of our executive officers, senior management and principals of our dealerships. Furthermore, we will likely be dependent on the senior management of any dealerships acquired in the future. If any of those persons leave or if we fail to attract and retain other qualified employees, our business could be adversely affected. Although we have entered into employment agreements with each of our executive officers and some of the principals of our dealerships, we cannot guarantee that any individual will continue in his present capacity with us for any particular period of time. We currently have no key man insurance for any of our officers or senior management. YEAR 2000 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 interpreted 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 recognize the need to ensure that our computer systems, equipment and operations will not be adversely impacted by the change to the calendar year 2000. In this regard, we have taken steps to identify potential areas of risk and have begun addressing these in our planning, purchasing and daily operations. We have not quantified the total cost of converting all internal systems, equipment and operations for the year 2000, but we do not believe that the cost will be material to our financial position. In connection with acquisitions, we review and address the candidate's year 2000 readiness during the due diligence process. We are currently reviewing the potential adverse impact on us of the failure of our third party service providers or vendors to address any of their year 2000 issues. We are dependent upon our dealerships' computer systems in our daily operations. All our dealerships are, or are expected to be, using a computer system supported by a major automobile dealership computer system provider. We have contacted each of these providers and have received assurance from the providers 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. In addition, we are dependent on our 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. Failure by us, our Manufacturers or our third party service providers and vendors to adequately address the year 2000 issue could have an adverse effect on us. GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL RISKS We are subject to a wide range of federal, state and local laws and regulations, such as local licensing requirements, consumer protection laws and environmental requirements governing, among other things, discharges to the air and water, the storage of petroleum substances and chemicals, the handling and disposal of wastes, and the remediation of contamination arising from spills and releases. The violation of those laws and regulations could result in civil and criminal penalties being levied against us or in a cease and desist order against operations that are not in compliance. Future acquisitions by us may also be subject to governmental regulation, including antitrust reviews. Although we believe that we substantially comply with all applicable laws and regulations relating to our business, future laws and regulations or 11 94 changes to existing laws or regulations may be more stringent and require us to incur significant additional costs. USE OF PROCEEDS Unless otherwise provided in a prospectus supplement, we will use the net proceeds from the sale of the securities offered by this prospectus and any prospectus supplement for our general corporate purposes, which may include repayment of indebtedness, the acquisition of additional automobile dealerships, additions to our working capital, and capital expenditures. RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS TO FIXED CHARGES PLUS DIVIDENDS The following table contains our consolidated ratios of earnings to fixed charges and earnings to fixed charges plus dividends for the periods indicated. Since we did not commence dealership operations until November 1997, only the financial information for periods after October 1997 reflects our combined dealership operations. The financial information for periods prior to November 1997 are the results of the Howard Group, one of the founding groups.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, -------------------------------- ------------- 1993 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- ------------- Ratio of earnings to fixed charges............. 2.28 1.86 1.98 2.32 2.16 2.69 Ratio of earnings to fixed charges plus dividends.................................... 2.28 1.86 1.98 2.32 2.16 2.69
For purposes of computing the ratios of earnings to fixed charges and earnings to fixed charges plus dividends: (i) earnings consist of income before provision for income taxes plus fixed charges (excluding capitalized interest) and (ii) "fixed charges" consist of interest expensed and capitalized, amortization of debt discount and expense relating to indebtedness and the portion of rental expense representative of the interest factor attributable to leases for rental property. There were no dividends paid or accrued during the periods presented above. DESCRIPTION OF DEBT SECURITIES The Debt Securities will be either our senior debt securities ("Senior Debt Securities") or our subordinated debt securities ("Subordinated Debt Securities"). The Senior Debt Securities and the Subordinated Debt Securities will be issued under separate Indentures among us, our subsidiaries, if our subsidiaries are guarantors of the Debt Securities, and a U.S. banking institution (a "Trustee"). Senior Debt Securities will be issued under a "Senior Indenture" and Subordinated Debt Securities will be issued under a "Subordinated Indenture." Together the Senior Indenture and the Subordinated Indenture are called "Indentures." The Debt Securities may be issued from time to time in one or more series. The particular terms of each series which are offered by a prospectus supplement will be described in the prospectus supplement. We have summarized selected provisions of the Indenture below. The summary is not complete. The forms of the Indenture have been filed as exhibits to the registration statement and you should read the Indentures for provisions that may be important to you. In the summary below we have included references to section numbers of the applicable Indentures so that you can easily locate these provisions. Whenever we refer in this prospectus or in the prospectus supplement to particular sections or defined terms of the Indenture, such sections or defined terms are incorporated by reference herein or therein, as applicable. Capitalized terms used in the summary have the meanings specified in the Indentures. GENERAL The Indentures provide that Debt Securities in separate series may be issued thereunder from time to time without limitation as to aggregate principal amount. We may specify a maximum aggregate principal 12 95 amount for the Debt Securities of any series. (Section 301) We will determine the terms and conditions of the Debt Securities, including the maturity, principal and interest, but those terms must be consistent with the Indenture. The Debt Securities will be our unsecured obligations. The Subordinated Debt Securities will be subordinated in right of payment to the prior payment in full of all of our Senior Debt (as defined) as described under "-- Subordination of Subordinated Debt Securities" and in the prospectus supplement applicable to any Subordinated Debt Securities. If specified in the prospectus supplement, our subsidiaries (the "Subsidiary Guarantors") will unconditionally guarantee (the "Subsidiary Guarantees") on a joint and several basis the Debt Securities as described under "Subsidiary Guarantees" and in the prospectus supplement. The Subsidiary Guarantees will be unsecured obligations of each Subsidiary Guarantor. The applicable prospectus supplement will set forth the price or prices at which the Debt Securities to be offered will be issued and will describe the following terms of such Debt Securities: (1) the title of the Debt Securities; (2) whether the Debt Securities are Senior Debt Securities or Subordinated Debt Securities and, if Subordinated Debt Securities, the subordinated terms relating thereto; (3) whether the Subsidiary Guarantors will provide Subsidiary Guarantees of the Debt Securities; (4) any limit on the aggregate principal amount of the Debt Securities; (5) the dates on which the principal of the Debt Securities will be payable; (6) the interest rate which the Debt Securities will bear and the interest payment dates for the Debt Securities; (7) the places where payments on the Debt Securities will be payable; (8) any terms upon which the Debt Securities may be redeemed, in whole or in part, at our option; (9) any sinking fund or other provisions that would obligate us to repurchase or otherwise redeem the Debt Securities; (10) the portion of the principal amount, if less than all, of the Debt Securities which will be payable upon declaration of acceleration of the Maturity of the Debt Securities; (11) whether the Debt Securities are defeasible; (12) any addition to or change in the Events of Default; (13) any addition to or change in the covenants in the Indenture applicable to any of the Debt Securities; and (14) any other terms of the Debt Securities not inconsistent with the provisions of the