<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
File No. 333-69693
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT DELIVER THESE SECURITIES UNTIL A FINAL PROSPECTUS SUPPLEMENT
IS DELIVERED. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS ARE NOT
AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to Completion. Dated February 5, 1999.
Prospectus Supplement to Prospectus Dated January 29, 1999.
$100,000,000
GROUP 1 AUTOMOTIVE, INC.
% Senior Subordinated Notes Due 2009
---------------------
Group 1 will pay interest on the Notes on and of each
year. The first such payment will be made on , 1999. The Notes will be
issued only in denominations of $1,000 and integral multiples of $1,000.
On or after , 2004, Group 1 has the option to redeem all or a
portion of the Notes at the redemption prices set forth in this prospectus
supplement. Before , 2002 Group 1 has the option to redeem up to
$35,000,000 of the Notes with the proceeds of certain public offerings of Group
1 common stock at a redemption price of % plus accrued interest to the
redemption date.
Group 1 must offer to purchase all of the Notes at a price of 101% plus
accrued interest to the purchase date in the event of a change of control.
The Notes are subordinated in right of payment to all senior debt of Group
1. The Notes will be fully and unconditionally guaranteed by all of Group 1's
current subsidiaries other than one immaterial foreign subsidiary. These
subsidiary guarantees are subordinated in right of payment to the senior debt of
the subsidiary guarantors.
You should read this prospectus supplement and the accompanying prospectus
carefully before you invest, including the risk factors which begin on page S-10
of this prospectus supplement.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
---------------------
<TABLE>
<CAPTION>
Per Note Total
-------- ------
<S> <C> <C>
Initial public offering price............................... % $
Underwriting discount....................................... % $
Proceeds, before expenses, to Group 1....................... % $
</TABLE>
The initial public offering price set forth above does not include accrued
interest, if any. Interest on the Notes must be paid by the purchaser if the
Notes are delivered after , 1999.
---------------------
The underwriters expect to deliver the Notes in book-entry form only
through the facilities of The Depository Trust Company against payment in New
York, New York on , 1999.
GOLDMAN, SACHS & CO.
CHASE SECURITIES INC.
MERRILL LYNCH & CO.
---------------------
Prospectus Supplement dated , 1999.
<PAGE> 2
PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights selected information from this document and does
not contain all of the information you need to consider in making your
investment decision. To understand all of the terms of this offering and for a
more complete understanding of the business of Group 1, you should read
carefully this entire document, the accompanying prospectus and the documents
incorporated by reference in this document and the prospectus. In addition to
those described below, we use certain defined terms in this document for ease of
reading and to avoid repetition. When we use the terms "Group 1", "we" or "us",
we are referring to Group 1 Automotive, Inc. together with its consolidated
subsidiaries, unless the context otherwise requires. Unless otherwise specified,
all information in this prospectus supplement assumes no exercise of the
over-allotment option granted to the underwriters in the Common Stock Offering
discussed herein.
THE COMPANY
OVERVIEW
Group 1 is a leading operator and consolidator in the highly fragmented
automotive retailing industry. We currently own 63 dealership franchises
comprised of 23 different brands of automobiles and 12 collision service centers
located in Texas, Oklahoma, Florida, New Mexico, Georgia and Colorado. Our
dealerships include the second largest Toyota dealership and the fifth largest
Lexus dealership in the United States, as ranked by 1998 new retail unit sales.
Through our dealerships, we sell new and used cars and light trucks, provide
maintenance and repair services, sell replacement parts and arrange related
financing, vehicle service contracts and insurance.
Simultaneously with the closing of the initial public offering of our
common stock in November 1997, we commenced dealership operations with the
acquisition of four automobile dealership groups, known as our "founding
groups", representing 30 automobile dealership franchises located in Texas and
Oklahoma. In 1998, we acquired an additional 33 automobile dealership franchises
in five states in ten separate acquisitions. Four of these acquisitions,
consisting of 19 dealership franchises in Florida, Georgia, Texas, New Mexico
and Colorado, were of dealership groups that are located in areas in which we
had no operations or limited operations prior to the acquisition and serve as
platforms for our operations in such areas. The other six acquisitions consisted
of 14 dealership franchises acquired as "tuck-ins" to existing platforms. These
acquired dealerships (excluding three immaterial tuck-in acquisitions of seven
dealership franchises that had revenues of approximately $126 million in 1997)
had combined, pro forma revenues and earnings before interest, taxes and
depreciation and amortization ("EBITDA") of $675.8 million and $28.0 million,
respectively, in 1997. In January 1999, we completed two tuck-in acquisitions
consisting of four dealership franchises and entered into definitive agreements
to acquire an additional 10 dealership franchises, including eight dealership
franchises that will collectively serve as a new platform in west Texas. See
"-- Recent Developments -- Pending and Recent Acquisitions".
We believe that we are one of the ten largest automobile dealership
retailers in the country in terms of revenues. On a pro forma basis for all our
completed acquisitions (excluding the three immaterial tuck-in acquisitions
completed in 1998 and the two tuck-in acquisitions completed in January 1999),
we had revenues and EBITDA of $1,755.0 million and $63.3 million, respectively,
for the twelve months ended September 30, 1998.
We believe that our strengths include:
- our senior management's experience in consolidating and operating in
highly fragmented industries;
S-1
<PAGE> 3
- the reputation and experience of our management and our dealership
principals as leaders in the automotive retailing industry;
- our ability to utilize equity incentives to attract and retain high
quality personnel;
- our dealerships' established customer base and local name recognition;
- our brand and geographic diversity;
- our ability to capitalize on regional economies of scale;
- our ability to save costs by centralizing financing and certain
administrative functions of our dealerships; and
- our dealerships' proven ability to obtain high quality used vehicles at
cost-effective prices through trade-ins and off-lease programs.
We pursue a growth strategy led by a management team with extensive
experience in consolidation and the management of growth companies led by B.B.
Hollingsworth, Jr. Mr. Hollingsworth, Chairman of the Board, President and Chief
Executive Officer of Group 1, has experience not only in the automotive
retailing industry, but also in consolidating a major national industry. Mr.
Hollingsworth served in various senior management capacities, including
President, of Service Corporation International during its early growth period
as the world's leading consolidator of the funeral industry.
The U.S. automotive retailing industry is estimated to have annual sales in
excess of $600 billion, with the 100 largest automobile dealership groups
generating approximately 10% of total sales revenue and controlling
approximately 6% of the 22,000 existing automobile dealership locations
(representing approximately 49,000 dealership franchises). Sales by franchised
automobile dealers are estimated to account for one-fifth of the nation's total
retail sales of all products and merchandise. We believe that the enormous size
and the fragmentation of the industry, together with the increasing cost of
operating automobile dealerships, the lack of a viable exit strategy (especially
for larger dealerships) and the aging of dealership owners create an attractive
environment for our consolidation program. In addition, many successful and
entrepreneurial "megadealers" have expressed interest in expanding their
operations, but have been restrained by a lack of capital. We believe that we
provide an attractive opportunity for these megadealers due to our origin as a
series of similar megadealers, our access to the public capital markets, and the
growth opportunities we offer these megadealers.
BUSINESS STRATEGY
We plan to capitalize on our position as a leading consolidator, while
maintaining our high operating standards in the automotive retailing industry,
by (1) emphasizing growth through acquisitions and (2) implementing an operating
strategy that includes managing our dealerships on a decentralized basis,
rewarding employees with equity grants and incentive compensation, centralizing
certain administrative functions on a national basis, expanding our higher
margin businesses, continuing our commitment to customer service and
implementing new technology. By merging the management talent and proven
operating capabilities of our dealership groups with a corporate management team
that is experienced in achieving and managing long-term growth in a
consolidation environment, we believe that we are in a strong position to
execute this strategy.
GROWTH THROUGH ACQUISITIONS
Under our acquisition program, we pursue (1) platform acquisitions of
large, profitable and well-managed dealership groups in large metropolitan and
high-growth suburban geographic markets that we do not currently serve and (2)
smaller tuck-in acquisitions to existing platforms that allow us to increase
brand diversity, capitalize on economies of scale and offer a greater
S-2
<PAGE> 4
breadth of products and services in each of the markets in which we operate. We
have used and intend to continue to use our common stock to fund a significant
portion of our acquisitions. In addition, we have a revolving credit facility,
which, after the offering of the Notes, will provide us with the ability to
borrow up to $110 million for acquisitions.
ENTERING NEW GEOGRAPHIC MARKETS. We intend to expand into geographic
markets that we do not currently serve by acquiring large, profitable and well
established megadealers that are leaders in their regional markets. We pursue
megadealers that have high quality personnel, and we attempt to retain this
personnel. We believe that by retaining existing high quality management we will
be able to effectively operate acquired megadealers with management personnel
who understand the local market without having to employ and train new and
untested personnel. We believe that we are well positioned to pursue larger,
well established acquisition candidates because of our management depth, our
capital structure and the reputation of our dealership principals as leaders in
the automotive retailing industry.
EXPANDING WITHIN EXISTING MARKETS. We plan to make tuck-in acquisitions of
additional dealerships in each of the markets in which we operate, including
acquisitions that increase the brands, products and services offered in these
markets. We believe that these acquisitions will increase our operating
efficiencies and cost savings on a regional level in areas such as facility and
personnel utilization, vendor consolidation and advertising.
OPERATING STRATEGY
We follow an operating strategy that focuses on decentralized dealership
operations, centralization of certain administrative functions, expansion of
higher margin businesses, customer service and new technology initiatives.
We formed committees made up of the platform presidents and general
managers of our dealerships in order to identify and share best practices. We
believe that these committees promote the widespread application of our
strategic programs, facilitate the integration of future acquisitions and
improve operating efficiency and customer satisfaction.
DECENTRALIZED DEALERSHIP OPERATIONS. We believe that by managing our
dealerships on a decentralized basis we provide superior customer service and a
focused, market-specific responsiveness to sales, service, marketing and
inventory control. Local presence and an in-depth knowledge of customers' needs
and preferences are important in generating market share growth. By coordinating
certain operations on a platform basis, we believe that we will achieve cost
savings in such areas as vendor consolidation, data processing, personnel
utilization and advertising. We create incentives for our management teams and
sales forces through the use of stock options and cash bonus programs. In
addition, the management of the dealerships we acquire generally receive
significant equity positions in Group 1 as a result of our use of common stock
in our acquisition program.
NATIONALLY CENTRALIZED ADMINISTRATIVE FUNCTIONS. We believe that by
consolidating the purchasing power of our dealerships on a centralized basis, we
have benefited from significant cost savings. For example since we began
operations, we have reduced the interest rate on our floorplan financing.
Furthermore, we have benefitted from the consolidation of administrative
functions such as risk management, employee benefits and employee training. For
example, we negotiated insurance coverage that reduced our insurance costs by
approximately 30 percent as compared to the annual insurance costs incurred by
the founding groups and our acquisitions prior to our acquisition of them.
EXPAND HIGHER MARGIN ACTIVITIES. We focus on expanding our higher margin
businesses such as used vehicle retail sales, parts and service and arranging
vehicle service, finance and insurance contracts. While each of our platforms
operates independently in a manner consistent with its specific market's
characteristics, each platform also pursues an integrated, company-
S-3
<PAGE> 5
wide strategy which is designed to grow these higher margin businesses, enhance
profitability and stimulate internal growth. With a competitive advantage in
obtaining used vehicles, dealership franchises are especially well positioned to
take advantage of industry growth in used vehicle sales. In addition, each of
our dealerships offers an integrated parts and service department, which
provides an important source of recurring higher margin revenues. We also
generate incremental revenues on each new or used vehicle sold by arranging
vehicle service, insurance, finance and lease contracts on these vehicles. We
have negotiated and are currently realizing increased commissions on vehicle
service contract sales and on vehicle financing arrangements for certain
customers. These increases represent revenue enhancements obtained through the
consolidation of the dealerships.
COMMITMENT TO CUSTOMER SERVICE. We focus on providing high quality customer
service to meet the needs of our customers. Our dealerships strive to cultivate
lasting relationships with their customers, and we believe these efforts
increase our opportunities for significant repeat and referral business. For
example, the dealerships regard their service and repair activities as an
integral part of their overall approach to customer service. This approach
provides us with an opportunity to foster ongoing relationships with customers
and deepen customer loyalty. In addition, our dealerships continually review
their selling procedures in an effort to better meet the needs of their
customers.
RECENT DEVELOPMENTS
FINANCIAL RESULTS
On February 3, 1999, we reported our financial results for the three months
and the year ended December 31, 1998. The following table sets forth certain
unaudited financial data reported for such periods:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- ----------------------
1997 1998 1997 1998(1)
-------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total revenues......................... $213,245 $472,542 $902,295 $1,630,057
Gross profit........................... 29,531 69,173 127,131 236,510
Income from operations................. 5,348 14,366 25,412 52,046
Pretax income.......................... 3,945 9,248 19,380 35,221
Net income............................. 2,311 5,469 11,413 20,719
EBITDA(2).............................. $ 6,162 $ 16,463 $ 28,252 $ 58,511
Gross margin........................... 13.8% 14.6% 14.1% 14.5%
Operating margin....................... 2.5% 3.0% 2.8% 3.2%
Pretax income margin................... 1.8% 2.0% 2.1% 2.2%
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1998
------------
<S> <C> <C> <C> <C>
Floorplan debt......................... $ 193,405
Other debt............................. 45,786
----------
Total debt........................ 239,191
Stockholders' equity................... 136,184
</TABLE>
- ---------------
(1) On a pro forma basis to give effect to the Sale and Leaseback (as defined
herein) and all of the dealership acquisitions that we have completed since
our initial public offering, except for three immaterial tuck-in
acquisitions of seven dealership franchises completed in 1998 and the Recent
Acquisitions (as defined herein), as if such transactions occurred on
January 1, 1998, revenues and EBITDA for the twelve months ended December
31, 1998 would have been $1,853.7 million and $65.6 million, respectively.
(2) EBITDA represents net income plus income taxes, interest expense and
depreciation and amortization expense. EBITDA is not presented as an
indicator of Group 1's operating performance, an indicator of cash available
for discretionary spending or as a measure of liquidity. EBITDA, as
calculated by Group 1, may not be comparable to other similarly titled
measures of other companies.
S-4
<PAGE> 6
PENDING AND RECENT ACQUISITIONS
In January, 1999, we entered into definitive agreements to acquire 14
dealership franchises located in seven markets that had aggregate 1998 revenues
of approximately $445 million. These acquisitions represent one platform
acquisition in west Texas of eight dealership franchises and four tuck-in
acquisitions of six other dealership franchises. The total consideration for the
14 dealership franchises will be approximately $59 million in cash and 750,000
shares of our common stock. In January 1999, we closed two of the tuck-in
acquisitions consisting of four dealership franchises, as described below (the
"Recent Acquisitions"). The other acquisitions that have not been completed (the
"Pending Acquisitions") are subject to customary closing conditions, including
approval of various manufacturers, government agencies and the completion of due
diligence, and there can be no assurance that any of them will be completed. The
Pending Acquisitions are expected to close before the end of the second quarter
of 1999.
Our Recent Acquisitions consist of:
- Sunshine Pontiac, Buick and GMC, located in Albuquerque, New Mexico,
which has been added to the Johns platform; and
- South Pointe Chevrolet in Tulsa, Oklahoma, which has become a part of the
Howard Group and will serve as a base to create a Tulsa platform.
The following is a description of our Pending Acquisitions:
The Messer Group Platform. The Messer Group has operations in Lubbock,
Amarillo, and Rockwall, Texas and had 1998 revenues of approximately $270
million. The Messer Group consists of three Ford dealership franchises as well
as Toyota, Mitsubishi, Cadillac, Jeep and Volkswagen dealership franchises. Greg
Wessels, chief operating officer of the Messer Group, who has been with the
Messer organization for over 20 years, will execute a long-term employment
contract and his management team will continue to operate the dealerships.
Pending Tuck-in Acquisitions. Our pending tuck-in acquisitions consist of:
- Tidwell Ford in Atlanta, which will be added to the Carroll Platform; and
- a BMW franchise in Beaumont, Texas, which will be added to our Beaumont
platform (in exchange for our Lincoln and Mercury dealership franchises
in Beaumont, Texas).
None of the pro forma financial information contained in this prospectus
supplement gives effect to any of the Recent Acquisitions or the Pending
Acquisitions.
COMMON STOCK OFFERING
Concurrently with the offering of Notes being made by this prospectus
supplement, we are offering 2,000,000 shares of our common stock (plus up to an
additional 300,000 shares that may be sold pursuant to the underwriters'
over-allotment option) (the "Common Stock Offering"). We expect to receive net
proceeds of approximately $51.6 million from the Common Stock Offering
(excluding the underwriters' over-allotment option), based on the last reported
sale price of our common stock on February 3, 1999, after deducting the
estimated underwriting discount and offering expenses. We intend to use the
proceeds from the Common Stock Offering, if any, to reduce our debt outstanding
under our credit facility. The Common Stock Offering is being made by means of a
separate prospectus supplement and this prospectus supplement does not
constitute an offer to sell or the solicitation of an offer to buy the common
stock being offered in that offering. The consummation of the offering of the
Notes is not conditioned on the completion of the Common Stock Offering and we
can not give you any assurances that the Common Stock Offering will be
completed.
S-5
<PAGE> 7
THE OFFERING
Issuer..................
Group 1 Automotive, Inc.
Securities Offered......
$100.0 million aggregate principal amount of %
Senior Subordinated Notes due , 2009 (the
"Notes").
Maturity Date........... , 2009
Interest Payment dates.. and . The first payment
date will be , 1999.
Subsidiary Guarantees...
Our payment obligations under the Notes will be fully and
unconditionally guaranteed by certain of our current and future subsidiaries.
The subsidiaries providing the guarantees will be each
subsidiary that has any outstanding debt unless that debt
is either floorplan debt or a guarantee of our floorplan
debt. All of our subsidiaries other than one immaterial
foreign subsidiary will be guarantors when the Notes are
first issued. We may terminate the guarantee of any
subsidiary guarantor at any time in the future if and for
so long as that subsidiary guarantor does not have any
outstanding debt other than floor plan debt or a
guarantee of floor plan debt.
Optional Redemption.....
On or after , 2004, we may redeem all or a
portion of the Notes at any time at the redemption prices
set forth in the section "Description of Notes" under the
heading "Optional Redemption."
Before , 2002, we may redeem up to
$35,000,000 of the Notes with the proceeds of certain
public offerings of our common stock at a redemption
price equal to % of their principal amount plus
accrued interest to the redemption date.
Change of Control.......
We must offer to purchase all of the Notes at a price of
101% of the principal amount plus accrued interest to the
purchase date in the event of a change of control.
Ranking.................
The Notes and the subsidiary guarantees are senior
subordinated obligations. The Notes rank behind our
current and future senior debt and the subsidiary
guarantee of each subsidiary guarantor ranks behind the
senior debt of that subsidiary guarantor.
After we issue the Notes and apply the proceeds as
intended, as of December 31, 1998, we would have had
approximately $143.2 million ($91.6 million if the Common
Stock Offering is consummated) of indebtedness
outstanding in addition to the Notes. The Notes and the
subsidiary guarantees will be subordinated to the entire
amount of that outstanding indebtedness.
Restrictive Covenants...
The indenture governing the Notes will, among other
things, limit our ability and the ability of our
subsidiaries to:
- become liable for additional indebtedness;
- pay dividends on stock or repurchase stock;
- make certain investments;
- sell certain assets;
- use assets to secure subordinated indebtedness;
S-6
<PAGE> 8
- engage in transactions with affiliated persons or
entities; and
- engage in mergers and consolidations.
Use of Proceeds......... To repay outstanding indebtedness under our revolving
credit facility. We intend to subsequently reborrow the
amounts repaid to fund acquisitions, including the
Pending Acquisitions, and for other corporate purposes.
S-7
<PAGE> 9
SUMMARY PRO FORMA AND HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table presents certain pro forma and historical financial
data of Group 1 as of and for each of the periods indicated. The principles we
used to calculate the pro forma income statement data, other data and selected
ratios presented below are as follows:
- - The founding groups income statement data gives effect only to our acquisition
of our founding groups in November 1997 and the application of the net
proceeds from our initial public offering in November 1997 to repay certain
indebtedness and to pay the cash portion of the purchase price for the
founding groups as if each had occurred at the start of the period.
- - The data in the columns under the captions "Pro Forma as Adjusted for Notes
Offering" gives effect to the following transactions that occurred after the
beginning of the period presented as if they had occurred at the start of such
period:
- the acquisition of our founding groups in November 1997 and the
application of the net proceeds from our initial public offering in
November 1997 to repay certain outstanding indebtedness and to pay the
cash portion of the purchase price for the founding groups;
- all of the dealership acquisitions that we have completed since our
initial public offering except for three immaterial tuck-in acquisitions
of seven dealership franchises completed in 1998 and the Recent
Acquisitions;
- the sale and leaseback of seven of our dealership properties consummated
after September 30, 1998 and the application of the net proceeds
therefrom (collectively the "Sale and Leaseback"); and
- the sale of the Notes and the application of the assumed net proceeds of
$96.0 million therefrom as described herein.
- - The data in the columns under the captions "Pro Forma as Adjusted for Notes
and Common Stock Offerings" gives effect to the transactions listed
immediately above plus the sale of the common stock in the Common Stock
Offering and the application of the assumed net proceeds of $51.6 million
therefrom (based on an assumed initial public offering price for the common
stock of $27 13/16 per share, which was the last reported sale price of the
common stock on the New York Stock Exchange on February 3, 1999) as described
herein as if each had occurred at the start of the period presented.
The historical balance sheet data presented below presents certain
historical financial data of Group 1 derived from the historical unaudited
balance sheet of Group 1 as of September 30, 1998. The pro forma balance sheet
data presented below give effect to the following post-September 30, 1998
transactions as though they occurred on that date:
- - The data under the caption "Pro Forma" gives effect to the Sale and Leaseback;
- - The data under the caption "Pro Forma as Adjusted for Notes Offering" gives
effect to both the Sale and Leaseback and the Notes offering and the
application of the assumed net proceeds of $96.0 million therefrom as
described herein; and
- - The data under the caption "Pro Forma as Adjusted for Notes and Common Stock
Offerings" gives effect to the Sale and Leaseback and each of the Notes
offering and the Common Stock Offering and the application of the aggregate
assumed net proceeds of the offerings of $147.6 million therefrom as described
herein.
No effect is given to any of the Pending Acquisitions or the Recent
Acquisitions in any of the following information. The following information
should be read together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Pro Forma Consolidated Financial
Statements and notes thereto and the Consolidated Financial Statements and notes
thereto included elsewhere in this prospectus supplement.
S-8
<PAGE> 10
<TABLE>
<CAPTION>
PRO FORMA
AS ADJUSTED FOR
NOTES AND
FOUNDING PRO FORMA AS ADJUSTED FOR NOTES OFFERING COMMON STOCK
GROUPS ------------------------------------------------------ OFFERINGS
------------ TWELVE ---------------
FISCAL YEAR FISCAL YEAR NINE MONTHS ENDED MONTHS TWELVE MONTHS
ENDED ENDED SEPTEMBER 30, ENDED ENDED
DECEMBER 31, DECEMBER 31, ----------------------- SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1997 1998 1998 1998
------------ ------------ ---------- ---------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
New vehicle sales................. $513,864 $ 902,176 $ 687,451 $ 785,332 $1,000,057 $1,000,057
Used vehicle sales................ 288,010 481,306 369,777 432,044 543,573 543,573
Parts & service sales............. 77,215 150,428 113,308 121,265 158,385 158,385
Other dealership revenue, net..... 23,206 44,231 33,803 42,511 52,939 52,939
-------- ---------- ---------- ---------- ---------- ----------
Total revenues.............. 902,295 1,578,141 1,204,339 1,381,152 1,754,954 1,754,954
Cost of sales....................... 775,164 1,345,592 1,027,759 1,178,747 1,496,580 1,496,580
-------- ---------- ---------- ---------- ---------- ----------
Gross profit...................... 127,131 232,549 176,580 202,405 258,374 258,374
Selling general and administrative
expenses.......................... 98,967 176,360 133,750 152,584 195,194 195,194
Depreciation and amortization....... 2,752 6,275 4,606 5,375 7,044 7,044
-------- ---------- ---------- ---------- ---------- ----------
Income from operations............ 25,412 49,914 38,224 44,446 56,136 56,136
Other income (expense):
Floorplan interest expense.......... (5,194) (10,789) (8,240) (9,012) (11,561) (7,844)
Other interest expense, net......... (926) (11,480) (8,611) (8,494) (11,363) (11,363)
-------- ---------- ---------- ---------- ---------- ----------
Interest expense, net............. (6,120) (22,269) (16,851) (17,506) (22,924) (19,207)
Other income (expense), net......... 88 94 (5) 16 115 115
-------- ---------- ---------- ---------- ---------- ----------
Income before income taxes........ 19,380 27,739 21,368 26,956 33,327 37,044
Provision for income taxes.......... 7,967 11,363 8,752 11,031 13,642 15,112
-------- ---------- ---------- ---------- ---------- ----------
Net income.................. $ 11,413 $ 16,376 $ 12,616 $ 15,925 $ 19,685 $ 21,932
======== ========== ========== ========== ========== ==========
OTHER DATA:
EBITDA(1)........................... $ 28,252 $ 56,283 $ 42,825 $ 49,837 $ 63,295 $ 63,295
Capital expenditures................ 3,811 6,485 4,613 7,757 9,629 9,629
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
AS ADJUSTED FOR
PRO FORMA NOTES AND
AS ADJUSTED FOR COMMON STOCK
HISTORICAL PRO FORMA NOTES OFFERING OFFERINGS
------------------ ------------------ ------------------ ------------------
AS OF AS OF AS OF AS OF
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998 SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............... $ 53,632 $ 53,200 $109,452 $161,077
Total assets.................. 450,036 426,232 430,232 430,232
Floorplan debt................ 160,316 160,316 104,064 52,439
Acquisition debt.............. 56,000 39,748 -- --
Senior Subordinated Notes..... -- -- 100,000 100,000
Other debt.................... 10,880 1,632 1,632 1,632
-------- -------- -------- --------
Total debt................ 227,196 201,696 205,696 154,071
Stockholders' equity.......... 130,820 130,820 130,820 182,445
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
AS ADJUSTED FOR
PRO FORMA NOTES AND
AS ADJUSTED FOR COMMON STOCK
NOTES OFFERING OFFERINGS
--------------------- ---------------------
TWELVE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
--------------------- ---------------------
<S> <C> <C>
SELECTED RATIOS:
Including floorplan debt:
Ratio of EBITDA to interest expense, net.................. 2.8x 3.3x
Ratio of total debt (end of period) to EBITDA............. 3.2x 2.4x
Excluding floorplan debt:
Ratio of EBITDA to interest expense, net(2)............... 4.6x 4.9x
Ratio of total debt (end of period) to EBITDA(3).......... 2.0x 1.8x
</TABLE>
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(1) EBITDA represents net income plus income taxes, interest expense and
depreciation and amortization expense. EBITDA is not presented as an
indicator of Group 1's operating performance, an indicator of cash available
for discretionary spending or as a measure of liquidity. EBITDA, as
calculated by Group 1, may not be comparable to other similarly titled
measures of other companies.
(2) Represents EBITDA as defined above minus floorplan interest expense divided
by other interest expense.
(3) Represents total debt minus floorplan debt divided by EBITDA minus floorplan
interest expense.
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RISK FACTORS
You should read carefully this entire document, the accompanying prospectus
and the documents incorporated by reference in this document and the prospectus
before investing in the Notes.
HIGH LEVERAGE
As of December 31, 1998, we had $239.2 million of debt outstanding.
Assuming we had issued the Notes and applied the proceeds on December 31, 1998,
our outstanding debt would have been approximately $243.2 million or
approximately 64% of our total capitalization. If we had issued, in addition to
the Notes, the common stock being offered in the Common Stock Offering and
applied the proceeds on December 31, 1998, our outstanding debt would have been
approximately $191.6 million or approximately 51% of our capitalization. In
addition, the indenture for the Notes and our other debt instruments permit us
to incur additional debt under certain circumstances.
Our ability to meet our debt service obligations depends on our future
performance. Our future performance is influenced by general economic conditions
and by financial, business and other factors affecting our operations, many of
which are beyond our control. If we are unable to service our debt, we may have
to:
- delay our acquisition program;
- sell our equity securities;
- sell our assets; or
- restructure or refinance our debt.
We cannot give you any assurances that, if we are unable to service our
debt, we will be able to sell our equity securities, sell our assets or
restructure or refinance our debt.
Our substantial debt could have important consequences to you. For example,
it could:
- make it more difficult for us to obtain additional financing in the
future for our acquisitions and operations;
- require us to dedicate a substantial portion of our cash flows from
operations to the repayment of our debt and the interest associated with
our debt;
- limit our operating flexibility due to financial and other restrictive
covenants, including restrictions on incurring additional debt, creating
liens on our properties and paying dividends;
- subject us to risks that interest rates and our interest expense will
increase;
- place us at a competitive disadvantage compared to our competitors that
have less debt; and
- make us more vulnerable in the event of a downturn in our business.
SUBORDINATION OF NOTES TO SENIOR DEBT AND SECURED DEBT
The Notes and the subsidiary guarantees will be subordinated to our current
and future senior debt and the senior debt of our subsidiary guarantors. Upon
any distribution to our creditors or the creditors of one of our subsidiary
guarantors in a liquidation or dissolution or in a bankruptcy or other similar
proceeding, the holders of our senior debt or the senior debt of such subsidiary
guarantor, will be entitled to be paid in full before any payment may be made to
the holders of the Notes. In addition, all payments on the Notes and the
subsidiary guarantees will be
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blocked in the event of a payment default on senior debt and may be blocked for
up to 179 days in the event of certain non-payment defaults on senior debt. In
any of the foregoing events, we cannot guarantee that we will have sufficient
assets to pay amounts due on the Notes. As a result, holders of Notes may
receive less, proportionately, than the holders of senior debt. Assuming we had
issued the Notes and applied the proceeds on December 31, 1998, our outstanding
senior debt would have been approximately $143.2 million. If we had issued, in
addition to the Notes, the common stock currently being offered in the Common
Stock Offering and applied the proceeds on December 31, 1998, our outstanding
senior debt would have been approximately $91.6 million. Our indenture for the
notes permits us to incur additional senior debt, in the future, including the
entire amount that will be available for borrowing under our revolving credit
facility. Although the indenture limits our ability to incur additional debt,
the indenture does not limit the amount of such debt that may constitute senior
debt.
In addition to being subordinate to all of our senior debt, the Notes will
not be secured by any of our assets. As a result, the Notes will be subordinated
to any of our secured debt to the extent of the assets securing such
indebtedness. Upon any distribution to our creditors or the creditors of one of
our subsidiary guarantors in a liquidation or dissolution or in a bankruptcy, or
other similar proceeding, the holders of our secured debt or of the secured debt
of that subsidiary guarantor may assert rights against the secured assets in
order to receive payment in full of such debt before such assets may be used to
pay the holders of the Notes. Borrowings under our credit facility are secured
by (a) a pledge of 100% of the capital stock of all of our subsidiaries (other
than our subsidiaries owning GM dealerships) and (b) liens on substantially all
of our other material property and the material property of our subsidiaries
(other than the GM subsidiaries).
FRAUDULENT CONVEYANCE CONSIDERATIONS RELATING TO SUBSIDIARY GUARANTEES
Various applicable fraudulent conveyance laws have been enacted for the
protection of creditors. A court may use these laws to subordinate or avoid the
subsidiary guarantees of the Notes issued by any of our subsidiary guarantors.
It is also possible that under certain circumstances a court could hold that the
direct obligations of a subsidiary guaranteeing the Notes could be superior to
the obligations under that guarantee.
A court could avoid or subordinate the guarantee of the Notes by any of our
subsidiaries in favor of that subsidiary's other debts or liabilities to the
extent that the court determined either of the following were true at the time
the subsidiary issued the guarantee:
- that subsidiary incurred the guarantee with the intent to hinder, delay
or defraud any of its present or future creditors or that such subsidiary
contemplated insolvency with a design to favor one or more creditors to
the total or partial exclusion of others; or
- that subsidiary did not receive fair consideration or reasonable
equivalent value for issuing the guarantee and, at the time it issued the
guarantee, that subsidiary:
-- was insolvent or rendered insolvent by reason of the issuance of the
guarantee,
-- was engaged or about to engage in a business or transaction for which
the remaining assets of that subsidiary constitute unreasonable small
capital, or
-- intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they matured.
Among other things, a legal challenge of a subsidiary's guarantee of the Notes
on fraudulent conveyance grounds may focus on the benefits, if any, realized by
that subsidiary as a result of our issuance of the Notes. To the extent a
subsidiary's guarantee of the Notes is avoided as a result of fraudulent
conveyance or held unenforceable for any other reason, the Note holders would
cease to have any claim in respect of that guarantee and would be creditors
solely of us.
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MANUFACTURER RESTRICTIONS
The following table sets forth the percentage of our new vehicle retail
unit sales attributable to the manufacturers we represent:
<TABLE>
<CAPTION>
PERCENTAGE OF OUR NEW
VEHICLE PRO FORMA
RETAIL UNITS FOR THE
NINE MONTHS ENDED
MANUFACTURER SEPTEMBER 30, 1998(1)
------------ ---------------------
<S> <C>
Ford................................................... 25.7%
Toyota/Lexus........................................... 19.3
Chrysler............................................... 18.1
General Motors......................................... 14.8
Nissan................................................. 9.4
Honda/Acura............................................ 9.2
Other.................................................. 3.5
-----
Total.................................................. 100.0%
=====
</TABLE>
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(1) Does not give effect to the Recent Acquisitions or the Pending
Acquisitions.
The loss of our relationships with one or more of these named manufacturers
could have an adverse effect on our business.
The term Manufacturers in this prospectus supplement refers to all of the
manufacturers of new vehicles that we sell, including Ford Motor Company
("Ford"), General Motors Corporation ("GM"), DaimlerChrysler ("Chrysler"),
Toyota Motor Corp. and Toyota Motor Sales, U.S.A., Inc. (collectively "Toyota"),
Honda Motor Co., Ltd. and American Honda Motor Co., Inc. (collectively "Honda"),
Nissan Motor Co., Ltd. and Nissan Motor North America, Inc. (collectively
"Nissan"), Mitsubishi Motor Sales of America, Inc., American Isuzu Motors, Inc.,
American Suzuki Motor Corporation and Volvo Cars of North America, Inc.
FRANCHISE AGREEMENTS. Each of our dealerships operates under a franchise
agreement with one of our Manufacturers or authorized distributors of the
Manufacturers. Under our dealership franchise agreements, the Manufacturers
exert considerable influence over the operations of our dealerships. Each of the
franchise agreements may be terminated or not renewed by the Manufacturer for a
variety of reasons, including any unapproved change of ownership or management.
While we believe that we will be able to renew all of our franchise agreements,
we cannot guarantee that all of our franchise agreements will be renewed or that
the terms of the renewals will be favorable to us.
Our franchise agreements do not give us the exclusive right to sell a
Manufacturer's product within a given geographic area. Accordingly, a
Manufacturer may, subject to any protection of state law, grant another dealer a
franchise to start a new dealership near one of our locations, or an existing
dealer may move its dealership to a location which would compete directly with
us. The location of new dealerships near our existing dealerships could
adversely affect our operations.
ACQUISITIONS. We must obtain the consent of the Manufacturer prior to the
acquisition of any of its dealership franchises. Delays in obtaining, or failing
to obtain, Manufacturer approvals for dealership acquisitions could adversely
affect our growth strategy. Obtaining the consent of a Manufacturer for the
acquisition of a dealership could take a significant amount of time or might be
rejected entirely. Obtaining the approvals of the Manufacturers for the
acquisition of our founding groups took almost one year. Although the
Manufacturer approvals of our recent acquisitions have taken significantly less
time, future approvals may not be prompt and such approvals may not ultimately
be obtained.
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In determining whether to approve an acquisition, Manufacturers may
consider many factors, including the moral character and business experience of
the dealership principals and the financial condition, ownership structure and
customer satisfaction index scores of our dealerships.
Our Manufacturers attempt to measure customers' satisfaction with
automobile dealerships through systems generally known as the customer
satisfaction index or "CSI". The Manufacturers have modified the components of
their CSI scores from time to time in the past, and they may replace them with
different systems. Failure of our dealerships to comply with a Manufacturer's
CSI standards could adversely affect our ability to acquire additional
dealerships.
In addition, a Manufacturer may limit the total number of its dealerships
that we may own or the number that we may own in a particular geographic area.
The following is a summary of the restrictions imposed by our most significant
Manufacturers.
Ford. Ford currently limits the number of dealerships that we may own to
the greater of (1) 15 Ford and 15 Lincoln Mercury dealerships and (2) that
number of Ford and Lincoln Mercury dealerships accounting for 5% of the
preceding year's total Ford and Lincoln Mercury retail sales of those brands in
the United States. In addition, Ford limits us to one Ford dealership in a
Ford-defined market area having two or less authorized Ford dealerships and
one-third of the Ford dealerships in any Ford-defined market area having more
than three authorized Ford dealerships. In many of its dealership franchise
agreements, Ford has the right of first refusal to acquire, subject to
applicable state law, the Ford franchised dealership when its ownership changes.
Toyota. Toyota restricts the number of dealerships that we may own and the
time frame over which they may be acquired. We can acquire no more than two
Toyota dealerships in each semi-annual period from January to June and July to
December until we acquire a total of seven Toyota dealerships. After we acquire
seven Toyota dealerships we can acquire, if we are then qualified, additional
dealerships over a minimum of seven semi-annual periods up to a maximum number
of dealerships equal to 5% of Toyota's aggregate national annual retail sales
volume. In addition, Toyota restricts the number of Toyota dealerships that we
may acquire in any Toyota-defined region and "Metro" market, as well as any
contiguous market. We may acquire only three Lexus dealerships nationally and
two Lexus dealerships in any one of the four Lexus geographic areas. While we
recently have been granted a Lexus companion dealership located south of
Houston, this dealership is not considered by Lexus to be a new and separate
Lexus dealership for purposes of the restriction on the number of Lexus
dealerships we may acquire.
Chrysler. Currently, we have no agreement with Chrysler restricting our
ability to acquire Chrysler dealerships. Chrysler has advised us that in
determining whether to approve an acquisition of a Chrysler dealership, Chrysler
considers the number of Chrysler dealerships the acquiring company already owns.
Chrysler currently considers carefully, on a case-by-case basis, any acquisition
that would cause the acquiring company to own more than 10 Chrysler dealerships
nationally, six in the same Chrysler-defined zone and two in the same market.
General Motors. General Motors currently limits the number of GM
dealerships that we may acquire prior to October 1999 to five additional GM
dealership locations (any one dealership, however, may include a number of
different GM franchises, such as a combination of GMC, Pontiac and Buick
franchises). In addition, GM limits the maximum number of GM dealerships that we
may acquire at any time to 50% of the GM dealerships, by franchise line, in a
GM-defined geographic market area. However, our current agreement with GM does
not include Saturn dealerships and our future acquisition of a Saturn dealership
will be subject to GM approval on a case-by-case basis.
Nissan. Nissan restricts us from owning Nissan dealerships whose primary
marketing areas ("PMA", as defined by Nissan) competitive segment registration
count comprises more than 5%
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of Nissan's total national competitive segment registrations based on the sum of
the retail competitive segment registrations in PMAs associated with us; or 20%
of any Nissan region's total competitive segment registrations contained in all
PMAs associated with us in that region.
Honda. Under our current agreement with Honda, Honda limits the number of
dealerships that we may own to (1) seven Honda and three Acura franchises
nationally, (2) one Honda dealership in a Honda-defined "Metro" market with two
to 10 Honda dealership points, (3) two Honda dealerships in a Metro market with
11 to 20 Honda dealership points, (4) three Honda dealerships in a Metro market
with 21 or more Honda dealership points, (5) no more than 4% of the Honda
dealerships in any one of the 10 Honda geographic zones, (6) one Acura
dealership in a Metro market, and (7) two Acura dealerships in any one of the
six Acura geographic zones.
Honda has proposed a new agreement to replace our current agreement. Honda
has proposed that we could acquire Honda dealerships representing up to 6% of
total Honda unit sales in the United States by December 31, 2005, increasing 1%
each year beginning January 1, 2002 from the 2% level in effect through December
31, 2001. The proposed new agreement contains additional restrictions in various
geographic markets. We are continuing to negotiate with Honda on these
geographic restrictions as well as other restrictions on the number of
dealerships that we may acquire. Also under the proposed new agreement, we could
acquire no more than two Acura dealerships in a Metro market with four or more
dealer points and one Acura dealership in other Metro markets, three Acura
dealerships in any one of the six Acura geographic zones and five Acura
dealerships nationally.
We currently own six Ford, one Lincoln, one Mercury, 21 Chrysler, two
Toyota, one Lexus, three Honda and two Acura dealership franchises and eight
General Motors dealership locations. Under current restrictions, we may acquire
the maximum number of Toyota dealerships described above based on aggregate
national retail sales volume of Toyota, two additional Lexus dealerships, four
additional Honda dealerships, one additional Acura dealership, approximately 400
additional Ford and Lincoln Mercury dealerships and five additional GM
dealership locations prior to October 1999, subject to being increased.
FINANCINGS. Provisions in our agreements with our Manufacturers may
restrict in the future our ability to obtain financing. Our current agreement
with Honda requires Honda's consent for any equity offering. Honda's proposed
new agreement with us does not contain that requirement. We have not negotiated
or executed the proposed new agreement, nor have we obtained Honda's consent for
the Common Stock Offering. If Honda were to claim that we breached its existing
agreement with us by consummating the Common Stock Offering and seek to enforce
its remedies, we could be adversely affected.
If we materially breach our agreement with Honda, Honda could purchase our
Honda and Acura dealerships at their fair market value and terminate our dealer
agreements with Honda and Acura. For the nine-month period ended September 30,
1998, our Honda and Acura dealerships represented approximately 8.9% and 8.4% of
our pro forma revenues and operating income, respectively.
Honda's proposed new agreement prohibits pledging the stock of Honda
franchised dealerships to secure debt financing, although it allows pledging the
proceeds from the sale of Honda franchised dealership stock. We are continuing
to negotiate with Honda on the terms of the proposed new agreement.
Our agreement with General Motors contains provisions prohibiting pledging
the stock of our GM franchised dealerships. Our agreement with Ford permits
pledging our Ford franchised dealerships' stock and assets, but only for Ford
dealership-related debt. Moreover, our Ford agreement permits our Ford
franchised dealerships to guarantee, and to use Ford franchised dealership
assets to secure our debt, but only for Ford dealership-related debt. Ford has
waived that requirement with respect to the Notes and the subsidiary guarantees
of the Notes. If,
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however, we fail to meet certain minimum financial ratios Ford can reject any
acquisitions of Ford franchised dealerships and/or purchase our Ford franchised
dealerships.
