-----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, LpgcsZw+rgvSStOjdVttBGgFQ40TDFYF5wpt5ZUhZWIgZrVOEBxpk230bYCPVLOt Og9PzLlqgAGS+GGOkO3utg== 0000950129-04-001195.txt : 20040311 0000950129-04-001195.hdr.sgml : 20040311 20040311165004 ACCESSION NUMBER: 0000950129-04-001195 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040311 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: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13461 FILM NUMBER: 04663394 BUSINESS ADDRESS: STREET 1: 950 ECHO LANE STREET 2: STE 100 CITY: HOUSTON STATE: TX ZIP: 77024 BUSINESS PHONE: 7134676268 MAIL ADDRESS: STREET 1: 950 ECHO LANE STREET 2: STE 100 CITY: HOUSTON STATE: TX ZIP: 77024 10-K 1 h13155e10vk.txt GROUP 1 AUTOMOTIVE, INC. - DATED 12/31/2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 COMMISSION FILE NUMBER: 1-13461 GROUP 1 AUTOMOTIVE, INC. (Exact name of Registrant as specified in its charter) DELAWARE 76-0506313 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 950 ECHO LANE, SUITE 100, HOUSTON, TEXAS 77024 (Address of principal executive offices) (Zip code) Registrant's telephone number including area code (713) 647-5700 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of each class Name of exchange on which Registered ------------------- ------------------------------------ COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] State the aggregate market value of voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, as of the last business day of the registrant's most recently completed second fiscal quarter: $604.2 million. As of March 1, 2004, there were 22.6 million shares of our common stock, par value $.01 per share, outstanding. Documents incorporated by reference: Proxy Statement of Group 1 Automotive, Inc. for the Annual Meeting of Stockholders to be held on May 19, 2004, which is incorporated into Part III of this Form 10-K. 2 TABLE OF CONTENTS PART I ..................................................................................................... 5 Item 1. Business............................................................................................. 5 Item 2. Properties........................................................................................... 22 Item 3. Legal Proceedings.................................................................................... 22 Item 4. Submission of Matters to a Vote of Security Holders.................................................. 22 PART II ..................................................................................................... 23 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................ 23 Item 6. Selected Financial Data.............................................................................. 24 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 25 Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................................... 39 Item 8. Financial Statements and Supplementary Data.......................................................... 40 Item 9. Changes in and Disagreements on Accounting and Financial Disclosure.................................. 40 Item 9A. Controls and Procedures.............................................................................. 40 PART III ..................................................................................................... 40 Item 10. Directors and Executive Officers of the Registrant................................................... 40 Item 11. Executive Compensation............................................................................... 40 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters....... 40 Item 13. Certain Relationships and Related Transactions....................................................... 40 Item 14. Principal Accountant Fees and Services............................................................... 40 PART IV ..................................................................................................... 40 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................... 40
3 CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS This annual report includes certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include statements regarding our plans, goals, beliefs or current expectations, including those plans, goals, beliefs and expectations of our officers and directors with respect to, among other things: - the completion of future acquisitions - operating cash flows and availability of capital - future stock repurchases - capital expenditures - changes in sales volumes in the new and used vehicle and parts and service markets - business trends, including incentives, product cycles and interest rates - availability of financing for inventory and working capital - inventory levels - year-end used vehicle valuation reserves Any such forward-looking statements are not assurances of future performance and involve risks and uncertainties. Actual results may differ materially from anticipated results in the forward-looking statements for a number of reasons, including: - the future economic environment, including consumer confidence, interest rates, the price of gasoline, the level of manufacturer incentives and the availability of consumer credit may affect the demand for new and used vehicles and parts and service sales - the effect of adverse international developments such as war, terrorism, political conflicts or other hostilities - regulatory environment, adverse legislation or unexpected litigation - our principal automobile manufacturers, especially Toyota / Lexus, Ford, DaimlerChrysler, General Motors and Nissan / Infiniti may not continue to produce or make available to us vehicles that are in high demand by our customers - requirements imposed on us by our manufacturers may limit our acquisitions and affect capital expenditures related to our dealership facilities - our dealership operations may not perform at expected levels or achieve expected improvements - we may not achieve expected future cost savings and our future costs could be higher than we expected - available capital resources and various debt agreements may limit our ability to complete acquisitions, complete construction of new or expanded facilities and repurchase shares - our cost of financing could increase significantly - new accounting standards could materially impact our reported earnings per share - we may not complete additional acquisitions or the pace of acquisitions may change - we may not be able to adjust our cost structure - we may lose key personnel - competition in our industry may impact our operations or our ability to complete acquisitions - our estimation of the realizable value of our inventories may be high - insurance costs could increase significantly - we may not achieve expected sales volumes from the new franchises granted to us - we may not obtain inventory of new and used vehicles and parts, including imported inventory, at the cost, or in the volume, we expect The information contained in this annual report, including the information set forth under the heading "Business - Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," identifies factors that could affect our operating results and performance. We urge you to carefully consider those factors. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement. 4 PART I ITEM 1. BUSINESS GENERAL Group 1 Automotive, Inc. ("Group 1," the "Company," "we" or "us") is a leading operator in the $1 trillion automotive retailing industry. Through a series of acquisitions, we operate 122 dealership franchises in California, Colorado, Florida, Georgia, Louisiana, Massachusetts, New Jersey, New Mexico, Oklahoma and Texas. Through our dealerships and Internet sites, we sell new and used cars and light trucks; arrange related financing, vehicle service and insurance contracts; provide maintenance and repair services; and sell replacement parts. OPERATING STRATEGY We follow an operating strategy that focuses on decentralized management of locally branded dealership operations, expansion of higher margin businesses, superior customer service, effective asset management, development of human capital and technology initiatives. During the last five years we estimate that our parts and service operations contributed approximately 41% of our pretax income; finance and insurance operations contributed approximately 27% of our pretax income; new vehicle operations contributed approximately 17% of our pretax income; and used vehicle operations contributed approximately 15% of our pretax income. During 2003, we achieved an operating margin of 3.3%. Since our inception in 1997, our annual operating margin has ranged between 2.8% and 3.4%. DECENTRALIZED OPERATIONS BRANDED LOCALLY. 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 decision-making and an in-depth knowledge of customers' needs and preferences are important in maximizing financial performance. By coordinating certain operations on a local basis, we believe that we achieve cost savings in such areas as advertising, vendor consolidation, data processing and personnel utilization. The following table sets forth our geographic diversity, based on new vehicle retail sales, and the number of dealerships and franchises we own:
PERCENTAGE OF OUR NEW VEHICLE RETAIL UNITS SOLD DURING THE TWELVE AS OF MARCH 1, 2004 MONTHS ENDED ------------------------------------------------ MARKET AREA DECEMBER 31, 2003 NUMBER OF DEALERSHIPS NUMBER OF FRANCHISES - -------------------------------------------------------------------------------------------------------- Oklahoma.............. 14.3% 13 22 Houston............... 12.7 7 6 New England........... 12.7 10 13 California............ 11.9 7 7 Central Texas......... 7.6 7 9 Florida............... 7.6 4 4 West Texas............ 6.9 8 15 New Orleans........... 6.6 7 10 Atlanta............... 6.0 6 8 Dallas................ 6.0 4 7 Beaumont.............. 3.3 2 10 Albuquerque........... 3.2 3 7 Denver................ 1.2 1 1 New Jersey............ - 3 3 ------------------------------------------------------------------ TOTAL.............. 100.0% 82 122 ==================================================================
EXPAND HIGHER MARGIN ACTIVITIES. We focus on expanding our higher margin businesses such as used vehicle retail sales, sales of replacement parts, maintenance and repair services and arranging financing, vehicle service and insurance contracts. While each of our local operations conducts business in a manner consistent with its specific market's characteristics, 5 they also pursue an integrated companywide strategy designed to grow each of these higher margin businesses to enhance profitability and stimulate internal growth. With a competitive advantage in sourcing used vehicle inventory and synergies from new vehicle operations, new vehicle franchises are especially well positioned to compete in the used vehicle market. In addition, each of our dealerships offers an integrated parts and service department, which provides an important source of recurring higher margin revenues. We also have the opportunity on each sale of a new or used vehicle to generate incremental revenues from arranging finance and lease contracts, vehicle service contracts and insurance policies. COMMITMENT TO CUSTOMER SERVICE. We focus on providing high-quality service to meet the needs of our customers. Our dealerships strive to cultivate lasting relationships with their customers, and we believe these efforts increase our opportunities for significant repeat and referral business. For example, the dealerships regard their service and repair activities as an integral part of their overall approach to customer service. This approach provides us with an opportunity to foster ongoing relationships with customers and deepen customer loyalty. In addition, our dealerships continually review their processes in an effort to better meet the needs of their customers. We believe that our ability to share best practices among our dealerships gives us an advantage over smaller dealership groups. For example, our dealerships strive to: (1) employ more efficient selling approaches; (2) utilize computer technology that decreases the time necessary to purchase a vehicle; (3) engage in extensive follow-up after a sale or service visit in order to develop long-term relationships with customers; and (4) extensively train their staffs to be able to meet the needs of the customer. ASSET MANAGEMENT. We monitor our inventory levels and sales. We target a 60-day new vehicle inventory supply and a 30-day used vehicle inventory supply. We monitor our investments in parts and receivables to maximize our financial results. We allocate capital among competing investment opportunities in the entire company based on expected returns on invested capital. HUMAN CAPITAL. The success of our dealerships is highly dependent on dealership personnel. We believe that our decentralized operating approach, incentive compensation plans and training programs attract, develop and retain top automotive retailing talent. TECHNOLOGY INITIATIVES. We use the Internet to communicate more effectively with our customers. Customers can arrange service appointments, search our inventory and receive notice of special offers. Our local operation based portal Web pages furnish customers a direct one-stop shopping experience in their local market, providing multiple brands and an extensive inventory of vehicles. Also, as franchised dealerships, we receive Internet leads from manufacturers' e-commerce programs and, through a contractual relationship with an e-commerce software company, we receive Internet leads from several major portals. Lastly, at times, we use automotive Internet referral services to provide incremental sales opportunities. DEALERSHIP OPERATIONS Each of our local operations has an established management structure that promotes and rewards entrepreneurial spirit, and the achievement of team goals. The general manager of each dealership is ultimately responsible for the operation, personnel and financial performance of the dealership. The general manager is complemented with a management team consisting of new vehicle sales, used vehicle sales, parts and service and finance and insurance 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 are generally long-time members of their local communities and are typically best able to conduct day-to-day operations based on their experience in, and familiarity with, the local market. On a monthly basis, each of our local operations is compared to its monthly operating forecast, and our other dealerships. Key financial information and customer satisfaction data is also analyzed by corporate management and followed up as necessary. 6 NEW VEHICLE SALES. We currently represent 30 American, Asian and European brands of economy, family, sports and luxury cars, light trucks and sport utility vehicles. The following table sets forth the brands and number of new vehicles we sold at retail during 2003, and the number of franchises, of each of the manufacturers that we currently represent:
YEARS ENDED DECEMBER 31, 2003 ------------------------------------- ACTUAL NUMBER PERCENTAGE OF NUMBER OF OF NEW TOTAL NEW FRANCHISES OWNED BRAND VEHICLES SOLD VEHICLES SOLD AS OF MARCH 1, 2004 ----- ------------- ------------- ------------------- Ford................. 22,676 22.7% 14 Toyota / Scion....... 20,894 20.9 9 Nissan............... 8,336 8.3 10 Honda................ 8,019 8.0 6 Dodge................ 7,102 7.1 9 Chevrolet............ 6,430 6.4 7 Lexus................ 5,259 5.3 2 Jeep................. 2,696 2.7 7 Mitsubishi........... 2,647 2.7 6 GMC.................. 2,227 2.2 4 Chrysler............. 2,181 2.2 7 Infiniti............. 1,897 1.9 1 Acura................ 1,762 1.8 2 Mazda................ 1,081 1.1 2 Lincoln.............. 1,006 1.0 6 Pontiac.............. 759 0.8 4 Mercury.............. 713 0.7 7 Subaru............... 705 0.7 1 Audi................. 703 0.7 1 Buick................ 564 0.6 4 BMW.................. 539 0.5 2 Cadillac............. 351 0.4 2 Volkswagen........... 341 0.3 2 Hyundai.............. 332 0.3 1 Mercedes-Benz........ 272 0.3 2 Porsche............... 158 0.2 1 Kia................... 131 0.1 1 Hummer................ 129 0.1 1 Isuzu................. 38 0.0 1 Other................. 23 0.0 - --------- -------- --------- TOTAL............ 99,971 100.0% 122 ========= ======== =========
Our dealerships' new vehicle retail sales include traditional new vehicle retail lease transactions and lease-type transactions, both of which are arranged by the dealerships. New vehicle leases generally have short terms, bringing the customer back to the market sooner than if the purchase was debt financed. In addition, leases provide our dealerships with a steady source of late-model, off-lease vehicles for their used vehicle inventory. Generally, leased vehicles remain under factory warranty for the term of the lease, allowing the dealerships to provide repair services to the lessee throughout the lease term. We do not guarantee residual values on lease transactions. We acquire substantially our entire new vehicle inventory from our manufacturers and do not have a cost advantage in purchasing new vehicle inventory from them. Manufacturers allocate a limited inventory among their franchised dealers based primarily on sales volume and input from dealers. Our dealerships finance their inventory purchases through the floorplan portion of our revolving credit facility. At times, the manufacturers offer incentives to the dealerships to achieve new vehicle sales goals set by them. These incentives are recorded as a reduction of new vehicle cost of sales as the vehicles are sold. We also receive interest assistance from several of our manufacturers. This assistance has ranged from approximately 80% to 160% of our total floorplan interest expense over the past three years. During 2003, we recognized $27.4 million of assistance, which we accounted for as a vehicle purchase price 7 discount and reflected as a reduction of cost of sales in the income statement as vehicles were sold. USED VEHICLE SALES. We sell used vehicles at each of our franchised dealerships. Sales of used vehicles are a significant source of profit for the dealerships. Used vehicles sold at retail typically generate higher gross margins than new vehicles because of their limited comparability and the subjective nature of their valuation, which is dependent on a vehicles age, mileage and condition, among other things. Valuations will also vary based on supply and demand factors, the level of new vehicle incentives, the availability of retail finance and general economic conditions. We intend to grow our used vehicle retail sales operations by maintaining a high-quality inventory, providing competitive prices, offering vehicle service contracts for our used vehicles and continuing to promote used vehicle sales. At times, manufacturer incentives, including below-market retail financing rates on new vehicles, can result in used vehicle buyers switching from the used vehicle market to the new vehicle market. This results in a lower sales volume of used vehicles and a higher sales volume of new vehicles. For example, during 2002 and 2003, we experienced a decline in same store used vehicle retail sales due to high levels of manufacturer incentives on new vehicle sales. The incentives resulted in a reduction of the price difference to the customer between a late model used vehicle and a new vehicle, thus driving more customers to new vehicles. 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 and from wholesalers. Each of our dealerships generally maintains a 30-days supply of used vehicles, and offers to other dealers and wholesalers used vehicles that they do not retail to customers. Sales to other dealers or wholesalers are frequently close to, or below, our cost and therefore negatively affect our gross margin on used vehicle sales. Vehicles may be transferred among our dealerships, on a local basis, to provide balanced inventories of used vehicles at each of our dealerships. Our dealerships have taken several steps towards building customer confidence in their used vehicle inventory, including participation in manufacturer certification programs, which are available only to new vehicle franchises. This process makes these used vehicles eligible for new vehicle benefits such as new vehicle finance rates and in some cases, extension of the manufacturer warranty. In addition, the dealerships offer vehicle service contracts covering the used vehicles that they sell. We believe that our franchised dealerships' strengths in offering used vehicles include: (1) access to trade-ins on new vehicle purchases, which are typically lower mileage and higher quality relative to trade-ins on used car purchases; (2) access to late-model, low mileage off-lease vehicles; (3) access to manufacturers' auctions available only to their respective franchised dealers; (4) the availability of manufacturer certification programs for our used vehicles; and (5) access to a large number of finance sources to arrange financing for our customers. PARTS AND SERVICE SALES. We sell replacement parts and provide maintenance and repair services at each of our franchised dealerships, primarily for the vehicle brands sold at that dealership. We perform both warranty and non-warranty service work. During 2003 warranty work accounted for approximately 17% of our parts, service and collision service revenues. Additionally, our parts and service departments perform used vehicle reconditioning and new vehicle preparation services. The profits from these services are realized when the vehicles are sold to third parties. We also currently own 29 collision service centers. 8 Historically, the automotive repair industry has been highly fragmented. However, we believe that the increased use of advanced technology in vehicles has made it difficult for independent repair shops to retain the expertise to perform major or technical repairs. Additionally, manufacturers permit warranty work to be performed only at franchised dealerships. Hence, unlike independent service operations, our franchised dealerships are qualified to perform work covered by our manufacturers' warranties. Given the increasing technological complexity of motor vehicles and the trend toward extended warranty periods for new vehicles, we believe that an increasing percentage of repair work will be performed at our franchised dealerships, each of which have the sophisticated equipment and skilled personnel necessary to perform complex repairs and warranty repairs. We realize approximately the same gross margin on warranty repairs as we do on customer-paid repairs. We attribute our profitability in parts and service to a comprehensive management system, including the use of variable rate pricing structures, cultivation of strong customer relationships through an emphasis on preventive maintenance and the efficient management of our parts inventory. In charging for their technicians' labor, our dealerships use variable rate structures designed to reflect the difficulty and sophistication of different types of repairs. The percentage mark-ups on parts are similarly priced based on market conditions for different parts. We believe that variable rate pricing helps our dealerships achieve overall gross margins in parts and service which are superior to those of certain competitors who rely on fixed labor rates and percentage markups. Additionally, it allows the dealerships to be competitive with independent repair shops that provide discounted pricing on select services. Our dealerships seek to retain each vehicle purchaser as a customer of the dealership's parts and service departments. The dealerships have systems in place that track their customers' maintenance records and notify owners of vehicles purchased or serviced at the dealerships when their vehicles are due for periodic services. The dealerships regard service and repair activities as an integral part of their overall approach to customer service, providing an opportunity to foster ongoing relationships with the dealership's customers and deepen customer loyalty. The dealerships' parts departments support their respective sales and service departments. Each of the dealerships sells factory-approved parts for the vehicle makes and models sold by that dealership. These parts are used either in repairs made by the dealership, sold at retail to its customers or sold at wholesale to independent repair shops and other franchised dealerships. The dealerships employ a parts manager and independently control parts inventory and sales. Our dealerships frequently share parts with each other. FINANCE AND INSURANCE SALES. Finance and insurance ("F&I") revenues consist primarily of fees for arranging financing, vehicle service and insurance contracts. The dealerships arrange financing for their customers' vehicle purchases, sell vehicle service contracts and arrange selected types of insurance in connection with the financing of vehicle sales. We provide advanced F&I training to our F&I personnel. Typically, the dealerships forward proposed financing contracts to manufacturers' captive finance companies, selected commercial banks or other financing parties. The dealerships receive a financing fee from the lender for arranging the financing and, for a limited time, may be assessed a chargeback against a portion of the financing fee. We recognize the expected net fee as revenue at the time we complete the sale and financing of the vehicle. Additionally, we have negotiated incentive programs with several of the financing institutions we use that provide for additional fees to be paid to us when we achieve certain volumes of business with them. We do not own a finance company and, generally, do not retain credit risk after a loan is made. At the time of a new vehicle sale, the dealerships offer vehicle service contracts to supplement the manufacturer warranty. Additionally, the dealerships sell vehicle service contracts for used vehicles as the manufacturer warranty period may have ended. Our dealerships sell service contracts of third party vendors and our manufacturers, for which they receive a fee upon the sale of the contract and are typically assessed a chargeback against a portion of the fee if the contract is terminated prior to its scheduled maturity. In administrator-obligor states, which are 9 states where a third party, not our dealerships, has all responsibility for claims made on the contract, we recognize the expected net fee as revenue at the time we complete the sale of the contract, as the dealership has no future liability. In dealer-obligor states, which are states where our dealership has responsibility for claims made on the contract if the administrator is unable to fulfill its obligation, the fees and related direct costs are deferred and recognized over the life of the contracts. Due to a change in state law during 2002, we no longer sell dealer-obligor contracts as none of the states we currently operate in are dealer-obligor states. We expect the deferred revenues related to previously sold contracts, and the associated deferred costs, to be recognized over the next four years. The dealerships also offer selected types of insurance products to customers who arrange the financing of their vehicle purchases through the dealerships. The dealerships sell credit life insurance policies to these customers, providing for repayment of the vehicle loan if the obligor dies while the loan is outstanding. The dealerships also sell accident and disability insurance policies, which provide payment of the monthly loan obligations during a period in which the obligor is disabled. The dealerships sell this insurance through third party vendors and we own a company that reinsures the policies. As such, we defer all of the revenues and direct costs related to the sales of these policies and recognize them over the life of the policies. Additionally, the dealerships sell a gap insurance product that, if the customer's loan balance is greater than the value of the vehicle, will pay the difference if the vehicle is stolen or damaged beyond repair. The dealerships sell the gap insurance products of third party vendors, for which they receive a fee upon the sale of the contract and are typically assessed a chargeback against a portion of the fee if the contract is terminated prior to its scheduled maturity. ACQUISITION PROGRAM We have a disciplined two-tier acquisition program that is designed to enhance brand and geographic diversity, create economies of scale and deliver a targeted return on invested capital. Under our acquisition program, we pursue: (1) "platform" acquisitions of large, profitable and well-managed multi-franchise dealership groups in large metropolitan and suburban geographic markets that we do not currently serve, and (2) "tuck-in" acquisitions, which are key, single-point dealerships that are added to existing platforms. They allow us to increase brand diversity, capitalize on economies of scale and offer a greater breadth of products and services in each of the markets in which we operate. Over the past five years, we have purchased 79 dealership franchises with annual revenues of approximately $2.5 billion, disposed of 22 dealership franchises with annual revenues of approximately $277.2 million and been granted 12 new dealership franchises by the manufacturers. Our acquisition target for 2004 is to complete platform and tuck-in acquisitions of dealerships that have approximately $1 billion in annual revenues. ENTERING NEW GEOGRAPHIC MARKETS. We intend, over time, to expand into geographic markets we do not currently serve by acquiring large, profitable and well-established megadealers that are leaders in their regional markets. We pursue megadealers that have superior operational and financial management personnel, whom we seek to retain. We believe that by retaining existing high-quality management we will be able to effectively operate acquired megadealers with management personnel who understand the local market without having to employ and train new and untested personnel. EXPANDING WITHIN EXISTING MARKETS. We intend to make tuck-in acquisitions of additional dealerships in the markets in which we operate, including acquisitions that increase the brands, products and services offered in these markets. We believe that these acquisitions will increase our operating efficiencies and cost savings on a regional level in areas such as advertising, vendor consolidation, data processing and personnel utilization. RECENT ACQUISITIONS AND DISPOSITIONS. During 2003 we acquired, or were granted by the manufacturers, a total of 10 franchises. Also, we completed a market consolidation project in conjunction with DaimlerChrysler's Alpha Initiative in Dallas, Texas. We completed tuck-in 10 acquisitions of eight franchises, consisting of Ford, Lincoln and Mercury in Oklahoma City, Dodge, Lincoln, Mercury and Mitsubishi in New Orleans and Chevrolet in Lubbock, Texas. These tuck-in acquisitions have annual revenues of approximately $309.3 million. The aggregate consideration paid in completing all of the 2003 acquisitions included approximately $35.4 million in cash and the assumption of approximately $52.7 million of inventory financing. Additionally, we were granted Lincoln and Mercury franchises in Oklahoma City by the manufacturers during 2003, at no cost to us, and began operations during 2003. During 2003 we opened a new add-point Ford dealership in Pensacola, Florida that was previously granted to us. Included in the acquisitions discussed above, are three franchises purchased from Robert E. Howard II, one of our directors. Additionally, we sold one franchise to a company owned by Mr. Howard. We acquired Ford, Lincoln and Mercury franchises, with $131.2 million in annual revenues, and sold a Mercedes-Benz franchise, with $47.4 million in annual revenues. All of the franchises are located in Oklahoma City. In completing the acquisitions, the aggregate consideration paid by us consisted of $12.7 million of cash, net of cash received and the assumption of approximately $22.9 million of inventory financing. We received $7.4 million in cash from the sale of the Mercedes-Benz dealership franchise and related assets, which exceeded our basis in the dealership by approximately $1.3 million. This excess sales price over cost was recorded as a reduction of the cost basis in the newly acquired Ford, Lincoln and Mercury dealerships. Additionally, the outstanding inventory financing for the Mercedes-Benz dealership was assumed by Mr. Howard. During 2003, we disposed of three dealership franchises in Massachusetts, Oklahoma and Texas, with annual revenues of approximately $76.5 million. We realized no gain or loss on the Massachusetts and Texas disposals. The Oklahoma transaction was the sale of the Mercedes-Benz franchise to Mr. Howard discussed in the preceding paragraph. Since December 31, 2003, we have completed acquisitions of four franchises. One of the acquisitions, with three franchises, is a new platform in New Jersey. The other franchise was acquired in a tuck-in acquisition, and will complement platform operations in Central Texas. The aggregate consideration paid in completing these acquisitions was approximately $38.6 million in cash, net of cash received, 54,372 shares of common stock and the assumption of $29.8 million of inventory financing. COST AND REVENUE SYNERGIES We believe that by consolidating the purchasing power of our dealerships on a centralized basis we have benefited from certain significant cost savings. For example, since we began operations, we have significantly reduced the interest rate on our floorplan financing through our consolidated credit facility. Furthermore, we have benefited from the consolidation of administrative functions such as risk management, employee benefits and employee training. We have also enhanced revenues by benchmarking our dealerships and by establishing preferred providers for retail finance and vehicle service contracts. COMPETITION The automotive retailing industry is highly competitive. In large metropolitan areas consumers have a number of choices in deciding where to purchase a new or used vehicle and where to have the vehicle serviced. In the new vehicle market, our dealerships compete with other franchised dealerships in their marketing areas. We also compete for vehicle sales with auto brokers and leasing companies, and with Internet companies that provide customer referrals to other dealerships or who broker vehicle sales between customers and other dealerships. Our dealerships do not have any cost advantage in purchasing new vehicles from the manufacturers, and typically rely on advertising and merchandising, sales expertise, service reputation and location of the dealership to sell new vehicles. In the used vehicle market, our dealerships compete with other franchised dealers, independent used vehicle dealers, automobile rental agencies and private parties for supply and resale of used vehicles. 11 In the parts and service market, our dealerships compete against franchised dealers to perform warranty repairs and against other automobile dealers, franchised and independent service center chains and independent repair shops for non-warranty repair and routine maintenance business. The dealerships compete with other automobile dealers, service stores and auto parts retailers in their parts operations. We believe that the principal competitive factors in parts and service sales are the quality of customer service, the use of factory-approved replacement parts, familiarity with a manufacturer's brands and models, and price. A number of regional or national chains offer selected parts and services at prices that may be lower than our dealerships' prices. In arranging financing for our customers' vehicle purchases, we compete with a broad range of financial institutions. In addition, financial institutions are now offering F&I products through the Internet, which may reduce our profits on these items. We believe that the principal competitive factors in providing financing are convenience, interest rates and flexibility in contract length. Our success depends, in part, on national and regional automobile-buying trends, local and regional economic factors and other regional competitive pressures. Conditions and competitive pressures affecting the markets in which we operate, such as price-cutting by dealers in these areas, or in any new markets we enter, could adversely affect us, although the retail automobile industry as a whole might not be affected. Some of our competitors may have greater financial, marketing and personnel resources and lower overhead and sales costs. We cannot guarantee that our strategy will be more effective than the strategies of our competitors. In the acquisition area, we compete with other national dealer groups and individual investors for acquisitions. Some of our competitors may have greater financial resources and competition may increase acquisition pricing. We cannot guarantee that we will be able to complete acquisitions on terms acceptable to us. RELATIONSHIPS AND AGREEMENTS WITH OUR MANUFACTURERS The following table sets forth the percentage of our new vehicle retail unit sales attributable to the manufacturers we represented during 2003 that accounted for 10% or more of our new vehicle retail unit sales:
PERCENTAGE OF OUR NEW VEHICLE RETAIL UNITS SOLD DURING THE TWELVE MONTHS ENDED MANUFACTURER DECEMBER 31, 2003 ------------ ----------------- Toyota / Lexus .............................. 26.2% Ford......................................... 25.5% DaimlerChrysler.............................. 12.3% General Motors............................... 10.5% Nissan / Infiniti........................... 10.2%
Each of our dealerships operates under a franchise agreement with one of our manufacturers (or authorized distributors). Under our dealership franchise agreements, the manufacturers exert considerable influence over the operations of our dealerships. Each of the franchise agreements may be terminated or not renewed by the manufacturer for a variety of reasons, including any unapproved changes of ownership or management. While we believe we will be able to renew all of our franchise agreements, we cannot guarantee all of our franchise agreements will be renewed or that the terms of the renewals will be as favorable to us as our current agreements. Our franchise agreements do not give us the exclusive right to sell a manufacturer's product within a given geographic area. Our agreements with our manufacturers impose a number of restrictions on our operations, including our ability to make acquisitions and obtain financing, and on our 12 management and ownership of our common stock. For a description of these restrictions, please read "--Risk Factors." GOVERNMENTAL REGULATIONS A number of regulations affect our business of marketing, selling, financing and servicing automobiles. We are also subject to laws and regulations relating to business corporations generally. Typically, we must obtain a license in order to establish, operate or relocate a dealership or provide certain automotive repair services. These laws also regulate the way we conduct our business, including our advertising and sales practices. We may be required to file applications and obtain clearances under applicable federal antitrust laws before completing an acquisition. These regulatory requirements may restrict or delay our acquisitions, and may increase the cost of completing acquisitions. Various federal and state laws established to protect dealerships from the general unequal bargaining power between the parties also govern the automobile franchise relationship. The following discussion of state court and administrative holdings and various state laws is based on management's beliefs and may not be an accurate description of the state court and administrative holdings and various state laws. The state statutes generally provide that it is a violation for a manufacturer to terminate or fail to renew a franchise without good cause. These statutes also provide that the manufacturer is prohibited from unreasonably withholding approval for a proposed change in ownership of the dealership. Acceptable grounds for disapproval include material reasons relating to the character, financial ability or business experience of the proposed transferee. Accordingly, certain provisions of the franchise agreements, particularly as they relate to a manufacturer's rights to terminate or fail to renew the franchise, have repeatedly been held invalid by state courts and administrative agencies. Our financing activities with our customers are subject to federal truth in lending, consumer leasing and equal credit opportunity regulations, as well as state and local motor vehicle finance laws, installment finance laws, insurance laws, usury laws and other installment sales laws. Some states regulate finance fees that may be paid as a result of vehicle sales. Penalties for violation of any of these laws or regulations may include revocation of certain licenses, assessment of criminal and civil fines and penalties, and in certain instances, create a private cause of action for individuals. We believe that our dealerships comply substantially with all laws and regulations affecting their business and do not have any material liabilities under such laws and regulations. ENVIRONMENTAL MATTERS We are subject to a wide range of federal, state, and local environmental laws and regulations, including those governing discharges into the air and water, the storage of petroleum substances and chemicals, the handling and disposal of wastes, and the remediation of contamination arising from spills and releases. These environmental laws and regulations have become very complex and stringent over the years, and the task of achieving and maintaining full compliance with all applicable environmental laws and regulations has become much more rigorous. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, imposition of injunctions that limit or prohibit certain activities, or the performance of investigatory and remedial activities. We believe that we are in substantial compliance with current applicable environmental laws and regulations and that continued compliance with these existing laws and regulations will not have a material adverse effect on our operations, earnings or competitive position. Moreover, we generally obtain environmental studies on dealerships to be acquired and, as necessary, implement environmental management or remedial activities to reduce the risk of noncompliance with environmental laws and regulations. As with automobile dealerships generally, and parts, service and collision service center operations in particular, our business involves the generation, use, handling, storage, transport and disposal of hazardous or toxic substances or wastes. Operations involving the management of hazardous and nonhazardous wastes are subject to the requirements of the federal Resource 13 Conservation and Recovery Act ("RCRA") and comparable state statutes. Pursuant to these laws, federal and state environmental agencies have established approved methods for storage, treatment, and disposal of regulated wastes with which we must comply. Our business involves the use of aboveground and underground storage tanks. Under applicable laws and regulations, we are responsible for the proper use, maintenance and abandonment of regulated storage tanks which we own or operate, and for remediation of subsurface soils and groundwater impacted by releases from such existing or abandoned aboveground or underground storage tanks. In addition to these regulated tanks, we own, operate or have otherwise abandoned, other underground and aboveground devices or containers (e.g., automotive lifts and service pits) that may not be classified as regulated tanks, but which are capable of releasing stored materials into the environment, thereby potentially obligating us to remediate any soils or groundwater resulting from such releases. We are also subject to laws and regulations governing remediation of contamination at facilities we operate or to which we send hazardous or toxic substances or wastes for treatment, recycling or disposal. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the "Superfund" law, and analogous state laws impose liability, without regard to fault or the legality of the original conduct, on certain classes of persons that are considered to have contributed to the release of a "hazardous substance" into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances released at such sites. Under CERCLA, these "responsible parties" may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources and for the costs of certain health studies, and it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances. We currently own or lease, and in connection with our acquisition program will in the future own or lease, properties that in some instances have been used for auto retailing and servicing for many years. Although we have utilized operating and disposal practices that were standard in the industry at the time, it is possible that environmentally sensitive materials such as new and used motor oil, transmission fluids, antifreeze, lubricants, solvents and motor fuels may have been spilled or released on or under the properties owned or leased by us or on or under other locations where such materials were taken for disposal. Further, we believe that structures found on some of these properties may contain suspect asbestos-containing materials, albeit in an undisturbed condition. In addition, many of these properties have been operated by third parties whose use, handling and disposal of such environmentally sensitive materials were not under our control. These properties and the waste materials spilled, released or otherwise found thereon may be subject to RCRA, CERCLA and analogous state laws. Under such laws, we could be required to remove or remediate previously spilled or released waste materials (including such materials spilled or released by prior owners or operators), or property contamination (including groundwater contamination caused by prior owners or operators), or to perform monitoring or remedial activities to prevent future contamination (including asbestos found to be in a friable and disturbed condition). In September 2001, we responded to a request for information from the U.S. Environmental Protection Agency ("EPA") regarding materials sent by one of our dealerships to the R&H Oil Company site in Bexar County, Texas, which site currently has been proposed for inclusion on the EPA's National Priorities List of Superfund sites. Our dealership apparently is one of some 300 or more parties that may have contributed materials to the R&H site. We have received no response from the EPA since our September 2001 correspondence. Our records indicate that this dealership sent one 50-gallon barrel of used oil to the R&H site. In other matters, five of our dealerships, as well as approximately 2,000 other parties, were notified in late December 2001, by the Georgia Department of Natural Resources ("GDNR") of their identification as potentially responsible parties ("PRPs") with respect to the M&J Solvents site in Atlanta, Georgia, which is on the agency's Hazardous Site Inventory list. The GDNR has completed its delineation of contamination at the M&J Solvents site and is currently preparing a report summarizing the results of the field investigation. We received no response from the GDNR in 14 follow-up to the initial notifications made in December 2001. No further response is required from us with respect to either of these matters at this time. In January 2003, we, along with some 100 other parties, received a letter from a private party who is seeking all of our participation in a voluntary mediation with the EPA and the U.S. Department of Justice regarding the remedial liabilities of PRPs at the Double Eagle Refinery Superfund site in Oklahoma City, Oklahoma. During 2003, we joined some 42 other parties in a group that entered into negotiations with the EPA and DOJ regarding potential liability for costs of remediating contamination and natural resource damages at this Superfund site. Currently, negotiations between the parties are at an advanced stage, with both sides having exchanged proposals for resolving this matter. Based on the most recent set of proposals exchanged, we believe our pro rata share of any settlement would be no higher than $61,000. However, because no agreement has yet been reached between the parties, we cannot make any assurances at this time as to our potential liability with respect to this matter. During the last week of December 2001, the Miller dealerships (together with all other new car dealerships in the State of California) received a 60-Day Notice of Intent to Sue ("Notice") from Citizens for Responsible Business, Inc. ("CFRB") under California's Proposition 65. The Notice alleged that the dealerships exposed its employees and customers to a variety of harmful chemicals without furnishing them with prior notice that those chemicals may cause cancer, birth defects or other reproductive harm. Proposition 65 is codified in California's Health & Safety Code, Sections 25249.5, et seq. On January 28, 2002, California's Attorney General's Office sent a letter to CFRB's attorneys, challenging their Notice on the basis that CFRB had no apparent substantiation of its various contentions. CFRB thereafter complied with the Attorney General's request for substantiation by providing 14 binders of studies and test data, after which CFRB received a letter of September 25, 2002, from the Attorney General's Office, confirming that CFRB could proceed with its action. Thereafter, in December, 2002, CFRB sent a new round of 60-Day notices under Proposition 65 to all California dealers, including the Miller dealerships. Nonetheless, despite CFRB's issuance of notice in December 2002, we were not served with a lawsuit by CFRB during 2003. 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 prevention, control and countermeasure ("SPCC") plans. Currently, we are evaluating and, as necessary, updating or otherwise implementing a number of our SPCC plans to satisfy amended regulations that take effect in 2004. Some of our operations involving the release of emissions, such as spray painting activities, are also subject to regulation under the Clean Air Act and comparable state and local requirements. We believe we are in substantial compliance with these water and air related laws and regulations. EMPLOYEES As of December 31, 2003, we employed approximately 7,400 people, of whom approximately 890 were employed in managerial positions, 2,290 were employed in non-managerial vehicle sales department positions, 3,290 were employed in non-managerial parts and service department positions and 930 were employed in administrative support positions. We believe that our relationships with our employees are favorable. 71 of our current employees are represented by a labor union in our New Jersey operations. Because of our dependence on the manufacturers, we may be affected by labor strikes, work slowdowns and walkouts at the manufacturers' manufacturing facilities. Additionally, labor strikes, work slowdowns and walkouts at businesses participating in the distribution of the manufacturers' products may also affect us. 15 RISK FACTORS IF WE FAIL TO OBTAIN A DESIRABLE MIX OF POPULAR NEW VEHICLES FROM MANUFACTURERS OUR PROFITABILITY WILL BE NEGATIVELY AFFECTED. 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. IF WE FAIL TO OBTAIN RENEWALS OF ONE OR MORE OF OUR FRANCHISE AGREEMENTS ON FAVORABLE TERMS OR SUBSTANTIAL FRANCHISES ARE TERMINATED, OUR OPERATIONS MAY BE SIGNIFICANTLY IMPAIRED. Each of our dealerships operates under a franchise agreement with one of our manufacturers (or authorized distributors). Under our dealership franchise agreements, the manufacturers exert considerable influence over the operations of our dealerships. Each of the franchise agreements may be terminated or not renewed by the manufacturer for a variety of reasons, including any unapproved changes of ownership or management. While we believe we will be able to renew all of our franchise agreements, we cannot guarantee all of our franchise agreements will be renewed or that the terms of the renewals will be as favorable to us as our current agreements. Our franchise agreements do not give us the exclusive right to sell a manufacturer's product within a given geographic area. As result, a manufacturer may grant another dealer a franchise, which could directly compete against us and reduce the profitability of our existing dealerships. MANUFACTURERS' RESTRICTIONS ON ACQUISITIONS MAY LIMIT OUR FUTURE GROWTH. We must obtain the consent of the manufacturer prior to the acquisition of any of its dealership franchises. Delays in obtaining, or failing to obtain, manufacturer approvals for dealership acquisitions could adversely affect our acquisition program. Obtaining the consent of a manufacturer for the acquisition of a dealership could take a significant amount of time or might be rejected entirely. In determining whether to approve an acquisition, manufacturers may consider many factors, including the moral character and business experience of the dealership principals and the financial condition, ownership structure, customer satisfaction index scores and other performance measures 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 at any time. From time to time, we may not meet all of the manufacturers' requirements to make acquisitions. To date, we have not been materially adversely affected by these standards and have not been denied approval of any acquisition based on low CSI scores or other measures. However, we cannot assure you that all of our proposed future acquisitions will be approved. In addition, a manufacturer may limit the number of its dealerships that we may own or the number that we may own in a particular geographic area. If we reach a limitation imposed by a manufacturer for a particular geographic market, we will be unable to make additional tuck-in acquisitions in that market of that manufacturer's franchises, which could limit our ability to grow in that geographic area. In addition, geographic limitations imposed by manufacturers could restrict our ability to acquire platforms whose markets overlap with those already served by us. The following is a summary of the restrictions imposed by the manufacturers that accounted for 10% or more of our new vehicle retail unit sales in 2003. FORD. Ford currently limits the number of dealerships that we may own to the greater of (1) 15 Ford and 15 Lincoln and Mercury dealerships and (2) that number of Ford, Lincoln and Mercury dealerships accounting for 5% of the preceding year's total Ford, Lincoln and Mercury retail sales of those brands in the United States. Currently, we own a total of 27 Ford, Lincoln and Mercury dealership franchises and represent only approximately 0.7% of the national retail 16 sales of Ford, Lincoln and Mercury for 2003. In addition, Ford limits us to one Ford dealership in a Ford-defined market area having two or less authorized Ford dealerships and one-third of Ford dealerships in any Ford-defined market area having more than three authorized Ford dealerships. In many of its dealership franchise agreements Ford has the right of first refusal to acquire, subject to applicable state law, a Ford franchised dealership when its ownership changes. Currently, Ford is emphasizing increased sales performance from all of its franchised dealers, including our Ford dealerships. To this end, Ford has requested that we focus on the performance of owned dealerships as opposed to acquiring additional Ford dealerships. We intend to comply with this request. TOYOTA / LEXUS. Toyota restricts the number of dealerships that we may own and the time frame over which we may acquire them. Under Toyota's standard Multiple Ownership Agreement, we may acquire additional dealerships, over a minimum of seven semi-annual periods, up to a maximum number of dealerships equal to 5% of Toyota's aggregate national annual retail sales volume. In addition, Toyota restricts the number of Toyota dealerships that we may acquire in any Toyota-defined region and "Metro" market, as well as any contiguous market. We may acquire only four primary Lexus dealerships or six outlets nationally, including only two Lexus dealerships in any one of the four Lexus geographic areas. Our Lexus companion dealership located south of Houston is not considered by Lexus to be a primary Lexus dealership for purposes of the restriction on the number of Lexus dealerships we may acquire. Currently, we own nine Toyota and two primary Lexus dealership franchises. We represented approximately 1.3% of the national retail sales of Toyota for 2003. GENERAL MOTORS. General Motors, or GM currently evaluates our acquisitions of GM dealerships on a case-by-case basis. GM, however, limits the maximum number of GM dealerships that we may acquire at any time to 50% of the GM dealerships, by franchise line, in a GM-defined geographic market area. Currently, we own 22 GM dealership franchises and could acquire approximately 6,800 GM dealership franchises nationally, dependent upon franchise line and restrictions within particular GM-defined geographic market areas. Additionally, our current agreement with GM does not include Saturn dealerships and our future acquisition of a Saturn dealership will be subject to GM approval on a case-by-case basis. DAIMLERCHRYSLER. Currently, we have no agreement with Chrysler restricting our ability to acquire Chrysler dealerships. However, we are in discussions with them regarding the creation of a framework agreement that has similar terms and conditions to our other agreements. Chrysler has advised us that in determining whether to approve an acquisition of a Chrysler dealership, Chrysler considers the number of Chrysler dealerships the acquiring company already owns. Chrysler currently carefully considers, on a case-by-case basis, any acquisition that would cause the acquiring company to own more than 10 Chrysler dealerships nationally, six in the same Chrysler-defined zone and two in the same market. Our agreement with Mercedes-Benz, in addition to limitations on the number of dealership franchises in particular metropolitan markets and regions, limits us to a maximum of the greater of four Mercedes-Benz dealership franchises or the number of dealership franchises that would account for up to 3% of the preceding year's total Mercedes-Benz retail sales. Currently, we own 23 Chrysler and two Mercedes-Benz dealership franchises. NISSAN / INFINITI. Nissan currently limits the number of dealerships that we may own up to a maximum number of dealerships that would equal 5% of Nissan's (or Infiniti's as applicable) aggregate national annual vehicle registrations. In addition, Nissan restricts the number of dealerships that we may own in any Nissan defined region to 20% of the aggregate regional registrations for the applicable area. Currently we own 10 Nissan franchises and one Infiniti franchise, and represent only approximately 1.2% and 1.6% of the national vehicle registrations for Nissan and Infiniti, respectively. MANUFACTURERS' RESTRICTIONS COULD NEGATIVELY IMPACT OUR ABILITY TO OBTAIN CERTAIN TYPES OF FINANCINGS. Provisions in our agreements with our manufacturers may restrict, in the future, our ability to obtain certain types of financing. A number of our manufacturers prohibit pledging the stock of their franchised dealerships. For example, our agreement contains provisions prohibiting pledging the stock of our GM franchised dealerships. Our agreement with Ford permits pledging our Ford 17 franchised dealerships' stock and assets, but only for Ford dealership-related debt. Moreover, our Ford agreement permits our Ford franchised dealerships to guarantee, and to use Ford franchised dealership assets to secure our debt, but only for Ford dealership-related debt. Ford waived that requirement with respect to our March 1999 and August 2003, senior subordinated notes offerings and the subsidiary guarantees of those notes. Certain of our manufacturers require us to meet certain financial ratios, which, if we fail to meet these ratios the manufacturers may reject proposed acquisitions, and may give them the right to purchase their franchises for fair value. CERTAIN RESTRICTIONS RELATING TO OUR MANAGEMENT AND OWNERSHIP OF OUR COMMON STOCK COULD DETER PROSPECTIVE ACQUIRERS FROM ACQUIRING CONTROL OF US AND ADVERSELY AFFECT OUR ABILITY TO ENGAGE IN EQUITY OFFERINGS. As a condition to granting their consent to our previous acquisitions and our initial public offering, some of our 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 (ranging from 20% to 50% depending on the particular manufacturer's restrictions) and this trigger level can fall to as low as 5% if another vehicle manufacturer is the entity acquiring the ownership interest or voting rights; - certain material changes in our business 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; and - change in control of our Board of Directors or change in management. Our manufacturers may also impose additional restrictions on us in the future. If we are unable to comply with these restrictions, we generally must sell the assets of the dealerships to the manufacturer or to a third party acceptable to the manufacturer, or terminate the dealership agreements with the manufacturer, which may have a material adverse effect on us. IF MANUFACTURERS DISCONTINUE SALES INCENTIVES AND OTHER PROMOTIONAL PROGRAMS, OUR RESULTS OF OPERATIONS MAY BE MATERIALLY ADVERSELY AFFECTED. We depend on our 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 our 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 RELATIONSHIP WITH OUR MANUFACTURERS IMPOSES A NUMBER OF RESTRICTIONS ON OUR OPERATIONS, WHICH MAY REQUIRE US TO DIVERT FINANCIAL RESOURCES FROM USES THAT MANAGEMENT BELIEVES MAY BE OF BETTER VALUE TO US. Our manufacturer agreements specify that, in certain situations, we cannot operate a dealership franchised by another manufacturer in the same building as that manufacturer's franchised dealership. In addition, some manufacturers, like GM, are in the process of realigning their franchised dealerships along defined "channels," such as combining Pontiac, Buick and GMC in one dealership location. As a result, GM, as well as other manufacturers, may require us to move or sell some dealerships. Our manufacturers generally require that the dealership premises meet defined image standards and may direct us to implement costly capital improvements to dealerships as a condition for renewing certain franchise agreements. All of these requirements could impose significant capital expenditures on us in the future. 18 Pursuant to the automobile dealership franchise agreements to which our dealerships are subject, all dealerships are required to maintain a certain minimum working capital, as determined by the manufacturers. This requirement could require us to utilize available capital to maintain the working capital levels of our dealerships at manufacturer-required levels. OUR SUCCESS DEPENDS UPON THE CONTINUED VIABILITY AND OVERALL SUCCESS OF THE MANUFACTURERS OF THE VEHICLES THAT EACH OF OUR DEALERSHIPS SELLS. Demand for our manufacturers' vehicles as well as the financial condition, management, marketing, production and distribution capabilities of our manufacturers affect our business. Our Toyota / Lexus, Ford, DaimlerChrysler, GM and Nissan / Infiniti dealerships represented approximately 84.7% of our 2003 total new vehicle retail sales. Although we have attempted to lessen our dependence on any one manufacturer by buying dealerships representing a number of different domestic and foreign manufacturers, events such as labor disputes and other production disruptions that may adversely affect a manufacturer may also adversely affect us. Similarly, the late delivery of vehicles from manufacturers, which sometimes occurs during periods of new product introductions, can lead to reduced sales during those periods. Moreover, any event that causes adverse publicity involving any of our manufacturers may have an adverse effect on us regardless of whether such event involves any of our dealerships. Additionally, the inability of a manufacturer to continue operations will not only impact our vehicle sales and profitability, but could also result in the partial or complete impairment of intangible assets recorded, thus resulting in a write off of those assets. GROWTH IN OUR REVENUES AND EARNINGS WILL BE IMPACTED BY OUR ABILITY TO ACQUIRE AND SUCCESSFULLY INTEGRATE AND OPERATE DEALERSHIPS. We cannot guarantee that we will be able to identify and acquire dealerships in the future. In addition, we cannot guarantee that such acquisitions will be successful or will be on terms and conditions consistent with past acquisitions. Restrictions by our manufacturers, as well as covenants contained in our debt instruments, limit our ability to acquire additional dealerships. In addition, increased competition for acquisition candidates may develop, which could result in fewer acquisition opportunities available to us and/or higher acquisition prices. Some of our competitors may have greater financial resources than us. We will continue to need substantial capital in order to acquire additional automobile dealerships. In the past, we have financed these acquisitions with a combination of cash flow from operations, proceeds from borrowings under our credit facility, bond issuances and stock offerings and issuances of our common stock to the sellers of the acquired dealerships. We currently intend to finance future acquisitions by using cash and issuing shares of common stock as partial consideration for acquired dealerships. The use of common stock as consideration for acquisitions will depend on two factors: (1) the market value of our common stock at the time of the acquisition and (2) 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 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 is depressed. 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. Acquisitions involve a number of special risks, including the difficulties of managing operations located in geographic areas where we have not previously operated, possible diversion of resources and management's attention, inability to retain key personnel at the acquired entity and risks associated with unanticipated events or liabilities, some or all of which could have a material adverse effect on our business, financial condition and results of operations. Although we conduct what we believe to be a prudent level of investigation regarding the operating condition of the businesses we purchase, in light of the circumstances of each transaction, an unavoidable level of risk remains regarding the actual operating condition of these businesses. Until we actually assume operating control of such business assets, we may not be able to ascertain the actual value of the acquired entity. 19 THE LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR OPERATIONS AND GROWTH. We depend to a large extent upon the abilities and continued efforts of our executive officers, senior management and principals of our dealerships. Furthermore, we will likely be dependent on the senior management of any dealerships acquired in the future. Effective March 31, 2004, we employ two senior executive officers, our Chairman, President and Chief Executive Officer and our Executive Vice President. Our Executive Vice President, Chief Financial Officer and Treasurer has resigned effective March 31, 2004. Our Senior Vice President, Operations died tragically in an accident in November 2003. We are currently conducting searches to replace those persons. If either of our current senior executives leave or if we fail to attract and retain other qualified employees, our business could be adversely affected. CHANGES IN INTEREST RATES COULD ADVERSELY IMPACT OUR PROFITABILITY. All of the borrowings under our credit facility bear interest based on a floating rate. A significant increase in interest rates could cause a substantial increase in our cost of borrowing. At times, we manage our exposure to interest rate volatility through the use of interest rate swaps. Please see "Quantitative and Qualitative Disclosures about Market Risk" for a discussion regarding our interest rate sensitivity. Additionally, a significant increase in interest rates could adversely impact our ability to arrange financing for vehicle sales at rates acceptable to our customers and the volume of fees we receive for arranging the financing. CHANGES IN OUR INSURANCE PROGRAMS COULD ADVERSELY IMPACT OUR PROFITABILITY. Automobile dealerships require insurance covering a broad variety of risks. We have insurance on our real property, comprehensive coverage for our vehicle inventory, general liability insurance, employee dishonesty coverage, employment practices liability insurance, pollution coverage and errors and omissions insurance in connection with vehicle sales and financing activities. Additionally, our current insurance includes umbrella policies with a $105.0 million aggregate limit, which covers losses in excess of our $1 million self-insured retention on general liability claims. Additionally, we retain some risk of loss under our self-insured medical and property / casualty programs. Changes in the insurance market could impact our level of retained risk and our results of operations. WE ARE SUBJECT TO A NUMBER OF RISKS ASSOCIATED WITH IMPORTING INVENTORY. A portion of our new vehicle business involves the sale of vehicles, vehicle parts or vehicles composed of parts that are manufactured outside the United States. As a result, our operations are subject to customary risks associated with imported merchandise, including fluctuations in the value of currencies, import duties, exchange controls, trade restrictions, work stoppages and general political and economic conditions in foreign countries. The United States or the countries from which our products are imported may, from time to time, impose new quotas, duties, tariffs or other restrictions, or adjust presently prevailing quotas, duties or tariffs on imported merchandise. Any of those impositions or adjustments could affect our operations and our ability to purchase imported vehicles and parts. This, in turn, could have an adverse effect on our business. THE CYCLICALITY AND SEASONALITY OF VEHICLE SALES MAY ADVERSELY IMPACT OUR PROFITABILITY. Our operations, like the automotive retailing industry in general, can be impacted by a number of factors relating to general economic conditions, including consumer business cycles, consumer confidence, economic conditions, availability of consumer credit and interest rates. Our operations are subject to seasonal variations, with the second and third quarters generally contributing more operating profit than the first and fourth quarters. Three primary forces drive this seasonality: (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. 20 THE AUTOMOTIVE RETAILING INDUSTRY IS HIGHLY COMPETITIVE, WHICH MAY REDUCE OUR PROFITABILITY AND GROWTH. Our business and acquisition activity is subject to intense competition. Please see "Business-Competition" for a discussion of competition in our industry. GOVERNMENTAL REGULATION AND ENVIRONMENTAL REGULATION COMPLIANCE COSTS MAY ADVERSELY AFFECT OUR PROFITABILITY. We are subject to a number of regulations that affect our business, the compliance of which may impose substantial costs on us. Please see "Business - Governmental Regulations" and "Environmental Matters" for a discussion of the effect of such regulations on us. CHANGES IN ACCOUNTING ESTIMATES COULD ADVERSELY IMPACT OUR PROFITABILITY. We are required to make estimates and assumptions in the preparation of financial statements in conformity with accounting principles generally accepted in the United States. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Discussion of Critical Accounting Policies" for a discussion of what we believe are our critical accounting policies. OUR STOCKHOLDER RIGHTS PLAN AND CERTAIN PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS CONTAIN CERTAIN PROVISIONS THAT MAKE A TAKEOVER OF GROUP 1 DIFFICULT. Our stockholder rights plan and certain provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire control of Group 1, even if such change of control would be beneficial to stockholders. These include provisions: - 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 affect 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. These terms of our dealer agreements could also make it more difficult for a third party to acquire control of Group 1. INTERNET WEB SITE AND AVAILABILITY OF PUBLIC FILINGS Our Internet address is www.group1auto.com. We make the following information available free of charge on our Internet Web site: - Annual Report on Form 10-K - Quarterly Reports on Form 10-Q - Current Reports on Form 8-K - Amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 - Corporate Governance Guidelines 21 - Charters for our Audit, Compensation and Nominating/Governance Committees - Code of Conduct for Directors, Officers and Employees - Code of Ethics for our Chief Executive Officer, Chief Financial Officer, Controller and all of our financial and accounting officers. We make our SEC filings available on our Web site as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. We make our SEC filings available via a link to our filings on the SEC Web site. The above information is available in print to anyone who requests it. ITEM 2. PROPERTIES We use a number of facilities to conduct our dealership operations. Each of our dealerships may include facilities for (1) new and used vehicle sales, (2) vehicle service operations, (3) retail and wholesale parts operations, (4) collision service operations, (5) storage and (6) general office use. We try to structure our operations so as to avoid the ownership of real property. In connection with our acquisitions, we generally seek to lease rather than acquire the facilities on which the acquired dealerships are located. We generally enter into lease agreements with respect to such facilities that have 30-year total terms with 15-year initial terms and three five-year option periods, at our option. As a result, we lease the majority of our facilities under long-term operating leases. ITEM 3. LEGAL PROCEEDINGS From time to time, our dealerships are named in claims involving the manufacture of automobiles, contractual disputes and other matters arising in the ordinary course of business. The Texas Automobile Dealers Association ("TADA") and certain new vehicle dealerships in Texas that are members of the TADA, including a number of our Texas dealership subsidiaries, have been named in two state court class action lawsuits and one federal court class action lawsuit. The three actions allege that since January 1994, Texas dealers have deceived customers with respect to a vehicle inventory tax and violated federal antitrust and other laws. In April 2002, the state court in which two of the actions are pending certified classes of consumers on whose behalf the action would proceed. On October 25, 2002, the Texas Court of Appeals affirmed the trial court's order of class certification in the state action and the defendants have requested that the Texas Supreme Court review that decision on appeal. On August 25, 2003, the Texas Supreme Court requested briefing in the state cases. Such briefing was completed on February 6, 2004. In the other action, on March 26, 2003, the federal court also certified a class of consumers, but denied a request to certify a defendants' class consisting of all TADA members. On May 19, 2003, the Fifth Circuit Court of Appeals granted a request for permission to appeal the class certification ruling of the lower federal court. Briefing on the merits of defendants' appeal was completed on February 13, 2004. The parties participated in mediation in 2003. That mediation resulted in a settlement proposal from the plaintiff class representatives to the defendant dealers, including our Texas dealership subsidiaries. The proposal was contingent on achieving a certain minimum level of participation among the defendant dealers based on the number of transactions in which each dealer engaged. Because the participation threshold was not satisfied, the proposal failed. While we do not believe this litigation will have a material adverse effect on our financial condition or results of operations, no assurance can be given as to its ultimate outcome. A settlement or an adverse resolution of this matter could result in the payment of significant costs and damages. In addition to the foregoing cases, there are currently no legal proceedings pending against or involving us that, in our opinion, based on current known facts and circumstances, are expected to have a material adverse effect on our financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 22 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock is listed on the New York Stock Exchange ("NYSE") under the symbol "GPI." There were 109 holders of record of our common stock as of March 1, 2004. The following table presents the quarterly high and low sales prices for our common stock for 2002 and 2003, as reported on the New York Stock Exchange Composite Tape under the symbol "GPI."