Indenture. (Section 301) Debt Securities, including Original Issue Discount Securities, may be sold at a substantial discount below their principal amount. Special United States federal income tax considerations applicable to Debt Securities sold at an original issue discount may be described in the applicable prospectus supplement. In addition, special United States federal income tax or other considerations applicable to any Debt Securities which are denominated in a currency or currency unit other than United States dollars may be described in the applicable prospectus supplement. SUBORDINATION OF SUBORDINATED DEBT SECURITIES The indebtedness evidenced by the Subordinated Debt Securities will, to the extent set forth in the Subordinated Indenture with respect to each series of Subordinated Debt Securities, be subordinate in right of payment to the prior payment in full of all of our Senior Debt, including the Senior Debt 13 96 Securities. The prospectus supplement relating to any Subordinated Debt Securities will summarize the subordination provisions of the Subordinated Indenture applicable to that series including: - the applicability and effect of such provisions upon any payment or distribution of our assets to creditors upon any liquidation, dissolution, winding-up, reorganization, assignment for the benefit of creditors or marshaling of assets or any bankruptcy, insolvency or similar proceedings; - the applicability and effect of such provisions in the event of specified defaults with respect to any or certain Senior Debt, including the circumstances under which and the periods in which we will be prohibited from making payments on the Subordinated Debt Securities; and - the definition of Senior Debt applicable to the Subordinated Debt Securities of that series. The prospectus supplement will also describe as of a recent date the approximate amount of Senior Debt to which the Subordinated Debt Securities of that series will be subordinated. The failure to make any payment on any of the Subordinated Debt Securities by reason of the subordination provisions of the Subordinated Indenture described in the prospectus supplement will not be construed as preventing the occurrence of an Event of Default with respect to the Subordinated Debt Securities arising from any such failure to make payment. The subordination provisions described above will not be applicable to payments in respect of the Subordinated Debt Securities from a defeasance trust established in connection with any defeasance or covenant defeasance of the Subordinated Debt Securities as described under "-- Defeasance and Covenant Defeasance." SUBSIDIARY GUARANTEES If specified in the prospectus supplement, the Subsidiary Guarantors will guarantee the Debt Securities of a series. Unless otherwise indicated in the prospectus supplement, the following provisions will apply to the Subsidiary Guarantees of the Subsidiary Guarantors. Subject to the limitations described below and in the prospectus supplement, the Subsidiary Guarantors will, jointly and severally, unconditionally guarantee the performance and punctual payment when due, whether at Stated Maturity, by acceleration or otherwise, of all our obligations under the Indentures and the Debt Securities of a series, whether for principal of, premium, if any, or interest on the Debt Securities or otherwise (all such obligations guaranteed by a Subsidiary Guarantor being herein called the "Guaranteed Obligations"). The Subsidiary Guarantors will also pay, in addition to the amount stated above, any and all expenses (including reasonable counsel fees and expenses) incurred by the applicable Trustee in enforcing any rights under a Subsidiary Guarantee with respect to a Subsidiary Guarantor. In the case of Subordinated Debt Securities, a Subsidiary Guarantor's Subsidiary Guarantee will be subordinated in right of payment to the Senior Debt of such Subsidiary Guarantor on the same basis as the Subordinated Debt Securities are subordinated to our Senior Debt. No payment will be made by any Subsidiary Guarantor under its Subsidiary Guarantee during any period in which payments by us on the Subordinated Debt Securities are suspended by the subordination provisions of the Subordinated Indenture. Each Subsidiary Guarantee will be limited in amount to an amount not to exceed the maximum amount that can be guaranteed by the relevant Subsidiary Guarantor without rendering such Subsidiary Guarantee voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. Each Subsidiary Guarantee will be a continuing guarantee and will: (1) remain in full force and effect until either (a) payment in full of all the Guaranteed Obligations (or the applicable Debt Securities are defeased and discharged in accordance with the defeasance provisions of the Indentures) or (b) released as described in the following paragraph, (2) be binding upon each Subsidiary Guarantor and 14 97 (3) inure to the benefit of and be enforceable by the applicable Trustee, the Holders and their successors, transferees and assigns. In the event that a Subsidiary Guarantor ceases to be a Restricted Subsidiary, whether as a result of a disposition of all of the assets or all of the Capital Stock of such Subsidiary Guarantor, by way of sale, merger, consolidation or otherwise, such Subsidiary Guarantor will be deemed released and relieved of its obligations under its Subsidiary Guarantee without any further action required on the part of the Trustee or any Holder and no other Person acquiring or owning the assets or Capital Stock of such Subsidiary Guarantor (if not otherwise a Restricted Subsidiary) will be required to enter into a Subsidiary Guarantee; provided, in each case, that the transaction or transactions resulting in such Subsidiary Guarantor's ceasing to be a Restricted Subsidiary are carried out pursuant to and in compliance with all of the applicable covenants in the Indenture. In addition, the prospectus supplement may specify additional circumstances under which a Subsidiary Guarantor can be released from its Subsidiary Guarantee. FORM, EXCHANGE AND TRANSFER The Debt Securities of each series will be issuable only in fully registered form, without coupons, and, unless otherwise specified in the applicable prospectus supplement, only in denominations of $1,000 and integral multiples thereof. (Section 302) At the option of the Holder, subject to the terms of the applicable Indenture and the limitations applicable to Global Securities, Debt Securities of each series will be exchangeable for other Debt Securities of the same series of any authorized denomination and of a like tenor and aggregate principal amount. (Section 305) Subject to the terms of the applicable Indenture and the limitations applicable to Global Securities, Debt Securities may be presented for exchange as provided above or for registration of transfer (duly endorsed or with the form of transfer endorsed thereon duly executed) at the office of the Security Registrar or at the office of any transfer agent designated by us for such purpose. No service charge will be made for any registration of transfer or exchange of Debt Securities, but we may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Such transfer or exchange will be effected upon the Security Registrar or such transfer agent, as the case may be, being satisfied with the documents of title and identity of the person making the request. The Security Registrar and any other transfer agent initially designated by us for any Debt Securities will be named in the applicable prospectus supplement. (Section 305) We may at any time designate additional transfer agents or rescind the designation of any transfer agent or approve a change in the office through which any transfer agent acts, except that we will be required to maintain a transfer agent in each Place of Payment for the Debt Securities of each series. (Section 1002). If the Debt Securities of any series (or of any series and specified terms) are to be redeemed in part, we will not be required to (i) issue, register the transfer of or exchange any Debt Security of that series (or of that series and specified terms, as the case may be) during a period beginning at the opening of business 15 days before the day of mailing of a notice of redemption of any such Debt Security that may be selected for redemption and ending at the close of business on the day of such mailing or (ii) register the transfer of or exchange any Debt Security so selected for redemption, in whole or in part, except the unredeemed portion of any such Debt Security being redeemed in part. (Section 305) GLOBAL SECURITIES Some or all of the Debt Securities of any series may be represented, in whole or in part, by one or more Global Securities which will have an aggregate principal amount equal to that of the Debt Securities represented thereby. Each Global Security will be registered in the name of a Depositary or a nominee thereof identified in the applicable prospectus supplement, will be deposited with such Depositary or nominee or a custodian therefor and will bear a legend regarding the restrictions on exchanges and registration of transfer thereof referred to below and any such other matters as may be provided for pursuant to the Indenture. 