OUR OWNERSHIP AND MANAGEMENT. As a condition to granting their consent to
our previous acquisitions and our initial public offering, some Manufacturers
have imposed other restrictions on us.
These restrictions prohibit, among other things:
- any one person who in the opinion of the Manufacturer is unqualified to
own its franchised dealership or has interests incompatible with the
Manufacturer from acquiring more than a specified percentage of our
common stock (for example, 5% in the case of Honda, 20% in the case of
General Motors, Toyota and Nissan, and 50% in the case of Ford);
- certain material changes in us or extraordinary corporate transactions
such as a merger or sale of a material amount of our assets;
- the removal of a dealership general manager without the consent of the
Manufacturer;
- the use of dealership facilities to sell or service new vehicles of other
Manufacturers in certain situations; and
- changes in control of our Board of Directors or management.
If we are unable to comply with these restrictions, we generally must (1)
sell the assets of the dealerships to the Manufacturer or to a third party
acceptable to the Manufacturer or (2) terminate the dealership agreements with
the Manufacturer. The Manufacturers may impose additional restrictions on us in
the future. Our failure to meet these restrictions may adversely affect our
business and acquisition strategy.
Our current agreement with Honda gives Honda the right to approve the
acquisition of more than 5% of our common stock by any individual or entity, and
any subsequent acquisition of more than 10% by such individual, if Honda
determines that such acquisition is reasonably detrimental to its interests.
Honda may determine that such acquisition is reasonably detrimental to its
interests if the acquiring person: competes with Honda, has criminal
affiliations or a criminal record, has inadequate experience in the automotive
sales and service business, has an unacceptable credit rating, has unacceptable
CSI scores or has had prior unsatisfactory relationships with Honda.
An institutional investor may acquire up to 10% of our common stock without
the consent of Honda, unless the institutional investor competes with Honda, has
criminal affiliations or a criminal record, or has acquired, or has a reasonable
likelihood of acquiring, a controlling interest in us.
We are required to notify Honda with respect to any such acquisition or
proposed acquisition, and if Honda does not approve of the acquisition, we are
required to use our best efforts to prevent the acquisition or, if the
acquisition has already occurred, to reacquire the shares so transferred. If we
are unable to prevent the acquisition or to reacquire the shares we will be in
material breach of our agreement with Honda.
In addition, under our agreement with Honda, each stockholder of the
founding groups has agreed not to sell, transfer or in any manner encumber any
of the shares of our common stock he acquired in connection with our acquisition
of the founding groups, or enter into any agreement or other arrangement
providing for the voting of such shares of common stock, without the prior
written approval of Honda. If one of these stockholders violates this
restriction, we must inform Honda. If Honda does not approve the transfer, and
we cannot acquire the shares or arrange for the retransfer of such shares to a
person approved by Honda, we will be in breach of our agreement with Honda. The
new agreement proposed by Honda does not contain these restrictions on our
stockholders.
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Our agreement with Honda also provides that if an entity that Honda has not
approved acquires or threatens to acquire a controlling interest in us or any of
our Honda or Acura dealerships, we will be in breach of our agreement with
Honda.
OPERATIONS. We depend on our Manufacturers for operational support:
- We depend on the Manufacturers to provide us with a desirable mix of new
vehicles. The most popular vehicles usually produce the highest profit
margins and are frequently difficult to obtain from the Manufacturers. If
we cannot obtain sufficient quantities of the most popular models, our
profitability may be adversely affected. Sales of less desirable models
may reduce our profit margins.
- We depend on the Manufacturers for sales incentives and other programs
that are intended to promote dealership sales or support dealership
profitability. Manufacturers historically have made many changes to their
incentive programs during each year. A discontinuation or change in
Manufacturers' incentive programs could adversely affect our business.
Moreover, some Manufacturers use a dealership's CSI scores as a factor
for participating in incentive programs. Failure to comply with the CSI
standards could adversely affect our participation in dealership
incentive programs, which could have a material adverse effect on us.
Our Manufacturer agreements also specify that we cannot operate a
dealership franchised by another Manufacturer in the same building as that
Manufacturer's franchised dealership in certain situations. In addition, some
Manufacturers, like GM, are in the process of realigning their franchised
dealerships along defined "channels", such as combining Pontiac, Buick and GMC
in one dealership location. As a result, GM may require us to move or sell some
dealerships. Moreover, our Manufacturers generally require that the dealership
premises meet defined image standards. All of these requirements could impose
significant capital expenditures on us in the future.
DEPENDENCE ON ACQUISITIONS FOR GROWTH
Growth in our revenues and earnings depends substantially on our ability to
acquire and successfully operate dealerships. We cannot guarantee that we will
be able to identify and acquire dealerships in the future. In addition, managing
and integrating additional dealerships into our existing mix of dealerships may
result in substantial costs, delays or other operational or financial problems.
Restrictions by our Manufacturers as well as covenants contained in our
debt instruments limit our ability to acquire additional dealerships. In
addition, increased competition for acquisition candidates may develop, which
could result in fewer acquisition opportunities available to us and higher
acquisition prices.
Acquisitions involve a number of additional risks, including:
- diversion of our resources and our management's attention,
- our possible inability to retain key personnel of the acquired
dealership, and
- unanticipated events or liabilities.
We will continue to need substantial capital in order to acquire additional
automobile dealerships. In the past, we have financed these acquisitions with a
combination of cash flow from operations, proceeds from borrowings under our
credit facilities with banks and issuances of our common stock. We cannot
guarantee that these sources of funds will be sufficient to fund our acquisition
program and other cash needs, or that we will be able to obtain adequate
additional capital from other sources.
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We expect to utilize our current credit facility to borrow a portion of the
funds required for acquisitions. If funds under the credit facility are
insufficient to fund our acquisition program, we will be required to obtain
alternative financing such as from the issuance of additional debt or equity
securities or an expansion or replacement of the credit facility.
We currently intend to finance future acquisitions by issuing shares of
common stock as full or partial consideration for acquired dealerships. The
extent to which we will be able or willing to issue common stock for
acquisitions will depend on the market value of the common stock from time to
time and the willingness of potential acquisition candidates to accept common
stock as part of the consideration for the sale of their businesses. If
potential acquisition candidates are unwilling to accept our common stock, we
will be forced to rely solely on available cash or debt or equity financing,
which could adversely affect our acquisition program. Accordingly, our ability
to make acquisitions could be adversely affected if the price of our common
stock declines.
DEPENDENCE ON THE SUCCESS OF OUR MANUFACTURERS
Our success depends upon the overall success of the line of vehicles that
each of our dealerships sells. Demand for our Manufacturers' vehicles as well as
the financial condition, management, marketing, production and distribution
capabilities of our Manufacturers affect our business.
Although we have attempted to lessen our dependence on any one Manufacturer
by buying dealerships representing a number of different domestic and foreign
Manufacturers, events such as labor disputes and other production disruptions
that may adversely affect a Manufacturer may also adversely affect us.
Similarly, the late delivery of vehicles from Manufacturers, which sometimes
occurs during periods of new product introductions, can lead to reduced sales
during those periods. Moreover, any event that causes adverse publicity
involving any of our Manufacturers may have an adverse effect on us regardless
of whether such event involves any of our dealerships.
RISKS OF IMPORTING PRODUCTS
A significant portion of our new vehicle business involves the sale of
vehicles, vehicle parts or vehicles composed of parts that are manufactured
outside the United States. As a result, our operations are subject to customary
risks associated with imported merchandise, including fluctuations in the value
of currencies, import duties, exchange controls, trade restrictions, work
stoppages and general political and economic conditions in foreign countries.
The United States or the countries from which our products are imported
may, from time to time, impose new quotas, duties, tariffs or other
restrictions, or adjust presently prevailing quotas, duties or tariffs on
imported merchandise. Any of those impositions or adjustments could affect our
operations and our ability to purchase imported vehicles and parts. This, in
turn, could have an adverse effect on our business.
FLUCTUATIONS IN PROFITABILITY
The automobile industry is cyclical and historically has experienced
downturns characterized by oversupply and weak demand. Many factors affect the
industry, including general economic conditions, consumer confidence, personal
discretionary spending levels, interest rates and credit availability. We cannot
guarantee that the industry will not experience sustained periods of decline in
vehicle sales in the future. Any such decline could have an adverse effect on
our business.
The automobile industry also experiences seasonal variations in revenue.
Demand for automobiles is generally lower during the winter months than in other
seasons, particularly in regions of the United States associated with harsh
winters. Accordingly, we expect revenues and
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operating results generally to be lower in our first and fourth quarters than in
our second and third quarters.
CONTINGENT ACQUISITION PAYMENTS
In our early acquisitions in which we issued shares of our common stock as
consideration, we guaranteed to the recipients of the shares that they will
receive a minimum price for their shares if they sell the shares in the market.
In the event that they do not receive the guaranteed price in a sale, we are
required to pay them the difference between the price they received and the
guaranteed price. As of December 31, 1998, there were 3,450,187 shares of common
stock subject to our guarantee with a weighted average guarantee price of
approximately $13.49 per share. These guarantees have terms of three years to
ten years with a weighted average term of approximately 6.5 years. If the price
of our common stock declines substantially and we are required to perform on our
guarantees, our liquidity and ability to finance our acquisition program could
be adversely affected.
In addition, in many of our acquisitions, we may be required to pay
contingent consideration to the former stockholders of the acquired dealerships
based on an increase in earnings before taxes of their operations during certain
periods of time. We cannot determine whether or how much we will have to pay
under these contingent payment arrangements. If we are required to make any of
these contingent payments, we will have to pay approximately one-half of each
payment in common stock and one-half in cash. If these contingent payments must
be paid in full, our liquidity and ability to finance our acquisition program
could be adversely affected.
LIMITED COMBINED OPERATING HISTORY
We were incorporated in December 1995 and commenced dealership operations
in November 1997 with the acquisition of the founding groups. The founding
groups had been owned, operated and managed as separate independent entities
prior to their acquisition by us. We have made a number of additional
acquisitions of automobile dealerships since we acquired the founding groups. We
intend to continue to acquire additional dealerships. Our future operating
results will depend in part on our ability to integrate the operations of those
businesses and manage the combined enterprise.
Our management group has been working together since December 1996. We
cannot guarantee that our management team will be able to effectively and
profitably integrate the founding groups and our other acquisitions or to
effectively manage the combined entity. Their inability to do so could adversely
affect our business.
SUBSTANTIAL COMPETITION
The automotive retailing industry is highly competitive with respect to
price, service, location and selection. We compete with automobile dealerships
(including other public franchised dealership consolidators), private market
buyers and sellers of used vehicles, used vehicle dealerships, service center
chains and independent service and repair shops. In the new vehicle area, we
compete with other franchised dealers.
We do not have any cost advantage in purchasing new vehicles from the
manufacturers and typically rely on advertising, merchandising, sales expertise,
service reputation and dealership location to sell new vehicles.
In recent years, our dealerships have also faced competition from
non-traditional sources such as companies that sell automobiles on the Internet,
automobile rental agencies, independent leasing companies, used-car
"superstores" and price clubs associated with established consumer agencies,
such as the American Automobile Association. Some of these competitors use
non-traditional sales techniques such as one-price shopping.
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In addition, Ford has begun owning and operating automobile dealerships for
the purpose of consolidating Ford dealerships. For example, Ford has acquired
dealerships in Tulsa, Oklahoma and has entered into an agreement with Republic
Industries, Inc. to jointly acquire Ford dealerships in Rochester, New York.
Ford has also announced that it is exploring the possibility of going into
business with some of its dealers to create automotive superstores in selected
markets.
Some of our competitors, including these recent market entrants, may have
greater financial, marketing and personnel resources than us and lower overhead
and sales costs.
In the parts and service area, we also compete with a number of regional or
national chains which offer selected parts and services at prices that may be
lower than our prices. We cannot guarantee that our strategy will be more
effective than the strategies of our competitors.
RELIANCE ON KEY PERSONNEL
We depend to a large extent upon the abilities and continued efforts of our
executive officers, senior management and principals of our dealerships.
Furthermore, we will likely be dependent on the senior management of any
dealerships acquired in the future. If any of those persons leave or if we fail
to attract and retain other qualified employees, our business could be adversely
affected.
Although we have entered into employment agreements with each of our
executive officers and some of the principals of our dealerships, we cannot
guarantee that any individual will continue in his present capacity with us for
any particular period of time. We currently have no key man insurance for any of
our officers or senior management.
YEAR 2000
Year 2000 issues result from the inability of computer programs or
computerized equipment to accurately calculate, store or use a date subsequent
to December 31, 1999. The erroneous date can be interpreted in a number of
different ways; typically the year 2000 is interpreted as the year 1900. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
We recognize the need to ensure that our computer systems, equipment and
operations will not be adversely impacted by the change to the calendar year
2000. In this regard, we have taken steps to identify potential areas of risk
and have begun addressing these in our planning, purchasing and daily
operations. We have not quantified the total cost of converting all internal
systems, equipment and operations for the year 2000, but we do not believe that
the cost will be material to our financial position. In connection with
acquisitions, we review and address the candidate's year 2000 readiness during
the due diligence process.
We are currently reviewing the potential adverse impact on us of the
failure of our third party service providers or vendors to address any of their
year 2000 issues. We are dependent upon our dealerships' computer systems in our
daily operations. All our dealerships are, or are expected to be, using a
computer system supported by a major automobile dealership computer system
provider. We have contacted each of these providers and have received assurance
from the providers that their systems are, or will be, year 2000 ready. We are
dependent upon these providers, as are most dealerships in the United States, to
address the year 2000 issues. In addition, we are dependent on our Manufacturers
for the production and delivery of new vehicles and parts. Although we have no
reason to believe that our Manufacturers will not be year 2000 ready, we have
been unable to obtain written assurance from them that their systems are year
2000 ready.
S-19
<PAGE> 21
Failure by us, our Manufacturers or our third party service providers and
vendors to adequately address the year 2000 issue could have an adverse effect
on us.
GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL RISKS
We are subject to a wide range of federal, state and local laws and
regulations, such as local licensing requirements, consumer protection laws and
environmental requirements governing, among other things, discharges to the air
and water, the storage of petroleum substances and chemicals, the handling and
disposal of wastes, and the remediation of contamination arising from spills and
releases. The violation of those laws and regulations could result in civil and
criminal penalties being levied against us or in a cease and desist order
against operations that are not in compliance. Future acquisitions by us may
also be subject to governmental regulation, including antitrust reviews.
Although we believe that we substantially comply with all applicable laws and
regulations relating to our business, future laws and regulations or changes to
existing laws or regulations may be more stringent and require us to incur
significant additional costs.
POSSIBLE INABILITY TO FUND A CHANGE OF CONTROL OFFER
Upon a change of control, we must offer to purchase all outstanding Notes
at 101% of their principal amount plus accrued and unpaid interest to the date
of purchase. We cannot guarantee that sufficient funds will be available at the
time of any change of control to make any required purchases of Notes tendered
or that restrictions in our credit facility or other debt instruments entered
into in the future will allow us to make such required purchases.
Notwithstanding these provisions, we could enter into certain transactions,
including certain recapitalizations, that would increase the amount of our debt
but would not constitute a change of control.
ABSENCE OF TRADING MARKET
The Notes will be new securities for which currently there is no trading
market. We do not currently intend to apply for listing of the Notes on any
securities exchange or stock market. Although the Underwriters have informed us
that they currently intend to make a market in the Notes, they are not obligated
to do so. In addition, they may discontinue any such market making at any time
without notice. The liquidity of any market for the Notes will depend on the
number of holders of those Notes, the interest of securities dealers in making a
market in those securities and other factors. Accordingly, we cannot assure you
as to the development or liquidity of any market for the Notes. Historically,
the market for noninvestment grade debt has been subject to disruptions that
have caused substantial volatility in the prices of securities similar to the
notes. We cannot assure you that the market, if any, for the Notes will be free
from similar disruptions. Any such disruptions may adversely effect the note
holders.
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
This prospectus supplement and the accompanying prospectus contains
statements that constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements appear in a number of places in this
prospectus supplement and the accompanying prospectus and include statements
regarding our plans, beliefs or current expectations, including those plans,
beliefs and expectations of our officers and directors with respect to, among
other things:
- future acquisitions;
- expected future cost savings;
- future capital expenditures;
- trends affecting our future financial condition or results of operations;
and
S-20
<PAGE> 22
- our business strategy regarding future operations.
Any such forward-looking statements are not assurances of future
performance and involve risks and uncertainties. Actual results may differ
materially from anticipated results for a number of reasons, including:
- industry conditions;
- future demand for new and used vehicles;
- restrictions imposed on us by automobile manufacturers;
- the ability to obtain the consents of automobile manufacturers to our
acquisitions;
- the availability of capital resources; and
- the willingness of acquisition candidates to accept our common stock as
currency.
The information contained in this prospectus supplement and the
accompanying prospectus, including the information set forth under the heading
"Risk Factors", identifies additional factors that could affect our operating
results and performance. We urge you to carefully consider those factors.
All forward-looking statements attributable to us are expressly qualified
in their entirety by this cautionary statement.
S-21
<PAGE> 23
USE OF PROCEEDS
We expect to receive approximately $96.0 million of net proceeds from this
offering and approximately $51.6 million ($59.5 million if the underwriters'
over-allotment option is exercised in full) of net proceeds from the Common
Stock Offering (based on an assumed initial public offering price for the common
stock of $27 13/16 per share, which was the last reported sale price for the
common stock on the New York Stock Exchange on February 3, 1999, and an initial
public offering price for the Notes of 100%, less in each case estimated
offering expenses and underwriters' discount). We intend to (1) use a portion of
these net proceeds to repay all borrowings outstanding under the acquisition
portion of our credit facility, which was $42.0 million as of December 31, 1998
and (2) use the remaining net proceeds to reduce our outstanding borrowings
under the floorplan portion of our credit facility. At December 31, 1998, the
effective interest rates on borrowings under the floorplan portion of our credit
facility and the acquisition portion of our credit facility were 7.12% and
7.37%, respectively.
In the event that the Common Stock Offering is not consummated, we intend
to (1) use a portion of the net proceeds of the Notes offering to repay all
borrowings outstanding under the acquisition portion of our credit facility and
(2) use the remaining net proceeds to reduce our outstanding borrowings under
the floorplan portion of our credit facility.
We intend to pursue acquisitions in the future which will be financed with
common stock, cash (including cash obtained from borrowings under our credit
facility) or a combination of both common stock and cash. We have identified and
held preliminary discussions with numerous potential acquisition candidates. As
described above, we have entered into definitive agreements with respect to the
Recent Acquisitions (which have been completed) and the Pending Acquisitions to
acquire 14 dealership franchises for a total consideration of $59 million in
cash and 750,000 shares of common stock. See "Prospectus Supplement
Summary -- Recent Developments -- Pending and Recent Acquisitions". We intend to
subsequently reborrow the amounts repaid with the net proceeds from the Notes
offering and the Common Stock Offering to fund acquisitions, including the
Pending Acquisitions, and for other corporate purposes. See "Description of
Credit Facility."
S-22
<PAGE> 24
CAPITALIZATION
The following table sets forth, as of September 30, 1998, our short-term
debt (including current portion of long-term debt), long-term debt and
capitalization (1) on an historical basis, (2) on a pro forma basis to give
effect to the Sale and Leaseback, (3) on the pro forma basis described in clause
(2) above as adjusted to give effect to the sale of the Notes and the
application of the assumed net proceeds therefrom as described herein and (4) on
the pro forma basis described in clause (2) above as adjusted to give effect to
the sale of the Notes and the common stock in the Common Stock Offering and the
application of the assumed net proceeds therefrom as described herein.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
----------------------------------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
AS ADJUSTED FOR NOTES AND
FOR NOTES COMMON STOCK
HISTORICAL PRO FORMA OFFERING OFFERINGS
---------- --------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Short-term debt:
Current portion of long-term debt........ $ 1,487 $ 223 $ 223 $ 223
Floorplan facility....................... 160,316 160,316 104,064 52,439
-------- -------- -------- --------
Total short-term debt................. 161,803 160,539 104,287 52,662
Long-term debt:
Acquisition facility..................... 56,000 39,748 -- --
Other long-term debt..................... 9,393 1,409 1,409 1,409
Senior Subordinated Notes offered
hereby................................ -- -- 100,000 100,000
-------- -------- -------- --------
Total long-term debt.................. 65,393 41,157 101,409 101,409
-------- -------- -------- --------
Total debt....................... 227,196 201,696 205,696 154,071
Stockholders' equity:
Preferred stock, par value $.01 per
share, 1,000,000 shares authorized; no
shares issued and outstanding......... -- -- -- --
Common stock, par value $.01 per share,
50,000,000 shares authorized;
18,240,795 shares issued and
outstanding, actual; 20,240,795 shares
issued and outstanding, pro forma as
adjusted for the common stock
offering.............................. 182 182 182 202
Additional paid-in capital............... 118,509 118,509 118,509 170,114
Treasury stock........................... (592) (592) (592) (592)
Retained earnings........................ 12,721 12,721 12,721 12,721
-------- -------- -------- --------
Total stockholders' equity............ 130,820 130,820 130,820 182,445
-------- -------- -------- --------
Total capitalization............. $358,016 $332,516 $336,516 $336,516
======== ======== ======== ========
</TABLE>
S-23
<PAGE> 25
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma consolidated financial statements present certain
pro forma financial information of Group 1 as of and for each of the periods
indicated.
The pro forma statements of operations data give effect to the following
transactions that occurred after the beginning of the period presented as if
they had occurred as of the beginning of such period:
- the acquisitions of our founding groups in November 1997;
- the application of the net proceeds from our initial public offering in
November 1997 to repay certain indebtedness and pay the cash portion of
the purchase price for the founding groups;
- all of the dealership acquisitions that we have completed since our
initial public offering except for three immaterial tuck-in acquisitions
of seven dealership franchises completed in 1998 and the Recent
Acquisitions;
- the Sale and Leaseback;
- the sale of the Notes and the application of the assumed net proceeds of
$96.0 million therefrom as described herein; and
- the sale of the common stock in the Common Stock Offering and the
application of the assumed net proceeds of $51.6 million therefrom as
described herein (based on an assumed initial public offering price for
the common stock of $27 13/16 per share, which was the last reported sale
price of the common stock on the New York Stock Exchange on February 3,
1999).
The pro forma balance sheet data gives effect to the following transactions
as if they had occurred as of September 30, 1998:
- the Sale and Leaseback;
- the sale of the Notes and the application of the assumed net proceeds of
$96.0 million therefrom as described herein; and
- the sale of the common stock in the Common Stock Offering and the
application of the assumed net proceeds of $51.6 million therefrom as
described herein (based on an assumed initial public offering price for
the common stock of $27 13/16 per share, which was the last reported sale
price of the common stock on the New York Stock Exchange on February 3,
1999).
Neither the pro forma statements of operations data nor the pro forma
balance sheet data give effect to the Recent Acquisitions or the Pending
Acquisitions.
The pro forma financial information referred to above will not be
comparable to and may not be indicative of our financial position or results of
operations for any future period since the founding groups and the other
dealerships we have acquired were not under common control of management.
S-24
<PAGE> 26
PRO FORMA STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------------------------------------
ACQUISITIONS
PRO FORMA AND SALE- NOTES PRO FORMA
AS LEASEBACK FINANCING AS ADJUSTED FOR
REPORTED(1) ACQUISITIONS(2) ADJUSTMENTS PRO FORMA ADJUSTMENTS NOTES OFFERING
----------- --------------- ------------ ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
New vehicle sales................. $513,864 $388,312 $ -- $ 902,176 $ -- $ 902,176
Used vehicle sales................ 288,010 193,296 -- 481,306 -- 481,306
Parts & service sales............. 77,215 73,213 -- 150,428 -- 150,428
Other dealership revenues, net.... 23,206 17,772 3,253(a) 44,231 -- 44,231
-------- -------- ------- ---------- ------- ----------
Total revenues.............. 902,295 672,593 3,253 1,578,141 -- 1,578,141
Cost of sales...................... 775,164 570,976 (548)(b) 1,345,592 -- 1,345,592
-------- -------- ------- ---------- ------- ----------
Gross profit...................... 127,131 101,617 3,801 232,549 -- 232,549
Selling general and administrative
expenses.......................... 98,967 79,432 (2,039)(c)(d) 176,360 -- 176,360
Depreciation and amortization...... 2,752 1,852 1,671(d)(e) 6,275 -- 6,275
-------- -------- ------- ---------- ------- ----------
Income from operations...... 25,412 20,333 4,169 49,914 -- 49,914
Other income (expense):
Floorplan interest expense........ (5,194) (8,547) (921)(f) (14,662) 3,873(i) (10,789)
Other interest expense, net....... (926) (667) (2,532)(d)(g) (4,125) (7,355)(j) (11,480)
Other income, net................. 88 6 -- 94 -- 94
-------- -------- ------- ---------- ------- ----------
Income before taxes............... 19,380 11,125 716 31,221 (3,482) 27,739
Provision for income taxes......... 7,967 407 4,364(h) 12,738 (1,375)(k) 11,363
-------- -------- ------- ---------- ------- ----------
Net income.................. $ 11,413 $ 10,718 $(3,648) $ 18,483 $(2,107) $ 16,376
======== ======== ======= ========== ======= ==========
Other Data:
EBITDA............................ $ 28,252 $ 22,191 $ 5,840 $ 56,283 $ -- $ 56,283
Ratio of earnings to fixed
charges(3)...................... 1.96
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------
PRO FORMA
AS ADJUSTED FOR
STOCK NOTES AND
FINANCING COMMON STOCK
ADJUSTMENTS OFFERINGS
----------- ----------------
<S> <C> <C>
Revenues:
New vehicle sales................. $ $ 902,176
Used vehicle sales................ -- 481,306
Parts & service sales............. -- 150,428
Other dealership revenues, net.... -- 44,231
------ ----------
Total revenues.............. -- 1,578,141
Cost of sales...................... -- 1,345,592
------ ----------
Gross profit...................... -- 232,549
Selling general and administrative
expenses.......................... -- 176,360
Depreciation and amortization...... -- 6,275
------ ----------
Income from operations...... -- 49,914
Other income (expense):
Floorplan interest expense........ 3,717(i) (7,072)
Other interest expense, net....... -- (11,480)
Other income, net................. -- 94
------ ----------
Income before taxes............... 3,717 31,456
Provision for income taxes......... 1,468(k) 12,831
------ ----------
Net income.................. $2,249 $ 18,625
====== ==========
Other Data:
EBITDA............................ $ -- $ 56,283
Ratio of earnings to fixed
charges(3)...................... 2.25
</TABLE>
- ---------------
(1) Represents the Pro Forma Statement of Operations for the acquisition of our
founding groups and the application of the net proceeds from our initial
public offering as presented in our December 31, 1997 Annual Report on Form
10-K.
(2) Represents the pre-acquisition operations of all of the dealerships that we
have acquired since our initial public offering except for three immaterial
tuck-in acquisitions completed in 1998 and the Recent Acquisitions. We do
not have sufficiently detailed financial information to include their
results in the pro forma financial information. These excluded acquisitions
had estimated aggregate revenues of approximately $215 million for the year
ended December 31, 1997.
(3) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before provision for income taxes plus fixed charges
(excluding capitalized interest). Fixed charges consist of interest expensed
and capitalized, amortization of debt discount and expense related to
indebtedness and the portion of rental expense representative of the
interest factor attributable to leases for rental property.
S-25
<PAGE> 27
PRO FORMA STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
---------------------------------------------------------------------------
ACQUISITIONS
PRO FORMA AND SALE- NOTES
AS LEASEBACK FINANCING
REPORTED(1) ACQUISITIONS(2) ADJUSTMENTS PRO FORMA ADJUSTMENTS
----------- --------------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
New vehicle sales................. $391,928 $295,523 $ -- $ 687,451 $ --
Used vehicle sales................ 220,735 149,042 -- 369,777 --
Parts & service sales............. 58,389 54,919 -- 113,308 --
Other dealership revenues, net.... 17,998 13,389 2,416(a) 33,803 --
-------- -------- ------- ---------- -------
Total revenues.............. 689,050 512,873 2,416 1,204,339 --
Cost of sales...................... 591,450 436,309 -- 1,027,759 --
-------- -------- ------- ---------- -------
Gross profit...................... 97,600 76,564 2,416 176,580 --
Selling general and administrative
expenses.......................... 75,492 59,816 (1,558)(c)(d) 133,750 --
Depreciation and amortization...... 2,044 1,308 1,254(d)(e) 4,606 --
-------- -------- ------- ---------- -------
Income from operations.......... 20,064 15,440 2,720 38,224 --
Other income (expense):
Floorplan interest expense........ (3,928) (6,529) (689)(f) (11,146) 2,906(i)
Other interest expense, net....... (684) (319) (2,091)(d)(g) (3,094) (5,517)(j)
Other income (expense), net....... (17) 12 -- (5) --
-------- -------- ------- ---------- -------
Income before taxes............. 15,435 8,604 (60) 23,979 (2,611)
Provision for income taxes......... 6,333 201 3,249(h) 9,783 (1,031)(k)
-------- -------- ------- ---------- -------
Net income...................... $ 9,102 $ 8,403 $(3,309) $ 14,196 $(1,580)
======== ======== ======= ========== =======
Other Data:
EBITDA............................ $ 22,091 $ 16,760 $ 3,974 $ 42,825 $ --
Ratio of earnings to fixed
charges(3)......................
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------------------
PRO FORMA
AS ADJUSTED FOR
PRO FORMA STOCK NOTES AND
AS ADJUSTED FOR FINANCING COMMON STOCK
NOTES OFFERING ADJUSTMENTS OFFERINGS
---------------- ----------- ----------------
<S> <C> <C> <C>
Revenues:
New vehicle sales................. $ 687,451 $ -- $ 687,451
Used vehicle sales................ 369,777 -- 369,777
Parts & service sales............. 113,308 -- 113,308
Other dealership revenues, net.... 33,803 -- 33,803
---------- ------ ----------
Total revenues.............. 1,204,339 -- 1,204,339
Cost of sales...................... 1,027,759 -- 1,027,759
---------- ------ ----------
Gross profit...................... 176,580 -- 176,580
Selling general and administrative
expenses.......................... 133,750 -- 133,750
Depreciation and amortization...... 4,606 -- 4,606
---------- ------ ----------
Income from operations.......... 38,224 -- 38,224
Other income (expense):
Floorplan interest expense........ (8,240) 2,788(i) (5,452)
Other interest expense, net....... (8,611) -- (8,611)
Other income (expense), net....... (5) -- (5)
---------- ------ ----------
Income before taxes............. 21,368 2,788 24,156
Provision for income taxes......... 8,752 1,100(k) 9,852
---------- ------ ----------
Net income...................... $ 12,616 $1,688 $ 14,304
========== ====== ==========
Other Data:
EBITDA............................ $ 42,825 $ -- $ 42,825
Ratio of earnings to fixed
charges(3)...................... 1.98 2.27
</TABLE>
- ---------------
(1) Represents the Pro Forma Statement of Operations for the acquisition of our
founding groups and the application of the net proceeds from our initial
public offering as presented in our September 30, 1998 Quarterly Report on
Form 10-Q.
(2) Represents the pre-acquisition operations of all of the dealerships that we
have acquired since our initial public offering except for three immaterial
tuck-in acquisitions completed in 1998 and the Recent Acquisitions. We do
not have sufficiently detailed financial information to include their
results in the pro forma financial information. These excluded acquisitions
had estimated aggregate revenues of approximately $215 million for the year
ended December 31, 1997.
(3) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before provision for income taxes plus fixed charges
(excluding capitalized interest). Fixed charges consist of interest expensed
and capitalized, amortization of debt discount and expense related to
indebtedness and the portion of rental expense representative of the
interest factor attributable to leases for rental property.
S-26
<PAGE> 28
PRO FORMA STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
-----------------------------------------------------------------------------
ACQUISITIONS
AND NOTES
SALE-LEASEBACK FINANCING
HISTORICAL(1) ACQUISITIONS(2) ADJUSTMENTS PRO FORMA ADJUSTMENTS
------------- --------------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
New vehicle sales................. $ 662,323 $123,009 $ -- $ 785,332 $ --
Used vehicle sales................ 363,096 68,948 -- 432,044 --
Parts & service sales............. 97,264 24,001 -- 121,265 --
Other dealership revenues, net.... 34,833 6,702 976(a) 42,511 --
---------- -------- ------- ---------- -------
Total revenues.............. 1,157,516 222,660 976 1,381,152 --
Cost of sales...................... 990,179 188,568 -- 1,178,747 --
---------- -------- ------- ---------- -------
Gross profit.................... 167,337 34,092 976 202,405 --
Selling, general and administrative
expenses.......................... 125,282 26,084 1,218(c)(d) 152,584 --
Depreciation and amortization...... 4,375 601 399(d)(e) 5,375 --
---------- -------- ------- ---------- -------
Income from operations...... 37,680 7,407 (641) 44,446 --
Other income (expense):
Floorplan interest expense........ (8,994) (2,940) (116)(f) (12,050) 3,038(i)
Other interest expense, net....... (2,705) (150) 15(d)(g) (2,840) (5,654)(j)
Other income (expense), net....... (8) 24 -- 16 --
---------- -------- ------- ---------- -------
Income before taxes......... 25,973 4,341 (742) 29,572 (2,616)
Provision for income taxes......... 10,723 267 1,075(h) 12,065 (1,034)(k)
---------- -------- ------- ---------- -------
Net income.................. $ 15,250 $ 4,074 $(1,817) $ 17,507 $(1,582)
========== ======== ======= ========== =======
Other Data:
EBITDA............................ $ 42,047 $ 8,032 $ (242) $ 49,837 $ --
Ratio of earnings to fixed
charges(3)......................
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
-------------------------------------------
PRO FORMA
PRO FORMA AS ADJUSTED FOR
AS ADJUSTED STOCK NOTES AND
FOR NOTES FINANCING COMMON STOCK
OFFERING ADJUSTMENTS OFFERINGS
----------- ----------- ---------------
<S> <C> <C> <C>
Revenues:
New vehicle sales................. $ 785,332 $ -- $ 785,332
Used vehicle sales................ 432,044 -- 432,044
Parts & service sales............. 121,265 -- 121,265
Other dealership revenues, net.... 42,511 -- 42,511
---------- ------ ----------
Total revenues.............. 1,381,152 -- 1,381,152
Cost of sales...................... 1,178,747 -- 1,178,747
---------- ------ ----------
Gross profit.................... 202,405 -- 202,405
Selling, general and administrative
expenses.......................... 152,584 -- 152,584
Depreciation and amortization...... 5,375 -- 5,375
---------- ------ ----------
Income from operations...... 44,446 -- 44,446
Other income (expense):
Floorplan interest expense........ (9,012) 2,788(i) (6,224)
Other interest expense, net....... (8,494) -- (8,494)
Other income (expense), net....... 16 -- 16
---------- ------ ----------
Income before taxes......... 26,956 2,788 29,744
Provision for income taxes......... 11,031 1,102(k) 12,133
---------- ------ ----------
Net income.................. $ 15,925 $1,686 $ 17,611
========== ====== ==========
Other Data:
EBITDA............................ $ 49,837 $ -- $ 49,837
Ratio of earnings to fixed
charges(3)...................... 2.20 2.51
</TABLE>
- ---------------
(1) Represents the Historical Statement of Operations for Group 1 as presented
in our September 30, 1998 Quarterly Report on Form 10-Q, including the
results of operations from the date of acquisition of all acquisitions
completed during the nine months ended September 30, 1998.
(2) Represents the pre-acquisition operations of all of the dealerships that we
have acquired since our initial public offering except for three immaterial
tuck-in acquisitions completed in 1998 and the Recent Acquisitions. We do
not have sufficiently detailed financial information to include their
results in the pro forma financial information. These excluded acquisitions
had estimated aggregate revenues of approximately $215 million for the year
ended December 31, 1997.
(3) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before provision for income taxes plus fixed charges
(excluding capitalized interest). Fixed charges consist of interest expensed
and capitalized, amortization of debt discount and expense related to
indebtedness and the portion of rental expense representative of the
interest factor attributable to leases for rental property.
S-27
<PAGE> 29
PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON
NOTES PRO FORMA STOCK
PRO FORMA FINANCING AS ADJUSTED FOR FINANCING
HISTORICAL ADJUSTMENTS(1) PRO FORMA ADJUSTMENTS NOTES OFFERING ADJUSTMENTS
---------- -------------- --------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........... $ 55,403 $ -- $ 55,403 $ -- $ 55,403 $ --
Accounts receivable, net............ 22,233 -- 22,233 -- 22,233 --
Inventories......................... 193,324 -- 193,324 -- 193,324 --
Deferred taxes...................... 14,627 -- 14,627 -- 14,627 --
Other current assets................ 3,265 -- 3,265 -- 3,265 --
-------- -------- -------- -------- -------- --------
Total current assets.......... 288,852 -- 288,852 -- 288,852 --
Property & equipment, net............. 44,741 (24,229)(a) 20,512 -- 20,512 --
Goodwill, net......................... 112,884 -- 112,884 -- 112,884 --
Other assets.......................... 3,559 425(a) 3,984 4,000(b) 7,984 --
-------- -------- -------- -------- -------- --------
Total assets.................. $450,036 $(23,804) $426,232 $ 4,000 $430,232 $ --
======== ======== ======== ======== ======== ========
Current liabilities:
Floorplan Facility.................. $160,316 $ -- $160,316 $(56,252)(b) $104,064 $(51,625)(c)
Current maturities of long-term
debt.............................. 1,487 (1,264)(a) 223 -- 223 --
Accounts payable and accrued
expenses.......................... 73,417 1,696(a) 75,113 -- 75,113 --
-------- -------- -------- -------- -------- --------
Total current liabilities..... 235,220 432 235,652 (56,252) 179,400 (51,625)
Debt, net of current maturities....... 9,393 (7,984)(a) 1,409 -- 1,409 --
Acquisition Facility.................. 56,000 (16,252)(a) 39,748 (39,748)(b) -- --
Senior Subordinated Notes............. -- -- -- 100,000(b) 100,000 --
Deferred taxes........................ 4,282 -- 4,282 -- 4,282 --
Other liabilities..................... 14,321 -- 14,321 -- 14,321 --
Stockholders' equity:
Common stock........................ 182 -- 182 -- 182 20(c)
Additional paid-in capital.......... 118,509 -- 118,509 -- 118,509 51,605(c)
Treasury stock, at cost............. (592) -- (592) -- (592) --
Retained earnings................... 12,721 -- 12,721 -- 12,721 --
-------- -------- -------- -------- -------- --------
Total stockholders' equity.... 130,820 -- 130,820 -- 130,820 51,625
-------- -------- -------- -------- -------- --------
Total liabilities and
stockholders' equity........ $450,036 $(23,804) $426,232 $ 4,000 $430,232 $ --
======== ======== ======== ======== ======== ========
<CAPTION>
PRO FORMA
AS ADJUSTED FOR
NOTES AND
COMMON STOCK
OFFERINGS
---------------
<S> <C>
Current assets:
Cash and cash equivalents........... $ 55,403
Accounts receivable, net............ 22,233
Inventories......................... 193,324
Deferred taxes...................... 14,627
Other current assets................ 3,265
--------
Total current assets.......... 288,852
Property & equipment, net............. 20,512
Goodwill, net......................... 112,884
Other assets.......................... 7,984
--------
Total assets.................. $430,232
========
Current liabilities:
Floorplan Facility.................. $ 52,439
Current maturities of long-term
debt.............................. 223
Accounts payable and accrued
expenses.......................... 75,113
--------
Total current liabilities..... 127,775
Debt, net of current maturities....... 1,409
Acquisition Facility.................. --
Senior Subordinated Notes............. 100,000
Deferred taxes........................ 4,282
Other liabilities..................... 14,321
Stockholders' equity:
Common stock........................ 202
Additional paid-in capital.......... 170,114
Treasury stock, at cost............. (592)
Retained earnings................... 12,721
--------
Total stockholders' equity.... 182,445
--------
Total liabilities and
stockholders' equity........ $430,232
========
</TABLE>
- ---------------
(1) Reflects the Sale and Leaseback.
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<PAGE> 30
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
1. PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS FOR THE YEAR ENDED DECEMBER 31,
1997 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (UNAUDITED)
(a) Records increases in revenues related to certain third-party products
sold by the dealerships as a result of (1) negotiated increases in the
commission revenues received by the dealerships for the sale of various finance
and insurance products and (2) the termination of agreements of the owners of
certain of the acquired dealerships that withheld fees and commissions from the
payments to the dealerships for sales of certain finance and insurance products
and paid the withheld amounts to affiliates of the prior owners.
(b) Adjusts cost of sales to the specific identification method of
inventory accounting from the last-in, first-out basis.
(c) Adjusts pre-acquisition compensation expense and management fees to the
level that certain management employees and owners of the acquired dealerships
will contractually receive subsequent to the closing of the acquisitions.
Additionally, adjusts insurance expense to the level the dealerships will
contractually pay subsequent to the closing of the acquisitions.
(d) Reflects the impact of our Sale and Leaseback. We entered into a
definitive agreement for the sale and leaseback of nine of our dealership
properties on December 21, 1998. On December 30, 1998 the sale and leaseback of
six of the properties was closed. One additional property is expected to close
during the first quarter of 1999. The two properties anticipated to close after
the first quarter of 1999 have not been included in this adjustment. Records the
reduction of depreciation expense due to the sale of the dealership properties
and the increase in lease expense due to the leaseback of such dealership
properties. Additionally, it records the reduction of interest expense related
to the payoff of existing mortgages on the dealership properties sold and
reduction of borrowings under the acquisition portion of our credit facility
with the proceeds from the sale.
(e) Records the pro forma goodwill amortization expense over an estimated
useful life of 40 years.
(f) Records the incremental floorplan interest expense resulting from our
increased debt balances due to borrowings used to fund the cash portion of the
purchase price paid for the acquisitions, offset by decreases in floorplan
interest expense with respect to the dealerships we acquired resulting from our
ability to borrow at a lower interest rate than the dealerships acquired.
(g) Records the incremental interest expense resulting from borrowings used
to fund the cash portion of the purchase price paid for the acquisitions, net of
reduced interest expense attributable to long-term debt not assumed in the
acquisition of the Carroll Group.
(h) Records the incremental provision for federal and state income taxes
relating to the compensation differential, S corporation income and other pro
forma adjustments.
(i) Records the reduction of floorplan interest expense related to the
repayment of borrowings under the floorplan portion of our credit facility, with
a portion of the net proceeds from the sale of Notes and the common stock being
offered in the Common Stock Offering.
(j) Records the incremental other interest expense related to the sale of
the Notes assuming an interest rate of 10.5%, partially offset by decreases in
interest expense related to the repayment of borrowings under the acquisition
portion of the credit facility for acquisition financing.