HIGH LOW ---- --- 2002: First Quarter............................. $43.69 $25.31 Second Quarter............................ 50.80 34.85 Third Quarter............................. 38.11 22.20 Fourth Quarter............................ 24.75 18.00 2003: First Quarter............................. 27.35 19.91 Second Quarter............................ 33.94 20.80 Third Quarter............................. 40.19 32.17 Fourth Quarter............................ 39.04 31.60
We have never declared or paid dividends on our common stock. Generally, we have retained earnings to finance the development and expansion of our business. Any decision to pay dividends will be made by our Board of Directors after considering our results of operations, financial condition, capital requirements, outlook for our business, general business conditions and other factors. Certain provisions of our credit facilities and our senior subordinated notes require us to maintain certain financial ratios and limit the amount of disbursements outside the ordinary course of business, including limitations on the payment of cash dividends and stock repurchases, which are limited to percentage of cumulative net income. We have entered into an agreement to purchase certain assets and assume certain liabilities of various automobile dealerships for cash and shares of our Common Stock. The following is the transaction in which stock has been issued:
Date Securities Date of Agreement Issued Acquisition Shares - ----------------- ------ ----------- ------ November 11, 2003 February 9, 2004 David Michael Motor Group 54,372
We relied on Section 4(2) under the Securities Act of 1933, as amended (the "Securities Act"), as an exemption from the registration requirements of the Securities Act relating to the issuance of the common stock in the acquisition. We believe we are justified in relying on such exemption since only one person received common stock in the transaction and such person is an "accredited investor" as defined by Regulation D. EQUITY COMPENSATION PLANS Information regarding our equity compensation plans as of December 31, 2003, is disclosed in Item 12. "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters." 23 ITEM 6. SELECTED FINANCIAL DATA The following selected historical financial data as of December 31, 2003, 2002, 2001, 2000 and 1999, and for the five years in the period ended December 31, 2003, have been derived from our audited financial statements. This selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related notes included elsewhere in this Form 10-K. We have accounted for all of our dealership acquisitions using the purchase method of accounting and, as a result, we do not include in our financial statements the results of operations of these dealerships prior to the date they were acquired by us. As a result of the effects of our acquisitions and other potential factors in the future, the historical financial information described in the selected financial data is not necessarily indicative of the results of operations and financial position of Group 1 in the future or the results of operations and financial position that would have resulted had such acquisitions occurred at the beginning of the periods presented in the selected financial data.
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 2003 2002 2001 2000 1999 --------------------------------------------------------------------- (dollars in thousands, except per share amounts) INCOME STATEMENT DATA: Revenues............................. $ 4,518,560 $ 4,214,364 $ 3,996,374 $ 3,586,146 $ 2,508,324 Cost of sales........................ 3,795,149 3,562,069 3,389,122 3,058,709 2,131,967 ----------- ----------- ----------- ----------- ----------- Gross profit...................... 723,411 652,295 607,252 527,437 376,357 Selling, general and administrative expenses........... 561,698 502,732 458,546 393,679 279,791 Depreciation and amortization........ 14,381 11,940 17,358 16,038 10,616 ----------- ----------- ----------- ----------- ----------- Income from operations............ 147,332 137,623 131,348 117,720 85,950 Other income (expense): Floorplan interest expense........ (20,615) (19,371) (27,935) (37,536) (20,395) Other interest expense, net....... (14,276) (9,925) (13,863) (15,500) (10,052) Other income (expense), net....... 631 (1,045) (128) 1,142 186 ----------- ----------- ----------- ----------- ----------- Income before income taxes........ 113,072 107,282 89,422 65,826 55,689 Provision for income taxes........... 36,946 40,217 33,980 25,014 22,174 ----------- ----------- ----------- ----------- ----------- Net income........................ $ 76,126 $ 67,065 $ 55,442 $ 40,812 $ 33,515 =========== =========== =========== =========== =========== Earnings per share: Basic............................. $ 3.38 $ 2.93 $ 2.75 $ 1.91 $ 1.62 Diluted........................... $ 3.26 $ 2.80 $ 2.59 $ 1.88 $ 1.55 Weighted average shares outstanding: Basic............................. 22,523,825 22,874,918 20,137,661 21,377,902 20,683,308 Diluted........................... 23,346,221 23,968,072 21,415,154 21,709,833 21,558,920
AS OF DECEMBER 31, --------------------------------------------------------------------- 2003 2002 2001 2000 1999 --------------------------------------------------------------------- (in thousands) BALANCE SHEET DATA: Working capital....................... $ 276,530 $ 94,910 $ 154,361 $ 54,769 $ 80,128 Inventories, net...................... 671,279 622,205 454,961 527,101 386,255 Total assets.......................... 1,488,165 1,422,393 1,052,823 1,097,721 840,848 Total long-term debt, including current portion.................... 231,088 82,847 95,584 140,067 112,188 Stockholders' equity.................. 518,109 443,417 392,243 247,416 232,029 Long-term debt to capitalization...... 31% 16% 20% 36% 33%
24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We are a leading operator in the $1 trillion automotive retailing industry. Through a series of acquisitions, we operate 122 dealership franchises in California, Colorado, Florida, Georgia, Louisiana, Massachusetts, New Jersey, New Mexico, Oklahoma and Texas. Through our dealerships and Internet sites, we sell new and used cars and light trucks; arrange related financing, vehicle service and insurance contracts; provide maintenance and repair services; and sell replacement parts. We also operate 29 collision service centers. We have diverse sources of automotive retailing revenues, including: new car sales, new truck sales, used car sales, used truck sales, manufacturer remarketed vehicle sales, parts sales, service sales, collision repair service sales, financing fees, vehicle service contract fees, insurance fees and after-market product sales. Sales revenues from new and used vehicle sales and parts and service sales include sales to retail customers, other dealerships and wholesalers. Finance and insurance revenues include fees from arranging financing, vehicle service and insurance contracts, net of a provision for anticipated chargebacks. Our total gross margin varies as our merchandise mix (the mix between new vehicle sales, used vehicle sales (retail and wholesale), parts and service sales, collision repair service sales and finance and insurance revenues) changes. Our gross margin on the sale of products and services varies significantly, with new vehicle sales generally resulting in the lowest gross margin and finance and insurance revenues generally resulting in the highest gross margin. When our new vehicle sales increase or decrease at a rate greater than our other revenue sources, our gross margin responds inversely. Factors such as seasonality, weather, cyclicality and manufacturers' advertising and incentives may impact our merchandise mix, and therefore influence our gross margin. Selling, general and administrative expenses consist primarily of incentive-based compensation for sales, finance and general management personnel, salaries for administrative personnel and expenses for rent, marketing, insurance and utilities. We believe that a majority of our selling, general and administrative expenses are variable, allowing us to adjust our cost structure based on business trends. It takes several months to adjust our cost structure when business volume changes significantly. Interest expense consists of interest charges on interest-bearing debt, which is generally based on variable rates. We receive interest assistance from several of our manufacturers. This assistance, which is reflected as a reduction of cost of sales, has ranged between 80% and 160% of floorplan interest expense over the past three years, mitigating the impact of interest rate changes on our financial results. We have grown our business through acquisitions. Over the past five years, we have purchased 79 dealership franchises with annual revenues of approximately $2.5 billion, disposed of 22 dealership franchises with annual revenues of approximately $277.2 million and been granted 12 new dealership franchises by the manufacturers. Our acquisition target for 2004 is to complete platform and tuck-in acquisitions of dealerships that have approximately $1 billion in annual revenues. CURRENT BUSINESS TRENDS During the last three years, new vehicle sales have ranged between 16.7 million and 17.2 million units in the United States. Industry analyst estimates for 2004 are predicting new vehicle unit sales of approximately 17 million units. The used vehicle market has been negatively impacted by aggressive manufacturer incentives on new vehicles during 2003 and 2002. We expect the used vehicle market to be stable in 2004 as we anticipate the new vehicle market improving and increases in manufacturer incentives abating. Due to the increase in vehicles in operation, and the increasing complexity of the vehicles, we expect to see growth in the parts and service market for franchised automobile dealers. We expect the interest rate environment in 2004 to be flat at the beginning of the year with minor increases in the last six months of the year. For a discussion of other uncertainties that may impact our business, please review the "Business-Risk Factors" section of this Form 10-K. 25 RESULTS OF OPERATIONS SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2002 NEW VEHICLE DATA (dollars in thousands, except per unit amounts)
INCREASE/ PERCENT 2003 2002 (DECREASE) CHANGE ---- ---- ---------- ------ Retail unit sales........................... 99,971 95,005 4,966 5.2 % Retail sales revenues....................... $2,739,315 $2,526,847 $ 212,468 8.4 % Gross profit (1)............................ $ 199,996 $ 189,624 $ 10,372 5.5 % Average gross profit per retail unit sold... $ 2,001 $ 1,996 $ 5 0.3 % Gross margin (1)............................ 7.3 % 7.5 % (0.2)% -
(1) Interest assistance is recorded as a reduction of cost of sales, as the vehicles are sold to third parties. Interest assistance varies with changes in interest rates and will impact gross margin. USED VEHICLE DATA (dollars in thousands, except per unit amounts)
INCREASE/ PERCENT 2003 2002 (DECREASE) CHANGE ---- ---- ----------- ----------- Retail unit sales........................... 62,721 65,698 (2,977) (4.5)% Wholesale unit sales........................ 43,616 39,754 3,862 9.7 % Retail sales revenues....................... $ 884,819 $ 921,359 $ (36,540) (4.0)% Wholesale sales revenues.................... 265,187 222,529 42,658 19.2 % ---------- ---------- --------- Total revenues............................ $1,150,006 $1,143,888 $ 6,118 0.5 % Total gross profit.......................... $ 100,412 $ 96,079 $ 4,333 4.5 % Total gross margin (1)...................... 8.7 % 8.4 % 0.3 % - Average gross profit per retail unit sold (2)................................. $ 1,601 $ 1,462 $ 139 9.5 % Retail gross margin (1)..................... 11.3 % 10.4 % 0.9 % - Net wholesale loss.......................... $ (6,141) $ (7,895) $ 1,754 (22.2)% Average wholesale loss per wholesale unit sold...................... $ (141) $ (199) $ 58 (29.1)% Wholesale gross margin...................... (2.3)% (3.5)% 1.2 % -
(1) Total gross margin equals total gross profit divided by total revenues. Retail gross margin equals total gross profit, which includes net wholesale loss, divided by retail sales revenues. The profit or loss on wholesale sales are included in this number, as these transactions facilitate retail vehicle sales and are not expected to generate profit. (2) Average gross profit per retail unit sold equals total gross profit, which includes net wholesale loss, divided by retail unit sales. The profit or loss on wholesale sales are included in this number, as these transactions facilitate retail vehicle sales and are not expected to generate profit. PARTS AND SERVICE DATA (dollars in thousands)
INCREASE/ PERCENT 2003 2002 (DECREASE) CHANGE ---- ---- ---------- ------ Sales revenues.............................. $465,989 $402,169 $ 63,820 15.9 % Gross profit................................ $259,753 $225,132 $ 34,621 15.4 % Gross margin................................ 55.7 % 56.0 % (0.3) % -
26 FINANCE AND INSURANCE DATA (dollars in thousands, except per unit amounts)
PERCENT 2003 2002 INCREASE CHANGE ---- ---- -------- ------ Retail new and used unit sales.............. 162,692 160,703 1,989 1.2 % Retail finance fees......................... $ 63,210 $ 58,869 $ 4,341 7.4 % Vehicle service contract fees............... 61,315 52,346 8,969 17.1 % Other finance and insurance revenues........ 38,725 30,245 8,480 28.0 % -------- -------- -------- Total finance and insurance revenues...... $163,250 $141,460 $ 21,790 15.4 % Finance and insurance revenues, per retail unit sold.......................... $ 1,003 $ 880 $ 123 14.0 %
SAME STORE REVENUES COMPARISON (1) (dollars in thousands)
INCREASE/ PERCENT 2003 2002 (DECREASE) CHANGE ---- ---- ---------- ------ New vehicle retail sales.................... $2,192,028 $2,283,499 $(91,471) (4.0)% Used vehicle retail sales................... 741,650 838,668 (97,018) (11.6)% Used vehicle wholesale sales................ 220,047 198,656 21,391 10.8 % Parts and service sales..................... 380,669 357,893 22,776 6.4 % Retail finance fees......................... 50,311 52,603 (2,292) (4.4)% Vehicle service contract fees............... 42,692 45,111 (2,419) (5.4)% Other finance and insurance revenues, net............................ 24,377 27,978 (3,601) (12.9)% ------ ------ ------- Total same store revenues.............. $3,651,774 $3,804,408 $(152,634) (4.0)%
(1) Includes only those dealerships owned during all of the months of both periods in the comparison. YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEAR ENDED DECEMBER 31, 2002 OVERVIEW. Net income increased $9.0 million, or 13.4%, to $76.1 million for the year ended December 31, 2003, from $67.1 million for the year ended December 31, 2002. Diluted earnings per share increased $0.46, or 16.4%, to $3.26 from $2.80. The increase in net income and diluted earnings per share was primarily the result of the accretive impact of acquisitions, organic growth in parts and service, improved used vehicle inventory valuations, which resulted in lower expected losses being reserved, and a reduction in our tax liability as we successfully resolved certain tax contingencies. Offsetting these positives were negative new and used vehicle same store revenues, higher interest expense from our new 8 1/4% senior subordinated note issuance and very unfavorable results from our Atlanta operations. REVENUES. Revenues increased $304.2 million, or 7.2%, to $4,518.6 million for the year ended December 31, 2003, from $4,214.4 million for the year ended December 31, 2002. The growth in total revenues came from acquisitions, which were partially offset by a same store revenues decline of $152.6 million. New vehicle revenues increased $212.5 million, as acquired operations offset a same store decline of $91.5 million. The same store revenues decreased reflecting a less robust vehicle market in 2003, particularly with respect to our Ford and Mitsubishi dealerships, as these manufacturers lost market share nationally during 2003. Additionally, revenues were down at a Toyota dealership in Houston due to increased competitive pressures in that market. Our used vehicle retail revenues declined $36.5 million as revenues from acquired operations were offset by a $97.0 million decline in our same store sales. The same store sales decline was due primarily to high levels of manufacturer incentives on new vehicle sales, which reduced the price difference to the customer between a late model used vehicle and a new vehicle, thus switching more customers to new vehicles. Wholesale sales increased $42.7 million. The decline in retail sales required us to wholesale more vehicles to keep inventory turns on target and inventory levels in line with expected retail sales volumes. The increase in parts and service revenues of $63.8 million included a same store revenues increase of $22.8 million. The same store revenues increase was driven by increased 27 customer-pay parts and service sales and wholesale parts sales, which were driven by expanded wholesale parts operations in Oklahoma City. Retail finance fee revenues increased $4.3 million, with a $2.3 million same store decrease partially offsetting the revenues contributed by acquisitions. The same store decline was caused primarily by a decline in retail unit sales, partially offset by the impact of a favorable interest rate environment. Vehicle service contract fee revenues increased $9.0 million, of which $4.6 million was from the recognition of revenues related to contracts requiring revenue deferral over the life of the contracts. During 2003 we did not sell any contracts requiring revenue and cost deferral. We expect the deferred revenues balance at December 31, 2003, and the associated deferred costs, to be recognized over the next four years. The increases were partially offset by same store sales decreases of $2.4 million. The same store decline is due to the decline in retail unit sales, partially offset by increased revenues per unit sold. The increased revenues per unit sold was driven by the receipt of increased annual incentives on vehicle service contract sales, increased sales training and our customers' increased ability and willingness to finance vehicle service contract purchases due to the low interest rates available. Other finance and insurance revenues increased $8.5 million, of which $4.7 million was from the recognition of revenues related to contracts requiring revenue deferral over the life of the contracts. The deferred revenues consist primarily of amounts related to sales of credit life and accident and health insurance contracts, which are reinsured by a company we own. The remainder is related to certain products sold in two platforms in prior years. The platforms did not sell a significant number of contracts requiring revenue and cost deferral during 2003, thus, we expect the majority of the remaining deferred revenues, and associated deferred costs, to be recognized over the next four years. The increases were partially offset by same store sales declines of $3.6 million. The same store decrease is driven primarily by a decline in retail unit sales. GROSS PROFIT. Gross profit increased $71.1 million, or 10.9%, to $723.4 million for the year ended December 31, 2003, from $652.3 million for the year ended December 31, 2002. The increase was attributable to an increase in the gross margin from 15.5% for the year ended December 31, 2002, to 16.0% for the year ended December 31, 2003, and increased revenues. The gross margin increased, as lower margin new and used vehicle revenues decreased as a percentage of total revenues, and finance and insurance revenues, per retail unit sold, increased. Although our new vehicle gross profit per retail unit remained consistent with the prior year, the gross margin on new vehicle retail sales declined to 7.3% from 7.5% due to an increase in the average selling price of vehicles sold. Our used vehicle gross profit per retail unit sold increased to $1,601 for the year ended December 31, 2003, from $1,462 for the year ended December 31, 2002. Our used vehicle retail gross margin increased to 11.3 % for the year ended December 31, 2003, from 10.4% for the year ended December 31, 2002. The increase per retail unit sold and the increase in the retail gross margin were due primarily to increased gross margins in the Florida market and improved used vehicle valuations at year end, which resulted in reduced valuation reserves. Our used vehicle inventory is required to be carried at the lower of cost or estimated market value at the end of each reporting period. Valuation reserves are provided against the inventory balance based on a detailed review of our inventory, actual subsequent sales of the inventory, our historical loss experience and our consideration of current market trends. As a result, a $1.1 million reserve for estimated used vehicle losses was established at December 31, 2003, as compared to a $6.6 million reserve at December 31, 2002. The net decline of $5.5 million in the used vehicle valuation reserve, based on $1.2 billion of used vehicle sales, was due to the application of losses incurred retailing and wholesaling used vehicles during 2003 against the reserve. Based on a detailed review of our used vehicle inventory at December 31, 2003, subsequent sales of this inventory and economic trends indicating an improved used vehicle market, we determined that $1.1 million was the appropriate used vehicle valuation reserve in 28 the current environment, and it was not necessary to charge used vehicle cost of sales to establish the used vehicle valuation reserve at the same level as at December 31, 2002. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $59.0 million, or 11.7%, to $561.7 million for the year ended December 31, 2003, from $502.7 million for the year ended December 31, 2002. The increase was primarily attributable to the additional operations acquired. Selling, general and administrative expenses increased as a percentage of gross profit to 77.6% from 77.1% due primarily to below expected operating performance in our Atlanta and Dallas operations and adjustments to variable expenses lagging the decline in sales volume. INTEREST EXPENSE. Floorplan and other interest expense, net, increased $5.6 million, or 19.1%, to $34.9 million for the year ended December 31, 2003, from $29.3 million for the year ended December 31, 2002. The increase was due to an increase in the average balance of debt outstanding partially offset by a decline in interest rates. During 2003, our average debt outstanding increased due to increased floorplan borrowings and the issuance, in August 2003, of $150.0 million of 8 1/4% senior subordinated notes. Floorplan borrowings increased due to: - acquisitions completed during 2002 and 2003, and - an increase in our average new vehicle inventory supply to 75 days during 2003 from 63 days during 2002. Partially offsetting the factors increasing the average floorplan borrowings outstanding was the use of the proceeds from our 8 1/4% senior subordinated notes offering to temporarily pay down our floorplan notes payable. Interest expense on our floorplan notes payable and acquisition borrowings under the bank credit facility is based on LIBOR plus a spread. During 2003, there was an approximately 56 basis point reduction in the average LIBOR rate as compared to the prior year. OTHER INCOME (EXPENSE), NET. Other income increased $1.6 million to $0.6 million for the year ended December 31, 2003, from $(1.0) million for the year ended December 31, 2002. The increase is due primarily to a net gain of $0.6 million on the disposal of dealership assets in 2003, as compared to $1.2 million of losses recorded on the repurchases and retirements of a portion of our senior subordinated notes during 2002. PROVISION FOR INCOME TAXES. The provision for income taxes decreased $3.3 million to $36.9 million for the year ended December 31, 2003, from $40.2 million for the year ended December 31, 2002. The decrease is due to a $5.4 million reduction in our estimated tax liabilities as a result of the favorable resolution of tax contingencies during 2003 as various state and federal tax audits were concluded, providing certainty and resolution on various formation, financing, acquisition and structural matters. In addition, various other tax exposures of acquired companies have been favorably resolved. The impact of the change in our reserve was to reduce our effective tax rate for 2003 to 32.7% as compared to 37.5% for 2002. We expect our effective tax rate in future years to be between 36.5% and 38.5%. 29 SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE YEARS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001 NEW VEHICLE DATA (dollars in thousands, except per unit amounts)
INCREASE/ PERCENT 2002 2001 (DECREASE) CHANGE ---- ---- ----------- ------ Retail unit sales........................... 95,005 90,615 4,390 4.8 % Retail sales revenues....................... $2,526,847 $2,373,299 $153,548 6.5 % Gross profit (1)............................ $ 189,624 $ 187,360 $ 2,264 1.2 % Average gross profit per retail unit sold... $ 1,996 $ 2,068 $ (72) (3.5)% Gross margin (1)............................ 7.5 % 7.9 % (0.4)% -
- ------------ (1) Interest assistance is recorded as a reduction of cost of sales, as the vehicles are sold to third parties. Interest assistance varies with changes in interest rates and will impact gross margin. USED VEHICLE DATA (dollars in thousands, except per unit amounts)
INCREASE/ PERCENT 2002 2001 (DECREASE) CHANGE ---- ---- ---------- ------ Retail unit sales........................... 65,698 67,927 (2,229) (3.3)% Wholesale unit sales........................ 39,754 37,771 1,983 5.3 % Retail sales revenues....................... $ 921,359 $ 949,086 $ (27,727) (2.9)% Wholesale sales revenues.................... 222,529 190,565 31,964 16.8 % ------- ------- ------ Total revenues............................ $1,143,888 $1,139,651 $ 4,237 0.4 % Total gross profit.......................... $ 96,079 $ 96,798 $ (719) (0.7)% Total gross margin (1)...................... 8.4 % 8.5 % (0.1)% - Average gross profit per retail unit $ 1,462 $ 1,425 $ 37 2.6 % sold (2)................................. Retail gross margin (1)..................... 10.4 % 10.2 % 0.2 % - Net wholesale loss.......................... $ (7,895) $ (6,707) $ (1,188) 17.7 % Average wholesale loss per wholesale unit sold...................... $ (199) $ (178) $ (21) 11.8 % Wholesale gross margin...................... (3.5)% (3.5)% (0.0)% -
(1) Total gross margin equals total gross profit divided by total revenues. Retail gross margin equals total gross profit, which includes net wholesale loss, divided by retail sales revenues. The profit or loss on wholesale sales are included in this number, as these transactions facilitate retail vehicle sales and are not expected to generate profit. (2) Average gross profit per retail unit sold equals total gross profit, which includes net wholesale loss, divided by retail unit sales. The profit or loss on wholesale sales are included in this number, as these transactions facilitate retail vehicle sales and are not expected to generate profit. PARTS AND SERVICE DATA (dollars in thousands)
PERCENT 2002 2001 INCREASE CHANGE ---- ---- -------- ------ Sales revenues.............................. $402,169 $360,201 $41,968 11.7 % Gross profit................................ $225,132 $199,871 $25,261 12.6 % Gross margin................................ 56.0 % 55.5 % 0.5 % -
30 FINANCE AND INSURANCE DATA (dollars in thousands, except per unit amounts)
PERCENT 2002 2001 INCREASE CHANGE ---- ---- -------- ------ Retail new and used unit sales ........................ 160,703 158,542 2,161 1.4 % Retail finance fees ................................... $ 58,869 $ 56,272 $ 2,597 4.6 % Vehicle service contract fees ......................... 52,346 44,080 8,266 18.8 % Other finance and insurance revenues .................. 30,245 22,871 7,374 32.2 % -------- -------- -------- Total finance and insurance revenues ................ $141,460 $123,223 $ 18,237 14.8 % Finance and insurance revenues, per retail unit sold .................................... $ 880 $ 777 $ 103 13.3 %
SAME STORE REVENUES COMPARISON (1) (dollars in thousands)
INCREASE/ PERCENT 2002 2001 (DECREASE) CHANGE ---------- ---------- ---------- ------ New vehicle retail sales .................... $2,279,737 $2,323,086 $ (43,349) (1.9)% Used vehicle retail sales ................... 834,268 922,375 (88,107) (9.6)% Used vehicle wholesale sales ................ 198,999 180,917 18,082 10.0 % Parts and service sales ..................... 348,654 349,163 (509) (0.1)% Retail finance fees ......................... 52,472 56,261 (3,789) (6.7)% Vehicle service contract fees ............... 44,606 43,233 1,373 3.2 % Other finance and insurance revenues, net ............................ 27,693 22,138 5,555 25.1 % ---------- ---------- ---------- Total same store revenues .............. $3,786,429 $3,897,173 $ (110,744) (2.8)%
- ---------------- (1) Includes only those dealerships owned during all of the months of both periods in the comparison. YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001 REVENUES. Revenues increased $218.0 million, or 5.5%, to $4,214.4 million for the year ended December 31, 2002, from $3,996.4 million for the year ended December 31, 2001. The growth in total revenues came from acquisitions, which were partially offset by a same store revenues decline of $110.7 million. New vehicle revenues increased $153.5 million, as acquired operations offset a same store decline of $43.3 million. The same store revenues decreased slightly, which reflected a less robust vehicle market in 2002, as compared to the near-record new vehicle sales in 2001, for all automobile retailers in the United States. Our used vehicle retail revenues declined $27.7 million as revenues from acquired operations were offset by an $88.1 million decline in our same store sales. The same store sales decline was due to high levels of manufacturer incentives on new vehicle sales, which reduced the price difference to the customer between a late model used vehicle and a new vehicle, thus switching more customers to new vehicles. Wholesale sales increased $32.0 million. The decline in retail sales required us to wholesale more vehicles to keep inventory turns on target and inventory levels in line with expected retail sales volumes. The increase in parts and service revenues of $42.0 million was from acquired operations as our same store sales declined $0.5 million. The primary driver of the same store sales decline was the Ford / Firestone tire recall, which caused a one-time increase in warranty and associated repairs at our Ford dealerships during 2001. Also contributing to the decrease was increased business during the summer months of 2001, due to the damage caused by tropical storm Allison, in Houston. These declines offset the same store increases we had in other areas of our operations. Retail finance fee revenues increased $2.6 million, with a $3.8 million same store decrease partially offsetting the revenues contributed by acquisitions. The same store decline was caused primarily by zero percent financing offered by many of the manufacturers for our 31 customers, which began late in 2001 and continued throughout 2002, which reduced the amount of fees we earned for arranging the financing. Vehicle service contract fee revenues increased $8.3 million, with same store sales increasing $1.4 million. Included in the revenues from acquired dealerships is $1.3 million of deferred revenues recognized on dealer-obligor contracts written prior to our acquisitions of the dealerships. At the date of acquisition, we moved the dealerships to administrator-obligor contracts. Other finance and insurance revenues increased $7.4 million, with same store sales contributing $5.6 million. The same store increases were driven by the introduction and sale of new products, in addition to our training programs. GROSS PROFIT. Gross profit increased $45.0 million, or 7.4%, to $652.3 million for the year ended December 31, 2002, from $607.3 million for the year ended December 31, 2001. The increase was attributable to an increase in the gross margin from 15.2% for the year ended December 31, 2001, to 15.5% for the year ended December 31, 2002, and increased revenues. The gross margin increased, as lower margin new and used vehicle revenues decreased as a percentage of total revenues, and increased finance and insurance revenues, per retail unit sold, offset the decline in the new and used vehicle gross margins. The gross margin on new retail vehicle sales declined to 7.5% from 7.9%, partially due to a reduction in floorplan assistance received from our manufacturers as a result of the decline in interest rates during the year, which reduced our gross profit by $3.8 million and our gross margin by 15 basis points. Floorplan assistance is a purchase discount and is recorded as a reduction of new vehicle cost of sales. Performance below expectations and prior year levels in our Dallas operations accounted for approximately 10 basis points of the decline in our new vehicle margin. Also, generally, the gross profit per retail unit does not vary with changes in the selling prices of the vehicles. As such, the 1.6% increase in our average selling price per new vehicle sold negatively impacted our new vehicle gross margin by 10 basis points. The gross margin on retail used vehicle sales increased to 10.4% from 10.2% as our dealerships worked to increase the gross profit per unit sold to offset the impact of the reduction of retail used vehicle sales. Our wholesale losses increased, as we wholesaled more vehicles, in light of the decline in the retail sales volume. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $44.2 million, or 9.6%, to $502.7 million for the year ended December 31, 2002, from $458.5 million for the year ended December 31, 2001. The increase was primarily attributable to the additional operations acquired and increased compensation and benefits. Compensation and benefits are largely incentive-based and constitute approximately 60% of total expenses, and increased due to increased gross profit. Selling, general and administrative expenses increased as a percentage of gross profit to 77.1% from 75.5% due primarily to below expected operating performance in our Atlanta and Dallas operations. Excluding the gross profit and selling, general and administrative expenses of our Atlanta and Dallas operations, our selling, general and administrative expenses as a percentage of gross profit would have been 75.1% in 2002. DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense decreased $5.5 million, or 31.6%, to $11.9 million for the year ended December 31, 2002, from $17.4 million for the year ended December 31, 2001. The decline was due to the implementation of SFAS No. 142, which resulted in the elimination of goodwill amortization expense. INTEREST EXPENSE. Floorplan and other interest expense, net, decreased $12.5 million, or 29.9%, to $29.3 million for the year ended December 31, 2002, from $41.8 million for the year ended December 31, 2001. The decrease was due to a decline in interest rates and a lower average balance of debt outstanding. During the year ended December 31, 2002, there was an approximately 230 basis point reduction in our floorplan financing rate as compared to the prior year. During October 2001, we completed a $98.5 million stock offering and used the proceeds initially to pay down borrowings under our credit facility. By the end of the third quarter of 2002, 32 we had reborrowed the amounts used to pay down the floorplan portion of our credit facility. We had no borrowings under the acquisition portion of our credit facility during 2002. OTHER INCOME (EXPENSE), NET. Other expense increased $917,000 to $(1,045,000) for the year ended December 31, 2002, from $(128,000) for the year ended December 31, 2001. The increase was due primarily to $1.2 million of losses recorded on the repurchases and retirements of a portion of our senior subordinated notes. LIQUIDITY AND CAPITAL RESOURCES Our principal sources of liquidity are cash from operations, our credit facilities (which include floorplan facilities and an acquisition facility) and equity and debt offerings. The following table sets forth selected historical information from our statements of cash flows:
YEAR ENDED DECEMBER 31, ----------------------- 2003 2002 2001 ---- ---- ---- (in thousands) Net cash provided by operating activities .................. $ 80,345 $ 74,839 $ 76,687 Net cash used in investing activities ...................... (52,603) (122,295) (27,229) Net cash provided by (used in) financing activities ........ (26,634) 54,928 (55,844) --------- --------- --------- Net increase (decrease) in cash and cash equivalents ....... $ 1,108 $ 7,472 $ (6,386) ========= ========= =========
CASH FLOWS Total cash at December 31, 2003, was $25.4 million. OPERATING ACTIVITIES. Net income plus depreciation and amortization is generally a good indicator of our operating cash flow as revenues are converted into cash in a very short timeframe, typically less than two weeks, and there are very few deferred expenses. Additionally, while our inventory balances can change dramatically from period to period, there is typically little impact on cash flow from operations as changes in contracts-in-transit, vehicle receivables and floorplan notes payable generally combine to offset the impact of the inventory change. For the three-year period ended December 31, 2003, we generated $231.9 million in net cash from operating activities, primarily driven by net income plus depreciation and amortization. INVESTING ACTIVITIES. During 2003, the $52.6 million of cash used for investing activities was primarily attributable to the use of $35.4 million of cash in acquisitions, net of cash balances obtained in the acquisitions, and $34.6 million for purchases of property and equipment. Approximately $22.9 million of the property and equipment purchases were for the purchase of land and construction of new or expanded facilities. Offsetting these uses was $11.6 million received from the sales of property and equipment and $7.4 million received from the sale of one dealership franchise during 2003. During 2002, the $122.3 million of cash used for investing activities was primarily attributable to the use of $81.4 million of cash in acquisitions, net of cash balances obtained in the acquisitions, and $43.5 million for purchases of property and equipment. Approximately $32.4 million of the property and equipment purchases were the purchase of land and construction of new or expanded facilities. Offsetting these uses was $7.4 million received from the sales of three dealership franchises during 2002. During 2001, $27.2 million of cash was used for investing activities primarily attributable to purchases of property and equipment and cash paid in acquisitions, net of cash balances obtained in the acquisitions, partially offset by proceeds from sales of franchises. During 2001, we used approximately $20.9 million in purchasing property and equipment, of which, approximately $12.5 million was for the purchase of land and construction of new or expanded facilities. FINANCING ACTIVITIES. We used approximately $26.6 million in financing activities during 2003, primarily for payments on our credit facility, using the proceeds from our issuance of 8 1/4% senior subordinated notes in August 2003 and cash flows from operations. Additionally, we spent $14.4 million for repurchases of common stock. 33 During 2002, we obtained approximately $54.9 million from financing activities, primarily borrowings under our credit facility. We reborrowed amounts available under our credit facility that were paid down with the proceeds from our stock offering in October 2001. Additionally, we spent $11.6 million repurchasing a portion of our senior subordinated notes and $23.8 million for repurchases of common stock. During 2001, we used approximately $55.8 million in financing activities. The uses were primarily attributable to payments made on our revolving credit facility and repurchases of common stock, largely offset by the proceeds of our common stock offering. In October 2001, we completed an offering of 3.3 million shares of our common stock, with net proceeds from the offering, after expenses, of approximately $98.5 million. The proceeds from the offering, as well as cash flows from operations, were used to reduce the outstanding balance under our credit facility by $121.0 million WORKING CAPITAL. At December 31, 2003, we had working capital of $276.5 million, which is approximately $160 million higher than we believe we need to operate our existing business. On March 1, 2004, we used approximately $79.5 million of this excess working capital to fund the redemption of our 10 7/8% senior subordinated notes. We expect to use the remaining excess working capital to fund acquisitions and anticipated capital expenditures. Historically, we have funded our operations with internally generated cash flow and borrowings. While we cannot guarantee it, based on current facts and circumstances, we believe we have adequate cash flow coupled with borrowing capacity under our credit facility to fund our current operations and capital expenditures and acquisitions budgeted for 2004. If our capital expenditure or acquisition plans for 2004 as outlined below change, we may need to access the private or public capital markets to obtain additional funding. Changes in our working capital are driven primarily by changes in floorplan notes payable outstanding. Borrowings on our new vehicle floorplan notes payable, subject to agreed upon pay off terms, are equal to 100% of the factory invoice of the vehicles. Borrowings on our used vehicle floorplan notes payable, subject to agreed upon pay off terms, are limited to 55% of the aggregate book value of our used vehicle inventory. At times, as at December 31, 2003, we have made payments on our floorplan notes payable using excess cash flow from operations and the proceeds of debt and equity offerings. As needed, we reborrow the amounts later, up to the limits on the floorplan notes payable discussed above, for working capital, acquisitions, capital expenditures or general corporate purposes. STOCK REPURCHASE In February 2003, the board of directors authorized us to repurchase up to $25.0 million of our stock, subject to management's judgment and the restrictions of our various debt agreements. Our agreements, subject to other covenants, allow us to use a percentage of our cumulative net income to repurchase stock and pay dividends. During 2003 we repurchased approximately 463,000 shares for approximately $14.4 million. As of December 31, 2003, $10.6 million remained under the board of directors' authorization. CAPITAL EXPENDITURES Our capital expenditures include expenditures to extend the useful life of current facilities and expenditures to start or expand operations. Historically, our annual capital expenditures exclusive of new or expanded operations have approximately equaled our annual depreciation charge. Expenditures relating to the construction or expansion of dealership facilities, generally, are driven by new franchises being granted to us by a manufacturer, significant growth in sales at an existing facility or manufacturer imaging programs. During 2004, we plan to invest approximately $31.1 million to expand 11 existing facilities, prepare four new facilities for operations and purchase equipment for new and expanded facilities. We have agreed to sell three of the new facilities completed during 2004. Expected total proceeds from the sales of these construction projects is estimated at approximately $12.3 million, resulting in net capital expenditures for new and expanded operations of $18.8 million. Upon sale we will begin leasing the facilities from the buyer, resulting in an estimated incremental annual rent expense of $2.5 million, per year. 34 ACQUISITION FINANCING Our acquisition target for 2004 is to complete platform and tuck-in acquisitions that have approximately $1 billion in annual revenues. We expect the cash needed to complete our acquisitions will come from excess working capital, operating cash flows of our dealerships and borrowings under our credit facility. Depending on the market value of our common stock, we may issue common stock to fund a portion of the purchase price of acquisitions. We purchase businesses based on expected return on investment. Generally, the purchase price is approximately 15% to 20% of the annual revenue. Thus our targeted acquisition budget of $1 billion is expected to cost us between $150 and $200 million, which is expected to be funded with a blend of cash and the issuance of common stock. Since December 31, 2003, we have completed acquisitions of four franchises. One of the acquisitions, with three franchises, is a new platform in New Jersey. The other franchise was acquired in a tuck-in acquisition and will complement platform operations in Central Texas. The aggregate consideration paid in completing these acquisitions was approximately $38.6 million in cash, net of cash received, 54,372 shares of common stock and the assumption of $29.8 million of inventory financing. CREDIT FACILITIES During June 2003, we completed an amendment to our existing $900.0 million credit facility and entered into a new credit facility with Ford Motor Credit Company. The two facilities provide us with $1.075 billion of borrowing capacity. $775 MILLION CREDIT FACILITY. The amendment to our existing credit facility extended the term until June 2006 and provides $775.0 million of financing, consisting of two tranches: 75% of the facility is for floorplan financing (the "Floorplan Tranche") and 25% is for working capital and acquisition financing (the "Acquisition Tranche"). The Acquisition Tranche, which bears interest at a rate of LIBOR plus a margin varying between 175 and 325 basis points, determined based on a ratio of debt to equity, totals $193.8 million. The amount available to be borrowed under the Acquisition Tranche is dependent upon a calculation based on our cash flow. The Floorplan Tranche bears interest at rates of LIBOR plus 112.5 basis points for new vehicle inventory and LIBOR plus 125 basis points for used vehicle inventory. The credit facility also contains various covenants including financial ratios, such as fixed-charge coverage, interest coverage and a minimum net worth requirement, among others, as well as other requirements that must be maintained. As of December 31, 2003, we were in compliance with these covenants. The lending group is comprised of 14 major financial institutions, including two manufacturer captive finance companies. As of February 29, 2004, $188.8 million was available, after deducting $5.0 million for outstanding letters of credit, to be drawn under the Acquisition Tranche for working capital, acquisition or floorplan financing and letters of credit. The credit facility allows up to 33% of net income to be used for cash dividends and stock repurchases. FORD MOTOR CREDIT FACILITY. Simultaneous with the amendment of the above described credit facility, we entered into a separate floorplan financing arrangement with Ford Motor Credit Company ("FMCC Facility") to provide financing for our entire Ford, Lincoln and Mercury new vehicle inventory. The arrangement provides for up to $300.0 million of financing for the inventory at an interest rate of Prime plus 100 basis points minus certain incentives, and matures in June 2006. We expect the net cost of these borrowings, after all incentives, to approximate our floorplan cost under the $775.0 million credit facility. 35 The following table summarizes our outstanding borrowings and total commitments under our credit facilities:
OUTSTANDING UNUSED TOTAL AT DECEMBER 31, 2003 COMMITMENTS COMMITMENT -------------------- ----------- ---------- (in millions) Floorplan Tranche $ 291.7 $ 289.5 $ 581.2 Acquisition Tranche (1) 5.0 188.8 193.8 -------- -------- ---------- Total Bank Facility 296.7 478.3 775.0 FMCC Facility 192.9 107.1 300.0 -------- -------- ---------- Total Credit Facilities $ 489.6 $ 585.4 $ 1,075.0 ======== ======== ==========
- ---------------- (1) The outstanding balance at December 31, 2003 includes $5.0 million of letters of credit. For a more detailed discussion of our credit facilities, please read Notes 6 and 7 to our consolidated financial statements. INTEREST RATE SWAPS. On July 25, 2003, one of our interest rate swaps, with a notional amount of $100.0 million, reached its termination date. Therefore, at this time, we have only one interest rate swap outstanding, with a notional amount of $100.0 million that converts the interest rate on a portion of our floorplan borrowings from the 30-day LIBOR-based rate to a fixed rate of 3.75% plus the applicable spread. SENIOR SUBORDINATED NOTES OFFERING During August 2003, we completed a private offering of $150.0 million of 8 1/4% senior subordinated notes due 2013. Net proceeds from the offering were $143.3 million and were used to temporarily pay down floorplan borrowings under the Floorplan Tranche of our credit facility, currently bearing interest at 2.25%. As of March 1, 2004, we have reborrowed approximately $38.6 million in completing acquisitions and $79.5 million in the redemption of all of our outstanding 10 7/8% senior subordinated notes. The 8 1/4% senior subordinated notes are fully and unconditionally guaranteed by our dealership subsidiaries and contain various provisions that permit us to redeem the notes at our option and a requirement that we repurchase all of the notes upon a change of control. Additionally, the notes contain various covenants, including financial ratios, such as cash flow coverage, as well as other requirements that must be maintained, such as limitations on the payment of dividends and repurchase of stock, among others. For a more detailed discussion of our notes please read Note 8 to our consolidated financial statements. OFF-BALANCE SHEET ARRANGEMENTS AND OBLIGATIONS AND COMMITMENTS The following is a summary of our off-balance sheet arrangements and future contractual cash obligations as of December 31, 2003:
2004 2005 2006 2007 2008 THEREAFTER TOTAL ---- ---- ---- ---- ---- ---------- ----- (in millions) Off-Balance Sheet Arrangements Leases ............................... $ 49,203 $ 47,846 $ 47,494 $ 47,203 $ 41,501 $ 224,389 $ 457,636 Contractual Commitments Capital expenditures ................. 17,098 2,581 -- -- -- -- 19,679 On-Balance Sheet Obligations Debt (1) ............................. 910 935 732 707 775 234,934 238,993 Floorplan notes payable (1) .......... 493,568 -- -- -- -- -- 493,568 Other long-term obligations .......... 25 114 25 25 -- -- 189 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total Obligations and Commitments ...... $ 560,804 $ 51,476 $ 48,251 $ 47,935 $ 42,276 $ 459,323 $1,210,065 ========== ========== ========== ========== ========== ========== ==========
- ------------- (1) Excludes interest payments. We lease various real estate, facilities and equipment under long-term operating lease agreements. Generally, the leases have 30-year total terms with initial terms of 15 years and three five-year option periods, at our option. Additionally, we generally have an option to purchase the real estate and facilities at the end of the lease term, and a right of first refusal, 36 giving us the opportunity to purchase the real estate and facilities if the owner reaches an agreement to sell them to a third party. Our credit facilities are currently set to mature in June 2006. The credit facilities provide commitments for inventory financing up to $881.2 million, of which we had borrowed $484.6 million at December 31, 2003. Payments, generally, are required to be made on the floorplan notes payable as the vehicles are sold. The Acquisition Tranche of our credit facility also provides commitments for a revolving credit line for general corporate purposes, including acquisitions, up to $193.8 million, of which $5.0 million was outstanding under letters of credit at December 31, 2003. On March 1, 2004, we completed the redemption of all of our 10 7/8% senior subordinated notes. The amount necessary to complete the redemption was obtained through borrowings under the Floorplan Tranche of our credit facility. The face value of $75.4 million is included in the Debt line in the Thereafter column in the preceding table. DISCUSSION OF CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The significant estimates made by us in the accompanying consolidated financial statements relate to reserves for inventory valuations and future chargebacks on finance and vehicle service contract fees, and valuation of intangible assets. Actual results could differ from those estimates. Critical accounting policies are those that are both most important to the portrayal of a company's financial position and results of operations, and require management's most difficult, subjective or complex judgments. Below is a discussion of what we believe are our critical accounting policies. See Note 2 to our consolidated financial statements for additional discussion regarding our accounting policies. INVENTORIES New, used and demonstrator vehicles are stated at the lower of cost or market. Vehicle inventory cost consists of the amount paid to acquire the inventory, plus reconditioning cost, cost of equipment added and transportation cost. Additionally, we receive interest assistance from some of our manufacturers. The assistance is accounted for as a vehicle purchase price discount and is reflected as a reduction to the inventory cost on the balance sheet and as a reduction to cost of sales in the income statement as the vehicles are sold. Parts and accessories are stated at the lower of cost (determined on a first-in, first-out basis) or market. As the market value of our inventories typically declines with the passage of time, valuation reserves are provided against the inventory balances based on the historical loss experience and market trends. Additionally, used vehicles present added complexity to the inventory valuation process. There is no standardized source for determining exact values, as each vehicle and each market we operate in, is unique. As such, these factors are also considered in determining the appropriate level of valuation reserves. RETAIL FINANCE AND VEHICLE SERVICE CONTRACT REVENUES RECOGNITION We arrange financing for customers through various institutions and receive financing fees based on the difference between the loan rates charged to customers over predetermined financing rates set by the financing institution. In addition, we receive fees from the sale of vehicle service contracts to customers. We may be charged back ("chargebacks") for unearned financing fees or vehicle service contract fees in the event of early termination of the contracts by customers. The revenues from financing fees and vehicle service contract fees in administrator-obligor states are recorded at the time of the sale of the vehicles and a reserve for future chargebacks is established based on historical operating results and the termination provisions of the applicable contracts. In dealer-obligor states, revenues from vehicle service contract fees and related direct costs are deferred 37 and recognized over the life of the contracts. Due to changes in state law during 2002, none of the states we currently operate in are dealer-obligor states. INTANGIBLE ASSETS In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was issued. SFAS No. 142 changes the treatment of goodwill by no longer amortizing goodwill; however, other identifiable intangible assets are to be separately recognized and amortized, as applicable. The statement requires, at least annually, an assessment for impairment of goodwill and other indefinite life intangible assets by applying a fair-value based test. We complete the required assessment at the end of each calendar year, and at such other times as required by events or circumstances at a reporting unit indicating a potential reduction of fair value below book value. In performing the assessment, we estimate the fair value of our intangibles using a calculation based on the historical and expected cash flows of the dealerships, market trends and conditions, review of completed transactions and current market valuations. A portion of our intangible assets relates to franchise value, which is considered to have an indefinite life, with goodwill accounting for the remainder. We adopted this statement effective January 1, 2002. Adoption did not result in an impairment of any intangible assets, based on the new fair-value based test; however, changes in facts and circumstances surrounding this estimate could result in an impairment of intangible assets in the future. LEGAL PROCEEDINGS From time to time our dealerships are named in claims involving the manufacture of automobiles, contractual disputes and other matters arising in the ordinary course of business. Currently, no legal proceedings are pending against or involve us that, in our opinion, could be expected to have a material adverse effect on our business, financial condition or results of operations. However, the results of these proceedings cannot be predicted with certainty, and changes in facts and circumstances could impact our estimate for reserves for legal proceedings. SELF-INSURANCE RESERVES We are self-insured for a portion of the claims related to our employee medical benefits and property / casualty insurance programs, requiring us to make estimates regarding expected claims to be incurred. These estimates, for the portion of claims not covered by stop-loss insurance, are based on certain actuarial assumptions, and our historical claims experience. Changes in the frequency or severity of claims could impact our reserve for claims. 38 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The table below provides information about our market-sensitive financial instruments and constitutes a "forward-looking statement." Our major market-risk exposure is changing interest rates. Our policy is to manage interest rate exposure through the use of a combination of fixed and floating rate debt. Additionally, interest rate swaps may be used to adjust our exposure to interest rate movements. These swaps are entered into with financial institutions with investment grade credit ratings, thereby minimizing the risk of credit loss. All interest rate swaps are non-trading and qualify for hedge accounting.