15 98 Notwithstanding any provision of the applicable Indenture or any Debt Security described herein, no Global Security may be exchanged in whole or in part for Debt Securities registered, and no transfer of a Global Security in whole or in part may be registered, in the name of any Person other than the Depositary for such Global Security or any nominee of such Depositary unless: (i) the Depositary has notified us that it is unwilling or unable to continue as Depositary for such Global Security or has ceased to be qualified to act as such as required by the applicable Indenture, (ii) there shall have occurred and be continuing an Event of Default with respect to the Debt Securities represented by such Global Security or (iii) there shall exist such circumstances, if any, in addition to or in lieu of those described above as may be described in the applicable prospectus supplement. All Debt Securities issued in exchange for a Global Security or any portion thereof will be registered in such names as the Depositary may direct. (Sections 204 and 305) As long as the Depositary, or its nominee, is the registered Holder of a Global Security, the Depositary or such nominee, as the case may be, will be considered the sole owner and Holder of such Global Security and the Debt Securities represented thereby for all purposes under the Debt Securities and the applicable Indenture. Except in the limited circumstances referred to above, owners of beneficial interests in a Global Security will not be entitled to have such Global Security or any Debt Securities represented thereby registered in their names, will not receive or be entitled to receive physical delivery of certificated Debt Securities in exchange therefor and will not be considered to be the owners or Holders of such Global Security or any Debt Securities represented thereby for any purpose under the Debt Securities or the applicable Indenture. All payments of principal of and any premium and interest on a Global Security will be made to the Depositary or its nominee, as the case may be, as the Holder thereof. The laws of some jurisdictions require that certain purchasers of Debt Securities take physical delivery of such Debt Securities in definitive form. These laws may impair the ability to transfer beneficial interests in a Global Security. Ownership of beneficial interests in a Global Security will be limited to institutions that have accounts with the Depositary or its nominee ("participants") and to persons that may hold beneficial interests through participants. In connection with the issuance of any Global Security, the Depositary will credit, on its book-entry registration and transfer system, the respective principal amounts of Debt Securities represented by the Global Security to the accounts of its participants. Ownership of beneficial interests in a Global Security will be shown only on, and the transfer of those ownership interests will be effected only through, records maintained by the Depositary (with respect to participants' interests) or any such participant (with respect to interests of persons held by such participants on their behalf). Payments, transfers, exchanges and other matters relating to beneficial interests in a Global Security may be subject to various policies and procedures adopted by the Depositary from time to time. None of us, the Subsidiary Guarantors, the Trustees or our agents, the Subsidiary Guarantors or the Trustees will have any responsibility or liability for any aspect of the Depositary's or any participant's records relating to, or for payments made on account of, beneficial interests in a Global Security, or for maintaining, supervising or reviewing any records relating to such beneficial interests. PAYMENT AND PAYING AGENTS Unless otherwise indicated in the applicable prospectus supplement, payment of interest on a Debt Security on any Interest Payment Date will be made to the Person in whose name such Debt Security (or one or more Predecessor Debt Securities) is registered at the close of business on the Regular Record Date for such interest. (Section 307) Unless otherwise indicated in the applicable prospectus supplement, principal of and any premium and interest on the Debt Securities of a particular series will be payable at the office of such Paying Agent or Paying Agents as we may designate for such purpose from time to time, except that at our option payment of any interest may be made by check mailed to the address of the Person entitled thereto as such address 16 99 appears in the Security Register. Unless otherwise indicated in the applicable prospectus supplement, the corporate trust office of the trustee under the Senior Indenture (the "Senior Trustee") in The City of New York will be designated as sole Paying Agent for payments with respect to Senior Debt Securities of each series and the corporate trust office of the Subordinated Trustee in the City of New York will be designated as the sole Paying Agent for payment with respect to Subordinated Debt Securities of each series. Any other Paying Agents initially designated by us for the Debt Securities of a particular series will be named in the applicable prospectus supplement. We may at any time designate additional Paying Agents or rescind the designation of any Paying Agent or approve a change in the office through which any Paying Agent acts, except that we will be required to maintain a Paying Agent in each Place of Payment for the Debt Securities of a particular series. (Section 1002) All moneys paid by us to a Paying Agent for the payment of the principal of or any premium or interest on any Debt Security which remain unclaimed at the end of two years after such principal, premium or interest has become due and payable will be repaid to us, and the Holder of such Debt Security thereafter may look only to us for payment thereof. (Section 1003) CONSOLIDATION, MERGER AND SALE OF ASSETS We may not consolidate with or merge into, or convey, transfer or lease our properties and assets substantially as an entirety to, any Person (a "successor Person"), and may not permit any Person to merge into, or convey, transfer or lease its properties and assets substantially as an entirety to, us, unless: (i) the successor Person (if any) is a corporation, partnership, trust or other entity organized and validly existing under the laws of any domestic jurisdiction and assumes our obligations on the Debt Securities and under the Indentures, (ii) immediately after giving effect to the transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have occurred and be continuing and (iii) certain other conditions, including any additional conditions with respect to any particular Debt Securities specified in the applicable prospectus supplement, are met. (Section 801) EVENTS OF DEFAULT Unless otherwise specified in the prospectus supplement, each of the following will constitute an Event of Default under the applicable Indenture with respect to Debt Securities of any series: (1) failure to pay principal of or any premium on any Debt Security of that series when due, whether or not, in the case of Subordinated Debt Securities, such payment is prohibited by the subordination provisions of the Subordinated Indenture; (2) failure to pay any interest on any Debt Securities of that series when due, continued for 30 days, whether or not, in the case of Subordinated Debt Securities, such payment is prohibited by the subordination provisions of the Subordinated Indenture; (3) failure to deposit any sinking fund payment, when due, in respect of any Debt Security of that series, whether or not, in the case of Subordinated Debt Securities, such deposit is prohibited by the subordination provisions of the Subordinated Indenture; (4) failure to perform or comply with the provisions described under "Consolidation, Merger and Sale of Assets"; (5) failure to perform any of our other covenants in such Indenture (other than a covenant included in such Indenture solely for the benefit of a series other than that series), continued for 60 days after written notice has been given by the Trustee, or the Holders of at least 25% in principal amount of the Outstanding Debt Securities of that series, as provided in such Indenture; (6) default under the terms of any instrument evidencing or securing any of our Debt or any Restricted Subsidiary having an outstanding principal amount of $10 million individually or in the aggregate which default results in the acceleration of the payment of all or any portion of such Debt 17 100 (which acceleration is not rescinded within a period of 10 days from the occurrence of such acceleration) or constitutes the failure to pay all or any portion of the principal amount of such Debt when due; (7) the rendering of a final judgment or judgments (not subject to appeal) against us or any Restricted Subsidiary in an amount in excess of $10 million which remains undischarged or unstayed for a period of 60 days after the date on which the right to appeal has expired; (8) certain events of bankruptcy, insolvency or reorganization affecting us, any Significant Restricted Subsidiary or any group of Restricted Subsidiaries that together would constitute a Significant Restricted Subsidiary; and (9) in the case of Debt Securities guaranteed by any Subsidiary