(k) Records the provision for federal and state income taxes related to the
change in interest expense resulting from (i) and (j) above.
S-29
<PAGE> 31
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENTS
(a) Represents the impact of the Sale and Leaseback. We entered into a
definitive agreement for the sale and leaseback of nine of our dealership
properties on December 21, 1998. On December 30, 1998, the sale and leaseback of
six of the properties was closed. One additional property is expected to close
during the first quarter of 1999. The two properties not anticipated to close
during the first quarter of 1999 have not been included in this adjustment.
(b) Records the issuance of the Notes, and the use of the assumed net
proceeds from the sale thereof to reduce outstanding borrowings under the credit
facility, net of estimated offering costs of $4.0 million.
(c) Records the issuance of common stock being offered in the Common Stock
Offering and the use of the assumed net proceeds from the sale thereof to reduce
outstanding borrowings under the credit facility, net of estimated offering
costs of $4.0 million.
S-30
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Group 1 is a leading operator and consolidator in the highly fragmented
automotive retailing industry. We own automobile dealership franchises located
in Texas, Oklahoma, Florida, New Mexico, Georgia and Colorado. Additionally, we
provide maintenance and repair services at all of our dealerships and operate 12
collision service centers. We expect that a significant portion of our future
growth will be derived from acquisitions of additional dealerships.
We have diverse sources of revenues, including: new car sales, new truck
sales, used car sales, used truck sales, manufacturer remarketed vehicle sales,
parts sales, service sales, collision repair services, finance fees, insurance
commissions, vehicle service contract sales, documentary fees and after-market
product sales. Sales revenues from new and used vehicles sales and parts and
service sales include sales to retail customers, other dealers and wholesalers.
Other dealership revenue includes revenue from arranging financing and selling
vehicle service contracts and insurance, net of a provision for anticipated
chargebacks and documentary fees.
Our gross margin varies as our merchandise mix (the mix between new vehicle
sales, used vehicle sales, parts and service sales, collision repair services
and other dealership revenues) changes. Our gross margin on the sale of our
products and services generally varies between approximately 8.0% and 85.0%,
with new vehicle sales generally resulting in the lowest gross margin and other
dealership revenues generally resulting in the highest gross margin. When our
new vehicle sales increase or decrease at a rate greater than our other revenue
sources, our gross margin responds inversely. Factors such as seasonality,
weather, cyclicality and Manufacturers' advertising and incentives may impact
our merchandise mix and, therefore, influence our gross margin. We believe that
more than 90% of our costs, including costs of goods sold, are variable in
nature and can be adjusted in times of depressed sales.
Selling, general and administrative expenses consist primarily of
compensation for sales, administrative, finance and general management
personnel, rent, marketing, insurance and utilities. Interest expense consists
of interest charges on interest-bearing debt, including floorplan inventory
financing, net of interest income earned. Before Group 1 acquired them, the
founding groups were managed as independent private companies. As a consequence
their operating results reflect different tax structures (S Corporations and C
Corporations), which influenced, among other things, their historical levels of
owners' compensation. The owners and certain key employees of the founding
groups agreed to certain reductions in their compensation and benefits in
connection with the organization of Group 1.
We have implemented a "best practices" program that involves the
installation of practices that have been successful at other franchises and in
other retail segments. This integration of functions and installation of best
practices may present opportunities to increase revenues and reduce costs but
may also necessitate additional costs and expenditures for corporate
administration, including expenses necessary to implement our acquisition
strategy. These various costs and possible cost-savings and revenue enhancements
may make historical operating results difficult to compare with and not
indicative of, future performance.
PRO FORMA COMBINED FOUNDING GROUPS' DATA
The following tables set forth certain financial data for 1995, 1996, 1997
and for the nine months ended September 30, 1997 on a pro forma basis giving
effect to the combination of the founding groups. The pro forma combined
founding groups' data presented below for 1995, 1996 and 1997 and for the nine
months ended September 30, 1997 do not purport to present the combined founding
groups in accordance with generally accepted accounting principles, but
S-31
<PAGE> 33
represent a summation of certain data of the individual founding groups on an
historical basis including the effects of the pro forma adjustments. Such
information does not give effect to any other acquisitions that were made by us
other than the founding groups. This data will not be comparable to and may not
be indicative of our post-combination results of operations because (i) the
founding groups were not under common control of management and had different
tax structures (S Corporations and C Corporations) during the periods presented
and (ii) we used the purchase method to establish a new basis of accounting to
record the acquisitions.
The financial information presented below for the nine months ended
September 30, 1998 reflects the historical results of our operations and
includes acquisitions made during such period commencing on the effective date,
for accounting purposes, of such acquisitions.
OPERATIONS DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------ -----------------------------------------
1995 1996 1997 1997 1998
------------------ ------------------ ------------------ ------------------ --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- ------- -------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
New vehicle sales..... $422,348 57.9% $469,318 57.1% $513,864 56.9% $391,928 56.9% $ 662,323 57.2%
Used vehicle sales.... 222,373 30.5 258,027 31.4 288,010 31.9 220,735 32.0 363,096 31.4
Parts and service
sales............. 65,599 9.0 73,451 8.9 77,215 8.6 58,389 8.5 97,264 8.4
Other dealership
revenues, net....... 19,033 2.6 21,117 2.6 23,206 2.6 17,998 2.6 34,833 3.0
-------- ----- -------- ----- -------- ----- -------- ----- ---------- -----
Total revenues.. 729,353 100.0 821,913 100.0 902,295 100.0 689,050 100.0 1,157,516 100.0
Cost of sales.......... 629,305 86.3 705,783 85.9 775,164 85.9 591,450 85.8 990,179 85.5
-------- ----- -------- ----- -------- ----- -------- ----- ---------- -----
Gross profit........... $100,048 13.7% $116,130 14.1% $127,131 14.1% $ 97,600 14.2% $ 167,337 14.5%
======== ===== ======== ===== ======== ===== ======== ===== ========== =====
</TABLE>
NEW VEHICLE DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Retail unit sales................... 20,357 21,378 23,201 17,923 28,640
Retail sales revenue................ $422,348 $469,318 $513,864 $391,928 $662,323
Gross profit........................ $ 32,047 $ 37,677 $ 42,199 $ 32,765 $ 52,405
Gross margin........................ 7.6% 8.0% 8.2% 8.4% 7.9%
Average gross profit per retail unit
sold.............................. $ 1,574 $ 1,762 $ 1,819 $ 1,828 $ 1,830
</TABLE>
USED VEHICLE DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Retail unit sales................... 15,358 17,220 18,130 13,923 22,431
Retail sales revenue(1)............. $185,665 $219,183 $235,353 $180,350 $298,817
Gross profit........................ $ 17,560 $ 21,358 $ 21,035 $ 16,181 $ 27,916
Gross margin........................ 9.5% 9.7% 8.9% 9.0% 9.3%
Average gross profit per retail unit
sold.............................. $ 1,143 $ 1,240 $ 1,160 $ 1,162 $ 1,245
</TABLE>
- ---------------
(1) Excludes wholesale revenues.
S-32
<PAGE> 34
PARTS AND SERVICE DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales revenue............................ $65,599 $73,451 $77,215 $58,389 $97,264
Gross profit............................. $31,408 $35,978 $40,691 $30,656 $52,183
Gross margin............................. 47.9% 49.0% 52.7% 52.5% 53.7%
</TABLE>
HISTORICAL NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH PRO FORMA
COMBINED FOUNDING GROUPS NINE MONTHS ENDED SEPTEMBER 30, 1997
REVENUES. Revenues increased $468.4 million, or 68.0%, from $689.1 million
for the nine months ended September 30, 1997 to $1,157.5 million for the nine
months ended September 30, 1998. New vehicle revenues increased $270.4 million,
or 69.0% from $391.9 million for the nine months ended September 30, 1997 to
$662.3 million for the nine months ended September 30, 1998. The increase in
revenue was primarily attributable to strong customer acceptance of our
products, particularly Toyota and Lexus, and the acquisition of additional
dealership operations during 1998. The increase was partially offset by reduced
sales at our Nissan franchises, which declined due to reduced manufacturer sales
incentives as compared to the prior year. Used vehicle revenues increased $142.4
million, or 64.5%, from $220.7 million for the nine months ended September 30,
1997 to $363.1 million for the nine months ended September 30, 1998. The
increase was primarily attributable to an emphasis on used vehicle sales in the
Oklahoma market and the additional franchise operations acquired. Parts and
service sales increased $38.9 million, or 66.6%, from $58.4 million for the nine
months ended September 30, 1997 to $97.3 million for the nine months ended
September 30, 1998. The increase was primarily attributable to the additional
dealership operations acquired. Other dealership revenues increased $16.8
million or 93.3% from $18.0 million for the nine months ended September 30, 1997
to $34.8 million for the nine months ended September 30, 1998. The increase was
due primarily to an increase in the number of retail new and used vehicle sales
and the implementation of our vehicle service contract and insurance programs,
which resulted in improved revenues per unit.
GROSS PROFIT. Gross profit increased $69.7 million, or 71.4%, from $97.6
million for the nine months ended September 30, 1997 to $167.3 million for the
nine months ended September 30, 1998. The increase was attributable to increased
revenues and an increased gross margin from 14.2% for the nine months ended
September 30, 1997 to 14.5% for the nine months ended September 30, 1998. This
increase was caused by improvements in the gross margin earned on used vehicle
sales and parts and service sales and a change in the merchandising mix, as
higher margin other dealership revenues increased as a percentage of total
revenues. Partially offsetting the gross margin increases, the gross margin on
new retail vehicle sales declined from 8.4% for the nine months ended September
30, 1997 to 7.9% for the nine months ended September 30, 1998. The decline is
attributable primarily to reduced margins in the Nissan product line, due to
reduced manufacturer sales incentives in 1998. The gross margin for used retail
vehicle sales increased from 9.0% for the nine months ended September 30, 1997
to 9.3% for the nine months ended September 30, 1998. The increase was primarily
attributable to an emphasis on the used vehicle operations in the Oklahoma
platform. Parts and service gross margin increased from 52.5% for the nine
months ended September 30, 1997 to 53.7% for the nine months ended September 30,
1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $49.8 million, or 66.0%, from $75.5 million
for the nine months ended September 30, 1997 to $125.3 million for the nine
months ended September 30, 1998. The increase was primarily attributable to the
additional dealership operations acquired and increased variable expenses,
particularly incentive pay to employees, which increased as revenues and gross
profit
S-33
<PAGE> 35
increased. Selling, general and administrative expenses declined as a percentage
of revenues from 11.0% for the nine months ended September 30, 1997 to 10.8% for
the nine months ended September 30, 1998. The decline is primarily attributable
to maintaining total expenses at a constant level by offsetting increased
variable expenses with cost reductions, such as our risk management program.
Additionally, by implementing our budgeting process, the dealerships have
improved their operating expense leverage.
INTEREST EXPENSE. Floorplan and other interest expense, net, increased $7.1
million, or 154.3%, from $4.6 million for the nine months ended September 30,
1997 to $11.7 million for the nine months ended September 30, 1998. The increase
was primarily attributable to the interest expense of the additional dealership
operations acquired, reduced interest earnings due to the utilization of cash in
completing the acquisitions and additional interest expense due to borrowings on
our credit facility to complete acquisitions. Partially offsetting the increases
were cost reductions realized due to the lower interest rates on floorplan notes
payable obtained through our credit facility.
PRO FORMA COMBINED FOUNDING GROUPS YEAR ENDED DECEMBER 31, 1997 COMPARED WITH
PRO FORMA COMBINED FOUNDING GROUPS YEAR ENDED DECEMBER 31, 1996
REVENUES. Revenues increased $80.4 million, or 9.8%, from $821.9 million
for the year ended December 31, 1996 to $902.3 million for the year ended
December 31, 1997. New vehicle revenues increased $44.6 million, or 9.5% from
$469.3 million for the year ended December 31, 1996 to $513.9 million for the
year ended December 31, 1997. The increase in revenue was primarily attributable
to significant revenue growth from maturing Round Rock Nissan and Bob Howard
Dodge franchise operations, successful marketing efforts and strong customer
acceptance of the founding groups' products, particularly Lexus. Used vehicle
revenues increased $30.0 million, or 11.6%, from $258.0 million for the year
ended December 31, 1996 to $288.0 million for the year ended December 31, 1997.
The increase was primarily attributable to the maturing franchise operations,
successful marketing efforts and an emphasis on used vehicle sales in the
Oklahoma market to mitigate the impact of lower than expected new vehicle
demand. Parts and service sales increased $3.7 million, or 5.0%, from $73.5
million for the year ended December 31, 1996 to $77.2 million for the year ended
December 31, 1997. The increase was primarily attributable to the maturing
dealership operations and increased vehicle sales. Other dealership revenues
increased $2.1 million or 10.0% from $21.1 million for the year ended December
31, 1996 to $23.2 million for the year ended December 31, 1997. The increase was
due primarily to an increase in the number of retail new and used vehicle sales.
GROSS PROFIT. Gross profit increased $11.0 million, or 9.5%, from $116.1
million for the year ended December 31, 1996 to $127.1 million for the year
ended December 31, 1997. The increase was attributable to increased revenues and
a stable overall gross margin. The gross margin on new retail vehicle sales
increased from 8.0% for the year ended December 31, 1996 to 8.2% for the year
ended December 31, 1997 primarily due to stronger margins in the Lexus and
Nissan product lines, partially offset by reduced margins in the Oklahoma
market. The gross margin for used retail vehicle sales declined from 9.7% for
the year ended December 31, 1996 to 8.9% for the year ended December 31, 1997.
The decline was primarily attributable to efforts to increase market share in
the Oklahoma market while customer demand for new vehicles was not as strong as
in prior years. Parts and service gross margin increased from 49.0% for the year
ended December 31, 1996 to 52.7% for the year ended December 31, 1997.
PRO FORMA COMBINED FOUNDING GROUPS YEAR ENDED DECEMBER 31, 1996 COMPARED WITH
PRO FORMA COMBINED FOUNDING GROUPS YEAR ENDED DECEMBER 31, 1995
REVENUES. Revenues increased $92.5 million, or 12.7%, from $729.4 million
for the year ended December 31, 1995 to $821.9 million for the year ended
December 31, 1996. New vehicle revenues increased $47.0 million, or 11.1%, from
$422.3 million for the year ended December 31,
S-34
<PAGE> 36
1995 to $469.3 million for the year ended December 31, 1996. This increase was
primarily attributable to increased sales at all but one of the founding groups
with the McCall Group accounting for $40.6 million of the increase. New and
expanded franchise operations, primarily the Howard Group's new Dodge franchise,
successful marketing efforts and strong customer acceptance of the founding
groups' products, particularly Toyota, Lexus and Chevrolet, contributed to the
increase. The Smith Group had an $8.0 million decline in new vehicle revenues
caused by reduced unit sales at its Dallas Nissan franchise. Used vehicle
revenues increased $35.6 million, or 16.0%, from $222.4 million for the year
ended December 31, 1995 to $258.0 million for the year ended December 31, 1996.
All of the founding groups had increases in used vehicle revenues with the
McCall Group accounting for $22.6 million of the increase. The increase was
attributable primarily to a strong used vehicle market and successful marketing
efforts. Parts and service sales increased $7.9 million, or 12.0%, from $65.6
million for the year ended December 31, 1995 to $73.5 million for the year ended
December 31, 1996. The increase was primarily attributable to new and expanded
operations at McCall Lexus, and increased vehicle sales. Other dealership
revenues increased $2.1 million or 11.1% from $19.0 million for the year ended
December 31, 1995 to $21.1 million for the year ended December 31, 1996. The
increase was due primarily to an increase in the number of retail new and used
vehicle sales.
GROSS PROFIT. Gross profit increased $16.1 million, or 16.1%, from $100.0
million for the year ended December 31, 1995 to $116.1 million for the year
ended December 31, 1996. The increase was attributable to increased revenues and
an increase in gross margin from 13.7% for the year ended December 31, 1995 to
14.1% for the year ended December 31, 1996. The increase in gross margin was
primarily due to a change in the merchandise mix as used vehicle sales became a
greater percentage of total revenues and margins on vehicle and parts and
service sales grew. The gross margin on new retail vehicle sales increased from
7.6% for the year ended December 31, 1995 to 8.0% for the year ended December
31, 1996. The gross margin on used retail vehicle sales increased from 9.5% for
the year ended December 31, 1995 to 9.7% for the year ended December 31, 1996.
The gross margin on parts and service sales increased from 47.9% for the year
ended December 31, 1995 to 49.0% for the year ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash on hand, cash from operations,
floorplan financing and our credit facility (which includes the floorplan
facility and the acquisition facility).
The following table sets forth historical selected information from our
statements of cash flows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities............................... $ 7,197 $ 7,332 $ 6,922 $ 2,241 $ 9,816
Net cash provided by (used in) investing
activities............................... (1,303) (4,615) 10,661 (676) (76,001)
Net cash provided by (used in) financing
activities............................... (520) (1,558) 5,830 (4,656) 86,496
------- ------- ------- ------- --------
Net increase in (decrease in) cash and cash
equivalents.............................. $ 5,374 $ 1,159 $23,413 $(3,091) $ 20,311
======= ======= ======= ======= ========
</TABLE>
CASH FLOW
Total cash and cash equivalents at September 30, 1998 were $55.4 million.
S-35
<PAGE> 37
OPERATING ACTIVITIES. For the three-year period ended December 31, 1997, we
generated $21.5 million in net cash from operating activities, primarily driven
by net income plus depreciation and amortization. During the first nine months
of 1998, we generated cash flow from net income plus depreciation and
amortization of approximately $19.6 million, of which a portion was utilized to
temporarily pay down floorplan notes payable, resulting in net cash flow from
operating activities of approximately $9.8 million.
INVESTING ACTIVITIES. We obtained approximately $10.7 million from investing
activities in 1997 primarily from the cash balances obtained in the acquisitions
of the founding groups. The $76.0 million of cash used for investing activities
in the first nine months of 1998 was primarily attributable to cash paid in
completing acquisitions offset by the cash balances obtained in the acquisitions
and purchases of property and equipment. Of the $7.2 million used in purchasing
property and equipment, approximately $4.6 million related to the purchase of
land and construction of facilities for new or expanded operations, including a
new Lexus companion dealership located in south Houston, which we expect to be
opened by the third quarter of 1999.
FINANCING ACTIVITIES. We obtained approximately $5.8 million and $86.5 million
from financing activities in 1997 and the nine months ended September 30, 1998,
respectively. The net cash provided by financing activities for 1997 was
primarily attributable to the net proceeds of our initial public offering of
approximately $51.8 million offset primarily by the pay down of floorplan debt
in the amount of $33.5 million. The cash attributable to the nine months ended
September 30, 1998 was generated primarily from drawings on our credit facility
and was utilized in completing acquisitions and supporting increased sales
volume.
WORKING CAPITAL. At September 30, 1998, we had working capital of $53.6
million. Historically, we have funded our operations with internally generated
cash flow and borrowings. While we cannot guarantee it, based on current facts
and circumstances, management believes we have adequate cash flow coupled with
borrowings under our credit facility to fund our current operations.
ACQUISITION FINANCING
We anticipate that our primary use of cash will be for the completion of
acquisitions. We expect the cash needed to complete our acquisitions will come
from the operating cash flows of the existing dealerships, borrowings under our
credit facility, other borrowings or equity or debt offerings. Although we
believe that we will be able to obtain sufficient capital to fund acquisitions,
we cannot guarantee that such capital will be available to us at the time it is
required or on terms acceptable to us.
CREDIT FACILITY
In November 1998, we amended our credit facility to increase the commitment
from $345 million to $425 million (which will be reduced to $405 million upon
consummation of the Notes offering) and to extend the term of the credit
facility from December 2000 to December 2001. The credit facility provides for a
floorplan facility of $295 million for the financing of vehicle inventories and
an acquisition facility of $130 million (which will be reduced to $110 million
upon consummation of this Notes offering), for the financing of acquisitions,
general corporate purposes and capital expenditures. As of December 31, 1998,
there was $193.4 million drawn on the floorplan facility and $42.0 million drawn
on the acquisition facility. The amount of funds available under the acquisition
facility is dependent upon a calculation based on our cash flow and the
maintenance of certain financial ratios. Upon consummation of the Notes offering
and the application of the proceeds therefrom, $110 million will be available to
be drawn under the acquisition facility, subject to compliance with certain
financial ratios. Additionally, the credit facility contains various covenants,
including financial ratios and other requirements which must be maintained by
us. The credit facility also limits the amount we may pay as cash dividends.
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<PAGE> 38
In January 1998, we entered into a three-year interest rate swap agreement
with a bank. The effect of this swap is to convert the interest rate on $75
million of floorplan financing under the credit facility to a fixed rate of
approximately 7.16%.
SALE OF DEALERSHIP PROPERTIES TO CAPITAL AUTOMOTIVE REIT
On December 21, 1998, we entered into an agreement with Capital Automotive
REIT to sell nine of our dealership properties for approximately $32.3 million
in cash. In connection with the sale of the properties, we have agreed to lease
back the properties under leases with terms of 30 years, with termination
options after 15, 20 and 25 years. As of December 31, 1998, we had closed the
sale of six properties to Capital Automotive REIT pursuant to the terms of the
agreement for approximately $20.0 million.
LEASES
We lease various real estate, facilities and equipment under long-term
operating lease agreements, including leases with related parties. Substantially
all related-party leases have terms of 30 years and are cancelable at our option
ten years from execution of the lease and at the end of each subsequent
five-year period.
CYCLICALITY
Our operations, like the automotive retailing industry in general, can be
impacted by a number of factors relating to general economic conditions,
including consumer business cycles, consumer confidence, economic conditions,
availability of consumer credit and interest rates. Although the above factors,
among others, may impact our business, we believe the impact on our operations
of future negative trends in such factors will be somewhat mitigated by our (1)
strong parts, service and collision repair services, (2) variable cost salary
structure, (3) geographic diversity and (4) product diversity.
SEASONALITY
Our operations are subject to seasonal variations, with the second and
third quarters generally contributing more operating profit than the first and
fourth quarters. This seasonality is driven by three primary forces: (1)
Manufacturer-related factors, primarily the historical timing of major
Manufacturer incentive programs and model changeovers, (2) weather-related
factors and (3) consumer buying patterns.
YEAR 2000 CONVERSION
Year 2000 issues result from the inability of computer programs or
computerized equipment to accurately calculate, store or use a date subsequent
to December 31, 1999. The erroneous date can be interpreted in a number of
different ways; typically the year 2000 is represented as the year 1900. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
We recognize the need to ensure that our computer systems, equipment and
operations will not be adversely impacted by the change to the calendar year
2000. In this regard, we have taken steps to identify potential areas of risk
and have begun addressing these in our planning, purchasing and daily
operations. We have not quantified the total cost of converting all internal
systems, equipment and operations for the year 2000, but we do not expect the
cost to be material to our financial position. In connection with acquisitions,
we review and address the candidates year 2000 readiness during the due
diligence process.
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<PAGE> 39
We are currently reviewing the potential adverse impact resulting from the
failure of third party service providers and vendors to address any of their
year 2000 issues.
We are dependent upon our dealerships' computer systems in our daily
operations. All of our dealerships are, or are expected to be, using a computer
system supported by a major automobile dealership computer system provider. We
have contacted each of these providers and have received assurance from the
providers that their systems are, or will be, year 2000 ready. We are dependent
upon these providers, as are most dealerships in the United States, to address
the year 2000 issue.
We are primarily dependent upon the Manufacturers for the production and
delivery of new vehicles and parts. Although we have no reason to believe that
the Manufacturers are not year 2000 ready, we have been unable to obtain written
assurance from them that their systems are year 2000 ready.
Failure by us, the Manufacturers or our third party service providers and
vendors to adequately address the year 2000 issue could have an adverse effect
on us.
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<PAGE> 40
BUSINESS
OVERVIEW
Group 1 is a leading operator and consolidator in the highly fragmented
automotive retailing industry. We currently own 63 dealership franchises
comprised of 23 different brands of automobiles, and 12 collision service
centers located in Texas, Oklahoma, Florida, New Mexico, Georgia and Colorado.
Our dealerships include the second largest Toyota dealership and the fifth
largest Lexus dealership in the United States, as ranked by 1998 new retail unit
sales. Through our dealerships, we sell new and used cars and light trucks,
provide maintenance and repair services, sell replacement parts and arrange
related financing, vehicle service contracts and insurance.
Simultaneously with the closing of our initial public offering in November
1997, we commenced dealership operations with the acquisition of four automobile
dealership groups, known as our "founding groups", representing 30 automobile
dealership franchises located in Texas and Oklahoma. In 1998, we acquired an
additional 33 automobile dealership franchises in five states in ten separate
acquisitions. Four of these acquisitions, consisting of 19 dealership franchises
in Florida, Georgia, Texas, New Mexico and Colorado, were of dealership groups
that are located in areas in which we had no operations or limited operations
prior to the acquisition and serve as Platforms for our operations in such
areas. The other six acquisitions consisted of 14 individual dealership
franchises acquired as "tuck-ins" to existing platforms. During 1998 we sold one
Subaru franchise and returned one Kia franchise to the Manufacturer. In
addition, Chrysler ceased operation of the Eagle brand nationally, of which we
had four franchises. These six franchises were insignificant to our operations.
Additionally, we obtained two franchises through Manufacturer grants in December
1998 in areas of existing operations. In January 1999, we completed the Recent
Acquisitions and entered into definitive agreements to acquire the Pending
Acquisitions. See "Prospectus Supplement Summary -- Recent
Developments -- Pending and Recent Acquisitions."
We believe that we are one of the ten largest automobile dealership
retailers in the country in terms of revenues. On a pro forma basis for all of
our completed acquisitions (excluding the three immaterial tuck-in acquisitions
completed in 1998 and the Recent Acquisitions), we had revenues and EBITDA of
$1,755.0 million and $63.3 million, respectively, for the twelve months ended
September 30, 1998.
We believe that our strengths include:
- our senior management's experience in consolidating and operating in
highly fragmented industries;
- the reputation and experience of our management and our dealership
principals as leaders in the automotive retailing industry;
- our ability to utilize equity incentives to attract and retain high
quality personnel;
- our dealerships' established customer base and local name recognition;
- our brand and geographic diversity;
- our ability to capitalize on economies of scale;
- our ability to save costs by centralizing the financing and certain
administrative functions of our dealerships; and
- our dealerships' proven ability to obtain high quality used vehicles at
cost-effective prices through trade-ins and off-lease programs.
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<PAGE> 41
We pursue a growth strategy led by a management team with extensive
experience in consolidation and the management of growth companies led by B.B.
Hollingsworth, Jr. Mr. Hollingsworth, Chairman of the Board, President and Chief
Executive Officer of Group 1, has experience not only in the automotive
retailing industry, but also in consolidating a major national industry. Mr.
Hollingsworth served in various senior management capacities, including
President, of Service Corporation International during its early growth period
as the world's leading consolidator of the funeral industry.
BUSINESS STRATEGY
We plan to capitalize on our position as a leading consolidator, while
maintaining our high operating standards in the automotive retailing industry,
by (1) emphasizing growth through acquisitions and (2) implementing an operating
strategy that includes managing our dealerships on a decentralized basis,
rewarding employees with equity grants and incentive compensation, centralizing
certain administrative functions on a national basis, expanding our higher
margin businesses, continuing our commitment to customer service and
implementing new technology. By merging the management talent and proven
operating capabilities of our dealership groups with a corporate management team
that is experienced in achieving and managing long-term growth in a
consolidation environment, we believe that we are in a strong position to
execute this strategy.
GROWTH THROUGH ACQUISITIONS
Under our acquisition program, we pursue (1) platform acquisitions of
large, profitable and well-managed dealerships in large metropolitan and
high-growth suburban geographic markets that we do not currently serve and (2)
smaller tuck-in acquisitions to existing platforms that allow us to increase
brand diversity, capitalize on economies of scale and offer a greater breadth of
products and services in each of the markets in which we operate. We have used
and intend to continue to use our common stock to fund a significant portion of
our acquisitions. In addition, we have a revolving credit facility, which, after
the offering of the Notes, will provide us with the ability to borrow up to $110
million for acquisitions.
ENTERING NEW GEOGRAPHIC MARKETS. We intend to expand into geographic
markets that we do not currently serve by acquiring large, profitable and well
established megadealers that are leaders in their regional markets. We pursue
megadealers that have high quality personnel, and we attempt to retain this
personnel. We believe that by retaining existing high quality management we will
be able to effectively operate acquired megadealers with management personnel
who understand the local market without having to employ and train new and
untested personnel. We believe that we are positioned to pursue larger, well
established acquisition candidates because of our depth of management, our
capital structure and the reputation of our dealership principals as leaders in
the automotive retailing industry.
EXPANDING WITHIN EXISTING MARKETS. We plan to make tuck-in acquisitions of
additional dealerships in each of the markets in which we operate, including
acquisitions that increase the brands, products and services offered in these
markets. We believe that these acquisitions will increase our operating
efficiencies and cost savings on a regional level in areas such as facility and
personnel utilization, vendor consolidation and advertising.
OPERATING STRATEGY
We follow an operating strategy that focuses on decentralized dealership
operations, centralization of certain administrative functions, expansion of
higher margin businesses, customer service and new technology initiatives.
We formed committees made up of the platform presidents and general
managers of our dealerships in order to identify and share best practices. We
believe that these committees
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promote the widespread application of our strategic programs, facilitate the
integration of future acquisitions and improve operating efficiency and customer
satisfaction.
DECENTRALIZED DEALERSHIP OPERATIONS. We believe that by managing our
dealerships on a decentralized basis, we provide superior customer service and a
focused, market-specific responsiveness to sales, service, marketing and
inventory control. Local presence and an in-depth knowledge of customers' needs
and preferences are important in generating market share growth. By coordinating
certain operations on a platform basis, we believe that we will achieve cost
savings in such areas as vendor consolidation, data processing, personnel
utilization and advertising. We create incentives for our management teams and
sales forces through the use of stock options and cash bonus programs. In
addition, the management of the dealerships we acquire generally receive
significant equity positions in us as a result of our use of common stock in our
acquisition program.
NATIONALLY CENTRALIZED ADMINISTRATIVE FUNCTIONS. We believe that by
consolidating the purchasing power of our dealerships on a centralized basis, we
have benefited from significant cost savings. For example, since we began
operations, we have reduced the interest rate on our floorplan financing.
Furthermore, we have benefitted from the consolidation of administrative
functions such as risk management, employee benefits and employee training. For
example, we negotiated insurance coverage that reduced our annual insurance
costs by 30 percent as compared to the annual insurance costs incurred by the
founding groups and our acquisitions prior to their being acquired by us.
EXPAND HIGHER MARGIN ACTIVITIES. We focus on expanding our higher margin
businesses such as used vehicle retail sales, parts and service and arranging
vehicle service, finance and insurance contracts. While each of our platforms
operates independently in a manner consistent with its specific market's
characteristics, each platform also pursues an integrated company-wide strategy
which is designed to grow each of these higher margin businesses, enhance
profitability and stimulate internal growth. With a competitive advantage in
obtaining used vehicles, dealership franchises are especially well positioned to
take advantage of industry growth in used vehicle sales. In addition, each of
our dealerships offers an integrated parts and service department, which
provides an important source of recurring higher margin revenues. We also
generate incremental revenues on each new or used vehicle sold by arranging
vehicle service, insurance, finance and lease contracts on these vehicles. We
have negotiated and are currently realizing increased commissions on vehicle
service contracts sales and on vehicle financing arrangements for certain
customers. These increases represent revenue enhancements obtained through the
consolidation of the dealerships.
COMMITMENT TO CUSTOMER SERVICE. We focus on providing high quality customer
service to meet the needs of our customers. Our dealerships strive to cultivate
lasting relationships with their customers, and we believe these efforts
increase our opportunities for significant repeat and referral business. For
example, the dealerships regard their service and repair activities as an
integral part of their overall approach to customer service. This approach
provides us with an opportunity to foster ongoing relationships with customers
and deepen customer loyalty. In addition, our dealerships continually review
their selling processes in an effort to better meet the needs of their
customers.
ACQUISITIONS COMPLETED AFTER OUR INITIAL PUBLIC OFFERING
In 1998, we acquired 33 additional automobile dealership franchises located
in five states. These acquisitions consist of four platform acquisitions
representing 19 dealership franchises in Florida, Georgia, Texas, New Mexico and
Colorado and six tuck-in acquisitions of 14 individual dealership franchises in
our existing areas of operation. These acquired dealerships (excluding three
immaterial tuck-in acquisitions described in the table below) had combined pro
forma revenues and EBITDA of $675.8 million and $28.0 million, respectively, in
1997. The total
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consideration paid for all of these acquisitions, including the three excluded
immaterial tuck-in acquisitions and certain related real estate acquired,
excluding the assumption of approximately $103.1 million of inventory financing,
was $68.1 million in cash (net of cash received), the assumption of
approximately $2.9 million in mortgage financing and 3,516,805 shares of our
common stock. In addition, we obtained two franchises through manufacturer
grants in areas of existing operations. In January 1999, we completed the Recent
Acquisitions and entered into definitive agreements to acquire the Pending
Acquisitions. See "Prospectus Supplement Summary -- Recent
Developments -- Pending and Recent Acquisitions."
The following is a summary of our platform acquisition history:
<TABLE>
<CAPTION>
1997
DATE PRO FORMA
PLATFORM FRANCHISE LOCATION ACQUIRED REVENUES(1)
-------- --------- -------- -------- --------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Carroll.............. Ford Hollywood, Florida March 1998 $245.8
Ford Miami, Florida
Ford Atlanta, Georgia
Maxwell.............. Chrysler (3 franchises) Austin, Texas April 1998 106.6
Plymouth (3 franchises)
Jeep
Dodge
Eagle(2)
Subaru(3)
Johns................ Chrysler Albuquerque, New Mexico May 1998 117.2
Plymouth
Jeep
Eagle(2)
Chevrolet
Luby................. Chevrolet Denver, Colorado July 1998 63.2
</TABLE>
- ---------------
(1) Pro forma revenues gives effect to certain adjustments made to the
historical revenues of the acquired dealerships.
(2) The Eagle brand ceased operations after the 1998 model year. These
franchises were not significant to our platform operations.
(3) This franchise was sold post-closing and was not significant to the
operations of the Maxwell Group.
The following table summarizes our tuck-in acquisitions and the platforms
into which such acquisitions were incorporated:
<TABLE>
<CAPTION>
PLATFORM FRANCHISE LOCATION DATE ACQUIRED
-------- --------- -------- -------------
<S> <C> <C> <C>
Austin.................. Ford(1) Austin, Texas February 1998
Beaumont................ Mercedes Benz(1) Beaumont, Texas April 1998
Volvo(1)
Dodge(1)
Buick(1)
Nissan(1)
Maxwell................. Chrysler Austin, Texas May 1998
Dodge
Plymouth
Jeep
Eagle(2)
Carroll................. Ford Homestead, Florida May 1998
Dallas.................. Dodge(1) Dallas, Texas July 1998
Maxwell................. Ford Austin, Texas August 1998
Johns................... Pontiac(1) Albuquerque, New Mexico January 1999
Buick(1)
GMC(1)
Howard.................. Chevrolet(1) Tulsa, Oklahoma January 1999
</TABLE>
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- ---------------
(1) Except as expressly provided otherwise, the financial results of operations
of these dealerships, prior to their acquisition by us, are not included in
the pro forma financial information contained in this prospectus supplement,
including the Pro Forma Consolidated Financial Statements. The historical
financial information of these dealerships were not available in sufficient
detail to accurately include them in the pro forma financial information in
this prospectus supplement. These dealerships had aggregate revenues of
approximately $215 million in 1997.
(2) The Eagle brand ceased operations nationally after the 1998 model year.
These franchises were not significant to our platform's operations.
In addition, we were granted Cadillac and Pontiac dealerships by General
Motors in December 1998. The two dealership franchises will be located at our
Beaumont automall.
INDUSTRY OVERVIEW
With more than $600 billion in 1997 sales, automotive retailing is the
largest retail trade sector in the United States. The industry is highly
fragmented and largely privately held with approximately 22,000 automobile
dealership locations representing more than 49,000 franchised dealerships. In
1997, U.S. franchised automobile dealers sold 15.2 million new vehicles and 18.9
million used vehicles for sales of approximately $342.1 billion and $174.8
billion, respectively. It is estimated that these sales by franchised automobile
dealers account for one-fifth of the nation's total retail sales of all products
and merchandise. Since 1993, new vehicle revenues have grown at a 7.8% compound
annual rate. Over the same period, used vehicle revenues have grown at a 11.0%
compound annual rate. Slower unit volume growth over this time period has been
offset by the rising prices associated with new vehicles and, on average, the
higher prices paid for later model high quality used vehicles which now comprise
a significant part of the used vehicle market. Automobile sales are affected by
many factors, including rates of employment, income growth, interest rates,
weather patterns and other national and local economic conditions, automotive
innovations and general consumer sentiment.
The following table sets forth new and used vehicle sales by franchised
automobile dealers in the United States for each of the five years ended
December 31, 1997. New vehicles can only be sold at retail by franchised
dealerships. The following table excludes sales of used vehicles by
nonfranchised dealerships and casual sales by individuals.
<TABLE>
<CAPTION>
UNITED STATES FRANCHISED DEALERS' VEHICLE SALES
-----------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(UNITS IN MILLIONS; DOLLARS IN BILLIONS)
<S> <C> <C> <C> <C> <C>
New vehicle unit sales......................... 13.9 15.1 14.8 15.1 15.2
New vehicle sales.............................. $253.0 $289.9 $302.7 $328.4 $342.1
Used vehicle unit sales........................ 16.3 17.8 18.5 19.2 18.9
Used vehicle sales............................. $115.0 $138.6 $157.0 $171.8 $174.8
Total vehicle sales............................ $368.0 $428.5 $459.7 $500.2 $516.9
Annual growth in total vehicle sales........... 15.0% 16.5% 7.3% 8.8% 3.3%
</TABLE>
Manufacturers originally established franchised dealer networks for the
distribution of their vehicles as single-dealership, single-owner operations. In
return for distribution rights within specified territories, Manufacturers
exerted significant influence over such matters as a dealer's location,
inventory size and composition and merchandising programs, as well as the
identity of owners and managers. This strict control contributed to the
proliferation of small dealerships, which at their peak in the late 1940s
numbered in excess of 46,000 dealership locations. Several Manufacturers went
out of business in the 1950s, and the number of dealership locations decreased
to 36,000 by 1960.
Significant industry changes took place in the 1970s when fuel shortages
forced dramatic increases in gasoline prices and foreign Manufacturers increased
their penetration of the U.S. market with fuel-efficient, low-cost vehicles. As
a result of these competitive pressures,
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dealers were able to negotiate significant changes in the traditional
distribution system with Manufacturers. Dealers began to add foreign franchises
and the phenomenon of the multi-franchise automobile dealer, or megadealer,
emerged, prompting the significant acquisition and consolidation activities of
the 1980s. The easing of restrictions against megadealers, competitive pressures
upon undercapitalized dealerships and the aging of dealership owners has led to
further consolidation of the industry. Since 1960, the number of dealership
locations has declined 39% to the current 22,000 level.
As the industry has evolved, so has the dealership profile. Over the past
three decades, there has been a trend toward fewer, but larger, dealerships. In
1997, each of the largest 100 dealer groups had more than $170 million in
revenues. Although significant consolidation has taken place since its
inception, today the industry remains highly fragmented, with the largest 100
dealer groups generating approximately 10% of total sales revenues and
controlling approximately 6% of all franchised dealerships. We believe that
these factors, together with increasing capital requirements for operating
automobile dealerships, lack of a viable exit strategy (especially for larger
dealerships) and the aging of dealership owners provide an attractive
environment for our consolidation program.
As with retailers generally, automobile dealership profitability varies
widely and depends in part on the effective management of inventory, marketing,
quality control and responsiveness to customers. Since 1991, retail automobile
dealerships in the United States have earned on average between 12.7% and 14.1%
total gross margin on sales with smaller dealerships generally realizing a
higher gross margin than larger dealerships. New vehicle sales were the smallest
proportionate contributors to dealers' gross profits during this period, most
recently earning an average gross margin of 6.4% in 1997. Used vehicles provided
higher gross margins than new vehicles during this period, with an average used
vehicle gross margin of 10.8% in 1997. Dealerships also offer a range of other
services and products, including repair and warranty work, replacement parts,
extended service contracts, financing and credit insurance.
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DEALERSHIP OPERATIONS
The following is a list of our 63 automobile dealership franchises:
<TABLE>
<CAPTION>
STATE DEALERSHIP/FRANCHISE METROPOLITAN AREA
----- -------------------- -----------------
<S> <C> <C>
Texas............. Acura Southwest Houston
Sterling McCall Lexus Houston
Sterling McCall Toyota Houston
A.J. Foyt Honda, Isuzu Houston
Mike Smith Autoplaza -- Cadillac, GMC, Honda, Beaumont
Lincoln, Mercury, Mitsubishi, Oldsmobile, Pontiac
Autoplex 2000 -- Buick, Dodge, Mercedes-Benz, Beaumont
Nissan, Volvo
Town North Nissan, Mitsubishi, Suzuki Austin
Round Rock Nissan Austin
Elgin Ford Austin
Prestige Chrysler Plymouth Northwest Austin
Prestige Chrysler Plymouth South Austin
Maxwell Chrysler Plymouth Jeep Dodge Austin
Highland Autoplex -- Chrysler, Dodge, Jeep, Plymouth Austin
Maxwell Ford Austin
Courtesy Nissan Dallas
McKinney Dodge Dallas
Oklahoma.......... Bob Howard Automall -- Chrysler, GMC, Isuzu, Jeep, Oklahoma City
Plymouth, Pontiac
Bob Howard Chevrolet Oklahoma City
Bob Howard Toyota Oklahoma City
Bob Howard Dodge Oklahoma City
Bob Howard Honda, Acura Oklahoma City
Bob Howard Nissan Oklahoma City
South Pointe Chevrolet Tulsa
Florida........... World Ford Hollywood Hollywood
World Ford Kendall Miami
World Ford Homestead Homestead
Georgia........... Perimeter Ford Atlanta
New Mexico........ Casa Chevrolet Albuquerque
Westside Chrysler, Plymouth, Jeep Albuquerque
Sunshine Pontiac, Buick and GMC Albuquerque
Colorado.......... Luby Chevrolet Denver
</TABLE>
Each of our platforms has an established management structure that promotes
and rewards entrepreneurial spirit, individual pride and responsibility and the
achievement of team goals. The general manager of each dealership is ultimately
responsible for the operation, personnel and financial performance of the
dealership. The general manager is complemented with a management team
consisting of a new vehicle sales manager, used vehicle sales manager, parts and
service managers and finance managers. Each dealership is operated as a distinct
profit center, in which dealership general managers are given a high degree of
autonomy. The general manager and the other members of the dealership management
team, as long-time members of their local communities, are typically best able
to judge how to conduct day-to-day operations based on the team's experience in
and familiarity with its local market.