LIABILITY EXPECTED MATURITY DATE FAIR VALUE AT --------------------------------------------------------------------------------- DECEMBER 31, (dollars in millions) 2004 2005 2006 2007 2008 Thereafter Total 2003 ---- ---- ---- ---- ---- ---------- ----- ---- VARIABLE RATE DEBT Current ................... $ 493.6 $ - $ - $ - $ - $ - $ 493.6 $493.6 Average interest rates (1)(2) ................. 2.55% - - - - - Non-current ............... $ - $ - $ - $ - $ - $ - $ - $ - Average interest rates .. - - - - -------- -------- -------- -------- -------- -------- -------- Total variable rate debt .. $ 493.6 $ - $ - $ - $ - $ - $ 493.6 Interest rate swaps ....... $ 100.0 $ - $ - $ - $ - $ - $ 100.0 $ 2.1 Average pay rate (fixed) (2) ....................... 4.88% - - - - - Average receive rate (variable) (1)(2)(3) ........... 2.25% - - - - - -------- -------- -------- -------- -------- -------- -------- Net variable rate debt .... $ 393.6 $ - $ - $ - $ - $ - $ 393.6 ======== ======== ======== ======== ======== ======== ======
- --------------------- (1) Based on 30-day LIBOR and Prime as of December 31, 2003. (2) The average rate shown includes the spread charged on our floorplan notes payable. (3) The swap's variable rate is based on 30-day LIBOR. At December 31, 2003, our variable rate floorplan notes payable have decreased since the prior year due to decreased leverage on the inventory partially offset by increases in inventory levels. A 100 basis point increase in interest rates would have increased floorplan interest expense $5.5 million for the year ended December 31, 2003, before the impact of our interest rate swaps. We have had no other significant balances outstanding under variable rate borrowing agreements. At times, we have used interest rate swaps to reduce our exposure to interest rate fluctuations. Currently, we have one interest rate swap outstanding, with a notional amount of $100 million and converting 30-day LIBOR to a fixed rate. Another swap, with a notional amount of $100.0 million, expired at the end of July 2003. As the swaps hedged our floorplan interest rate exposure, the impact on interest expense is included in floorplan interest expense in our statements of operations. A 100 basis point increase in interest rates would have reduced the cost of the swaps and, thus, would have reduced our floorplan interest expense by $1.6 million for the year ended December 31, 2003. The swap currently outstanding expires at the end of October 2004. As such, depending on interest rate levels during the last two months of 2004, and whether we enter into other interest rate swaps, our floorplan interest expense could be impacted. The net result on floorplan interest expense of a 100 basis point increase in interest rates would have been an increase of $3.9 million, after combining the increase in expense on our borrowings and the decrease in expense from our swaps. Additionally, we receive floorplan interest assistance from the majority of our manufacturers. This assistance, which has ranged from approximately 80% to 160% of our floorplan interest expense over the past three years, totaled $27.4 million during 2003 and $26.7 million during 2002. We treat this interest assistance as a vehicle purchase price discount, and reflect it as a reduction of new vehicle cost of sales as new vehicles are sold. Approximately half of the assistance we receive varies with changes in interest rates and thus mitigates the impact of interest rate changes. 39 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the Financial Statements beginning on page F-1 for the information required by this Item. ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Our Chief Executive Officer and Chief Financial Officer performed an evaluation of our disclosure controls and procedures, which have been designed to permit us to effectively identify and timely disclose important information. They concluded that the controls and procedures were effective as of December 31, 2003 to ensure that material information was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. During the three months ended December 31, 2003, we have made no change in our internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. PART III Please see the definitive Proxy Statement of Group 1 Automotive, Inc. for the Annual Meeting of Stockholders to be held on May 19, 2004, which will be filed with the Securities and Exchange Commission and is incorporated herein by reference for the information concerning: ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements The financial statements listed in the accompanying Index to Financial Statements are filed as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K On March 5, 2004, the Company filed a Current Report on Form 8-K reporting under Item 9. On February 26, 2004, the Company filed a Current Report on Form 8-K reporting under Items 7 and 12. 40 On February 18, 2004, the Company filed a Current Report on Form 8-K reporting under Item 9. On February 5, 2004, the Company filed a Current Report on Form 8-K reporting under Item 9. On January 29, 2004, the Company filed a Current Report on Form 8-K reporting under Item 9. On January 27, 2004, the Company filed a Current Report on Form 8-K reporting under Items 5 and 7. On January 27, 2004, the Company filed a Current Report on Form 8-K reporting under Items 5 and 7. On December 4, 2003, the Company filed a Current Report on Form 8-K reporting under Items 5 and 7. On October 30, 2003, the Company filed a Current Report on Form 8-K reporting under Items 7 and 12. On October 14, 2003, the Company filed a Current Report on Form 8-K reporting under Items 5 and 7. On October 8, 2003, the Company filed a Current Report on Form 8-K reporting under Item 9. (c) Other Information None. 41 (d) Exhibits
EXHIBIT NUMBER DESCRIPTION ------ ----------- 3.1 -- Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 3.2 -- Certificate of Designation of Series A Junior Participating Preferred Stock (Incorporated by reference to Exhibit 3.2 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 3.3 -- Bylaws of the Company (Incorporated by reference to Exhibit 3.3 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 4.1 -- Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 4.2 -- Subordinated Indenture dated as of August 13, 2003 among Group 1 Automotive, Inc., the Subsidiary Guarantors named therein and Wells Fargo Bank, N.A., as Trustee (Incorporated by reference to Exhibit 4.6 of the Company's Registration Statement on Form S-4 Registration No. 333-109080). 4.3 -- First Supplemental Indenture dated as of August 13, 2003 among Group 1 Automotive, Inc., the Subsidiary Guarantors named therein and Wells Fargo Bank, N.A., as Trustee (Incorporated by reference to Exhibit 4.7 of the Company's Registration Statement on Form S-4 Registration No. 333-109080). 4.4 -- Form of Subordinated Debt Securities (included in Exhibit 4.3). 10.1* -- Employment Agreement between the Company and B.B. Hollingsworth, Jr. effective March 1, 2002 (Incorporated by reference to Exhibit 10.1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001). 10.2* -- Employment Agreement between the Company and John T. Turner dated November 3, 1997 (Incorporated by reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.3* -- Employment Agreement between the Company and Scott L. Thompson dated November 3, 1997 (Incorporated by reference to Exhibit 10.6 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.4* -- 1996 Stock Incentive Plan (Incorporated by reference to Exhibit 10.7 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 10.5* -- First Amendment to 1996 Stock Incentive Plan (Incorporated by reference to Exhibit 10.8 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 10.6 -- Lease Agreement between Howard Pontiac GMC and Robert E. Howard II (Incorporated by reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 10.7 -- Lease Agreement between Bob Howard Motors and Robert E. Howard II (Incorporated by reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 10.8 -- Lease Agreement between Bob Howard Chevrolet and Robert E. Howard II (Incorporated by reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 10.9 -- Lease Agreement between Bob Howard Automotive-H and North Broadway Real Estate (Incorporated by reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 10.10 -- Rights Agreement between Group 1 Automotive, Inc. and ChaseMellon Shareholder Services, L.L.C., as rights agent dated October 3, 1997 (Incorporated by reference to Exhibit 10.10 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 10.11* -- 1998 Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.11 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 10.12 -- Form of Agreement between Toyota Motor Sales, U.S.A., and Group 1 Automotive, Inc. (Incorporated by reference to Exhibit 10.12 of the Company's Registration Statement on Form S-1 Registration No. 333-29893).
42
EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.13 -- Form of Supplemental Agreement to General Motors Corporation Dealer Sales and Service Agreement (Incorporated by reference to Exhibit 10.13 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 10.14 -- Supplemental Terms and Conditions between Ford Motor Company and Group 1 Automotive, Inc. dated September 4, 1997 (Incorporated by reference to Exhibit 10.16 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 10.15 -- Toyota Dealer Agreement between Gulf States Toyota, Inc. and Southwest Toyota, Inc. dated April 5, 1993 (Incorporated by reference to Exhibit 10.17 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 10.16 -- Lexus Dealer Agreement between Toyota Motor Sales, U.S.A., Inc. and SMC Luxury Cars, Inc. dated August 21, 1995 (Incorporated by reference to Exhibit 10.18 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 10.17 -- Form of General Motors Corporation U.S.A. Sales and Service Agreement (Incorporated by reference to Exhibit 10.25 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 10.18 -- Fifth Amended and Restated Revolving Credit Agreement, dated as of June 2, 2003 (Incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003). 10.19 -- Form of Ford Motor Credit Company Automotive Wholesale Plan Application for Wholesale Financing and Security Agreement (Incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003). 10.20 -- First Amendment to Fifth Restated Revolving Credit Agreement, dated as of July 25, 2003 (Incorporated by reference to Exhibit 10.37 of the Company's Registration Statement on Form S-4 Registration No. 333-109080). 10.21 -- Stock Pledge Agreement dated December 19, 1997 (Incorporated by reference to Exhibit 10.54 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.22* -- First Amendment to Group 1 Automotive, Inc. 1998 Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.35 of the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 10.23 -- Form of Ford Motor Company Sales and Service Agreement (Incorporated by reference to Exhibit 10.38 of the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 10.24 -- Form of Chrysler Corporation Sales and Service Agreement (Incorporated by reference to Exhibit 10.39 of the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 10.25 -- Form of Nissan Division Dealer Sales and Service Agreement. 10.26 -- Form of Infiniti Division Dealer Sales and Service Agreement. 10.27* -- Second Amendment to the 1996 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999). 10.28* -- Group 1 Automotive, Inc. Deferred Compensation Plan, as Amended and Restated (Incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-8 Registration No. 333-83260). 10.29* -- Second Amendment to Group 1 Automotive, Inc. 1998 Employee Stock Purchase Plan (Incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-8 Registration No. 333-75754). 10.30* -- Third Amendment to Group 1 Automotive, Inc. 1996 Stock Incentive Plan (Incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-8 Registration No. 333-75784). 10.31 -- ISDA Master Agreement (Incorporated by reference to Exhibit 10.33 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001). 10.32 -- Interest Rate Swap Confirmation, dated as of October 19, 2001 (Incorporated by reference to Exhibit 10.35 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001).
43
EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.33* -- Split Dollar Life Insurance Agreement between Group 1 Automotive, Inc., and Leslie Hollingsworth and Leigh Hollingsworth Copeland, as Trustees of the Hollingsworth 2000 Children's Trust, dated as of January 23, 2002 (Incorporated by reference to Exhibit 10.36 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002). 10.34 -- Lease Agreement between Bob Howard Automotive-East, Inc. and REHCO East, L.L.C (Incorporated by reference to Exhibit 10.37 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002). 10.35 -- Lease Agreement between Howard-H, Inc. and REHCO, L.L.C (Incorporated by reference to Exhibit 10.38 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002). 10.36 -- Lease Agreement between Howard Pontiac-GMC, Inc. and North Broadway Real Estate Limited Liability Company (Incorporated by reference to Exhibit 10.39 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002). 10.37* -- Employment Agreement between the Company and Kevin H. Whalen dated November 3, 2002 (Incorporated by reference to Exhibit 10.40 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002). 10.38 -- Lease Agreement between Howard-Ford, Inc. and REHCO EAST, LLC dated as of February 28, 2003. 10.39 -- Amendment and Assignment of Lease between Howard Ford, Inc., Howard-FLM, Inc. and REHCO EAST, LLC dated as of November 1, 2003. 10.40* -- First Amendment to Employment Agreement between the Company and B.B. Hollingsworth, Jr. effective March 1, 2002. 10.41* -- Split Dollar Life Insurance Payment Deferral Letter dated January 28, 2004. 11.1 -- Statement re: computation of earnings per share is included under Note 2 to the financial statements. 14.1 -- Code of Ethics for Specified Officers of Group 1 Automotive, Inc. dated as of May 14, 2003. 21.1 -- Group 1 Automotive, Inc. Subsidiary List. 23.1 -- Consent of Ernst & Young LLP. 31.1 -- Certification of Chief Executive Officer Under Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 -- Certification of Chief Financial Officer Under Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 -- Certification of Chief Executive Officer Under Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 -- Certification of Chief Financial Officer Under Section 906 of the Sarbanes-Oxley Act of 2002.
- -------------- * Management contract or compensatory plan 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the city of Houston, Texas, on 11th day of March, 2004. Group 1 Automotive, Inc. By: /s/ B.B. Hollingsworth, Jr. ---------------------------------- B.B. Hollingsworth, Jr. Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on the 11th day of March, 2004.
SIGNATURE TITLE --------- ----- /s/ B.B. Hollingsworth, Jr. Chairman, President and Chief - ------------------------------------------------- Executive Officer and Director (Principal B.B. Hollingsworth, Jr. Executive Officer) /s/ Scott L. Thompson Executive Vice President, - ------------------------------------------------- Chief Financial Officer and Treasurer (Chief Scott L. Thompson Financial and Accounting Officer) /s/ John L. Adams Director - ------------------------------------------------- John L. Adams /s/ Robert E. Howard II Director - ------------------------------------------------- Robert E. Howard II /s/ Louis E. Lataif Director - ------------------------------------------------- Louis E. Lataif /s/ Stephen D. Quinn Director - ------------------------------------------------- Stephen D. Quinn /s/ J. Terry Strange Director - ------------------------------------------------- J. Terry Strange /s/ Max P. Watson, Jr. Director - ------------------------------------------------- Max P. Watson, Jr.
45 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS Group 1 Automotive, Inc. and Subsidiaries -- Consolidated Financial Statements Report of Independent Auditors................................................. F-2 Report of Independent Public Accountants....................................... F-3 Consolidated Balance Sheets.................................................... F-4 Consolidated Statements of Operations.......................................... F-5 Consolidated Statements of Stockholders' Equity................................ F-6 Consolidated Statements of Cash Flows.......................................... F-7 Notes to Consolidated Financial Statements..................................... F-8
F-1 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Group 1 Automotive, Inc. and Subsidiaries: We have audited the consolidated balance sheets of Group 1 Automotive, Inc. and Subsidiaries as of December 31, 2003 and 2002, and the related statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2003. 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. The financial statements of Group 1 Automotive, Inc. and Subsidiaries as of December 31, 2001, and for the year then ended were audited by other auditors who have ceased operations and whose report dated February 14, 2002, expressed an unqualified opinion on those statements before the reclassification adjustments described in Note 14 and the transitional disclosures described in Note 5. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 2003 and 2002 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Group 1 Automotive, Inc. and Subsidiaries at December 31, 2003 and 2002 and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. As discussed in Note 5 to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill. As discussed above, the financial statements of Group 1 Automotive, Inc. and Subsidiaries as of December 31, 2001, and for the year then ended were audited by other auditors who have ceased operations. As described in Note 14, these financial statements have been revised. We audited the reclassification adjustments described in Note 14 that were applied to revise the 2001 financial statements. In our opinion, such reclassification adjustments are appropriate and have been properly applied. Additionally, as described in Note 5, these financial statements were further revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company on January 1, 2002. Our audit procedures with respect to the disclosures in Note 5 for 2001 included (a) agreeing the previously reported net income to the previously issued financial statements and the adjustments to reported net income representing amortization expense, net of tax, recognized in those periods related to goodwill and intangible assets that are no longer being amortized to the Company's underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliation of adjusted net income to reported net income, and the related earnings-per-share amounts. In our opinion, the disclosures for 2001 in Note 5 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 financial statements of the Company other than with respect to such reclassification adjustments and transitional disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 financial statements taken as a whole. /s/ Ernst & Young LLP Houston, Texas February 26, 2004 F-2 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Group 1 Automotive, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of Group 1 Automotive, Inc. (a Delaware corporation) and Subsidiaries (the "Company") as of December 31, 2001 and 2000 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Houston, Texas February 14, 2002 NOTE: This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with Group 1 Automotive, Inc.'s filing on Form 10-K for the year ended December 31, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K. F-3 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------ 2003 2002 ----------- ----------- (in thousands) ASSETS CURRENT ASSETS: Cash ......................................................... $ 25,441 $ 24,333 Contracts-in-transit and vehicle receivables, net ............ 143,260 178,623 Accounts and notes receivable, net ........................... 63,604 58,194 Inventories, net ............................................. 671,279 622,205 Deferred income taxes ........................................ 11,163 10,793 Prepaid expenses and other assets ............................ 16,176 8,890 ----------- ----------- Total current assets ....................................... 930,923 903,038 ----------- ----------- PROPERTY AND EQUIPMENT, net ..................................... 131,647 116,270 GOODWILL ........................................................ 314,211 307,907 INTANGIBLE ASSETS ............................................... 76,656 60,879 INVESTMENTS, AT MARKET VALUE, RELATED TO INSURANCE POLICY SALES ....................................... 16,025 15,813 DEFERRED COSTS RELATED TO INSURANCE POLICY AND VEHICLE SERVICE CONTRACT SALES .................... 12,238 16,824 OTHER ASSETS .................................................... 6,465 1,662 ----------- ----------- Total assets ............................................... $ 1,488,165 $ 1,422,393 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Floorplan notes payable ...................................... $ 493,568 $ 652,538 Current maturities of long-term debt ......................... 910 997 Accounts payable ............................................. 87,675 90,809 Accrued expenses ............................................. 72,240 63,784 ----------- ----------- Total current liabilities .................................. 654,393 808,128 ----------- ----------- DEBT, net of current maturities ................................. 12,703 9,073 SENIOR SUBORDINATED NOTES ....................................... 217,475 72,777 DEFERRED INCOME TAXES ........................................... 19,506 7,651 OTHER LIABILITIES ............................................... 25,224 29,927 ----------- ----------- Total liabilities before deferred revenues ................. 929,301 927,556 ----------- ----------- DEFERRED REVENUES FROM INSURANCE POLICY SALES ................... 24,984 24,637 DEFERRED REVENUES FROM VEHICLE SERVICE CONTRACT SALES ........... 12,952 24,550 DEFERRED REVENUES FROM VEHICLE MAINTENANCE AGREEMENT SALES ...... 2,819 2,233 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, 23,454,046 and 23,183,226 issued .............. 235 232 Additional paid-in capital ................................... 255,356 254,145 Retained earnings ............................................ 291,150 215,024 Accumulated other comprehensive loss ......................... (1,285) (3,359) Treasury stock, at cost, 1,002,506 and 942,419 shares ........ (27,347) (22,625) ----------- ----------- Total stockholders' equity ................................. 518,109 443,417 ----------- ----------- Total liabilities and stockholders' equity ................. $ 1,488,165 $ 1,422,393 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-4 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ---------------------------------------------- 2003 2002 2001 ------------ ------------ ------------ (dollars in thousands, except per share amounts) REVENUES: New vehicle retail sales ............................ $ 2,739,315 $ 2,526,847 $ 2,373,299 Used vehicle retail sales ........................... 884,819 921,359 949,086 Used vehicle wholesale sales ........................ 265,187 222,529 190,565 Parts and service sales ............................. 465,989 402,169 360,201 Retail finance fees ................................. 63,210 58,869 56,272 Vehicle service contract fees ....................... 61,315 52,346 44,080 Other finance and insurance revenues, net ........... 38,725 30,245 22,871 ------------ ------------ ------------ Total revenues ................................... 4,518,560 4,214,364 3,996,374 COST OF SALES: New vehicle retail sales ............................ 2,539,319 2,337,223 2,185,939 Used vehicle retail sales ........................... 778,266 817,385 845,581 Used vehicle wholesale sales ........................ 271,328 230,424 197,272 Parts and service sales ............................. 206,236 177,037 160,330 ------------ ------------ ------------ Total cost of sales .............................. 3,795,149 3,562,069 3,389,122 ------------ ------------ ------------ GROSS PROFIT .......................................... 723,411 652,295 607,252 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ............................ 561,698 502,732 458,546 DEPRECIATION AND AMORTIZATION EXPENSE ............................... 14,381 11,940 17,358 ------------ ------------ ------------ Income from operations ................................ 147,332 137,623 131,348 OTHER INCOME AND (EXPENSES): Floorplan interest expense, excludes manufacturer interest assistance ................. (20,615) (19,371) (27,935) Other interest expense, net ......................... (14,276) (9,925) (13,863) Other income (expense), net ......................... 631 (1,045) (128) ------------ ------------ ------------ INCOME BEFORE INCOME TAXES ............................ 113,072 107,282 89,422 PROVISION FOR INCOME TAXES ............................ 36,946 40,217 33,980 ------------ ------------ ------------ NET INCOME ............................................ $ 76,126 $ 67,065 $ 55,442 ============ ============ ============ EARNINGS PER SHARE: Basic ............................................... $ 3.38 $ 2.93 $ 2.75 Diluted ............................................. $ 3.26 $ 2.80 $ 2.59 WEIGHTED AVERAGE SHARES OUTSTANDING: Basic ............................................... 22,523,825 22,874,918 20,137,661 Diluted ............................................. 23,346,221 23,968,072 21,415,154
The accompanying notes are an integral part of these consolidated financial statements. F-5 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL --------------------------- PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS ----------- ----------- ----------- --------- (dollars in thousands) BALANCE, December 31, 2000 ................. 21,260,227 $ 213 $ 170,683 $ 92,517 Comprehensive income: Net income ............................... - - - 55,442 Other accumulated comprehensive income: Interest rate swap adjustment ....................... - - - - Tax benefit on interest rate swap adjustment ............. - - - - Total comprehensive income ............... Common stock offering, net ............... 3,300,000 33 98,489 - Proceeds from sales of common stock under employee benefit plans ................................. 439,325 4 4,997 - Issuance of treasury stock to employee benefit plans ................ (390,254) (4) (4,669) - Purchase of treasury stock ............... - - - - Cancellation of treasury stock purchased ............................. (1,579,445) (16) (18,990) - Tax benefit from options exercised ............................ - - 635 - ----------- ----------- ----------- --------- BALANCE, December 31, 2001 ................. 23,029,853 230 251,145 147,959 Comprehensive income: Net income ............................ - - - 67,065 Other accumulated comprehensive income: Interest rate swap adjustment ....................... - - - - Tax benefit on interest rate swap adjustment ............. - - - - Total comprehensive income ............... Proceeds from sales of common stock under employee benefit plans ................................. 547,306 6 8,030 - Issuance of treasury stock to employee benefit plans ................ (393,933) (4) (7,427) - Non-cash stock compensation .............. - - 193 - Purchase of treasury stock ............... - - - - Tax benefit from options exercised ............................ - - 2,204 - ----------- ----------- ----------- --------- BALANCE, December 31, 2002 ................. 23,183,226 232 254,145 215,024 Comprehensive income: Net income ............................ - - - 76,126 Other accumulated comprehensive income: Interest rate swap adjustment ....................... - - - - Tax expense on interest rate swap adjustment ............. - - - - Total comprehensive income ............... Proceeds from sales of common stock under employee benefit plans ................................. 673,572 7 8,984 - Issuance of treasury stock to employee benefit plans ................ (402,752) (4) (9,678) - Purchase of treasury stock ............... - - - - Tax benefit from options exercised ............................ - - 1,905 - ----------- ----------- ----------- --------- BALANCE, December 31, 2003 ................. 23,454,046 $ 235 $ 255,356 $ 291,150 =========== =========== =========== ========= ACCUMULATED OTHER COMPREHENSIVE TREASURY LOSS STOCK TOTAL ----------- ----------- ----------- (dollars in thousands) BALANCE, December 31, 2000 ................. $ - $ (15,997) $ 247,416 Comprehensive income: Net income ............................... - - 55,442 Other accumulated comprehensive income: Interest rate swap adjustment ....................... (1,303) - (1,303) Tax benefit on interest rate swap adjustment ............. 496 - 496 ------ Total comprehensive income ............... 54,635 Common stock offering, net ............... - - 98,522 Proceeds from sales of common stock under employee benefit plans ................................. - - 5,001 Issuance of treasury stock to employee benefit plans ................ - 4,673 - Purchase of treasury stock ............... - (13,966) (13,966) Cancellation of treasury stock purchased ............................. - 19,006 - Tax benefit from options exercised ............................ - - 635 ----------- ----------- ----------- BALANCE, December 31, 2001 ................. (807) (6,284) 392,243 Comprehensive income: Net income ............................ - - 67,065 Other accumulated comprehensive income: Interest rate swap adjustment ....................... (4,115) - (4,115) Tax benefit on interest rate swap adjustment ............. 1,563 - 1,563 ------ 64,513 Total comprehensive income ............... Proceeds from sales of common stock under employee benefit plans ................................. - - 8,036 Issuance of treasury stock to employee benefit plans ................ - 7,431 - Non-cash stock compensation .............. - - 193 Purchase of treasury stock ............... - (23,772) (23,772) Tax benefit from options exercised ............................ - - 2,204 ----------- ----------- ----------- BALANCE, December 31, 2002 ................. (3,359) (22,625) 443,417 Comprehensive income: Net income ............................ - - 76,126 Other accumulated comprehensive income: Interest rate swap adjustment ....................... 3,362 - 3,362 Tax expense on interest rate swap adjustment ............. (1,288) - (1,288) ------ Total comprehensive income ............... 78,200 Proceeds from sales of common stock under employee benefit plans ................................. - - 8,991 Issuance of treasury stock to employee benefit plans ................ - 9,682 - Purchase of treasury stock ............... - (14,404) (14,404) Tax benefit from options exercised ............................ - - 1,905 ----------- ----------- ----------- BALANCE, December 31, 2003 ................. $ (1,285) $ (27,347) $ 518,109 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-6 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------------------- 2003 2002 2001 --------- --------- --------- (dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income ....................................................... $ 76,126 $ 67,065 $ 55,442 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization ................................... 14,381 11,940 17,358 Deferred income taxes ........................................... 11,951 6,883 (1,225) Provision for doubtful accounts and uncollectible notes ......... (631) 1,078 1,732 (Gain) loss on sale of assets ................................... (622) 483 120 Gain on sales of franchises ..................................... -- (414) -- Losses on repurchases of senior subordinated notes .............. -- 1,173 -- Changes in operating assets and liabilities, net of effects of acquisitions and dispositions- Contracts-in-transit and vehicle receivables .................. 36,704 (37,750) (12,720) Accounts receivable ........................................... (2,799) (3,055) (4,996) Inventories ................................................... 4,709 (107,487) 68,472 Prepaid expenses and other assets ............................. (8,486) (8,610) (6,689) Floorplan notes payable ....................................... (41,438) 143,727 (78,707) Accounts payable, accrued expenses and deferred revenues ...... (9,550) (194) 37,900 --------- --------- --------- Total adjustments ............................................. 4,219 7,774 21,245 --------- --------- --------- Net cash provided by operating activities ................... 80,345 74,839 76,687 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Increase in notes receivable ..................................... (2,958) (8,083) (2,678) Collections on notes receivable .................................. 1,388 1,303 1,150 Purchases of property and equipment .............................. (34,627) (43,498) (20,857) Proceeds from sale of property and equipment ..................... 11,598 1,975 818 Proceeds from sales of franchises ................................ 7,414 7,430 5,373 Cash paid in acquisitions, net of cash received .................. (35,418) (81,422) (11,035) --------- --------- --------- Net cash used in investing activities ....................... (52,603) (122,295) (27,229) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (payments) on revolving credit facility ........... (165,170) 82,022 (120,991) Principal payments of long-term debt ............................. (1,253) (1,950) (1,791) Borrowings of long-term debt ..................................... -- 17 1,426 Proceeds from common stock offering, net ......................... -- -- 98,522 Proceeds from issuance of senior subordinated notes .............. 143,297 -- -- Repurchase of senior subordinated notes .......................... -- (11,629) (9,601) Proceeds from issuance of common stock to benefit plans .......... 10,896 10,240 5,001 Repurchase of common stock, amounts based on settlement date ............................................................ (14,404) (23,772) (28,410) --------- --------- --------- Net cash provided by (used in) financing activities ......... (26,634) 54,928 (55,844) --------- --------- --------- NET INCREASE (DECREASE) IN CASH ...................................... 1,108 7,472 (6,386) CASH, beginning of period ............................................ 24,333 16,861 23,247 --------- --------- --------- CASH, end of period .................................................. $ 25,441 $ 24,333 $ 16,861 ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for - Interest ........................................................ $ 38,863 $ 31,075 $ 44,647 Income taxes .................................................... $ 31,971 $ 36,632 $ 28,975
The accompanying notes are an integral part of these consolidated financial statements. F-7 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION: Group 1 Automotive, Inc., a Delaware corporation, is a leading operator in the automotive retailing industry. Group 1 Automotive, Inc. is a holding company with no independent assets or operations other than its investments in its subsidiaries, which are located in California, Colorado, Florida, Georgia, Louisiana, Massachusetts, New Jersey, New Mexico, Oklahoma and Texas. These subsidiaries sell new and used cars and light trucks through their dealerships and Internet sites; arrange related financing, vehicle service and insurance contracts; provide maintenance and repair services; and sell replacement parts. Group 1 Automotive, Inc. and its subsidiaries are herein collectively referred to as the "Company" or "Group 1." 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Presentation All acquisitions of dealerships completed during the periods presented have been accounted for using the purchase method of accounting and their results of operations are included from the effective dates of the closings of the acquisitions. The allocations of purchase price to the assets acquired and liabilities assumed are assigned and recorded based on estimates of fair value. All significant intercompany balances and transactions have been eliminated in consolidation. Revenue Recognition Revenues from vehicle sales, parts sales and vehicle service are recognized upon completion of the sale and delivery to the customer. Conditions to completing a sale include having an agreement with the customer, including pricing, and the sales price must be reasonably expected to be collected. In accordance with Emerging Issues Task Force ("EITF") No. 00-21, "Revenue Arrangements with Multiple Deliverables," the Company defers revenues received for products and services to be delivered at a later date. This relates primarily to the sale of various maintenance services, to be provided in the future, at the time of the sale of a vehicle. The amount of revenues deferred is based on the then current retail price of the service to be provided. The revenues are recognized over the period during which the services are to be delivered. In accordance with EITF No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent," the Company records the profit it receives for arranging vehicle fleet transactions net in other finance and insurance revenues, net. Since all sales of new vehicles must occur through franchised new vehicle dealerships, the dealerships effectively act as agents for the automobile manufacturers in completing sales of vehicles to fleet customers. As these customers typically order the vehicles, the Company has no significant general inventory risk. Additionally, fleet customers generally receive special purchase incentives from the automobile manufacturers and the Company receives only a nominal fee for facilitating the transactions. Retail Finance, Vehicle Service and Insurance Contract Revenue Recognition The Company arranges financing for customers through various institutions and receives financing fees based on the difference between the loan rates charged to customers and predetermined financing rates set by the financing institution. In addition, the Company receives fees from the sale of vehicle service contracts to customers. The Company may be charged back ("chargebacks") a portion of the financing fees or vehicle service contract fees in the event of early termination of the contracts by customers. The revenues from financing fees and vehicle service contract fees in administrator-obligor states are recorded at the time of the sale of the vehicles, net of a reserve for estimated future chargebacks based on historical operating results and the termination provisions of the applicable contracts. In dealer-obligor states, revenues from vehicle service contract fees and related direct costs are deferred and recognized over the life of the contracts. The Company consolidates the operations of its reinsurance companies. The Company reinsures the credit life and accident and health insurance policies sold by its dealerships. All of F-8 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the revenues and related direct costs from the sales of these policies are deferred and recognized over the life of the policies, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 60, "Accounting and Reporting by Insurance Enterprises." Investments related to insurance policy sales are regulated by state insurance commissions and consist of permitted investments, in general, government-backed securities and obligations of government agencies. These investments are carried at market value. Contracts-in-Transit and Vehicle Receivables Contracts-in-transit and vehicle receivables consist primarily of amounts due from financing institutions on retail finance contracts from vehicle sales. Also included are amounts receivable from vehicle wholesale sales. Inventories New, used and demonstrator vehicles are stated at the lower of cost or market. Vehicle inventory cost consists of the amount paid to acquire the inventory, plus reconditioning cost, cost of equipment added and transportation cost. Additionally, the Company receives interest assistance from some of the automobile manufacturers. The assistance is accounted for as a vehicle purchase price discount and is reflected as a reduction to the inventory cost on the balance sheet and as a reduction to cost of sales in the income statement as the vehicles are sold. At December 31, 2003 and 2002, inventory cost had been reduced by $5.6 and $5.2 million, respectively, for interest assistance received from manufacturers. New vehicle cost of sales has been reduced by $27.4, $26.7 and $29.1 million for interest assistance received related to vehicles sold for the years ended December 31, 2003, 2002 and 2001, respectively. Parts and accessories are stated at the lower of cost (determined on a first-in, first-out basis) or market. Valuation reserves are provided against the inventory balances based on the historical loss experience and management's considerations of current market trends. Property and Equipment Property and equipment are recorded at cost and depreciation is provided using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are capitalized and amortized over the lesser of the life of the lease or the estimated useful life of the asset. Expenditures for major additions or improvements, which extend the useful lives of assets, are capitalized. Minor replacements, maintenance and repairs, which do not improve or extend the lives of the assets, are charged to operations as incurred. Disposals are removed at cost less accumulated depreciation, and any resulting gain or loss is reflected in current operations. Intangible Assets and Goodwill Intangible assets and goodwill represent the excess of the purchase price of businesses acquired over the fair value of the net tangible assets acquired at the date of acquisition. The Company has determined that, generally, its only identifiable intangible asset is franchise value, which is an indefinite-lived intangible. In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was issued. SFAS No. 142 changes the treatment of goodwill by no longer permitting the amortization of goodwill or indefinite-lived intangible assets, but requires, at least annually, an assessment for impairment of goodwill and other indefinite-lived intangible assets by applying a fair-value based test. The Company completes the required assessment at the end of each calendar year, and at such other times as required by events or circumstances at a reporting unit indicating a potential reduction of fair value below book value. The Company adopted this statement effective January 1, 2002, and adoption did not result in an impairment of any intangible assets or goodwill, based on the fair-value based test. Additionally, as of December 31, 2003 and 2002, no impairment of any intangible assets or goodwill resulted from the required assessment, based on the fair-value based test. However, changes in facts and circumstances surrounding this estimate could result in an impairment of intangible assets in the F-9 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS future. Prior to the adoption of SFAS No. 142, all purchase prices in excess of the net tangible assets was recorded as goodwill and no intangible assets were recognized. Impairment of Long-Lived Assets SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" requires that long-lived assets be reviewed for impairment whenever there is evidence that the carrying amount of such assets may not be recoverable. This consists of comparing the carrying amount of the asset with its expected future undiscounted cash flows without interest costs. If the asset carrying amount is less than such cash flow estimate, it is written down to its fair value. Estimates of expected future cash flows represent management's best estimate based on currently available information and reasonable and supportable assumptions. Any impairment recognized in accordance with SFAS No. 144 is permanent and may not be restored. Through December 31, 2003, the Company has not recorded any significant impairment writedowns of its long-lived assets. Income Taxes The Company follows the liability method of accounting for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under this method, deferred income taxes are recorded based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the underlying assets are realized or liabilities are settled. A valuation allowance reduces deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized. See Note 12 regarding income taxes. Self-Insured Medical and Property / Casualty Plans The Company is self-insured for a portion of the claims related to its employee medical benefits and property / casualty insurance programs. Claims, not subject to stop-loss insurance, are accrued based upon the Company's estimates of the aggregate liability for claims incurred using certain actuarial assumptions and the Company's historical claims experience. Fair Value of Financial Instruments The Company's financial instruments consist primarily of floorplan notes payable and long-term debt. Excluding the Company's senior subordinated notes, the carrying amount of these financial instruments approximates fair value due either to length of maturity or existence of variable interest rates that approximate current market rates. The following table sets forth the carrying values and fair values, based on market quotes, of the Company's outstanding senior subordinated notes issuances as of December 31, 2003:
FACE CARRYING FAIR VALUE AT YIELD TO NOTE DESCRIPTION VALUE DISCOUNT VALUE DECEMBER 31, 2003 MATURITY - ---------------- ----- -------- ----- ----------------- -------- (in millions) 10 7/8% due 2009 $ 75.4 $2.2 $ 73.2 $ 80.3 4.1% 8 1/4% due 2013 $150.0 $5.7 $144.3 $160.5 7.2%
F-10 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During 2001, the Company entered into an interest rate swap transaction. The Company entered into the swap to mitigate its exposure to fluctuations in interest rates and has designated the swap as a cash flow hedge, in accordance with SFAS No. 133. The details of the transaction are as follows:
FAIR VALUE NOTIONAL RATE RATE AT DECEMBER 31, 2003 EXPIRATION DATE AMOUNT PAID RECEIVED LIABILITY - --------------- ------ ---- -------- --------- October 2004 $100 million 3.75% 30-day LIBOR $2.1 million
The net fair value of the swap is included in other liabilities, with a corresponding charge to other comprehensive income, net of tax. The fair value is based on the settlement value obtained from the counter-party in the transaction. If the interest rates at December 31, 2003 remain unchanged, the cash flow settlements to be paid by the Company for the next ten months would total approximately $2.2 million. The Company intends to hold the swap to maturity. There is no ineffectiveness in the transaction as the rate being swapped is identical to the underlying rate on the floorplan notes payable. Factory Incentives In addition to the interest assistance discussed above, the Company receives various incentive payments from certain of its automobile manufacturers. These incentive payments are typically received on parts purchases from the automobile manufacturers and on new vehicle retail sales. These incentives are reflected as reductions of cost of sales in the statement of operations. Advertising The Company expenses production and other costs of advertising as incurred. Advertising expense for the years ended December 31, 2003, 2002, and 2001, totaled $60.5, $49.6 and $38.3 million, respectively. Additionally, the Company receives advertising assistance from some of the automobile manufacturers. The assistance is accounted for as an advertising expense reimbursement and is reflected as a reduction of advertising expense in the income statement as the vehicles are sold, and in other accruals on the balance sheet for amounts related to vehicles still in inventory on that date. Advertising expense has been reduced by $13.9, $13.2 and $11.5 million for advertising assistance received related to vehicles sold for the years ended December 31, 2003, 2002, and 2001, respectively. At December 31, 2003 and 2002, accrued expenses included $2.9 and $1.4 million, respectively, related to deferrals of advertising assistance received from the manufacturers. Business Concentrations The Company owns and operates franchised automotive dealerships in the United States. Automotive dealerships operate pursuant to franchise agreements with vehicle manufacturers. Franchise agreements generally provide the manufacturers or distributors with considerable influence over the operations of the dealership and generally provide for termination of the franchise agreement for a variety of causes. The success of any franchised automotive dealership is dependent, to a large extent, on the financial condition, management, marketing, production and distribution capabilities of the vehicle manufacturers or distributors of which the Company holds franchises. The Company purchases substantially all of its new vehicles from various manufacturers or distributors at the prevailing prices to all franchised dealers. The Company's sales volume could be adversely impacted by the manufacturers' or distributors' inability to supply the dealerships with an adequate supply of vehicles. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 F-11 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS accompanying consolidated financial statements relate to reserves for inventory valuations, future chargebacks on finance and vehicle service contract fees, and self-insured medical, income taxes and property / casualty plans and valuation of intangible assets. Actual results could differ from those estimates. Statements of Cash Flows For purposes of the statements of cash flows, the net change in floorplan financing of inventory, which is a customary financing technique in the industry, is reflected as an operating activity in the statements of cash flows. Related Party Transactions From time to time, the Company has entered into transactions with related parties. Related parties include officers, directors, five percent or greater stockholders and other management personnel of the Company. At times, the Company has purchased its stock from related parties. These transactions were completed at then current market prices. See Note 11 for a summary of our related party lease commitments. See Note 3 for information regarding certain transactions that occurred during the year ended December 31, 2003. There are no other significant related party transactions. Earnings Per Share SFAS No. 128, "Earnings per Share" requires the presentation of basic earnings per share and diluted earnings per share in financial statements of public enterprises. Under the provisions of this statement, basic earnings per share is computed based on weighted average shares outstanding and excludes dilutive securities. Diluted earnings per share are computed including the impact of all potentially dilutive securities. The following table sets forth the shares outstanding for the earnings per share calculations for the years ended December 31, 2003, 2002 and 2001:
YEAR ENDED DECEMBER 31, ----------------------------------------------- 2003 2002 2001 ----------- ----------- ----------- Common stock issued, beginning of period .................................. 22,499,158 23,029,853 21,260,227 Weighted average common stock issued in offerings ...................... - - 605,753 Weighted average common stock issued to employee stock purchase plan ....................................................... 124,336 76,914 180,034 Weighted average common stock issued in stock option exercises ......... 298,168 247,494 62,773 Less: Weighted average treasury shares purchased and weighted average shares purchased and cancelled .............................. (397,837) (479,343) (1,971,126) ----------- ----------- ----------- Shares used in computing basic earnings per share ......................... 22,523,825 22,874,918 20,137,661 Dilutive effect of stock options, net of assumed repurchase of treasury stock ................................................... 822,396 1,093,154 1,277,493 ----------- ----------- ----------- Shares used in computing diluted earnings per share ....................... 23,346,221 23,968,072 21,415,154 =========== =========== ===========