Guarantor, the Subsidiary Guarantee of any Subsidiary Guarantor is held by a final non-appealable order or judgment of a court of competent jurisdiction to be unenforceable or invalid or ceases for any reason to be in full force and effect (other than in accordance with the terms of the applicable Indenture) or any Subsidiary Guarantor or any Person acting on behalf of any Subsidiary Guarantor denies or disaffirms such Subsidiary Guarantor's obligations under its Subsidiary Guarantee (other than by reason of a release of such Subsidiary Guarantor from its Subsidiary Guarantee in accordance with the terms of the applicable Indenture). (Section 501) If an Event of Default (other than an Event of Default described in clause (8) above) with respect to the Debt Securities of any series at the time Outstanding shall occur and be continuing, either the applicable Trustee or the Holders of at least 25% in aggregate principal amount of the Outstanding Debt Securities of that series by notice as provided in the Indenture may declare the principal amount of the Debt Securities of that series (or, in the case of any Debt Security that is an Original Issue Discount Debt Security or the principal amount of which is not then determinable, such portion of the principal amount of such Debt Security, or such other amount in lieu of such principal amount, as may be specified in the terms of such Debt Security) to be due and payable immediately. If an Event of Default described in clause (8) above with respect to the Debt Securities of any series at the time Outstanding shall occur, the principal amount of all the Debt Securities of that series (or, in the case of any such Original Issue Discount Security or other Debt Security, such specified amount) will automatically, and without any action by the applicable Trustee or any Holder, become immediately due and payable. After any such acceleration, but before a judgment or decree based on acceleration, the Holders of a majority in aggregate principal amount of the Outstanding Debt Securities of that series may, under certain circumstances, rescind and annul such acceleration if all Events of Default, other than the non-payment of accelerated principal (or other specified amount), have been cured or waived as provided in the applicable Indenture. (Section 502) For information as to waiver of defaults, see "Modification and Waiver". Subject to the provisions of the Indentures relating to the duties of the Trustees in case an Event of Default shall occur and be continuing, each Trustee will be under no obligation to exercise any of its rights or powers under the applicable Indenture at the request or direction of any of the Holders, unless such Holders shall have offered to such Trustee reasonable indemnity. (Section 603) Subject to such provisions for the indemnification of the Trustees, the Holders of a majority in aggregate principal amount of the Outstanding Debt Securities of any series will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee with respect to the Debt Securities of that series. (Section 512) No Holder of a Debt Security of any series will have any right to institute any proceeding with respect to the applicable Indenture, or for the appointment of a receiver or a trustee, or for any other remedy thereunder, unless (i) such Holder has previously given to the Trustee under the applicable Indenture written notice of a continuing Event of Default with respect to the Debt Securities of that series, (ii) the Holders of at least 25% in aggregate principal amount of the Outstanding Debt Securities of that series have made written request, and such Holder or Holders have offered reasonable indemnity, to the Trustee to institute such proceeding as trustee and (iii) the Trustee has failed to institute such proceeding, and has not received from the Holders of a majority in aggregate principal amount of the Outstanding 18 101 Debt Securities of that series a direction inconsistent with such request, within 60 days after such notice, request and offer. (Section 507) However, such limitations do not apply to a suit instituted by a Holder of a Debt Security for the enforcement of payment of the principal of or any premium or interest on such Debt Security on or after the applicable due date specified in such Debt Security. (Section 508) We will be required to furnish to each Trustee annually a statement by certain of our officers as to whether or not we, to their knowledge, are in default in the performance or observance of any of the terms, provisions and conditions of the applicable Indenture and, if so, specifying all such known defaults. (Section 1004) MODIFICATION AND WAIVER Modifications and amendments of the Indentures may be made by us, the Subsidiary Guarantors and the applicable Trustee with the consent of the Holders of a majority in aggregate principal amount of the Outstanding Debt Securities of each series affected by such modification or amendment; provided, however, that no such modification or amendment may, without the consent of the Holder of each Outstanding Debt Security affected thereby: (1) change the Stated Maturity of the principal of, or any installment of principal of or interest on, any Debt Security, (2) reduce the principal amount of, or any premium or interest on, any Debt Security, (3) reduce the amount of principal of an Original Issue Discount Security or any other Debt Security payable upon acceleration of the Maturity thereof, (4) change the place or currency of payment of principal of, or any premium or interest on, any Debt Security, (5) impair the right to institute suit for the enforcement of any payment on or with respect to any Debt Security, (6) in the case of Subordinated Debt Securities, modify the subordination provisions in a manner adverse to the Holders of the Subordinated Debt Securities, (7) except as provided in the applicable Indenture, release the Subsidiary Guarantee of a Subsidiary Guarantor, (8) reduce the percentage in principal amount of Outstanding Debt Securities of any series, the consent of whose Holders is required for modification or amendment of the Indenture, (9) reduce the percentage in principal amount of Outstanding Debt Securities of any series necessary for waiver of compliance with certain provisions of the Indenture or for waiver of certain defaults or (10) modify such provisions with respect to modification and waiver. (Section 902) The Holders of a majority in principal amount of the Outstanding Debt Securities of any series may waive compliance by us with certain restrictive provisions of the applicable Indenture. The Holders of a majority in principal amount of the Outstanding Debt Securities of any series may waive any past default under the applicable Indenture, except a default in the payment of principal, premium or interest and certain covenants and provisions of the Indenture which cannot be amended without the consent of the Holder of each Outstanding Debt Security of such series affected. (Section 513) The Indentures provide that in determining whether the Holders of the requisite principal amount of the Outstanding Debt Securities have given or taken any direction, notice, consent, waiver or other action under such Indenture as of any date, (i) the principal amount of an Original Issue Discount Security that will be deemed to be Outstanding will be the amount of the principal thereof that would be due and payable as of such date upon acceleration of the Maturity thereof to such date, (ii) if, as of such date, the principal amount payable at the Stated Maturity of a Debt Security is not determinable (for example, because it is based on an index), the principal amount of such Debt Security deemed to be Outstanding as of such date will be an amount determined in the manner prescribed for such Debt Security and (iii) the 19 102 principal amount of a Debt Security denominated in one or more foreign currencies or currency units that will be deemed to be Outstanding will be the U.S. dollar equivalent, determined as of such date in the manner prescribed for such Debt Security, of the principal amount of such Debt Security (or, in the case of a Debt Security described in clause (i) or (ii) above, of the amount described in such clause). Certain Debt Securities, including those for whose payment or redemption money has been deposited or set aside in trust for the Holders and those that have been fully defeased pursuant to Section 1302, will not be deemed to be Outstanding. (Section 101) Except in certain limited circumstances, we will be entitled to set any day as a record date for the purpose of determining the Holders of Outstanding Debt Securities of any series entitled to give or take any direction, notice, consent, waiver or other action under the applicable Indenture, in the manner and subject to the limitations provided in the Indenture. In certain limited circumstances, the Trustee will be entitled to set a record date for action by Holders. If a record date is set for any action to be taken by Holders of a particular series, such action may be taken only by persons who are Holders of Outstanding Debt Securities of that series on the record date. To be effective, such action must be taken by Holders of the requisite principal amount of such Debt Securities within