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<PAGE> 47
NEW VEHICLE SALES
We currently represent 23 American, Asian and European brands of economy,
family, sports and luxury cars and light trucks and sport utility vehicles. The
following table sets forth for the nine months ended September 30, 1998, certain
information relating to the brands of new vehicles sold at retail by Group 1 on
a pro forma basis assuming that all of our dealerships (other than the Recent
Acquisitions and the Pending Acquisitions) were acquired on January 1, 1998.
These results may not be indicative of our results after the acquisition of the
dealerships by us:
<TABLE>
<CAPTION>
NUMBER OF NEW VEHICLES PERCENTAGE
---------------------- ----------
<S> <C> <C>
Ford............................................... 8,797 25.2%
Toyota............................................. 5,293 15.2
Chevrolet.......................................... 3,404 9.8
Nissan............................................. 3,261 9.4
Dodge.............................................. 2,404 6.9
Honda.............................................. 2,332 6.7
Plymouth........................................... 1,557 4.5
Lexus.............................................. 1,421 4.1
Chrysler........................................... 1,321 3.8
Jeep............................................... 999 2.9
GMC................................................ 865 2.5
Acura.............................................. 854 2.5
Pontiac............................................ 589 1.7
Mitsubishi......................................... 571 1.6
Isuzu.............................................. 530 1.5
Oldsmobile......................................... 161 0.5
Mercury............................................ 156 0.4
Suzuki............................................. 77 0.2
Mercedes-Benz...................................... 73 0.2
Buick.............................................. 61 0.2
Lincoln............................................ 53 0.1
Cadillac........................................... 47 0.1
Other(1)........................................... 22 0.0
------ -----
Total.................................... 34,848 100.0%
====== =====
</TABLE>
- ---------------
(1) Includes Volvo and Eagle. In 1998, Chrysler discontinued the Eagle line of
vehicles. As a result, we no longer sell the Eagle line of vehicles.
Our dealerships' new vehicle retail sales include traditional new vehicle
retail lease transactions and lease-type transactions, both of which are
arranged by the dealerships. New vehicle leases generally have short terms,
which brings the consumer back to the market sooner than if the purchase were
debt financed. In addition, leases provide our dealerships with a steady source
of late-model, off-lease vehicles for their used vehicle inventory. Generally,
leased vehicles remain under factory warranty for the term of the lease, which
allows the dealerships to provide repair service to the lessee throughout the
lease term.
Our dealerships seek to provide customer-oriented service designed to meet
the needs of its customers and establish lasting relationships that will result
in repeat and referral business. For example, the dealerships strive to:
- employ more efficient selling approaches;
- utilize computer technology that decreases the time necessary to purchase
a vehicle;
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<PAGE> 48
- engage in extensive follow-up after a sale in order to develop long-term
relationships with customers; and
- extensively train their sales staffs to be able to meet the needs of the
customer.
The dealerships continually evaluate innovative ways to improve the buying
experience for their customers. We believe that our ability to share best
practices among our dealerships gives us an advantage over smaller dealerships.
Our dealerships acquire substantially all their new vehicle inventory from
the Manufacturers. Manufacturers allocate a limited inventory among their
franchised dealers based primarily on sales volume and input from dealers. The
dealerships generally finance their inventory purchases through revolving credit
arrangements, including a portion of our credit facility, known in the industry
as floorplan facilities.
USED VEHICLE SALES. We sell used vehicles at each of our franchised
dealerships. Sales of used vehicles have become an increasingly significant
source of profit for the dealerships. Consumer demand for used vehicles has
increased as prices of new vehicles have risen and as more high quality used
vehicles have become available. Furthermore, used vehicles typically generate
higher gross margins than new vehicles because of their limited comparability
and the somewhat subjective nature of their valuation. We intend to continue
growing our used vehicle sales operations by maintaining a high quality
inventory, providing competitive prices and extended service contracts for our
used vehicles and continuing to promote used vehicle sales.
Profits from sales of used vehicles depend primarily on the dealerships'
ability to obtain a high quality supply of used vehicles and effectively manage
that inventory. Our new vehicle operations provide the used vehicle operations
with a large supply of high quality trade-ins and off-lease vehicles, which are
the best sources of high quality used vehicles. The dealerships supplement their
used vehicle inventory with used vehicles purchased at auctions.
Each of our dealerships generally maintains a 35-day supply of used
vehicles and offers to other dealers and wholesalers used vehicles that they do
not retail to customers. Trade-ins may be transferred among our dealerships to
provide balanced inventories of used vehicles at each of our dealerships. We
believe that the acquisitions of additional dealerships will expand our internal
market for transfers of used vehicles among our dealerships and, therefore,
increase the ability of each of our dealerships to offer the same brand of used
vehicles as it sells new and to maintain a balanced inventory of used vehicles.
We intend to develop integrated computer inventory systems that will allow us to
coordinate vehicle transfers between our dealerships, primarily on a regional
basis.
Our dealerships have taken several steps towards building client confidence
in their used vehicle inventory, one of which includes their participation in
manufacturer certification processes which are available only to new vehicle
franchises. This process makes these used vehicles eligible for new vehicle
benefits such as new vehicle finance rates and extended manufacturer warranties.
In addition, the dealerships offer extended service contracts covering the used
vehicles that they sell.
We believe that our franchised dealerships' strengths in offering used
vehicles include: (1) access to trade-ins on new vehicle purchases, which are
typically lower mileage and higher quality relative to trade-ins on used car
purchases, (2) access to late-model, low mileage off-lease vehicles, and (3) the
availability of manufacturer certification programs for our higher quality used
vehicles. This supply of high quality trade-ins and off-lease vehicles reduces
our dependence on auction vehicles, which are typically a higher cost source of
used vehicles.
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PARTS AND SERVICE SALES
We provide parts and service at each of our franchised dealerships
primarily for the vehicle makes sold at that dealership. We perform both
warranty and non-warranty service work. In addition to each of our dealerships
parts and service businesses, we own 12 collision service centers which are
located at certain of our dealerships.
Historically, the automotive repair industry has been highly fragmented.
However, we believe that the increased use of advanced technology in vehicles
has made it difficult for independent repair shops to retain the expertise to
perform major or technical repairs. Additionally, Manufacturers permit warranty
work to be performed only at franchised dealerships. Hence, unlike independent
service stations, or independent and superstore used car dealerships with
service operations, our franchised dealerships are qualified to perform work
covered by Manufacturer warranties. Given the increasing technological
complexity of motor vehicles and the trend toward extended manufacturer and
dealer warranty periods for new vehicles, we believe that an increasing
percentage of repair work will be performed at our franchised dealerships, each
of which have the sophisticated equipment and skilled personnel necessary to
perform such repairs and offer extended service contracts.
We attribute our profitability in parts and service to a comprehensive
management system, including the use of variable rate pricing structures,
cultivation of strong customer relationships through an emphasis on preventive
maintenance and the efficient management of parts inventory.
In charging for their mechanics' labor, the dealerships use variable rate
structures designed to reflect the difficulty and sophistication of different
types of repairs. The percentage mark-ups on parts are similarly priced based on
market conditions for different parts. We believe that variable rate pricing
helps our dealerships achieve overall gross margins in parts and service which
are superior to those of certain competitors who rely on fixed labor rates and
percentage markups.
Our dealerships seek to retain each vehicle purchaser as a customer of the
dealership's parts and service departments. The dealerships have systems in
place which track their customers' maintenance records and notify owners of
vehicles purchased or serviced at the dealerships when their vehicles are due
for periodic services. The dealerships regard service and repair activities as
an integral part of their overall approach to customer service, which provides
an opportunity to foster ongoing relationships with the dealership's customers
and deepen customer loyalty.
The dealerships' parts departments support their respective sales and
service departments. Each of the dealerships sells factory-approved parts for
vehicle makes and models sold by that dealership. These parts are either used in
repairs made by the dealership or sold at retail to its customers or at
wholesale to independent repair shops and other franchised dealerships.
Currently, each of the dealerships employs its own parts manager and
independently controls its parts inventory and sales. Our dealerships that sell
the same new vehicle makes have access to each other's computerized inventories
and frequently obtain unstocked parts from our other dealerships.
OTHER DEALERSHIP REVENUES
Other dealership revenues consist primarily of finance and insurance
income. The dealerships arrange financing for their customers' vehicle
purchases, sell extended service contracts and arrange selected types of credit
insurance in connection with the financing of vehicle sales. The dealerships
place heavy emphasis on finance and insurance ("F&I") and offer advanced F&I
training to their finance and insurance managers. Typically, the dealerships
forward proposed financing contracts to Manufacturers' captive finance
companies, selected commercial banks or other financing parties. The dealerships
receive a financing fee from the lender for arranging the
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financing and are typically assessed a charge-back against a portion of the
financing fee if the contract is terminated prior to its scheduled maturity for
any reason, such as early repayment or default. As a result, the dealerships
must arrange financing for a customer that is competitive (i.e., the customer is
more likely to accept the financing terms and the loan is less likely to be
refinanced) and affordable (i.e., the loan is more likely to be repaid). We do
not own a finance company and, generally, do not retain significant credit risk
after a loan is made.
At the time of a new vehicle sale, the dealerships offer extended service
contracts to supplement the manufacturer warranty. Additionally, the dealerships
sell primary service contracts for used vehicles. Currently, the dealerships
sell service contracts of third party vendors, for which they recognize a
commission upon the sale of the contract.
The dealerships also offer certain types of credit insurance to customers
who arrange the financing of their vehicle purchases through the dealerships.
The dealerships sell credit life insurance policies to these customers, which
policies provide for repayment of the vehicle loan if the obligor dies while the
loan is outstanding. The dealerships also sell accident and disability insurance
policies, which provide payment of the monthly loan obligations during a period
in which the obligor is disabled. Currently, the dealerships primarily sell such
insurance through third party vendors, for which they recognize a commission
upon the sale of the contract.
FACILITIES
We use a number of facilities to conduct our dealership operations. Each of
our dealerships may include facilities for (1) new and used vehicle sales, (2)
vehicle service operations, (3) retail and wholesale parts operations, (4)
collision service operations, (5) storage and (6) general office use. We try to
structure our operations so as to avoid the ownership of real property. In
connection with our acquisitions, we generally seek to lease rather than acquire
the facilities on which the acquired dealerships are located. We generally enter
into lease agreements with respect to such facilities that have 30 year terms
and are cancelable at our option after an initial 10 year period and at the end
of each subsequent five year period. As a result, we lease a substantial
majority of our facilities, and most of our facilities are subject to long term
leases.
AGREEMENTS WITH MANUFACTURERS
The following table sets forth the percentage of our new vehicle retail
unit sales attributable to the Manufacturers we represent:
<TABLE>
<CAPTION>
PERCENTAGE OF OUR
NEW VEHICLE
PRO FORMA RETAIL
UNITS FOR THE NINE
MONTHS ENDED
MANUFACTURER SEPTEMBER 30, 1998(1)
- ------------ ---------------------
<S> <C>
Ford........................................................ 25.7%
Toyota/Lexus................................................ 19.3
Chrysler.................................................... 18.1
General Motors.............................................. 14.8
Nissan...................................................... 9.4
Honda/Acura................................................. 9.2
Other....................................................... 3.5
-----
Total............................................. 100.0%
=====
</TABLE>
- ---------------
(1) Does not give effect to the Recent Acquisitions or the Pending
Acquisitions.
FRANCHISE AGREEMENTS. Each of our dealerships operates under a franchise
agreement with one of our Manufacturers (or authorized distributors). Under our
dealership franchise
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agreements, the Manufacturers exert considerable influence over the operations
of our dealerships. Each of the franchise agreements may be terminated or not
renewed by the Manufacturer for a variety of reasons, including any unapproved
change of ownership or management. While we believe that we will be able to
renew all of our franchise agreements, we cannot guarantee that all of our
franchise agreements will be renewed or that the terms of the renewals will be
favorable to us.
Our franchise agreements do not give us the exclusive right to sell a
Manufacturer's product within a given geographic area. Accordingly, a
Manufacturer may, subject to any protection of state law, grant another dealer a
franchise to start a new dealership near one of our locations, or an existing
dealer may move its dealership to a location which would compete directly with
us.
ACQUISITIONS. We must obtain the consent of the Manufacturer prior to the
acquisition of any of its dealership franchises. Delays in obtaining, or failing
to obtain, Manufacturer approvals for dealership acquisitions could adversely
affect our growth strategy. Obtaining the consent of a Manufacturer for the
acquisition of a dealership could take a significant amount of time or might be
rejected entirely. Obtaining the approvals of the Manufacturers for the
acquisition of our founding groups took almost one year.
In determining whether to approve an acquisition, Manufacturers may
consider many factors, including the moral character and business experience of
the dealership principals and the financial condition, ownership structure and
customer satisfaction index scores of our dealerships.
Our Manufacturers attempt to measure customers' satisfaction with
automobile dealerships through systems generally known as the customer
satisfaction index or "CSI". The Manufacturers have modified the components of
their CSI scores from time to time in the past, and they may replace them with
different systems.
In addition, a Manufacturer may limit the total number of its dealerships
that we may own or the number that we may own in a particular geographic area.
The following is a summary of the restrictions imposed by our most significant
Manufacturers.
Ford. Ford currently limits the number of dealerships that we may own to
the greater of (1) 15 Ford and 15 Lincoln Mercury dealerships and (2) that
number of Ford and Lincoln Mercury dealerships accounting for 5% of the
preceding year's total Ford and Lincoln Mercury retail sales of those brands in
the United States. In addition, Ford limits us to one Ford dealership in a
Ford-defined market area having two or less authorized Ford dealerships and
one-third of the Ford dealerships in any Ford-defined market area having more
than three authorized Ford dealerships. In many of its dealership franchise
agreements, Ford has the right of first refusal to acquire, subject to
applicable state law, the Ford franchised dealership when its ownership changes.
Toyota. Toyota restricts the number of dealerships that we may own and the
time frame over which they may be acquired. We can acquire no more than two
Toyota dealerships in each semi-annual period from January to June and July to
December until we acquire a total of seven Toyota dealerships. After we acquire
seven Toyota dealerships we can acquire, if we are then qualified, additional
dealerships over a minimum of seven semi-annual periods up to a maximum number
of dealerships equal to 5% of Toyota's aggregate national annual retail sales
volume. In addition, Toyota restricts the number of Toyota dealerships that we
may acquire in any Toyota-defined region and "Metro" market, as well as any
contiguous market. We may acquire only three Lexus dealerships nationally and
two Lexus dealerships in any one of the four Lexus geographic areas. While we
recently have been granted a Lexus companion dealership located south of
Houston, this dealership is not considered by Lexus to be a new and separate
Lexus dealership for purposes of the restriction on the number of Lexus
dealerships we may acquire.
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Chrysler. Currently, we have no agreement with Chrysler restricting our
ability to acquire Chrysler dealerships. Chrysler has advised us that in
determining whether to approve an acquisition of a Chrysler dealership, Chrysler
considers the number of Chrysler dealerships the acquiring company already owns.
Chrysler currently considers carefully, on a case-by-case basis, any acquisition
that would cause the acquiring company to own more than 10 Chrysler dealerships
nationally, six in the same Chrysler-defined zone and two in the same market.
General Motors. General Motors currently limits the number of GM
dealerships that we may acquire prior to October 1999 to five additional GM
dealership locations (any one dealership, however, may include a number of
different GM franchises, such as a combination of GMC, Pontiac and Buick
franchises). In addition, GM limits the maximum number of GM dealerships that we
may acquire at any time to 50% of the GM dealerships, by franchise line, in a
GM-defined geographic market area. However, our current agreement with GM does
not include Saturn dealerships and our future acquisition of a Saturn dealership
will be subject to GM approval on a case-by-case basis.
Nissan. Nissan restricts us from owning Nissan dealerships whose primary
marketing areas ("PMA", as defined by Nissan) competitive segment registration
count comprises more than 5% of Nissan's total national competitive segment
registrations based on the sum of the retail competitive segment registrations
in PMAs associated with us; or 20% of any Nissan region's total competitive
segment registrations contained in all PMAs associated with us in that region.
Honda. Under our current agreement with Honda, Honda limits the number of
dealerships that we may own to (1) seven Honda and three Acura franchises
nationally, (2) one Honda dealership in a Honda-defined "Metro" market with two
to 10 Honda dealership points, (3) two Honda dealerships in a Metro market with
11 to 20 Honda dealership points, (4) three Honda dealerships in a Metro market
with 21 or more Honda dealership points, (5) no more than 4% of the Honda
dealerships in any one of the 10 Honda geographic zones, (6) one Acura
dealership in a Metro market, and (7) two Acura dealerships in any one of the
six Acura geographic zones.
Honda has proposed a new agreement to replace our current agreement. Honda
has proposed that we could acquire Honda dealerships representing up to 6% of
total Honda unit sales in the United States by December 31, 2005, increasing 1%
each year beginning January 1, 2002 from the 2% level in effect through December
31, 2001. Also under the proposed new agreement, we could acquire no more than
two Acura dealerships in a Metro market with four or more dealer points and one
Acura dealership in other Metro markets, three Acura dealerships in any one of
the six Acura geographic zones and five Acura dealerships nationally.
We currently own six Ford, one Lincoln, one Mercury, 21 Chrysler, two
Toyota, one Lexus, three Honda and two Acura dealership franchises and eight
General Motors dealership locations. Under current restrictions, we may acquire
the maximum number of Toyota dealerships described above based on aggregate
national retail sales volume of Toyota, two additional Lexus dealerships, four
additional Honda dealerships, one additional Acura dealership, approximately 400
additional Ford and Lincoln Mercury dealerships and five additional GM
dealership locations prior to October 1999, subject to being increased.
FINANCINGS. Provisions in our agreements with our Manufacturers may
restrict in the future our ability to obtain financing. Our current agreement
with Honda requires Honda's consent for any equity offering. Honda's proposed
new agreement with us does not contain that requirement. We have not negotiated
or executed the proposed new agreement, nor have we obtained Honda's consent for
the common stock offering. If Honda were to claim that we breached its existing
agreement with us by consummating the Common Stock Offering and seek to enforce
its remedies, we could be adversely affected.
If we materially breach our agreement with Honda, Honda could purchase our
Honda and Acura dealerships at their fair market value and terminate our dealer
agreements with Honda and
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Acura. For the nine-month period ended September 30, 1998, our Honda and Acura
dealerships represented approximately 8.9% and 8.4% of our pro forma revenues
and operating income, respectively.
Honda's proposed new agreement prohibits pledging the stock of Honda
franchised dealerships to secure debt financing, although it allows pledging the
proceeds from the sale of Honda franchised dealership stock. We are continuing
to negotiate with Honda on the terms of the proposed new agreement.
Our agreement with General Motors contains provisions prohibiting pledging
the stock of our GM franchised dealerships. Our agreement with Ford permits
pledging our Ford franchised dealerships' stock and assets, but only for Ford
dealership-related debt. Moreover, our Ford agreement permits our Ford
franchised dealerships to guarantee, and to use Ford franchised dealership
assets to secure, our debt, but only for Ford dealership-related debt. Ford has
waived that requirement with respect to the Notes and the subsidiary guarantees.
If, however, we fail to meet certain minimum financial ratios, Ford can reject
any acquisitions of Ford franchised dealerships and/or purchase our Ford
franchised dealerships.
OUR OWNERSHIP AND MANAGEMENT. As a condition to granting their consent to
our previous acquisitions and our initial public offering, some Manufacturers
have imposed other restrictions on us.
These restrictions prohibit, among other things:
- any one person who in the opinion of the Manufacturer is unqualified to
own its franchised dealership or has interests incompatible with the
Manufacturer from acquiring more than a specified percentage of our
common stock (for example, 5% in the case of Honda; 20% in the case of
General Motors, Toyota and Nissan, and 50% in the case of Ford);
- certain material changes in us or extraordinary corporate transactions
such as a merger or sale of a material amount of our assets;
- the removal of a dealership general manager without the consent of the
Manufacturer
- the use of dealership facilities to sell or service new vehicles of other
Manufacturers in certain situations; and
- changes in control of our Board of Directors or management.
If we are unable to comply with these restrictions, we generally must (1)
sell the assets of the dealerships to the Manufacturer or to a third party
acceptable to the Manufacturer or (2) terminate the dealership agreements with
the Manufacturer. The Manufacturers may impose additional restrictions on us in
the future.
Our current agreement with Honda gives Honda the right to approve the
acquisition of more than 5% of our common stock by any individual or entity, and
any subsequent acquisition of more than 10% by such individual, if Honda
determines that such acquisition is reasonably detrimental to its interests.
Honda may determine that such acquisition is reasonably detrimental to its
interests if the acquiring person: competes with Honda, has criminal
affiliations or a criminal record, has inadequate experience in the automotive
sales and service business, has an unacceptable credit rating, has unacceptable
CSI scores or has had prior unsatisfactory relationships with Honda.
An institutional investor may acquire up to 10% of our common stock without
the consent of Honda, unless the institutional investor competes with Honda, has
criminal affiliations or a criminal record, or has acquired, or has a reasonable
likelihood of acquiring, a controlling interest in us.
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We are required to notify Honda with respect to any such acquisition or
proposed acquisition, and if Honda does not approve of the acquisition, we are
required to use our best efforts to prevent the acquisition or, if the
acquisition has already occurred, to reacquire the shares so transferred. If we
are unable to prevent the acquisition or to reacquire the shares we will be in
material breach of our agreement with Honda.
In addition, under our agreement with Honda, each stockholder of the
founding groups has agreed not to sell, transfer or in any manner encumber any
of the shares of our common stock he acquired in connection with our acquisition
of the founding groups, or enter into any agreement or other arrangement
providing for the voting of such shares of common stock, without the prior
written approval of Honda. If one of these stockholders violates this
restriction, we must inform Honda. If Honda does not approve the transfer, and
we cannot acquire the shares or arrange for the retransfer of such shares to a
person approved by Honda, we will be in breach of our agreement with Honda. The
new agreement proposed by Honda does not contain these restrictions on our
stockholders.
Our agreement with Honda also provides that if an entity that Honda has not
approved acquires or threatens to acquire a controlling interest in us or any of
our Honda or Acura dealerships, we will be in breach of our agreement with
Honda.
OPERATIONS. We depend on our Manufacturers for operational support:
- We depend on the Manufacturers to provide us with a desirable mix of new
vehicles. The most popular vehicles usually produce the highest profit
margins and are frequently difficult to obtain from the Manufacturers. If
we cannot obtain sufficient quantities of the most popular models, our
profitability may be adversely affected. Sales of less desirable models
may reduce our profit margins.
- We depend on the Manufacturers for sales incentives and other programs
that are intended to promote dealership sales or support dealership
profitability. Manufacturers historically have made many changes to their
incentive programs during each year. A discontinuation or change in
Manufacturers' incentive programs could adversely affect our business.
Moreover, some Manufacturers use a dealership's CSI scores as a factor
for participating in incentive programs. Failure to comply with the CSI
standards could adversely affect our participation in dealership
incentive programs, which could have a material adverse effect on us.
Our Manufacturer agreements also specify that we cannot operate a
dealership franchised by another Manufacturer in the same building as that
Manufacturer's franchised dealership in certain situations. In addition, some
Manufacturers, like GM, are in the process of realigning their franchised
dealerships along defined "channels", such as combining Pontiac, Buick and GMC
in one dealership location. As a result, GM may require us to move or sell some
dealerships. Moreover, our Manufacturers generally require that the dealership
premises meet defined image standards. All of these requirements could impose
significant capital expenditures on us in the future.
COMPETITION
The automotive retailing industry is highly competitive. In large
metropolitan areas, consumers have a number of choices in deciding where to
purchase a new or used vehicle and where to have such vehicle serviced.
In the new vehicle area, our dealerships compete with other franchised
dealers in their marketing areas. The dealerships do not have any cost advantage
in purchasing new vehicles from Manufacturers, and typically rely on advertising
and merchandising, sales expertise, service reputation and location of the
dealership to sell new vehicles. In recent years, automobile dealers
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have also faced increased competition in the sale or lease of new vehicles from
independent leasing companies, on-line purchasing services and warehouse clubs.
In addition, Ford has started to acquire and subsequently operate automobile
dealerships for the purpose of consolidating Ford dealerships. For example, Ford
acquired dealerships in Tulsa, Oklahoma and entered into an agreement with
Republic Industries, Inc. to jointly acquire Ford dealerships in Rochester, New
York. Ford also announced that it is exploring the possibility of going into
business with some of its dealers to create automotive superstores in selected
markets.
In used vehicles, the dealerships compete with other franchised dealers,
independent used car dealers, automobile rental agencies, private parties and
used car "superstores" for supply and resale of used vehicles. Used car
"superstores" have recently opened in certain markets in which the dealerships
compete. We believe that additional used car "superstores" will open in other
markets in which we operate.
We believe that the principal competitive factors in vehicle sales are the
marketing campaigns conducted by Manufacturers, the ability of dealerships to
offer a wide selection of the most popular vehicles, the location of dealerships
and the quality of customer service. Other competitive factors include customer
preference for particular brands of automobiles, pricing (including Manufacturer
rebates and other special offers) and warranties. We believe that our
dealerships are competitive in all of these areas that they control.
The dealerships compete against franchised dealers to perform warranty
repairs and against other automobile dealers, franchised and independent service
center chains and independent garages for non-warranty repair and routine
maintenance business. The dealerships compete with other automobile dealers,
service stores and auto parts retailers in their parts operations. We believe
that the principal competitive factors in parts and service sales are price, the
use of factory-approved replacement parts, the familiarity with a Manufacturer's
brands and models and the quality of customer service. A number of regional or
national chains offer selected parts and services at prices that may be lower
than the dealerships prices.
GOVERNMENTAL REGULATIONS
A number of regulations affect our business of marketing, selling,
financing and servicing automobiles. We are also subject to laws and regulations
relating to business corporations generally.
Generally, we must obtain a license in order to establish, operate or
relocate a dealership or provide certain automotive repair services. These laws
also regulate the way in which we conduct our business, including our
advertising and sales practices.
Our financing activities with our customers are subject to federal truth in
lending, consumer leasing and equal credit opportunity regulations as well as
state and local motor vehicle finance laws, installment finance laws, insurance
laws, usury laws and other installment sales laws. Some states regulate finance
fees that may be paid as a result of vehicle sales. Penalties for violation of
any of these laws or regulations may include revocation of certain licenses,
assessment of criminal and civil fines and penalties, and, in certain instances,
may create a private cause of action for individuals. We believe that our
dealerships comply substantially with all laws and regulations affecting their
business and do not have any material liabilities under such laws and
regulations and that compliance with all such laws and regulations will not,
individually or in the aggregate, have a material adverse effect on its capital
expenditures, earnings, or competitive position.
ENVIRONMENTAL MATTERS
We are subject to a wide range of federal, state, and local environmental
laws and regulations, including those governing discharges into the air and
water, the storage of petroleum
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substances and chemicals, the handling and disposal of wastes, and the
remediation of contamination arising from spills and releases. As with
automobile dealerships generally, and parts, service and collision service
center operations in particular, our business involves the generation, use,
handling, storage, transport and disposal of hazardous or toxic substances or
wastes. Operations involving the management of hazardous and nonhazardous wastes
are subject to requirements of the federal Resource Conservation and Recovery
Act and comparable state statutes. Pursuant to these laws, federal and state
environmental agencies have established approved methods for storage, treatment,
and disposal of regulated wastes with which we must comply.
Our business involves the use of aboveground and underground storage tanks.
Under applicable laws and regulations, we are responsible for the proper use,
maintenance and abandonment of regulated storage tanks, which we own or operate,
and for remediation of subsurface soils and groundwater impacted by releases
from such existing or abandoned aboveground or underground storage tanks. In
addition to these regulated tanks, we own, operate, or have otherwise abandoned
other underground and aboveground devices or containers (e.g., automotive
hydraulic lifts and service pits) that may not be classified as regulated tanks,
but which are capable of releasing stored materials into the environment,
thereby potentially obligating us to remediate any soils or groundwater
resulting from such releases.
We are also subject to laws and regulations governing remediation of
contamination at facilities we operate or to which we send hazardous or toxic
substances or wastes for treatment, recycling or disposal. The Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), also known as
the "Superfund" law, imposes liability, without regard to fault or the legality
of the original conduct, on certain classes of persons that are considered to
have contributed to the release of a "hazardous substance" into the environment.
These persons include the owner or operator of the disposal site or sites where
the release occurred and companies that transported or disposed, or arranged for
the transport or disposal, of the hazardous substances released at such sites.
Under CERCLA, these "responsible parties" may be subject to joint and several
liability for the costs of cleaning up the hazardous substances that have been
released into the environment, for damages to natural resources and for the
costs of certain health studies, and it is not uncommon for neighboring
landowners and other third parties to file claims for personal injury and
property damage allegedly caused by the release of hazardous substances.
Further, the Federal Water Pollution Control Act, also known as the Clean
Water Act, and comparable state laws prohibit discharges of pollutants into
regulated waters without authorized National Pollution Discharge Elimination
System (NPDES) and similar state permits, require containment of potential
discharges of oil or hazardous substances, and require preparation of spill
contingency plans.
Environmental laws and regulations have become more complex and stringent
over the years, and the task of achieving and maintaining full compliance with
all applicable environmental laws and regulations has become much more rigorous.
We currently own or lease, and in connection with our acquisition program will
in the future own or lease, properties that in some instances have been used for
auto retailing and servicing for many years. Although we have utilized operating
and disposal practices that were standard in the industry at the time, it is
possible that environmentally sensitive materials such as new and used motor
oil, transmission fluids, antifreeze, lubricants, solvents and motor fuels may
have been spilled or released on or under the properties owned or leased by us
or on or under other locations where such materials were taken for disposal.
Further, we believe that structures found on some of these properties may
contain suspect asbestos-containing materials, albeit in nonfriable, undisturbed
condition. In addition, many of these properties have been operated by third
parties whose use, handling and disposal of such environmentally sensitive
materials were not under the Company's control.
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These properties and the waste materials spilled, released or otherwise found
thereon may be subject to RCRA, CERCLA, the federal Clean Air Act and analogous
state laws. Under such laws, we could be required to remove or remediate
previously spilled or released waste materials (including such materials spilled
or released by prior owners or operators), or property contamination (including
groundwater contamination caused by prior owners or operators), or to perform
monitoring or remedial activities to prevent future contamination (including
asbestos found to be in a friable and disturbed condition). However, we believe
that we are not subject to any material environmental liabilities and that
compliance with environmental laws and regulations does not have a material
adverse effect on our operations, earnings or competitive position. Moreover, we
generally obtain environmental studies on dealerships to be acquired and, as
necessary, implement environmental management or remedial activities to reduce
the risk of noncompliance with environmental laws and regulations.
Of course, environmental laws and regulations and their interpretation and
enforcement are subject to frequent change and we believe that the trend of more
expansive and more strict environmental legislation and regulations will likely
continue. Hence, we cannot guarantee that future compliance with environmental
laws or regulations or the future discovery of unknown environmental conditions
will not require additional expenditures by us, or that such expenditures would
not be material.
EMPLOYEES
As of December 31, 1998, Group 1 employed 3,101 people, of whom 379 were
employed in managerial positions, 1,001 were employed in non-managerial sales
positions, 1,289 were employed in non-managerial parts and service positions and
432 were employed in administrative support positions.
We believe that our relationships with our employees are favorable. None of
our employees are represented by a labor union. Because of our dependence on our
Manufacturers, however, we may be affected by labor strikes, work slowdowns and
walkouts at the manufacturers' manufacturing facilities.
LEGAL PROCEEDINGS
From time to time, our dealerships are named in claims involving the
manufacture of automobiles, contractual disputes and other matters arising in
the ordinary course of business. Currently, no legal proceedings are pending
against or involve Group 1 that, in the opinion of management, could reasonably
be expected to have a material adverse effect on our business, financial
condition or results of operations.
Because of their vehicle inventory and nature of business, automobile
dealerships generally require significant levels of insurance covering a broad
variety of risks. Our insurance includes an umbrella policy with a $50 million
per occurrence limit as well as insurance on our real property, comprehensive
coverage for our vehicle inventory, general liability insurance, employee
dishonesty coverage and errors and omissions insurance in connection with its
vehicle sales and financing activities.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below are the Company's executive officers and directors,
together with their positions and ages.
<TABLE>
<CAPTION>
EXPIRATION
OF TERM AS
NAME AGE POSITION DIRECTOR
- ---- --- -------- ----------
<S> <C> <C> <C>
B.B. Hollingsworth, Jr............ 56 Chairman, President and Chief Executive Officer 2000
John T. Turner.................... 55 Senior Vice President -- Corporate Development
Scott L. Thompson................. 40 Senior Vice President -- Chief Financial Officer
and Treasurer
John S. Bishop.................... 52 Senior Vice President -- Operations
Charles M. Smith.................. 53 Senior Vice President -- Industry Relations; 1999
Director
Bennett E. Bidwell................ 71 Director 2001
John H. Duncan.................... 71 Director 1999
Robert E. Howard, II.............. 51 Director; President of Howard Group 2000
Sterling B. McCall, Jr. .......... 63 Director; President of McCall Group 2001
</TABLE>
Set forth below is a brief description of the business experience of the
executive officers and directors of the Company.
B.B. HOLLINGSWORTH, JR. has served as Chairman of Group 1 since March 1997
and as President and Chief Executive Officer of the Company since August 1996.
Mr. Hollingsworth has been a director of Group 1 since August 1996. Prior to
joining Group 1, Mr. Hollingsworth spent nineteen years with Service Corporation
International ("SCI"), where he directed an acquisition program that established
SCI as the world's leading consolidator of the funeral industry. He joined SCI
in 1967, was then named Vice President for Corporate Development, was named Vice
President and Chief Financial Officer in 1972, and was elected President and
named Director in 1975. He served as President and Director of SCI from 1975
until retirement in 1986. From 1986 to 1996, Mr. Hollingsworth served as a
consultant to SCI. Prior to November 1997, Mr. Hollingsworth was a shareholder
and director of Foyt Motors, Inc., a subsidiary of Group 1 that was acquired by
Group 1 in November 1997. He has served as a director of several public and
private companies.
JOHN T. TURNER has served as Group 1's Senior Vice President -- Corporate
Development since December 1996. Prior to joining us, Mr. Turner functioned as
Managing Director -- Corporate Development, Europe for SCI. From 1990 to 1993,
Mr. Turner served as Senior Vice President -- Operations and Director of The
Loewen Group, Inc. From 1986 to 1990, he served as President and Director of
Paragon Family Services, Inc. From 1981 to 1986, he served as Senior Vice
President -- Corporate Development for SCI. Mr. Turner was a partner in Arthur
Young & Company from 1977 to 1981. Currently, he is a director of Metamor
Worldwide, Inc.
SCOTT L. THOMPSON has served as Senior Vice President -- Chief Financial
Officer and Treasurer of Group 1 since December 1996. From 1991 to 1996, Mr.
Thompson served as Executive Vice President, Operations and Finance for KSA
Industries, Inc., a diversified enterprise with interests in automotive
retailing, energy and professional sports. Among Mr. Thompson's other
responsibilities within the KSA group of companies, he served as a Vice
President and director of three Houston-area automobile dealerships with
aggregate annual
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revenues of $180 million. Additionally, in connection with his position at KSA
Industries, Inc. he served as a director of Adams Resources Energy, Inc., a
public oil and gas company. He is a Certified Public Accountant, and from 1980
to 1991 he held various positions with Arthur Andersen LLP.
JOHN S. BISHOP has served as Senior Vice President -- Operations since
October 1998. From 1981 until 1998, he served as Group Vice President of Sales
and Marketing for Gulf States Toyota, an independent distributor of Toyota
vehicles, parts and accessories serving approximately 140 dealers in a
five-state area. Before joining Gulf States Toyota, Mr. Bishop was employed at
both Ford Motor Company and Chrysler Corporation for a combined 8 years.
BENNETT E. BIDWELL has served as Director of Group 1 since June 1997. Mr.
Bidwell joined Chrysler as Executive Vice President in 1983 and was elected to
its board of directors in that same year. He was named Vice Chairman of Chrysler
in 1985, Vice Chairman of Chrysler Motors Corporation in 1987 and
President -- Product and Marketing of Chrysler Motors Corporation in 1988. From
1988 to 1990, Mr. Bidwell served as Chairman of Chrysler Motors Corporation. Mr.
Bidwell retired from Chrysler in 1993. Prior to joining Chrysler, Mr. Bidwell
spent 27 years with Ford Motor Company, and from 1981 to 1983 he was President
and Chief Operating Officer of The Hertz Corporation. His past directorships
include National Steel Corporation (1981-1983) and McDonald & Company
Securities, Inc. (1992-1995). Mr. Bidwell currently serves as a director for
International Management Group, Budd Company and Kelly Management Group.
JOHN H. DUNCAN has served as Director of Group 1 since June 1997. Since
1988, Mr. Duncan has been a private investor with holdings in the automotive,
oil and gas and real estate industries. From 1958 to 1968, Mr. Duncan served as
President of Gulf & Western Industries, a company which he co-founded. Mr.
Duncan currently serves as a director, Chairman of the Executive Committee and
member of the Compensation Committee of Enron Corporation and a director and
Chairman of the Compensation Committee of Enron Oil Trading & Transportation.
Mr. Duncan also serves on the Board of Trustees of Southwestern University, the
Board of Trustees of the Texas Heart Institute and the Board of Visitors of the
University of Texas (M.D. Anderson) Cancer Foundation.
ROBERT E. HOWARD, II has served as a Director of Group 1 since April 1997.
Mr. Howard has served as President of Howard Group since November 1997. Mr.
Howard has more than 28 years experience in the automotive retailing industry.
From 1969 to 1977, he served in various management positions at franchised
dealerships. From 1978 to November 1997, he served as Chairman of Howard
Pontiac-GMC, Inc., a franchised dealership acquired by the Company in November
1997. Prior to November 1997, Mr. Howard was also Chairman of the following
companies acquired by the Company in November 1997: Bob Howard Chevrolet, Bob
Howard Honda/Acura, Bob Howard Toyota and Bob Howard Dodge. He was a recipient
of the 1997 Time Magazine Quality Dealer Award and presently serves as Chairman
of the Oklahoma Motor Vehicle Commission and as a Director of the Oklahoma City
Metropolitan Automobile Dealers Association.
STERLING B. MCCALL, JR. has served as Director of Group 1 since August
1996. Mr. McCall has served as President of McCall Group since November 1997.
Mr. McCall has over 29 years experience in the automotive retailing industry
and, prior to November 1997, was Chairman of Sterling McCall Toyota and Sterling
McCall Lexus, both subsidiaries of Group 1 that were acquired by the Company in
November 1997. He served as President or Chairman of Sterling McCall Toyota and
Sterling McCall Lexus since their inception in 1969 and 1989, respectively. He
is a former Director of the American International Automobile Dealers
Association, a former Director and Chairman of the Houston Automobile Dealers
Association and a former Chairman of the Gulf States Toyota Dealer Council, and
is a former Director of the Texas Automobile Dealers Association. Mr. McCall has
won the Time Magazine Quality Dealer Award and the Sports Illustrated Dealer of
Distinction Award.
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CHARLES M. SMITH has served as Senior Vice President -- Industry Relations
of Group 1 since January 1, 1999. Mr. Smith has served as a Director of the
Company since its formation in December 1996. From November 1997 to December
1998 Mr. Smith served as President of Smith Group. Mr. Smith has more than 29
years experience in the automotive retailing industry. From 1968 to 1980, he
served in various capacities in dealerships owned and operated by the Smith
family. From 1980 to 1985, he owned and operated his own automobile dealership.
From 1985 to November 1997, he served as managing partner of Smith & Liu
Management Company, the management entity for the Smith Group dealerships, which
were acquired by the Company in November 1997. He is the former Chairman of the
American International Automobile Dealers Association and is Vice Chairman of
the Texas Automobile Dealers Association. He has won the Time Magazine Quality
Dealer Award and the Sports Illustrated All-Star Dealer Award.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Common Stock as of December 31, 1998 by (1) each person known by
Group 1 to own beneficially more than five percent of its outstanding Common
Stock, (2) Group 1's Chief Executive Officer and certain of the Company's other
executive officers, (3) each of Group 1's directors and (4) all executive
officers and directors as a group. All persons listed have an address c/o of
Group 1's principal executive offices and have sole voting and dispositive power
over the shares of common stock indicated as owned by such person unless
otherwise indicated.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
-----------------------
NAME OF BENEFICIAL OWNERS SHARES PERCENT
- ------------------------- ---------- --------
<S> <C> <C>
B.B. Hollingsworth, Jr...................................... 613,135 3.4%
John T. Turner.............................................. 114,645 *
Scott L. Thompson........................................... 83,086 *
John S. Bishop.............................................. -- *
Charles M. Smith............................................ 714,492 3.9
Robert E. Howard, II........................................ 2,998,805(2) 16.5
Sterling B. McCall, Jr. .................................... 1,472,001(3) 8.1
John H. Duncan.............................................. 201,701 1.1
Bennett E. Bidwell.......................................... 3,333 *
James S. Carroll............................................ 1,052,667(4) 5.8
All directors and executive officers as a group (9 persons
including the directors and executive officers named
above).................................................... 6,201,198 33.6
</TABLE>
- ---------------
* Less than 1%.
(1) Under the regulations of the Securities Exchange Commission (the
"Commission"), shares are deemed to be "beneficially owned" by a person if
he directly or indirectly has or shares the power to vote or dispose of such
shares, whether or not he has any pecuniary interest in such shares, or if
he has the right to acquire the power to vote or dispose of such shares
within 60 days, including any right to acquire such power through the
exercise of any option, warrant or right. The shares beneficially owned by
Messrs. Hollingsworth, Turner, Thompson, Bishop and Smith include 54,667,
100,000, 53,280, 0 and 0 shares, respectively, that may be acquired by such
person within 60 days through the exercise of stock options. The shares
owned by the executive officers and directors as a group include 214,613
shares that may be acquired by such persons within 60 days through the
exercise of stock options.
(2) Includes (1) 592,303 shares held in escrow with Chase Bank of Texas pending
release to Mr. Howard upon completion of authorizing documentation, (2)
780,000 shares held by Howard Investments, L.L.C., which is controlled by
Mr. Howard and (3) 25,450 shares held by Century Reinsurance Company, Inc.,
which is controlled by Mr. Howard.
(3) Includes (1) 637,475 shares owned by SMC Investment, Inc., which is
controlled by Mr. McCall; (2) 250,248 shares owned by Gulf Coast Family
Limited Partnership, which is controlled by Mr. McCall, (3) 106,041 shares
owned by SBM-T Family Limited Partnership, which is controlled by Mr. McCall
and (4) 30,629 shares owned by Mr. McCall's spouse.