Any options with an exercise price in excess of the average market price of the Company's common stock, during the periods presented, are not considered when calculating the dilutive effect of stock options for diluted earnings per share calculations. The weighted average number of options not included in the calculation of the dilutive effect of stock options was 0.4, 0.4 and 0.7 million for the years ended December 31, 2003, 2002 and 2001, respectively. Stock Compensation In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which, if fully adopted, requires the Company to record stock-based compensation at fair value. The Company has adopted the disclosure requirements of SFAS No. 123 and has elected to record employee compensation expense in accordance with APB No. 25, "Accounting for Stock Issued to Employees." Accordingly, F-12 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 stock incentive 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 stock incentive plan has been recorded. Additionally, no compensation expense is recorded for shares issued pursuant to the employee stock purchase plan as it is a qualified plan. Had compensation expense for the stock incentive and employee stock purchase plans been determined based on the provisions of SFAS No. 123, the impact on the Company's net income would have been as follows:
FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------- 2003 2002 2001 ---------- ---------- ---------- (in thousands, except per share amounts) Net income, as reported ........................ $ 76,126 $ 67,065 $ 55,442 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects .......................... -- 120 - Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects ...................................... (3,576) (5,333) (3,728) ---------- ---------- ---------- Pro forma net income ........................... $ 72,550 $ 61,852 $ 51,714 ========== ========== ========== Earnings per share: Basic - as reported .......................... $ 3.38 $ 2.93 $ 2.75 Basic - pro forma ............................ $ 3.22 $ 2.70 $ 2.57 Diluted - as reported ........................ $ 3.26 $ 2.80 $ 2.59 Diluted - pro forma .......................... $ 3.11 $ 2.58 $ 2.41
Recent Accounting Pronouncements In January 2003, FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities" was issued. FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to variable interest entities, which are certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated support from other parties. The interpretation is intended to achieve more consistent application of consolidation policies to variable interest entities and thus, to improve comparability between enterprises engaged in similar activities even if some of those activities are conducted through variable interest entities. The interpretation is effective immediately for variable interest entities created after January 31, 2003, and to variable interest entities in which a company obtains an interest after that date. In December 2003, the FASB issued a revision to FIN No. 46, ("FIN No. 46R"), to clarify some of the provisions of FIN No. 46 and to exempt certain entities from its requirements. Under the new guidance, special effective date provisions apply to enterprises that have fully or partially applied FIN No. 46 prior to issuance of this revised interpretation. Otherwise, application of FIN No. 46R is required in financial statements of public entities that have interests in structures that are commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities, other than small business issuers, for all other types of variable interest entities is required in financial statements for periods ending after March 15, 2004. The Company is currently analyzing the impact this interpretation will have on its consolidated results of operations and its financial position, with respect to entities created or acquired before February 1, 2003. F-13 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Business Segment Information The Company, through its operating companies, operates in the automotive retailing industry. All of the operating companies sell new and used vehicles, provide maintenance and repair services, sell replacement parts and arrange financing, vehicle service and insurance contracts. For the reasons discussed below, all of our operating companies represent one reportable segment under SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Accordingly, the accompanying consolidated financial statements reflect the operating results of the Company's reportable segment. The Company's operating companies deliver the same products and services to a common customer group. The Company's customers, generally, are individuals. All of the operating companies, generally, follow the same procedures and methods in managing their operations. Each operating company also operates in a similar regulatory environment. The Company's management evaluates performance and allocates resources based on the operating results of the individual operating companies. 3. BUSINESS COMBINATIONS: During 2003, the Company acquired eight automobile dealership franchises in Louisiana, Oklahoma and Texas, and completed a market consolidation project in conjunction with DaimlerChrysler's Alpha Initiative in Dallas, Texas. The acquisitions were accounted for as purchases. The aggregate consideration paid in completing the acquisitions included approximately $35.4 million in cash, net of cash received, the assumption of an estimated $52.7 million of inventory financing and the assumption of $4.8 million of notes payable. The consolidated balance sheet includes preliminary allocations of the purchase price for all of the acquisitions, and the allocations are subject to final adjustment. These allocations resulted in recording approximately $15.8 million of franchise value intangible assets, and $10.6 million of goodwill, of which $9.7 million is deductible for tax purposes. Included in the acquisitions and dispositions discussed above, the Company purchased three automobile dealership franchises from Robert E. Howard II, a director of the Company, and sold one automobile dealership franchise to a company owned by Mr. Howard. The Company acquired Ford, Lincoln and Mercury franchises, with $131.2 million in annual revenues, and sold a Mercedes-Benz franchise, with $47.4 million in annual revenues. In completing the acquisitions, the aggregate consideration paid by the Company consisted of $12.7 million of cash, net of cash received and the assumption of approximately $22.9 million of inventory financing. The Company received $7.4 million in cash from the sale of the Mercedes-Benz dealership franchise and related assets, including goodwill of approximately $3.6 million. The Company believes the sale of the Mercedes-Benz dealership was at fair market value. The proceeds received exceeded the Company's basis in the dealership by approximately $1.3 million. This excess sales price over cost was recorded as a reduction of the cost basis in the newly acquired Ford, Lincoln and Mercury dealerships. Additionally, the outstanding inventory financing for the Mercedes-Benz dealership was assumed by a company owned by Mr. Howard. As a result of the two transactions described above, the Company's goodwill was reduced by $3.3 million and its intangible asset for franchise value increased $0.5 million. Additionally, during 2003, the Company disposed of the net assets, including $3.6 million of goodwill, of three dealership franchises and received $7.4 million in cash. No gain or loss was recognized on these transactions. See the discussion in the preceding paragraph regarding the accounting for the sale of the Mercedes-Benz franchise. During 2002, the Company acquired 15 automobile dealership franchises. The acquisitions were accounted for as purchases. The aggregate consideration paid in completing the acquisitions included approximately $81.4 million in cash, net of cash and cash equivalents received, and the assumption of an estimated $59.0 million of inventory financing. The purchase price allocations resulted in recording approximately $56.3 million of franchise value intangible assets and $37.0 million of goodwill, of which $17.2 million is deductible for tax purposes. F-14 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Six of the franchises acquired were part of Miller Automotive Group, a platform acquisition completed in August of 2002 in Southern California and their results of operations have been included in our statements since that time. The acquisition expanded the Company's geographic and brand diversity, and represents its first operations in California. All of the businesses acquired are now 100% wholly-owned subsidiaries of the Company. The Company paid $55.8 million in cash, net of cash and cash equivalents received, and assumed $40.5 million of floorplan notes payable in completing this acquisition. The purchase price was arrived at based on a calculation including the tangible net worth of the companies acquired, plus an amount equal to the estimated income before taxes times an agreed upon multiple. The total purchase price paid in excess of the net amounts assigned to the assets acquired, including franchise value intangibles, and liabilities assumed was recognized as goodwill. Additionally, during 2002, the Company disposed of the net assets, including $4.2 million of goodwill, of five dealership franchises and received $7.4 million in cash. A gain of $0.4 million was recognized on these sales and is recorded in Other Income (Expense), net in the statement of operations. During 2001, the Company acquired four automobile dealership franchises. These acquisitions were accounted for as purchases. The aggregate consideration paid in completing these acquisitions included approximately $11.0 million in cash, net of cash received, the assumption of an estimated $7.7 million of inventory financing and the assumption of approximately $0.3 million of notes payable. The purchase price allocations resulted in recording approximately $8.5 million of intangible assets, a portion of which was amortized during 2001. Additionally, during 2001, the Company sold eight dealership franchises for $5.4 million in cash. No gain or loss was recognized on these sales as they were completed at net book value. The following pro forma financial information consists of income statement data from the consolidated financial statements plus (1) unaudited income statement data for all acquisitions and dispositions completed between January 1, 2002, and December 31, 2003, assuming that they occurred on January 1, 2002, and (2) certain pro forma adjustments discussed below:
2003 2002 ---- ---- (in millions, except per share amounts) (unaudited) Revenues .................................... $ 4,568.9 $ 4,738.4 Gross profit ................................ 730.7 734.9 Income from operations ...................... 147.9 155.7 Net income .................................. 75.8 75.0 Basic earnings per share .................... 3.36 3.28 Diluted earnings per share .................. 3.25 3.13
Pro forma adjustments included in the amounts above primarily relate to: (a) increases in revenues related to changes in the contractual commission arrangements on certain third-party products sold by the dealerships; (b) changes in interest expense resulting from net cash borrowings utilized to complete acquisitions, net of interest rate reductions received; and (c) incremental provisions for federal and state income taxes relating to the compensation differential, S Corporation income and other pro forma adjustments. F-15 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS: Accounts and notes receivable consist of the following:
DECEMBER 31, --------------------------- 2003 2002 -------- -------- (in thousands) Amounts due from manufacturers .............. $ 36,458 $ 32,156 Parts and service receivables ............... 12,856 11,244 Finance and insurance receivables ........... 7,439 7,531 Other ....................................... 9,121 10,012 -------- -------- Total accounts and notes receivable ...... 65,874 60,943 Less - Allowance for doubtful accounts ...... (2,270) (2,749) -------- -------- Accounts and notes receivable, net ....... $ 63,604 $ 58,194 ======== ========
Inventories, net of valuation reserves, consist of the following:
DECEMBER 31, -------------------------- 2003 2002 -------- -------- (in thousands) New vehicles ..................... $536,289 $500,842 Used vehicles .................... 86,108 80,115 Rental vehicles .................. 10,744 11,254 Parts, accessories and other ..... 38,138 29,994 -------- -------- Total inventories ............. $671,279 $622,205 ======== ========
The Company provides valuation reserves against its used vehicle inventories based on a detailed review of its inventory, actual subsequent sales of the inventory, the Company's historical loss experience and consideration of current market trends. At December 31, 2003, the Company established a $1.1 million reserve for estimated used vehicle losses, as compared to a $6.6 million reserve at December 31, 2002. The net decline of $5.5 million in the used vehicle valuation reserve, based on $1.2 billion of used vehicle sales, was due to the application of losses incurred retailing and wholesaling used vehicles during 2003 against the reserve. Based on a detailed review of the used vehicle inventory at December 31, 2003, subsequent sales of the inventory and economic trends indicating an improved used vehicle market, the Company determined that $1.1 million was the appropriate used vehicle valuation reserve in the current environment, and it was not necessary to charge used vehicle cost of sales to establish the used vehicle valuation reserve at the same level as at December 31, 2002. F-16 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Property and equipment consist of the following:
ESTIMATED DECEMBER 31, USEFUL LIVES ----------------------------- IN YEARS 2003 2002 -------------- -------- --------- (in thousands) Land.................................. - $ 22,282 $ 20,168 Buildings............................. 30 to 40 29,672 22,958 Leasehold improvements................ 7 to 15 33,559 28,413 Machinery and equipment............... 7 to 20 32,450 30,044 Furniture and fixtures................ 3 to 10 42,328 35,808 Company vehicles...................... 3 to 5 5,879 5,285 -------- -------- Total............................... 166,170 142,676 Less - Accumulated depreciation and amortization........................ (44,102) (35,255) Construction in progress.............. 9,579 8,849 -------- -------- Property and equipment, net......... $131,647 $116,270 ======== ========
Depreciation expense totaled approximately $12.5, $10.1, and $8.2 million for the years ended December 31, 2003, 2002 and 2001, respectively. 5. INTANGIBLE ASSETS AND GOODWILL: The following is a roll forward of the Company's intangible asset and goodwill accounts:
FRANCHISE VALUE INTANGIBLE GOODWILL ---------- -------- Balance, December 31, 2000 ............................ $ - $ 285,892 Additions through acquisitions ..................... 4,614 3,861 Amortization expense ............................... - (7,488) Reductions from sales of dealerships ............... - (4,352) --------- --------- Balance, December 31, 2001 ............................ 4,614 277,913 Additions through acquisitions ..................... 56,265 37,034 Reductions from sales of dealerships ............... - (4,161) Realization of tax benefits ........................ - (2,879) --------- --------- Balance, December 31, 2002 ............................ 60,879 307,907 Additions through acquisitions .................... 15,777 10,618 Reductions from sales of dealerships .............. - (3,615) Realization of tax benefits ....................... - (699) --------- --------- Balance, December 31, 2003 ............................ $ 76,656 $ 314,211 ========= =========
The reduction in goodwill related to the realization of certain tax benefits is due to differences between the book and tax bases of the goodwill. The following table computes the impact on net income of the change in accounting for intangible assets, required by SFAS No. 142:
YEAR ENDED DECEMBER 31, 2001 ---------------------- (dollars in thousands, except per share amounts) Net income .......................................... $55,442 Goodwill amortization expense, net of tax ........... 5,611 ------- Pro forma net income ................................ $61,053 ======= Pro forma earnings per share: Basic ............................................ $ 3.03 Diluted .......................................... $ 2.85
F-17 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. FLOORPLAN NOTES PAYABLE: The Company obtains its floorplan financing through its Revolving Credit Agreement with a lending group (the "Credit Facility"), a floorplan arrangement with Ford Motor Credit Company (the "FMCC Facility"), and arrangements with several of the automobile manufacturers for financing of its rental vehicle inventory. The floorplan notes payable reflect amounts payable for the purchase of specific vehicle inventory and consist of the following:
DECEMBER 31, -------------------------- 2003 2002 -------- -------- (in thousands) New vehicles-Credit Facility .......................... $229,495 $585,204 New vehicles-FMCC Facility ............................ 192,897 -- Used vehicles-Credit Facility ......................... 60,570 56,164 Rental vehicles-Credit Facility ....................... 1,682 1,220 Rental vehicles-others ................................ 8,924 9,950 -------- -------- Total floorplan notes payable ................ $493,568 $652,538 ======== ========
The Credit Facility lending group is comprised of 14 major financial institutions, including two manufacturer captive finance companies. The manufacturer captive finance companies are Toyota Motor Credit Corporation and BMW Financial Services NA, LLC. The Credit Facility provides $581.2 million of floorplan financing for new and used vehicles and matures on June 30, 2006, and can be expanded to a maximum capacity of $800 million. The notes payable bear interest at the London Interbank Offered Rate ("LIBOR") plus 112.5 basis points for new vehicle inventory and LIBOR plus 125 basis points for used vehicle inventory. As of December 31, 2003 and 2002, the interest rate on the notes payable outstanding was 2.31% and 2.53%, respectively. See the discussion of the Company's interest rate swaps under Note 2. During 2003, the Company entered into the FMCC Facility for the financing of its entire Ford, Lincoln and Mercury new vehicle inventory. The arrangement provides for $300.0 million of floorplan financing and matures on June 2, 2006. The notes payable bear interest at a rate of Prime plus 100 basis points minus certain incentives. As of December 31, 2003, the interest rate on the notes payable outstanding was 2.90%, before considering non-interest related incentives. After all incentives received, the effective interest rate approximates the interest rate on the Credit Facility. As discussed more fully in Note 2, the Company receives interest assistance from certain automobile manufacturers. The assistance, has ranged from approximately 80% to 160% of the Company's floorplan interest expense, over the past three years. The Credit Facility and FMCC Facility arrangements permit the Company to borrow up to $881.2 million, dependent upon new and used vehicle inventory levels. As of December 31, 2003, total available borrowings under the arrangements were approximately $396.6 million. Payments on the floorplan notes payable are due as the vehicles are sold. The floorplan notes payable are collateralized by substantially all of the vehicle inventories of the Company. Additionally, under the FMCC Facility, the Company is required to maintain a $1.5 million balance in a Ford Money Market Account as additional collateral. This balance is reflected in other long term assets on the balance sheet at December 31, 2003. Excluding rental vehicles financed through the Credit Facility, financing for rental vehicles is typically obtained directly from the automobile manufacturers. The financing arrangements generally require small monthly payments and mature in varying amounts between 2004 and 2006. The weighted average interest rate charged as of December 31, 2003, was 3.9%. Rental vehicles are typically moved to used vehicle inventory when they are removed from rental service and repayment of the borrowing is required at that time. F-18 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. LONG-TERM DEBT:
DECEMBER 31, --------------------------- 2003 2002 -------- -------- (in thousands) Credit Facility (described below) ............................... $ -- $ -- Various notes payable, maturing in varying amounts through August 2018 with a weighted average interest rate of 10.38% ................................................ 13,613 10,070 -------- -------- Total long-term debt ............................................ 13,613 10,070 Less - Current portion ........................................ (910) (997) -------- -------- Long-term portion ............................................... $ 12,703 $ 9,073 ======== ========
In addition to floorplan notes payable, the Credit Facility provides an acquisition line of credit of up to $193.8 million for the financing of acquisitions, general corporate purposes or capital expenditures. The acquisition line can be expanded to a maximum capacity of $200.0 million. The amount of funds available under the acquisition line is dependent upon a calculation based on the Company's cash flow. Based on the December 31, 2003 financial statements, $188.8 million was available under the acquisition line, after deducting $5.0 million for outstanding letters of credit. The acquisition line of credit of the Credit Facility bears interest based on LIBOR plus a margin varying from 175 to 325 basis points, determined based on a ratio of debt to equity. Additionally, the Credit Facility contains various covenants including financial ratios, such as, fixed-charge coverage, interest coverage and a minimum net worth requirement, among others, and other requirements that must be maintained by the Company. As of December 31, 2003, the Company was in compliance with these requirements. The Credit Facility permits up to 33% of the Company's net income to be used for cash dividends and stock repurchases. The interest rate on borrowings under the acquisition line of credit of the Credit Facility would have been 3.62% based on LIBOR at December 31, 2003, but there were no amounts outstanding at that time. Land, buildings or other assets secure all of the notes payable listed above. Total interest incurred on long-term debt was approximately $2.8, $3.0 and $5.2 million for the years ended December 31, 2003, 2002 and 2001, respectively, which included approximately $1.0, $1.3, and $0.9 million of capitalized interest on construction projects in 2003, 2002 and 2001, respectively. The aggregate maturities of long-term debt as of December 31, 2003, were as follows (in thousands): 2004 $ 910 2005 ..................... 935 2006 ..................... 732 2007 ..................... 707 2008 ..................... 775 Thereafter ............... 9,554 ------- Total long-term debt ... $13,613 =======
8. SENIOR SUBORDINATED NOTES: During August 2003, the Company issued 8 1/4% Senior Subordinated Notes due 2013 (the "8 1/4% Notes") with a face amount of $150.0 million. The 8 1/4% Notes pay interest semi-annually on February 15 and August 15, each year beginning February 15, 2004. The 8 1/4% Notes have the following redemption provisions: - The Company, before August 15, 2006, may redeem up to $52.5 million of the 8 1/4% Notes with the proceeds of certain public offerings of common stock at a redemption price of 108.250% of the principal amount plus accrued interest. - The Company may redeem all or a portion of the 8 1/4% Notes prior to August 15, 2008, at a redemption price equal to the principal amount plus a make-whole premium to be determined, plus accrued interest. F-19 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - The Company may redeem all or a portion of the 8 1/4% Notes at redemption prices of 104.125%, 102.750%, 101.375% and 100.000% of the principal amount plus accrued interest during the twelve-month periods beginning August 15, 2008, 2009, 2010 and 2011 and thereafter, respectively. The 8 1/4% Notes are jointly and severally and fully and unconditionally guaranteed, on an unsecured senior subordinated basis, by all subsidiaries of the Company, other than certain minor subsidiaries (the "Subsidiary Guarantors"). All of the Subsidiary Guarantors are wholly-owned subsidiaries of the Company. Additionally, the 8 1/4% Notes are subject to various covenants, including financial ratios, and other requirements that must be maintained by the Company. The Company's 10 7/8% Senior Subordinated Notes due 2009 (the "Notes") pay interest semi-annually on March 1 and September 1, each year. The Company intends to redeem all or part of the Notes at a redemption price of 105.438% of the principal amount plus accrued interest on the initial redemption date of March 1, 2004. See further discussion of the redemption in Note 16. The Notes are jointly and severally and fully and unconditionally guaranteed, on an unsecured senior subordinated basis, by all of the Subsidiary Guarantors. Additionally, the Notes are subject to various covenants, including financial ratios, and other requirements that must be maintained by the Company. During 2001 and 2002, the Company repurchased a portion of its Notes. The Company recorded a $1.2 million loss during 2002 related to the repurchases, which is included in Other income (expense), net in the statement of operations. The purchases during 2001 were completed at or near the Company's carrying value of the Notes. At the time of the issuances of the Notes and the 8 1/4% Notes, the Company incurred certain costs, which are included in long-term Other Assets on the balance sheets. The balances in the deferred cost accounts at December 31, 2003 and 2002, totaled $0.9 and $0.1 million, respectively. Total interest expense on the Notes for the years ended December 31, 2003, 2002 and 2001, was approximately $12.9, $8.8 and $10.1 million, respectively. 9. STOCK-BASED COMPENSATION PLANS: In 1996, Group 1 adopted the 1996 Stock Incentive Plan, as amended, (the "Plan"), which provides for the granting or awarding of stock options, stock appreciation rights and restricted stock to employees and directors. The number of shares authorized and reserved for issuance under the Plan is 4.5 million shares, of which 414,148 are available for future issuance as of December 31, 2003. The terms of the option awards (including vesting schedules) are established by the Compensation Committee of the Company's Board of Directors. All outstanding options are exercisable over a period not to exceed 10 years and vest over three- to six-year periods. F-20 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the Company's outstanding stock options:
WEIGHTED AVERAGE NUMBER EXERCISE PRICE ---------- -------------- Options outstanding, December 31, 2000 ............... 3,542,129 $13.36 Grants (exercise prices between $11.31 and $28.97 per share) ............................... 559,500 25.18 Exercised .......................................... (182,090) 12.29 Forfeited .......................................... (334,230) 15.75 ---------- ------ Options outstanding, December 31, 2001 ............... 3,585,309 15.04 Grants (exercise prices between $19.47 and $44.96 per share) ............................... 505,950 34.61 Exercised .......................................... (383,245) 11.16 Forfeited .......................................... (189,665) 20.26 ---------- ------ Options outstanding, December 31, 2002 ............... 3,518,349 18.00 Grants (exercise prices between $22.93 and $34.85 per share) ............................... 176,000 29.78 Exercised .......................................... (482,509) 10.60 Forfeited .......................................... (374,205) 23.28 ---------- ------ Options outstanding, December 31, 2003 ............... 2,837,635 $19.29 ========== ======
At December 31, 2003, 2002 and 2001, 1,767,339, 1,771,538 and 1,309,079 options, respectively, were exercisable at weighted average exercise prices of $15.44, $13.49 and $13.02, respectively. The weighted average fair value per share of options granted during the years ended December 31, 2003, 2002 and 2001 is $18.02, $21.73 and $18.67, respectively. The fair value of options granted is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model is not designed to measure not-for-sale options, but is the most widely used method for option valuation. The following table summarizes the weighted average information used in determining the fair value of the options granted during the years ended December 31, 2003, 2002 and 2001:
2003 2002 2001 ------ ------- -------- Weighted average risk-free interest rate .............. 3.8% 4.6% 5.1% Weighted average expected life of options ............. 8 years 8 years 10 years Weighted average expected volatility .................. 51.9% 52.5% 57.7% Weighted average expected dividends ................... -- -- --
The following table summarizes information regarding stock options outstanding as of December 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------- --------------------------------- NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE PRICES AT 12/31/03 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/03 EXERCISE PRICE --------------- ----------- ---------------- -------------- ----------- -------------- $ 2.90 26,000 3.2 years $ 2.90 26,000 $ 2.90 $9.00 to $13.99 988,915 5.6 11.11 759,475 11.09 $14.00 to $19.99 946,813 5.6 17.08 761,763 16.83 $20.00 to $24.99 342,307 7.3 24.49 106,569 24.58 $25.00 to $44.99 533,600 8.4 35.85 113,532 29.44 --------- --------- --------- --------- --------- Total 2,837,635 6.3 years $ 19.29 1,767,339 $ 15.44 ========= ========= ========= ========= =========
In September 1997, Group 1 adopted the Group 1 Automotive, Inc. 1998 Employee Stock Purchase Plan, as amended, (the "Purchase Plan"). The Purchase Plan authorizes the issuance of up to 2.0 million shares of common stock and provides that no options to purchase shares may be granted under the Purchase Plan after June 30, 2007. As of December 31, 2003, there were 628,272 shares remaining in reserve for future issuance under the Purchase Plan. The Purchase F-21 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Plan is available to all employees of the Company and its participating subsidiaries and is a qualified plan as defined by Section 423 of the Internal Revenue Code. At the end of each fiscal quarter (the "Option Period") during the term of the Purchase Plan, the employee contributions are used to acquire shares of common stock at 85% of the fair market value of the common stock on the first or the last day of the Option Period, whichever is lower. During 2003, 2002 and 2001, the Company issued 191,063, 153,954 and 257,235 shares, respectively, of common stock to employees participating in the Purchase Plan. 10. EMPLOYEE SAVINGS PLANS: The Company has a deferred compensation plan to provide selected employees with the opportunity to accumulate additional savings for retirement on a tax-deferred basis. Participants in the plan are allowed to defer receipt of a portion of their salary and/or bonus compensation earned. The participants can choose from various defined investment options to determine their earnings crediting rate, however, the Company has complete discretion over how the funds are utilized. Participants in the plan are unsecured creditors of the Company. The balances due to participants of the deferred compensation plan as of December 31, 2003 and 2002 were $12.3 and $7.5 million, respectively. The Company offers a 401k plan to all of its employees and provides a matching contribution to those employees that participate. The matching contributions paid by the Company totaled $3.2, $2.7 and $2.2 million for the years ended December 31, 2003, 2002 and 2001, respectively. 11. OPERATING LEASES: The Company leases various facilities and equipment under long-term operating lease agreements. These leases expire on various dates through December 2031 and, in general, have renewal or cancellation options, at the Company's option, at various times during the lease term. Future minimum lease payments for operating leases as of December 31, 2003, are as follows (in thousands):
RELATED THIRD YEAR ENDED DECEMBER 31, PARTIES PARTIES TOTAL - ------------------------------- ------- -------- -------- 2004........................... $10,326 $ 38,877 $ 49,203 2005........................... 10,198 37,648 47,846 2006........................... 10,198 37,296 47,494 2007........................... 10,078 37,125 47,203 2008........................... 7,307 34,194 41,501 Thereafter..................... 51,837 172,552 224,389 ------- -------- -------- Total.......................... $99,944 $357,692 $457,636 ======= ======== ========
Total rent expense under all operating leases, including operating leases with related parties, was approximately $46.5, $36.8 and $30.7 million for the years ended December 31, 2003, 2002 and 2001, respectively. Rental expense on related party leases, which is included in the above amounts, totaled approximately $9.5, $8.4 and $7.9 million for the years ended December 31, 2003, 2002 and 2001, respectively. In addition to the transactions discussed in Note 3, effective February 18, 2003, the Company sold certain dealership buildings in Oklahoma City to Mr. Howard for $4.5 million and leased them back on a 25-year lease. The sales price represents the Company's cost basis in recently constructed buildings and no gain or loss was recognized. The Company will pay Mr. Howard a market rental rate of $44,376 per month, under standard lease terms, for land owned by Mr. Howard and the buildings sold and leased back. The Company believes that the terms of the lease are at fair market value. F-22 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. INCOME TAXES: Federal and state income taxes are as follows:
DECEMBER 31, -------------------------------------------- 2003 2002 2001 -------- -------- -------- (in thousands) Federal - Current ................................... $ 22,837 $ 31,026 $ 32,514 Deferred .................................. 11,091 6,336 (1,129) State - Current ................................... 2,158 2,308 2,691 Deferred .................................. 860 547 (96) -------- -------- -------- Provision for income taxes .................. $ 36,946 $ 40,217 $ 33,980 ======== ======== ========
Actual income tax expense differs from income tax expense computed by applying the U.S. federal statutory corporate tax rate of 35% in 2003, 2002 and 2001 to income before income taxes as follows:
DECEMBER 31, --------------------------------------------- 2003 2002 2001 -------- -------- -------- (in thousands) Provision at the statutory rate .................. $ 39,575 $ 37,549 $ 31,298 Increase (decrease) resulting from - State income tax, net of benefit for federal deduction ....................... 2,058 1,856 1,669 Non-deductible portion of goodwill amortization ....................... - - 776 Resolution of tax contingencies ............... (5,423) - - Other .......................................... 736 812 237 -------- -------- -------- Provision for income taxes ....................... $ 36,946 $ 40,217 $ 33,980 ======== ======== ========
During 2003, the Company resolved certain tax contingencies as various state and federal tax audits were concluded providing certainty and resolution on various formation, financing, acquisition and structural matters. In addition, various other tax exposures of acquired companies have been favorably resolved. As a result the Company recorded a reduction in its tax reserve, which reduced the effective tax rate for 2003 to 32.7% as compared to 37.5% for 2002. Deferred income tax provisions result from temporary differences in the recognition of income and expenses for financial reporting purposes and for tax purposes. The tax effects of these temporary differences representing deferred tax assets (liabilities) result principally from the following:
DECEMBER 31, --------------------------- 2003 2002 -------- -------- (in thousands) Loss reserves and accruals ............................ $ 24,911 $ 27,150 Goodwill amortization ................................. (20,030) (13,855) Depreciation expense .................................. (9,583) (5,785) Reinsurance operations ................................ (2,258) (2,490) Interest rate swaps ................................... 771 2,059 Other ................................................. (2,154) (3,937) -------- -------- Net deferred tax asset (liability) ................. $ (8,343) $ 3,142 ======== ========
F-23 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The net deferred tax assets (liabilities) are comprised of the following:
DECEMBER 31, ------------ 2003 2002 -------- -------- (in thousands) Deferred tax assets - Current ............................................ $ 13,585 $ 14,297 Long-term .......................................... 19,302 24,264 Deferred tax liabilities - Current ............................................ (2,421) (3,504) Long-term .......................................... (38,809) (31,915) -------- -------- Net deferred tax asset (liability) ................... $ (8,343) $ 3,142 ======== ========
The Company believes it is more likely than not, that the deferred tax assets will be realized, based primarily on the assumption of future taxable income. 13. COMMITMENTS AND CONTINGENCIES: Legal Proceedings From time to time, the Company's dealerships are named in claims involving the manufacturer of automobiles, contractual disputes and other matters arising in the ordinary course of business. The Texas Automobile Dealers Association ("TADA") and certain new vehicle dealerships in Texas that are members of the TADA, including a number of the Company's Texas dealership subsidiaries, have been named in two state court class action lawsuits and one federal court class action lawsuit. The three actions allege that since January 1994, Texas dealers have deceived customers with respect to a vehicle inventory tax and violated federal antitrust and other laws. In April 2002, the state court in which two of the actions are pending certified classes of consumers on whose behalf the action would proceed. On October 25, 2002, the Texas Court of Appeals affirmed the trial court's order of class certification in the state action and the defendants have requested that the Texas Supreme Court review that decision on appeal. On August 25, 2003, the Texas Supreme Court requested briefing in the state cases. Such briefing was completed on February 6, 2004. In the other action, on March 26, 2003, the federal court also certified a class of consumers, but denied a request to certify a defendants' class consisting of all TADA members. On May 19, 2003, the Fifth Circuit Court of Appeals granted a request for permission to appeal the class certification ruling of the lower federal court. Briefing on the merits of defendants' appeal was completed on February 13, 2004. The parties participated in mediation in 2003. That mediation resulted in a settlement proposal from the plaintiff class representatives to the defendant dealers, including the Company's Texas dealership subsidiaries. The proposal was contingent on achieving a certain minimum level of participation among the defendant dealers based on the number of transactions in which each dealer engaged. Because the participation threshold was not satisfied, the proposal failed. While the Company does not believe this litigation will have a material adverse effect on its financial condition or results of operations, no assurance can be given as to its ultimate outcome. A settlement or an adverse resolution of this matter could result in the payment of significant costs and damages. In addition to the foregoing cases, there are currently no legal proceedings pending against or involving the Company that, in management's opinion, based on current known facts and circumstances, are expected to have a material adverse effect on the Company's financial position. Insurance Because of their vehicle inventory and nature of business, automobile dealerships generally require significant levels of insurance covering a broad variety of risks. The Company's insurance includes umbrella policies with a $105.0 million aggregate limit, as well as insurance on its real property, comprehensive coverage for its vehicle inventory, general liability insurance, employee dishonesty coverage, employment practices liability insurance, pollution coverage and errors and omissions insurance in connection with its vehicle sales and financing activities. F-24 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Additionally, the Company retains some risk of loss under its self-insured medical and property / casualty plans. See further discussion under Note 2. The Company has a $4.9 million letter of credit outstanding, supporting its obligations with respect to its property/casualty insurance program. Split Dollar Life Insurance On January 23, 2002, the Company, with the approval of the Compensation Committee of the Board of Directors, entered into an agreement with a trust established by B.B. Hollingsworth, Jr., the Company's Chairman, President and Chief Executive Officer, and his wife (the "Split-Dollar Agreement"). Under the Split-Dollar Agreement, the Company committed to make advances of a portion of the insurance premiums on a life insurance policy purchased by the trust on the joint lives of Mr. and Mrs. Hollingsworth. Under the terms of the Split-Dollar Agreement, the Company committed to pay the portion of the premium on the policies not related to term insurance each year for a minimum of seven years. The obligations of the Company under the Split-Dollar Agreement to pay premiums on the split-dollar insurance are not conditional, contingent or terminable under the express terms of the contract. Premiums to be paid by the Company are approximately $300,000 per year. The face amount of the policy is $7.5 million. The Company is entitled to reimbursement of the amounts paid, without interest, upon the first to occur of (a) the death of the survivor of Mr. and Mrs. Hollingsworth and (b) the termination of the Split-Dollar Agreement. In no event will the Company's reimbursement exceed the accumulated cash value of the insurance policy, which will be less than the premiums paid in the early years. The Split-Dollar Agreement terminates upon the later to occur of the following: (a) the date that Mr. Hollingsworth ceases to be an officer, director, consultant or employee of the Company for any reason other than total and permanent disability and (b) January 23, 2017. The insurance policy has been assigned to the Company as security for repayment of the amounts which the Company contributes toward payments due on such policy. In accordance with the terms of the Split-Dollar Agreement, the Company paid the 2002 premium in the amount of $299,697 in January 2002. However, due to the uncertainty surrounding the applicability of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") to split-dollar life insurance arrangements, the Company, Mr. and Mrs. Hollingsworth and the trustees of the trust have agreed to the deferral of the Company's then-current obligations to pay premiums in 2003 and 2004 on the split-dollar life insurance policies until January 2005 or such earlier time as the parties mutually determine that such payments are not prohibited by the Sarbanes-Oxley Act. Due to the uncertainty surrounding the resolution of this matter, nothing has been recorded in the financial statements for the premium payments scheduled, but deferred for 2003 and 2004, of approximately $300,000 each. If the 2003 payment had been made as scheduled, the Company would have recorded approximately $26,000 as expense in the statement of operations, with the remainder being recorded as an increase in the cash surrender value of the insurance policy, which is reflected as an asset on the balance sheet. Vehicle Service Contract Obligations In November 2002, FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" was issued. FIN No. 45 enhances the disclosures to be made by a guarantor about its obligations under certain guarantees that it has issued. It also requires, on a prospective basis, beginning after January 1, 2003, that guarantors recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. While the Company is not an obligor under the vehicle service contracts it currently sells, it is an obligor under vehicle service contracts previously sold in two states. The contracts were sold to our retail vehicle customers with terms, typically, ranging from two to seven years. The purchase price paid by the customer, net of the fee the Company received, was remitted to an administrator. The administrator set the pricing at a level adequate to fund expected future claims and their profit. Additionally, the administrator purchased insurance to further secure its ability to pay the claims under the contracts. The Company can become liable if the administrator and the insurance company are unable to fund future claims. Though the Company has never had to fund any claims related to these contracts, and reviews the credit worthiness of the administrator and the insurance company, it is unable to estimate the maximum potential claim exposure, but believes there will not be any future obligation to fund claims on the contracts. The Company's revenues related to these contracts were deferred at the time of sale and are being recognized over the life of the contracts. The amounts deferred are presented on the face of the balance sheets as deferred revenues from vehicle service contract sales. 14. RECLASSIFICATIONS: Certain reclassifications have been made in the 2002 and 2001 financial statements to conform to the current year presentation. The following are the reclassifications made: - Documentary fees, which are fees charged to retail new and used vehicle customers for processing vehicle purchase documentation, were reclassified from other dealership revenues, net to new vehicle retail sales and used vehicle retail sales. The impact of this reclassification was as follows: F-25 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2001 --------------------- (dollars in thousands) Increase new vehicle retail sales revenues ............ $ 8,291 Increase used vehicle retail sales revenues ........... 6,585 Decrease other dealership revenues, net ............... (14,876) -------- Net impact on revenues ........................ $ - ========
- Used vehicle retail and used vehicle wholesale sales and their respective cost of sales have been reclassified to separately present them on the face of 2001 statements of operations. The retail and wholesale amounts were combined in the used vehicle sales and used vehicle cost of sales line items in the 2001 statements of operations. - Retail finance fees, vehicle service contract fees and other finance and insurance revenues, net have been reclassified to separately present them on the face of the statements of operations. The amounts were combined in the other dealership revenues, net line item in the 2001 statements of operations. - Contracts-in-transit were reclassified from the cash line to a separate line item in the 2001 balance sheet. As a result of this reclassification, contracts-in-transit are now presented under changes in operating assets and liabilities in the operating activities section of the 2001 statements of cash flows. In 2001, the impact of this change was to reduce net cash provided by operating activities and the net increase (decrease) in cash by $12.7 million in the 2001 statement of cash flows. - Changes in the borrowings on the revolving credit facilities resulting from cash flow from operating activities were reclassified from changes in floorplan notes payable to be presented as changes in net borrowings (payments) on revolving credit facility in the 2002 and 2001 consolidated statements of cash flows. The impact of the changes was to increase net cash provided by operating activities and reduce net cash provided by (used in) financing activities by $1.3 million and $2.4 million in the 2002 and 2001 statements of cash flows, respectively. - Debt issue costs related to the underwriters' discount were reclassified from long term other assets to be presented as a reduction of senior subordinated notes on the December 31, 2002 balance sheet. The effect was to reduce the long term other assets balance by $1.4 million and reduce the senior subordinated notes balance by $1.4 million. - Deferred revenues related to the sale of vehicle maintenance agreements were reclassified from accrued expenses and long term other liabilities to be presented separately as deferred revenues from vehicle maintenance agreement sales on the December 31, 2002 balance sheet. The effect of the reduction was to reduce accrued liabilities and long term other liabilities by $1.1 million each. F-26 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
QUARTER ---------------------------------------------------------- FULL YEAR ENDED DECEMBER 31, FIRST SECOND THIRD FOURTH YEAR - ----------------------- ----- ------ ----- ------ ---- (in thousands, except per share data) 2003 Total revenues .............................. $1,029,791 $1,147,880 $1,239,490 $1,101,399 $4,518,560 Gross profit ................................ 169,448 184,216 194,447 175,300 723,411 Net income .................................. 14,816 19,980 21,694 19,636 76,126 Basic earnings per share .................... 0.66 0.89 0.96 0.87 3.38 Diluted earnings per share .................. 0.64 0.86 0.92 0.84 3.26 2002 Total revenues .............................. $ 946,074 $1,033,104 $1,202,588 $1,032,598 $4,214,364 Gross profit ................................ 151,509 160,763 180,508 159,515 652,295 Net income .................................. 15,493 19,137 20,141 12,294 67,065 Basic earnings per share .................... 0.68 0.83 0.88 0.55 2.93 Diluted earnings per share .................. 0.64 0.78 0.84 0.53 2.80
During the fourth quarter of 2003, the Company realized a tax benefit from the resolution of tax contingencies, resulting in a $4.8 million decrease in tax expense. During the fourth quarter of 2002, the Company revised its estimates related to certain exposures of its dealership properties resulting in a $2 million decrease in the estimate. The Company also increased its revenue deferrals related to certain warranty contracts sold to its customers by $3.8 million and increased related deferred costs by $0.9 million. 16. SUBSEQUENT EVENTS (UNAUDITED): Recent Acquisitions Since December 31, 2003, the Company has completed acquisitions of four franchises. One of the acquisitions, with three franchises, is a new platform in New Jersey. The other franchise was acquired in a tuck-in acquisition and will complement platform operations in Central Texas. The aggregate consideration paid in completing these acquisitions was approximately $38.6 million in cash, net of cash received, 54,372 shares of Common Stock and the assumption of $29.8 million of inventory financing. Bond Redemption On March 1, 2004, the Company completed the redemption of all of its 10 7/8% senior subordinated notes. The Company incurred a $6.4 million pretax charge in completing the redemption, consisting of a $4.1 million redemption premium and a $2.3 million non-cash write-off of unamortized bond discount and deferred cost. Total cash used in completing the redemption, excluding accrued interest of $4.1 million, totaled $79.5 million. F-27 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------ ----------- 3.1 -- Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 3.2 -- Certificate of Designation of Series A Junior Participating Preferred Stock (Incorporated by reference to Exhibit 3.2 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 3.3 -- Bylaws of the Company (Incorporated by reference to Exhibit 3.3 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 4.1 -- Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 4.2 -- Subordinated Indenture dated as of August 13, 2003 among Group 1 Automotive, Inc., the Subsidiary Guarantors named therein and Wells Fargo Bank, N.A., as Trustee (Incorporated by reference to Exhibit 4.6 of the Company's Registration Statement on Form S-4 Registration No. 333-109080). 4.3 -- First Supplemental Indenture dated as of August 13, 2003 among Group 1 Automotive, Inc., the Subsidiary Guarantors named therein and Wells Fargo Bank, N.A., as Trustee (Incorporated by reference to Exhibit 4.7 of the Company's Registration Statement on Form S-4 Registration No. 333-109080). 4.4 -- Form of Subordinated Debt Securities (included in Exhibit 4.3). 10.1* -- Employment Agreement between the Company and B.B. Hollingsworth, Jr. effective March 1, 2002 (Incorporated by reference to Exhibit 10.1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001). 10.2* -- Employment Agreement between the Company and John T. Turner dated November 3, 1997 (Incorporated by reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.3* -- Employment Agreement between the Company and Scott L. Thompson dated November 3, 1997 (Incorporated by reference to Exhibit 10.6 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.4* -- 1996 Stock Incentive Plan (Incorporated by reference to Exhibit 10.7 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 10.5* -- First Amendment to 1996 Stock Incentive Plan (Incorporated by reference to Exhibit 10.8 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 10.6 -- Lease Agreement between Howard Pontiac GMC and Robert E. Howard II (Incorporated by reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 10.7 -- Lease Agreement between Bob Howard Motors and Robert E. Howard II (Incorporated by reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 10.8 -- Lease Agreement between Bob Howard Chevrolet and Robert E. Howard II (Incorporated by reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 10.9 -- Lease Agreement between Bob Howard Automotive-H and North Broadway Real Estate (Incorporated by reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 10.10 -- Rights Agreement between Group 1 Automotive, Inc. and ChaseMellon Shareholder Services, L.L.C., as rights agent dated October 3, 1997 (Incorporated by reference to Exhibit 10.10 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 10.11* -- 1998 Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.11 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 10.12 -- Form of Agreement between Toyota Motor Sales, U.S.A., and Group 1 Automotive, Inc. (Incorporated by reference to Exhibit 10.12 of the Company's Registration Statement on Form S-1 Registration No. 333-29893).
EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.13 -- Form of Supplemental Agreement to General Motors Corporation Dealer Sales and Service Agreement (Incorporated by reference to Exhibit 10.13 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 10.14 -- Supplemental Terms and Conditions between Ford Motor Company and Group 1 Automotive, Inc. dated September 4, 1997 (Incorporated by reference to Exhibit 10.16 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 10.15 -- Toyota Dealer Agreement between Gulf States Toyota, Inc. and Southwest Toyota, Inc. dated April 5, 1993 (Incorporated by reference to Exhibit 10.17 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 10.16 -- Lexus Dealer Agreement between Toyota Motor Sales, U.S.A., Inc. and SMC Luxury Cars, Inc. dated August 21, 1995 (Incorporated by reference to Exhibit 10.18 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 10.17 -- Form of General Motors Corporation U.S.A. Sales and Service Agreement (Incorporated by reference to Exhibit 10.25 of the Company's Registration Statement on Form S-1 Registration No. 333-29893). 10.18 -- Fifth Amended and Restated Revolving Credit Agreement, dated as of June 2, 2003 (Incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003). 10.19 -- Form of Ford Motor Credit Company Automotive Wholesale Plan Application for Wholesale Financing and Security Agreement (Incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003). 10.20 -- First Amendment to Fifth Restated Revolving Credit Agreement, dated as of July 25, 2003 (Incorporated by reference to Exhibit 10.37 of the Company's Registration Statement on Form S-4 Registration No. 333-109080). 10.21 -- Stock Pledge Agreement dated December 19, 1997 (Incorporated by reference to Exhibit 10.54 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.22* -- First Amendment to Group 1 Automotive, Inc. 1998 Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.35 of the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 10.23 -- Form of Ford Motor Company Sales and Service Agreement (Incorporated by reference to Exhibit 10.38 of the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 10.24 -- Form of Chrysler Corporation Sales and Service Agreement (Incorporated by reference to Exhibit 10.39 of the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 10.25 -- Form of Nissan Division Dealer Sales and Service Agreement. 10.26 -- Form of Infiniti Division Dealer Sales and Service Agreement. 10.27* -- Second Amendment to the 1996 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999). 10.28* -- Group 1 Automotive, Inc. Deferred Compensation Plan, as Amended and Restated (Incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-8 Registration No. 333-83260). 10.29* -- Second Amendment to Group 1 Automotive, Inc. 1998 Employee Stock Purchase Plan (Incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-8 Registration No. 333-75754). 10.30* -- Third Amendment to Group 1 Automotive, Inc. 1996 Stock Incentive Plan (Incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-8 Registration No. 333-75784). 10.31 -- ISDA Master Agreement (Incorporated by reference to Exhibit 10.33 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001). 10.32 -- Interest Rate Swap Confirmation, dated as of October 19, 2001 (Incorporated by reference to Exhibit 10.35 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001).
EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.33* -- Split Dollar Life Insurance Agreement between Group 1 Automotive, Inc., and Leslie Hollingsworth and Leigh Hollingsworth Copeland, as Trustees of the Hollingsworth 2000 Children's Trust, dated as of January 23, 2002 (Incorporated by reference to Exhibit 10.36 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002). 10.34 -- Lease Agreement between Bob Howard Automotive-East, Inc. and REHCO East, L.L.C (Incorporated by reference to Exhibit 10.37 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002). 10.35 -- Lease Agreement between Howard-H, Inc. and REHCO, L.L.C (Incorporated by reference to Exhibit 10.38 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002). 10.36 -- Lease Agreement between Howard Pontiac-GMC, Inc. and North Broadway Real Estate Limited Liability Company (Incorporated by reference to Exhibit 10.39 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002). 10.37* -- Employment Agreement between the Company and Kevin H. Whalen dated November 3, 2002 (Incorporated by reference to Exhibit 10.40 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002). 10.38 -- Lease Agreement between Howard-Ford, Inc. and REHCO EAST, LLC dated as of February 28, 2003. 10.39 -- Amendment and Assignment of Lease between Howard Ford, Inc., Howard-FLM, Inc. and REHCO EAST, LLC dated as of November 1, 2003. 10.40* -- First Amendment to Employment Agreement between the Company and B.B. Hollingsworth, Jr. effective March 1, 2002. 10.41* -- Split Dollar Life Insurance Payment Deferral Letter dated January 28, 2004. 11.1 -- Statement re: computation of earnings per share is included under Note 2 to the financial statements. 14.1 -- Code of Ethics for Specified Officers of Group 1 Automotive, Inc. dated as of May 14, 2003. 21.1 -- Group 1 Automotive, Inc. Subsidiary List. 23.1 -- Consent of Ernst & Young LLP. 31.1 -- Certification of Chief Executive Officer Under Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 -- Certification of Chief Financial Officer Under Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 -- Certification of Chief Executive Officer Under Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 -- Certification of Chief Financial Officer Under Section 906 of the Sarbanes-Oxley Act of 2002.
- -------------- * Management contract or compensatory plan EX-10.25 3 h13155exv10w25.txt FORM OF NISSAN DIVISION DEALER SALES & SERV. AGMT EXHIBIT 10.25 [NISSAN LOGO] NISSAN DEALER SALES & SERVICE AGREEMENT THIS AGREEMENT is entered into effective the day last set forth below by and between the Nissan Division of NISSAN NORTH AMERICA, INC., a California corporation, hereinafter called Seller, and the natural person or entity identified as "Dealer" in the Final Article of this Agreement. INTRODUCTION The purpose of this Agreement is to establish Dealer as an authorized dealer of Nissan Products and to provide for the sale and servicing of Nissan Products in a manner that will best serve the interests of Seller, Dealer, other Authorized Nissan Dealers and owners and purchasers of Nissan Products. This Agreement sets forth: the rights which Dealer will enjoy as an Authorized Nissan Dealer; the responsibilities which Dealer assumes in consideration of its receipt of these rights; and the respective conditions, rights and obligations of Seller and Dealer that apply to Seller's grant to Dealer of such rights and Dealer's assumption of such responsibilities. This is a personal services Agreement. In entering into this Agreement and appointing Dealer as provided below, Seller is relying upon the personal qualifications, expertise, reputation, integrity, experience, ability and representations of the individual(s) named herein as Principal Owner(s) and Executive Manager. Achievement of the purposes of this Agreement is premised upon mutual understanding and cooperation between Seller and Dealer. Dealer has entered into this Agreement in reliance upon Seller's integrity and expressed intention to deal fairly with Dealer and the consuming public. Seller has entered into this Agreement in reliance upon Dealer's integrity and ability and expressed intention to deal fairly with Seller and the consuming public. It is the responsibility of Seller to market Nissan Products throughout the Territory. It is the responsibility of Dealer to actively promote the retail sale of Nissan Products and to provide courteous and efficient service of Nissan Products. The success of Seller and Dealer will depend on how well they each fulfill their respective responsibilities under this Agreement. It is recognized that: Nissan North America, Inc. (hereinafter called "Manufacturer") will endeavor to provide motor vehicle that offer outstanding value to the consuming public; Seller will endeavor to establish a national network of Authorized Nissan Dealers that can provide effective sales and service effort at the retail level; and Dealer will endeavor to fulfill its responsibilities through aggressive, sound, ethical selling practices and through conscientious regard for customer service. Seller and Dealer shall refrain from engaging in conduct or activities which might be detrimental to or reflect adversely upon the reputation of Seller, Manufacturer, Dealer or Nissan Products and shall engage in no discourteous, deceptive, misleading or unethical practices or activities. For consistency and clarity, terms which are used frequently in this Agreement have been defined in Section 1 of the Standard Provisions. All terms used herein which are defined in the Standard Provisions shall have the meaning stated in said Standard Provisions. These definitions should be read carefully for a proper understanding of the provisions in which they appear. To achieve the purposes referred to above, Seller and Dealer agree as follows: ARTICLE FIRST: Appointment of Dealer Subject to the conditions and provisions of this Agreement, Seller: (a) appoints Dealer as an Authorized Nissan Dealer and grants Dealer the non-exclusive right to buy from Seller those Nissan Products specified in Dealer's current Product Addendum hereto, for resale, rental or lease at or from the Dealership Locations established and described in accordance with Section 2 of the Standard Provisions; and (b) grants Dealer a non-exclusive right, subject to and in accordance with Section 6.K of the Standard Provisions, to identify itself as an Authorized Nissan Dealer, to display the Nissan Marks in the conduct of its Dealership Operations and to use the Nissan Marks in the advertising, promotion and sale of Nissan Products in the manner provided in this Agreement. ARTICLE SECOND: Assumption of Responsibilities by Dealer Dealer hereby accepts from Seller its appointment as an Authorized Nissan Dealer and, in consideration of its appointment and subject to the other conditions and provisions of this Agreement, hereby assumes the responsibility for: (a) establishing and maintaining at the Dealership Locations the Dealership Facilities in accordance with Section 2 of the Standard Provisions; (b) actively and effectively promoting the sale at retail (and, if Dealer elects, the leasing and rental) of Nissan Vehicles within Dealer's Primary Market Area in accordance with Section 3 of the Standard Provisions; (c) servicing Nissan Vehicles and for selling and servicing Genuine Nissan Parts and Accessories in accordance with Section 5 of the Standard Provisions; (d) building and maintaining consumer confidence in Dealer and in Nissan Products in accordance with Section 5 of the Standard Provisions; and (e) performance of the additional responsibilities set forth in this Agreement, including those specified in Section 6 of the Standard Provisions. ARTICLE THIRD: Ownership (a) Owners. This Agreement has been entered into by Seller in reliance upon, and in consideration of, the personal qualifications, expertise, reputation, integrity, experience, ability and representations with respect thereto of the Principal Owner(s) named in the Final Article of this Agreement and in reliance upon Dealer's representations concerning the ownership of Dealer as follows: (i) Dealer represents and agrees that the person(s) named as Principal Owner(s) in the Final Article of this Agreement, and only those person(s), shall be the Principal Owner(s) of Dealer; (ii) Dealer represents and agrees that the person(s) named as Other Owner(s) in the Final Article of this Agreement, and only those person(s), shall be the Other Owner(s) of Dealer. (b) Holding Company. Seller requires that a natural person be named as the Principal Owner(s) of Dealer because Seller relies on the personal qualifications, expertise, reputation, integrity, experience, ability and representations of such individuals. If one or more of the owner(s) of Dealer is a corporation, partnership or other entity and not a natural person (hereinafter called "Holding Company"), Dealer and Seller agree that the natural persons listed in the Holding Company Addendum of this Agreement as owners of the Holding Company shall be deemed to be the Principal Owner(s) and Other Owner(s) of Dealer, as the case may be and that the terms and conditions of this Agreement, including without limitation the provisions of this Article Third and Sections 12, 14 and 15 of the Standard Provisions, shall apply to the owner(s) of the Holding Company as well as to Dealer. Dealer represents to Seller and agrees that the Holding Company is owned as indicated in the Holding Company Addendum to this Agreement. (c) Changes in Ownership. In view of the fact that this is a personal services agreement and in view of its objectives and purposes, this Agreement and the rights and privileges conferred on Dealer hereunder are not assignable, transferable or salable by Dealer, and no property right or interest is or shall be deemed to be sold, conveyed or transferred to Dealer under this Agreement. Dealer agrees that any change in the ownership of Dealer specified herein requires the prior written consent of Seller, excepting only changes in the record or beneficial ownership interests of Other Owner(s) not effecting a change in majority control or interest. Dealer shall give Seller prior notice of any proposed change in said ownership requiring the consent of Seller and immediate notice of the death or incapacity of any Principal Owner. No such change, and no assignment of this Agreement or of any right or interest herein, shall be effective against Seller unless and until embodied in an appropriate amendment to or assignment of this Agreement, as the case may be, duly executed and delivered by Seller and by Dealer. Seller shall not, however, unreasonably withhold its consent to any such change. Seller shall have no obligation to transact business with any person who is not named either as a Principal Owner or Executive Manager of Dealer hereunder or otherwise to give effect to any proposed sale or transfer of the ownership or management of Dealer prior to having concluded the evaluation of such a proposal as provided in Section 15 of the Standard Provisions. ARTICLE FOURTH: Management (a) Executive Manager. Seller and Dealer agree that the retention by Dealer of qualified management is of critical importance to the successful operation of Dealer and to the achievement of the purposes and objectives of this Agreement. This Agreement has been entered into by Seller in reliance upon, and in consideration of, the personal qualifications, expertise, reputation, integrity, experience, ability and representations with respect thereto of the person named as Executive Manager in the Final Article of this Agreement and on Dealer's representation to Seller and agreement that the person identified as Executive Manager shall be Dealer's executive manager, shall have full managerial authority for the Dealership Operations, and shall continually provide his or her personal services in operating the dealership and will be physically present at the Dealership Facilities. (b) Changes in Management. In view of the fact that this is a personal services Agreement and in view of its objectives and purposes, Dealer agrees that any change in the Executive Manager from that specified in the Final Article of this Agreement requires the prior written consent of Seller. Dealer shall give Seller prior notice of any proposed change in Executive Manager and immediate notice of the death or incapacity of any Executive Manager. No change in Executive Manager shall be effective unless and until embodied in an appropriate amendment to this Agreement duly executed and delivered by Seller and by Dealer. Subject to the foregoing, Dealer shall make its own, independent decisions concerning the hiring and firing of its employees including without limitation, its Executive Manager. To enable Seller to evaluate and respond to Dealer concerning any proposed change in Executive Manager, Dealer agrees to provide, in the form requested by Seller and in a timely manner, all applications and information customarily requested by Seller to evaluate the proposed change. While Seller shall not unreasonably withhold its consent to any such change, it is agreed that any successor Executive Manager must possess personal qualifications, expertise, reputation, integrity, experience and ability which are, in the opinion of Seller, satisfactory. Seller will determine whether, in its opinion, the proposed change is likely to result in a successful dealership operation with capable management that will satisfactorily perform Dealer's obligations under this Agreement. Seller shall have no obligation to transact business with any person who is not named as an Executive Manager of Dealer hereunder prior to having concluded its evaluation of such person. (c) Evaluation of Management. Dealer and Seller understand and acknowledge that the personal qualifications, expertise, reputation, ability, integrity, experience and ability of the Executive Manager and his or her ability to effectively manage Dealer's day-to-day Dealership Operations is critical to the success of Dealer in performing its obligations under this Agreement. Seller may from time to time develop standards and/or procedures for evaluating the performance of the Executive Manager and of Dealer's personnel generally. Seller may, from time to time, evaluate the performance of the Executive Manager and will advise Dealer and the Executive Manager of the results of such evaluations, and Dealer shall promptly take such action as may be required to correct any deficiencies in the Executive Manager's performance to the reasonable satisfaction of Seller. ARTICLE FIFTH: Additional Provisions The additional provisions set forth in the attached "Nissan Dealer Sales and Service Agreement Standard Provisions," bearing form number NDA-4S/9-88 are hereby incorporated in and made a part of this Agreement. The Notice of Primary Market Area, Dealership Facilities Addendum, Product Addendum, Dealer Identification Addendum, Holding Company Addendum, if applicable, and all Guides referred to in this Agreement (including references contained in the Standard Provisions referred to above) are hereby incorporated in and made a part of this Agreement. Dealer further agrees to be bound by and comply with: the Warranty Manual; Seller's Manuals or Instructions heretofore or hereafter issued by Seller to Dealer; any amendment, revision or supplement to any of the foregoing; and any other manuals heretofore or hereafter issued by Seller to Dealer. ARTICLE SIXTH: Termination of Prior Agreements This Agreement cancels, supersedes and annuls all prior contracts, agreements and understandings except as stated herein, all negotiations, representations and understandings being merged herein. No waiver, modification or change of any of the terms of this Agreement or change or erasure of any printed part of this Agreement or addition to it (except filling of blank spaces and lines) will be valid or binding on Seller unless approved in writing by the President or an authorized Vice-President of Seller. ARTICLE SEVENTH: Term This Agreement shall have a term commencing on the effective date hereof and continuing until terminated by either party in accordance with Section 12 of the Standard Provisions. ARTICLE EIGHTH: License of Dealer If Dealer is required to secure or maintain a license for the conduct of its business as contemplated by this Agreement in any state or jurisdiction where any of its Dealership Operations are to be conducted or any of its Dealership Facilities are located, this Agreement shall not be valid until and unless Dealer shall have furnished Seller with written notice specifying the date and number, if any, of such license or licenses issued to Dealer, Dealer shall notify Seller immediately in writing if Dealer shall fail to secure or maintain any and all such licenses or renewal thereof or, if such license or licenses are suspended or revoked, specifying the effective date of any such suspension or revocation. ARTICLE NINTH: Execution of Agreement This Agreement, and any Addendum or amendment or notice with respect thereto, shall be valid and binding on Seller only when it bears the signature of either the President or an authorized Vice-President of Seller and, when such signature is a facsimile, the manual countersignature of an authorized employee of Seller and a duplicate original thereof is delivered personally or by mail to the main Dealership Location. This Agreement shall bind Dealer only when it is signed by: a duly authorized officer or executive of Dealer if a corporation; one of the general partners of Dealer if a partnership; or Dealer if an individual. ARTICLE TENTH: Special Conditions FINAL ARTICLE Dealer_____________________________________________________________________, is a(an) (SELECT ONE) [ ] individual [ ] partnership [ ] corporation [ ] limited liability company, incorporated or formed under the laws of the State of ___________________________________doing business as____________________________ ________________________________________________________________________________ ("Dealer"). Dealer is located in_________________________________,______________ City State The Principal Owner(s) of Dealer are as follows:
PERCENTAGE NAME RESIDENCE INTEREST - ---- --------- --------
The Other Owner(s) of Dealer are as follows:
PERCENTAGE NAME RESIDENCE INTEREST - ---- --------- --------
The Executive Manager of Dealer is as follows:
PERCENTAGE NAME RESIDENCE INTEREST - ---- --------- --------
IN WITNESS THEREOF, the parties hereto have executed this Agreement in triplicate as of ______________________________________________________________, ________at Carson, California. DEALER: ________________________________________________________________________________ By___________________________________ SELLER: NISSAN DIVISION Title_____________________________ NISSAN NORTH AMERICA, INC. By____________________________________ Title_______________________________ By____________________________________ Form # NDA-4P/4-2000 Title______________________________ EX-10.26 4 h13155exv10w26.txt FORM OF INFINITI DIVISION DEALER SALES & SERV AGMT EXHIBIT 10.26 [INFINITI LOGO] INFINITI DEALER SALES AND SERVICE AGREEMENT THIS AGREEMENT is entered into effective the day last set forth below by and between the INFINITI DIVISION of NISSAN NORTH AMERICA, INC., a California corporation, hereinafter called Seller, and the natural person or entity identified as "Dealer" in the Final Article of this Agreement. INTRODUCTION The purpose of this Agreement is to establish Dealer as an authorized dealer of Infiniti Products and to provide for the sale and servicing of Infiniti Products in a manner that will best serve owners, potential owners and purchasers of Infiniti Products as well as the interests of Seller, Dealer and other Authorized Infiniti Dealers. This Agreement sets forth: the rights which Dealer will enjoy as an Authorized Infiniti Dealer; the responsibilities which Dealer assumes in consideration of its receipt of these rights; and the respective conditions, rights and obligations of Seller and Dealer that apply to Seller's grant to Dealer of such rights and Dealer's assumption of such responsibilities. This is a personal services Agreement. In entering into this Agreement and appointing Dealer as provided below, Seller is relying upon the personal qualifications, expertise, reputation, integrity, experience, ability and representations of the individual(s) named herein as Principal Owner(s) and Executive Manager. Infiniti Products are intended for discriminate owners with the expectation that such owners will be loyal and proud, but also demanding toward Seller and Dealer with respect to Infiniti Products and the manner in which they are sold and serviced. Owners, potential owners and purchasers of Infiniti Products are expected to want, and are entitled to do business with, dealers who enjoy the highest reputation in their communities and have well located, attractive and efficient places of business, courteous personnel and outstanding service and parts facilities. Infiniti Products must be sold by enthusiastic dealers who are not interested in short term results only but are willing to look toward long term goals and who are devoted to creating and maintaining a positive total ownership experience for owners of Infiniti Products. Seller's standard of excellence for Infiniti Products must be matched by the dealers who sell them to the public and who service them during their operative lives. Achievement of the purposes of this Agreement is premised upon mutual understanding and cooperation between Seller and Dealer. Dealer has entered into this Agreement in reliance upon Seller's integrity and expressed intention to deal fairly with Dealer and the consuming public. Seller has entered into this Agreement in reliance upon Dealer's integrity and ability and expressed intention to deal fairly with the consuming public and Seller. It is the responsibility of Seller to market Infiniti Products throughout the Territory. It is the responsibility of Dealer to actively promote the retail sale of Infiniti Products and to provide courteous and efficient service of Infiniti Products. The success of both Seller and Dealer will depend on how well they each fulfill their respective responsibilities under this Agreement. It is recognized that: Seller will endeavor to provide motor vehicles of excellent quality and workmanship and to establish a network of Authorized Infiniti Dealers that can provide an outstanding sales and service effort at the retail level; and Dealer will endeavor to fulfill its responsibilities through aggressive, sound, ethical selling practices and through conscientious regard for customer service in all aspects of its Infiniti Dealership Operations. Seller and Dealer shall refrain from engaging in conduct or activities which might be detrimental to or reflect adversely upon the reputation of Seller, Dealer or Infiniti Products and shall engage in no discourteous, deceptive, misleading or unethical practices or activities. For consistency and clarity, terms which are used frequently in this Agreement have been defined in Section 1 of the Standard Provisions. All terms used herein which are defined in the Standard Provisions shall have the meaning stated in said Standard Provisions. These definitions should be read carefully for a proper understanding of the provisions in which they appear. To achieve the purposes referred to above, Seller and Dealer agree as follows: ARTICLE FIRST: Appointment of Dealer Subject to the conditions and provisions of this Agreement, Seller: (a) appoints Dealer as an Authorized Infiniti Dealer and grants Deafer the non-exclusive right to buy from Seller those Infiniti Products specified in Dealer's current Product Addendum hereto, for resale, rental or lease at or from the Dealership Locations established and described in accordance with Section 2 of the Standard Provisions; and (b) grants Dealer a non-exclusive right, subject to and in accordance with Section 51 of the Standard Provisions, to identify itself as an Authorized Infiniti Dealer, to display the Infiniti Marks in the conduct of its Dealership Operations and to use the Infiniti Marks in the advertising, promotion and sale of Infiniti Products in the manner provided in this Agreement. ARTICLE SECOND: Assumption of Responsibilities by Dealer Dealer hereby accepts from Seller its appointment as an Authorized Infiniti Dealer and, in consideration of its appointment and subject to the other conditions and provisions of this Agreement, hereby assumes the responsibility for: (a) establishing and maintaining at the Dealership Location the Dealership Facilities in accordance with Section 2 of the Standard Provisions; 1 (b) actively and effectively promoting the sale at retail (and, if Dealer elects, the leasing and rental) of Infiniti Vehicles within Dealer's Primary Market Area in accordance with Section 3 of the Standard Provisions; (c) servicing Infiniti Vehicles and for selling and servicing Genuine Parts and Accessories in accordance with Section 4 of the Standard Provisions; (d) building and maintaining consumer confidence in Dealer and in Infiniti Products in accordance with Sections 3, 4, and 5 of the Standard Provisions; and (e) performance of the additional responsibilities set forth in this Agreement, including those specified in Section 5 of the Standard Provisions. ARTICLE THIRD: Ownership (a) OWNERS. This Agreement has been entered into by Seller in reliance upon, and in consideration of, the personal qualifications, expertise, reputation, integrity, experience, ability and representations with respect thereto of the Principal Owner(s) named in the Final Article of this Agreement and in reliance upon Dealer's representations concerning the ownership of Dealer as follows: (i) Dealer represents and agrees that the person(s) named as Principal Owner(s) in the Final Article of this Agreement, and only those person(s), shall be the Principal Owner(s) of Dealer. (ii) Dealer represents and agrees that the person(s) named as Other Owner(s) in the Final Article of this Agreement, and only those person(s), shall be the Other Owner(s) of Dealer. (b) HOLDING COMPANY. Seller requires that a natural person be named as the Principal Owner(s) of Dealer because Seller relies on the personal qualifications, expertise, reputation, integrity, experience, ability and representations of such individuals. If one or more of the Principal Owners of Dealer is a corporation, partnership or other entity and not a natural person (hereinafter called "Holding Company"), Dealer and Seller agree that the natural persons listed in the Holding Company Addendum of this Agreement as owners of the Holding Company shall be deemed to be the Principal Owner(s) and/or Other Owner(s) of Dealer, as the case may be, and that the terms and conditions of this Agreement, including without limitation the provisions of this Article Third and Sections 11, 13 and 14 of the Standard Provisions, shall apply to the owner(s) of the Holding Company as well as to Dealer. Dealer represents to Seller and agrees that the Holding Company is owned as indicated in the Holding Company Addendum to this Agreement. (c) CHANGES IN OWNERSHIP. In view of the fact that this is a personal services Agreement and in view of its objectives and purposes, this Agreement and the rights and privileges conferred on Dealer hereunder are not assignable, transferable or salable by Dealer, and no property right or interest is or shall be deemed to be sold, conveyed or transferred to Dealer under this Agreement. Dealer agrees that any change in the ownership of Dealer specified herein requires the prior written consent of Seller, excepting only changes in the record or beneficial ownership interests of Other Owners not effecting a change in majority control or interest. Dealer shall give Seller prior notice of any proposed change in said ownership requiring the consent of Seller and immediate notice of the death or incapacity of any Principal Owner. No such change, and no assignment of this Agreement or of any right or interest herein, shall be effective against Seller unless and until embodied in an appropriate amendment to or assignment of this Agreement, as the case may be, duly executed and delivered by Seller and by Dealer. Seller shall not, however, unreasonably withhold its consent to any such change. Seller shall have no obligation to transact business with any person who is not named either as a Principal Owner or Executive Manager of Dealer hereunder or otherwise to give effect to any proposed sale or transfer of the ownership or management of Dealer prior to having concluded the evaluation of such a proposal as provided in Section 14 of the Standard Provisions. ARTICLE FOURTH: Management (a) EXECUTIVE MANAGER. Seller and Dealer agree that the retention by Dealer of qualified management is of critical importance to the successful operation of Dealer and to the achievement of the purposes and objectives of this Agreement. This Agreement has been entered into by Seller in reliance upon, and in consideration of, the personal qualifications, expertise, reputation, integrity, experience, ability and representations with respect thereto of the person named as Executive Manager in the Final Article of this Agreement and on Dealer's representation to Seller and agreement that the person identified as Executive Manager shall be Dealer's executive manager, shall have full managerial authority for the Dealership Operations, and shall continually provide his or her personal services in operating the dealership and will be physically present at the Dealership Facilities on a full-time basis. (b) CHANGES IN MANAGEMENT. In view of the fact that this is a personal services Agreement and in view of its objectives and purposes, Dealer agrees that any change in the Executive Manager from that specified in the Final Article of this Agreement requires the prior written consent of Seller. Dealer shall give Seller prior notice of any proposed change in Executive Manager and immediate notice of the death or incapacity of any Executive Manager. No change in Executive Manager shall be effective unless and until embodied in an appropriate amendment to this Agreement duly executed and delivered by Seller and by Dealer. Subject to the foregoing, Dealer shall make its own, independent decisions concerning the hiring and firing of its employees, including, without limitation, its Executive Manager. To enable Seller to evaluate and respond to Dealer concerning any proposed change in Executive Manager, Dealer agrees to provide, in the form requested by Seller and in a timely manner, all applications and information customarily requested by Seller to evaluate the proposed change. While Seller shall not unreasonably withhold its consent to any such change, it is agreed that any successor Executive Manager must possess personal qualifications, expertise, reputation, integrity, experience and ability which are, in the opinion of Seller, satisfactory. Seller will determine whether, in its opinion, the proposed change is likely to result in a successful dealership operation with capable management that will satisfactorily perform Dealer's obligations 2 under this Agreement. Seller shall have no obligation to transact business with any person who is not named as an Executive Manager of Dealer hereunder prior to having concluded its evaluation of such person. (c) EVALUATION OF MANAGEMENT. Dealer and Seller understand and acknowledge that the personal qualifications, expertise, reputation, integrity, experience and ability of the Executive Manager and his or her ability to effectively manage Dealer's day-to-day Dealership Operations is critical to the success of Dealer in performing its obligations under this Agreement. Seller may from time to time develop standards and/or procedures for evaluating the performance of the Executive Manager and of Dealer's personnel generally. Seller may, from time to time, evaluate the performance of the Executive Manager and will advise Dealer and the Executive Manager of the results of such evaluations and the way in which any deficiencies affect Dealer's performance of its obligations under this Agreement. ARTICLE FIFTH: Additional Provisions The additional provisions set forth in the attached "Infiniti Dealer Sales and Service Agreement Standard Provisions," bearing form number IA-4S-D-7/89, are hereby incorporated in and made a part of this Agreement. The Notice of Primary Market Area, Dealership Facilities Addendum, Product Addendum, Dealer Operating Requirements Addendum, Dealership Identification Addendum, Holding Company Addendum, if applicable, and all Guides and Standards referred to in this Agreement (including references contained in the Standard Provisions referred to above) are hereby incorporated in and made a part of this Agreement. Dealer further agrees to be bound by and comply with: the Warranty Manual; Seller's Manuals or Instructions heretofore or hereafter issued by Seller to Dealer; any amendment, revision or supplement to any of the foregoing; and any other manuals heretofore or hereafter issued by Seller to Dealer. ARTICLE SIXTH: Termination of Prior Agreements This Agreement cancels, supersedes and annuls all prior contracts, agreements and understandings except as stated herein, all negotiations, representations and understandings being merged herein. No waiver, modification or change of any of the terms of this Agreement or change or erasure of any printed part of this Agreement or addition to it (except filling of blank spaces and lines) will be valid or binding on Seller unless approved in writing by the President or an authorized Vice-President of Seller. ARTICLE SEVENTH: Term This Agreement shall have a term commencing on the effective date hereof and continuing until terminated by either party in accordance with Section 11 of the Standard Provisions. ARTICLE EIGHTH: License of Dealer If Dealer is required to secure or maintain a license for the conduct of its business as contemplated by this Agreement in any state or jurisdiction where any of its Dealership Operations are to be conducted or any of its Dealership Facilities are located, this Agreement shall not be valid until and unless Dealer shall have furnished Seller with written notice specifying the date and number, if any, of such license or licenses issued to Dealer, Dealer shall notify Seller immediately in writing if Dealer shall fail to secure or maintain any and all such licenses or renewal thereof or, if such license or licenses are suspended or revoked, specifying the effective date of any such suspension or revocation. ARTICLE NINTH: Execution of Agreement This Agreement, and any Addendum or amendment or notice with respect thereto, shall be valid and binding on Seller only when it bears the signature of either the President or an authorized Vice-President of Seller and, when such signature is a facsimile, the manual countersignature of an authorized employee of Seller at the Director level and a duplicate original thereof is delivered personally or by mail to the Dealership Location. This Agreement shall bind Dealer only when it is signed by: a duly authorized officer or executive of Dealer if a corporation; one of the general partners of Dealer if a partnership; or Dealer if an individual. ARTICLE TENTH: Special Conditions 3 FINAL ARTICLE Dealer is_______________________________________________________________, a (an) (Select One) [ ] individual [ ] partnership [ ] corporation [ ] limited liability company, incorporated or formed under the laws of the State of ________________________________________________________________________ doing business as_____________________________________________________________________ ("Dealer"). Dealer is located in_______________________________________________, __________________________________ The Principal Owner(s) of Dealer are as follows:
PERCENTAGE NAME RESIDENCE INTEREST - ---- --------- --------
The Other Owner(s) of Dealer are as follows:
PERCENTAGE NAME RESIDENCE INTEREST - ---- --------- --------
The Executive Manager of Dealer is as follows:
PERCENTAGE NAME RESIDENCE INTEREST - ---- --------- --------
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in triplicate effective as of the____________________day of ______________________, _________at Carson, California. (YEAR) DEALER: SELLER: INRNITI DIVISION NISSAN NORTH AMERICA, INC. ___________________________________ By____________________________________ Name Signature By__________________________________ ______________________________________ Signature Type Name & Title ____________________________________ By____________________________________ Type Name & Title Signature ______________________________________ Type Name & Title 4 EX-10.38 5 h13155exv10w38.txt LEASE AGREEMENT DATED 2/28/2003 EXHIBIT 10.38 LEASE AGREEMENT ------------------- BETWEEN REHCO EAST, L.L.C. (LANDLORD) AND HOWARD FORD, INC. (TENANT) Street Address: 616 W. Memorial Drive, Oklahoma City, Oklahoma Dealership Name: Bob Howard Lincoln Mercury LEASE AGREEMENT This Lease Agreement ("LEASE") is entered into as of the 28th, day of February, 2003 ("LANDLORD"), and HOWARD FORD, INC., a Delaware corporation ("TENANT"). ARTICLE 1 LEASE OF PROPERTY Section 0.1 PREMISES LEASED. Landlord leases to Tenant, and Tenant leases from Landlord the real property described on Exhibit A (the "LAND"), together with all of Landlord's rights, interests, estates, and appurtenances thereto, all improvements thereon, and all other rights, titles, interests, and estates, if any, of the Landlord in adjacent streets and roads. Section 0.2 PREMISES DEFINED. All of the Land and the properties, rights, and interests leased to Tenant pursuant to Section 1.1, together with all improvements now or hereafter constructed thereon, are hereinafter collectively referred to as the "PREMISES." Section 0.3 HABENDUM. To have and to hold the Premises, together with all and singular the rights, privileges, and appurtenances thereunto attaching or in anywise belonging, exclusively unto Tenant, its successors and assigns, upon the terms and conditions set forth herein and subject to the matters set forth on EXHIBIT B. ARTICLE 2 TERM OF LEASE Unless sooner terminated as herein provided, this Lease shall continue in effect for a term ("TERM") commencing on the Commencement Date, as hereinafter defined, and ending at 11:59 p.m., Oklahoma City, Oklahoma time, on the first date to occur of December 31, 2027 or the Early Termination Date. The EARLY TERMINATION DATE shall be December 31, 2017 or December 31, 2022; whichever of such dates (each of which dates is herein referred to as a "POSSIBLE EARLY TERMINATION DATE") is designated by Tenant, in its sole discretion, in a written notice delivered to Landlord no less than six months prior to the Early Termination Date. ARTICLE 3 RENT Section 3.1 BASE RENT. (a) Subject to the terms and provisions contained in this Section 3.1, Tenant shall pay Landlord monthly Base Rent of an amount equal to Landlord's cost of the Land and the Construction Costs, times 9.75%. (For example, if the actual cost is $3,500,000 the annual base rent during the Initial Term would be $341,250 per annum or $28,437.50 per month.). The actual cost of the Land is $2,250,000. "Construction Costs" shall be defined as the actual cost of the construction of building and other improvements, inclusive of direct interest costs incurred relative to the construction of buildings and improvements (but excluding any interest associated with the purchase of the land). Construction Costs shall include the actual amounts paid to contractors, subcontractors, architects and surveyors, for the zoning and construction of the Improvements. Base Rent shall be paid in advance on or before the first day of each calendar month during the Term, subject to adjustment as hereafter provided., in advance on or before the first day of each calendar month 2 during the Term, subject to adjustment as hereafter provided. If the Term commences on a day other than the first day of a calendar month, or ends on a day other than the last day of a calendar month, then the Base Rent for such month shall be prorated on the basis of 1/30th of the monthly Base Rent for each day of such month. If the CPI on any Adjustment Date shall be greater than the CPI for the Commencement Date, monthly Base Rent commencing on the Adjustment Date shall be adjusted to be the original monthly Base Rent specified in this Section 3.1(a) plus an amount equal to one-half (?) of the product obtained by multiplying: (i) the original monthly Base Rent specified in this Section 3.1 (a) by (ii) the percentage increase in the CPI from the Commencement Date through the Adjustment Date. "ADJUSTMENT DATE" shall be January 1 of each of the following years: 2008; 2013; 2018; 2023, and the term "CPI" shall have the meaning specified therefor in Section 13.5. During the Term, none of Landlord's Financing may be modified or refinanced except in accordance with the following: (i) Landlord may refinance or modify Landlord's Financing if the effect of any such modification does not result in an increase in principal and interest payable by Landlord during any Lease Year which exceeds Primary Base Rent required to be paid by Tenant during such Lease Year. As an example and not by way of limitation, Landlord may refinance Landlord's Financing by (x) increasing the principal amount thereof while maintaining the amount of the current principal and interest payments (or payments which are less than the current payments) with respect to Landlord's Financing but providing for a balloon payment which is required to be paid after the end of the Term, or (y) maintaining the amount of the current principal and interest payments on Landlord's Financing (or payments which are less than the current payments) but providing for an increased rate of interest thereunder with an accrual feature permitting Landlord to defer accrued but unpaid interest by adding the same to the principal balance of Landlord's Financing so long as the payment of such accrued but unpaid interest is required to be paid after the end of the Term. In connection with any refinancing or modification permitted under this clause (i), Landlord agrees to obtain for Landlord and Tenant from the applicable refinancing lender a mutual recognition and attornment agreement complying with all of the terms and provisions of Article 11. (ii) If Landlord desires to refinance or modify Landlord's Financing in any manner which does not comply with the requirements of the immediately preceding clause (i), then prior to the date of such refinancing, Landlord must deliver to Tenant from the refinancing lender a mutual recognition and attornment agreement complying with all of the terms and provisions of Article 11. (b) As used herein, "COMMENCEMENT DATE" means the first day of the month following completion of construction of the Lincoln Mercury dealership facility improvements (including receipt of completion/occupancy permits from the appropriate City of Oklahoma City officials) and the term "LEASE YEAR" means the 12-month period commencing on the Commencement Date and each subsequent 12-month period during the Term. Section 3.2 ADDITIONAL RENT AND RENT. All amounts required to be paid by Tenant under the terms of this Lease, other than Base Rent, are herein from time to time collectively referred to as "ADDITIONAL RENT." Base Rent and Additional Rent are herein collectively referred to as "RENT." Section 3.3 PAYMENT OF RENT. Base Rent shall be payable to Landlord at the original or changed address of Landlord as set forth in Section 13.1 or to such other persons or at 3 such other addresses in the United States of America as Landlord may designate from time to time in writing to Tenant; however, if Tenant receives notice of a default under the Landlord's Financing (defined below), then Tenant shall have the right, but not the obligation, to pay to Landlord's Financing Lender (defined below) any sums due and owing on such Landlord's Financing and all such payments by Tenant shall reduce the amount of Rent owing to Landlord. Additional Rent shall be paid as herein set forth. Base Rent shall be paid by Tenant in lawful money of United States of America without notice, demand, or offset except as provided in this Lease. ARTICLE 4 IMPOSITIONS, UTILITIES, NET LEASE Section 4.1 IMPOSITIONS DEFINED. "IMPOSITIONS" means all taxes, assessments, use and occupancy taxes, water, storm water and sewer charges, rates and rents, charges for public utilities, excises, levies, license and permit fees, and other charges by any public authority, general and special, ordinary and extraordinary, foreseen and unforeseen, of any kind and nature whatsoever, including penalties levied for failure by Tenant to pay any of same in a timely manner, which shall or may during the Term be assessed, levied, charged, confirmed or imposed by any Governmental Authority (defined below) upon (a) the Premises or any part thereof, (b) the buildings or improvements now or hereafter comprising a part thereof, (c) the appurtenances thereto or the sidewalks, streets, or vaults adjacent thereto, (d) the rent and income received by or for the account of Tenant from any sublessees or for any use or occupation of the Premises, (e) such franchises, licenses, and permits as may be pertinent to the use of the Premises, or (f) any documents to which the Tenant is a party creating or transferring an interest or estate in the Premises; in each case, only to the event the same are attributable to the Premises. Impositions shall not include any income tax, capital levy, estate, succession, inheritance or transfer taxes, or similar tax of Landlord; any franchise tax imposed upon any owner of the fee of the Premises; or any income, profits, or revenue tax, assessment, or charge imposed upon the rent or other benefit received by Landlord under this Lease by any municipality, county, state, the United States of America, or any other governmental body, subdivision, agency, or authority (all of such foregoing governmental bodies are collectively referred to herein as "GOVERNMENTAL AUTHORITIES"). If at any time during the Term the present method of taxation shall be so changed that the whole or any part of the taxes, assessments, levies, impositions or charges now levied, assessed or imposed on real estate and improvements thereon (herein collectively called "AD VALOREM TAXES") shall be discontinued and in whole or partial substitution therefor, taxes, assessments, levies, impositions, or charges shall be levied, assessed, and/or imposed wholly or partially as a capital levy or otherwise on the rents received from real estate or the Rents reserved herein or any part thereof, then such substitute taxes, assessments, levies, impositions, or charges (herein collectively called "SUBSTITUTE TAXES"), to the extent so levied, assessed, or imposed, shall be deemed to be included within the term "Impositions." Notwithstanding the foregoing, if a discontinuance occurs as to only a portion of Ad Valorem Taxes and the substitution therefor provided in the immediately preceding sentence has occurred, then if the remaining Ad Valorem Taxes are subsequently reduced, then the amounts that Tenant is required to pay with respect to Substitute Taxes shall be reduced by an amount equal to the fraction, the numerator of which is the amount of the reduction in the remaining portion of Ad Valorem Taxes over the amount of Ad Valorem Taxes immediately prior to such reduction. Section 4.2 TENANT'S OBLIGATIONS. During the Term, Tenant will pay all Impositions before they become delinquent. Impositions that are payable by Tenant for the tax year in which this Lease commences as well as during the year in which the Term ends shall be apportioned so that Tenant shall pay its share of the Impositions payable by Tenant for the portion 4 of such Taxes allocable to the portion of such year occurring during the Term. Where any Imposition that Tenant is obligated to pay may be paid pursuant to law in installments and shall only be obligated to pay such installments that become due during the Term, Tenant may pay such Imposition in installments as and when such installments become due. Tenant shall, if so requested, deliver to Landlord evidence of due payment of all Impositions Tenant is obligated to pay hereunder, concurrently with the making of such payment. If Landlord's Financing Lender requires Landlord to prepay Ad Valorem Taxes to Lender or its designee, then upon notification from Landlord to Tenant, Tenant shall pay to Landlord with each payment of Basic Rent due hereunder an amount equal to one-twelfth (1/12th) of the estimated Ad Valorem Taxes for the then applicable calendar year. Such estimate shall be based on the actual Ad Valorem Taxes paid for the Premises for the immediately preceding calendar year. Notwithstanding anything to the contrary contained in this Lease including, without limitation, this Section 4.2, Tenant's obligation to pay Ad Valorem Taxes as part of Impositions shall be reduced by the amount of any payments made to Landlord in accordance with the foregoing. In the event that such payments by Tenant exceed the amounts actually paid in connection