a specified period following the record date. For any particular record date, this period will be 180 days or such other period as may be specified by us (or the Trustee, if it set the record date), and may be shortened or lengthened (but not beyond 180 days) from time to time. (Section 104) DEFEASANCE AND COVENANT DEFEASANCE If and to the extent indicated in the applicable prospectus supplement, we may elect, at our option at any time, to have the provisions of Section 1502, relating to defeasance and discharge of indebtedness, or Section 1503, relating to defeasance of certain restrictive covenants applied to the Debt Securities of any series, or to any specified part of a series. (Section 1501) Defeasance and Discharge. The Indentures provide that, upon our exercise of our option (if any) to have Section 1502 applied to any Debt Securities, we and, if applicable, each Subsidiary Guarantor will be discharged from all our obligations, and, if such Debt Securities are Subordinated Debt Securities, the provisions of the Subordinated Indenture relating to subordination will cease to be effective, with respect to such Debt Securities (except for certain obligations to exchange or register the transfer of Debt Securities, to replace stolen, lost or mutilated Debt Securities, to maintain paying agencies and to hold moneys for payment in trust) upon the deposit in trust for the benefit of the Holders of such Debt Securities of money or U.S. Government Obligations, or both, which, through the payment of principal and interest in respect thereof in accordance with their terms, will provide money in an amount sufficient to pay the principal of and any premium and interest on such Debt Securities on the respective Stated Maturities in accordance with the terms of the applicable Indenture and such Debt Securities. Such defeasance or discharge may occur only if, among other things, (i) we have delivered to the applicable Trustee an Opinion of Counsel to the effect that we have received from, or there has been published by, the United States Internal Revenue Service a ruling, or there has been a change in tax law, in either case to the effect that Holders of such Debt Securities will not recognize gain or loss for federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to federal income tax on the same amount, in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge were not to occur; (ii) no Event of Default or event that with the passing of time or the giving of notice, or both, shall constitute an Event of Default shall have occurred or be continuing; (iii) such deposit, defeasance and discharge will not result in a breach or violation of, or constitute a default under, any agreement or instrument to which we or any Restricted Subsidiary is a party or by which we or any Restricted Subsidiary is bound; (iv) in the case of Subordinated Debt Securities, at the time of such deposit, no default in the payment of all or a portion of principal of (or premium, if any) or interest on or other obligations in respect of any of our Senior Debt shall have occurred and be continuing and no other event of default 20 103 with respect to any of our Senior Debt shall have occurred and be continuing permitting after notice or the lapse of time, or both, the acceleration thereof; and (v) we have delivered to the Trustee an Opinion of Counsel to the effect that such deposit shall not cause the Trustee or the trust so created to be subject to the Investment Company Act of 1940. (Sections 1502 and 1504) Defeasance of Certain Covenants. The Indentures provide that, upon our exercise of our option (if any) to have Section 1503 applied to any Debt Securities, we may omit to comply with certain restrictive covenants, including those that may be described in the applicable prospectus supplement, the occurrence of certain Events of Default, which are described above in clause (5) (with respect to such restrictive covenants) and clauses (6) and (7) under "Events of Default" and any that may be described in the applicable prospectus supplement, will not be deemed to either be or result in an Event of Default and, if such Debt Securities are Subordinated Debt Securities, the provisions of the Subordinated Indenture relating to subordination will cease to be effective, in each case with respect to such Debt Securities. In order to exercise such option, we must deposit, in trust for the benefit of the Holders of such Debt Securities, money or U.S. Government Obligations, or both, which, through the payment of principal and interest in respect thereof in accordance with their terms, will provide money in an amount sufficient to pay the principal of and any premium and interest on such Debt Securities on the respective Stated Maturities in accordance with the terms of the applicable Indenture and such Debt Securities. Such covenant defeasance may occur only if we have delivered to the applicable Trustee an Opinion of Counsel that in effect says that Holders of such Debt Securities will not recognize gain or loss for federal income tax purposes as a result of such deposit and defeasance of certain obligations and will be subject to federal income tax on the same amount, in the same manner and at the same times as would have been the case if such deposit and defeasance were not to occur and the requirements set forth in clauses (ii), (iii), (iv) and (v) above are satisfied. If we exercise this option with respect to any Debt Securities and such Debt Securities were declared due and payable because of the occurrence of any Event of Default, the amount of money and U.S. Government Obligations so deposited in trust would be sufficient to pay amounts due on such Debt Securities at the time of their respective Stated Maturities but may not be sufficient to pay amounts due on such Debt Securities upon any acceleration resulting from such Event of Default. In such case, we would remain liable for such payments. (Sections 1503 and 1504) NOTICES Notices to Holders of Debt Securities will be given by mail to the addresses of such Holders as they may appear in the Security Register. (Sections 101 and 106) TITLE We, the Subsidiary Guarantors, the Trustees and any agent of us, the Subsidiary Guarantors or a Trustee may treat the Person in whose name a Debt Security is registered as the absolute owner of the Debt Security (whether or not such Debt Security may be overdue) for the purpose of making payment and for all other purposes. (Section 308) GOVERNING LAW The Indentures and the Debt Securities will be governed by, and construed in accordance with, the law of the State of New York. (Section 112) DESCRIPTION OF CAPITAL STOCK As of December 31, 1998, our authorized capital stock was 51,000,000 shares. Those shares consisted of: (a) 1,000,000 shares of preferred stock, none of which were outstanding; and (b) 50,000,000 shares of common stock, of which 18,230,149 shares were outstanding. 21 104 COMMON STOCK Subject to any special voting rights of any series of preferred stock that we may issue in the future, the holders of the common stock may vote one vote for each share held on all matters voted upon by our stockholders, including the election of our directors. Holders of common stock may not cumulate their votes in elections of directors. Subject to the rights of any then outstanding shares of preferred stock, the holders of common stock may receive such dividends as our Board of Directors may declare in its discretion out of legally available funds. Holders of common stock will share equally in our net assets upon liquidation after payment or provision for all liabilities and any preferential liquidation rights of any preferred stock then outstanding. The holders of common stock have no preemptive rights to purchase our shares of stock. Shares of common stock are not subject to any redemption provisions and are not convertible into any of our other securities. All outstanding shares of common stock are fully paid and non-assessable. Any additional common stock we issue will also be fully paid and non-assessable. PREFERRED STOCK The prospectus supplement will specify any terms of any series of preferred stock offered by it including: - the series, the number of shares offered and the liquidation value of the preferred stock, - the price at which the preferred stock will be issued, - the dividend rate, the dates on which the dividends will be payable and other terms relating to the payment of dividends on the preferred stock, - the liquidation preference of the preferred stock, - the voting rights of the preferred stock, - whether the preferred stock is redeemable or subject to a sinking fund, and the terms of any such redemption or sinking fund, - whether the preferred stock is convertible or exchangeable for any other securities, and the terms of any such conversion, and - any additional rights, preferences, qualifications, limitations and restrictions of the preferred stock. The description of the terms of the preferred stock to be set forth in an applicable prospectus supplement will not be complete and will be subject to and qualified in its entirety by reference to the statement of resolution relating to the applicable series of preferred stock. The registration statement of which this prospectus forms a part will include the