(4) Includes 1,052,267 shares held by J. C. World Limited Partnership, which is
indirectly controlled by Mr. Carroll and 400 shares owned by his children.
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DESCRIPTION OF CREDIT FACILITY
GENERAL
The credit facility is among Group 1, our subsidiaries, Chase Bank of
Texas, National Association, as administrative agent (the "Agent"), Comerica
Bank, as floorplan agent, NationsBank, N.A., as documentation agent, U.S. Bank
National Association, Bank of America National Trust & Savings Association, Bank
One, N.A. and BankBoston, N.A., as co-agents, and other lending institutions
party thereto (the "Lenders"). The credit facility generally provides for an
acquisition facility equal to $130 million (which will be reduced to $110
million upon consummation of the Notes offering) and a floorplan facility equal
to $295 million, subject to certain advance limitations on used and program
vehicles, demonstrator vehicles and rental vehicles.
Group 1 and our subsidiaries, which are co-borrowers under the credit
facility, are generally jointly and severally liable for all obligations.
SECURITY
Our indebtedness under the credit facility is secured by (1) the pledge
most of the capital stock of all of our subsidiaries (other than the stock of
subsidiaries owning General Motors dealerships) and (2) liens on substantially
all of our other material property.
INTEREST
Acquisition loans under the credit facility bear interest at a floating
rate based (at our option) upon (1) the base rate with respect to base rate
loans, plus a margin percentage or (2) LIBOR, plus a margin percentage. The base
rate is the greater of (a) the prime rate or (b) the federal funds rate plus
0.50%. The margin percentage for base rate loans varies from 0.25% to 1.75%
depending on our leverage ratio. The margin percentage for acquisition loans
that are Eurodollar loans varies from 1.75% to 3.25% depending on our leverage
ratio.
Our leverage ratio is generally defined as the ratio of: (1) our
indebtedness minus the sum of (a) retail loan guarantees, (b) floorplan loans
and (c) subordinated indebtedness to (2) our consolidated pro forma EBITDA minus
pro forma floorplan interest expense.
Floorplan loans under the credit facility bear interest at a floating rate
based (at our option) upon either (1) the greater of (a) the Comerica prime rate
minus 0.50% or (b) the federal funds rate minus 0.50% or (2) LIBOR plus 1.50%.
MATURITY
The credit facility matures on December 31, 2001. The credit facility
provides that the loans may be borrowed, repaid and reborrowed from time to time
until such termination date, subject to the satisfaction of certain conditions
on the date of any such borrowing and, in the case of repayment of Eurodollar
loans, compliance with certain yield protection provisions.
SCHEDULED PAYMENTS AND PREPAYMENTS
The credit facility does not require any scheduled payments of principal.
Amounts under the credit facility may be voluntarily prepaid without premium or
penalty, subject to certain notice requirements, certain required minimum
prepayment amounts and in the case of Eurodollar loans, certain yield protection
provisions.
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CONDITIONS TO EXTENSIONS OF CREDIT
The obligation of the Lenders to make subsequent loans or extend letters of
credit is subject to the satisfaction of certain customary conditions including,
but not limited to, the absence of a default or event of default under the
credit facility, all representations and warranties under the credit facility
and the other related loan documents being true and correct in all material
respects, and that there has been no material adverse change in our properties
or business.
COVENANTS
The credit facility requires us to meet certain financial tests, including
meeting a minimum net worth test and minimum fixed charge coverage ratio,
interest coverage ratio and current ratio tests. The credit facility also
contains covenants which, among other things, limit the incurrence of additional
indebtedness, the nature of our business, investments, leases of assets,
creation and ownership of subsidiaries, dividends, transactions with affiliates,
mergers, consolidations and acquisitions and dispositions of assets, liens and
encumbrances and other matters customarily restricted in credit agreements of
this type. The credit facility also contains additional covenants that require
us to maintain our properties, together with insurance thereon, to provide
certain information to the Agent and the Lenders, including financial
statements, notices and reports, to permit inspections of our books and records
and to comply with applicable laws.
EVENTS OF DEFAULT
The credit facility contains customary events of default, including payment
defaults, breach of representations, warranties and covenants (subject to
certain cure periods), cross-defaults to certain other indebtedness, certain
events of bankruptcy and insolvency, judgment defaults in excess of $5 million
and the failure of any of the loan documents to be in full force and effect.
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DESCRIPTION OF NOTES
The following summary of the particular terms of the Notes supplements, and
to the extent inconsistent therewith replaces, the description of the general
terms and provisions of the Debt Securities set forth in the accompanying
prospectus, to which description reference is hereby made. The Notes are to be
issued under an Indenture (the "Indenture"), among the Company, the Subsidiary
Guarantors and IBJ Whitehall Bank & Trust Company, as trustee (the "Trustee").
In this description, the word "Company" refers only to Group 1 Automotive, Inc.
and not to any of its subsidiaries.
GENERAL
The Notes will be limited to $100 million aggregate principal amount and
will mature on , 2009. The Notes will bear interest at the rate of
% per annum. Interest on the Notes will be payable semi-annually on
and of each year, commencing , 1999. The
Company will make each interest payment to the Holders of record on the
immediately preceding and . The Notes will bear interest
on overdue principal and premium, if any, and, to the extent permitted by law,
overdue interest at the rate of % per annum. Interest on the Notes will be
computed on the basis of a 360-day year of twelve 30-day months.
Principal of and premium, if any, and interest on the Notes will be
payable, and the Notes may be presented for registration of transfer and
exchange, at the office or agency of the Company maintained for that purpose in
the Borough of Manhattan, the City of New York, provided that at the option of
the Company, payment of interest on the Notes may be made by check mailed to the
address of the Person entitled thereto as it appears in the Note Register. Until
otherwise designated by the Company, such office or agency will be the corporate
trust office of the Trustee, as Paying Agent and Registrar.
Reference is made to the Prospectus for a detailed summary of additional
provisions of the Notes and of the Indenture under which the Notes and the
Subsidiary Guarantees are issued. Capitalized terms not otherwise defined herein
shall have the meanings given to them in the Prospectus and the Indenture.
OPTIONAL REDEMPTION
The Company may redeem all or a part of the Notes at any time on or after
, 2004 upon not less than 30 nor more than 60 days' notice, at the
following Redemption Prices (expressed as percentages of the principal amount)
plus accrued interest to but excluding the Redemption Date, if redeemed during
the 12-month period beginning of the years indicated:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<S> <C>
2004........................................................ %
2005........................................................ %
2006........................................................ %
2007 and thereafter......................................... 100.000%
</TABLE>
In the event that on or before , 2002 the Company receives net
proceeds from the sale of its Common Stock in one or more Equity Offerings, the
Company may use all or a portion of any such net proceeds to redeem up to $35
million aggregate principal amount of the
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Notes at a redemption price of % of the principal amount thereof plus
accrued interest to but excluding the Redemption Date; provided that:
(1) at least $65 million in principal amount of Notes remains
outstanding after each such redemption; and
(2) the Redemption Date is within 75 days of such sale and the Company
provides not less than 30 and not more than 60 days' notice of the
redemption.
SUBORDINATION
The indebtedness evidenced by the Notes will, to the extent set forth in
the Indenture, be subordinate in right of payment to the prior payment in full
of all Senior Debt of the Company.
Upon any payment or distribution of assets to creditors upon any
liquidation, dissolution, winding-up, reorganization, assignment for the benefit
of creditors or marshaling of assets of the Company, whether voluntary or
involuntary, or any bankruptcy, insolvency, receivership or similar proceedings
of the Company, the holders of all Senior Debt of the Company will first be
entitled to receive payment in full of such Senior Debt, or provision made for
such payment before the Holders of the Notes will be entitled to receive any
payment in respect of the principal of or premium, if any, or interest on, or
any obligation to purchase, the Notes. In the event that notwithstanding the
foregoing, the Trustee or the Holder of any Note receives any payment or
distribution of assets of the Company of any kind or character (including any
such payment or distribution which may be payable or deliverable by the reason
of the payment of any other indebtedness of the Company being subordinated to
the payment of the Notes), before all the Senior Debt of the Company is so paid
in full, then such payment or distribution will be required to be paid over or
delivered forthwith to the trustee in bankruptcy or other person making payment
or distribution of assets of the Company for application to the payment of all
Senior Debt of the Company remaining unpaid, to the extent necessary to pay such
Senior Debt in full. However, notwithstanding the foregoing, Holders of the
Notes may receive shares of stock of the Company or securities of the Company
which are subordinate in right of payment to all Senior Debt of the Company to
substantially the same extent as the Notes are so subordinated ("subordinated
consideration").
No payments on account of principal of, premium, if any, or interest on, or
in respect of the purchase or other acquisition of, the Notes (except for
subordinated consideration), and no defeasance of the Notes, may be made if
there shall have occurred and be continuing a Senior Payment Default.
"Senior Payment Default" means any default in the payment of any principal
of or premium, if any, or interest on Senior Debt of the Company when due,
whether at the stated maturity of any such payment or by declaration of
acceleration, call for redemption or otherwise.
Upon the occurrence of a Senior Nonmonetary Default and receipt of written
notice by the Company and the Trustee of the occurrence of such Senior
Nonmonetary Default from the agent for the Designated Senior Debt which is the
subject of such Senior Nonmonetary Default, the Company shall make no payments
on account of principal of, premium, if any, or interest on, or in respect of
the purchase or other acquisition of, the Notes (except for subordinated
consideration), for a period (the "Payment Blockage Period") commencing on the
date of the receipt of such notice and ending the earlier of:
(1) the date on which such Senior Nonmonetary Default has been cured
or waived or ceased to exist or all Designated Senior Debt the subject of
such Senior Nonmonetary Default has been discharged;
(2) the 179th day after the date of the receipt of such notice; and
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(3) the date on which the Payment Blockage Period has been terminated
by written notice to the Company or the Trustee from the agent for the
Designated Senior Debt initiating the Payment Blockage Period.
In any event, no more than one Payment Blockage Period may be commenced
during any 360-day period and there shall be a period of at least 181 days
during each 360-day period when no Payment Blockage Period is in effect. In
addition, no Senior Nonmonetary Default that existed or was continuing on the
date of the commencement of a Payment Blockage Period may be the basis of the
commencement of a subsequent Payment Blockage Period whether or not within a
period of 360 consecutive days unless such Senior Nonmonetary Default shall have
been cured for a period of not less than 90 consecutive days.
"Senior Nonmonetary Default" means the occurrence or existence and
continuance of an event of default with respect to Designated Senior Debt, other
than a Senior Payment Default, permitting the holders of the Designated Senior
Debt (or a trustee or other agent on behalf of the holders thereof) then to
declare such Designated Senior Debt due and payable prior to the date on which
it would otherwise become due and payable.
The failure to make any payment on the Notes by reason of the provisions of
the Indenture described under this "-- Subordination" will not prevent the
occurrence of an Event of Default with respect to the Notes arising from any
such failure to make payment. Upon termination of any period of payment blockage
the Company shall resume making any and all required payments in respect of the
Notes, including any missed payments.
As a result of this subordination, in the event of insolvency, creditors of
the Company who are not holders of Senior Debt of the Company or of the Notes
may recover less, ratably, than holders of Senior Debt of the Company and more,
ratably, than Holders of the Notes.
The subordination provisions described above will not be applicable to
payments in respect of the Notes from a defeasance trust established in
connection with any defeasance or covenant defeasance of the Notes as described
under "-- Defeasance."
In addition, the Notes will be effectively subordinated to all indebtedness
and other liabilities of the Company's subsidiaries. Although the Notes will be
guaranteed by the Subsidiary Guarantors, the Subsidiary Guarantee of each
Subsidiary Guarantor will be subordinated to the Senior Debt of such Subsidiary
Guarantor on the same basis as the Notes are subordinated to the Senior Debt of
the Company, and such Subsidiary Guarantee may be released prior to the payment
of the principal of the Notes under certain circumstances. See "-- Subsidiary
Guarantees."
After giving effect to the issuance of the Notes and the application of the
net proceeds therefrom, as of December 31, 1998 the Company would have had
approximately $143.2 million ($91.6 million if the Common Stock Offering is
consummated) of outstanding Debt other than the Notes, all of which will
constitute Senior Debt.
SUBSIDIARY GUARANTEES
Subject to the limitations described below, the Subsidiary Guarantors will,
jointly and severally, unconditionally guarantee on a senior subordinated basis
the performance and punctual payment when due, whether at Stated Maturity, by
acceleration or otherwise, of all obligations of the Company under the Indenture
and the Notes, whether for principal of, premium, if any, or interest on the
Notes or otherwise (all such obligations guaranteed by a Subsidiary Guarantor
being herein called the "Guaranteed Obligations"). The Subsidiary Guarantors
will also pay, on a senior subordinated basis and in addition to the amount
stated above, any and all expenses (including reasonable counsel fees and
expenses) incurred by the
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Trustee in enforcing any rights under a Subsidiary Guarantee with respect to a
Subsidiary Guarantor.
Each current and future Restricted Subsidiary, other than any Restricted
Subsidiary that has no outstanding Debt (including Guarantees) other than Debt
consisting of Floor Plan Debt or Guarantees of Floor Plan Debt of the Company,
will be required to be a Subsidiary Guarantor for so long as such Restricted
Subsidiary has outstanding any Debt (including Guarantees) other than Debt
consisting of Floor Plan Debt, Guarantees of Floor Plan Debt of the Company or
such Subsidiary Guarantor's Subsidiary Guarantee. All of the Company's
Subsidiaries other than a foreign subsidiary that is immaterial to the Company's
operations will be Subsidiary Guarantors when the Notes are issued on the
Closing Date.
A Subsidiary Guarantor's Subsidiary Guarantee will be subordinated in right
of payment to the Senior Debt of such Subsidiary Guarantor on the same basis as
the Notes are subordinated to the Senior Debt of the Company. No payment will be
made by any Subsidiary Guarantor under its Subsidiary Guarantee during any
period in which payments by the Company on the Notes are suspended by the
subordination provisions of the Indenture.
Each Subsidiary Guarantee will be limited in amount to an amount not to
exceed the maximum amount that can be guaranteed by the relevant Subsidiary
Guarantor without rendering such Subsidiary Guarantee voidable under applicable
law relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally. See "Risk Factors -- Fraudulent
Conveyance".
TERMINATION OF SUBSIDIARY GUARANTEES
In the event that a Subsidiary Guarantor ceases to be a Restricted
Subsidiary, whether as a result of a disposition of all of the assets or all of
the Capital Stock of such Subsidiary Guarantor, by way of sale, merger,
consolidation or otherwise, such Subsidiary Guarantor will be deemed released
and relieved of its obligations under its Subsidiary Guarantee without any
further action required on the part of the Trustee or any Holder. In any such
case, no other Person acquiring or owning the assets or Capital Stock of such
Subsidiary Guarantor (if not otherwise a Restricted Subsidiary) will be required
to enter into a Subsidiary Guarantee. In addition, in the event that any
Subsidiary Guarantor ceases to have outstanding any Debt (including Guarantees)
other than Debt consisting of Floor Plan Debt, Guarantees of Floor Plan Debt of
the Company or such Subsidiary Guarantor's Subsidiary Guarantee, the Company
may, at its option, obtain the release of such Subsidiary Guarantor's Subsidiary
Guarantee by delivering an Officers' Certificate to the Trustee certifying to
such effect.
COVENANTS
The Indenture will contain, among others, the following covenants:
LIMITATION ON DEBT
The Company may not, and may not permit any Restricted Subsidiary to, Incur
any Debt except that the Company and any Subsidiary Guarantor (but not any
Restricted Subsidiary that is not a Subsidiary Guarantor) may Incur Debt if
after giving pro forma effect to the Incurrence of such Debt and the receipt and
application of the proceeds thereof the Consolidated Cash Flow Coverage Ratio of
the Company would be greater than 2.0 to 1.
Notwithstanding the foregoing limitation, the following Debt may be
Incurred.
(1) Debt of the Company or any Subsidiary Guarantor, other than Floor
Plan Debt, under the Senior Credit Facility in an aggregate principal
amount at any one time not to exceed the greater of $110 million or 30% of
the Company's Consolidated Net Tangible Assets at the time of such
Incurrence;
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(2) Debt of the Company or any Restricted Subsidiary consisting of
Floor Plan Debt or Guarantees of Floor Plan Debt of the Company;
(3) Debt owed by the Company to any Wholly Owned Restricted Subsidiary
for which fair value has been received or Debt owed by a Restricted
Subsidiary to the Company or a Wholly Owned Restricted Subsidiary;
provided, however, that:
(a) any such Debt owing by the Company to a Wholly Owned Restricted
Subsidiary shall be Subordinated Debt evidenced by an intercompany
promissory note and
(b) upon either the transfer or other disposition by such Wholly
Owned Restricted Subsidiary or the Company of any Debt so permitted to a
Person other than the Company or another Wholly Owned Restricted
Subsidiary or the issuance (other than directors' qualifying shares),
sale, lease, transfer or other disposition of shares of Capital Stock
(including by consolidation or merger) of such Wholly Owned Restricted
Subsidiary to a Person other than the Company or another such Wholly
Owned Restricted Subsidiary, the provisions of this clause (3) shall no
longer be applicable to such Debt and such Debt shall be deemed to have
been Incurred at the time of such transfer or other disposition;
(4) Debt consisting of the Notes, the Subsidiary Guarantees and
Guarantees by Restricted Subsidiaries of any Debt Incurred to refinance or
refund the Notes;
(5) Debt of the Company or any Restricted Subsidiary consisting of
Permitted Interest Rate, Currency or Commodity Price Agreements;
(6) Debt which is exchanged for or the proceeds of which are used to
refinance or refund, or any extension or renewal of (each of the foregoing,
a "refinancing"),
(a) the Notes,
(b) outstanding Debt that is not described in any other clause
hereof that was outstanding as of the Closing Date after giving effect
to the application of the proceeds from the sale of the Notes as
described in a schedule to the Indenture,
(c) outstanding Debt Incurred pursuant to the first paragraph of
this "Limitation on Debt" covenant, and
(d) Debt previously Incurred pursuant to this clause (6),
in each case an aggregate principal amount not to exceed the principal
amount of the Debt so refinanced plus the amount of any premium required
to be paid in connection with such refinancing pursuant to the terms of
the Debt so refinanced or the amount of any premium reasonably
determined by the Company as necessary to accomplish such refinancing by
means of a tender offer or privately negotiated repurchase, plus the
expenses of the Company or the Restricted Subsidiary, as the case may
be, incurred in connection with such refinancing; provided, however,
that:
(i) Debt the proceeds of which are used to refinance the Notes
or Debt which is pari passu with or subordinate in right of payment
to the Notes shall only be permitted if (A) in the case of any
refinancing of the Notes or Debt which is pari passu to the Notes,
the refinancing Debt is Incurred by the Company and made pari passu
to the Notes or subordinated to the Notes, and (B) in the case of any
refinancing of Debt which is subordinated to the Notes, the
refinancing Debt is Incurred by the Company and constitutes Debt that
is subordinated to the Notes at least to the same extent as the Debt
being refinanced;
(ii) the refinancing Debt by its terms, or by the terms of any
agreement or instrument pursuant to which such Debt is issued, (A)
does not have an Average
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Life that is less than the remaining Average Life of the Debt being
refinanced and (B) does not permit redemption or other retirement
(including pursuant to an offer to purchase) of such Debt at the
option of the holder thereof prior to the final stated maturity of
the Debt being refinanced, other than a redemption or other
retirement at the option of the holder of such Debt (including
pursuant to an offer to purchase) which is conditioned upon
provisions substantially similar to those described under " -- Change
of Control" and "-- Limitation on Asset Dispositions";
(iii) in the case of any refinancing of Debt of the Company, the
refinancing Debt may be Incurred only by the Company, and in the case
of any refinancing of Debt of a Restricted Subsidiary, the
refinancing Debt may be Incurred only by such Restricted Subsidiary
or the Company; and
(iv) in the case of any refinancing of Preferred Stock of a
Restricted Subsidiary, such Preferred Stock may be refinanced only
with Preferred Stock of such Restricted Subsidiary; and
(7) Debt of the Company or any Subsidiary Guarantor not otherwise
permitted to be Incurred pursuant to clauses (1) through (6) above, which,
together with any other outstanding Debt Incurred pursuant to this clause
(7), and in both such cases including any renewals, extensions,
substitutions, refinancings or replacements of such Debt has an aggregate
principal amount not in excess of $25 million at any time outstanding.
For purposes of determining compliance with this "Limitation of Debt"
covenant, in the event that an item of proposed Debt meets the criteria of more
than one of the categories of Debt described in clauses (1) through (7) above,
or is entitled to be Incurred pursuant to the first paragraph of this covenant,
the Company will be permitted to classify such item of Debt on the date of its
Incurrence in any manner that complies with this covenant.
LIMITATION ON RESTRICTED PAYMENTS
The Company:
(1) may not, and may not permit any Restricted Subsidiary to, directly
or indirectly, declare or pay any dividend or make any distribution
(including any payment in connection with any merger or consolidation
derived from assets of the Company or any Restricted Subsidiary) in respect
of its Capital Stock or to the holders thereof (in their capacity as
holders of Capital Stock), other than
(a) any dividends or distributions by the Company payable solely in
shares of its Capital Stock (other than Redeemable Stock) or in options,
warrants or other rights to acquire its Capital Stock (other than
Redeemable Stock), and
(b) in the case of a Restricted Subsidiary, dividends or
distributions payable to the Company or a Wholly Owned Restricted
Subsidiary or pro rata dividends or distributions,
(2) may not, and may not permit any Restricted Subsidiary to,
purchase, redeem, or otherwise acquire or retire for value
(a) any Capital Stock of the Company or any Restricted Subsidiary
or
(b) any options, warrants or other rights to acquire shares of
Capital Stock of the Company or any Restricted Subsidiary or any
securities convertible or exchangeable into shares of Capital Stock of
the Company or any Restricted Subsidiary,
in each case except, in the case of Capital Stock of a Restricted
Subsidiary, from the Company or a Wholly Owned Restricted Subsidiary;
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(3) may not make, or permit any Restricted Subsidiary to make, any
Investment in any Unrestricted Subsidiary or any Affiliate or any Person
that would become an Affiliate after giving effect thereto, other than a
Permitted Investment; and
(4) may not, and may not permit any Restricted Subsidiary to, redeem,
repurchase, defease or otherwise acquire or retire for value prior to any
scheduled maturity, repayment or sinking fund payment Debt of the Company
which is subordinate in right of payment to the Notes
(each of clauses (1) through (4) being a "Restricted Payment") unless:
(a) no Event of Default, or an event that with the passing of time or
the giving of notice, or both, would constitute an Event of Default, has
occurred and is continuing or would result from such Restricted Payment,
(b) after giving pro forma effect to such Restricted Payment as if
such Restricted Payment had been made at the beginning of the applicable
four-fiscal-quarter period, the Company could Incur at least $1.00 of
additional Debt pursuant to the terms of the first paragraph of the
"Limitation on Debt" covenant above, and
(c) upon giving effect to such Restricted Payment, the aggregate of
all Restricted Payments from the Closing Date does not exceed the sum of:
(i) 50% of cumulative Consolidated Net Income (or, in the case
Consolidated Net Income shall be negative, less 100% of such deficit) of
the Company since January 1, 1999 through the last day of the last full
fiscal quarter ending immediately preceding the date of such Restricted
Payment for which quarterly or annual financial statements are available
(taken as a single accounting period); plus
(ii) 100% of the aggregate net cash proceeds received by the
Company after the Closing Date from contributions of capital or the
issuance and sale (other than to a Subsidiary of the Company) of Capital
Stock (other than Redeemable Stock) of the Company, options, warrants or
other rights to acquire Capital Stock (other than Redeemable Stock) of
the Company and Debt of the Company that has been converted into or
exchanged for Capital Stock (other than Redeemable Stock and other than
by or from a Subsidiary of the Company) of the Company after the Closing
Date, provided that any such net proceeds received by the Company from
an employee stock ownership plan financed by loans from the Company or a
Subsidiary of the Company shall be included only to the extent such
loans have been repaid with cash on or prior to the date of
determination; plus
(iii) an amount equal to the net reduction in Investments by the
Company and its Restricted Subsidiaries, subsequent to the Closing Date,
in any Person subject to clause (3) above upon the disposition,
liquidation or repayment (including by way of dividends) thereof or from
redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries,
but only to the extent such amounts are not included in Consolidated Net
Income and not to exceed in the case of any one Person the amount of
Investments previously made by the Company and its Restricted
Subsidiaries in such Person; plus
(iv) $5 million.
Notwithstanding the foregoing, so long as no Event of Default, or event
that with the passing of time or the giving of notice, or both, would constitute
an Event of Default, shall have occurred and is continuing or would result
therefrom:
(1) the Company and any Restricted Subsidiary may pay any dividend on
Capital Stock of any class within 60 days after the declaration thereof if,
on the date when the dividend
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was declared, the Company or such Restricted Subsidiary could have paid
such dividend in accordance with the foregoing provisions;
(2) the Company may refinance any Debt otherwise permitted by clause
(6) of the second paragraph of the "Limitation on Debt" covenant above or
redeem, acquire or retire any Debt solely in exchange for, by conversion
into or out of the net proceeds of the substantially concurrent sale (other
than from or to a Subsidiary of the Company or from or to an employee stock
ownership plan financed by loans from the Company or a Subsidiary of the
Company) of shares of Capital Stock (other than Redeemable Stock) of the
Company;
(3) the Company may purchase, redeem, acquire or retire any shares of
Capital Stock of the Company solely in exchange for, by conversion into or
out of the net proceeds of the substantially concurrent sale (other than
from or to a Subsidiary of the Company or from or to an employee stock
ownership plan financed by loans from the Company or a Subsidiary of the
Company) of shares of Capital Stock (other than Redeemable Stock) of the
Company; and
(4) the Company may purchase or redeem any Debt from Net Available
Proceeds to the extent permitted by the "Limitation on Asset Dispositions"
covenant.
Any payment made pursuant to clause (1) of this paragraph shall be a Restricted
Payment for purposes of calculating aggregate Restricted Payments pursuant to
the preceding paragraph and the amount of net proceeds from any exchange for,
conversion into or sale of Capital Stock of the Company pursuant to clause (2)
or (3) of this paragraph shall be excluded from the calculation of the amount
available for Restricted Payments pursuant to clause (c)(ii) above.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company may not, and may not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any encumbrance or restriction on the ability of any Restricted
Subsidiary:
(1) to pay dividends (in cash or otherwise) or make any other
distributions in respect of its Capital Stock owned by the Company or any
other Restricted Subsidiary or pay any Debt or other obligation owed to the
Company or any other Restricted Subsidiary;
(2) to make loans or advances to the Company or any other Restricted
Subsidiary; or
(3) to transfer any of its property or assets to the Company or any
other Restricted Subsidiary.
Notwithstanding the foregoing, the Company may, and may permit any
Restricted Subsidiary to, suffer to exist any such encumbrance or restriction:
(1) pursuant to any agreement in effect on the Closing Date (including
the Senior Credit Facility) as described in a schedule to the Indenture;
(2) pursuant to an agreement relating to any Debt Incurred by a Person
(other than a Restricted Subsidiary existing on the Closing Date or any
Restricted Subsidiary carrying on any of the businesses of any such
Restricted Subsidiary) prior to the date on which such Person became a
Restricted Subsidiary and outstanding on such date and not Incurred in
anticipation of becoming a Restricted Subsidiary, which encumbrance or
restriction is not applicable to any Person, or the properties or assets of
any Person, other than the Person so acquired, provided that the Incurrence
of such Debt is permitted by the "Limitation on Debt" covenant;
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(3) pursuant to an agreement effecting a renewal, refunding or
extension of Debt Incurred pursuant to an agreement referred to in clause
(1) or (2) of this paragraph; provided, however, that the provisions
contained in such renewal, refunding or extension agreement relating to
such encumbrance or restriction are no more restrictive in any material
respect than the provisions contained in the agreement the subject thereof;
(4) in the case of a restriction described in clause (3) of the
preceding paragraph, contained in any security agreement (including a
capital lease) securing Debt of a Restricted Subsidiary otherwise permitted
under the Indenture, but only to the extent such restrictions restrict the
transfer of the property subject to such security agreement;
(5) in the case of a restriction described in clause (3) of the
preceding paragraph, consisting of customary nonassignment provisions
entered into in the ordinary course of business in leases and other
contracts to the extent such provisions restrict the transfer or subletting
of any such lease or the assignment of rights under any such contract;
(6) which is contained in a franchise or other agreement entered into
in the ordinary course of business with an automobile manufacturer and
which has terms reasonably customary for such agreements between or among
such automobile manufacturer, its dealers and/or the owners of such
dealers;
(7) with respect to a Restricted Subsidiary, imposed pursuant to an
agreement which has been entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Restricted
Subsidiary, provided that such restriction terminates if such transaction
is closed or abandoned; or
(8) if such encumbrance or restriction is the result of applicable
laws or regulations relating to the payment of dividends or distributions.
LIMITATION ON RANKING OF CERTAIN DEBT
The Company:
(1) may not Incur any Debt which by its terms is both subordinate in
right of payment to any Senior Debt of the Company and senior in right of
payment to the Notes;
(2) may not permit any Subsidiary Guarantor to Incur any Debt which by
its terms is both subordinate in right of payment to any Senior Debt of
such Subsidiary Guarantor and senior in right of payment to the Subsidiary
Guarantee of such Subsidiary Guarantor; and
(3) may not permit any Restricted Subsidiary to Guarantee any Debt of
the Company that is subordinate in right of payment to the Notes unless:
(a) the Guarantee by such Restricted Subsidiary of such other Debt
shall be subordinated to such Restricted Subsidiary's Subsidiary
Guarantee at least to the same extent as such Debt of the Company is
subordinated to the Notes and
(b) such Restricted Subsidiary waives, and agrees that it will not
in any manner whatsoever claim or take the benefit or advantage of, any
rights of reimbursement, indemnity or subrogation or any other rights
against the Company or any other Restricted Subsidiary as a result of
any payment by such Restricted Subsidiary under its Guarantee of such
other Debt of the Company until the Notes have been paid in full.
For purposes of this covenant, no Debt shall be deemed subordinate in right of
payment to any other Debt solely by reason of such other Debt having the benefit
of a security interest.
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LIMITATION ON LIENS SECURING SUBORDINATED DEBT
The Company may not, and may not permit any Restricted Subsidiary to, Incur
or suffer to exist any Lien on or with respect to any property or assets now
owned or hereafter acquired to secure any Debt that is expressly by its terms
subordinate or junior in right of payment to any other Debt of the Company or
such Restricted Subsidiary without making, or causing such Restricted Subsidiary
to make, effective provision for securing the Notes or such Restricted
Subsidiary's Subsidiary Guarantee (1) equally and ratably with such Debt as to
such property or assets for so long as such Debt will be so secured or (2) in
the event such Debt is subordinate in right of payment to the Notes or such
Subsidiary Guarantee, prior to such Debt as to such property or assets for so
long as such Debt will be so secured.
LIMITATION ON ASSET DISPOSITIONS
The Company may not, and may not permit any Restricted Subsidiary to, make
any Asset Disposition in one or more related transactions unless:
(1) the Company or the Restricted Subsidiary, as the case may be,
receives consideration for such disposition at least equal to the fair
market value for the assets sold or disposed of as determined by the Board
of Directors in good faith and evidenced by a resolution of the Board of
Directors filed with the Trustee;
(2) at least 80% of the consideration for such disposition consists
of:
(a) cash or Cash Equivalents;
(b) the assumption of Debt of the Company or such Restricted
Subsidiary (other than Debt that is subordinated to the Notes or such
Restricted Subsidiary's Subsidiary Guarantee) relating to such assets
and release from all liability on the Debt assumed;
(c) Replacement Assets; or
(d) a combination of the foregoing;
provided that the amount of any Liquid Securities received by the
Company or such Restricted Subsidiary received as consideration that are
converted into cash within 180 days of the closing of such Asset
Disposition shall be deemed to be cash for purposes of this provision
(to the extent of the cash received); and
(3) all Net Available Proceeds, less any amounts invested within 360
days of such disposition in Replacement Assets, are applied within 360 days
of such disposition:
(a) first, to the permanent repayment or reduction of Senior Debt
of the Company then outstanding under any agreements or instruments
which would require such application or prohibit payments pursuant to
clause (b) following,
(b) second, to the extent of remaining Net Available Proceeds, to
make an Offer to Purchase outstanding Notes at 100% of their principal
amount plus accrued interest to the date of purchase and, to the extent
required by the terms thereof, any other Debt of the Company that is
pari passu with the Notes at a price no greater than 100% of the
principal amount thereof plus accrued interest to the date of purchase,
(c) third, to the extent of any remaining Net Available Proceeds
following the completion of the Offer to Purchase, to the repayment of
other Debt of the Company or Debt of a Restricted Subsidiary, to the
extent permitted under the terms thereof and
(d) fourth, to the extent of any remaining Net Available Proceeds,
to any other use as determined by the Company which is not otherwise
prohibited by the Indenture.
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Notwithstanding the foregoing, the Company shall not be required to make an
Offer to Purchase pursuant to clause 3(b) above if the remaining Net Available
Proceeds after giving effect to the application required by clause 3(a) is less
than $10 million.
LIMITATION ON OWNERSHIP OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
The Company may not, and may not permit any Restricted Subsidiary to,
issue, transfer, convey, lease or otherwise dispose of any shares of Capital
Stock of a Restricted Subsidiary or securities convertible or exchangeable into,
or options, warrants, rights or any other interest with respect to, Capital
Stock (other than directors' qualifying shares) of a Restricted Subsidiary to
any Person other than the Company or a Wholly Owned Restricted Subsidiary except
in a transaction consisting of a sale of all of the Capital Stock of such
Restricted Subsidiary owned by the Company and any Restricted Subsidiary and
that complies with the provisions of the "Limitation on Asset Dispositions"
covenant described above to the extent such provisions apply.
TRANSACTIONS WITH AFFILIATES
The Company may not, and may not permit any Restricted Subsidiary to, enter
into any transaction (or series of related transactions) with an Affiliate of
the Company or a Restricted Subsidiary, including any Investment, either
directly or indirectly, unless such transaction is on terms no less favorable to
the Company or such Restricted Subsidiary than those that could be obtained in a
comparable arm's-length transaction with an entity that is not an Affiliate and
is in the best interests of such Company or such Restricted Subsidiary. For any
transaction that involves in excess of $1 million, a majority of the
disinterested members of the Board of Directors shall determine that the
transaction satisfies the above criteria and shall evidence such a determination
by a Board Resolution filed with the Trustee. For any transaction that involves
in excess of $10 million, the Company shall also obtain an opinion from a
nationally recognized expert with experience in appraising the terms and
conditions of the type of transaction (or series of related transactions) for
which the opinion is required stating that such transaction (or series of
related transactions) is on terms no less favorable to the Company or such
Restricted Subsidiary than those that could be obtained in a comparable
arm's-length transaction with an entity that is not an Affiliate of the Company,
which opinion shall be filed with the Trustee.
The foregoing requirements shall not apply to:
(1) any transaction pursuant to agreements in effect on the date of
issuance of the Notes;
(2) any employment agreement or employee benefit arrangements with any
officer or director, including under any stock option or stock incentive
plans, entered into by the Company or any of its Restricted Subsidiaries in
the ordinary course of business and consistent with the past practice of
the Company or such Restricted Subsidiary or approved by a majority of the
disinterested members of the Board of Directors;
(3) transactions between or among the Company and/or its Restricted
Subsidiaries;
(4) payment of reasonable directors fees to Persons who are not
otherwise employees of the Company;
(5) indemnities of officers, directors and employees of the Company or
any Subsidiary of the Company pursuant to bylaws, or statutory provisions
or indemnification agreements or the purchase of indemnification insurance
for any director or officer;
(6) any Restricted Payment that is permitted to be made by the
"Limitation on Restricted Payments" covenant; and
(7) written agreements entered into or assumed in connection with
acquisitions of other businesses with persons who were not Affiliates prior
to such transactions.
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Notwithstanding the foregoing, the requirements set forth in the third
sentence of the first paragraph of this "Transaction with Affiliates" covenant
relating to an opinion from a nationally recognized expert shall not apply to
leases of property or equipment entered into in the ordinary course of business.
CHANGE OF CONTROL
Within 30 days of the occurrence of a Change of Control, the Company will
be required to make an Offer to Purchase all Outstanding Notes at a purchase
price equal to 101% of their principal amount plus accrued interest to the date
of purchase. A "Change of Control" will be deemed to have occurred at such time
as either:
(1) any Person (other than a Permitted Holder) or any Persons acting
together that would constitute a "group" (a "Group") for purposes of
Section 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act"),
or any successor provision thereto (other than Permitted Holders), shall
beneficially own (within the meaning of Rule 13d-3 under the Exchange Act,
or any successor provision thereto) at least 50% of the aggregate voting
power of all classes of Voting Stock of the Company; or
(2) any Person or Group (other than Permitted Holders) shall succeed
in having a sufficient number of its nominees elected to the Board of
Directors of the Company such that such nominees, when added to any
existing director remaining on the Board of Directors of the Company after
such election who was a nominee of or is an Affiliate of such Person or
Group, will constitute a majority of the Board of Directors of the Company;
provided, that a transaction effected to create a holding company of the
Company, (i) pursuant to which the Company becomes a Wholly Owned Subsidiary of
such holding company, and (ii) as a result of which the holders of Capital Stock
of such holding company are substantially the same as the holders of Capital
Stock of the Company immediately prior to such transaction, shall not be deemed
to involve a "Change of Control"; provided further that following such a holding
company transaction, references in this definition of "Change of Control" shall
thereafter be treated as references to such holding company.
In the event that the Company makes an Offer to Purchase the Notes, the
Company intends to comply with any applicable securities laws and regulations,
including any applicable requirements of Section 14(e) of, and Rule 14e-1 under,
the Exchange Act.
PAYMENTS FOR CONSENT
The Company may not, and may not permit any of its Subsidiaries to,
directly or indirectly, pay or cause to be paid any consideration, whether by
way of interest, fee or otherwise, to any Holder for or as an inducement to any
consent, waiver or amendment of any of the terms or provisions of the Indenture,
the Notes or any Subsidiary Guarantee unless such consideration is offered to be
paid or is paid to all Holders of the Notes that consent, waive or agree to
amend in the time frame set forth in the solicitation documents relating to such
consent, waiver or agreement.
PROVISION OF FINANCIAL INFORMATION
Whether or not the Company is required to be subject to Section 13(a) or
15(d) of the Exchange Act, or any successor provision thereto, the Company shall
file with the Commission the annual reports, quarterly reports and other
documents which the Company would have been required to file with the Commission
pursuant to such Section 13(a) or 15(d) or any successor provision thereto if
the Company were so required, such documents to be filed with the Commission on
or prior to the respective dates (the "Required Filing Dates") by which the
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Company would have been required so to file such documents if the Company were
so required. The Company shall also in any event:
(1) within 15 days of each Required Filing Date transmit by mail to
all Holders, as their names and addresses appear in the Security Register,
without cost to such Holders, and file with the Trustee, copies (without
exhibits) of the annual reports, quarterly reports and other documents
which the Company files with the Commission pursuant to such Section 13(a)
or 15(d) or any successor provision thereto or would have been required to
file with the Commission pursuant to such Section 13(a) or 15(d) or any
successor provisions thereto if the Company were required to be subject to
such Sections and
(2) if filing such documents by the Company with the Commission is not
permitted under the Exchange Act, promptly upon written request supply
copies of such documents to any prospective Holder.
UNRESTRICTED SUBSIDIARIES
The Company may designate any Restricted Subsidiary to be an "Unrestricted
Subsidiary" as provided below in which event such Subsidiary and each other
Person that is then or thereafter becomes a Subsidiary of such Subsidiary will
be deemed to be an Unrestricted Subsidiary. "Unrestricted Subsidiary" means:
(1) any Subsidiary designated as such by the Board of Directors as set
forth below where
(a) neither the Company nor any of its other Subsidiaries (other
than another Unrestricted Subsidiary) provides credit support for, or
Guarantee of, any Debt of such Subsidiary or any Subsidiary of such
Subsidiary (including any undertaking, agreement or instrument
evidencing such Debt) or is directly or indirectly liable for any Debt
of such Subsidiary or any Subsidiary of such Subsidiary, and
(b) no default with respect to any Debt of such Subsidiary or any
Subsidiary of such Subsidiary (including any right which the holders
thereof may have to take enforcement action against such Subsidiary)
would permit (upon notice, lapse of time or both) any holder of any
other Debt of the Company and its Subsidiaries (other than another
Unrestricted Subsidiary) to declare a default on such other Debt or
cause the payment thereof to be accelerated or payable prior to its
final scheduled maturity and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Subsidiary to be an Unrestricted
Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds
any Lien on any property of, any other Restricted Subsidiary which is not a
Subsidiary of the Subsidiary to be so designated or otherwise an Unrestricted
Subsidiary, provided that the Company could make a Restricted Payment in an
amount equal to the greater of the fair market value and book value of such
Subsidiary pursuant to the "Limitation on Restricted Payments" covenant and such
amount is thereafter treated as a Restricted Payment for the purpose of
calculating the aggregate amount available for Restricted Payments thereunder.
MERGERS, CONSOLIDATIONS AND CERTAIN SALES OF ASSETS
The Company may not, in a single transaction or a series of related
transactions: (1) consolidate with or merge into any other Person or permit any
other Person to consolidate
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with or merge into the Company or (2) directly or indirectly, transfer, sell,
lease or otherwise dispose of all or substantially all of its assets unless:
(1) in a transaction in which the Company does not survive or in which
the Company sells, leases or otherwise disposes of all or substantially all
of its assets, the successor entity to the Company is organized under the
laws of the United States of America or any State thereof or the District
of Columbia and shall expressly assume, by a supplemental indenture
executed and delivered to the Trustee in form satisfactory to the Trustee,
all of the Company's obligations under the Indenture;
(2) immediately before and after giving pro forma effect to such
transaction and treating any Debt which becomes an obligation of the
Company or a Restricted Subsidiary as a result of such transaction as
having been Incurred by the Company or such Restricted Subsidiary at the
time of the transaction, no Event of Default or event that with the passing
of time or the giving of notice, or both, would constitute an Event of
Default shall have occurred and be continuing;
(3) immediately after giving pro forma effect to such transaction, the
Consolidated Net Worth of the Company (or other successor entity to the
Company) is equal to or greater than that of the Company immediately prior
to the transaction;
(4) except in the case of any such consolidation or merger of the
Company with or into a Wholly Owned Restricted Subsidiary, immediately
after giving pro forma effect to such transaction and treating any Debt
which becomes an obligation of the Company or a Restricted Subsidiary as a
result of such transaction as having been Incurred by the Company or such
Restricted Subsidiary at the time of the transaction, the Company
(including any successor entity to the Company) could Incur at least $1.00
of additional Debt pursuant to the provisions of the first paragraph of the
"Limitation on Debt" covenant; and
(5) if, as a result of any such transaction, property or assets of the
Company would become subject to a Lien prohibited by the provisions of the
"Limitation on Liens Securing Subordinated Debt" covenant, the Company or
the successor entity to the Company shall have secured the Notes as
required by said covenant.