with such Ad Valorem Taxes, Landlord shall promptly return the excess to Tenant. Landlord agrees that to the extent that Landlord has collected any portion of such Ad Valorem Taxes from Tenant, Landlord shall pay or cause to be paid all such sums to the applicable taxing authorities on or before the applicable due date thereof to satisfy all applicable Ad Valorem Taxes, and the remainder shall be returned to Tenant in accordance with the foregoing terms. Section 4.3 TAX CONTEST. Tenant may, at its expense, contest the validity or amount of any Imposition for which it is responsible, in which event the payment thereof may be deferred, as permitted by law, during the pendency of such contest, if diligently prosecuted. Landlord shall cooperate with Tenant in connection with any such contest but Landlord shall not be required to spend any sums or incur any liability in cooperating with Tenant. Nothing herein contained, however, shall be construed to allow any Imposition to remain unpaid for such length of time as would permit the Premises, or any part thereof, to be sold or seized by any Governmental Authority for the nonpayment thereof Section 4.4 EVIDENCE CONCERNING IMPOSITIONS. The certificate, advice, bill, or statement issued or given by the appropriate officials authorized by law to issue the same or to receive payment of any Imposition of the existence, nonpayment, or amount of such Imposition shall be prima facie evidence for all purposes of the existence, nonpayment, or amount of such Imposition. Section 4.5 UTILITIES. Tenant shall pay all charges for gas, electricity, light, heat, air conditioning, power, telephone and other communication services, and all other utilities and similar services rendered or supplied to the Premises, and all water rents, sewer service charges, or other similar charges levied or charged against, or in connection with, the Premises. Section 4.6 NET LEASE. Except as expressly provided herein (including, without limitation, Section 6.3), Landlord shall not be required to make any expenditure, incur any obligation, or incur any liability of any kind whatsoever in connection with the Premises or the financing, construction, maintenance, operation, or repair of the Premises. It is expressly understood and agreed that this is a completely net lease intended to assure Landlord the rentals herein reserved on an absolute net basis. ARTICLE 5 IMPROVEMENTS Section 5.1 ALTERATIONS. At any time and from time to time during the Term, Tenant may perform such alteration, renovation, repair, refurbishment, and other work (herein such 5 matters being connectively called the "ALTERATIONS") with regard to any Improvements as Tenant may elect. All buildings, structures, and other improvements located at any time on the Land are herein called the "IMPROVEMENTS." Any and all alteration, renovation, repair, refurbishment, or other work with regard thereto shall be performed, in accordance with the following "CONSTRUCTION STANDARDS" herein so referenced): (i) All such construction or work shall be performed in a good and workmanlike manner in accordance with good industry practice for the type of work in question; (ii) All such construction or work shall be done in compliance with all applicable building codes, ordinances, and other laws or regulations of Governmental Authorities having jurisdiction; (iii) No such construction or work shall be commenced until there shall have been first obtained all licenses, permits, and authorizations required of all Governmental Authorities having jurisdiction; (iv) Tenant shall have obtained and shall maintain in force and effect the insurance coverage required in Article 7 with respect to the type of construction or work in question; (v) After commencement, such construction or work shall be prosecuted with due diligence to its completion; (vi) Without the prior written consent of Landlord, which shall not be unreasonably withheld or delayed and shall be deemed given if a request is not approved or denied within thirty (30) days after receipt, no Alteration shall be made which (x) involves any material repairs or modifications to the structural portions of the Premises, or (y) would impair the market value, structural integrity or usefulness of the Premises for the purposes for which the same are presently being used; and (vii) Tenant shall furnish Landlord with a copy of all plans and specifications relating to each Alteration to the extent that such plans and specifications have been furnished to Tenant. Section 5.2 MECHANIC'S AND MATERIALMEN'S LIENS. Tenant shall have no right, authority, or power to bind Landlord or any interest of Landlord in the Premises for any claim for labor or for material or for any other charge or expense incurred in construction of any Improvements or performing any alteration, renovation, repair, refurbishment, or other work with regard thereto, nor to render Landlord's interest in the Premises liable for any lien or right of lien for any labor, materials, or other charge or expense incurred in connection therewith, and Tenant shall in no way be considered as the agent of Landlord in the construction, erection, or operation of any such Improvements. If any liens or claims for labor or materials supplied or claimed to have been supplied to the Premises shall be filed, Tenant shall promptly pay or bond such liens to Landlord's reasonable satisfaction or otherwise obtain the release or discharge thereof. Section 5.3 OWNERSHIP OF IMPROVEMENTS. During the Term all currently existing Improvements shall be solely the property of Landlord. All other Improvements which may be added by Tenant (which do not constitute replacements of existing Improvements) shall be the property of Tenant, but at the end of the Term, all then-existing Improvements shall be the property of Landlord. However, upon expiration or earlier termination of this Lease, Tenant shall have the right to remove all movable equipment, furniture, furnishings and other personal property located in the Premises and other items not permanently attached to the Premises provided that Tenant repairs any damages 6 caused by the removal of such items. Section 5.4 CONDITION OF IMPROVEMENTS. Except as to any asbestos which may be present, whether friable or unfriable, Tenant acknowledges that it accepts the Improvements "as-is" and that except for the representations and warranties expressly set forth in this Lease and in Exhibit C hereto, Landlord makes no representations or warranties as to the condition of the Improvements. Landlord shall remain fully liable and responsible for the presence of asbestos on any portion of the Premises prior to the date of this Lease even if such asbestos is in an unfriable state on the date of this Lease and Tenant thereafter disturbs such asbestos in any manner including, without limitation, in connection with any alterations performed by Tenant on the Premises. If Tenant intentionally disturbs or causes to be disturbed by any contractor or other party any asbestos presently located on the Premises of which Tenant has actual knowledge, then any such disturbance of such asbestos shall only be done in accordance with all laws, regulations, ordinances, or requirements of any Governmental Authority having jurisdiction in the Premises including, without limitation, those which govern the disposition of Hazardous Materials. ARTICLE 6 USE, MAINTENANCE, AND REPAIRS Section 6.1 USE. (a) Subject to the terms and provisions hereof, Tenant may use and enjoy the Premises only for the sale, lease, trade or repair of motor or other vehicles and other uses in the course of prudent business practices normally associated therewith including, without limitation, the sale of parts and services. Without limiting the generality of the foregoing, the provisions relating to use of the Premises shall be broadly construed to encompass all uses normally associated with premises occupied by automobile, boat and recreational vehicle dealerships. Tenant shall not use or occupy, permit the Premises to be used or occupied, nor do or permit anything to be done in or on the Premises in a manner which would constitute a public or private nuisance, or which would violate (i) any laws, regulations, ordinances, or requirements of any Governmental Authority having jurisdiction in the Premises including, without limitation, those which relate to Hazardous Materials, or (ii) any recorded restrictive covenants covering the Premises provided that such restrictive covenants do not impair Tenant's use of the Premises for the purposes set forth herein. (b) Tenant covenants and agrees that Tenant shall not at any time maintain on, dispose of or generate on or discharge or release to or from the Premises, or permit any party in possession through or under Tenant to maintain on, dispose of, discharge from or generate or release on the Premises, any "Hazardous Materials" (hereafter defined), except for (i) any Hazardous Materials that may be used, generated or maintained in the ordinary course of Tenant's operations at the Premises for the use permitted under Section 6.1(a), and (ii) any asbestos in any form existing on the Premises as of the date of this Lease. Subject to the foregoing, Tenant or any party in possession through or under Tenant or any persons occupying or present on the Premises with the consent of Tenant shall not at any time discharge from, spill or release to the Premises any Hazardous Materials. Except for any asbestos in any form existing on the Premises as of the date of this Lease (the proper disposition of which shall always be the responsibility of Landlord), Tenant agrees to comply, and to cause all its employees, agents, contractors, invitees, customers and any other persons occupying or present on the Premises with the consent of Tenant to comply, with all applicable building codes and other federal, state and municipal laws, directives, orders, ordinances and regulations (collectively "Laws") relating to Hazardous Materials with respect to any use by Tenant of such Hazardous Materials and with all Laws relating to the environment. The term "Hazardous Materials" as used herein shall include any hazardous waste, hazardous substances or any pollutant or contaminant as defined by 7 42 U.S.C. Section 9601, and any toxic substances, petroleum, oil, asbestos or other hazardous materials, chemical or substances now or hereafter regulated by any Laws relating to hazardous or toxic materials, wastes or substances and/or the environment. The foregoing covenants and agreements of Tenant shall survive the term and expiration or termination of this Lease, and Tenant shall immediately notify Landlord of its receipt of any report, citation, notice or other writing by, to or from any governmental or quasi-government authority and power to regulate or oversee any of the foregoing activities or in any way related to or connected with Hazardous Materials. Section 6.2 MAINTENANCE AND REPAIRS BY TENANT. Subject to Tenant's rights under this Lease including, without limitation, Article 5 and Article 8, and Landlord's obligations under this Lease including, without limitation, the provisions of Section 6.3, Tenant shall maintain the Premises including, without limitation, the roof (but excluding the structural support components thereof) and the sidewalks and curbs around the Premises in good order, repair, and condition at all times. In connection with Tenant's maintenance of the roof of the Premises, if Tenant replaces any portion of the roof then such replaced portion shall be deemed by the parties hereto to have a useful life equal to ten years from the date of completion of such replacement ("Completion Date"). Except as to any Tenant New Improvements (as defined in Section 6.3), in the event Tenant has replaced any portion of the roof of the Premises and prior to the end of the ten-year useful life of such replace portion Tenant has exercised its right to terminate this Lease in accordance with the provisions contained herein, then Landlord shall pay to Tenant on the date that this Lease is terminated an amount equal to the cost of such replaced portion of the roof times a fraction, the numerator of which is 120 minus the number of months from the Completion Date to the date this Lease is terminated, and the denominator of which is 120. Section 6.3 MAINTENANCE AND REPAIRS BY LANDLORD. Landlord shall maintain and repair all structural portions of the Premises including, without limitation, the foundation, all structural supports relating to the roof of the Premises and all other structural support components of the Premises (herein collectively called "Structural Components"). Subject to the immediately following sentence, Landlord shall not be liable for any failure to make such repairs or to perform any maintenance unless Landlord fails to commence such repairs within thirty (30) days after its receipt of written notice of a need for such repairs or maintenance from Tenant and diligently and continuously prosecutes the completion of such repairs or maintenance on or before one-hundred eighty (180) days after its receipt of such notice. In connection with any maintenance or repair obligation of Landlord set forth herein which Landlord fails to perform promptly upon receipt of notice from Tenant and which is an imminent threat to the health, safety or welfare of any persons on the Premises ("Emergency Repairs") and in addition to all other remedies Tenant may have under this Lease and at law and in equity, Tenant may perform such Emergency Repairs and shall be entitled to offset the amounts necessary for such maintenance against any Rent due under this Lease in the regular order of payment. If Landlord fails to maintain and repair the Premises in accordance with the foregoing provisions, then Tenant shall have the option of either (i) performing such maintenance or repairs and Tenant shall be entitled to credit against the next accruing monthly rental payments all amounts relating to such maintenance and repairs, (ii) terminating this Lease by giving written notice thereof to Landlord, except in the case of Emergency Repairs, which are governed by the foregoing provisions, or (iii) pursuing any and all other remedies available to Tenant under this Lease, at law or in equity. Notwithstanding anything to the contrary contained in this Section 6.3, in the event Tenant constructs or causes to be constructed any new improvements ("Tenant New Improvements") or causes any of the existing Structural Components to be modified in any manner, then Landlord shall have no maintenance or repair obligations with respect to such new improvements or the modified existing Structural Components to extent so modified by Tenant. ARTICLE 7 8 INSURANCE AND INDEMNITY Section 7.1 BUILDING INSURANCE. Tenant will, at its cost and expense, keep and maintain in force the following policies of insurance: (1) Insurance on the Improvements against loss or damage by fire and against loss or damage by any other risk now and from time to time insured against by "extended coverage" provisions of policies generally in force on improvements of like type in the city in which the Premises are located, and in builder's risk completed value form during construction, in amounts sufficient to provide coverage for the full insurable value of the Improvements; the policy for such insurance shall have a replacement cost endorsement or similar provision. "FULL INSURABLE VALUE," shall mean actual replacement value (exclusive of cost of excavation, foundations, and footings below the surface of the ground or below the lowest basement level), and such full insurable value shall be confirmed from time to time at the request of Landlord by one of the insurers. (2) Boiler and pressure apparatus insurance to the limit of not less than $-0- with respect to any one accident, such limit to be increased if requested by Landlord by an amount which may be reasonable at the time. If the Improvements shall be without a boiler plant, no such boiler insurance will be required. (3) Workman's Compensation Insurance as to Tenant's employees involved in the construction, operation, or maintenance of the Premises in compliance with applicable law. (4) Such other insurance against other insurable hazards which at the time are commonly insured against in the case of improvements similarly situated, due regard being given to the height and type of the Improvements, their construction, location, use, and occupancy. Section 7.2 LIABILITY INSURANCE. Tenant shall secure and maintain in force comprehensive general liability insurance, including contractual liability specifically applying to the provisions of this Lease and completed operations liability, with limits of not less than $6,000,000 with respect to bodily injury or death to any number of persons in any one accident or occurrence and with respect to property damage in any one accident or occurrence, such limits to be increased in the event of request by Landlord by an amount which may be reasonable at the time. Section 7.3 POLICIES. All insurance maintained in accordance with the provisions of this Article 7 shall be issued by companies reasonably satisfactory to Landlord, the Landlord's Financing Lender and all Permitted Mortgagees (hereafter defined), and shall be carried in the name of both Landlord and Tenant, as their respective interests may appear, and shall contain a mortgagee clause acceptable to the Landlord's Financing Lender and the Permitted Mortgagees. All property policies shall (i) be subject to prior written approval of Landlord, which shall not be unreasonably withheld or delayed, and (ii) expressly provide that any loss thereunder may be adjusted with Tenant, Landlord's Financing Lender and Permitted Mortgagees, but, unless required otherwise under Landlord's Financing, shall be payable to Tenant and disbursed as set forth in Section 8.2. All property and liability insurance policies shall name Landlord as an additional named insured and shall include contractual liability endorsements. Tenant shall furnish Landlord, Landlord's Financing Lender and each Permitted Mortgagee with duplicate originals or copies certified as being true and correct of all insurance policies required under this Article 7, and shall furnish and maintain with each of such parties, at all times, a certificate of the insurance carrier certifying that such insurance shall not be canceled without at least fifteen (15) days advance written notice to each of such parties. Section 7.4 TENANT'S INDEMNITY. Subject to Section 7.6, Tenant shall indemnify 9 and hold harmless Landlord, its shareholders, partners, trustees, members, directors, officers, employees ant its successors ant assigns (the "INDEMNIFIED LANDLORD PARTIES"), from all claims, suits, actions, and proceedings whatsoever ("CLAIMS") which may be brought or instituted on account of or growing out of any Default and any and all injuries or damages, including death, to persons or property on the Premises and all losses, liabilities, judgments, settlements, costs, penalties, damages, and expenses relating thereto, including but not limited to attorneys' fees and other costs of defending against, investigating, and settling the Claims, to the extent, but only to the extent, such Claims are not attributable to (i) events or conditions that occurred or existed, in whole or in part, prior to the date when Tenant first occupied the Premises or (ii) any Structural Components that Landlord is required to maintain under the terms of Section 6.3. Tenant shall assume on behalf of the Indemnified Landlord Parties and conduct with due diligence and in good faith the defense of all such Claims against any of the Indemnified Landlord Parties. Tenant may contest the validity of any such Claims, in the name of Landlord or Tenant, as Tenant may deem appropriate, provided that the expenses thereof shall be paid by Tenant. The foregoing covenants and agreements of Tenant shall survive the Term and expiration or termination of this Lease. Section 7.5 LANDLORD'S INDEMNITY. Subject to Section 7.6, Landlord shall indemnify and hold harmless Tenant, its shareholders, partners, trustees, members, directors, officers, employees and its successors and assigns (the "INDEMNIFIED TENANT PARTIES"), from all Claims which may be brought or instituted on account of or growing out of any default by Landlord of its obligations under this Lease and all injuries or damages, including death, to persons or property on the Premises and all losses, liabilities, judgments, settlements, costs, penalties, damages, and expenses relating thereto, including but not limited to attorneys' fees and other costs of defending against, investigating, and settling the Claims, to the extent, but only to the extent, any such Claims are attributable to or arise out of events or conditions that (i) existed or occurred, in whole or in part, prior to the date when Tenant first occupied the Premises, (ii) arise out of the failure of any of Landlord's representations or warranties made in this Lease or in Exhibit C to be true and correct or (iii) relate to asbestos in any form which is present on the Premises prior to the date of this Lease. Landlord shall assume on behalf of the Indemnified Tenant Parties and conduct with due diligence and in good faith the defense of all Claims against any of the Indemnified Tenant Parties. Landlord may contest the validity of any Claims, in the name of Landlord or Tenant, as Landlord may deem appropriate, provided that the expenses thereof shall be paid by Landlord. The foregoing covenants and agreements of Landlord shall survive the Term and expiration or termination of this Lease. Section 7.6 SUBROGATION. Anything in this Lease to the contrary notwithstanding, Landlord and Tenant each hereby waives any and all rights of recovery, claims, actions, or causes of action against the other, its agents, officers, and employees for any loss or damage that may occur to any improvements located on the Premises, or any part thereof, or any personal property of such party therein, by reason of fire, the elements, or any other cause which is insured under standard "all risk of direct loss" insurance policies available in the state in which the Premises are located, regardless of cause or origin, including negligence of either party hereto, its agents. officers, or employees. No insurer of one party shall hold any right of subrogation against the other party as to any such loss or damage. ARTICLE 8 CASUALTY; CONDEMNATION Section 8.1 TENANT'S OBLIGATION TO RESTORE. In the event of damage to, or destruction of, any Improvements by fire or other casualty, Tenant shall, to the extent of the insurance proceeds actually received by Tenant or a Permitted Mortgagee for such purpose, promptly repair, replace, restore, and reconstruct the same, all in compliance with the provisions of Section 10 8.2. If insurance proceeds are unavailable due solely to Tenant's failure to pay the premiums applicable to the insurance coverage referred to in Section 7.1, then Tenant shall be obligated to promptly repair, replace, restore, and reconstruct the Improvements, all in compliance with the provisions of Section 8.2, notwithstanding the unavailability of insurance proceeds for such purpose. Notwithstanding the foregoing, in the event of destruction or damage involving more than seventy-five percent (75%) of the interior floor area of the Improvements which occurs at any time within the last twelve months of the Term, then Landlord, at its election exercisable by written notice to Tenant within thirty days following such destruction or damage, shall have the right to cancel this Lease effective as of the date of such fire or other casualty. In the event of a casualty loss where the Improvements will not be restored or replaced, the insurance proceeds shall be applied, (1) first, to pay the cost of razing the Improvements and leveling, cleaning and otherwise putting the Premises in good order, (2) second, to Landlord's Financing Lender, (3) third, to the payment to Tenant for any of its improvements, and (4) fourth, to Landlord, to the extent of any remaining proceeds. Section 8.2 RESTORATION AND DEPOSIT OF FUNDS. (a) Prior to Tenant commencing any repair, restoration or rebuilding pursuant to Section 8.1, involving an estimated cost of more than One Hundred Thousand Dollars ($100,000), Tenant shall submit to Landlord for its approval, which will not be unreasonably withheld or delayed: (i) plans and specifications therefor, prepared by a licensed architect reasonably satisfactory to Landlord; (ii) copies of appropriate governmental permits; (iii) an estimate of the cost of the proposed work, certified to by said architect (iv) a fixed price construction contract in an amount not in excess of such architect's estimated cost from a reputable and experienced general contractor; and (v) satisfactory evidence of sufficient contractor's comprehensive general liability insurance covering Landlord, builder's risk insurance, and workman's compensation insurance. Upon completion of any such work by or on behalf of Tenant, Tenant shall provide Landlord with written evidence, in form and substance reasonably satisfactory to Landlord, showing that (i) Tenant has paid all contractors for all costs incurred in connection with such repair, restoration or rebuilding, and (ii) that the Premises is not encumbered by any mechanic's or materialmen's liens relating to such repair, restoration or rebuilding. Regarding Tenant's obligations with respect to mechanic's or materialmen's liens, reference is made herein to all of the terms and provisions of Section 5.2 in connection with such repair, restoration or rebuilding. (b) Provided that: (i) Landlord does not exercise its right to cancel this Lease as provided in Section 8.1, (ii) the insurer does not deny liability as to the insureds, and (iii) a Default does not then exist, then all sums arising by reason of such loss under insurance policies maintained by Tenant, shall be deposited with the Depositary (as hereinafter defined) to be available to Tenant for the repair, restoration and rebuilding of the Premises. Tenant shall diligently pursue the repair, restoration and rebuilding of the improvements in a good and workmanlike manner using only materials which are of a quality comparable to the quality of the materials used in the Improvements prior to their destruction or damage. The insurance proceeds will be disbursed to Tenant by the Depositary after delivery of evidence reasonably satisfactory to the Depositary that (A) such repairs, restoration, or rebuilding have been completed and effected in compliance with the plans and specifications for the restoration or rebuilding, (B) no mechanic's and materialman's liens against the Premises have been filed, or that all such liens have been paid or bonded around, and (C) all payments for work performed and materials purchased as of the date of such disbursement for which mechanic's and materialman's liens might arise have been paid or will be paid from such disbursement or that all such potential liens have been paid or bonded around. At the option of Tenant, such proceeds shall be advanced in reasonable installments. Each such installment (except the final installment) shall be advanced in an amount equal to the cost of the construction work completed since the last prior advance (or since commencement of work as to the first advance) less 11 statutorily required retainage in respect of mechanic's and materialman's liens or retainage which may be required by Landlord's Financing Lender in an amount not to exceed ten percent (10%) of such cost. The amount of each installment requested shall be certified as being due and owing by Tenant's architect in charge, and each request shall include all bills for labor and materials for which reimbursement is requested and reasonably satisfactory evidence that no lien affidavit has been placed against the Premises for any labor or material furnished for such work. The final disbursement, which shall be an amount equal to the balance of the insurance proceeds, shall be made upon receipt of (C) an architect's certificate of substantial completion as to the work from Tenant's architect, and (D) reasonably satisfactory evidence that all bills incurred in connection with the work have been paid. The term "DEPOSITARY", as used herein, shall mean either: (i) Landlord's Financing Lender, or its designee (provided that Landlord's Financing Lender is an institutional lender and its designee is not an Affiliate of Landlord, as defined in Section 14.1, or related in any other manner to Landlord), or (ii) such other party that is acceptable to Landlord and Tenant, if there is no such Landlord's Financing Lender or if such Landlord's Financing Lender has refused to act as Depositary. (c) If no Default then exists, any excess of money received from insurance policies remaining with the Depositary after the repair or rebuilding of the Improvements shall, to the extent required by any Permitted Mortgagee, be applied to payment of Tenant's Permitted Mortgage, otherwise any such proceeds shall be paid to Tenant. (d) If Tenant shall not commence the repair or rebuilding of the Improvements within a period of sixty (60) days after damage or destruction by fire or other casualty and prosecute the same thereafter with such dispatch as may be necessary to complete the same within a reasonable period after said damage or destruction occurs, not to exceed two hundred seventy (270) days from the date of commencement of such repair or rebuilding; then, in addition to all other remedies Landlord may have either under this Lease, at law or in equity, the money received by and then remaining in the hands of the Depositary shall be paid to and retained by Landlord as security for the continued performance and observance by Tenant of Tenant's covenants and agreements hereunder. (e) This Lease shall not terminate or be forfeited or be affected in any manner by reason of damage to, or total, substantial or partial destruction of, the Premises or any part thereof or by reason of the untenantability of the same or any part thereof, for or due to any reason or cause whatsoever, and Tenant, notwithstanding any law or statute, present or future, waives any and all rights to quit or surrender the Premises or any part thereof. Tenant expressly agrees that its obligations hereunder, including the payment of Rent, shall continue as if the Premises, or any part thereof, had not been damaged or destroyed, and without abatement, offset, suspension, diminution or reduction of any kind (except that if Impositions are reduced on account of such damage or destruction, Tenant shall be obligated to pay only such reduced amount). Section 8.3 NOTICE OF DAMAGE. Tenant shall immediately notify Landlord and each Permitted Mortgagee of any destruction or damage to the Premises. Section 8.4 TOTAL TAKING. Should the entire Premises be taken (which term, as used in this Article 8, shall include any conveyance in avoidance or settlement of eminent domain, condemnation, or other similar proceedings) by any Governmental Authority, corporation, or other entity under the right of eminent domain, condemnation, or similar right, then Tenant's right of possession under this Lease shall terminate as of the date of taking possession by the condemning authority, and the award therefor will be distributed as follows: (1) first, to the payment of all reasonable fees and expenses incurred in collecting the award, (2) second, to Landlord's Financing Lender, and (3) third, to Landlord and Tenant, to the extent of their interests in the Premises, as the 12 applicable condemning authority shall determine taking into account certain factors including, without limitation, the term of the leasehold estate of the Tenant and the ownership interest of Landlord. After the determination and distribution of the condemnation award as herein provided, the Lease shall terminate. Section 8.5 PARTIAL TAKING. Should a portion of the Premises be taken by any Governmental Authority, corporation, or other entity under the right of eminent domain, condemnation, or similar right, this Lease shall nevertheless continue in effect as to the remainder of the Premises unless, in Tenant's reasonable judgment, so much of the Premises shall be so taken as to make it economically unsound to use the remainder for the uses and purposes contemplated hereby, whereupon this Lease shall terminate as of the date of taking of possession by the condemning authority in the same manner as if the whole of the Premises had thus been taken, and the award therefor shall be distributed as provided in Section 8.4. In the event of a partial taking where this Lease is not terminated, all awards payable in respect thereof shall be payable to Landlord and Tenant, to the extent of their interests in the Premises, as the applicable condemning authority shall determine taking into account certain factors including, without limitation, the term of the leasehold estate of the Tenant and the ownership interest of Landlord. Tenant shall restore and repair the Premises to the extent of the award actually received by Tenant and there shall be no abatement or reduction in any rental because of such taking or condemnation. Subject to the foregoing, Tenant shall promptly and diligently proceed to make a complete architectural unit of the remainder of the Improvements, complying with the procedure set forth in Section 8.2 (a). For such purpose, and provided that a Default does not then exist, the amount of the awards to Tenant and Landlord relating to the Improvements, shall be deposited with the Depositary which shall disburse the awards towards the cost of said repairing or restoration in accordance with the procedure set forth in Section 8.2. If Tenant does not make a complete architectural unit of the remainder of the Improvements within a reasonable period after such taking or condemnation, not to exceed two hundred seventy days after Tenant is required to vacate the Premises and the applicable awards have been made and deposited with the Depositary, then, in addition to whatever other remedies Landlord may have either under this Lease, at law or in equity, the money received by and then remaining in the custody of the Depositary shall, at Landlord's election, be paid to Landlord, and the remaining portion which was deposited by Tenant with the Depositary shall be held by Landlord as security for the continued performance and observance by Tenant of Tenant's covenants and agreements hereunder; provided, that Landlord shall be obligated to disburse the amounts received by Landlord from the Depositary in accordance with the foregoing provisions as if Landlord were the Depositary. Section 8.6 TEMPORARY TAKING. If the whole or any portion of the Premises shall be taken for temporary use or occupancy, the Term shall not be reduced or affected and Tenant shall continue to pay the Rent in full. Except to the extent Tenant is prevented from so doing pursuant to the terms of the order of the condemning authority, Tenant shall continue to perform and observe all of the other covenants, agreements, terms, and provisions of this Lease. In the event of any temporary taking, Tenant shall be entitled to receive the entire amount of any award therefor unless the period of temporary use or occupancy shall extend beyond the expiration of the Term, in which case such award shall be apportioned between Landlord and Tenant as of the day of expiration of the Term in the same ratio that the part of the entire period for such compensation is made falling before and that part falling after the day of expiration, bear to such entire period. Section 8.7 MORTGAGEE'S RIGHTS. Any Permitted Mortgagee shall, if it so desires, be made a party to any condemnation proceeding. Section 8.8 NOTICE OF TAKING, COOPERATION. Tenant shall immediately notify Landlord and each Permitted Mortgagee of the commencement of any eminent domain, 13 condemnation, or other similar proceedings with regard to Premises. Landlord and Tenant covenant and agree to fully cooperate in any condemnation, eminent domain, or similar proceeding in order to maximize the total award receivable in respect thereof. ARTICLE 9 ASSIGNMENT AND SUBLETTING Section 9.1 TENANT'S RIGHT TO ASSIGN. Tenant may assign its rights hereunder or sublease all or a portion of the Premises without Landlord's prior written approval provided that Tenant shall remain liable for all liabilities and obligations arising under this Lease. Notwithstanding the foregoing, if Tenant has assigned or subleased its rights under this Lease to any party other than an affiliate or subsidiary of Tenant, then, to the extent that the rent paid by any such other party exceeds the Rent and other amounts, if any, required to be paid by Tenant under the terms of this Lease, fifty percent (50%) of such excess amounts shall be paid to Landlord upon the receipt of same by Tenant. ARTICLE 10 TENANT'S FINANCING Section 10.1 TENANT'S RIGHT TO ENCUMBER. Tenant shall have the right, from time to time and at any time, without Landlord's consent or joinder, to encumber its interest in this Lease and the leasehold estate hereby created with one or more deeds of trust, mortgages, or other lien instruments to secure any borrowings or obligations of Tenant. Any such mortgages, deeds of trust, and/or other lien instruments, and the indebtedness secured thereby, provided that Landlord has been given notice thereof as set forth in Section 10.2, are herein referred to as "PERMITTED MORTGAGEES," and the holder or other beneficiary thereof are herein referred to as "PERMITTED MORTGAGEES." Section 10.2 MORTGAGEE PROTECTIVE PROVISIONS. If Tenant encumbers its interest in this Lease and the leasehold estate hereby created with liens as above provided, then Tenant shall notify Landlord thereof, providing with such notice the name and mailing address of the Permitted Mortgagee in question, Landlord shall upon request, acknowledge receipt of such notice, and for so long as the Permitted Mortgage in question remains in effect the following shall apply: (a) Landlord shall give to the Permitted Mortgagee a duplicate copy of any and all notices which Landlord gives to Tenant pursuant to the terms hereof, including notices of default, and no such notice shall be effective until such duplicate copy is actually received by such Permitted Mortgagee, in the manner provided in Section 13.1. (b) There shall be no cancellation, surrender, or modification of this Lease by joint action of Landlord and Tenant without the prior written consent of the Permitted Mortgagee. (c) If a Default should occur hereunder, then Landlord specifically agrees that: (1) Landlord shall not enforce or seek to enforce any of its rights, recourses, or remedies, until a notice specifying the event giving rise to such Default has been received by the Permitted Mortgagee, in the manner provided in Section 13.1, and if the Permitted Mortgagee proceeds to cure the Default within a period of 30 days after receipt of such notice or, as to events of Default which by their very nature cannot be cured within such time period, the Permitted Mortgagee, to the extent it is able to do so, commences curing such Default within such time period and thereafter diligently pursues such cure to completion 14 within 60 days thereafter, then any payments made and all things done by the Permitted Mortgagee to effect such cure shall be as fully effective to prevent the exercise of any rights, recourses, or remedies by Landlord as if done by Tenant; (2) if the Default is a non-monetary default, the Permitted Mortgagee shall have a period of time in which to cure such Default equal to the greater of (i) the time period for such curing that is applicable to Tenant under the terms of this Lease, or (ii) 60 days after the date that the Permitted Mortgagee has been notified of such Default, provided that the Permitted Mortgagee cures all defaults relating to the payment of Base Rent and neither Landlord nor the Premises is or would be liable or subject to any lien, tax, penalty, expense, liability, or damages because of such Default. If Landlord or the Premises is or will be liable or subject to any such lien, tax, penalty, expense, liability or damages because of the Default, then for so long as the Permitted Mortgagee is diligently and with continuity attempting to secure possession of the Premises (whether by foreclosure or other procedures), Landlord shall allow the Permitted Mortgagee such time as may be reasonably necessary under the circumstances to obtain possession of the Premises in order to cure such Default, which shall not exceed 180 days, and during such time Landlord shall not enforce or seek to enforce any of its rights, remedies or recourses hereunder, and (3) if the Default is a non-monetary default of such a nature that it is not reasonably susceptible of being cured by the Permitted Mortgagee (as, for example, a non-permitted assignment by Tenant), then Landlord shall not enforce or seek to enforce any of its rights, remedies, or recourses hereunder so long as Permitted Mortgagee pays all Rent then due and thereafter keeps the monetary obligations of Tenant hereunder current and complies with those other provisions of this Lease which, by their nature, Permitted Mortgagee may then reasonably comply with. (d) No Permitted Mortgagee shall be or become liable to Landlord as an assignee of this Lease until such time as such Permitted Mortgagee, by foreclosure or other procedures, shall either acquire the rights and interests of Tenant under this Lease or shall actually take possession of the Premises, and upon such Permitted Mortgagee's assigning such rights and interests to another party or upon relinquishment of such possession, as the case may be, such Permitted Mortgagee shall have no further such liability. ARTICLE 11 WARRANTY OF TITLE AND PEACEFUL POSSESSION Landlord represents, warrants and covenants that (i) the representations and warranties set forth in Exhibit C are true and correct, (ii) it owns title to the Land and the Premises free and clear of all liens, claims and encumbrances except the liens described in Exhibit B hereto securing the financing described therein ("LANDLORD'S FINANCING") and the other encumbrances specifically described in such Exhibit B, (iii) subject to the terms and provisions of Section 3.1 (a), except as otherwise set forth in this Lease, Landlord's Financing shall not be modified in any manner without the prior written consent of Tenant and (iv) the lender providing such Landlord's Financing ("LANDLORD'S FINANCING LENDER") has executed, caused to be acknowledged (notarized in accordance with applicable law) and delivered to Landlord and Tenant a mutual recognition and attornment agreement, in form and substance reasonably satisfactory to Tenant, suitable for recording in the appropriate records to notify third parties of the existence of such agreement and that the Land and the Premises are subject thereto. Such agreement shall provide, among other provisions, that the Tenant's interest under this Lease shall be subordinate to the Landlord's Financing and that the Landlord's Financing Lender shall (i) give to Tenant a duplicate copy of any and all notices which 15 Landlord's Financing Lender gives to Landlord, including notices of default, and no such notice shall be effective until such duplicate copy is actually received by Tenant in the manner provided in Section 13.1, (ii) give Tenant the right and opportunity to cure any defaults under the Landlord's Financing, and (iii) recognize Tenant's rights under this Lease in the event of a foreclosure or deed in lieu thereof so long as Tenant continues to perform its obligations under this Lease. As used herein, the term (A) "Landlord's Financing Lender" shall also include any lender that refinances Landlord's Financing, and (B) "Landlord's Financing" shall include all financings secured by liens covering all or any portion of the Premises which are permitted under the terms of this Lease. Moreover, Landlord covenants that Tenant shall and may peaceably and quietly have, hold, occupy, use, and enjoy the Premises during the Term, and may exercise all of its rights hereunder, subject only to the provisions of this Lease and applicable governmental laws, rules, and regulations; and Landlord agrees to warrant and forever defend Tenant's right to such occupancy, use, and effort and the title to the Premises against the claims of any and all persons whomsoever lawfully claim the same, or any part thereof, by, through or under Landlord, but not otherwise, subject only to provisions of this Lease and all applicable governmental laws, rules, and regulations. Landlord's Financing Lender shall not be or become liable to Tenant as an assignee of Landlord's interest in this Lease until such time as such Landlord's Financing Lender, by foreclosure or other procedures, shall either acquire the rights and interests of Landlord under this Lease, and upon Landlord's Financing Lender's assigning such rights and interests to another party, Landlord's Financing Lender shall have no further such liability. ARTICLE 12 DEFAULT AND REMEDIES Section 12.1 DEFAULT. Each of the following shall be deemed a "DEFAULT" by Tenant hereunder and a material breach of this Lease: (1) Whenever Tenant shall fail to pay any installment of Rent or any other sum payable by Tenant to Landlord or any third party under this Lease on the date upon which the same is due to be paid, and such default shall continue for ten (10) days after Tenant shall have been given a written notice specifying such default; (2) Whenever Tenant shall fail to keep, perform, or observe any of the covenants, agreements, terms, or provisions contained in this Lease that are to be kept or performed by Tenant other than with respect to payment of Rent or other liquidated sums of money, and Tenant shall fail to commence and take such steps as are necessary to remedy the same within thirty (30) days after Tenant shall have been given a written notice specifying the same, or having so commenced, shall thereafter fail to proceed diligently and with continuity to remedy the same within one hundred eighty (180) days after such failure; (3) Whenever an involuntary petition shall be filed against Tenant under any bankruptcy or insolvency law or under the reorganization provisions of any law of like import or whenever a receiver of Tenant, or of all or substantially all of the property of Tenant, shall be appointed without acquiescence, and such petition or appointment is not discharged or stayed within sixty (60) days after the happening of such event; or (4) Whenever Tenant shall make an assignment of its property for the benefit of creditors or shall file a voluntary petition under any bankruptcy or insolvency law, or seek relief under any other law for the benefit of debtors. 16 Section 12.2 REMEDIES. If a Default occurs, then subject to the rights of any Permitted Mortgagee as provided in Section 11.2, Landlord may at any time thereafter prior to the curing thereof and without waiving any other rights hereunder or available to Landlord at law or in equity (Landlord's rights being cumulative), do any one or more of the following: (1) Landlord may terminate this Lease by giving Tenant written notice thereof, in which event this Lease and the leasehold estate hereby created and all interest of Tenant and all parties claiming by, through, or under Tenant (except for sublessees as provided in Section 10.2) shall automatically terminate upon the effective date of such notice with the same force and effect and to the same extent as if the effective date of such notice were the day originally fixed in Article 2 hereof for the expiration of the Term; and Landlord, its agents or representatives, shall have the right, without further demand or notice, to reenter and take possession of the Premises and remove all persons and property therefrom with or without process of law, without being deemed guilty of any manner of trespass and without prejudice to any remedies for arrears of Rent or existing breaches hereof. In the event of such termination, Tenant shall be liable to Landlord for damages in an amount equal to (A) the discounted present value of the amount by which the Rent reserved hereunder for the remainder of the stated Term (assuming that the Term would expire upon the next Possible Early Termination Date) exceeds the then net fair market rental value of the Premises for such period of time, plus (B) all expenses incurred by Landlord enforcing its rights hereunder. (2) Landlord may terminate Tenant's right to possession of the Premises and enjoyment of the rents, issues, and profits therefrom without terminating this Lease or the leasehold estate created hereby, reenter and take possession of the Premises and remove all persons and property therefrom (except for sublessees as provided in Section 10.2) with or without process of law, without being deemed guilty of any manner of trespass and without prejudice to any remedies for arrears of Rent (assuming the Term would expire upon the next Possible Early Termination Date) or existing breaches hereof, and lease, manage, and operate the Premises and collect the rents, issues, and profits therefrom all for the account of Tenant, and credit to the satisfaction of Tenant's obligations hereunder the net rental thus received (after deducting therefrom all reasonable costs and expenses of repossessing, leasing, managing, and operating the Premises). If the net rental so received by Landlord exceeds the amounts necessary to satisfy all of Tenant's obligations under this Lease, nevertheless Landlord shall retain such excess. In no event shall Landlord be liable for failure to so lease, manage, or operate the Premises or collect the rentals due under any subleases and any such failure shall not reduce Tenant's liability hereunder. If Landlord elects to proceed under this Section 12.2(2), it may at any time thereafter elect to terminate this Lease as provided in Section 12.2(1). ARTICLE 13 MISCELLANEOUS Section 13.1 NOTICES. Any notice provided for or permitted to be given hereunder must be in writing and may be given by (a) depositing same in the United States Mail, postage prepaid, registered or certified, with return receipt requested, addressed as set forth in this Section 13.1; (b) delivering the same to the party to be notified; or (c) sending a prepaid telex or telegram, so addressed. Notice given in accordance herewith shall be effective upon receipt at the address of the addressee, as evidenced by the executed postal receipt or other receipt for delivery. For purposes of notice the addresses of the parties hereto shall, until changed, be as follows: Landlord: REHCO EAST, L.L.C. P.O. Box 8183 Oklahoma City, Oklahoma 73083 Attention: Robert E. Howard II 17 Tenant: Howard Ford, Inc. c/o Group 1 Automotive, Inc. 950 Echo Lane, Suite 100 Houston, Texas 77024 Attention: John T. Turner with a copy to: Calvert Law Firm 1041 NW Grand Boulevard Oklahoma City, Oklahoma 73118 Attention: Randall K. Calvert The parties hereto shall have the right from time to time to change their respective addresses for purposes of notice hereunder to any other location within the United States by giving a notice to such effect in accordance with the provisions of this Section 13.1. Section 13.2 PERFORMANCE OF OTHER PARTY'S OBLIGATIONS. If either party hereto fails to perform or observe any of its covenants, agreements, or obligations hereunder for a period of 30 days after notice of such failure is given by the other party, then the other party shall have the right, but not the obligation, at its sole election (but not as its exclusive remedy), to perform or observe the covenants, agreements, or obligations which are asserted to have not been performed or observed at the expense of the failing party and to recover all costs or expenses incurred in connection therewith, together with interest thereon from the date expended until repaid at an annual rate ("DEFAULT RATE") equal to the lesser of: (A) three (3) percentage points above the prime rate of interest established from time to time by NationsBank (or a comparable rate of interest if such rate of interest is not in effect); or (B) the maximum rate of interest permitted by applicable law. Any performance or observance by a party pursuant to this Section 13.2 shall not constitute a waiver of the other party's failure to perform or observe. Section 13.3 MODIFICATION AND NON-WAIVER. No variations, modifications, or changes herein or hereof shall be binding upon any party hereto unless set forth in a writing executed by it or by a duly authorized officer or agent. No waiver by either party of any breach or default of any term, condition, or provision hereof, including without limitation the acceptance by Landlord of any Rent at any time or in any manner other than as herein provided, shall be deemed a waiver of any other or subsequent breaches or defaults of any kind, character, or description under any circumstance. No waiver of any breach or default of any term, condition, or provision hereof shall be implied from any action of any party, and any such waiver, to be effective, shall be set out in a written instrument signed by the waiving party. Section 13.4 GOVERNING LAW. This Lease shall be construed and enforced in accordance with the laws of the state in which the Premises are located. Section 13.5 NUMBER AND GENDER; CAPTIONS; REFERENCES. Pronouns, wherever used herein, and of whatever gender, shall include natural persons and corporations and associations of every kind and character, and the singular shall include the plural wherever and as often as may be appropriate. Article and Section headings in this Lease are for convenience of reference and shall not affect the construction or interpretation of this Lease. Whenever the terms "hereof," hereby," herein," or words of similar import are used in this Lease they shall be construed as referring to this Lease in its entirety rather than to a particular Section or provision, unless the context specifically indicates to the contrary. Any reference to a particular "Article" or "Section" shall be construed as referring to the indicated Article or Section of this Lease. 