statement of resolution as an exhibit or incorporate it by reference. We may issue preferred stock from time to time in one or more series. Subject to the provisions of our Restated Certificate of Incorporation and limitations prescribed by law, our Board of Directors may adopt resolutions to issue the shares of preferred stock, to fix the number of shares, and to change the number of shares constituting any series and establish the voting powers, designations, preferences and relative participating, optional or other special rights, qualifications, limitations or restrictions thereof, including dividend rights (including whether dividends are cumulative), dividend rates, terms of redemption (including sinking fund provisions), redemption prices, conversion rights and liquidation preferences of the shares constituting any series of preferred stock, in each case without any further action or vote by our stockholders. Undesignated preferred stock may enable our Board of Directors to render more difficult or to discourage an attempt to obtain control of us by means of a tender offer, proxy contest, merger or otherwise, and to thereby protect the continuity of our management. The issuance of shares of preferred stock may adversely affect the rights of the holders of our common stock or any existing preferred stock. For example, any preferred stock issued may rank prior to our common stock or any existing preferred stock as to dividend rights, liquidation preference or both, may have full or limited voting rights and may 22 105 be convertible into shares of common stock or any existing preferred stock. As a result, the issuance of shares of preferred stock may discourage bids for our common stock or may otherwise adversely affect the market price of our common stock or any existing preferred stock. ANTI-TAKEOVER PROVISIONS Certain provisions in our Restated Certificate of Incorporation and Bylaws and our stockholders' rights plan may encourage persons considering unsolicited tender offers or other unilateral takeover proposals to negotiate with our Board of Directors rather than pursue non-negotiated takeover attempts. Classified Board of Directors and Limitations on Removal of Directors. Our Board of Directors is divided into three classes. The directors of each class are elected for three-year terms, and the terms of the three classes are staggered so that directors from a single class are elected at each annual meeting of stockholders. Stockholders may remove a director only for cause and upon the vote of holders of at least 80% of the voting power of the outstanding shares of common stock. In general, our Board of Directors, not the stockholders, has the right to appoint persons to fill vacancies on the Board of Directors. No Written Consent by Stockholders. Our Restated Certificate of Incorporation provides that any action required or permitted to be taken by our stockholders must be taken at a duly called annual or special meeting of our stockholders. Special meetings of our stockholders may be called only by our Board of Directors. Business Combinations under Delaware Law. We are a Delaware corporation and are subject to Section 203 of the Delaware General Corporation Law. Section 203 prevents a person who owns 15% or more of our outstanding voting stock (an "interested stockholder") from engaging in certain business combinations with us for three years following the date that the person become an interested stockholder. These restrictions do not apply if: - before the person became an interested stockholder, our Board of Directors approved the transaction in which the interested stockholder became an interested stockholder or the business combination; - upon completion of the transaction that resulted in the interested stockholder becoming an interested stockholder, the interested stockholder owns at least 85% of our outstanding voting stock at the time the transaction commenced; or - following the transaction in which the person became an interested stockholder, the business combination is approved by both our Board of Directors and the holders of at least two-thirds of our outstanding voting stock not owned by the interested stockholder. These restrictions do not apply to certain business combinations proposed by an interested stockholder following the announcement of certain extraordinary transactions involving us and a person who was not an interested stockholder during the previous three years or who became an interested stockholder with the approval of a majority of our directors, if that extraordinary transaction is approved or goes unopposed by a majority of our directors who were directors before any person became an interested stockholder in the previous three years or who were recommended for election or elected to succeed such directors by a majority of such directors then in office. Stockholders' Rights Plan. Our Board of Directors has adopted a stockholders' rights plan (the "Rights Plan"). Under the Rights Plan, each Right entitles the registered holder under the circumstances described below to purchase from us one one-thousandth of a share of our Junior Participating Preferred Stock (the "Preferred Shares") at a price of $65 per one one-thousandth of a Preferred Share (the "Purchase Price"), subject to adjustment. The following is a summary of certain terms of the Rights Plan. The Rights Plan is filed as an exhibit to the registration statement of which this prospectus is a part and this summary is qualified by reference to the specific terms of the Rights Plan. Until the Distribution Date (as defined below), the Rights attach to all common stock certificates representing outstanding shares. No separate Right Certificate will be distributed. A Right is issued for 23 106 each share of common stock issued. The Rights will separate from the common stock and a Distribution Date will occur upon the earlier of - 10 business days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired beneficial ownership of 20% or more of our outstanding Voting Shares (as defined in the Rights Agreement), or - 10 business days following the commencement or announcement of an intention to commence a tender offer or exchange offer the consummation of which would result in the person or group beneficially owning 20% or more of our outstanding Voting Shares. Until the Distribution Date or the earlier of redemption or expiration of the Rights, the Rights are evidenced by the certificates representing the common stock. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights (the "Rights Certificates") will be mailed to holders of record of the common stock as of the close of business on the Distribution Date and such separate Right Certificates alone will thereafter evidence the Rights. The Rights are not exercisable until the Distribution Date. The rights will expire on November 4, 2007 (the "Final Expiration Date"), unless the Final Expiration Date is extended or the Rights are earlier redeemed or exchanged. If a person or group acquires 20% or more of our Voting Shares, each Right then outstanding (other than Rights beneficially owned by the Acquiring Persons which would become null and void) becomes a right to buy that number of shares of common stock (or under certain circumstances, the equivalent number of one one-thousandths of a Preferred Share) that at the time of such acquisition has a market value of two times the Purchase Price of the Right. If we are acquired in a merger or other business combination transaction or assets constituting more than 50% of our consolidated assets or producing more than 50% of our earning power or cash flow are sold, proper provision will be made so that each holder of a Right will thereafter have the right to receive, upon the exercise thereof at the then current Purchase Price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction has a market value of two times the Purchase Price of the Right. The dividend and liquidation rights, and the non-redemption feature, of the Preferred Shares are designed so that the value of one one-thousandth of a Preferred Share purchasable upon exercise of each Right will approximate the value of one share of common stock. The Preferred Shares issuable upon exercise of the Rights will be non-redeemable and rank junior to all other series of our preferred stock. Each whole Preferred Share will be entitled to receive a quarterly preferential dividend in an amount per share equal to the greater of (i) $1.00 in cash, or (ii) in the aggregate, 1,000 times the dividend declared on the common stock. In the event of liquidation, the holders of Preferred Shares may receive a preferential liquidation payment equal to the greater of (i) $1,000 per share, or (ii) in the aggregate, 1,000 times the payment made on the shares of common stock. In the event of any merger, consolidation or other transaction in which the shares of common stock are exchanged for or changed into other stock or securities, cash or other property, each whole Preferred Share will be entitled to receive 1,000 times the amount received per share of common stock. Each whole Preferred Share will be entitled to 1,000 votes on all matters submitted to a vote of our stockholders and Preferred Shares will generally vote together as one class with the