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture:
(1) failure to pay principal of (or premium, if any, on) any Note when
due (whether or not prohibited by the subordination provisions of the
Indenture);
(2) failure to pay any interest on any Note when due (whether or not
prohibited by the subordination provisions of the Indenture), continued for
30 days;
(3) default in the payment of principal and interest on Notes required
to be purchased pursuant to an Offer to Purchase as described under "Change
of Control" and "Limitation on Asset Dispositions" when due and payable
(whether or not prohibited by the subordination provisions of the
Indenture);
(4) failure to perform or comply with the provisions described under
"Merger, Consolidation and Certain Sales of Assets";
(5) failure to perform any other covenant or agreement of the Company
under the Indenture or the Notes continued for 60 days after written notice
to the Company by the Trustee or Holders of at least 25% in aggregate
principal amount of Outstanding Notes;
(6) default under the terms of any instrument evidencing or securing
any Debt of the Company or any Restricted Subsidiary having an outstanding
principal amount of $10 million individually or in the aggregate which
default results in the acceleration of the payment of all
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or any portion of such Debt or constitutes the failure to pay all or any
portion of the principal amount of such Debt when due;
(7) the rendering of a final judgment or judgments (not subject to
appeal) against the Company or any Restricted Subsidiary in an amount in
excess of $10 million which remains undischarged or unstayed for a period
of 60 days after the date on which the right to appeal has expired;
(8) certain events of bankruptcy, insolvency or reorganization
affecting the Company, any Significant Restricted Subsidiary or any group
of Restricted Subsidiaries that together would constitute a Significant
Restricted Subsidiary; and
(9) the Subsidiary Guarantee of any Subsidiary Guarantor is held by a
final non-appealable order or judgment of a court of competent jurisdiction
to be unenforceable or invalid or ceases for any reason to be in full force
and effect (other than in accordance with the terms of the Indenture) or
any Subsidiary Guarantor or any Person acting on behalf of any Subsidiary
Guarantor denies or disaffirms such Subsidiary Guarantor's obligations
under its Subsidiary Guarantee (other than by reason of a release of such
Subsidiary Guarantor from its Subsidiary Guarantee in accordance with the
terms of the Indenture).
If an Event of Default (other than an Event of Default described in Clause
(8) above) shall occur and be continuing, either the Trustee or the Holders of
at least 25% in aggregate principal amount of the Outstanding Notes may
accelerate the maturity of all Notes; provided, however, that after such
acceleration, but before a judgment or decree based on acceleration, the Holders
of a majority in aggregate principal amount of Outstanding Notes may, under
certain circumstances, rescind and annul such acceleration if all Events of
Default, other than the non-payment of accelerated principal, have been cured or
waived as provided in the Indenture. If an Event of Default specified in Clause
(8) above occurs, the Outstanding Notes will ipso facto become immediately due
and payable without any declaration or other act on the part of the Trustee or
any Holder. For information as to waiver of defaults, see "Modification and
Waiver."
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the Holders of a majority in aggregate
principal amount of the Outstanding Notes; provided, however, that no such
modification or amendment may, without the consent of the Holder of each
Outstanding Note affected thereby:
(1) change the Stated Maturity of the principal of, or any installment
of interest on, any Note,
(2) reduce the principal amount of, (or the premium) or interest on,
any Note,
(3) change the place or currency of payment of principal of (or
premium), or interest on, any Note,
(4) impair the right to institute suit for the enforcement of any
payment on or with respect to any Note,
(5) reduce the above-stated percentage of Outstanding Notes necessary
to modify or amend the Indenture,
(6) reduce the percentage of aggregate principal amount of Outstanding
Notes necessary for waiver of compliance with certain provisions of the
Indenture or for waiver of certain defaults,
(7) modify any provisions of the Indenture relating to the
modification and amendment of the Indenture or the waiver of past defaults
or covenants, except as otherwise specified,
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(8) modify any of the provisions of the Indenture relating to the
subordination of the Notes or the Subsidiary Guarantees in a manner adverse
to the Holders, or
(9) following the mailing of any Offer to Purchase, modify any Offer
to Purchase for the Notes required under the "Limitation on Asset
Dispositions" and the "Change of Control" covenants contained in the
Indenture in a manner materially adverse to the Holders thereof.
The Holders of a majority in aggregate principal amount of the Outstanding
Notes, on behalf of all Holders of Notes, may waive compliance by the Company
with certain restrictive provisions of the Indenture. Subject to certain rights
of the Trustee, as provided in the Indenture, the Holders of a majority in
aggregate principal amount of the Outstanding Notes, on behalf of all Holders of
Notes, may waive any past default under the Indenture, except a default in the
payment of principal, premium or interest or a default arising from failure to
purchase any Note tendered pursuant to an Offer to Purchase.
FORM AND BOOK-ENTRY PROCEDURES
The Notes initially will be represented by a Global Security represented by
one or more Notes in registered, global form. The Global Security will be
deposited on issuance with the Trustee as custodian for The Depository Trust
Company (the "Depositary"), in New York, New York, and registered in the name of
the Depositary or its nominee, in each case for credit to an account of a direct
or indirect participant in the Depositary as described below.
The Depositary has advised the Company that it is a limited-purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934. The Depositary
was created to hold securities for its participants and to facilitate the
clearance and settlement of securities transactions among its participants in
such securities through electronic book-entry changes in accounts of the
participants, thereby eliminating the need for physical movement of securities
certificates. The Depositary's participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations, some of which (and/or their representatives) own the Depositary.
Access to the Depositary's book-entry system is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
Persons who are not participants may beneficially own securities held by the
Depositary only through participants.
The Depositary has advised the Company that its current practice, upon
receipt of any payment in respect of securities such as the Notes, is to credit
the accounts of the relevant participants with the payment on the payment date,
in amounts proportionate to their respective holdings in principal amount of
beneficial interests in the relevant security as shown on the records of the
Depositary. Payments by the participants and indirect participants to the
beneficial owners of the Notes will be governed by standing instructions and
customary practices and will be the responsibility of the participants or the
indirect participants and will not be the responsibility of the Depositary, the
Trustee, the Company or the Subsidiary Guarantors. Neither the Company, the
Subsidiary Guarantors nor the Trustee will be liable for any delay by the
Depositary or any of its participants in identifying the beneficial owners of
the Notes, and the Company, the Subsidiary Guarantors and the Trustee may
conclusively rely on and will be protected in relying on instructions from the
Depositary or its nominee for all purposes.
The Depositary has advised the Company that it will take any action
permitted to be taken by a holder of Notes only at the direction of one or more
participants to whose account with the Depositary interests in the Global
Security are credited and only in respect to such portion of the principal
amount of the Notes as to which such participant or participants has or have
given such
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direction. However, if there is an Event of Default under the Indenture, the
Depositary reserves the right to exchange the Global Security for legended Notes
in certificated form and to distribute such Notes to its participants.
The Global Security is exchangeable for Notes in registered certificated
form if:
(1) the Depositary notifies the Company that it is unwilling or unable
to continue as Depositary for the Global Security and the Company thereupon
fails to appoint a successor Depositary within 90 days,
(2) the Depositary has ceased to be clearing agency registered under
the Securities Exchange Act of 1934 or
(3) the Company in its sole discretion elects to cause the issuance of
the Notes in certificated form.
The information in this section concerning the Depositary and its
book-entry systems has been obtained from sources that we believe to be
reliable, but we take no responsibility for the accuracy thereof.
Although the Depositary has agreed to the foregoing procedures to
facilitate transfers of interests in the Global Security among participants in
the Depositary, it is under no obligation to perform or to continue to perform
such procedures, and such procedures may be discontinued at any time. Neither
the Company, the Subsidiary Guarantors nor the Trustee will have any
responsibility for the performance by the Depositary, or its participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing; provided that direct or
indirect beneficial ownership of 10% or more of the Voting Stock of a Person
shall be deemed to control.
"Asset Disposition" by any Person means any transfer, conveyance, sale,
lease or other disposition (but excluding the creation of any Lien) by such
Person or any of its Restricted Subsidiaries (including a consolidation or
merger or other sale of any such Restricted Subsidiary with, into or to another
Person in a transaction in which such Restricted Subsidiary ceases to be a
Restricted Subsidiary, but excluding a disposition by a Restricted Subsidiary of
such Person to such Person or a Wholly Owned Restricted Subsidiary of such
Person or by such Person to a Wholly Owned Restricted Subsidiary of such Person)
of:
(1) shares of Capital Stock (other than directors' qualifying shares)
or other ownership interests of a Restricted Subsidiary of such Person,
(2) substantially all of the assets of such Person or any of its
Restricted Subsidiaries representing a division or line of business or
(3) other assets or rights of such Person or any of its Restricted
Subsidiaries outside of the ordinary course of business, provided in each
case that the aggregate consideration for such transfer, conveyance, sale,
lease or other disposition is equal to $1 million or more.
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The term "Asset Disposition" shall not include:
(1) a Restricted Payment that is made in compliance with the
"Limitation on Restricted Payments" covenant,
(2) the designation of any Restricted Subsidiary as an Unrestricted
Subsidiary or the contribution to the capital of any Unrestricted
Subsidiary, in either case in compliance with the applicable provisions of
the Indenture or
(3) any transaction subject to and consummated in compliance with the
covenant described above under "Mergers, Consolidations and Certain Sales
of Assets."
"Average Life" means, as of any date of determination, with respect to any
Debt, the quotient obtained by dividing (1) the sum of the products of the
number of years from such date of determination to the dates of each successive
scheduled principal payments of such Debt by (2) the sum of all such principal
payments.
"Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Debt arrangements conveying
the right to use) real or personal property of such Person which is required to
be classified and accounted for as a capital lease or a liability on the face of
a balance sheet of such Person in accordance with generally accepted accounting
principles. The stated maturity of such obligation shall be the date of the last
payment of rent or any other amount due under such lease prior to the first date
upon which such lease may be terminated by the lessee without payment of a
penalty. The principal amount of such obligation shall be the capitalized amount
thereof that would appear on the face of a balance sheet of such Person in
accordance with generally accepted accounting principles.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock or
other equity participations, including partnership interests, whether general or
limited, of such Person.
"Cash Equivalents" means:
(1) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality thereof
having maturities of not more than six months from the date of acquisition,
(2) certificates of deposit and Eurodollar time deposits with
maturities of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any lender party to the Senior Credit Facility
or with any domestic commercial bank having capital and surplus in excess
of $500 million and a Thompson Bank Watch Rating of "B" or better,
(3) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (1) and (2) above
entered into with any financial institution meeting the qualifications
specified in clause (2) above,
(4) commercial paper having a rating of at least P-1 from Moody's
Investors Service, Inc. (or its successors) and a rating of at least A-1
from Standard & Poor's Ratings Group (or its successors),
(5) deposits available for withdrawal on demand with any commercial
bank not meeting the qualifications specified in clause (2) above, provided
all such deposits do not exceed $5 million in the aggregate at any one time
and
(6) investments in money market or other mutual funds substantially
all of whose assets comprise securities of the types described in clauses
(1) through (4) above.
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"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Consolidated Cash Flow Available for Fixed Charges" for any period means
the Consolidated Net Income for such period increased by the sum of:
(1) Consolidated Interest Expense for such period, plus
(2) Consolidated Income Tax Expense for such period, plus
(3) the consolidated depreciation and amortization expense included in
the income statement of the Company and its Restricted Subsidiaries for
such period, plus
(4) other non-cash expenses (excluding any such non-cash expense to
the extent that it represents an accrual of or reserve for cash expenses in
any future period or amortization of a prepaid cash expense that was paid
in a prior period) included in the income statement of the Company and its
Restricted Subsidiaries for such period; minus
(5) non-cash items increasing Consolidated Net Income for such period,
other than items that were accrued in the ordinary course of business, in
each case, on a consolidated basis and determined in accordance with
generally accepted accounting principles;
provided, however, that there shall be excluded therefrom the Consolidated Cash
Flow Available for Fixed Charges (if positive) of any Restricted Subsidiary that
is not a Subsidiary Guarantor (calculated separately for such Restricted
Subsidiary in the same manner as provided above for the Company) that is subject
to a restriction which prevents the payment of dividends or the making of
distributions to the Company or another Restricted Subsidiary to the extent of
such restriction.
"Consolidated Cash Flow Coverage Ratio" as of any date of determination
means the ratio of:
(1) Consolidated Cash Flow Available for Fixed Charges for the period
of the most recently completed four consecutive fiscal quarters for which
quarterly or annual financial statements are available to
(2) Consolidated Fixed Charges for such period;
provided, however, that Consolidated Fixed Charges shall be adjusted to give
effect on a pro forma basis to any Debt that has been Incurred by the Company or
any Restricted Subsidiary since the end of such period that remains outstanding
and to any Debt that is proposed to be Incurred by the Company or any Restricted
Subsidiary as if in each case such Debt had been Incurred on the first day of
such period and as if any Debt that is or will no longer be outstanding as the
result of the Incurrence of any such Debt had not been outstanding as of the
first day of such period; provided, however, that in making such computation,
the Consolidated Interest Expense attributable to interest on any proposed Debt
bearing a floating interest rate shall be computed on a pro forma basis as if
the rate in effect on the date of computation had been the applicable rate for
the entire period; and provided further that, in the event the Company or any of
its Restricted Subsidiaries has made Asset Dispositions or acquisitions of
assets not in the ordinary course of business (including acquisitions of other
Persons by merger, consolidation or purchase of Capital Stock) during or after
such period, such computation shall be made on a pro forma basis as if the Asset
Dispositions or acquisitions had taken place on the first day of such period.
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"Consolidated Fixed Charges" for any period means the sum of:
(1) Consolidated Interest Expense and
(2) the consolidated amount of interest capitalized by the Company and
its Restricted Subsidiaries during such period calculated in accordance
with generally accepted accounting principles.
"Consolidated Income Tax Expense" for any period means the consolidated
provision for income taxes of the Company and its Restricted Subsidiaries for
such period calculated on a consolidated basis in accordance with generally
accepted accounting principles.
"Consolidated Interest Expense" means for any period the consolidated
interest expense, other than floor plan interest expense, included in a
consolidated income statement (without deduction of interest income) of the
Company and its Restricted Subsidiaries for such period calculated on a
consolidated basis in accordance with generally accepted accounting principles,
including without limitation or duplication (or, to the extent not so included,
with the addition of):
(1) the amortization of Debt discounts;
(2) any payments or fees with respect to letters of credit, bankers'
acceptances or similar facilities;
(3) net fees with respect to interest rate swap or similar agreements
or foreign currency hedge, exchange or similar agreements;
(4) Preferred Stock dividends of the Company and its Restricted
Subsidiaries (other than with respect to Redeemable Stock) declared and
paid or payable;
(5) accrued Redeemable Stock dividends of the Company and its
Restricted Subsidiaries, whether or not declared or paid;
(6) interest on Debt guaranteed by the Company and its Restricted
Subsidiaries; and
(7) the portion of any rental obligation allocable to interest
expense.
"Consolidated Net Income" for any period means the consolidated net income
(or loss) of the Company and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with generally accepted
accounting principles; provided that there shall be excluded therefrom:
(1) the net income (or loss) of any Person acquired by the Company or
a Restricted Subsidiary in a pooling-of-interests transaction for any
period prior to the date of such transaction,
(2) the net income (or loss) of any Person that is not a Restricted
Subsidiary except to the extent of the amount of dividends or other
distributions actually paid to the Company or a Restricted Subsidiary by
such Person during such period,
(3) gains or losses on Asset Dispositions by the Company or its
Subsidiaries,
(4) all extraordinary gains and extraordinary losses,
(5) the cumulative effect of changes in accounting principles,
(6) non-cash gains or losses resulting from fluctuations in currency
exchange rates and
(7) the tax effect of any of the items described in clauses (1)
through (6) above;
provided, further, that for purposes of any determination pursuant to the
provisions of the "Limitation on Restricted Payments" covenant, there shall
further be excluded therefrom the net income (but not net loss) of any
Restricted Subsidiary that is not a Subsidiary Guarantor that is
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subject to a restriction which prevents the payment of dividends or the making
of distributions to the Company or another Restricted Subsidiary to the extent
of such restriction.
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
generally accepted accounting principles, less amounts attributable to
Redeemable Stock of such Person; provided that, with respect to the Company,
adjustments following the date of the Indenture to the accounting books and
records of the Company in accordance with Accounting Principles Board Opinions
Nos. 16 and 17 (or successor opinions thereto) or otherwise resulting from the
acquisition of control of the Company by another Person shall not be given
effect to.
"Consolidated Net Tangible Assets" of any Person means the total amount of
assets (less applicable reserves and other properly deductible items) which
under generally accepted accounting principles would be included on a
consolidated balance sheet of such Person and its Restricted Subsidiaries after
deducting therefrom:
(1) all goodwill, trade names, trademarks, patents, patent
applications, licenses, non-compete agreements, unamortized debt discount
and expense and other like intangibles, which in each case under generally
accepted accounting principles would be included on such consolidated
balance sheet and
(2) appropriate deductions for any minority interests.
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person and whether or not
contingent:
(1) every obligation of such Person for money borrowed;
(2) every obligation of such Person evidenced by bonds, debentures,
notes or other similar instruments, including obligations Incurred in
connection with the acquisition of property, assets or businesses;
(3) every reimbursement obligation of such Person with respect to
letters of credit, bankers' acceptances or similar facilities issued for
the account of such Person;
(4) every obligation of such Person issued or assumed as the deferred
purchase price of property or services (including securities repurchase
agreements but excluding trade accounts payable or accrued liabilities
arising in the ordinary course of business);
(5) every Capital Lease Obligation of such Person;
(6) all Receivables Sales of such Person which are sold with recourse
to such Person;
(7) all Redeemable Stock issued by such Person;
(8) if such Person is a Restricted Subsidiary, all Preferred Stock
issued by such Person;
(9) every net obligation under Interest Rate, Currency or Commodity
Price Agreements of such Person; and
(10) every obligation of the type referred to in clauses (1) through
(9) of another Person and all dividends of another Person the payment of
which, in either case, (a) such Person has Guaranteed or is responsible or
liable, directly or indirectly, as obligor, Guarantor or otherwise or (b)
is secured by (or for which the holder of such obligation has an existing
right, contingent or otherwise, to be secured by) any Lien upon or with
respect to property (including, without limitation, accounts and contract
rights) owned by such Person, even though such Person has not assumed or
become liable for the payment of such Debt or dividends.
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Notwithstanding the foregoing, Debt shall not include any obligation arising
from any agreement entered into in connection with the acquisition of any
business or assets with any seller of such business or assets that (1) provides
for the payment of earn-outs to such seller or (2) guarantees to such seller a
minimum price to be realized by such seller upon the sale of any Common Stock of
the Company that was issued by the Company to such seller in connection with
such acquisition.
The "amount" or "principal amount" of Debt at any time of determination as
used herein represented by (a) any contingent Debt, shall be the maximum
principal amount thereof, (b) any Debt issued at a price that is less than the
principal amount at maturity thereof, shall be the amount of the liability in
respect thereof determined in accordance with generally accepted accounting
principles, (c) any Receivables Sale, shall be the amount for which there is
recourse to the Seller, (d) any Redeemable Stock, shall be the maximum fixed
redemption or repurchase price in respect thereof, and (e) any Preferred Stock,
shall be the maximum voluntary or involuntary liquidation preference plus
accrued and unpaid dividends in respect thereof, in each case as of such time of
determination.
"Designated Senior Debt" of the Company means:
(1) Debt of the Company under the Senior Credit Facility and
(2) any Senior Debt of the Company
(a) which at the time of determination exceeds $25 million in
aggregate principal amount outstanding or available under a committed
facility,
(b) which is specifically designated in the instrument evidencing
such Senior Debt as "Designated Senior Debt" by the Company and
(c) as to which the Trustee has received an Officers' Certificate
of the Company specifying such Senior Debt as "Designated Senior Debt".
"Equity Offering" means an offering of Common Stock that results in
aggregate cash net proceeds to the Company of at least $25 million.
"Floor Plan Debt" means Debt in an aggregate principal amount at any time
not to exceed the value of the Inventory of the Company and its Restricted
Subsidiaries, which Debt is secured primarily by a Lien on Inventory of the
Company and/or its Restricted Subsidiaries.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person guaranteeing, or having the economic effect of guaranteeing, any
Debt of any other Person (the "primary obligor") in any manner, whether directly
or indirectly, and including, without limitation, any obligation of such Person,
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Debt or to purchase (or to advance or supply funds for the
purchase of) any security for the payment of such Debt,
(2) to purchase property, securities or services for the purpose of
assuring the holder of such Debt of the payment of such Debt, or
(3) to maintain working capital, equity capital or other financial
statement condition or liquidity of the primary obligor so as to enable the
primary obligor to pay such Debt (and "Guaranteed", "Guaranteeing" and
"Guarantor" shall have meanings correlative to the foregoing);
provided, however, that the Guarantee by any Person shall not include
endorsements by such Person for collection or deposit, in either case, in the
ordinary course of business.
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"Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Debt or other obligation
including by acquisition of Subsidiaries or the recording, as required pursuant
to generally accepted accounting principles or otherwise, of any such Debt or
other obligation on the balance sheet of such Person (and "Incurrence",
"Incurred", "Incurrable" and "Incurring" shall have meanings correlative to the
foregoing); provided, however, that a change in generally accepted accounting
principles that results in an obligation of such Person that exists at such time
becoming Debt shall not be deemed an Incurrence of such Debt.
"Interest Rate, Currency or Commodity Price Agreement" of any Person means
any forward contract, futures contract, swap, option or other financial
agreement or arrangement (including, without limitation, caps, floors, collars
and similar agreements) relating to, or the value of which is dependent upon,
interest rates, currency exchange rates or commodity prices or indices
(excluding contracts for the purchase or sale of goods in the ordinary course of
business).
"Inventory" of any Person means the automobile and automobile parts and
supplies inventories of such Person that are held for sale or lease, or are to
be used or consumed by such Person, in the ordinary course of business. The
value of each particular item of inventory shall be the historical purchase
price thereof.
"Investment" by any Person means any direct or indirect loan, advance or
other extension of credit or capital contribution (by means of transfers of cash
or other property (other than Capital Stock that is neither Redeemable Stock nor
Preferred Stock of a Restricted Subsidiary) to others or payments for property
or services for the account or use of others, or otherwise) to, or purchase or
acquisition of Capital Stock, bonds, notes, debentures or other securities or
evidence of Debt issued by, any other Person, including any payment on a
Guarantee of any obligation of such other Person, but shall not include
(1) trade accounts receivable in the ordinary course of business on
credit terms made generally available to the customers of such Person,
(2) any Permitted Interest Rate, Currency or Commodity Price Agreement
and
(3) endorsements of negotiable instruments and documents in the
ordinary course of business.
"Lien" means, with respect to any property or assets, any mortgage or deed
of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement (other than any easement not materially
impairing usefulness or marketability), encumbrance, preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever on or with respect to such property or assets (including, without
limitation, any conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing).
"Liquid Securities" means securities
(1) of an issuer that is not an Affiliate of the Company and
(2) that are publicly traded on the New York Stock Exchange, the
American Stock Exchange or the Nasdaq National Market.
"Net Available Proceeds" from any Asset Disposition by any Person means
cash or Cash Equivalents received (including by way of sale or discounting of a
note, installment receivable or other receivable, but excluding any other
consideration received in the form of assumption by the
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acquiree of Debt or other obligations relating to such properties or assets)
therefrom by such Person, net of:
(1) all legal, title and recording tax expenses, commissions and other
fees and expenses Incurred and all federal, state, foreign and local taxes
required to be accrued as a liability as a consequence of such Asset
Disposition;
(2) all payments made by such Person or its Restricted Subsidiaries on
any Debt which is secured by such assets in accordance with the terms of
any Lien upon or with respect to such assets or which must by the terms of
such Lien, or in order to obtain a necessary consent to such Asset
Disposition or by applicable law, be repaid out of the proceeds from such
Asset Disposition;
(3) all distributions and other payments made to minority interest
holders in Restricted Subsidiaries of such Person or joint ventures as a
result of such Asset Disposition; and
(4) appropriate amounts to be provided by such Person or any
Restricted Subsidiary thereof, as the case may be, as a reserve in
accordance with generally accepted accounting principles against any
liabilities associated with such assets and retained by such Person or any
Restricted Subsidiary thereof, as the case may be, after such Asset
Disposition, including, without limitation, liabilities under any
indemnification obligations and severance and other employee termination
costs associated with such Asset Disposition, in each case as determined by
the Board of Directors, in its reasonable good faith judgment evidenced by
a resolution of the Board of Directors filed with the Trustee; provided,
however, that any reduction in such reserve within twelve months following
the consummation of such Asset Disposition will be treated for all purposes
of the Indenture and the Notes as a new Asset Disposition at the time of
such reduction with Net Available Proceeds equal to the amount of such
reduction.
"Offer to Purchase" means a written offer (the "Offer") sent by the Company
by first class mail, postage prepaid, to each Holder at his address appearing in
the Note Register on the date of the Offer offering to purchase up to the
principal amount of Notes specified in such Offer at the purchase price
specified in such Offer (as determined pursuant to the Indenture). Unless
otherwise required by applicable law, the Offer shall specify an expiration date
(the "Offer Expiration Date") of the Offer to Purchase which shall be, subject
to any contrary requirements of applicable law, not less than 30 days or more
than 60 days after the date of such Offer and a settlement date (the "Purchase
Date") for purchase of Notes within five Business Days after the Offer
Expiration Date. The Company shall notify the Trustee at least 15 Business Days
(or such shorter period as is acceptable to the Trustee) prior to the mailing of
the Offer of the Company's obligation to make an Offer to Purchase, and the
Offer shall be mailed by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company. The Offer shall contain a
description of the events requiring the Company to make the Offer to Purchase
and all instructions and materials necessary to enable such Holders to tender
Notes pursuant to the Offer to Purchase. The Offer shall also state:
(1) the Section of the Indenture pursuant to which the Offer to
Purchase is being made;
(2) the Offer Expiration Date and the Purchase Date;
(3) the aggregate principal amount of the Outstanding Notes offered to
be purchased by the Company pursuant to the Offer to Purchase (including,
if less than 100%, the manner by which such has been determined pursuant to
the section of the Indenture requiring the Offer to Purchase) (the
"Purchase Amount");
(4) the purchase price to be paid by the Company for each $1,000
aggregate principal amount of Notes accepted for payment (as specified
pursuant to the Indenture) (the "Purchase Price");
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(5) that the Holder may tender all or any portion of the Notes
registered in the name of such Holder and that any portion of a Note
tendered must be tendered in an integral multiple of $1,000 principal
amount;
(6) the place or places where Notes are to be surrendered for tender
pursuant to the Offer to Purchase;
(7) that interest on any Note not tendered or tendered but not
purchased by the Company pursuant to the Offer to Purchase will continue to
accrue;
(8) that on the Purchase Date the Purchase Price will become due and
payable upon each Note being accepted for payment pursuant to the Offer to
Purchase and that interest thereon shall cease to accrue on and after the
Purchase Date;
(9) that each Holder electing to tender a Note pursuant to the Offer
to Purchase will be required to surrender such Note at the place or places
specified in the Offer prior to the close of business on the Expiration
Date (such Note being, if the Company or the Trustee so requires, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Trustee duly executed by, the Holder
thereof or his attorney duly authorized in writing);
(10) that Holders will be entitled to withdraw all or any portion of
Notes tendered if the Company (or their Paying Agent) receives, not later
than the close of business on the Expiration Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the Holder, the
principal amount of the Note the Holder tendered, the certificate number of
the Note the Holder tendered and a statement that such Holder is
withdrawing all or a portion of his tender;
(11) that (a) if Notes in an aggregate principal amount less than or
equal to the Purchase Amount are duly tendered and not withdrawn pursuant
to the Offer to Purchase, the Company shall purchase all such Notes and (b)
if Notes in an aggregate principal amount in excess of the Purchase Amount
are tendered and not withdrawn pursuant to the Offer to Purchase, the
Company shall purchase Notes having an aggregate principal amount equal to
the Purchase Amount on a pro rata basis (with such adjustments as may be
deemed appropriate so that only Notes in denominations of $1,000 or
integral multiples thereof shall be purchased); and
(12) that in the case of any Holder whose Note is purchased only in
part, the Company shall execute, and the Trustee shall authenticate and
deliver to the Holder of such Note without service charge, a new Note or
Notes, of any authorized denomination as requested by such Holder, in an
aggregate principal amount equal to and in exchange for the unpurchased
portion of the Note so tendered.
If any of the Notes subject to an Offer to Purchase is in global form, than the
Offer shall be modified by the Company to the extent necessary to comply with
the procedures of the Depositary applicable to repurchases. Any Offer to
Purchase shall be governed by and effected in accordance with the Offer for such
Offer to Purchase.
"Permitted Holder" means:.
(1) each of B.B. Hollingsworth, Jr., John Turner and Scott Thompson;
(2) the members of the immediate family of any of the persons referred
to in clause (1) above;
(3) any trust created for the benefit of the persons described in
clause (1) or (2) above or any of their estates; or
S-87
<PAGE> 89
(4) any other Person that is wholly owned by any one or more of the
Persons described in clause (1), (2) or (3) above.
"Permitted Interest Rate, Currency or Commodity Price Agreement" of any
Person means any Interest Rate, Currency or Commodity Price Agreement entered
into with one or more financial institutions in the ordinary course of business
that is designed to protect such Person against fluctuations in interest rates
or currency exchange rates with respect to Debt Incurred or proposed to be
Incurred and which shall have a notional amount no greater than the payments due
with respect to the Debt being hedged thereby, or in the case of currency or
commodity protection agreements, against currency exchange rate or commodity
price fluctuations in the ordinary course of business relating to then existing
financial obligations or then existing or sold production and not for purposes
of speculation.
"Permitted Investments" means:
(1) any Investment in the Company or a Restricted Subsidiary or a
Person that will become or be merged into or consolidated with a Restricted
Subsidiary as a result of such Investment,
(2) any Investment in a Permitted Joint Venture which, together with
any other outstanding Investment made pursuant to this clause (2), does not
exceed the greater of $10 million or 2.5% of the Company's Consolidated Net
Tangible Assets at the time of such Investment and
(3) any non-cash consideration received in connection with an Asset
Disposition that was made in compliance with the "Limitation on Asset
Dispositions" covenant.
"Permitted Joint Venture" means any joint venture arrangement (which may be
structured as a corporation, partnership, trust, limited liability company or
any other Person):
(1) in which the Company and its Restricted Subsidiaries own an equity
interest of at least 25% of the equity interest of all joint venturers
thereof and
(2) which engages only in a business of the type conducted by the
Company and its Subsidiaries on the Closing Date or any business ancillary
thereto or supportive thereof.
"Preferred Stock" of any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class of such Person.
"Receivables" means receivables, chattel paper, instruments, documents or
intangibles evidencing or relating to the right to payment of money.
"Receivables Sale" of any Person means any sale of Receivables of such
Person (pursuant to a purchase facility or otherwise), other than in connection
with a disposition of the business operations of such Person relating thereto or
a disposition of defaulted Receivables for purpose of collection and not as a
financing arrangement.
"Redeemable Stock" of any Person means any Capital Stock of such Person
that by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or otherwise (including upon the occurrence of
an event) matures or is required to be redeemed (pursuant to any sinking fund
obligation or otherwise) or is convertible into or exchangeable for Debt or is
redeemable at the option of the holder thereof, in whole or in part, at any time
prior to the final Stated Maturity of the Notes.
S-88
<PAGE> 90
"Replacement Assets" means:
(1) properties and assets (other than cash or any Capital Stock or
other security) that will be used in the automotive retail business, the
business of the Company and its Restricted Subsidiaries as conducted on the
Closing Date or any business ancillary thereto or supportive thereof and
(2) Capital Stock of any Person that is engaged in the automotive
retail business, the business of the Company and its Restricted
Subsidiaries as conducted on the Closing Date or any business ancillary
thereto or supportive thereof and that will be merged or consolidated with
or into a Restricted Subsidiary or that will become a Restricted
Subsidiary.
"Restricted Subsidiary" means any Subsidiary of the Company, whether
existing on or after the Closing Date, unless such Subsidiary is an Unrestricted
Subsidiary.
"Sale and Leaseback Transaction" of any Person means an agreement with any
lender or investor or to which such lender or investor is a party providing for
the leasing by such Person of any property or asset of such Person which has
been or is being sold or transferred by such Person more than 270 days after the
acquisition thereof or the completion of construction or commencement of
operation thereof to such lender or investor or to any person to whom funds have
been or are to be advanced by such lender or investor on the security of such
property or asset. The stated maturity of such arrangement shall be the date of
the last payment of rent or any other amount due under such arrangement prior to
the first date on which such arrangement may be terminated by the lessee without
payment of a penalty.
"Senior Credit Facility" means the Second Amended and Restated Revolving
Credit Agreement dated as of November 10, 1998 among the Company, its
subsidiaries, Chase Bank of Texas, National Association, as administrative
agent, Comerica Bank, as floorplan agent, NationsBank, N.A. as documentation
agent, U.S. Bank National Association, Bank of America, National Trust & Savings
Association, Bank One, N.A. and BankBoston, N.A., as co-agents, and other
lending institutions party thereto and any renewal, extension, refinancing or
refunding thereof.
"Senior Debt" means, with respect to any Person:
(1) the principal of (and premium, if any) and interest (including
interest accruing on or after the filing of any petition in bankruptcy or
for reorganization relating to such Person whether or not such claim for
post-petition interest is allowed in such proceeding) on, and penalties and
any obligation of such Person for reimbursement, indemnities and fees
relating to, the Senior Credit Facility,
(2) the principal of (and premium, if any) and interest on Debt of
such Person for money borrowed, whether Incurred on or prior to the date of
original issuance of the Notes or thereafter, and any amendments, renewals,
extensions, modifications, refinancings and refundings of any such Debt and
(3) Permitted Interest Rate Agreements and Permitted Currency
Agreements entered into with respect to Debt described in clauses (1) and
(2) above.
Notwithstanding the foregoing, the following shall not constitute Senior
Debt:
(1) any Debt as to which the terms of the instrument creating or
evidencing the same provide that such Debt is on a parity with, or is not
superior in right of payment to, the Notes or, in the case of a Subsidiary
Guarantor, a Subsidiary Guarantee,
(2) any Debt which is subordinated in right of payment in any respect
to any other Debt of such Person, other than Debt under the Senior Credit
Facility that is subordinated to other
S-89
<PAGE> 91
Debt under the Senior Credit Facility solely by reason of priority being
granted under the Senior Credit Facility to "swingline", overdraft of
similar tranches of Debt.
(3) Debt evidenced by the Notes or a Subsidiary Guarantee,
(4) any Debt owed to a Person when such Person is a Subsidiary of such
Person
(5) any obligation of such Person with respect to any Capital Stock of
such Person,
(6) that portion of any Debt which is Incurred in violation of the
Indenture,
(7) Debt which, when Incurred and without respect to any election
under Section 1111(b) of Title 11, United States Code, is without recourse
to such Person,
(8) any liability for federal, state, local or other taxes owed or
owing by such Person,
(9) any Debt for the purchase of goods, materials or services, or
consisting of operating lease rental payments, in the ordinary course of
business or Debt consisting of trade payables or other current liabilities
(other than current liabilities for money borrowed and the current portion
of long-term Senior Debt),
(10) Debt of or amounts owed by such Person for compensation to
employees or for services rendered; and
(11) Debt issued as a dividend on, or in redemption of or exchange
for, Capital Stock of such Person.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that represents 10% or more of the Company's total assets
at the end of the most recent fiscal quarter for which financial information is
available or 10% or more of the Company's consolidated net revenues or
consolidated operating income for the most recent four quarters for which
financial information is available.
"Subordinated Debt" means Debt of the Company as to which the payment of
principal of (and premium, if any) and interest and other payment obligations in
respect of such Debt shall be subordinate to the prior payment in full of the
Notes to at least the following extent:
(1) no payments of principal of (or premium, if any) or interest on or
otherwise due in respect of such Debt may be permitted for so long as any
default in the payment of principal (or premium, if any) or interest on the
Notes exists;
(2) in the event that any other default that with the passing of time
or the giving of notice, or both, would constitute an event of default
exists with respect to the Notes, upon notice by 25% or more in principal
amount of the Notes to the Trustee, the Trustee shall have the right to
give notice to the Company and the holders of such Debt (or trustees or
agents therefor) of a payment blockage, and thereafter no payments of
principal of (or premium, if any) or interest on or otherwise due in
respect of such Debt may be made for a period of 179 days from the date of
such notice; and
(3) such Debt may not
(A) provide for payments of principal of such Debt at the stated
maturity thereof or by way of a sinking fund applicable thereto or by
way of any mandatory redemption, defeasance, retirement or repurchase
thereof by the Company (including any redemption, retirement or
repurchase which is contingent upon events or circumstances, but
excluding any retirement required by virtue of acceleration of such Debt
upon an event of default thereunder), in each case prior to the final
Stated Maturity of the Notes or
(B) permit redemption or other retirement (including pursuant to an
offer to purchase made by the Company) of such other Debt at the option
of the holder thereof
S-90
<PAGE> 92
prior to the final Stated Maturity of the Notes, other than a redemption
or other retirement at the option of the holder of such Debt (including
pursuant to an offer to purchase made by the Company) which is
conditioned upon a change of control of the Company pursuant to
provisions substantially similar to those described under "Change of
Control" (and which shall provide that such Debt will not be repurchased
pursuant to such provisions prior to the Company's repurchase of the
Notes required to be repurchased by the Company pursuant to the
provisions described under "Change of Control").
"Subsidiary" of any Person means:
(1) a corporation more than 50% of the combined voting power of the
outstanding Voting Stock of which is owned, directly or indirectly, by such
Person or by one or more other Subsidiaries of such Person or by such
Person and one or more Subsidiaries thereof or
(2) any other Person (other than a corporation) in which such Person,
or one or more other Subsidiaries of such Person or such Person and one or
more other Subsidiaries thereof, directly or indirectly, has at least a
majority ownership and power to direct the policies, management and affairs
thereof.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such Person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person or by such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
S-91
<PAGE> 93
VALIDITY OF THE NOTES
The validity of the Notes will be passed upon for Group 1 by Vinson &
Elkins L.L.P., 1001 Fannin, Houston, Texas 77002-6760 and for the underwriters
by Sullivan & Cromwell, 125 Broad Street, New York, New York 10004. John S.
Watson, the Secretary of Group 1, is a partner of Vinson & Elkins L.L.P.