18 As used herein, "CPI" shall mean the Consumer Price Index for All Urban Consumers, All Items (Base Year 19 82-84 = 100) published by the United States Department of Labor, Bureau of Labor Statistics (or if a separate index is published by the Bureau of Labor Statistics for a metropolitan area within 100 miles of the Premises, then such metropolitan index). If the Bureau of Labor Statistics substantially revises the manner in which the CPI is determined, an adjustment shall be made in the revised index which would produce results equivalent, as nearly as possible to those which would be obtained hereunder if the CPI were not so revised. If the 1982-84 average shall no longer be used as an index of 100, such change shall constitute a substantial revision. If the CPI becomes unavailable to the public because publication is discontinued, or otherwise, Tenant shall substitute therefor a comparable index based upon changes in the cost of living or purchasing power of the consumer dollar published by a governmental agency, major bank other financial institution, university or recognized financial publisher. If the CPI is available on a monthly (or alternating monthly) basis, the CPI for the months in which (or immediately preceding, as the case may be) the Commencement Date and Adjustment Date respectively occur shall be used. Section 13.6 ESTOPPEL CERTIFICATE. Landlord and Tenant shall execute and deliver to each other, promptly upon any request therefor by the other party, a certificate addressed as indicated by the requesting party and stating: (a) whether or not this Lease is in full force and effect; (b) whether or not this Lease has been modified or amended in any respect, and submitting copies of such modifications or amendments; (c) whether or not there are any existing defaults hereunder known to the party executing the certificate, and specifying the nature thereof; (d) whether or not any particular Article, Section, or provision of this Lease has been complied with; and (e) such other matters as may be reasonably requested. Section 13.7 SEVERABILITY. If any provision of this Lease or the application thereof to any person or circumstance shall, at any time or to any extent, be invalid or unenforceable, and the basis of the bargain between the parties hereto is not destroyed or rendered ineffective thereby, the remainder of this Lease, or the application of such provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby. Section 13.8 ATTORNEY FEES. If litigation is ever instituted by either party hereto to enforce, or to seek damages for the breach of, any provision hereof, the prevailing party therein shall be promptly reimbursed by the other party for all attorneys' fees reasonably incurred by the prevailing party in connection with such litigation. Section 13.9 SURRENDER OF PREMISES; HOLDING OVER. Upon termination or the expiration of this Lease, Tenant shall peaceably quit, deliver up, and surrender the Premises. If Tenant does not surrender possession of the Premises at the end of the Term, such action shall not extend the Term, Tenant shall be a tenant at sufferance, and during such time of occupancy Tenant shall pay to Landlord, as damages, an amount equal to twice the amount of Rent that was being paid immediately prior to the end of the Term. Landlord shall not be deemed to have accepted a surrender of the Premises by Tenant, or to have extended the Term, other than by execution of a written agreement specifically so stating. 19 Section 13.10 RELATION OF PARTIES. It is the intention of Landlord and Tenant to hereby create the relationship of landlord and tenant, and no other relationship whatsoever is hereby created. Nothing in this Lease shall be construed to make Landlord and Tenant partners or joint venturers or to render either party hereto liable for any obligation of the other. Section 13.11 FORCE MAJEURE. As used herein "FORCE MAJEURE" means the occurrence of any event whereby Landlord or Tenant shall be delayed or prevented from the performance of any act required hereunder by reason of acts of God, strikes, lockouts, labor troubles, failure or refusal of governmental authorities or agencies to timely issue permits or approvals or conduct reviews or inspections, civil disorder, inability to procure materials, restrictive governmental laws or regulations or other cause without fault and beyond the control of the party obligated (financial inability excepted). If Tenant or Landlord shall be delayed, hindered, or prevented from performance of any of its obligations by reason of Force Majeure, the time for performance of such obligation shall be extended for the period of such delay. Section 13.12 NON-MERGER. Notwithstanding the fact that fee title to the land and to the leasehold estate hereby created may, at any time, be held by the same party, there shall be no merger of the leasehold estate hereby created unless the owner thereof executes and files for record in the appropriate real property records a document expressly providing for the merger of such estates. Section 13.13 ENTIRETIES. This Lease constitutes the entire agreement of the parties hereto with respect to its subject matter, and all prior agreements with respect thereto are merged herein. Any agreements entered into between Landlord and Tenant of even date herewith are not, however, merged herein. Section 13.14 RECORDATION. Landlord and Tenant will, at the request of the other, promptly execute an instrument in recordable form constituting a short form of this Lease, which shall be filed for record in the appropriate real property records, or at the request of either party this Lease shall be so filed for record. In the event that Tenant has requested such filing and the Premises are located in a jurisdiction where a tax or assessment will be due and owing based on the amounts payable by Tenant under this Lease, then Tenant, at its option, may require this Lease to be amended to provide that the Term shall be an initial term of 10 years from the date hereof with four options to renew the Term for a period of five years each upon notice to Landlord given at anytime on or before 180 days before the expiration of the Term, as the same may be extended. All of the terms and provisions of such modification shall be subject to the written consent of Landlord and Tenant which shall not be unreasonably withheld or delayed. Section 13.15 SUCCESSORS AND ASSIGNS. This Lease shall constitute a real right and covenant running with the Premises, and shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Whenever a reference is made herein to either party, such reference shall include the party's successors and assigns. Section 13.16 LANDLORD'S JOINDER. Landlord agrees to join with Tenant in the execution of such applications for permits and licenses from any Governmental Authority as may be reasonably necessary or appropriate to effectuate the intents and purposes of this Lease, provided that Landlord shall not incur or become liable for any obligation as a result thereof. Section 13.17 NO THIRD PARTIES BENEFITTED. Except as herein specifically and expressly otherwise provided with regard to notices and opportunities to cure defaults and certain enumerated rights granted to Permitted Mortgagees, the terms and provisions of this Lease are for 20 the sole benefit of Landlord and Tenant, and no third party whatsoever, is intended to benefit herefrom. Section 13.18 SURVIVAL. Any terms and provisions of this Lease pertaining to rights, duties, or liabilities extending beyond the expiration or termination of this Lease shall survive the end of the Term. Section 13.19 PERPETUITIES. To the extent that the rule against perpetuities is applicable thereto, but not otherwise, the rights granted to Tenant in Article 14 hereof shall expire upon the earlier to occur of (a) the date set forth for expiration of such rights in said Article 14 or (b) the date which is 21 years after the date of death of the last to die of the following parties: the last grandchild to survive of the presently living grandchildren of George H. Bush, former President of the United States of America. Section 13.20 TRANSFER OF LANDLORD'S INTEREST. Subject to the terms of the Landlord's Financing, Landlord may freely transfer and/or mortgage its interest in the Premises and under this Lease from time to time and at any time, provided that any such transfer or mortgage is expressly made subject to the terms, provisions, and conditions of this Lease, including specifically but without limitation Tenant's rights under Article 14, and the transferee or mortgagee agrees to be bound by the provisions hereof (in the case of a mortgagee, such agreement being contingent upon the mortgagee actually succeeding to the Landlord's interest in the Premises and hereunder by virtue of a foreclosure or conveyance in lieu thereof). Section 13.21 LANDLORD'S SEPARATE PROPERTY. If the state in which the Premises are located is a community property state, Landlord hereby warrants that the Premises are his sole or her sole and separate properly, and Tenant hereby agrees to make all payments of Rent accordingly. Section 13.22 GUARANTY. Group 1 Automotive, Inc. has executed that certain Guaranty, a copy of which is attached hereto as Exhibit D. Section 13.23 PAST DUE AMOUNTS. All amounts required to be paid by Tenant or Landlord under the terms and provisions of this Lease shall bear interest at the Default Rate from the date due until paid. ARTICLE 14 OPTION TO PURCHASE PREMISES Section 14.1 RIGHT OF FIRST REFUSAL. (a) If Landlord shall receive a bona fide offer to purchase the Premises during the Lease term or any renewal thereof from a party other than (i) any person who is the Landlord or is a present shareholder, partner, or member of Landlord, to the extent Landlord is an entity, and any such person's or entity's shareholder's, partner's, or member's immediate family or any entity in which such individuals, individually or collectively, own an interest and such entity is subject to the control, as hereinafter defined, of such individuals, or (ii) an Affiliate, as hereinafter defined (herein such purchasing party other than an Affiliate and any such person described in clause (i) is herein called an "APPROVED PURCHASER"), then any contract which may be entered into between Landlord and a third party purchaser shall provide that the sale shall be subject to Tenant's right of refusal set forth in this Section 14.1. If Landlord shall receive such offer or execute such contract, Landlord shall send to Tenant a true and complete copy of the executed contract and the complete terms of the offer 21 with Landlord's certification that it proposes to accept the offer, and Tenant shall have the option, to be exercised within 30 days after receipt thereof, to make a contract with Landlord on the same terms and conditions set forth in such third party contract or offer. If Tenant, after receipt of the third party contract or the terms of the offer acceptable to Landlord, shall fail to exercise its option within the 30-day period, Landlord shall have the right to conclude the proposed sale on the same terms as in the offer or contract originally forwarded to Tenant, provided the sale shall close within 180 days after the period within which Tenant is required hereby to exercise its option. If the sale shall not close within said 180 days, Landlord shall repeat the procedure specified in this Paragraph 14.1 before it can conclude any sale of the Premises. Notwithstanding Tenant's failure to exercise its option, any sale of the Premises shall be subject to this Lease. Tenant's option shall remain in force and be binding on any party other than an Approved Purchaser to the same extent as if said subsequent owner were Landlord herein, and said subsequent owner shall be required to do all of the things required of Landlord in this Lease prior to any such sale of the Premises. "AFFILIATE" shall mean and refer to any person or entity controlling, controlled by, or under common control with another such person or entity. "CONTROL" shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such controlled person or entity; the ownership, directly or indirectly, of at least fifty-one percent (51%) of the voting securities of, or possession of the right to vote, in the ordinary direction of its affairs, at least fifty-one percent (51%) of the voting interest in, any person or entity shall be presumed to constitute such control. (b) If any third party contract or offer for the Premises shall include property other than the Premises, Tenant's right of first refusal shall, at its election, be either applicable to the entire property covered by such contract or offer, or applicable to the Premises only at a purchase price which shall be that part of the price offered by the third party, which the value of the Premises shall bear to the value of all the property included in such third party contract or offer. (c) Tenant's right to purchase shall not be extinguished, canceled or called into operation by any offer, contract or conveyance which is between a nominee and his principal, or a sole shareholder and his corporation, or a corporation and its subsidiary or affiliate. (d) The price to be paid by Tenant if it exercises its right of first refusal shall include the amount of any brokerage commission which is actually paid by Landlord at the closing of the sale to Tenant to the extent, and only to the extent, that such commission is paid to a bona fide third party agent or broker pursuant to a written listing or brokerage agreement. (e) Tenant may not exercise the option to purchase set forth in Section 14.1(a) above so long as any Default shall exist or during any period following Tenant's notice to Landlord of its intention to terminate this Lease in accordance with Article 2. Section 14.2 SPECIFIC PERFORMANCE. It is expressly agreed that the remedy at law for breach of any of the obligations set forth in this Article 14 is inadequate in view of the complexities and uncertainties in measuring the actual damages that would be sustained by reason of the failure of Landlord or Tenant to comply fully with each of such obligations. Accordingly, each of the aforesaid obligations shall be, and is hereby expressly made, enforceable by specific performance. ARTICLE 15 ARBITRATION Section 14.3 ARBITRATION PROVISIONS. EXCEPT FOR ANY MATTER RELATING TO TENANT'S REASONABLE JUDGMENT AS SET FORTH IN SECTION 8.5, ANY 22 CONTROVERSY OR CLAIM BETWEEN THE PARTES HERETO RELATING TO THIS LEASE, INCLUDING, WITHOUT LIMITATION, ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL, TO THE EXTENT PERMITTED BY APPLICABLE LAW, BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION. SUCH ARBITRATION SHALL TAKE PLACE IN THE CITY IN WHICH THE PREMISES ARE LOCATED. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. EXCEPT FOR ANY MATTER RELATING TO TENANT'S REASONABLE JUDGMENT AS SET FORTH IN SECTION 8.5, ANY PARTY TO THIS LEASE MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS LEASE APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN NINETY (90) DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL SIXTY (60) DAYS. ALL STATUTES OF LIMITATIONS THAT WOULD OTHERWISE BE APPLICABLE SHALL) APPLY TO ANY DISPUTES ASSERTED IN ANY ARBITRATION PROCEEDING HEREOF. [The remainder of page intentionally left blank.] 23 EXECUTED as of the date and year first above written. "LANDLORD" REHCO EAST, L.L.C., an Oklahoma limited liability company By: s/Robert Howard II --------------------------------------- Robert E. Howard II, Manager/Member "TENANT" HOWARD FORD, INC., a Delaware corporation By: s/Scott L. Thompson --------------------------------------- Scott L. Thompson, Vice President 24 STATE OF OKLAHOMA ) ) SS COUNTY OF OKLAHOMA ) The foregoing instrument was acknowledged before me this 28th day of February, 2003, by Robert E. Howard II, Manager/Member of REHCO EAST, L.L.C., an Oklahoma limited liability company, on behalf of said company. s/Kathy E. Wallis ------------------------------------ NOTARY PUBLIC My Commission No.: 01017058 My Commission Expires: 11/5/05 (SEAL) STATE OF TEXAS ) ) SS COUNTY OF HARRIS ) The foregoing instrument was acknowledged before me this 28th day of February, 2003, by Scott L. Thompson, Vice President of Howard Ford, Inc., a Delaware corporation, on behalf of said corporation. s/Beth Sibley ----------------------------------- NOTARY PUBLIC My Commission Expires: 01-04-04 (SEAL) 25 EXHIBIT A [Description of Land] EXHIBIT B [Exceptions to title to Land] EXHIBIT C REPRESENTATIONS OF LANDLORD Landlord represents and warrants to Tenant as of the date of this Lease that: (a) The Premises are not subject to any prior lease, easement, adverse claim, or claims of parties in possession, whether or not shown by the public records, except as set forth on Exhibit B. (b) There is no pending or threatened condemnation action or agreement in lieu thereof which will or may affect the Premises or any part thereof in any respect whatsoever. (c) There is no action, suit or proceeding, including environmental, pending or threatened against or affecting the Premises or any part thereof. (d) The execution, delivery and performance of this Lease by Landlord has been duly authorized and this Lease is valid and enforceable against Landlord in accordance with its terms. (e) Landlord has no knowledge of any fact, action or proceeding, including environmental, whether actual, pending or threatened, which could result in the modification or termination of the present zoning classification of the Premises, or the termination of full free and adequate access to and from the Premises from all adjoining public highways and roads. (f) Landlord has not agreed to lease or convey or granted any rights with respect to or any part of the Premises or any interest therein to any other person or entity except as shown on Exhibit B. (g) The Premises are not subject to any restrictions (recorded or unrecorded), building and zoning laws or ordinances, or other laws, ordinances, rules, regulations and requirements of any Governmental Authority having jurisdiction which do or could prohibit the use of the premises as an automobile dealership. (h) Landlord has not received any notice from any Governmental Authority having jurisdiction over the Premises requiring or specifying any work to be done to the Premises. (i) Landlord has no knowledge of any existing, threatened or contemplated action, circumstances or conditions (including but not limited to subsurface conditions) which would materially interfere with the development or use of the Premises for an automobile dealership. (j) The Premises are in compliance in all material respects with all restrictive covenants and other restrictions applicable to the Premises and all applicable statutes, ordinances, rules and regulations (federal, state, county and municipal), including without limitation all zoning, environmental (with respect to asbestos), building, health, subdivision and "lot split" regulations. Except as to matters relating to the presence of asbestos contained in the Premises, if any, the representation and warranty set forth in this clause (j) shall not be applicable to the matters covered under clause (m) hereinbelow. (k) The Premises have public access to and from abutting roadways dedicated to an accepted by the State, City, or County where the Premises are located. (l) To the extent zoning regulations are applicable to the Premises, the Premises are zoned "I-2 Moderate Industrial" under the Oklahoma City, Oklahoma Zoning Ordinance, and there are no special or unusual zoning conditions or stipulations applicable to the Premises beyond the face of the Zoning Ordinance except as set forth in written instruments delivered to Tenant by Landlord prior to the date of this Lease. (m) To the best of Landlord's actual knowledge and except as may otherwise be disclosed to Tenant in any written environmental audit report delivered to Tenant prior to the date of this Lease, no hazardous wastes, pollutants or toxic substances have been dumped, deposited or buried upon, in or under the Premises, there have been no leaks of petroleum, toxic or hazardous materials from any of the underground storage tank facilities and there is no contaminated soil, as defined by federal, state and/or local laws or regulations, in, upon or under the Premises by reason of any such wastes, pollutants, toxins, substances, or facilities. (n) The Premises have an assured water supply sufficient to permit the operations now being conducted thereon to be conducted in accordance with all governmental requirements. (o) All dimensions in the description to the Premises are net of existing and proposed rights-of-way, easements and dedications except as set forth on Exhibit B. (p) The Premises are not located in a flood plane or a flood hazard area for which flood insurance would be required or for which flood insurance is available. EXHIBIT D GUARANTY The undersigned, GROUP 1 AUTOMOTIVE, INC., a Delaware corporation, hereby requests REHCO EAST, L.L.C., an Oklahoma limited liability company ("LANDLORD") to enter into that certain Lease dated ______________________, 2002 between Landlord and Howard Ford, Inc., a Delaware corporation ("TENANT") (the "LEASE"), and as an inducement to Landlord to do so, and as an additional consideration therefore, the undersigned hereby (a) guarantees unconditionally to Landlord the full, faithful and punctual performance, fulfillment and observance of all of the obligations and liabilities of Tenant under said Lease (the "TENANT OBLIGATIONS") throughout the Term, as defined therein, including the payment of all amounts that may be or become payable by Tenant to or for the benefit of Landlord under the Lease; (b) subject to the other terms and provisions of this Guaranty, waives notice of and consents to any and all amendments, extensions and renewals of said Lease, any and all assignments, subleases and other action that may be permitted thereunder by Tenant or Landlord, any and all other amendments, extensions, and renewals, any and all other advances, extensions, settlements, compromises, favors and indulgences, any and all other receipts, substitutions, additions and releases of persons primarily or secondarily liable, any and all acceptances by Landlord of negotiable instruments, commercial paper and other property, and agrees that none of the foregoing, should there be any, shall discharge or affect in any way the liability of the undersigned hereunder; (c) agrees that all rights and remedies of Landlord under said Lease and hereunder shall survive and not be affected by any such discharge, moratorium or other relief granted any person primarily or secondarily liable in any proceeding under federal or state law relating to bankruptcy, insolvency or the relief or rehabilitation of debtors, or any disaffirmance or rejection of the Lease in such proceedings, and any consent by Landlord to, or participation by Landlord in the proceeds of, any assignment, trust or mortgage for the benefit of creditors, or any composition or arrangement of debts, may be made without the undersigned being discharged or affected in any way thereby; (d) waives any right to require marshaling or exhaustion of any right or remedy against any person, collateral or other property; (e) subject to the other terms and provisions of this Guaranty, waives presentment, demand, protest and notice of default, nonpayment and protest and all demands, notices and suretyship defenses generally; and (f) agrees that upon the existence and continuance of a Default under the Lease, Landlord may have and maintain an action upon this Guaranty against the undersigned and in like manner may have and maintain successive actions upon this Guaranty for each and every other such continuing Default; the undersigned expressly agreeing hereby that its obligation hereunder shall not be exhausted by any such action or by any number of such successive actions until and unless each of the Tenant Obligations shall have been fully performed. This Guaranty shall be absolute and continuing. Landlord shall not be required to pursue any remedies that it may have against Tenant or pursue any security or other parties as a condition to the enforcement of this Guaranty. It is understood and agreed that Guarantor may be joined in any action against Tenant and that recovery may be had against Guarantor in such action, or in any independent action against Guarantor. This Guaranty shall not in any way be affected or impaired by reason of Landlord asserting against Tenant any rights or remedies reserved to the Landlord pursuant to the Lease, or available at law or in equity, including any termination of the Lease or re-entry into the Premises. If at any time payment of any of the Tenant Obligations under the Lease is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of the Tenant, the obligations of the Guarantor with respect to such payment shall be reinstated at such time as though such payment had not been made. Until all Tenant Obligations under the Lease are fully paid and satisfied, Guarantor (a) shall have no right of subrogation against Tenant by reason of Guarantor's performance under this Guaranty or monies or obligations owed by Tenant to Guarantor; (b) waives any right to enforce any remedy which Guarantor now has or may hereafter have against Tenant by reason of Guarantor's performance under this Guaranty and (c) subordinates any liability or indebtedness of Tenant now or hereafter held by or owed to Guarantor to the Tenant Obligations. This Guaranty and the obligations of the Guarantor under this Guaranty shall not be modified, discharged, waived or terminated except by an agreement in writing signed by Guarantor and Landlord. This Guaranty shall bind Guarantor and the successors and assigns of Guarantor. This Guaranty may be freely assigned, transferred or hypothecated by Landlord and shall run in favor and inure to the benefit of Landlord, its successors and assigns, and each subsequent holder of Landlord's interest under the Lease. References to the term "Tenant" shall be deemed to include Tenant's successors and assigns. This Guaranty shall be governed by and construed in accordance with Oklahoma law. Guarantor agrees to be subject to the jurisdiction of the courts of Oklahoma. If this Guaranty is enforced by suit or otherwise, Guarantor shall reimburse Landlord, upon demand, for all reasonable expenses incurred in connection therewith, including reasonable attorney's fees. Notices to the Guarantor shall be sent by certified or registered mail to the address of Group 1 Automotive, Inc., 950 Echo Lane, Suite 100, Houston, Texas 77024, and shall be effective upon being deposited in the United States mail, postage prepaid. Alternatively, notices may be sent by Federal Express or other recognized delivery service and shall be effective upon delivery to Guarantor at the same address. Guarantor may change its address by giving written notice to Landlord in accordance with this provision. Guarantor shall have the right to give written notice to Landlord in accordance with the Lease if at any time subsequent to the execution of this Guaranty, the then current Tenant under the Lease is not a subsidiary or affiliate of Guarantor. By its acceptance of this Guaranty, Landlord thereafter agrees to give written notice to Guarantor of any event, which, with the giving of notice or the passage of time, or both, would constitute a Default under the Lease, and Guarantor shall have the same grace period afforded to the Tenant under the Lease in which to cure the default in question. Guarantor represents and warrants that it had the legal right and capacity to execute this Guaranty, and each person executing this Guaranty on behalf of Guarantor covenants and warrants that he is duly authorized by the board of directors of Guarantor to execute and deliver this Guaranty on behalf of the Guarantor. WITNESS the execution hereof under seal as of the 28th day of February, 2003. GROUP 1 AUTOMOTIVE, INC. By: s/Scott L. Thompson ------------------------------------------- Its: Executive Vice President, CFO & Treasurer EX-10.39 6 h13155exv10w39.txt AMENDMENT AND ASSIGNMENT OF LEASE DATED 11/1/2003 EXHIBIT 10.39 AMENDMENT AND ASSIGNMENT OF LEASE THIS AMENDMENT AND ASSIGNMENT OF LEASE is entered into this 1st day of November, 2003, by and between REHCO EAST, L.L.C., an Oklahoma limited liability company ("Landlord"), HOWARD FORD, INC., a Delaware corporation ("Assignor") and HOWARD-FLM, INC., a Delaware corporation ("Assignee") WHEREAS, Landlord and Assignor executed that certain Lease Agreement dated February 28, 2003 (the "Lease"), whereby Landlord leased to Assignor that improved real property located in Oklahoma County, Oklahoma, more fully described on Exhibit "A" attached to and incorporated in the Lease (the "Land"); and WHEREAS, Assignor desires to assign its right, title and interest in and to the Lease to Assignee, and Assignee desires to acquire Assignor's right, title and interest in and to the Lease; WHEREAS, Landlord and Assignee desire to amend certain provisions of the Lease as hereinafter provided; WHEREAS, the Assignee has completed certain improvements on the Premises. Landlord and Assignee agree that the improvements shall remain the sole property of the Assignee until the expiration or earlier termination of this Lease; and NOW, THEREFORE, in consideration of the premises and the mutual covenants between the parties, Landlord and Tenant hereby agree and amend the Lease as follows: 1. ASSIGNMENT OF LEASE. Assignor hereby transfers and assigns to Assignee, all of Assignor's right, title and interest in, to and under the Lease. Assignee hereby accepts the transfer and assignment of Assignor's right, title and interest in, to and under the Lease. Assignee hereby assumes and agrees to be bound by the terms and provisions of the Lease as if Assignee were an original party thereto and timely to perform all of the obligations of Assignor thereunder. 2. BASE RENT. The first paragraph of Section 3.1 of the Lease is hereby amended and restated as follows: "Section 3.1 Base Rent. Subject to the terms and provisions contained in this Section 3.1, Tenant shall pay Landlord monthly Base Rent of Eighteen Thousand Two Hundred Eighty One and 25/100 Dollars ($18,281.25), in advance on or before the first day of each calendar month during the Term, subject to adjustment as hereafter provided. If the Term commences on a day other than the first day of a calendar month, or ends on a day other than the last day of a calendar month, then the Base Rent for such month shall be prorated on the basis of 1/30th of the monthly Base Rent for each day of such month. If the CPI on any Adjustment Date shall be greater than the CPI for the Commencement Date, monthly Base Rent commencing on the Adjustment Date shall be adjusted to be the original monthly Base Rent specified in this Section 3.1(a) plus an amount equal to one-half (1/2) of the product obtained by multiplying: (i) the original monthly Base Rent specified in this Section 3.1 (a) by (ii) the percentage increase in the CPI from the Commencement Date through the Adjustment Date. "ADJUSTMENT DATE" shall be January 1 of each of the following years: 2008; 2013; 2018; 2023, and the term "CPI" shall have the meaning specified therefor in Section 13.5." 3. COMMENCEMENT DATE. Section 3.1(b) of the Lease is hereby amended and restated as follows: "3.1(b) As used herein, "COMMENCEMENT DATE" means the date hereof and the term "LEASE YEAR" means the 12-month period commencing on November 1, 2003 and each subsequent 12-month period during the Term." 4. EFFECT OF THIS AMENDMENT. Each defined term used but not otherwise defined in this Amendment shall have the meaning assigned to it in the Lease. In the event of any conflict between this Amendment and the Lease, this Amendment shall control. As amended hereby, the Lease is ratified and confirmed and shall remain in full force and effect in accordance with its terms. 5. MULTIPLE COUNTERPARTS. This Amendment and Assignment may be executed in a number of identical counterparts which, taken together, shall constitute collectively one (1) agreement; but in making proof of this Amendment and Assignment, it shall not be necessary to produce or account for more than one such counterpart. [The remainder of page intentionally left blank] This signature page is attached to that certain Amendment to Lease as of the date and year first above written. "LANDLORD" REHCO EAST, L.L.C., an Oklahoma limited liability company By: s/Robert Howard II --------------------------------------------------- Robert E. Howard II, Manager "ASSIGNOR" HOWARD FORD, INC., a Delaware corporation By: s/Scott L. Thompson ---------------------------------------------------- Scott L. Thompson, Vice President "ASSIGNEE" HOWARD-FLM, INC., a Delaware corporation By: s/Scott L. Thompson ---------------------------------------------------- Scott L. Thompson, Vice President EXHIBIT "A" LEASE EX-10.40 7 h13155exv10w40.txt 1ST AMEND. TO EMP. AGMT. - B.B. HOLLINGSWORTH, JR. EXHIBIT 10.40 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT This First Amendment to Employment Agreement ("Amendment") is entered into between Group 1 Automotive, Inc. having offices at 950 Echo Lane, Suite 100, Houston, Texas 77024 ("Employer"), and B. B. Hollingsworth, Jr., an individual currently residing at 5763 Indian Circle, Houston, Texas 77057 ("Employee"), and amends the Employment Agreement entered into between Employer and Employee dated March 1, 2002 (the "Employment Agreement."). For and in consideration of the mutual promises, covenants, and obligations contained herein and in the Employment Agreement, Employer and Employee agree as follows: Notwithstanding anything to the contrary in the Employment Agreement, in the event that any payment, benefit or distribution by Employer to or for the benefit of Employee, whether paid or payable or distributed or distributable pursuant to the terms of the Employment Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, are hereinafter collectively referred to as the "Excise Tax"), Employer shall pay to Employee an additional payment (a "Gross-up Payment") in an amount such that after payment by Employee of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed on any Gross-up Payment, Employee retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Payments. Employer and Employee shall make an initial determination as to whether a Gross-up Payment is required and the amount of any such Gross-up Payment. Employee shall notify Employer in writing of any claim by the Internal Revenue Service which, if successful, would require Employer to make a Gross-up Payment (or a Gross-up Payment in excess of that, if any, initially determined by Employer and Employee) within five days of the receipt of such claim. Employer shall notify Employee in writing at least ten days prior to the due date of any response required with respect to such claim if it plans to contest the claim. If Employer decides to contest such claim, then Employee shall cooperate fully with Employer in such action; provided, however, Employer shall bear and pay directly or indirectly all costs and expenses (including additional interest and penalties) incurred in connection with such action and shall indemnify and hold Employee harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of Employer's action. If, as a result of Employer's action with respect to a claim, Employee receives a refund of any amount paid by Employer with respect to such claim, then Employee shall promptly pay such refund to Employer. If Employer fails to timely notify Employee whether it will contest such claim or Employer determines not to contest such claim, then Employer shall immediately pay to Employee the portion of such claim, if any, which it has not previously paid to Employee. IN WITNESS WHEREOF, Employer and Employee have duly executed this Amendment in multiple originals on May 21, 2003 to be effective as of March 1, 2002. GROUP 1 AUTOMOTIVE, INC. By: /s/ Scott Thompson Name: Scott Thompson Title: Executive Vice President, Chief Financial Officer and Treasurer /s/ B.B. Hollingsworth, Jr. B. B. Hollingsworth, Jr. Employee -2- EX-10.41 8 h13155exv10w41.txt SPLIT DOLLAR LIFE INSURANCE PAYMENT DEFERRAL LTR. EXHIBIT 10.41 January 28, 2004 Hollingsworth 2000 Children's Trust 950 Echo Lane, Suite 100 Houston, TX 77024 Mr. and Mrs. B. B. Hollingsworth, Jr. 3416 Ella Lee Lane Houston, Texas 77027 Ladies and Gentlemen: As you know, on January 23, 2002, Group 1 Automotive, Inc. (the "Company") entered into a Split Dollar Life Insurance Agreement with Leslie Hollingsworth and Leigh Hollingsworth Copeland, as Trustees of the Hollingsworth 2000 Children's Trust (the "Arrangement"). When it was entered into, the Company and the other parties thereto understood the Arrangement to constitute the Company's legally binding commitment to pay the entire premium in annual payments (the "Premium Payments") beginning in 2002 through 2008 on the split dollar life insurance policy referred to in the Arrangement. In accordance with the Arrangement, the Company paid the entire $299,697 premium due on the split dollar life insurance policy for 2002 with a payment made in January 2002 and a second payment made in April 2002. At this time, due to the uncertainty surrounding the applicability of Section 402 of the Sarbanes-Oxley Act of 2002 to split dollar life insurance arrangements, including ones that were implemented prior to the passage of the Sarbanes-Oxley Act on July 30, 2002, the Company believes that it is in the best interest of both the Company and you to continue to defer the Company's obligation to pay the Premium Payments required under the Arrangement for 2003 and 2004. Accordingly, with the consent of each of you (as acknowledged below), the Company's obligation to pay the Premium Payments due in 2003 and 2004 is deferred until January 2005 or such earlier time as we have mutually determined that such payments are not prohibited by the Sarbanes-Oxley Act. This letter is not in any way intended to (i) amend or limit your rights, the rights of the Trust or the rights of the Company under the Arrangement or (ii) modify the terms of the Arrangement in any way. Sincerely yours, /s/ Michael J. Poppe -------------------- Michael J. Poppe, Vice President and Corporate Controller The foregoing is accepted and agreed to as of the date first above written: /s/ B. B. Hollingsworth, Jr. - ---------------------------- B. B. Hollingsworth, Jr., Employee /s/ Starlett W. Hollingsworth - ----------------------------- Starlett W. Hollingsworth Hollingsworth 2000 Children's Trust /s/ Leslie Hollingsworth - ------------------------ By: Leslie Hollingsworth, as Trustee /s/ Leigh Hollingsworth Copeland - -------------------------------- By: Leigh Hollingsworth Copeland, as Trustee EX-14.1 9 h13155exv14w1.txt CODE OF ETHICS FOR SPECIFIED OFFICERS EXHIBIT 14.1 GROUP 1 AUTOMOTIVE, INC - -------------------------------------------------------------------------------- CODE OF CONDUCT THE GROUP 1 WAY TO ACHIEVE SUCCESS GROUP 1 AUTOMOTIVE, INC THE GROUP 1 WAY TO ACHIEVE SUCCESS "DOING THE RIGHT THING IS NOT AN ACT, BUT A HABIT AT GROUP 1"-Ben Hollingsworth It is a condition of employment that each associate accept responsibility for complying with the Code of Conduct, the employee handbook, and all applicable policies. The employment relationship between you and our Company is "at will". The Code of Conduct does not create a contract between you and our Company. We reserve the right to change, suspend or terminate any of our policies with or without notice. (revised 12/2/02) TABLE OF CONTENTS OUR CODE OF CONDUCT- 1 PURPOSE 1 OUR EXPECTATIONS 1 REPORTING & ANSWERS 2 SPEAK UP 2 GROUP 1 HOTLINE 3 CONFIDENTIALITY 3 TAKING ACTION 3 RETALIATION 3 WORKPLACE CONDUCT- 2 EQUAL OPPORTUNITY 4 HARASSMENT 4 FAIR DEALING- 3 OUR SELLING PRACTICES 6 OUR BUYING PRACTICES 7 CONFLICT OF INTEREST-4 CONFLICT OF INTEREST 8 DISCLOSURE 10 COMPLYING WITH THE LAW-5 CONTRACTS 11 COPYRIGHTS 11 INSIDER INFORMATION AND TRADING 11 PUBLIC DISCLOSURE 13 POLITICAL CONTRIBUTIONS 13 BRIBERY 13 WORKPLACE SAFETY 13 ENVIRONMENTAL PROTECTION 14 COMPANY PROPERTY-6 COMPANY ASSETS 15 RECORDS & ACCURACY 15 CONFIDENTIAL INFORMATION 17 PRIVACY 17 USE OF COMMUNICATION SERVICES 17 COMPLIANCE WITH THE CODE-7 WAIVERS OF THE CODE 19 APPENDIX A: ANNUAL REPRESENTATION- CONFLICT OF INTEREST 20 APPENDIX B: ANNUAL REPRESENTATION- SECURITIES TRADING POLICY 21
GROUP 1 1 OUR CODE OF CONDUCT "WHENEVER YOU ARE TO DO A THING, THOUGH IT CAN NEVER BE KNOWN BUT TO YOURSELF, ASK YOURSELF HOW YOU WOULD ACT WERE ALL THE WORLD LOOKING AT YOU, AND ACT ACCORDINGLY." -Thomas Jefferson PURPOSE This Code of Conduct (this "Code") sets forth the standards of behavior expected of every employee, director and agent of our Company. How the Code will be administered is explained in this handbook. OUR EXPECTATIONS Group 1 employees must conduct their affairs with uncompromising honesty and integrity. Business ethics are no different than personal ethics. The same high standard applies to both. Employees are expected to be honest and ethical in dealing with each other, with clients, vendors and all other third parties. We must also respect the rights of our fellow employees and all third parties. Our actions must be free from discrimination, libel, slander or harassment. Each person must be accorded equal opportunity, regardless of age, race, sex, sexual preference, color, creed, religion, national origin, marital status, veteran's status, handicap or disability. Misconduct cannot be excused because it was directed or requested by another. In this regard, we are expected to alert management whenever an illegal, dishonest or unethical act is discovered or suspected. You will never be penalized simply for reporting your discoveries or suspicions. Group 1 conducts its affairs consistent with all applicable laws and regulations. These ethical standards reflect who we are and are the standards by which we choose to be judged. 1 GROUP 1 REPORTING & ANSWERS Ethics come down to us. It is up to each one of us to uphold the laws and norms that govern our business environment and associated relationships. When we see something that does not feel "right" or does not follow our legal obligations, we must speak up. Otherwise, we do not improve and correct our shortcomings. There are many resources where you can turn for help and support. We must all work together to ensure prompt and consistent action against violations of our Company's policies and this Code; you don't need to make those tough decisions alone. THE FIRST PLACE TO GET HELP is your supervisor or manager or, if that is uncomfortable or impractical, you may contact your Platform President, your platform or corporate human resources representative or a member of executive management. SPEAK UP Don't be afraid to ask questions about business or workplace conduct or compliance with this Code. You will not be disciplined for asking questions or making good faith reports. Good faith does not always mean you are right, but it does mean that you sincerely believe that you are acting ethically in any given situation with the right intent in mind. When you are confronted with questions regarding compliance with this Code or other Company policies regarding business or workplace conduct, you should consider the following questions: - DO YOU HAVE ALL THE FACTS? In order to reach the right solutions, all relevant information must be known. - WHAT ARE YOU BEING ASKED TO DO AND DOES THIS REQUEST SEEM UNETHICAL OR IMPROPER? This will enable you to focus on the specific question, and the choices you have. If something seems unethical or improper, it probably is. - WHAT IS YOUR RESPONSIBILITY AND ROLE? In most situations, there is shared responsibility. Are other colleagues informed? It may help to get others involved and discuss the problem. - DID YOU ASK FOR HELP? When unsure of what to do in any situation, you should seek guidance and ask questions before the action in question is taken. 2 GROUP 1 [TELEPHONE LOGO] THE GROUP 1 HOTLINE The Group 1 Hotline, sponsored by INTOUCH allows all associates to report concerns about possible violations of our Company's policies or this Code as they relate to discrimination, harassment, financial or accounting irregularities, substance abuse, theft, fraud or violence. Reported issues dealing with financial reporting will be forwarded to the Audit Committee of the Board of Directors. The hotline is available 24 hours a day, seven days a week. To report a possible business or workplace conduct issue, simply dial toll free to 1-877-MY-INPUT (1-877-694-6788). When the automated system prompts you to enter our Company's pass code, you should push GPI (474). From this point, let the system take over and instruct you how best to leave the information we will need to assist you. CONFIDENTIALITY We hold in confidence all conversations about ethics, compliance, business and workplace conduct issues consistent with a "need to know basis" and according to our legal obligations. Calls to the hotline are completely confidential. No one at Group 1 will hear your voice, have access to phone records or have any way of knowing who called. In some instances it may be necessary to know your identity in order to resolve your concerns. We will tell you when that is the case. TAKING ACTION We take our business and workplace conduct commitments as well as the integrity of our financial reporting very seriously. We will investigate all reported concerns. If we find violations of business or workplace conduct, or violation of any law or regulation, or accounting irregularity we will take action. We will resolve individual situations where our standards were not followed and institute changes, as necessary, to prevent similar problems from reoccurring. Violation of our policies can lead to disciplinary action, up to and including termination of employment. Violations could also lead to legal action as appropriate. RETALIATION AGAINST EMPLOYEES WHO REPORT CODE OF CONDUCT VIOLATIONS IS STRICTLY PROHIBITED by our policies. Anyone that retaliates against an employee for reporting an issue in good faith will be subject to disciplinary action. 3 GROUP 1 2 WORKPLACE CONDUCT "THE NATION THAT DESTROYS ITS SOIL DESTROYS ITSELF." -Franklin D. Roosevelt EQUAL OPPORTUNITY We are committed to providing equal opportunity in all of our employment practices, including selection, hiring, promotion, transfer, and compensation, to all qualified applicants and employees without regard to race, religion, color, sex, national origin, citizenship status, age, disability or any other protected status in accordance with the requirements of all federal, state and local laws. HARASSMENT WE DO NOT TOLERATE UNLAWFUL HARASSMENT OF ANY OF OUR EMPLOYEES OR ANY THIRD PARTY. Any form of harassment, which violates federal, state or local law, including, but not limited to harassment related to an individual's race, religion, color, sex, sexual preference, national origin, citizenship status, age, handicap or disability is a violation of this policy and will be treated as a disciplinary matter. For these purposes the term "harassment," includes, but is not limited to slurs and any other offensive remarks, jokes, other verbal, graphic, or unwelcome physical contact. If you have any questions about what constitutes harassing behavior, ask your supervisor or another member of management. If you feel that another associate is harassing you, you should immediately notify your supervisor. If you do not 4 GROUP 1 feel that the matter can be discussed with your supervisor, you should contact your General Manager, Platform President or your Human Resources representative to discuss your complaint. You may be assured that you will not be penalized in any way for reporting a harassment concern. YOUR NOTIFICATION TO MANAGEMENT OF THE PROBLEM IS ESSENTIAL. We cannot help resolve a harassment problem unless we know about it. Therefore, it is your responsibility to bring these kinds of problems to our attention in a timely manner so that we can take whatever steps are necessary to correct the problem. If management finds that an associate has violated our Harassment Policy, appropriate disciplinary action will be taken, up to and including termination. FOR ADDITIONAL INFORMATION ON OUR EQUAL EMPLOYMENT OPPORTUNITY AND HARASSMENT POLICIES PLEASE REVIEW THESE POLICIES IN YOUR HANDBOOK. 5 GROUP 1 3 FAIR DEALING "PREFER A LOSS TO A DISHONEST GAIN; THE ONE BRINGS PAIN AT THE MOMENT, THE OTHER FOR ALL TIME." -Chilon We should endeavor to deal fairly with our employees and all other third parties with whom we do business. We are committed to great customer service. By treating our customers with respect, we earn their loyalty. We show our commitment to our customers when we treat them as we would like to be treated. Since a reputation for fair dealing must be earned every day, with every transaction, it is critical that we always deal with our customers honestly and truthfully and show a genuine concern for their needs. OUR SELLING PRACTICES We must always describe our products and services accurately. Our customers benefit when we sell responsibly by explaining how our products and services meet their needs. We have an obligation to be well-informed about the performance, pricing, features and quality of the products we sell. When describing our products or comparing our products to those offered by our competition, we should always be accurate and never misrepresent the truth. OUR ADVERTISEMENTS ARE SINCERE, good faith offers to sell the advertised products or services we market. We must always represent advertised items in a truthful light and make an affirmative offer to sell them. Failing to make a good faith offer to sell or intentionally discouraging customers from purchasing advertised items in order to "switch" them to other items may constitute "bait and switch" sales tactics which are contrary to our policies and the law. Our customers may rely on our product 6 GROUP 1 performance statements when deciding whether to purchase from us. Such statements must be supported by fact. Group 1 must always make its own decisions about pricing our products and services. Federal and state antitrust laws strictly prohibit competitors from agreeing on pricing levels. THE SERVICE WE PERFORM on products is done to the best of our abilities, and with the goal of dealing honestly and fairly with customers. We perform all work that we have committed to, and which the customer has approved, in a competent and professional manner. We will not recommend or perform unnecessary work. We use parts and supplies that have been procured from reputable sources. If work is to be done for customers by someone other than Group 1, we will inform the customer that the work will not be performed by Group 1. OUR BUYING PRACTICES The Company's success depends in part on strong relationships with high quality suppliers. Suppliers must be selected on the basis of the best interest of Group 1 Automotive. NEVER MAKE VENDOR SELECTIONS BASED ON YOUR OWN PERSONAL INTEREST. Those who purchase on behalf of Group 1 must be well-informed about the suppliers they select and must always consider their financial condition, trade reputation, business practices and reliability. FOR ADDITIONAL INFORMATION ON FAIR DEALING PLEASE REVIEW THE GROUP 1 FINANCE & INSURANCE MISSION STATEMENT. 