common stock and any other capital stock on all matters submitted to a vote of our stockholders. The number of outstanding Rights and the number of one one-thousandths of a Preferred Share or other securities or property issuable upon exercise of the Rights, and the Purchase Price payable, may be adjusted from time to time to prevent dilution. At any time after a person or group of affiliated or associated persons acquires beneficial ownership of 20% or more of our outstanding Voting Shares and before a person or group acquires beneficial ownership of 50% or more of our outstanding Voting Shares our Board of Directors may, at its option, issue common stock in mandatory redemption of, and in exchange for, all or part of the then outstanding and exercisable Rights (other than Rights owned by such person or group which would become null and void) at an 24 107 exchange ratio of one share of common stock (or one one-thousandth of a Preferred Share) for each two shares of common stock for which each Right is then exercisable, subject to adjustment. At any time prior to the first public announcement that a person or group has become the beneficial owner of 20% or more of the outstanding Voting Shares, our Board of Directors may redeem all but not less than all the then outstanding Rights at a price of $0.01 per Right (the "Redemption Price"). The redemption of the rights may be made effective at such time, on such basis and with such conditions as our Board of Directors in its sole discretion may establish. Immediately upon the action of our Board of Directors ordering redemption of the rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. LIMITATION OF LIABILITY OF OFFICERS AND DIRECTORS Delaware law authorizes corporations to limit or eliminate the personal liability of officers and directors to corporations and their stockholders for monetary damages for breach of officers' and directors' fiduciary duty of care. The duty of care requires that, when acting on behalf of the corporation, officers and directors must exercise an informed business judgment based on all material information reasonably available to them. Absent the limitations authorized by Delaware law, officers and directors are accountable to corporations and their stockholders for monetary damages for conduct constituting gross negligence in the exercise of their duty of care. Delaware law enables corporations to limit available relief to equitable remedies such as injunction or rescission. Our Restated Certificate of Incorporation limits the liability of our officers and directors to us and our stockholders to the fullest extent permitted by Delaware law. Specifically, our officers and directors will not be personally liable for monetary damages for breach of an officer's or director's fiduciary duty in such capacity, except for liability - for any breach of the officer's or director's duty of loyalty to us or our stockholders, - for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, - for unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation law, or - for any transaction from which the officer or director derived an improper personal benefit. The inclusion of this provision in our Restated Certificate of Incorporation may reduce the likelihood of derivative litigation against our officers and directors, and may discourage or deter stockholders or management from bringing a lawsuit against our officers and directors for breach of their duty of care, even though such an action, if successful, might have otherwise benefitted us and our stockholders. Both our Restated Certificate of Incorporation and Bylaws provide indemnification to our officers and directors and certain other persons with respect to certain matters to the maximum extent allowed by Delaware law as it exists now or may hereafter be amended. These provisions do not alter the liability of officers and directors under federal securities laws and do not affect the right to sue (nor to recover monetary damages) under federal securities laws for violations thereof. TRANSFER AGENT AND REGISTRAR Our transfer agent and registrar of the common stock, as well as the rights agent under our Rights Plan, is ChaseMellon Shareholder Services, L.L.C. 25 108 DEPOSITARY SHARES GENERAL We may offer fractional shares of preferred stock, rather than full shares of preferred stock. If we decide to offer fractional shares of preferred stock, we will issue receipts for depositary shares. Each depositary share will represent a fraction of a share of a particular series of preferred stock. The prospectus supplement will indicate that fraction. The shares of preferred stock represented by depositary shares will be deposited under a deposit agreement between us and a bank or trust company that meets certain requirements and is selected by us (the "Depositary"). Each owner of a depositary share will be entitled to all the rights and preferences of the preferred stock represented by the depositary share. The depositary shares will be evidenced by depositary receipts issued pursuant to the deposit agreement. Depositary receipts will be distributed to those persons purchasing the fractional shares of preferred stock in accordance with the terms of the offering. We have summarized selected provisions of the deposit agreement and the depositary receipts. The summary is not complete. The forms of the deposit agreement and the depositary receipts are filed as exhibits to the registration statement and you should read such documents for provisions that may be important to you. DIVIDENDS AND OTHER DISTRIBUTIONS If we pay a cash distribution or dividend on a series of preferred stock represented by depositary shares, the Depositary will distribute such dividends to the record holders of such depositary shares. If the distributions are in property other than cash, the Depositary will distribute the property to the record holders of the depositary shares. However, if the Depositary determines that it is not feasible to make the distribution of property, the Depositary may, with our approval, sell such property and distribute the net proceeds from such sale to the holders of the preferred stock. REDEMPTION OF DEPOSITARY SHARES If we redeem a series of preferred stock represented by depositary shares, the Depositary will redeem the depositary shares from the proceeds received by the Depositary in connection with the redemption. The redemption price per depositary share will equal the applicable fraction of the redemption price per share of the preferred stock. If fewer than all the depositary shares are redeemed, the depositary shares to be redeemed will be selected by lot or pro rata as the Depositary may determine. VOTING THE PREFERRED STOCK Upon receipt of notice of any meeting at which the holders of the preferred stock represented by depositary shares are entitled to vote, the Depositary will mail the notice to the record holders of the depositary shares relating to such preferred stock. Each record holder of these depositary shares on the record date (which will be the same date as the record date for the preferred stock) may instruct the Depositary as to how to vote the preferred stock represented by such holder's depositary shares. The Depositary will endeavor, insofar as practicable, to vote the amount of the preferred stock represented by such depositary shares in accordance with such instructions, and we will take all action which the Depositary deems necessary in order to enable the Depositary to do so. The Depositary will abstain from voting shares of the preferred stock to the extent it does not receive specific instructions from the holders of depositary shares representing such preferred stock. AMENDMENT AND TERMINATION OF THE DEPOSITARY AGREEMENT The form of depositary receipt evidencing the depositary shares and any provision of the deposit agreement may be amended by agreement between the Depositary and us. However, any amendment that materially and adversely alters the rights of the holders of depositary shares will not be effective unless such amendment has been approved by the holders of at least a majority of the depositary shares then outstanding. The deposit agreement may be terminated by the Depositary or us only if (i) all outstanding depositary shares have been redeemed or (ii) there has been a final distribution in respect of the preferred 26 109 stock in connection with any liquidation, dissolution or winding up of us and such distribution has been distributed to the holders of depositary receipts. CHARGES OF DEPOSITARY We will pay all transfer and other taxes and governmental charges arising solely from the existence of the depositary arrangements. We will pay charges of the Depositary in connection with the initial deposit of the preferred stock and any redemption of the preferred stock. Holders of depositary receipts will pay other transfer and other taxes and governmental charges and any other charges, including a fee for the withdrawal of shares of preferred stock upon surrender of depositary receipts, as are expressly provided in the deposit agreement to be for their accounts. WITHDRAWAL OF PREFERRED STOCK Upon surrender of depositary receipts at the principal office of the Depositary, subject to the terms of the deposit agreement, the owner of the