EXPERTS
The audited financial statements of Group 1 included in this prospectus
supplement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
S-92
<PAGE> 94
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Group 1 Automotive, Inc. and Subsidiaries -- Consolidated
Financial Statements
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statements of Stockholders' Equity........... F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE> 95
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Group 1 Automotive, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Group 1
Automotive, Inc. and Subsidiaries (a Delaware corporation) (the Company) as of
December 31, 1996 and 1997 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1996 and 1997, and the results of its operations and cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 6, 1998
F-2
<PAGE> 96
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1997 1998
------- -------- -------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............................. $11,679 $ 35,092 $ 55,403
Accounts receivable, net............................... 5,899 9,749 22,233
Inventories............................................ 47,674 105,421 193,324
Deferred income taxes.................................. -- 8,692 14,627
Other assets........................................... 859 2,728 3,265
------- -------- --------
Total current assets........................... 66,111 161,682 288,852
------- -------- --------
PROPERTY AND EQUIPMENT, net.............................. 4,129 21,586 44,741
GOODWILL, net............................................ 1,457 27,078 112,884
OTHER ASSETS............................................. 1,177 2,803 3,559
------- -------- --------
Total assets................................... $72,874 $213,149 $450,036
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Floorplan notes payable................................ $42,544 $ 58,488 $160,316
Current maturities of long-term debt................... 34 2,316 1,487
Deferred income taxes.................................. 357 -- --
Accounts payable and accrued expenses.................. 13,849 45,403 73,417
------- -------- --------
Total current liabilities...................... 56,784 106,207 235,220
------- -------- --------
DEBT, net of current maturities.......................... 310 7,053 65,393
DEFERRED INCOME TAXES.................................... 58 3,699 4,282
OTHER LIABILITIES........................................ 3,512 6,818 14,321
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, 1,000,000 shares authorized, none
issued or outstanding............................... -- -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 3,570,302, 14,673,051 and 18,240,795
issued and outstanding.............................. 36 147 182
Additional paid-in capital............................. 6,270 91,846 118,509
Retained earnings (deficit)............................ 5,904 (2,529) 12,721
Treasury stock, at cost, 0, 10,000 and 40,000 shares... -- (92) (592)
------- -------- --------
Total stockholders' equity..................... 12,210 89,372 130,820
------- -------- --------
Total liabilities and stockholders' equity..... $72,874 $213,149 $450,036
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE> 97
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PRO FORMA NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED SEPTEMBER 30,
------------------------------ DECEMBER 31, ------------------------
1995 1996 1997 1997 1997 1998
-------- -------- -------- ------------ ----------- ----------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
New vehicle sales................ $151,227 $164,979 $228,044 $ 513,864 $131,521 $ 662,323
Used vehicle sales............... 79,448 88,477 135,507 288,010 82,028 363,096
Parts and service sales.......... 16,940 20,649 30,006 77,215 16,186 97,264
Other dealership revenues, net... 6,388 7,387 10,410 23,206 6,381 34,833
-------- -------- -------- ---------- -------- ----------
Total revenues........... 254,003 281,492 403,967 902,295 236,116 1,157,516
COST OF SALES:
New vehicle sales................ 140,086 152,709 212,349 471,664 123,027 609,918
Used vehicle sales............... 71,554 78,912 123,932 266,976 74,449 335,180
Parts and service sales.......... 8,267 10,277 13,085 36,524 6,828 45,081
-------- -------- -------- ---------- -------- ----------
Total cost of sales...... 219,907 241,898 349,366 775,164 204,304 990,179
-------- -------- -------- ---------- -------- ----------
GROSS PROFIT....................... 34,096 39,594 54,601 127,131 31,812 167,337
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES......................... 25,628 30,027 43,360 98,967 24,382 125,282
DEPRECIATION AND AMORTIZATION...... 538 741 1,020 2,752 541 4,375
-------- -------- -------- ---------- -------- ----------
Income from operations... 7,930 8,826 10,221 25,412 6,889 37,680
OTHER INCOME AND EXPENSES:
Floorplan interest expense....... (3,410) (3,112) (3,810) (5,194) (2,632) (8,994)
Other interest expense, net...... (61) (56) (176) (926) (21) (2,705)
Other income (expense), net...... (80) (69) 156 88 43 (8)
-------- -------- -------- ---------- -------- ----------
INCOME BEFORE INCOME TAXES......... 4,379 5,589 6,391 19,380 4,279 25,973
PROVISION FOR INCOME TAXES......... 744 382 573 7,967 256 10,723
-------- -------- -------- ---------- -------- ----------
NET INCOME......................... $ 3,635 $ 5,207 $ 5,818 $ 11,413 $ 4,023 $ 15,250
======== ======== ======== ========== ======== ==========
S Corporation pro forma income
taxes (unaudited)................ 990 1,831 1,465 1,434
-------- -------- -------- --------
Pro forma net income (unaudited)... $ 2,645 $ 3,376 $ 4,353 $ 2,589
======== ======== ======== ========
Earnings per share on pro forma net
Income:
Basic............................ $ 0.78 $ 0.90
Diluted.......................... $ 0.76 $ 0.87
Weighted average shares
outstanding:
Basic............................ 14,672,804 16,957,327
Diluted.......................... 15,098,594 17,538,446
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE> 98
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
-------------------- PAID-IN EARNINGS TREASURY
SHARES AMOUNTS CAPITAL (DEFICIT) STOCK TOTAL
---------- ------- ---------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1994.................... 3,353,461 $ 34 $ 3,047 $ 2,266 $ -- $ 5,347
Net income.............. -- -- -- 3,635 -- 3,635
Capital contribution.... -- -- 1,725 -- -- 1,725
Dividends............... -- -- -- (2,086) -- (2,086)
---------- ---- -------- -------- ------- --------
BALANCE, December 31,
1995.................... 3,353,461 34 4,772 3,815 -- 8,621
Net income.............. -- -- -- 5,207 -- 5,207
Issuance of common
stock................ 216,841 2 1,498 -- -- 1,500
Dividends............... -- -- -- (3,118) -- (3,118)
---------- ---- -------- -------- ------- --------
BALANCE, December 31,
1996.................... 3,570,302 36 6,270 5,904 -- 12,210
Acquisition of founding
companies............ 5,954,613 60 33,294 -- -- 33,354
Initial public offering,
net.................. 5,148,136 51 51,707 -- -- 51,758
Purchase of treasury
stock................ -- -- -- -- (92) (92)
Stock transfer by
shareholder, net of
tax.................. -- -- 575 -- -- 575
Net income.............. -- -- -- 5,818 -- 5,818
Dividends............... -- -- -- (14,251) -- (14,251)
---------- ---- -------- -------- ------- --------
BALANCE, December 31,
1997.................... 14,673,051 147 91,846 (2,529) (92) 89,372
Net income.............. -- -- -- 15,250 -- 15,250
Issuance of common stock
in acquisitions...... 3,516,805 35 26,770 -- -- 26,805
Proceeds from sales of
stock under employee
benefit plans........ 50,939 -- 1,130 -- -- 1,130
Issuance of treasury
stock to employee
benefit plans........ -- -- (1,237) -- 1,237 --
Purchase of treasury
stock................ -- -- -- -- (1,737) (1,737)
---------- ---- -------- -------- ------- --------
BALANCE, September 30,
1998 (unaudited)........ 18,240,795 $182 $118,509 $ 12,721 $ (592) $130,820
========== ==== ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE> 99
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- -------- -------- -------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 3,635 $ 5,207 $ 5,818 $ 4,023 $15,250
Adjustments to reconcile net income to net cash provided
by (used in) operating activities --
Depreciation and amortization........................... 538 741 1,020 541 4,375
Non-cash compensation, net of tax....................... -- -- 575 -- --
Deferred income taxes................................... 191 (316) (1,015) 45 (6,127)
Provision for doubtful accounts and uncollectible
notes................................................. 85 108 270 69 219
Loss (gain) on sale of assets........................... 15 18 (112) (18) (123)
Changes in assets and liabilities --
Accounts receivable................................... 198 295 1,564 485 (6,210)
Inventories........................................... (4,874) (6,107) 5,686 12,533 25,864
Other assets.......................................... 197 (514) 3,609 (773) (821)
Due from affiliates, net.............................. -- -- 491 -- --
Floorplan notes payable............................... 3,877 5,508 (5,374) (13,539) (34,819)
Accounts payable and accrued expenses................. 3,335 2,392 (5,610) (1,125) 12,208
------- ------- -------- -------- -------
Total adjustments.................................. 3,562 2,125 1,104 (1,782) (5,434)
------- ------- -------- -------- -------
Net cash provided by operating activities.......... 7,197 7,332 6,922 2,241 9,816
------- ------- -------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable.............................. (375) (235) (362) (98) (1,760)
Collections on notes receivable........................... -- 192 88 29 947
Purchases of property and equipment....................... (928) (1,977) (2,164) (886) (7,218)
Proceeds from sale of property and equipment.............. -- -- 1,935 279 152
Cash received in acquisitions, net of cash paid........... -- (2,595) 11,164 -- (68,122)
------- ------- -------- -------- -------
Net cash provided by (used in) investing
activities....................................... (1,303) (4,615) 10,661 (676) (76,001)
------- ------- -------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under floorplan facilities for acquisition
financing............................................... -- -- (33,523) -- 33,523
Principal payments of long-term debt...................... (172) (153) (471) (205) (2,632)
Borrowings of long-term debt.............................. 13 212 109 -- 56,214
Issuance of common stock.................................. -- 1,500 -- -- 1,128
Initial public offering, net.............................. -- -- 51,759 -- --
Purchase of treasury stock................................ -- -- (92) -- (1,737)
Contribution from stockholders............................ 1,725 -- -- -- --
Dividends paid in cash, prior to the initial public
offering................................................ (2,086) (3,117) (11,952) (4,451) --
------- ------- -------- -------- -------
Net cash provided by (used in) financing
activities....................................... (520) (1,558) 5,830 (4,656) 86,496
------- ------- -------- -------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 5,374 1,159 23,413 (3,091) 20,311
CASH AND CASH EQUIVALENTS, beginning of period.............. 5,146 10,520 11,679 11,679 35,092
------- ------- -------- -------- -------
CASH AND CASH EQUIVALENTS, end of period.................... $10,520 $11,679 $ 35,092 $ 8,588 $55,403
======= ======= ======== ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for --
Interest................................................ $ 3,428 $ 3,118 $ 4,200 $ 2,814 $10,702
Taxes................................................... 475 924 131 41 12,293
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE> 100
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Group 1 Automotive, Inc. and subsidiaries (Group 1 or the Company) was
founded in December 1995 to become a leading consolidator in the highly
fragmented automobile retailing industry. In October 1997, Group 1 acquired four
separate dealership groups (the Founding Groups), consisting of 30 dealership
franchises and related businesses, in exchange for consideration consisting of a
combination of cash and common stock. Concurrent with the acquisition of the
Founding Groups, Group 1 completed an initial public offering of 5,520,000
shares of common stock. The Company is primarily engaged in the retail sale of
new and used vehicles and the sale of related finance, insurance and service
contracts thereon. In addition, the Company sells automotive parts and provides
vehicle servicing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
For financial statement presentation purposes, Howard Group, one of the
Founding Groups, has been identified as the accounting acquiror. The acquisition
of the remaining Founding Groups was accounted for using the purchase method of
accounting. The operations of Group 1 Automotive, Inc., the parent company, and
the Founding Groups, excluding the Howard Group, are included in the results of
operations beginning October 31, 1997, the effective closing date of the
acquisitions for accounting purposes. The results of operations of the Howard
Group are included for the full year for all periods presented. The allocation
of purchase price to the assets acquired and liabilities assumed has been
initially assigned and recorded based on preliminary estimates of fair value and
may be revised as additional information concerning the valuation of such assets
and liabilities becomes available. All significant intercompany balances and
transactions have been eliminated in consolidation.
Interim Financial Information
The interim financial statements as of September 30, 1998, and for the nine
months ended September 30, 1997 and 1998, are unaudited, and certain information
normally included in financial statements prepared in accordance with generally
accepted accounting principles has not been included herein. In the opinion of
management, all adjustments necessary to fairly present the financial position,
results of operations and cash flows with respect to the interim financial
statements, have been properly included. Due to seasonality and other factors,
the results of operations for the interim periods are not necessarily indicative
of the results that will be realized for the entire fiscal year.
Revenue Recognition
Revenue from vehicle sales, parts sales and vehicle service is recognized
upon delivery to the customer.
Finance, Insurance and Service Contract Income Recognition
The Company arranges financing for customers through various institutions
and receives financing fees equal to the difference between the loan rates
charged to customers over the predetermined financing rates set by the financing
institution. In addition, the Company receives commissions from the sale of
credit life and disability insurance and extended service contracts to
customers.
F-7
<PAGE> 101
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company may be charged back (chargebacks) for unearned financing fees,
insurance or service contract commissions in the event of early termination of
the contracts by customers. The revenues from financing fees and commissions are
recorded at the time of the sale of the vehicles and a reserve for future
chargebacks is established based on historical operating results and the
termination provisions of the applicable contracts. Finance, insurance and
service contract income, net of estimated chargebacks, are included in other
dealership revenue in the accompanying combined financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments that have an
original maturity of three months or less at the date of purchase and contracts
in transit. Contracts in transit represent contracts on vehicles sold, for which
the proceeds are in transit from financing institutions.
Inventories
New, used and demonstrator vehicles are stated at the lower of cost or
market, determined on a specific-unit basis. Parts and accessories are stated at
the lower of cost (determined on a first-in, first-out basis) or market.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated useful life of the asset.
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to operations
as incurred. Disposals are removed at cost less accumulated depreciation, and
any resulting gain or loss is reflected in current operations.
Goodwill
Goodwill represents the excess of the purchase price of dealerships
acquired over the fair value of tangible assets acquired at the date of
acquisition. Goodwill is amortized on a straight-line basis over 40 years.
Amortization expense charged to operations totaled approximately $27,000,
$37,000 and $170,000 for the years ended December 31, 1995, 1996 and 1997,
respectively. Accumulated amortization totaled approximately $129,000 and
$299,000 as of December 31, 1996 and 1997, respectively.
Income Taxes
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets are realized or liabilities are settled. A valuation allowance
reduces deferred tax assets when it is more likely than not that some or all of
the deferred tax assets will not be realized.
Prior to acquisition of the Founding Groups, certain entities of the Howard
Group elected S Corporation status, as defined by the Internal Revenue Code,
whereby the companies were not
F-8
<PAGE> 102
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
subject to taxation for federal purposes. Under S Corporation status, the
stockholders report their share of these companies' taxable earnings or losses
in their personal tax returns. All S Corporation elections were terminated in
conjunction with the acquisitions.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of floorplan notes
payable and long-term debt. The carrying amount of these financial instruments
approximates fair value due either to length of maturity or existence of
variable interest rates that approximate market rates.
In January 1998, the Company entered into a three-year interest rate swap
agreement with a bank. The effect of this swap will be to convert the interest
rate on $75 million of debt to a fixed rate of approximately 7.16%.
Advertising
The Company expenses production and other costs of advertising as incurred.
Advertising expense for the years ended December 31, 1995, 1996 and 1997 totaled
$3.4, $3.2 and $5.9 million, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in determining the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The significant estimates made by management in the
accompanying financial statements relate to reserves for used vehicle
valuations, retail loan guarantees and future chargebacks on finance, insurance
and service contract income. Actual results could differ from those estimates.
Statements of Cash Flows
For purposes of the statements of cash flows, cash and cash equivalents
include contracts in transit which are typically collected within one month.
Additionally, the net change in floorplan financing of inventory, which is a
customary financing technique in the industry, is reflected as an operating
activity in the statements of cash flows.
Earnings Per Share
SFAS No. 128 requires the presentation of basic earnings per share and
diluted earnings per share in financial statements of public enterprises rather
than primary and fully diluted earnings per share as previously required. Under
the provisions of this statement, basic earnings per share is computed based on
weighted average shares outstanding and excludes dilutive securities. Diluted
earnings per share is computed including the impacts of all potentially dilutive
securities. As the Company was not a public enterprise until October 1997, and
the companies included in the statements of operations were under different tax
structures (S Corporations and C Corporations), no earnings per share data has
been presented for the historical results of
F-9
<PAGE> 103
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operations for the years ended December 31, 1995, 1996 and 1997. The following
table sets forth the shares outstanding for the earnings per share calculations:
<TABLE>
<CAPTION>
PRO FORMA NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Common stock outstanding, beginning of period............ 14,673,051 14,673,051
Weighted average common stock issued in acquisitions... -- 2,280,121
Weighted average common stock issued to Employee Stock
Purchase Plan....................................... -- 58,259
Weighted average common stock issued in stock option
exercises........................................... -- 4,731
Less: Weighted average treasury shares repurchased..... (247) (58,835)
---------- ----------
Shares used in computing basic earnings per share........ 14,672,804 16,957,327
Dilutive effect of stock options, net of assumed
repurchase of treasury stock........................ 425,790 581,119
---------- ----------
Shares used in computing diluted earnings per share...... 15,098,594 17,538,446
========== ==========
</TABLE>
Recent Accounting Pronouncements
During June 1997, Statement of Financial Accounting Standards ("SFAS") No.
131, "Disclosures About Segments of an Enterprise and Related Information" was
issued. SFAS No. 131 requires that segment reporting for public reporting
purposes be conformed to the segment reporting used by management for internal
purposes. Additionally, it adds a requirement for the presentation of certain
segment data on a quarterly basis starting in 1999. Management is currently
evaluating the impact of this standard on the Company's future financial
reporting.
Reclassifications
Certain reclassifications have been made to prior year financial statements
to conform them with the current year presentation.
3. BUSINESS COMBINATIONS:
The accompanying consolidated balance sheet includes preliminary
allocations of the purchase price of the Founding Groups which are subject to
final adjustment.
Founding Groups
The following pro forma financial information consists of income statement
data from continuing operations as presented in the consolidated financial
statements plus (1) the acquisition of the Founding Groups assuming the
acquisitions occurred on January 1, 1996 and
F-10
<PAGE> 104
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997, respectively, (2) the completion of the IPO as of the beginning of the
respective periods and (3) certain pro forma adjustments discussed below.
<TABLE>
<CAPTION>
1996 1997
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $821,913 $902,295
Gross profit................................................ 116,130 127,131
Income from operations...................................... 21,822 25,412
Net income.................................................. 9,447 11,413
Basic earnings per share.................................... 0.64 0.78
Diluted earnings per share.................................. $ 0.63 $ 0.76
</TABLE>
Acquisitions (unaudited):
During the first nine months of 1998, the Company acquired thirty-three
automobile dealership franchises. These acquisitions were accounted for as
purchases. The consideration paid in completing these acquisitions, including
real estate acquired, included approximately $68.1 million in cash, net of cash
received, approximately 3.5 million shares of restricted Common Stock and the
assumption of an estimated $103.1 million of inventory financing and $2.9
million of mortgage financing. Additional consideration may be paid based on the
financial performance of certain dealerships, over specified periods. Additional
consideration, if any, will be payable in cash and Common Stock and will result
in an increase in goodwill on the balance sheet of the Company. The accompanying
consolidated balance sheet includes preliminary allocations of the purchase
price of the acquisitions, which are subject to final adjustment. The
preliminary allocations resulted in recording approximately $87.3 million of
goodwill, which is being amortized over 40 years.
The following unaudited pro forma financial information consists of income
statement data from continuing operations as presented in the consolidated
financial statements plus (1) unaudited income statement data for all
acquisitions, completed before September 30, 1998, assuming that they occurred
on January 1, 1997, (2) the completion of the initial public offering as of
January 1, 1997 and (3) certain pro forma adjustments discussed below.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Revenues.................................................. $1,381,152 $1,204,339
Gross profit.............................................. 202,405 176,580
Income from operations.................................... 46,233 39,651
Net income................................................ 17,079 14,300
Basic earnings per share.................................. 0.94 0.79
Diluted earnings per share................................ 0.91 0.77
</TABLE>
Pro forma adjustments included in the amounts above primarily relate to:
(a) increases in revenues and decreases in cost of sales related to commission
arrangements on certain third-party products sold by the dealerships which
previously directly benefited the stockholders and which were terminated in
conjunction with the acquisitions, allowing the dealerships to realize the
benefits thereafter; (b) pro forma goodwill amortization expense over an
estimated useful life of 40 years; (c) reductions in compensation expense and
management fees to the level that certain
F-11
<PAGE> 105
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
management employees and owners of the acquired companies will contractually
receive; (d) incremental corporate overhead costs related to personnel costs,
rents, professional service fees and directors and officers liability insurance
premiums; (e) net increases in interest expense resulting from net cash
borrowings utilized to complete acquisitions; and (f) incremental provisions for
federal and state income taxes relating to the compensation differential, S
Corporation income and other pro forma adjustments.
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
--------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Amounts due from Manufacturers.............................. $3,575 $ 3,889
Due from finance companies.................................. 1,002 3,217
Parts and service receivables............................... 652 2,273
Other....................................................... 778 890
------ -------
Total accounts receivable......................... 6,007 10,269
Less -- Allowance for doubtful accounts..................... (108) (520)
------ -------
Accounts receivable, net.......................... $5,899 $ 9,749
====== =======
</TABLE>
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
--------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
New vehicles................................................ $36,973 $ 70,574
Used vehicles............................................... 8,613 25,690
Rental vehicles............................................. -- 2,495
Parts, accessories and other................................ 2,088 6,662
------- --------
Total inventories................................. $47,674 $105,421
======= ========
</TABLE>
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Account payable, trade...................................... $ 6,136 $18,511
Reserve for finance, insurance and service contract
chargebacks............................................... 2,891 5,265
Reserve for retail loan guarantees.......................... -- 2,010
Other accrued expenses...................................... 4,822 19,617
------- -------
Total accounts payable and accrued expenses....... $13,849 $45,403
======= =======
</TABLE>
F-12
<PAGE> 106
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES -----------------------
IN YEARS 1996 1997
------------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Land................................................ -- $ -- $ 7,665
Buildings........................................... 20 to 35 32 5,403
Leasehold improvements.............................. 7 to 15 1,086 3,808
Machinery and equipment............................. 3 to 7 2,461 2,995
Furniture and fixtures.............................. 5 to 7 1,387 4,590
Company vehicles.................................... 5 2,146 528
------- -------
Total..................................... 7,112 24,989
Less -- Accumulated depreciation.................... (2,983) (3,403)
------- -------
Property and equipment, net............... $ 4,129 $21,586
======= =======
</TABLE>
6. FLOORPLAN NOTES PAYABLE:
Floorplan notes payable reflect amounts payable for the purchase of
specific vehicle inventory and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
New vehicles................................................ $38,678 $42,918
Used vehicles............................................... 3,866 13,174
Rental vehicles............................................. -- 2,396
------- -------
Total floorplan notes payable..................... $42,544 $58,488
======= =======
</TABLE>
Floorplan notes payable are due to various floorplan lenders, bearing
interest at rates ranging from prime minus 100 basis points to prime plus 175
basis points. As of December 31, 1996 and 1997 the weighted average interest
rate on floorplan notes payable outstanding was 7.75% and 7.93%. Interest
expense on floorplan notes payable totaled approximately $3.4, $3.1 and $3.9
million for the years ended December 31, 1995, 1996 and 1997, respectively. The
floorplan arrangements permit the Company to borrow up to $150.4 million,
dependent upon new and used vehicle sales and inventory levels. As of December
31, 1997, total available borrowings under floorplan agreements were
approximately $91.9 million. Vehicle payments on the notes are due when the
related vehicles are sold. The notes are collateralized by substantially all of
the inventories of the Company.
F-13
<PAGE> 107
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Note payable to a bank with monthly principal payments of
$41,892, due through March 2004, bearing interest at 7.5%,
payable monthly........................................... $ -- $ 3,138
Note payable to a bank, with monthly principal payments of
$13,740 due through August 2006, bearing interest at prime
rate (8.50% at December 31, 1997)......................... -- 2,083
Mortgage loan to a bank, with monthly principal payments of
$15,000, due through May 2005, bearing interest at prime
plus 25 basis points (8.75% at December 31, 1997), payable
monthly................................................... -- 1,314
Revolving line of credit with a bank, due on demand, bearing
interest at prime plus 100 basis points (9.5% at December
31, 1997)................................................. -- 985
Note payable to a bank, with monthly principal and interest
payments of $5,831 due through February 2006, bearing
interest at 8.20%......................................... -- 568
Other notes payable, maturing in varying amounts through
August 2001 with interest ranging from 7.0% to 13.7%...... 344 1,281
---- -------
Total long-term debt.............................. 344 9,369
Less -- Current portion..................................... (34) (2,316)
---- -------
Long-term portion................................. $310 $ 7,053
==== =======
</TABLE>
The notes payable are secured by the land, buildings or other assets for
which the debt was incurred. On December 31, 1997, Group 1 entered into a $125
million, three-year revolving Credit Agreement with a bank group (the "Credit
Facility"). There were no amounts drawn on the Credit Facility as of December
31, 1997. The Credit Facility provides for a floorplan line of credit of $75
million for the financing of vehicle inventories and an acquisition line of
credit of $50 million, for the financing of acquisitions, general corporate
purposes or capital expenditures. The amount of funds available under the
acquisition line is dependent upon a calculation based on the Company's cash
flow and maintaining certain financial ratios. At Group 1's option the
acquisition line of credit of the Credit Facility may bear interest based on the
London Interbank Offered Rate plus a margin varying from 150 to 275 basis
points, dependent upon certain financial ratios. Additionally, the loan
agreement contains various covenants including financial ratios and other
requirements which must be maintained by the Company. The agreements also limit
the amount the Company may pay as cash dividends.
Total interest expense on long-term debt was approximately $56,000 and
$176,000 for the years ended December 31, 1996 and 1997, respectively.
F-14
<PAGE> 108
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of long-term debt as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
1998........................................................ $2,316
1999........................................................ 1,206
2000........................................................ 1,139
2001........................................................ 1,056
2002........................................................ 897
Thereafter.................................................. 2,755
------
Total long-term debt.............................. $9,369
======
</TABLE>
8. CAPITAL STOCK AND STOCK OPTIONS:
In 1996, Group 1 adopted the 1996 Stock Incentive Plan (the Plan), which
provides for the granting or awarding of stock options, stock appreciation
rights and restricted stock to officers and other key employees and directors.
The number of shares authorized and reserved for issuance under the Plan is
2,000,000 shares of which 752,550 are available for future issuance. In general,
the terms of the option awards (including vesting schedules) are established by
the Compensation Committee of the Company's Board of Directors. As of December
31, 1997, the Company has granted options to employees and directors covering an
aggregate of 1,247,450 shares of common stock. All outstanding options are
exercisable over a period not to exceed 10 years and vest over a five- or
six-year period.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which, if fully adopted, requires the Company to record
stock-based compensation at fair value. The Company has adopted the disclosure
requirements of SFAS No. 123 and has elected to record employee compensation
expense in accordance with Accounting Principles Board (APB) Opinion No. 25.
Accordingly, compensation expense is recorded for stock options based on the
excess of the fair market value of the common stock on the date the options were
granted over the aggregate exercise price of the options. As the exercise price
of options granted under the Plan has been equal to or greater than the market
price of the Company's stock on the date of grant, no compensation expense
related to the Plan has been recorded.
Had compensation expense for the Plan been determined based on the
provisions of SFAS No. 123, the impact on the Company's net income would have
been as follows for the year ended December 31, 1997:
<TABLE>
<S> <C>
Net income as reported (in thousands)....................... $5,818
Pro forma net income under FAS 123 (in thousands)........... $5,451
</TABLE>
F-15
<PAGE> 109
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the Company's outstanding stock options:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
--------------------------
WEIGHTED
AVERAGE
NUMBER EXERCISE PRICE
--------- --------------
<S> <C> <C>
Options outstanding, beginning of year..................... 205,000 $2.90
Grants:
First quarter 1997 (all at $2.90 per share).............. 360,000 2.90
Fourth quarter 1997 (all at $12.00 per share)............ 682,450 12.00
--------- -----
Options outstanding, end of year........................... 1,247,450 $7.88
========= =====
</TABLE>
At December 31, 1997, 129,843 options were exercisable at a weighted
average exercise price of $6.56. The weighted average exercise price of options
granted during the year ended December 31, 1997 was $8.86. The weighted average
remaining contractual life of options outstanding is 9.5 years. The weighted
average fair value per share of options granted during the years ended December
31, 1996 and 1997 is $0.45 and $5.94, respectively. The fair value of the
options granted prior to the initial public offering were estimated on the date
of the grant using the minimum value method as the Company was not a public
entity and was not able to use the Black-Scholes model because estimating the
expected volatility was not feasible. The fair value of options granted at or
subsequent to the initial public offering is estimated on the date of grant
using the Black-Scholes option pricing model.
The following table summarizes the weighted average information used in
determining the fair value of the options granted during the years ended
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Weighted average risk-free interest rate.................... 5.0% 5.9%
Weighted average expected life of options................... 6 years 10 years
Weighted average expected volatility........................ N/A 58.1%
Weighted average expected dividends......................... -- --
</TABLE>
In September 1997, Group 1 adopted Group 1 Automotive's 1998 Employee Stock
Purchase Plan (the "Purchase Plan"). The Purchase Plan authorizes the issuance
of up to 200,000 shares of Common Stock and provides that no options may be
granted under the Purchase Plan after June 30, 2007. The Purchase Plan is
available to all employees of the Company and its participating subsidiaries. At
the end of each fiscal quarter ("Option Period") during the term of the Purchase
Plan, the employee contributions are used to acquire shares of Common Stock at
85% of the fair market value of the Common Stock on the first or the last day of
the Option Period, whichever is lower.
9. RELATED-PARTY TRANSACTIONS:
The principals of the Founding Groups lease certain of the dealership
facilities to Group 1 under long-term operating leases. Additional information
regarding the terms of these leases is contained in Note 10, "Operating Leases."
In connection with the acquisitions the principal stockholder of the Howard
Group acquired certain non-operating assets (recreational vehicles and
properties) owned by the Howard Group. The purchase price, which approximated
fair market value, was approximately $2.0 million.
F-16
<PAGE> 110
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. OPERATING LEASES:
The Company leases various facilities and equipment under long-term
operating lease agreements, including leases with related parties. The
related-party leases expire on December 31, 2027 and are cancelable, at the
Company's option, every five years beginning in 2007. The third-party leases are
non-cancelable and expire on various dates through August 2013.
Future minimum lease payments for operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, RELATED PARTIES THIRD PARTIES TOTAL
----------------------- --------------- ------------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
1998........................................... $ 5,022 $ 2,025 $ 7,048
1999........................................... 5,076 1,731 6,807
2000........................................... 5,044 1,671 6,715
2001........................................... 5,044 989 6,032
2002........................................... 4,909 570 5,479
Thereafter..................................... 24,412 5,038 29,450
------- ------- -------
Total................................ $49,507 $12,024 $61,531
======= ======= =======
</TABLE>
Total rent expense under all operating leases, including operating leases
with related parties, was approximately $2.2, $2.3 and $3.3 million for the
years ended December 31, 1995, 1996 and 1997, respectively. Total rental expense
for the year ending December 31, 1998 is not anticipated to be materially
different than the total rental expense incurred by all of the companies for the
year ended December 31, 1997. Rental expense on related-party leases, which is
included in the above amounts, totaled approximately $1.8, $1.9 and $2.6 million
for the years ended December 31, 1995, 1996 and 1997, respectively.
11. INCOME TAXES:
Federal and state income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1997 1996
----- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal --
Current.................................................. $476 $ 587 $1,291
Deferred................................................. 161 (262) (762)
State --
Current.................................................. 77 111 297
Deferred................................................. 30 (54) (253)
---- ----- ------
Provision for income taxes................................. $744 $ 382 $ 573
==== ===== ======
</TABLE>
F-17
<PAGE> 111
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996 1997
------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Provision at the statutory rate........................ $1,489 $ 1,900 $ 2,173
Increase (decrease) resulting from --
Income of S Corporations............................. (877) (1,585) (1,269)
State income tax, net of benefit for federal
deduction......................................... 70 38 29
Deferred tax assets realized on conversion of S
Corporations to C Corporations.................... -- -- (403)
Other................................................ 62 29 43
------ ------- -------
Provision for income taxes............................. $ 744 $ 382 $ 573
====== ======= =======
</TABLE>
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and (liabilities) result principally from the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Inventory................................................... $(2,637) $(3,166)
Reserves and accruals not deductible until paid............. 2,176 8,639
Depreciation................................................ (59) (645)
Other....................................................... 104 166
------- -------
Net deferred tax asset (liability).......................... $ (416) $ 4,994
======= =======
</TABLE>
The net deferred tax assets and (liabilities) are comprised of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets --
Current................................................... $ 2,145 $10,220
Deferred tax liabilities --
Current................................................... (2,502) (1,527)
Long-term................................................. (59) (3,699)
------- -------
Net deferred tax asset (liability).......................... $ (416) $ 4,994
======= =======
</TABLE>
12. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is a defendant in several lawsuits arising from normal business
activities. Management has reviewed pending litigation with legal counsel and
believes that the ultimate liability, if any, resulting from such actions will
not have a material adverse effect on the Companies' financial position or
results of operations.
F-18
<PAGE> 112
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Insurance
Because of their vehicle inventory and nature of business, automobile
retail dealerships generally require significant levels of insurance covering a
broad variety of risks. The Company's insurance includes an umbrella policy with
a $50 million per occurrence limit as well as insurance on its real property,
comprehensive coverage for its vehicle inventory, general liability insurance,
employee dishonesty coverage and errors and omissions insurance in connection
with its vehicle sales and financing activities.
Loan Guarantees
Two of the Company's dealerships provide financing for certain customers
through a third-party lender. Under the terms of this financing contract,
customers execute installment contracts which are guaranteed with full recourse
to the dealerships. The dealerships transfer the rights to the future economic
benefits related to the receivables; however, in the event that the customer
defaults on the note, the lender may require repayment of the principal amount
of the note plus earned interest through the date of default, with collection
efforts to be performed by the dealership. As of December 31, 1997, total
customer notes outstanding guaranteed by the two dealerships were approximately
$10.1 million. The dealerships have provided reserves for estimated future loan
losses based on historical loss trends and total guarantees outstanding (see
Note 4). This financing arrangement represents approximately 1.3% of the
Company's total financing arranged.
13. RETIREMENT PLANS:
Effective April 1, 1996, one of the Founding Groups established a 401(k)
salary deferral/savings plan for the benefit of all employees. Employees
electing to participate in the plan may contribute up to 15% of annual
compensation, limited to the maximum amount that can be deducted for income tax
purposes each year.
The Founding Group, at its discretion, has the option to match each
employee's contribution up to a maximum of 6% of annual compensation each plan
year. The Founding Group elected to make contributions totaling approximately
$178,000 and $306,000 for the years ended December 31, 1996 and 1997,
respectively.
F-19
<PAGE> 113
UNDERWRITING
Group 1, the subsidiary guarantors and the underwriters for the offering
named below have entered into an underwriting agreement and a pricing agreement
with respect to the notes. Subject to certain conditions, each underwriter has
severally agreed to purchase the principal amount of notes indicated in the
following table.
<TABLE>
<CAPTION>
Principal Amount
Underwriters of Notes
------------ ----------------
<S> <C>
Goldman, Sachs & Co. ....................................... $
Chase Securities Inc. ......................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
------------
Total............................................. $100,000,000
============
</TABLE>
Notes sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus
supplement. Any Notes sold by the underwriters to securities dealers may be sold
at a discount from the initial public offering price of up to % of the
principal amount of the Notes. Any such securities dealers may resell any Notes
purchased from the underwriters to certain other brokers or dealers at a
discount from the initial public offering price up to % per Note from the
initial public offering price. If all the Notes are not sold at the initial
offering price, the underwriters may change the offering price and the other
selling terms.
The Notes are a new issue of securities with no established trading market.
Group 1 has been advised by the underwriters that the underwriters intend to
make a market in the Notes but are not obligated to do so and may discontinue
market making at any time without notice. No assurance can be given as to the
liquidity of the trading market for the Notes.
In connection with the offering, the underwriters may purchase and sell
Notes in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater amount of
Notes than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the Notes while the
offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the underwriters have repurchased Notes sold by
or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the Notes. As a result, the price of the Notes may be
higher than the price that otherwise might exist in the open market. If these
activities are commenced, they may be discontinued by the underwriters at any
time. These transactions may be effected in the over-the-counter market or
otherwise.
Group 1 and the subsidiary guarantors have agreed to indemnify the several
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
Group 1 estimates that its expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $1.0 million.
As described below, an affiliate of Chase Securities Inc. will receive more
than 10% of the proceeds from the sale of the Notes. Accordingly, this offering
is being conducted pursuant to Rule 2710(c)(8) of the Rules of Conduct of the
National Association of Securities Dealers, Inc. In accordance with this
provision, Goldman, Sachs & Co. is acting as "qualified independent
U-1
<PAGE> 114
underwriter", and the yield at which the Notes are issued will be not lower than
that recommended by Goldman, Sachs & Co. in compliance with the requirements of
Rule 2720(c)(3) of the NASD Rules of Conduct. In connection with this offering,
Goldman Sachs & Co. has performed due diligence investigations and reviewed and
participated in the preparation of this prospectus.
Certain of the underwriters and their affiliates perform various investment
banking and commercial banking services for us from time to time. Chase
Securities Inc. is an affiliate of Chase Bank of Texas, National Association
("Chase Texas"). Chase Texas is agent bank and a lender under our credit
facility and will receive its proportionate share of our repayment of amounts
outstanding under the credit facility from the proceeds of the offering.
U-2
<PAGE> 115
PROSPECTUS
Group 1 Automotive, Inc.
950 Echo Lane, Suite 350
Houston, Texas 77024
(713) 467-6268
DEBT SECURITIES
PREFERRED STOCK
COMMON STOCK
---------------------
We may offer and sell the securities listed above with an aggregate offering
price up to $250 million in connection with this prospectus. We will provide
specific terms of these offerings and securities in supplements to this
prospectus, including whether the debt securities are guaranteed by all of our
subsidiaries.
YOU SHOULD READ THIS PROSPECTUS AND ANY SUPPLEMENT TO THIS PROSPECTUS
CAREFULLY BEFORE YOU INVEST, INCLUDING THE RISK FACTORS WHICH BEGIN ON PAGE 4 OF
THIS PROSPECTUS.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
This prospectus may not be used to consummate sales of securities unless
accompanied by a prospectus supplement.
This prospectus is dated January 29, 1999.
<PAGE> 116
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
About This Prospectus....................................... 2
Where You Can Find More Information......................... 2
Cautionary Statement About Forward-Looking Statements....... 3
Disclaimer.................................................. 4
The Company................................................. 4
Risk Factors................................................ 4
Use of Proceeds............................................. 12
Ratios of Earnings to Fixed Charges and Earnings to Fixed
Charges plus Dividends.................................... 12
Description of Debt Securities.............................. 12
Description of Capital Stock................................ 21
Depositary Shares........................................... 26
Plan of Distribution........................................ 27
Legal Matters............................................... 28
Experts..................................................... 28
</TABLE>
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission (the "SEC") utilizing a "shelf" registration
process. Under this shelf registration process, we may sell any combination of
the securities described in this prospectus in one or more offerings up to a
total dollar amount of $250 million. This prospectus provides you with a general
description of the securities we may offer. Each time we sell securities we will
provide a prospectus supplement that will contain specific information about the
terms of the offering and the securities. The prospectus supplement may also
add, update or change information contained in this prospectus. Any statement
that we make in this prospectus will be modified or superseded by any
inconsistent statement made by us in a prospectus supplement. You should read
both this prospectus and any prospectus supplement together with additional
information described under the heading "Where You Can Find More Information."
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and copy
any document we file at the SEC's public reference room at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the regional offices of the SEC located at
7 World Trade Center, Suite 1300, New York, New York 10048 and at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may obtain information
on the operation of the SEC's public reference room in Washington, D.C. by
calling the SEC at 1-800-SEC-0330. We also file such information with the New
York Stock Exchange. Such reports, proxy statements and other information may be
read and copied at 30 Broad Street, New York, New York 10005.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus, and information that we file later with
the SEC will automatically update and supersede this information. We incorporate
by reference the documents listed below and any further filings made with the
SEC under Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act") until we sell all of the securities or we terminate
this offering:
- Our Annual Report on Form 10-K for the year ended December 31, 1997 (as
amended on April 15, 1998);
2
<PAGE> 117
- Our Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998,
June 30, 1998 (as amended on September 22, 1998) and September 30, 1998;
- Our Current Reports on Form 8-K, filed March 31, 1998 (as amended on May
28, 1998), April 15, 1998, (as amended on June 11, 1998), December 11,
1998, January 25, 1999 and January 26, 1999; and
- The description of the common stock contained in our Form 8-A dated
October 7, 1997.
You may request a copy of these filings at no cost, by writing or
telephoning us at the following address:
Scott L. Thompson
Senior Vice President -- Chief Financial Officer & Treasurer
Group 1 Automotive, Inc.
950 Echo Lane, Suite 350
Houston, Texas 77024
(713) 467-6268
You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not authorized
anyone else to provide you with different information. We are not making an
offer of these securities in any state where the offer is not permitted. You
should not assume that the information in this prospectus or any prospectus
supplement is accurate as of any date other than the date on the front of those
documents.
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
This prospectus contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act (the
"Securities Act") and Section 21E of the Securities Exchange Act (the "Exchange
Act"). These statements appear in a number of places in this prospectus and
include statements regarding our plans, beliefs or current expectations,
including those plans, beliefs and expectations of our officers and directors
with respect to, among other things:
- future acquisitions,
- expected future cost savings,
- future capital expenditures,
- trends affecting our future financial condition or results of operations,
and
- our business strategy regarding future operations.
Any such forward-looking statements are not assurances of future
performance and involve risks and uncertainties. Actual results may differ
materially from anticipated results for a number of reasons, including:
- industry conditions,
- future demand for new and used vehicles,
- restrictions imposed on us by automobile manufacturers,
- the ability to obtain the consents of automobile manufacturers to our
acquisitions,
- the availability of capital resources, and
- the willingness of acquisition candidates to accept our common stock as
currency.
The information contained in this prospectus, including the information set
forth under the heading "Risk Factors," identifies additional factors that could
affect our operating results and performance. We urge you to carefully consider
those factors.
All forward-looking statements attributable to us are expressly qualified
in their entirety by this cautionary statement.
3
<PAGE> 118
DISCLAIMER
No Manufacturer or Distributor (as defined in this prospectus) has been
involved, directly or indirectly, in the preparation of this prospectus or in
any offering made hereby. No Manufacturer or Distributor has made any statements
or representations in connection with the offering or has provided any
information or materials that were used in connection with the offering, and no
Manufacturer or Distributor has any responsibility for the accuracy or
completeness of this prospectus.
THE COMPANY
We are a leading operator and consolidator in the highly fragmented
automotive retailing industry. We currently own 59 automobile dealership
franchises representing 23 different brands of automobiles and 12 collision
service centers located in Texas, Oklahoma, Florida, New Mexico, Georgia and
Colorado. Through our dealerships, we sell new and used cars and light trucks,
provide maintenance and repair services, sell replacement parts and arrange
related financing, vehicle service contracts and insurance.
We were incorporated in Delaware in December 1995. We began operating
automobile dealerships in November 1997 when we acquired our four "founding
groups" in four separate simultaneous transactions. Our founding groups owned 30
dealership franchises, and, since then, we have acquired an additional 33
dealership franchises in 10 separate acquisitions. Additionally, we acquired two
franchises through manufacturer grants. During 1998, we sold one Subaru
franchise and returned one Kia franchise to the manufacturer. In addition,
Chrysler ceased operation of the Eagle brand nationally, of which we had four
franchises. These six franchises were insignificant to our operations.
Our corporate headquarters is located in Houston, Texas at 950 Echo Lane,
Suite 350, Houston, Texas 77024 (telephone: (713) 467-6268).
RISK FACTORS
You should carefully consider and evaluate all of the information in this
prospectus, including the risk factors set forth below, before investing.
MANUFACTURER RESTRICTIONS
The following table sets forth the percentage of our new vehicle retail
unit sales attributable to the manufacturers we represent:
<TABLE>
<CAPTION>
PERCENTAGE OF OUR
NEW VEHICLE
PRO FORMA RETAIL
UNITS FOR THE NINE
MONTHS ENDED
MANUFACTURER SEPTEMBER 30, 1998
------------ ------------------
<S> <C>
Ford........................................................ 25.7%
Toyota/Lexus................................................ 19.3
Chrysler.................................................... 18.1
General Motors.............................................. 14.8
Nissan...................................................... 9.4
Honda/Acura................................................. 9.2
Other....................................................... 3.5
-----
Total....................................................... 100.0%
=====
</TABLE>
The loss of our relationships with one or more of these named manufacturers
could have an adverse effect on our business.
The term Manufacturers refers to all of the manufacturers of new cars that
we sell, including Ford Motor Company ("Ford"), General Motors Corporation
("GM"), DaimlerChrysler ("Chrysler"), Toyota Motor Corp. and Toyota Motor Sales,
U.S.A., Inc. (collectively "Toyota"), Honda Motor Co., Ltd. and American Honda
Motor Co., Inc. (collectively "Honda"), Nissan Motor Co., Ltd. and Nissan Motor
4
<PAGE> 119
North America, Inc. (collectively "Nissan"), Mitsubishi Motor Sales of America,
Inc., American Isuzu Motors, Inc., American Suzuki Motor Corporation and Volvo
Cars of North America, Inc.
FRANCHISE AGREEMENTS. Each of our dealerships operates under a franchise
agreement with one of our Manufacturers (or authorized distributors
("Distributors")). Under our dealership franchise agreements, the Manufacturers
exert considerable influence over the operations of our dealerships. Each of the
franchise agreements may be terminated or not renewed by the Manufacturer for a
variety of reasons, including any unapproved change of ownership or management.
While we believe that we will be able to renew all of our franchise agreements,
we cannot guarantee that all of our franchise agreements will be renewed or that
the terms of the renewals will be favorable to us.
Our franchise agreements do not give us the exclusive right to sell a
Manufacturer's product within a given geographic area. Accordingly, a
Manufacturer may, subject to any protection of state law, grant another dealer a
franchise to start a new dealership near one of our locations, or an existing
dealer may move its dealership to a location which would compete directly with
us. The location of new dealerships near our existing dealerships could
adversely affect our operations.
ACQUISITIONS. We must obtain the consent of the Manufacturer prior to the
acquisition of any of its dealership franchises. Delays in obtaining, or failing
to obtain, Manufacturer approvals for dealership acquisitions could adversely
affect our growth strategy. Obtaining the consent of a Manufacturer for the
acquisition of a dealership could take a significant amount of time or might be
rejected entirely. Obtaining the approvals of the Manufacturers for the
acquisition of our founding groups took almost one year. Although the
Manufacturer approvals of our recent acquisitions have taken significantly less
time, future approvals may not be prompt and such approvals may not be
ultimately obtained.