7 GROUP 1 4 CONFLICT OF INTEREST "HOLD YOURSELF RESPONSIBLE FOR A HIGHER STANDARD THAN ANYBODY ELSE EXPECTS OF YOU. NEVER EXCUSE YOURSELF." -Henry Ward Beecher An employee's inappropriate actions related to business decisions, or the improper disclosure of information or plans can have a significant impact on the Company's operations, financial position and the perception of the Company in the public market. A conflict of interest is the direct result of a situation where both the Company and an employee of the Company have vested, but differing interests in a particular transaction. All members of the Board of Directors, officers and employees have a fiduciary responsibility to enter into business transactions that are in the best interests of the Company, thereby reducing the potential for actual or apparent conflicts of interest. WHILE IT IS NOT POSSIBLE TO DEVELOP A DETAILED SET OF RULES covering all circumstances or serving as a substitute for good judgment, the following are examples of types of activity by an employee, director, officer or member of an employee's, director's, or officer's immediate family, which might cause conflicts of interest: - Owning any business that competes with the Company, or owning a direct interest in any vendor, supplier or significant customer that does business with, or seeks to do business with the Company. Shares of stock in a publicly traded company that are obtained through open market trading are excluded from this provision, so long as the ownership interest does not exceed 1% of the public company. Ownership interests in start up companies or private companies seeking to develop relationships with the Company are prohibited unless written consent is obtained from the Board of Directors. 8 GROUP 1 - Serving as a director, manager, employee or independent contractor to any vendor, supplier or competitor of the Company without specific prior knowledge and written consent of the Board of Directors. - Use or employment of Company property, information, position or personnel for personal gain or benefit beyond what is considered usual and customary in a normal business sense. - Accepting compensation or gifts (except of nominal value); engaging in excessive entertainment or other similar activities with any company or person which does or seeks to do business with the Company or is its competitor. The purpose of business entertainment and gifts in a commercial setting is to create good will and sound working relationships, not to gain unfair advantage with customers or suppliers. This area requires judgment and each situation should be considered carefully. All out of town trips/entertainment should be approved by your supervisor. - Obtaining personal loans from customers, vendors or suppliers of the Company. Loans from financial institutions with which the Company does business are permissible as long as they are in the ordinary course and are not granted at below market terms. - Representing the Company in any transaction in which the employee or a related person has a substantial personal interest. - Personally purchasing inventory from a vendor or supplier of the Company at below fair market value. - Personally purchasing inventory of the Company at below market value (particularly used vehicles and limited availability models). Employees may purchase inventory of the Company at below market value only if the purchase is made under a normal employee discount program that is available to all employees. - Taking personal opportunities that are made available through the use of Company information or position. - Disclosure of confidential or inside information to others. - Use of confidential or inside information for personal benefit (or the benefit of others), including use when buying or selling shares of stock of Group 1 in market transactions. 9 GROUP 1 PAYMENTS SHALL NOT BE MADE nor shall any property of the Company be used to bribe or influence the decisions or actions of any vendor, supplier or competitor of the Company or any governmental official, employee, or any other entities or individuals. These principles apply to all employees, and it is the responsibility of platform management to communicate this information to all employees. Platform Presidents are responsible for the conduct of their employees. DISCLOSURE FOR THE PROTECTION OF BOTH the Company and the individual, it is essential that each employee make prompt and full disclosure to their supervisor of any situation which may involve a conflict of interest, whether or not the employee is personally involved. In addition, all related party transactions involving platform executives must be communicated in writing as part of the quarterly platform representation letter. All information regarding conflicts of interest will be treated as confidential, except to the extent necessary for the protection of the interest of the Company. Information will also be disclosed for review by the Audit Committee, the Board of Directors or independent public accountants of Group 1, as deemed necessary. FOR ADDITIONAL INFORMATION ON OUR CONFLICT OF INTEREST POLICY PLEASE REVIEW THIS POLICY IN YOUR HANDBOOK. ALL GENERAL MANAGERS AND PLATFORM AND CORPORATE EXECUTIVES SHOULD REVIEW AND SIGN ANNUALLY THE ATTACHED APPENDIX A: CONFLICT OF INTEREST QUESTIONNAIRE AND RETURN IT TO THEIR SUPERVISOR AND COPY THE CORPORATE COMPLIANCE OFFICER. 10 GROUP 1 5 COMPLYING WITH THE LAW "NO MAN IS ABOVE THE LAW AND NO MAN IS BELOW IT." -Theodore Roosevelt Group 1 associates must adhere strictly to all applicable laws and regulations wherever the Company does business. This requires adherence to both the letter and spirit of the law. Many of the policies expressed in this Code are based on legal requirements. CONTRACTS We select vendors, suppliers, or contractors whose bids are most responsive to our needs. Selection decisions are based on objective information such as value, quality, price, technical excellence, service, reputation, experience and capacity. In negotiating contracts on behalf of Group 1, we should deal fairly and honestly with all parties. We may not submit false or misleading documents or proposals. COPYRIGHTS We should never make unauthorized distribution of material from copyrighted books, magazines, newspapers, video tapes, or computer programs. While it may be alright to make a working copy for your own use, multiple copies made without permission are a violation of copyright laws. INSIDER INFORMATION AND TRADING Group 1 stock is traded publicly on the New York Stock Exchange and the market price, in part, is based upon what the public knows about our Company. Investors could gain an unfair advantage through inside, non-public information that could affect their decision to buy or sell. Trading on, or "tipping" others about material, non-public information about Group 1, or its subsidiaries, or any vendor, supplier or competitor threatens our integrity and may result in serious civil and criminal penalties for both the employee and the Company. 11 GROUP 1 Many of us encounter inside information through the course of our normal business. Examples include news about our financial results prior to a formal release, planned actions regarding our stock, important lawsuits, acquisitions and senior management changes. The law forbids the purchase and sale of securities by anyone who has such material information which has not been made public through distribution over major news services or through publications widely distributed to the public. Insider trading is a complex issue, but we can avoid violations by being careful, exercising discretion and using common sense. As a general rule, we should never discuss inside information with family or friends, suggest they trade in Group 1 stock based on our inside information, or make personal investment decisions based on this information. ALL COMPANY EMPLOYEES MUST OBSERVE THE PROHIBITION ON TRADING ON MATERIAL INSIDE INFORMATION AND MAY BE SUBJECT TO TERMINATION FOR VIOLATIONS OF THE PROHIBITION. This restriction extends to the exercising of employee stock options and simultaneous sale of the underlying shares of Group 1 common stock (the most common form of exercise). However, this restriction does not extend to the exercising of employee stock options when an employee pays the exercise price and holds the underlying shares of Group 1 common stock without simultaneously selling them. Of course, the trading restrictions would apply whenever an employee subsequently sold the shares of Group 1 common stock in a market transaction. WE SHOULD NOT SPEAK WITH JOURNALISTS, FINANCIAL ANALYSTS OR SHAREHOLDERS on behalf of Group 1 unless authorized to do so. We must use caution when asked to make speeches and even in casual conversation. Group 1 is widely followed by the financial community and by many financial analysts. These analysts are constantly seeking information about the Company. Only the Chief Executive Officer and the Chief Financial Officer may talk to the financial analysts, our stockholders and the financial community about the Company's financial results, business prospects, products, competition, operating results or financial or sales projections. MATERIAL INSIDE INFORMATION MUST NOT BE DISCLOSED TO ANYONE OTHER THAN PERSONS WITHIN THE COMPANY WHOSE POSITIONS REQUIRE THEM TO KNOW IT UNTIL IT HAS BEEN PUBLICLY RELEASED BY GROUP 1. No financial data regarding the Company will be released except as authorized, specifically or generally, by the Chief Financial Officer or Chief Executive Officer. This includes disclosing information over the Web/Internet. Email intended for internal use only should not be forwarded outside the Company or disclosed to third parties. 12 GROUP 1 Associates considered in the Group 1 "window group" are required to follow the above policies plus the more restrictive policies outlined in Appendix B. THE "WINDOW GROUP" IS DEFINED AS MEMBERS OF THE GROUP 1 BOARD OF DIRECTORS, ALL GROUP 1 CORPORATE OFFICERS, AND PLATFORM PRESIDENTS AND CHIEF FINANCIAL OFFICERS. They must review and sign Appendix B: Insider Trading Policy and return it to Corporate Compliance. PUBLIC DISCLOSURE We all have the personal responsibility to make sure that our Company makes full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submit to, the Securities and Exchange Commission and in other public communications made by us. Compliance with this Code and adherence to the standards set forth in the Code will help us achieve that goal. POLITICAL CONTRIBUTIONS We cannot give Group 1 funds, property, services or labor directly or indirectly, to any candidate, political organization or political party without specific approval of the Chief Executive Officer. This applies to any federal, state, or local election. The Group 1 PAC is the appropriate method for providing our collective or corporate support for political initiatives. BRIBERY It is never right to give or receive a bribe or kickback. A kickback is the giving of money, fees, commissions, credits, gifts, favors or anything else of value provided directly or indirectly in return for favorable treatment. The U.S. government has a number of laws and regulations regarding business gratuities which may be accepted by U.S. government personnel. The promise, offer or delivery to an official or employee of the U.S. government of a gift, favor or other gratuity in violation of these rules would not only violate Company policy, but could also be a criminal offense. State and local governments, as well as foreign governments, may have similar rules. To determine whether a gift or gratuity to be made on behalf of the Company complies with applicable laws or this Code, you should seek guidance from a senior executive of the corporate office. WORKPLACE SAFETY Each of us is responsible for observing safety rules, policies, laws, and regulations. A safe and healthy workplace allows everyone to do quality work and perform with 13 GROUP 1 excellence. We must comply with all applicable Occupational Safety and Health Administration (OSHA) requirements and promptly correct any problems in the workplace that may jeopardize safety. Each associate is responsible for bringing any problems or potential workplace safety violations that they know about to their manager's attention. We expect your full concentration while on the job. You must report to work able to do your job, free from the effects of illegal drugs or alcohol. You may not use, possess, purchase, distribute or be impaired by illegal drugs while working at Group 1. We reserve the right to test associates when we suspect illegal drug or alcohol use and to conduct searches of personal or Company property to enforce our standards. We will not tolerate workplace violence or threats of any kind whether committed by or against our associates. You may not carry any licensed or unlicensed weapon in Company buildings or workplaces. Acts of threatening or violent behavior must be reported to your manager or human resources representative. ENVIRONMENTAL PROTECTION Group 1 is committed to protecting the environment. This commits us all to maintain a high level of awareness on environmental matters, including cooperating with governmental agencies, vendors, and communities in environmental protection efforts and complying with all applicable environmental laws and regulations. FOR ADDITIONAL INFORMATION ON OSHA REQUIREMENTS OR ENVIRONMENTAL AND SAFETY PLEASE REVIEW THE RELATED POLICIES IN YOUR HANDBOOK. 14 GROUP 1 6 COMPANY PROPERTY "THE EXPECTATIONS OF LIFE DEPEND UPON DILIGENCE; THE MECHANIC THAT WOULD PERFECT HIS WORK MUST FIRST SHARPEN HIS TOOLS." -Confucius We are given Company resources to help us do our jobs. Each of us is responsible for safeguarding Company funds, information, tools and property. We must be careful to prevent theft, loss, or damage to our property. COMPANY ASSETS If we see or suspect that someone is stealing or otherwise not properly protecting Company assets, we must report these concerns to our supervisor. Theft, carelessness and waste have a direct impact on the Company's profitability. All Company assets should be used for legitimate purposes. Company funds may not be paid to others without a signed, written agreement or an approved, appropriately detailed invoice. In addition, our Company will not extend or maintain personal loans to or for the benefit of any of our directors or executive officers. We must never maintain or authorize the accumulation of Company funds that are not recorded on Group 1's books and records. RECORDS & ACCURACY When we are asked to maintain reports or records, we are also responsible for the integrity of those records. We must not knowingly make any false or misleading entries. All Company financial reports, computer-based records, sales reports, expense accounts, time sheets and other similar documents must be completed accurately, completely and in accordance with Group 1's procedures and legal requirements governing the maintenance of records. No accounting entries will be recorded that intentionally conceal, disguise or misrepresent the true nature of any transaction involving the Company. Mistakes should never be covered up, but should be immediately disclosed and corrected. In this respect, the following guidelines must be followed: 15 GROUP 1 - No undisclosed, unrecorded, or "off book" funds should be established for any purpose; - No false or fictitious invoices should be paid or created; - No false or artificial entries should be made or misleading reports issued; - Revenues, expenses, assets, liabilities and equity of the Company shall be recognized and reported on the Company's financial statements in accordance with the Company's standard practices and generally accepted accounting practices; - No officer or director should take any action designed to fraudulently influence, coerce, manipulate or mislead our independent accountants; - No director or officer shall, directly or indirectly make or cause to be made a materially false or misleading statement; or omit to state, or cause another person to omit to state, any material fact necessary in order to make statements made, in light of the circumstances under which such statements were made, not misleading to our independent accountants in connection with (i) any audit or examination of our financial statements, or (ii) the preparation or filing of any document or report to be filed with the Securities and Exchange Commission; and - No director or officer, or any other person acting under the direction thereof, shall directly or indirectly take any action to fraudulently influence, coerce, manipulate or mislead our independent accountants if that person knew or was unreasonable in not knowing that such action could, if successful, result in rendering our financial statements materially misleading. If you believe that the Company's books and records are not being maintained in accordance with these requirements, you should report the matter directly by calling the Group 1 Hotline. In addition, you are prohibited from knowingly altering, destroying, mutilating, concealing, covering-up, falsifying or making a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence an investigation by any company auditor or by any agency of the government of the United States of America. 16 GROUP 1 CONFIDENTIAL INFORMATION We carefully protect our Company's confidential and proprietary information. Do not disclose business ideas, processes, negotiations, unannounced products, commercially sensitive data or other information entrusted to you by the Company (such as pricing, financial data, marketing plans, technical data, or research data) except when disclosure is authorized or legally mandated. Confidential information includes all non-public information that, if disclosed, might be of use to competitors, or harmful to the Company or its customers, or have an impact on the value of public securities. Confidential information also includes all non-public information that is learned about the Company's suppliers and customers that is not in the public domain. The obligation to preserve confidential information continues even after employment or agency with the Company ends. Any documents, papers, records, or other tangible items that contain trade secrets or proprietary information are the property of the Company. On occasion, we obtain confidential and proprietary information from other companies with which we do business. We safeguard their information with the same care we would give to our own Company's information. PRIVACY We are very careful with private and confidential information. Associate records, such as employment records, home addresses and telephone numbers, financial data, and medical records, are confidential and used only for business purposes. OUR CUSTOMERS TRUST US with one of their most important assets-their personal information. We reveal our customers' personal information only to others who need this information for legitimate business reasons when permitted by law or where the law requires disclosure. USE OF COMMUNICATION SERVICES Communications and computer systems (including e-mail, the Internet, telephones, etc.) are business tools and should be used primarily for business purposes. The use of these devices may be monitored at any time without your prior approval. We expect you to use only properly licensed and approved software on our computers and abide by all license terms. When you use e-mail or the Internet, your activity can be monitored and traced back to you. Don't put anything into an electronic message that you would not want to read later on paper. If you receive an offensive e-mail message, do not forward it to someone else. If the e-mail comes from a non-business acquaintance, delete it from your computer. If the e-mail comes from someone in the Company or from someone with whom we do business, notify your manager or someone in Human Resources. 17 GROUP 1 The Internet is a communication tool that can help us do our jobs more efficiently. However, do not use the Internet to access sites that may be offensive to others. Of special concern is the misuse of the Internet to access Web sites and chat groups that focus on racism, bigotry, gambling or pornography. Your use of the Internet should not harm productivity, embarrass our Company, or interfere with your regular work duties. Misuse of the internet could result in termination of employment and, if appropriate, prosecution under state or federal law. On occasion and within reasonable limits, you may use Company telephones and other communication resources for necessary personal reasons. Unauthorized use of long-distance telephone service should be avoided. FOR ADDITIONAL INFORMATION CONCERNING COMPANY PROPERTY, PLEASE SEE RELATED POLICIES IN YOUR HANDBOOK. 18 GROUP 1 7 COMPLIANCE WITH THE CODE We require that all laws applicable to us or the conduct of our business, regardless of where located, be observed. If a law conflicts with a policy in this Code, the law must be followed; however, if a local custom or policy conflicts with this Code, this Code must be followed. If in doubt about how to deal with conflicts between this Code and local laws, customs or practices, the Platform President or a senior officer at our corporate office should be contacted for guidance. This Code and all laws and regulations applicable to our Company must be strictly followed. The exercise of personal discretion or judgment in this area is not acceptable. We all have the personal responsibility to adhere to these standards and apply them in good faith and with reasonable business judgment. Any of our employees who do not adhere to these standards are acting outside the scope of employment or agency and may be subject to termination and, if appropriate, prosecution for failure to comply with such standards. Along with legal compliance, you should also observe high standards of business and personal ethics when performing assigned duties. This requires using honesty and integrity when dealing with other Company employees, the public, the business community, stockholders, customers, suppliers and governmental and regulatory authorities. WAIVERS OF THE CODE OF CONDUCT AND ETHICS Any waiver of this Code for corporate officers or directors of Group 1 may be made only by the Board of Directors or a committee of the board and will be promptly disclosed as required by the rules and regulations of the Securities and Exchange Commission, the New York Stock Exchange, and all applicable laws. Employees can apply for a waiver from their Platform President or a corporate executive officer. No illegal acts can be waived. 19 APPENDIX A: ANNUAL REPRESENTATION - CONFLICT OF INTEREST QUESTIONNAIRE I have reviewed and understand the Conflict of Interest section in the Group 1 Code of Conduct. Unless separately disclosed in an attachment to this questionnaire, to the best of my knowledge and belief, neither I, nor any member of my immediate family has: - Owned an interest in any direct competitor, or owned a direct interest in any vendor, supplier or significant customer that does, or seeks to do business with Group 1 Automotive, Inc. or any of its subsidiaries or affiliates (collectively referred to herein as the "Company"). (This excludes ownership of shares of stock of publicly traded companies that were obtained in normal market transactions and do not exceed 1% ownership interest and ownership intent approved in writing.) - Served as a director, manager, employee or independent contractor to any vendor, supplier or competitor of the Company without the specific prior knowledge and written consent of the Board of Directors of Group 1 Automotive, Inc. - Accepted compensation or gifts (except of nominal value) from, or engaged in excessive entertainment with any company or person that does or seeks to do business with the Company or is its competitor. This area requires judgment and each situation should be considered carefully. All trips/entertainment out of town should be approved by your supervisor. - Obtained personal loans from any vendor, customer or supplier of the Company. Loans from financial institutions have been in the ordinary course and were not made at below market terms. - Represented the Company in a transaction in which a related person or I had a substantial personal interest. - Personally purchased inventory from a vendor or supplier of the Company at below fair market value. - Except as described below, personally purchased inventory of the Company at below market value (particularly used vehicles and limited availability models). Any inventory purchases below market value were made under a normal employee discount program that is available to all employees. - Disclosed confidential or inside information to others. - Used confidential or inside information, including when buying or selling shares of stock of Group 1 Automotive, or shares of any competitor, vendor or supplier. in market transactions. - Contributed Company money, property, or services, to any political candidate or organization, or for any other political purpose. - Made payments to influence the decisions or actions of any vendor, supplier, or competitor of the Company or any governmental official or any employee of any of the above. - Traded in Group 1 common stock during any Company blackout period. Signed ___________________ Date___________________ NOTE: This Representation is required annually from Platform Presidents, Platform Executives, General Managers and Corporate Officers. 20 APPENDIX B: ANNUAL REPRESENTATION - SECURITIES TRADING POLICY (THIS IS REQUIRED FOR THE WINDOW GROUP- BOARD OF DIRECTORS, PLATFORM PRESIDENTS, PLATFORM EXECUTIVES, AND ALL CORPORATE OFFICERS.) The purpose of this policy is to establish consistent guidelines for compliance with U.S. federal statutes and regulations of the Securities and Exchange Commission ("SEC") and the New York Stock Exchange ("NYSE") regarding trading in Group 1's common stock. BACKGROUND The SEC, implementing various U.S. federal statutes, has enacted various regulations regarding the use and public disclosure of information about a corporation that is not known to the public, commonly known as "inside information." The purpose of these regulations is to protect the interests of shareholders by providing them with prompt and complete information about significant corporate developments that might affect the value of their investments and to assure that insiders do not profit from information not available to the investing public. These regulations and the underlying statutes require Group 1 and its directors and employees to ensure that information about the Company is not used unlawfully in connection with the purchase and sale of securities. Although this policy addresses federal securities laws, employees and agents should know that, in most cases, the violations of federal securities laws that are described in this policy are also violations of state securities laws and additional penalties may accrue under such state securities laws. All employees and agents of the Company should pay particularly close attention to the applicable laws against trading while in the possession of inside information. The federal securities laws are based on the belief that all persons trading in a company's securities should have equal access to all "material" information about that company. Therefore, if an employee of a company possesses material nonpublic information regarding a company or its securities, that employee is prohibited from buying or selling stock in the company until the information has been disclosed and disseminated to the public. This is because the employee knows information that will probably cause the stock price to change and it would be unfair for the employee to have an advantage that the rest of the investing public does not have. In general, it is a violation of U.S. federal securities laws for any person to buy or sell securities if he or she is in possession of MATERIAL INSIDE INFORMATION relating to those securities. Information is "MATERIAL" if it could be reasonably expected to affect a person's decision whether to buy, sell or hold the securities. Information is "INSIDE INFORMATION" if it has not been publicly disclosed. Furthermore, it is illegal for any person in possession of material inside information to provide other people with inside information or to recommend that they buy or sell the securities whether related to the Company or any third party. This is called "tipping." In this case, both the person who provides and the person who receives the information may be held liable. A violation of the U.S. federal insider trading laws can expose the violator to criminal fines of up to three times the profits earned (or losses avoided) and imprisonment for up to ten years, in addition to civil penalties of up to three times the profits earned (or losses avoided), and injunctive actions. The securities laws also subject controlling persons to civil penalties for illegal insider trading by employees. Controlling persons include Group 1 and may also include directors, officers and supervisory personnel. These persons may be subject to fines up to the greater of $1,000,000 or three times the profits earned (or losses avoided) by the inside trader. Inside information does not belong to the individual directors, employees or agents who may handle it or otherwise become knowledgeable about it, but instead it is an asset of the Company. A person who uses 21 inside information for personal benefit or discloses it to others outside the Company violates the Company's interests and commits a fraud against members of the investing public and against the Company. COMPANY POLICY GENERAL DISCLOSURE POLICY. The Company's strict policy is to make prompt and complete disclosure of material information to the public when and as required by the federal and state securities laws and rules and by the NYSE. TRADING RESTRICTIONS. TRADING IN GROUP 1 COMMON STOCK. No employee shall place a purchase or sale order, or recommend that another person place a purchase or sale order, in Group 1's common stock when he or she has knowledge of material information concerning the Company that has not been disclosed to the public. This includes selling shares acquired by exercising employee stock options. Any employee who possesses material inside information must wait until the information has been publicly released before trading. Group 1 discourages employees from ever making trading recommendations regarding Group 1 common stock to third parties including family members. Materiality. Information about the Company is MATERIAL when it would influence a reasonable investor's decision to buy or sell Group 1 common stock. Examples of material inside information include: - Significant financial information that has not yet been disclosed, whether positive or adverse, such as unreleased financial results for a quarter. - An unannounced merger, acquisition or other significant transaction. - Significant changes in relationships with the automobile manufacturers. - Unannounced major personnel changes. PROHIBITION AGAINST SELLING SHORT OR TRADING IN OPTIONS. The Board of Directors of Group 1 has approved a policy prohibiting directors, officers, platform presidents, and platform chief financial officers and general managers of dealerships and their spouses and relatives living in their houses from: - making "short" sales of Group 1's stock; - engaging in any "hedging" transaction in Group 1's stock or - otherwise buying or selling puts, calls or options in respect of Group 1's stock at any time. "Short" sales of securities are sales of securities that the seller does not own at the time of the sale or, if owned, that will not be delivered within 20 days of the sale. A person usually sells short when he or she thinks the market is going to decline substantially or the stock will otherwise drop in value. If the stock falls in price as expected, the person selling short can then buy the stock at a lower price for delivery at the earlier sale price (this is called "covering the short"). The person then will pocket the difference in price as profit. In addition to the fact that it is illegal for directors and officers to sell Group 1's stock short, the Board of Directors believes it is inappropriate for its insiders to bet against Group 1's stock. Some of you may wish to "hedge" the stock you currently own so you can lock in a favorable price. You may seek the advice of a broker or a broker may call you and suggest that you lock in the favorable price by entering 22 into a "hedge". If a broker "hedges" the stock for you, the broker will sell Group 1's stock short as part of that transaction. This type of transaction is similar to you selling Group 1's stock short and is also prohibited. Puts, calls and options for Group 1's stock also afford the opportunity for insiders to profit from a market view that is adverse to the Company. Options trading is highly speculative and very risky. People who buy options are betting that the stock price will move rapidly. Puts, calls and options carry a high risk of inadvertent securities law violations and as a result, all such transactions are prohibited. This prohibition does not cover employee stock options granted to you by Group 1, which are not tradable. TRADING GUIDELINES. PERSONS SUBJECT TO GUIDELINES. These guidelines apply to all Company employees and directors of Group 1, and to the members of their immediate families. ALL COMPANY EMPLOYEES MUST OBSERVE THE PROHIBITION ON TRADING ON MATERIAL INSIDE INFORMATION AND MAY BE SUBJECT TO TERMINATION FOR VIOLATIONS OF THE PROHIBITION. This restriction extends to the exercising of employee stock options and simultaneous sale of the underlying shares of Group 1 common stock (the most common form of exercise). However, this restriction does not extend to the exercising of employee stock options when an employee pays the exercise price and holds the underlying shares of Group 1 common stock without simultaneously selling them. Of course, the trading restrictions would apply whenever an employee subsequently sold the shares of Group 1 common stock in a market transaction. ADDITIONAL RESTRICTIONS ON THE WINDOW GROUP. The Window Group consists of (a) all members of the Group 1 Board of Directors; (b) all Group 1 officers; (c) all Platform Presidents and chief financial officers and (d) any other employees designated in writing by the Chief Executive Officer. The Window Group is subject to the following restrictions on trading in Group 1 common stock: - Trading in Group 1 common stock in each quarter is permitted only within the period which begins on the day after the completion of Group 1's conference call with analysts, of the announcement of financial results for the preceding fiscal quarter and ends on the last day of the last month of the quarter. Group 1's fiscal year ends on December 31, and its quarters end on March 31, June 30, September 30 and December 31. - The Chief Executive Officer or the Chief Financial Officer may from time to time "close the window" for trading. Therefore members of the "window group" should check with the Chief Executive Officer or Chief Financial Officer or their designated representative before trading. - Trading in Group 1 common stock is prohibited during any Company blackout period. - There shall be no trading outside the trading window except (a) pursuant to a trading plan which complies with SEC Rule 10b5-1 or (b) under mitigating circumstances as approved in writing by the Chief Executive Officer. - Individuals in the Window Group are also subject to the general restrictions on all employees. - All trades are subject to prior review and must be pre-cleared with the Chief Executive Officer or the Chief Financial Officer. Once you have received clearance to affect a trade, you must initiate the trade within three business days or you must go through the pre-clearance process again. - If you are subject to Section 16 of the Securities Exchange Act of 1934 (generally Senior Group 1 corporate officers and directors), you must comply with Section 16 of the 23 Securities Exchange Act of 1934 and disclose most purchases and sales of securities of Group 1 within two business days of the execution of the transaction. Contact the Company's legal department for assistance with your obligation to comply with Section 16 disclosure issues. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. MATERIAL INSIDE INFORMATION MUST NOT BE DISCLOSED TO ANYONE OTHER THAN PERSONS WITHIN THE COMPANY WHOSE POSITIONS REQUIRE THEM TO KNOW IT UNTIL IT HAS BEEN PUBLICLY RELEASED BY GROUP 1. No financial data regarding the Company will be released except as authorized, specifically or generally, by the Chief Financial Officer or Chief Executive Officer. This includes disclosing information over the Web/Internet. Employees should be aware that it is possible to trace email, even anonymous messages. Email intended for internal use only should not be forwarded outside the Company or disclosed to third parties. FINANCIAL ANALYSTS AND STOCKHOLDERS. Group 1 is widely followed by the financial community and by many financial analysts. These analysts are constantly seeking information about the Company. Only the Chief Executive Officer and the Chief Financial Officer may talk to the financial analysts, our stockholders and the financial community about the Company's financial results, business prospects, products, competition, operating results or financial or sales projections. Any discussions between an analyst or stockholder and any Company employee or board member of Group 1 other than the Chief Executive Officer or Chief Financial Officer must be expressly authorized by any one of such individuals. Employees should direct all inquiries from financial analysts or stockholders, even email, to the Chief Executive Officer or the Chief Financial Officer. VIOLATIONS OF SECURITIES TRADING POLICY. This policy is not an absolute guaranty of immunity from violations of the laws against insider trading. In the final analysis, each employee must bear the responsibility for his or her actions. If you violate this policy, Group 1 may not be able to help you and may be forced to take appropriate actions to enforce its policy and to assist authorities in upholding the law. ANY EMPLOYEE WHO ENGAGES IN ILLEGAL INSIDER TRADING, SPECULATES IN THE OPTIONS MARKET OR SELLS GROUP 1 COMMON STOCK SHORT MAY BE IMMEDIATELY TERMINATED. REPORTING VIOLATIONS. If you know or have reason to believe that this Securities Trading Policy on securities trading has been or is about to be violated in any way, you should promptly bring the actual or potential violation to the attention of the Chief Executive Officer or the Chief Financial Officer. QUESTIONS REGARDING SECURITIES TRADING POLICY. If you have any questions about the Securities Trading Policy, you should contact the Chief Executive Officer or the Chief Financial Officer. I HAVE READ THE POLICY OUTLINED ABOVE AND I AM IN FULL AND COMPLETE COMPLIANCE. Name _____________________ Signed ___________________ Date __________________ 24 EX-21.1 10 h13155exv21w1.txt SUBSIDIARY LIST EXHIBIT 21.1 SUBSIDIARY LIST Perimeter Ford, Inc. dba World Ford Sandy Springs Delaware corporation Jim Tidwell Ford, Inc. dba Jim Tidwell's World Ford Delaware corporation GPI Atlanta-T, Inc. dba World Toyota dba World Toyota Collision and Glass Center dba World Scion Delaware corporation GPI Atlanta-FLM, Inc. dba World Lincoln-Mercury Snellville Delaware corporation GPI Atlanta-FLM II, Inc. dba World Lincoln Mercury Alpharetta Delaware corporation GPI Atlanta-F, Inc. dba World Ford Stone Mountain Georgia corporation Harvey-T, Inc. Delaware corporation Harvey Ford, LLC dba Don Bohn Ford dba Don Bohn Used Cars Delaware limited liability company Harvey GM, LLC dba Don Bohn Buick, Pontiac GMC dba Don Bohn Used Cars Delaware limited liability company Harvey Operations-T, LLC dba Bohn Brothers Toyota dba Bohn Brothers Scion Delaware limited liability company Harvey-FLM, LLC dba Don Bohn Lincoln Mercury Delaware limited liability company Harvey-SM, LLC dba Don Bohn Mitsubishi Delaware limited liability company Page 1 of 10 Bohn-DC, LLC dba Don Bohn Dodge Delaware limited liability company Bohn-FII, LLC dba Bohn Ford Delaware limited liability company Bohn-FIII, LLC Delaware limited liability company Bohn Holdings-F, Inc. Delaware corporation Bohn Holdings-GM, Inc. Delaware corporation Bohn Holdings-DC, Inc. Delaware corporation Bohn Holdings-S, Inc. Delaware corporation NJ-DM, Inc. dba David Michael Motor Cars of Freehold Delaware corporation NJ-H, Inc. dba David Michael Honda of Freehold Delaware corporation NJ-SV, Inc. dba David Michael Volkswagen of Freehold Delaware corporation Koons Ford, LLC dba World Ford Pembroke Pines Delaware limited liability company Courtesy Ford, LLC dba World Ford Kendall Delaware limited liability company Key Ford, LLC dba World Ford Pensacola Delaware limited liability company Gulf Breeze Ford, LLC dba Gulf Breeze Ford Delaware limited liability company Bob Howard Chevrolet, Inc. dba Bob Howard Subaru dba Bob Howard Chevrolet-Geo dba Howard Chevrolet Oklahoma corporation Page 2 of 10 Bob Howard Dodge, Inc. Oklahoma corporation Bob Howard Motors, Inc. dba Bob Howard Toyota dba Bob Howard Scion Oklahoma corporation Bob Howard Nissan, Inc. Oklahoma corporation Howard Pontiac-GMC, Inc. dba Bob Howard Automall Oklahoma corporation Howard-DC, Inc. dba Bob Howard Jeep Eagle Delaware corporation Howard-GM, Inc. dba Bob Howard Pontiac dba Bob Howard GMC Truck Delaware corporation Howard-GM II, Inc. dba John Smicklas Chevrolet Delaware corporation Howard-H, Inc. dba Bob Howard Honda Delaware corporation Howard-HA, Inc. dba Bob Howard Acura Delaware corporation Howard-SI, Inc. dba Bob Howard Isuzu Delaware corporation Bob Howard Automotive-East, Inc. dba South Pointe Chevrolet Oklahoma corporation Howard-DCII, Inc. dba Crown Jeep dba Bob Howard Crown Jeep Delaware corporation Howard-GMIII, Inc. dba Crown Buick dba Bob Howard Crown Buick dba Crown Autoworld Delaware corporation Page 3 of 10 Howard-SB, Inc. dba Crown BMW Delaware corporation Howard Ford, Inc. dba Bob Howard Lincoln Mercury dba Bob Howard Downtown Lincoln Mercury dba Bob Howard Downtown Ford Delaware corporation Howard-FLM, Inc. dba Bob Howard Lincoln Mercury of Edmond Delaware corporation Casa Chevrolet Inc. dba Casa Chevrolet at Lomas & Louisiana New Mexico corporation Casa Chrysler Plymouth Jeep Inc. dba Casa Chrysler Jeep on the Westside New Mexico corporation Sunshine Buick Pontiac GMC Truck, Inc. dba Casa Buick Pontiac GMC on San Mateo New Mexico corporation Chaperral Dodge, Ltd. dba Dallas Dodge Chrysler Jeep Texas limited partnership Kutz-N, Ltd. dba Courtesy Nissan Texas limited partnership Luby Chevrolet Co. Delaware corporation Maxwell Chrysler Dodge Jeep, Ltd. dba Maxwell Superstore Texas limited partnership Prestige Chrysler Northwest, Ltd. dba Maxwell Dodge dba Maxwell Automotive Group dba Maxwell Dodge Supercenter Texas limited partnership Prestige Chrysler South, Ltd. dba Maxwell Chrysler South dba Maxwell South Texas limited partnership Maxwell Ford, Ltd. dba Maxwell Ford Texas limited partnership Page 4 of 10 Maxwell-NII, Ltd. dba Maxwell Nissan Round Rock Texas limited partnership Maxwell-SM, Ltd. dba Maxwell Mitsubishi North Texas limited partnership Maxwell-N, Ltd. dba Maxwell Nissan North Texas limited partnership Maxwell-GMII, Ltd dba Freedom Chevrolet Texas limited partnership McCall-H, Ltd. dba Sterling McCall Honda of Kingwood dba Sterling McCall Honda Texas limited partnership McCall-HA, Ltd. dba Sterling McCall Acura Texas limited partnership McCall-N, Ltd. dba Sterling McCall Nissan Texas limited partnership McCall-T, Ltd. dba Sterling McCall Toyota dba Sterling McCall Scion Texas limited partnership McCall-TII, Ltd. dba Sterling McCall Toyota-Fort Bend Texas limited partnership McCall-TL, Ltd. dba Sterling McCall Lexus dba Lexus of Clear Lake Texas limited partnership Amarillo Motors-C, Ltd. dba Gene Messer Cadillac dba Gene Messer Mitsubishi Texas limited partnership Amarillo Motors-F, Ltd. dba Gene Messer Ford of Amarillo dba Gene Messer Mazda dba Gene Messer Ford, Lincoln Mercury and Mazda of Amarillo dba Gene Messer Ford Lincoln Mercury Texas limited partnership Page 5 of 10 Amarillo Motors-J, Ltd. dba Gene Messer Jeep dba Gene Messer Chrysler-Plymouth dba Gene Messer Chrysler-Plymouth Jeep Texas limited partnership Amarillo Motors-SM, Ltd. dba Gene Messer Mitsubishi of Amarillo Texas limited partnership Lubbock Motors-GM, Ltd. dba Shamrock Chevrolet Texas limited partnership Lubbock Motors, Ltd. dba The Credit Connection dba The Credit Connection of Amarillo Texas limited partnership Lubbock Motors-F, Ltd. dba Gene Messer Ford dba The Credit Connection dba Gene Messer Value Lot dba Gene Messer Vale Lot Wolfforth Texas limited partnership Lubbock Motors-S, Ltd. dba Gene Messer Mitsubishi dba Gene Messer Volkswagen Texas limited partnership Lubbock Motors-SH, Ltd. dba Gene Messer Hyundai dba Gene Messer Kia Texas limited partnership Lubbock Motors-T, Ltd. dba Gene Messer Toyota Texas limited partnership Rockwall Automotive-DCD, Ltd. dba Rockwall Dodge Texas limited partnership Rockwall Automotive-F, Ltd. dba Rockwall Ford-Mercury Texas limited partnership Miller Automotive Group, Inc. California corporation Miller Family Company, Inc. dba Miller Honda - Van Nuys California corporation Miller Infiniti, Inc. California corporation Page 6 of 10 Miller Imports, Inc. dba Miller Mitsubishi California corporation Miller Nissan, Inc. dba Miller Nissan - Van Nuys California corporation Millbro, Inc. dba Miller Honda of Culver City California corporation FMM, Inc. dba Miller Toyota dba Miller Scion California corporation Miller-NII, Inc. dba Miller Nissan - Woodland Hills Delaware corporation Mike Smith Autoplex, Inc. dba Mike Smith Dodge dba Mike Smith Autoplex Mercedes Benz dba Mike Smith Autoplex - German Imports, Inc. dba Mike Smith Motors dba Mike Smith Cadillac dba Mike Smith Pontiac dba Mike Smith GMC Truck dba Mike Smith Autoplex Buick Texas corporation Mike Smith Autoplaza, Inc. dba Mike Smith Nissan dba Mike Smith Mitsubishi dba Mike Smith Honda dba BMW of Beaumont dba Mike Smith BMW Texas corporation Mike Smith Automotive-H, Inc. Delaware corporation Mike Smith Automotive-N, Inc. Texas corporation Mike Smith Autoplex Buick, Inc. Texas corporation Mike Smith Autoplex Dodge, Inc. dba Mike Smith Dodge Texas corporation Mike Smith GM, Inc. Delaware corporation Page 7 of 10 Mike Smith Autoplex-German Imports, Inc. Texas corporation Mike Smith Imports, Inc. Texas corporation Mike Smith Motors, Inc. Texas corporation Ira Automotive Group, LLC Delaware limited liability company Danvers-DCII, Inc. dba Ira Dodge-Medford Delaware corporation Danvers-DCIII, Inc. dba Ira Dodge-Lowell dba Ira Chrysler Jeep Dodge Delaware corporation Danvers-S, Inc. dba Ira Mazda-Isuzu dba Ira Porsche-Audi Delaware corporation Danvers-SU, Inc. dba Ira Subaru Delaware corporation Danvers-T, Inc. dba Ira Toyota Delaware corporation Danvers-TII, Inc. dba Ira Toyota II Delaware corporation Danvers-TIII, Inc. dba Ira Toyota III Delaware corporation Danvers-TL, Inc. dba Ira Lexus Delaware corporation Danvers-N, Inc. dba Ira Nissan Tewksbury Delaware corporation Danvers-NII, Inc. dba Ira Nissan Woburn Delaware corporation Group 1 Associates, Inc. Delaware corporation Page 8 of 10 Group 1 Realty, Inc. Delaware corporation Group 1 FL Holdings, Inc. Delaware corporation Delaware Acquisition-GM, LLC Delaware limited liability company Delaware Acquisition-F, LLC Delaware limited liability company Delaware Acquisition-DC, LLC Delaware limited liability company Delaware Acquisition-T, LLC Delaware limited liability company Delaware Acquisition-N, LLC Delaware limited liability company Group 1 Holdings-DC, LLC Delaware limited liability company Group 1 Holdings-F, LLC Delaware limited liability company Group 1 Holdings-GM, LLC. Delaware limited liability company Group 1 Holdings-H, LLC. Delaware limited liability company Group 1 Holdings-N, LLC. Delaware limited liability company Group 1 Holdings-S, LLC. Delaware limited liability company Group 1 Holdings-T, LLC Delaware limited liability company Group 1 LP Interests-DC, Inc. Delaware corporation Group 1 LP Interests-F, Inc. Delaware corporation Group 1 LP Interests-GM, Inc. Delaware corporation Group 1 LP Interests-H, Inc. Delaware corporation Group 1 LP Interests-N, Inc. Delaware corporation Page 9 of 10 Group 1 LP Interests-S, Inc. Delaware corporation Group 1 LP Interests-T, Inc. Delaware corporation GPI Ltd. Texas limited partnership Group 1 Automotive Reinsurance, Ltd. Nevis Island corporation Group 1 Automotive Reinsurance TWO, Ltd. Nevis Island corporation Page 10 of 10 EX-23.1 11 h13155exv23w1.txt CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-3 No. 333-75714 and Form S-8 No. 333-106486, No.333-42165, No. 333-70043, No. 333-83260, No. 333-80399, No. 333-75784 and No. 333-75754) of Group 1 Automotive, Inc. of our report dated February 26, 2004, with respect to the consolidated financial statements of Group 1 Automotive, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 2003. /s/ Ernst & Young LLP Houston, Texas March 11, 2004 EX-31.1 12 h13155exv31w1.txt CERTIFICATION OF CEO UNDER SECTION 302 Exhibit 31.1 CERTIFICATION I, B.B. Hollingsworth, Jr., Chief Executive Officer, certify that: 1. I have reviewed this annual report on Form 10-K of Group 1 Automotive, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and c) Disclosed in this report any change in the registrant's internal controls over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect, the registrant's internal controls over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material deficiencies in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: March 11, 2004 /s/ B.B. Hollingsworth, Jr. ------------------------------- B.B. Hollingsworth, Jr. Chief Executive Officer EX-31.2 13 h13155exv31w2.txt CERTIFICATION OF CFO UNDER SECTION 302 Exhibit 31.2 CERTIFICATION I, Scott L. Thompson, Chief Financial Officer, certify that: 1. I have reviewed this annual report on Form 10-K of Group 1 Automotive, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and c) Disclosed in this report any change in the registrant's internal controls over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect, the registrant's internal controls over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material deficiencies in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: March 11, 2004 /s/ Scott L. Thompson ----------------------- Scott L. Thompson Chief Financial Officer EX-32.1 14 h13155exv32w1.txt CERTIFICATION OF CEO UNDER SECTION 906 Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF GROUP 1 AUTOMOTIVE, INC. PURSUANT TO 18 U.S.C. Section 1350 In connection with the accompanying report on Form 10-K for the fiscal year ended December 31, 2003, and filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, B.B. Hollingsworth, Jr., Chief Executive Officer of Group 1 Automotive, Inc. (the "Company"), hereby certify, to the best of my knowledge, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 11, 2004 /s/ B.B. Hollingsworth, Jr. --------------------------- B.B. Hollingsworth, Jr. Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to Group 1 Automotive, Inc. and will be retained by Group 1 Automotive, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 15 h13155exv32w2.txt CERTIFICATION OF CFO UNDER SECTION 906 Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER OF GROUP 1 AUTOMOTIVE, INC. PURSUANT TO 18 U.S.C. Section 1350 In connection with the accompanying report on Form 10-K for the fiscal year ended December 31, 2003, and filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Scott L. Thompson, Chief Financial Officer of Group 1 Automotive, Inc. (the "Company"), hereby certify, to the best of my knowledge, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 11, 2004 /s/ Scott L.Thompson ------------------------ Scott L. Thompson Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to Group 1 Automotive, Inc. and will be retained by Group 1 Automotive, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----