depositary shares may demand delivery of the number of whole shares of preferred stock and all money and other property, if any, represented by those depositary shares. Partial shares of preferred stock will not be issued. If the depositary receipts delivered by the holder evidence a number of Depositary shares in excess of the number of depositary shares representing the number of whole shares of preferred stock to be withdrawn, the Depositary will deliver to such holder at the same time a new depositary receipt evidencing the excess number of depositary shares. Holders of preferred stock thus withdrawn may not thereafter deposit those shares under the deposit agreement or receive depositary receipts evidencing depositary shares therefor. MISCELLANEOUS The Depositary will forward to holders of depositary receipts all reports and communications from us that are delivered to the Depositary and that we are required to furnish to the holders of the preferred stock. Neither the Depositary nor us will be liable if we are prevented or delayed by law or any circumstance beyond our control in performing our obligations under the deposit agreement. The obligations of the Depositary and us under the deposit agreement will be limited to performance in good faith of our duties thereunder, and we will not be obligated to prosecute or defend any legal proceeding in respect of any depositary shares or preferred stock unless satisfactory indemnity is furnished. We may rely upon written advice of counsel or accountants, or upon information provided by persons presenting preferred stock for deposit, holders of depositary receipts or other persons believed to be competent and on documents believed to be genuine. RESIGNATION AND REMOVAL OF DEPOSITARY The Depositary may resign at any time by delivering to us notice of its election to do so, and we may at any time remove the Depositary. Any such resignation or removal will take effect upon the appointment of a successor Depositary and its acceptance of such appointment. Such successor Depositary must be appointed within 60 days after delivery of the notice of resignation or removal and must be a bank or trust company having its principal office in the United States and having a combined capital and surplus of at least $50,000,000. PLAN OF DISTRIBUTION We may sell securities pursuant to this prospectus (a) through underwriters or dealers; (b) through agents; or (c) directly to one or more purchasers, including existing stockholders in a rights offering. BY UNDERWRITERS If underwriters are used in the sale, the offered securities will be acquired by the underwriters for their own account. The underwriters may resell the securities in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale. The obligations of the underwriters to purchase the securities will be subject to certain conditions. Unless indicated in the prospectus supplement the underwriters must purchase all the securities of the series 27 110 offered by a prospectus supplement if any of the securities are purchased. Any initial public offering price and any discounts or concessions allowed or re-allowed or paid to dealers may be changed from time to time. BY AGENTS Securities offered by us pursuant to this prospectus may also be sold through agents designated by us. Unless indicated in the prospectus supplement, any such agent is acting on a best efforts basis for the period of its appointment. DIRECT SALES; RIGHTS OFFERINGS Securities offered by us pursuant to this prospectus may also be sold directly by us. In this case, no underwriters or agents would be involved. We may sell offered securities upon the exercise of rights which may be issued to our securityholders. DELAYED DELIVERY ARRANGEMENTS We may authorize agents, underwriters or dealers to solicit offers by certain institutional investors to purchase offered securities providing for payment and delivery on a future date specified in the prospectus supplement. Institutional investors to which such offers may be made, when authorized, include commercial and savings banks, insurance companies, pension funds, investment companies, education and charitable institutions and such other institutions as may be approved by us. The obligations of any such purchasers under such delayed delivery and payment arrangements will be subject to the condition that the purchase of the offered securities will not at the time of delivery be prohibited under applicable law. The underwriters and such agents will not have any responsibility with respect to the validity or performance of such contracts. GENERAL INFORMATION Underwriters, dealers and agents that participate in the distribution of offered securities may be underwriters as defined in the Securities Act, and any discounts or commissions received by them from us and any profit on the resale of the offered securities by them may be treated as underwriting discounts and commissions under the Securities Act. Any underwriters or agents will be identified and their compensation described in a prospectus supplement. We may have agreements with the underwriters, dealers and agents to indemnify them against certain civil liabilities, including liabilities under the Act, or to contribute with respect to payments which the underwriters, dealers or agents may be required to make. Underwriters, dealers and agents may engage in transactions with, or perform services for, us or our subsidiaries in the ordinary course of their businesses. LEGAL MATTERS Our legal counsel, Vinson & Elkins L.L.P., Houston, Texas, will pass upon certain legal matters in connection with the offered securities. Any underwriters will be advised about other issues relating to any offering by their own legal counsel. EXPERTS Arthur Andersen LLP, independent public accountants, audited the financial statements included in our annual report on Form 10-K for the year ended December 31, 1997 incorporated by reference in this prospectus and elsewhere in the registration statement. These documents are incorporated by reference herein in reliance upon the authority of Arthur Andersen LLP as experts in accounting and auditing in giving the report. Crowe, Chizek and Company LLP, independent public accountants, audited the financial statements of the Carroll Automotive Group included in the Current Report on Form 8-K dated May 28, 1998, incorporated by reference in this prospectus and elsewhere in the registration statement. These documents are incorporated by reference herein in reliance upon the authority of Crowe, Chizek and Company LLP as experts in accounting and auditing in giving the report. 28 111 - --------------------------------------------------------- - --------------------------------------------------------- No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the common stock offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. --------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Supplement Prospectus Supplement Summary........... S-1 Risk Factors............................ S-8 Cautionary Statement about Forward- Looking Statements.................... S-17 Price Range of Common Stock and Dividend Policy................................ S-18 Use of Proceeds......................... S-19 Capitalization.......................... S-20 Pro Forma Consolidated Financial Statements............................ S-21 Management's Discussion and Analysis of Financial Condition and Results of Operations............................ S-28 Business................................ S-36 Management.............................. S-54 Principal Stockholders.................. S-57 Description of Credit Facility.......... S-58 Validity of the Common Stock............ S-60 Experts................................. S-60 Index to Financial Statements........... F-1 Underwriting............................ U-1 Prospectus Table of Contents....................... 2 About this Prospectus................... 2 Where You Can Find More Information..... 2 Cautionary Statement about Forward- Looking Statements.................... 3 Disclaimer.............................. 4 The Company............................. 4 Risk Factors............................ 4 Use of Proceeds......................... 12 Ratios of Earnings to Fixed Charges and Earnings to Fixed Charges plus Dividends............................. 12 Description of Debt Securities.......... 12 Description of Capital Stock............ 21 Depositary Shares....................... 26 Plan of Distribution.................... 27 Legal Matters........................... 28 Experts................................. 28
- --------------------------------------------------------- - --------------------------------------------------------- - --------------------------------------------------------- - --------------------------------------------------------- 2,000,000 Shares GROUP 1 AUTOMOTIVE, INC. Common Stock (par value $.01 per share) ------------------------------------------------------ PROSPECTUS ------------------------------------------------------ GOLDMAN, SACHS & CO. MERRILL LYNCH & CO. NATIONSBANC MONTGOMERY SECURITIES LLC REPRESENTATIVES OF THE UNDERWRITERS - --------------------------------------------------------- - --------------------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----