In determining whether to approve an acquisition, Manufacturers may
consider many factors, including the moral character and business experience of
the dealership principals and the financial condition, ownership structure and
customer satisfaction index scores of our dealerships.
Our Manufacturers attempt to measure customers' satisfaction with
automobile dealerships through systems generally known as the customer
satisfaction index or "CSI". The Manufacturers have modified the components of
their CSI scores from time to time in the past, and they may replace them with
different systems. Failure of our dealerships to comply with a Manufacturer's
CSI standards could adversely affect our ability to acquire additional
dealerships.
In addition, a Manufacturer may limit the total number of its dealerships
that we may own or the number that we may own in a particular geographic area.
The following is a summary of the restrictions imposed by our most significant
Manufacturers.
Ford. Ford currently limits the number of dealerships that we may own to
the greater of (1) 15 Ford and 15 Lincoln Mercury dealerships and (2) that
number of Ford and Lincoln Mercury dealerships accounting for 5% of the
preceding year's total Ford and Lincoln Mercury retail sales of those brands in
the United States. In addition, Ford limits us to one Ford dealership in a
Ford-defined market area having two or less authorized Ford dealerships and
one-third of the Ford dealerships in any Ford-defined market area having more
than three authorized Ford dealerships. In many of its dealership franchise
agreements, Ford has the right of first refusal to acquire, subject to
applicable state law, the Ford franchised dealership when its ownership changes.
Toyota. Toyota restricts the number of dealerships that we may own and the
time frame over which they may be acquired. We can acquire no more than two
Toyota dealerships in each semi-annual period from January to June and July to
December until we acquire a total of seven Toyota dealerships. After we acquire
seven Toyota dealerships we can acquire, if we are then qualified, additional
dealerships over a minimum of seven semi-annual periods up to a maximum number
of dealerships equal to 5% of Toyota's aggregate national annual retail sales
volume. In addition, Toyota restricts the number of Toyota dealerships that we
may acquire in any Toyota-defined region and "Metro" market, as well as any
contiguous market. We may acquire only three Lexus dealerships nationally and
two Lexus dealerships in any one of the four Lexus geographic areas. While we
recently have been granted a Lexus companion
5
<PAGE> 120
dealership located south of Houston, this dealership is not considered by Lexus
to be a new and separate Lexus dealership for purposes of the restriction on the
number of Lexus dealerships we may acquire.
Chrysler. Currently, we have no agreement with Chrysler restricting our
ability to acquire Chrysler dealerships. Chrysler has advised us that in
determining whether to approve an acquisition of a Chrysler dealership, Chrysler
considers the number of Chrysler dealerships the acquiring company already owns.
Chrysler currently considers carefully, on a case-by-case basis, any acquisition
that would cause the acquiring company to own more than 10 Chrysler dealerships
nationally, six in the same Chrysler-defined zone and two in the same market.
General Motors. General Motors currently limits the number of GM
dealerships that we may acquire prior to October 1999 to seven additional GM
dealership locations (any one dealership, however, may include a number of
different GM franchises, such as a combination of GMC, Pontiac and Buick
franchises). In addition, GM limits the maximum number of GM dealerships that we
may acquire at any time to 50% of the GM dealerships, by franchise line, in a
GM-defined geographic market area. However, our current agreement with GM does
not include Saturn dealerships and our future acquisition of a Saturn dealership
will be subject to GM approval on a case-by-case basis.
Nissan. Nissan restricts us from owning Nissan dealerships whose primary
marketing areas ("PMA", as defined by Nissan) competitive segment registration
count comprises more than 5% of Nissan's total national competitive segment
registrations based on the sum of the retail competitive segment registrations
in PMAs associated with us; or 20% of any Nissan region's total competitive
segment registrations contained in all PMAs associated with us in that region.
Honda. Under our current agreement with Honda, Honda limits the number of
dealerships that we may own to (1) seven Honda and three Acura franchises
nationally, (2) one Honda dealership in a Honda-defined "Metro" market with two
to 10 Honda dealership points, (3) two Honda dealerships in a Metro market with
11 to 20 Honda dealership points, (4) three Honda dealerships in a Metro market
with 21 or more Honda dealership points, (5) no more than 4% of the Honda
dealerships in any one of the 10 Honda geographic zones, (6) one Acura
dealership in a Metro market, and (7) two Acura dealerships in any one of the
six Acura geographic zones.
Honda has proposed a new agreement to replace our current agreement. Honda
has proposed that we could acquire Honda dealerships representing up to 6% of
total Honda unit sales in the United States by December 31, 2005, increasing 1%
each year beginning January 1, 2002 from the 2% level in effect through December
31, 2001. The proposed new agreement contains additional restrictions in various
geographic markets. We are continuing to negotiate with Honda on these
geographic restrictions as well as other restrictions on the number of
dealerships that we may acquire. Also under the proposed new agreement, we could
acquire no more than two Acura dealerships in a Metro market with four or more
dealer points and one Acura dealership in other Metro markets, three Acura
dealerships in any one of the six Acura geographic zones and five Acura
dealerships nationally.
We currently own six Ford, one Lincoln, one Mercury, 21 Chrysler, two
Toyota, one Lexus, three Honda and two Acura dealership franchises and six
General Motors dealership locations. Under current restrictions, we may acquire
the maximum number of Toyota dealerships described above based on aggregate
national retail sales volume of Toyota, two additional Lexus dealerships, four
additional Honda dealerships, one additional Acura dealership, approximately 400
additional Ford and Lincoln Mercury dealerships and seven additional GM
dealership locations prior to October 1999, subject to being increased.
FINANCINGS. Provisions in our agreements with our Manufacturers may
restrict in the future our ability to obtain financing. Our current agreement
with Honda requires Honda's consent for any equity offering. Honda's proposed
new agreement with us does not contain that requirement. We have not negotiated
or executed the proposed new agreement, nor have we obtained Honda's consent for
any offering in connection with this prospectus. If Honda were to claim that we
breached its existing agreement with us and seek to enforce its remedies, we
could be adversely affected.
6
<PAGE> 121
If we materially breach our agreement with Honda, Honda could purchase our
Honda and Acura dealerships at their fair market value and terminate our dealer
agreements with Honda and Acura. For the nine-month period ended September 30,
1998, our Honda and Acura dealerships represented approximately 8.9% and 8.4% of
our pro forma revenues and operating income, respectively.
Honda's proposed new agreement prohibits pledging the stock of Honda
franchised dealerships to secure debt financing, although it allows pledging the
proceeds from the sale of Honda franchised dealership stock. We are continuing
to negotiate with Honda on the terms of the proposed new agreement.
Our agreement with General Motors contains provisions prohibiting pledging
the stock of our GM franchised dealerships. Our agreement with Ford permits
pledging our Ford franchised dealerships' stock and assets, but only for Ford
dealership-related debt. Moreover, our Ford agreement permits our Ford
franchised dealerships to guarantee, and to use Ford franchised dealership
assets to secure, our debt, but only for Ford dealership-related debt. Ford has
waived that requirement for the offering of Debt Securities covered by this
prospectus. If, however, we fail to meet certain minimum financial ratios Ford
can reject any acquisitions of Ford franchised dealerships and/or purchase our
Ford franchised dealerships.
OUR OWNERSHIP AND MANAGEMENT. As a condition to granting their consent to
our previous acquisitions and our initial public offering, some Manufacturers
have imposed other restrictions on us.
These restrictions prohibit:
- any one person who in the opinion of the Manufacturer is unqualified to
own its franchised dealership or has interests incompatible with the
Manufacturer from acquiring more than a specified percentage of our
common stock (5% in the case of Honda; 20% in the case of General Motors,
Toyota and Nissan, and 50% in the case of Ford;
- certain material changes in us or extraordinary corporate transactions
such as a merger or sale of a material amount of our assets;
- the removal of a dealership general manager without the consent of the
Manufacturer;
- the use of dealership facilities to sell or service new vehicles of other
Manufacturers in certain situations; and
- changes in control of our Board of Directors or management.
If we are unable to comply with these restrictions, we generally must (1)
sell the assets of the dealerships to the Manufacturer or to a third party
acceptable to the Manufacturer or (2) terminate the dealership agreements with
the Manufacturer. The Manufacturers may impose additional restrictions on us in
the future. Our failure to meet these restrictions may adversely affect, our
business and acquisition strategy.
Our current agreement with Honda gives Honda the right to approve the
acquisition of more than 5% of our common stock by any individual or entity, and
any subsequent acquisition of more than 10% by such individual, if Honda
determines that such acquisition is reasonably detrimental to its interests.
Honda may determine that such acquisition is reasonably detrimental to its
interests if the acquiring person: competes with Honda, has criminal
affiliations or a criminal record, has inadequate experience in the automotive
sales and service business, has an unacceptable credit rating, has unacceptable
CSI scores or has had prior unsatisfactory relationships with Honda.
An institutional investor may acquire up to 10% of our common stock without
the consent of Honda, unless the institutional investor competes with Honda, has
criminal affiliations or a criminal record, or has acquired, or has a reasonable
likelihood of acquiring, a controlling interest in us.
We are required to notify Honda with respect to any such acquisition or
proposed acquisition, and if Honda does not approve of the acquisition, we are
required to use our best efforts to prevent the acquisition or, if the
acquisition has already occurred, to reacquire the shares so transferred. If we
are unable to prevent the acquisition or to reacquire the shares we will be in
material breach of our agreement with Honda.
7
<PAGE> 122
In addition, under our agreement with Honda, each stockholder of the
founding groups has agreed not to sell, transfer or in any manner encumber any
of the shares of our common stock he acquired in connection with our acquisition
of the founding groups, or enter into any agreement or other arrangement
providing for the voting of such shares of common stock, without the prior
written approval of Honda. If one of these stockholders violates this
restriction, we must inform Honda. If Honda does not approve the transfer, and
we cannot acquire the shares or arrange for the retransfer of such shares to a
person approved by Honda, we will be in breach of our agreement with Honda. The
new agreement proposed by Honda does not contain these restrictions on our
stockholders.
Our agreement with Honda also provides that if an entity that Honda has not
approved acquires or threatens to acquire a controlling interest in us or any of
our Honda or Acura dealerships, we will be in breach of our agreement with
Honda.
OPERATIONS. We depend on our Manufacturers for operational support:
- We depend on the Manufacturers to provide us with a desirable mix of new
vehicles. The most popular vehicles usually produce the highest profit
margins and are frequently difficult to obtain from the Manufacturers. If
we cannot obtain sufficient quantities of the most popular models, our
profitability may be adversely affected. Sales of less desirable models
may reduce our profit margins.
- We depend on the Manufacturers for sales incentives and other programs
that are intended to promote dealership sales or support dealership
profitability. Manufacturers historically have made many changes to their
incentive programs during each year. A discontinuation or change in
Manufacturers' incentive programs could adversely affect our business.
Moreover, some Manufacturers use a dealership's CSI scores as a factor
for participating in incentive programs. Failure to comply with the CSI
standards could adversely affect our participation in dealership
incentive programs, which could have a material adverse effect on us.
Our Manufacturer agreements also specify that we cannot operate a
dealership franchised by another Manufacturer in the same building as that
Manufacturer's franchised dealership in certain situations. In addition, some
Manufacturers, like GM, are in the process of realigning their franchised
dealerships along defined "channels", such as combining Pontiac, Buick and GMC
in one dealership location. As a result, GM may require us to move or sell some
dealerships. Moreover, our Manufacturers generally require that the dealership
premises meet defined image standards. All of these requirements could impose
significant capital expenditures on us in the future.
DEPENDENCE ON ACQUISITIONS FOR GROWTH
Growth in our revenues and earnings depends substantially on our ability to
acquire and successfully operate dealerships. We cannot guarantee that we will
be able to identify and acquire dealerships in the future. In addition, managing
and integrating additional dealerships into our existing mix of dealerships may
result in substantial costs, delays or other operational or financial problems.
Restrictions by our Manufacturers as well as covenants contained in our
debt instruments limit our ability to acquire additional dealerships. In
addition, increased competition for acquisition candidates may develop, which
could result in fewer acquisition opportunities available to us and higher
acquisition prices.
Acquisitions involve a number of additional risks, including:
- diversion of our resources and our management's attention,
- our possible inability to retain key personnel of the acquired
dealership, and
- unanticipated events or liabilities.
We will continue to need substantial capital in order to acquire additional
automobile dealerships. In the past, we have financed these acquisitions with a
combination of cash flow from operations, proceeds from borrowings under our
credit facilities with banks and issuances of our common stock. We cannot
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guarantee that these sources of funds will be sufficient to fund our acquisition
program and other cash needs, or that we will be able to obtain adequate
additional capital from other sources.
We expect to utilize our current credit facility to borrow a portion of the
funds required for acquisitions. If funds under the credit facility are
insufficient to fund our acquisition program, we will be required to obtain
alternative financing such as from the issuance of additional debt or equity
securities or an expansion or replacement of the credit facility.
We currently intend to finance future acquisitions by issuing shares of
common stock as full or partial consideration for acquired dealerships. The
extent to which we will be able or willing to issue common stock for
acquisitions will depend on the market value of the common stock from time to
time and the willingness of potential acquisition candidates to accept common
stock as part of the consideration for the sale of their businesses. If
potential acquisition candidates are unwilling to accept our common stock, we
will be forced to rely solely on available cash or debt or equity financing,
which could adversely affect our acquisition program. Accordingly, our ability
to make acquisitions could be adversely affected if the price of our common
stock declines.
DEPENDENCE ON THE SUCCESS OF OUR MANUFACTURERS
Our success depends upon the overall success of the line of vehicles that
each of our dealerships sells. Demand for our Manufacturers' vehicles as well as
the financial condition, management, marketing, production and distribution
capabilities of our Manufacturers affect our business.
Although we have attempted to lessen our dependence on any one Manufacturer
by buying dealerships representing a number of different domestic and foreign
Manufacturers, events such as labor disputes and other production disruptions
that may adversely affect a Manufacturer may also adversely affect us.
Similarly, the late delivery of vehicles from Manufacturers, which sometimes
occurs during periods of new product introductions, can lead to reduced sales
during those periods. Moreover, any event that causes adverse publicity
involving any of our Manufacturers may have an adverse effect on us regardless
of whether such event involves any of our dealerships.
RISKS OF IMPORTING PRODUCTS
A significant portion of our new vehicle business involves the sale of
vehicles, vehicle parts or vehicles composed of parts that are manufactured
outside the United States. As a result, our operations are subject to customary
risks associated with imported merchandise, including fluctuations in the value
of currencies, import duties, exchange controls, trade restrictions, work
stoppages and general political and economic conditions in foreign countries.
The United States or the countries from which our products are imported
may, from time to time, impose new quotas, duties, tariffs or other
restrictions, or adjust presently prevailing quotas, duties or tariffs on
imported merchandise. Any of those impositions or adjustments could affect our
operations and our ability to purchase imported vehicles and parts. This, in
turn, could have an adverse effect on our business.
FLUCTUATIONS IN PROFITABILITY
The automobile industry is cyclical and historically has experienced
downturns characterized by oversupply and weak demand. Many factors affect the
industry, including general economic conditions, consumer confidence, personal
discretionary spending levels, interest rates and credit availability. We cannot
guarantee that the industry will not experience sustained periods of decline in
vehicle sales in the future. Any such decline could have an adverse effect on
our business.
The automobile industry also experiences seasonal variations in revenue.
Demand for automobiles is generally lower during the winter months than in other
seasons, particularly in regions of the United States associated with harsh
winters. Accordingly, we expect revenues and operating results generally to be
lower in our first and fourth quarters than in our second and third quarters.
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CONTINGENT ACQUISITION PAYMENTS
In our early acquisitions in which we issued shares of our common stock as
consideration, we guaranteed to the recipients of the shares that they will
receive a minimum price for their shares if they sell the shares in the market.
In the event that they do not receive the guaranteed price in a sale, we are
required to pay them the difference between the price they received and the
guaranteed price. As of December 31, 1998, there were 3,450,187 shares of common
stock subject to our guarantee with a weighted average guarantee price of
approximately $13.49 per share. These guarantees have terms of three years to
ten years with a weighted average term of approximately 6.3 years. If the price
of our common stock declines substantially and we are required to perform on our
guarantees, our liquidity and ability to finance our acquisition program could
be adversely affected.
In addition, in many of our acquisitions, we may be required to pay
contingent consideration to the former stockholders of the acquired dealerships
based on an increase in earnings before taxes of their operations during certain
periods of time. We cannot determine whether or how much we will have to pay
under these contingent payment arrangements. If we are required to make any of
these contingent payments, we will have to pay approximately one-half of each
payment in common stock and one-half in cash. If these contingent payments must
be paid in full, our liquidity and ability to finance our acquisition program
could be adversely affected.
LIMITED COMBINED OPERATING HISTORY
We were incorporated in December 1995 and commenced dealership operations
in November 1997 with the acquisition of the founding groups. The founding
groups had been owned, operated and managed as separate independent entities
prior to their acquisition by us. We have made a number of additional
acquisitions of automobile dealerships since we acquired the founding groups. We
intend to continue to acquire additional dealerships. Our future operating
results will depend in part on our ability to integrate the operations of those
businesses and manage the combined enterprise.
Our management group has been working together since December 1996. We
cannot guarantee that our management team will be able to effectively and
profitably integrate the founding groups and our other acquisitions or to
effectively manage the combined entity. Their inability to do so could adversely
affect our business.
SUBSTANTIAL COMPETITION
The automotive retailing industry is highly competitive with respect to
price, service, location and selection. We compete with automobile dealerships
(including other public franchised dealership consolidators), private market
buyers and sellers of used vehicles, used vehicle dealerships, service center
chains and independent service and repair shops. In the new vehicle area, we
compete with other franchised dealers.
We do not have any cost advantage in purchasing new vehicles from the
manufacturers and typically rely on advertising, merchandising, sales expertise,
service reputation and dealership location to sell new vehicles.
In recent years, our dealerships have also faced competition from
non-traditional sources such as companies that sell automobiles on the Internet,
automobile rental agencies, independent leasing companies, used-car
"superstores" and price clubs associated with established consumer agencies,
such as the American Automobile Association. Some of these competitors use
non-traditional sales techniques such as one-price shopping.
In addition, Ford has begun owning and operating automobile dealerships for
the purpose of consolidating Ford dealerships. For example, Ford has acquired
dealerships in Tulsa, Oklahoma and has entered into an agreement with Republic
Industries, Inc. to jointly acquire Ford dealerships in Rochester, New York.
Ford has also announced that it is exploring the possibility of going into
business with some of its dealers to create automotive superstores in selected
markets.
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Some of our competitors, including these recent market entrants, may have
greater financial, marketing and personnel resources than us and lower overhead
and sales costs.
In the parts and service area, we also compete with a number of regional or
national chains which offer selected parts and services at prices that may be
lower than our prices. We cannot guarantee that our strategy will be more
effective than the strategies of our competitors.
RELIANCE ON KEY PERSONNEL
We depend to a large extent upon the abilities and continued efforts of our
executive officers, senior management and principals of our dealerships.
Furthermore, we will likely be dependent on the senior management of any
dealerships acquired in the future. If any of those persons leave or if we fail
to attract and retain other qualified employees, our business could be adversely
affected.
Although we have entered into employment agreements with each of our
executive officers and some of the principals of our dealerships, we cannot
guarantee that any individual will continue in his present capacity with us for
any particular period of time. We currently have no key man insurance for any of
our officers or senior management.
YEAR 2000
Year 2000 issues result from the inability of computer programs or
computerized equipment to accurately calculate, store or use a date subsequent
to December 31, 1999. The erroneous date can be interpreted in a number of
different ways; typically the year 2000 is interpreted as the year 1900. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
We recognize the need to ensure that our computer systems, equipment and
operations will not be adversely impacted by the change to the calendar year
2000. In this regard, we have taken steps to identify potential areas of risk
and have begun addressing these in our planning, purchasing and daily
operations. We have not quantified the total cost of converting all internal
systems, equipment and operations for the year 2000, but we do not believe that
the cost will be material to our financial position. In connection with
acquisitions, we review and address the candidate's year 2000 readiness during
the due diligence process.
We are currently reviewing the potential adverse impact on us of the
failure of our third party service providers or vendors to address any of their
year 2000 issues. We are dependent upon our dealerships' computer systems in our
daily operations. All our dealerships are, or are expected to be, using a
computer system supported by a major automobile dealership computer system
provider. We have contacted each of these providers and have received assurance
from the providers that their systems are, or will be, year 2000 ready. We are
dependent upon these providers, as are most dealerships in the United States, to
address the year 2000 issues. In addition, we are dependent on our Manufacturers
for the production and delivery of new vehicles and parts. Although, we have no
reason to believe that our Manufacturers will not be year 2000 ready, we have
been unable to obtain written assurance from them that their systems are year
2000 ready.
Failure by us, our Manufacturers or our third party service providers and
vendors to adequately address the year 2000 issue could have an adverse effect
on us.
GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL RISKS
We are subject to a wide range of federal, state and local laws and
regulations, such as local licensing requirements, consumer protection laws and
environmental requirements governing, among other things, discharges to the air
and water, the storage of petroleum substances and chemicals, the handling and
disposal of wastes, and the remediation of contamination arising from spills and
releases. The violation of those laws and regulations could result in civil and
criminal penalties being levied against us or in a cease and desist order
against operations that are not in compliance. Future acquisitions by us may
also be subject to governmental regulation, including antitrust reviews.
Although we believe that we substantially comply with all applicable laws and
regulations relating to our business, future laws and regulations or
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changes to existing laws or regulations may be more stringent and require us to
incur significant additional costs.
USE OF PROCEEDS
Unless otherwise provided in a prospectus supplement, we will use the net
proceeds from the sale of the securities offered by this prospectus and any
prospectus supplement for our general corporate purposes, which may include
repayment of indebtedness, the acquisition of additional automobile dealerships,
additions to our working capital, and capital expenditures.
RATIOS OF EARNINGS TO FIXED CHARGES AND
EARNINGS TO FIXED CHARGES PLUS DIVIDENDS
The following table contains our consolidated ratios of earnings to fixed
charges and earnings to fixed charges plus dividends for the periods indicated.
Since we did not commence dealership operations until November 1997, only the
financial information for periods after October 1997 reflects our combined
dealership operations. The financial information for periods prior to November
1997 are the results of the Howard Group, one of the founding groups.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- -------------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges............. 2.28 1.86 1.98 2.32 2.16 2.69
Ratio of earnings to fixed charges plus
dividends.................................... 2.28 1.86 1.98 2.32 2.16 2.69
</TABLE>
For purposes of computing the ratios of earnings to fixed charges and
earnings to fixed charges plus dividends: (i) earnings consist of income before
provision for income taxes plus fixed charges (excluding capitalized interest)
and (ii) "fixed charges" consist of interest expensed and capitalized,
amortization of debt discount and expense relating to indebtedness and the
portion of rental expense representative of the interest factor attributable to
leases for rental property. There were no dividends paid or accrued during the
periods presented above.
DESCRIPTION OF DEBT SECURITIES
The Debt Securities will be either our senior debt securities ("Senior Debt
Securities") or our subordinated debt securities ("Subordinated Debt
Securities"). The Senior Debt Securities and the Subordinated Debt Securities
will be issued under separate Indentures among us, our subsidiaries, if our
subsidiaries are guarantors of the Debt Securities, and a U.S. banking
institution (a "Trustee"). Senior Debt Securities will be issued under a "Senior
Indenture" and Subordinated Debt Securities will be issued under a "Subordinated
Indenture." Together the Senior Indenture and the Subordinated Indenture are
called "Indentures."
The Debt Securities may be issued from time to time in one or more series.
The particular terms of each series which are offered by a prospectus supplement
will be described in the prospectus supplement.
We have summarized selected provisions of the Indenture below. The summary
is not complete. The forms of the Indenture have been filed as exhibits to the
registration statement and you should read the Indentures for provisions that
may be important to you. In the summary below we have included references to
section numbers of the applicable Indentures so that you can easily locate these
provisions. Whenever we refer in this prospectus or in the prospectus supplement
to particular sections or defined terms of the Indenture, such sections or
defined terms are incorporated by reference herein or therein, as applicable.
Capitalized terms used in the summary have the meanings specified in the
Indentures.
GENERAL
The Indentures provide that Debt Securities in separate series may be
issued thereunder from time to time without limitation as to aggregate principal
amount. We may specify a maximum aggregate principal
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amount for the Debt Securities of any series. (Section 301) We will determine
the terms and conditions of the Debt Securities, including the maturity,
principal and interest, but those terms must be consistent with the Indenture.
The Debt Securities will be our unsecured obligations.
The Subordinated Debt Securities will be subordinated in right of payment
to the prior payment in full of all of our Senior Debt (as defined) as described
under "-- Subordination of Subordinated Debt Securities" and in the prospectus
supplement applicable to any Subordinated Debt Securities.
If specified in the prospectus supplement, our subsidiaries (the
"Subsidiary Guarantors") will unconditionally guarantee (the "Subsidiary
Guarantees") on a joint and several basis the Debt Securities as described under
"Subsidiary Guarantees" and in the prospectus supplement. The Subsidiary
Guarantees will be unsecured obligations of each Subsidiary Guarantor.
The applicable prospectus supplement will set forth the price or prices at
which the Debt Securities to be offered will be issued and will describe the
following terms of such Debt Securities:
(1) the title of the Debt Securities;
(2) whether the Debt Securities are Senior Debt Securities or
Subordinated Debt Securities and, if Subordinated Debt Securities, the
subordinated terms relating thereto;
(3) whether the Subsidiary Guarantors will provide Subsidiary
Guarantees of the Debt Securities;
(4) any limit on the aggregate principal amount of the Debt
Securities;
(5) the dates on which the principal of the Debt Securities will be
payable;
(6) the interest rate which the Debt Securities will bear and the
interest payment dates for the Debt Securities;
(7) the places where payments on the Debt Securities will be payable;
(8) any terms upon which the Debt Securities may be redeemed, in whole
or in part, at our option;
(9) any sinking fund or other provisions that would obligate us to
repurchase or otherwise redeem the Debt Securities;
(10) the portion of the principal amount, if less than all, of the
Debt Securities which will be payable upon declaration of acceleration of
the Maturity of the Debt Securities;
(11) whether the Debt Securities are defeasible;
(12) any addition to or change in the Events of Default;
(13) any addition to or change in the covenants in the Indenture
applicable to any of the Debt Securities; and
(14) any other terms of the Debt Securities not inconsistent with the
provisions of the Indenture. (Section 301)
Debt Securities, including Original Issue Discount Securities, may be sold
at a substantial discount below their principal amount. Special United States
federal income tax considerations applicable to Debt Securities sold at an
original issue discount may be described in the applicable prospectus
supplement. In addition, special United States federal income tax or other
considerations applicable to any Debt Securities which are denominated in a
currency or currency unit other than United States dollars may be described in
the applicable prospectus supplement.
SUBORDINATION OF SUBORDINATED DEBT SECURITIES
The indebtedness evidenced by the Subordinated Debt Securities will, to the
extent set forth in the Subordinated Indenture with respect to each series of
Subordinated Debt Securities, be subordinate in right of payment to the prior
payment in full of all of our Senior Debt, including the Senior Debt
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Securities. The prospectus supplement relating to any Subordinated Debt
Securities will summarize the subordination provisions of the Subordinated
Indenture applicable to that series including:
- the applicability and effect of such provisions upon any payment or
distribution of our assets to creditors upon any liquidation,
dissolution, winding-up, reorganization, assignment for the benefit of
creditors or marshaling of assets or any bankruptcy, insolvency or
similar proceedings;
- the applicability and effect of such provisions in the event of specified
defaults with respect to any or certain Senior Debt, including the
circumstances under which and the periods in which we will be prohibited
from making payments on the Subordinated Debt Securities; and
- the definition of Senior Debt applicable to the Subordinated Debt
Securities of that series.
The prospectus supplement will also describe as of a recent date the approximate
amount of Senior Debt to which the Subordinated Debt Securities of that series
will be subordinated.
The failure to make any payment on any of the Subordinated Debt Securities
by reason of the subordination provisions of the Subordinated Indenture
described in the prospectus supplement will not be construed as preventing the
occurrence of an Event of Default with respect to the Subordinated Debt
Securities arising from any such failure to make payment.
The subordination provisions described above will not be applicable to
payments in respect of the Subordinated Debt Securities from a defeasance trust
established in connection with any defeasance or covenant defeasance of the
Subordinated Debt Securities as described under "-- Defeasance and Covenant
Defeasance."
SUBSIDIARY GUARANTEES
If specified in the prospectus supplement, the Subsidiary Guarantors will
guarantee the Debt Securities of a series. Unless otherwise indicated in the
prospectus supplement, the following provisions will apply to the Subsidiary
Guarantees of the Subsidiary Guarantors.
Subject to the limitations described below and in the prospectus
supplement, the Subsidiary Guarantors will, jointly and severally,
unconditionally guarantee the performance and punctual payment when due, whether
at Stated Maturity, by acceleration or otherwise, of all our obligations under
the Indentures and the Debt Securities of a series, whether for principal of,
premium, if any, or interest on the Debt Securities or otherwise (all such
obligations guaranteed by a Subsidiary Guarantor being herein called the
"Guaranteed Obligations"). The Subsidiary Guarantors will also pay, in addition
to the amount stated above, any and all expenses (including reasonable counsel
fees and expenses) incurred by the applicable Trustee in enforcing any rights
under a Subsidiary Guarantee with respect to a Subsidiary Guarantor.
In the case of Subordinated Debt Securities, a Subsidiary Guarantor's
Subsidiary Guarantee will be subordinated in right of payment to the Senior Debt
of such Subsidiary Guarantor on the same basis as the Subordinated Debt
Securities are subordinated to our Senior Debt. No payment will be made by any
Subsidiary Guarantor under its Subsidiary Guarantee during any period in which
payments by us on the Subordinated Debt Securities are suspended by the
subordination provisions of the Subordinated Indenture.
Each Subsidiary Guarantee will be limited in amount to an amount not to
exceed the maximum amount that can be guaranteed by the relevant Subsidiary
Guarantor without rendering such Subsidiary Guarantee voidable under applicable
law relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally.
Each Subsidiary Guarantee will be a continuing guarantee and will:
(1) remain in full force and effect until either (a) payment in full
of all the Guaranteed Obligations (or the applicable Debt Securities are
defeased and discharged in accordance with the defeasance provisions of the
Indentures) or (b) released as described in the following paragraph,
(2) be binding upon each Subsidiary Guarantor and
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(3) inure to the benefit of and be enforceable by the applicable
Trustee, the Holders and their successors, transferees and assigns.
In the event that a Subsidiary Guarantor ceases to be a Restricted
Subsidiary, whether as a result of a disposition of all of the assets or all of
the Capital Stock of such Subsidiary Guarantor, by way of sale, merger,
consolidation or otherwise, such Subsidiary Guarantor will be deemed released
and relieved of its obligations under its Subsidiary Guarantee without any
further action required on the part of the Trustee or any Holder and no other
Person acquiring or owning the assets or Capital Stock of such Subsidiary
Guarantor (if not otherwise a Restricted Subsidiary) will be required to enter
into a Subsidiary Guarantee; provided, in each case, that the transaction or
transactions resulting in such Subsidiary Guarantor's ceasing to be a Restricted
Subsidiary are carried out pursuant to and in compliance with all of the
applicable covenants in the Indenture. In addition, the prospectus supplement
may specify additional circumstances under which a Subsidiary Guarantor can be
released from its Subsidiary Guarantee.
FORM, EXCHANGE AND TRANSFER
The Debt Securities of each series will be issuable only in fully
registered form, without coupons, and, unless otherwise specified in the
applicable prospectus supplement, only in denominations of $1,000 and integral
multiples thereof. (Section 302)
At the option of the Holder, subject to the terms of the applicable
Indenture and the limitations applicable to Global Securities, Debt Securities
of each series will be exchangeable for other Debt Securities of the same series
of any authorized denomination and of a like tenor and aggregate principal
amount. (Section 305)
Subject to the terms of the applicable Indenture and the limitations
applicable to Global Securities, Debt Securities may be presented for exchange
as provided above or for registration of transfer (duly endorsed or with the
form of transfer endorsed thereon duly executed) at the office of the Security
Registrar or at the office of any transfer agent designated by us for such
purpose. No service charge will be made for any registration of transfer or
exchange of Debt Securities, but we may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith. Such
transfer or exchange will be effected upon the Security Registrar or such
transfer agent, as the case may be, being satisfied with the documents of title
and identity of the person making the request. The Security Registrar and any
other transfer agent initially designated by us for any Debt Securities will be
named in the applicable prospectus supplement. (Section 305) We may at any time
designate additional transfer agents or rescind the designation of any transfer
agent or approve a change in the office through which any transfer agent acts,
except that we will be required to maintain a transfer agent in each Place of
Payment for the Debt Securities of each series. (Section 1002).
If the Debt Securities of any series (or of any series and specified terms)
are to be redeemed in part, we will not be required to (i) issue, register the
transfer of or exchange any Debt Security of that series (or of that series and
specified terms, as the case may be) during a period beginning at the opening of
business 15 days before the day of mailing of a notice of redemption of any such
Debt Security that may be selected for redemption and ending at the close of
business on the day of such mailing or (ii) register the transfer of or exchange
any Debt Security so selected for redemption, in whole or in part, except the
unredeemed portion of any such Debt Security being redeemed in part. (Section
305)
GLOBAL SECURITIES
Some or all of the Debt Securities of any series may be represented, in
whole or in part, by one or more Global Securities which will have an aggregate
principal amount equal to that of the Debt Securities represented thereby. Each
Global Security will be registered in the name of a Depositary or a nominee
thereof identified in the applicable prospectus supplement, will be deposited
with such Depositary or nominee or a custodian therefor and will bear a legend
regarding the restrictions on exchanges and registration of transfer thereof
referred to below and any such other matters as may be provided for pursuant to
the Indenture.
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Notwithstanding any provision of the applicable Indenture or any Debt
Security described herein, no Global Security may be exchanged in whole or in
part for Debt Securities registered, and no transfer of a Global Security in
whole or in part may be registered, in the name of any Person other than the
Depositary for such Global Security or any nominee of such Depositary unless:
(i) the Depositary has notified us that it is unwilling or unable to
continue as Depositary for such Global Security or has ceased to be
qualified to act as such as required by the applicable Indenture,
(ii) there shall have occurred and be continuing an Event of Default
with respect to the Debt Securities represented by such Global Security or
(iii) there shall exist such circumstances, if any, in addition to or
in lieu of those described above as may be described in the applicable
prospectus supplement.
All Debt Securities issued in exchange for a Global Security or any portion
thereof will be registered in such names as the Depositary may direct. (Sections
204 and 305)
As long as the Depositary, or its nominee, is the registered Holder of a
Global Security, the Depositary or such nominee, as the case may be, will be
considered the sole owner and Holder of such Global Security and the Debt
Securities represented thereby for all purposes under the Debt Securities and
the applicable Indenture. Except in the limited circumstances referred to above,
owners of beneficial interests in a Global Security will not be entitled to have
such Global Security or any Debt Securities represented thereby registered in
their names, will not receive or be entitled to receive physical delivery of
certificated Debt Securities in exchange therefor and will not be considered to
be the owners or Holders of such Global Security or any Debt Securities
represented thereby for any purpose under the Debt Securities or the applicable
Indenture. All payments of principal of and any premium and interest on a Global
Security will be made to the Depositary or its nominee, as the case may be, as
the Holder thereof. The laws of some jurisdictions require that certain
purchasers of Debt Securities take physical delivery of such Debt Securities in
definitive form. These laws may impair the ability to transfer beneficial
interests in a Global Security.
Ownership of beneficial interests in a Global Security will be limited to
institutions that have accounts with the Depositary or its nominee
("participants") and to persons that may hold beneficial interests through
participants. In connection with the issuance of any Global Security, the
Depositary will credit, on its book-entry registration and transfer system, the
respective principal amounts of Debt Securities represented by the Global
Security to the accounts of its participants. Ownership of beneficial interests
in a Global Security will be shown only on, and the transfer of those ownership
interests will be effected only through, records maintained by the Depositary
(with respect to participants' interests) or any such participant (with respect
to interests of persons held by such participants on their behalf). Payments,
transfers, exchanges and other matters relating to beneficial interests in a
Global Security may be subject to various policies and procedures adopted by the
Depositary from time to time. None of us, the Subsidiary Guarantors, the
Trustees or our agents, the Subsidiary Guarantors or the Trustees will have any
responsibility or liability for any aspect of the Depositary's or any
participant's records relating to, or for payments made on account of,
beneficial interests in a Global Security, or for maintaining, supervising or
reviewing any records relating to such beneficial interests.
PAYMENT AND PAYING AGENTS
Unless otherwise indicated in the applicable prospectus supplement, payment
of interest on a Debt Security on any Interest Payment Date will be made to the
Person in whose name such Debt Security (or one or more Predecessor Debt
Securities) is registered at the close of business on the Regular Record Date
for such interest. (Section 307)
Unless otherwise indicated in the applicable prospectus supplement,
principal of and any premium and interest on the Debt Securities of a particular
series will be payable at the office of such Paying Agent or Paying Agents as we
may designate for such purpose from time to time, except that at our option
payment of any interest may be made by check mailed to the address of the Person
entitled thereto as such address
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appears in the Security Register. Unless otherwise indicated in the applicable
prospectus supplement, the corporate trust office of the trustee under the
Senior Indenture (the "Senior Trustee") in The City of New York will be
designated as sole Paying Agent for payments with respect to Senior Debt
Securities of each series and the corporate trust office of the Subordinated
Trustee in the City of New York will be designated as the sole Paying Agent for
payment with respect to Subordinated Debt Securities of each series. Any other
Paying Agents initially designated by us for the Debt Securities of a particular
series will be named in the applicable prospectus supplement. We may at any time
designate additional Paying Agents or rescind the designation of any Paying
Agent or approve a change in the office through which any Paying Agent acts,
except that we will be required to maintain a Paying Agent in each Place of
Payment for the Debt Securities of a particular series. (Section 1002)
All moneys paid by us to a Paying Agent for the payment of the principal of
or any premium or interest on any Debt Security which remain unclaimed at the
end of two years after such principal, premium or interest has become due and
payable will be repaid to us, and the Holder of such Debt Security thereafter
may look only to us for payment thereof. (Section 1003)
CONSOLIDATION, MERGER AND SALE OF ASSETS
We may not consolidate with or merge into, or convey, transfer or lease our
properties and assets substantially as an entirety to, any Person (a "successor
Person"), and may not permit any Person to merge into, or convey, transfer or
lease its properties and assets substantially as an entirety to, us, unless:
(i) the successor Person (if any) is a corporation, partnership, trust
or other entity organized and validly existing under the laws of any
domestic jurisdiction and assumes our obligations on the Debt Securities
and under the Indentures,
(ii) immediately after giving effect to the transaction, no Event of
Default, and no event which, after notice or lapse of time or both, would
become an Event of Default, shall have occurred and be continuing and
(iii) certain other conditions, including any additional conditions
with respect to any particular Debt Securities specified in the applicable
prospectus supplement, are met. (Section 801)
EVENTS OF DEFAULT
Unless otherwise specified in the prospectus supplement, each of the
following will constitute an Event of Default under the applicable Indenture
with respect to Debt Securities of any series:
(1) failure to pay principal of or any premium on any Debt Security of
that series when due, whether or not, in the case of Subordinated Debt
Securities, such payment is prohibited by the subordination provisions of
the Subordinated Indenture;
(2) failure to pay any interest on any Debt Securities of that series
when due, continued for 30 days, whether or not, in the case of
Subordinated Debt Securities, such payment is prohibited by the
subordination provisions of the Subordinated Indenture;
(3) failure to deposit any sinking fund payment, when due, in respect
of any Debt Security of that series, whether or not, in the case of
Subordinated Debt Securities, such deposit is prohibited by the
subordination provisions of the Subordinated Indenture;
(4) failure to perform or comply with the provisions described under
"Consolidation, Merger and Sale of Assets";
(5) failure to perform any of our other covenants in such Indenture
(other than a covenant included in such Indenture solely for the benefit of
a series other than that series), continued for 60 days after written
notice has been given by the Trustee, or the Holders of at least 25% in
principal amount of the Outstanding Debt Securities of that series, as
provided in such Indenture;
(6) default under the terms of any instrument evidencing or securing
any of our Debt or any Restricted Subsidiary having an outstanding
principal amount of $10 million individually or in the aggregate which
default results in the acceleration of the payment of all or any portion of
such Debt
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(which acceleration is not rescinded within a period of 10 days from the
occurrence of such acceleration) or constitutes the failure to pay all or
any portion of the principal amount of such Debt when due;
(7) the rendering of a final judgment or judgments (not subject to
appeal) against us or any Restricted Subsidiary in an amount in excess of
$10 million which remains undischarged or unstayed for a period of 60 days
after the date on which the right to appeal has expired;
(8) certain events of bankruptcy, insolvency or reorganization
affecting us, any Significant Restricted Subsidiary or any group of
Restricted Subsidiaries that together would constitute a Significant
Restricted Subsidiary; and
(9) in the case of Debt Securities guaranteed by any Subsidiary
Guarantor, the Subsidiary Guarantee of any Subsidiary Guarantor is held by
a final non-appealable order or judgment of a court of competent
jurisdiction to be unenforceable or invalid or ceases for any reason to be
in full force and effect (other than in accordance with the terms of the
applicable Indenture) or any Subsidiary Guarantor or any Person acting on
behalf of any Subsidiary Guarantor denies or disaffirms such Subsidiary
Guarantor's obligations under its Subsidiary Guarantee (other than by
reason of a release of such Subsidiary Guarantor from its Subsidiary
Guarantee in accordance with the terms of the applicable Indenture).
(Section 501)
If an Event of Default (other than an Event of Default described in clause
(8) above) with respect to the Debt Securities of any series at the time
Outstanding shall occur and be continuing, either the applicable Trustee or the
Holders of at least 25% in aggregate principal amount of the Outstanding Debt
Securities of that series by notice as provided in the Indenture may declare the
principal amount of the Debt Securities of that series (or, in the case of any
Debt Security that is an Original Issue Discount Debt Security or the principal
amount of which is not then determinable, such portion of the principal amount
of such Debt Security, or such other amount in lieu of such principal amount, as
may be specified in the terms of such Debt Security) to be due and payable
immediately. If an Event of Default described in clause (8) above with respect
to the Debt Securities of any series at the time Outstanding shall occur, the
principal amount of all the Debt Securities of that series (or, in the case of
any such Original Issue Discount Security or other Debt Security, such specified
amount) will automatically, and without any action by the applicable Trustee or
any Holder, become immediately due and payable. After any such acceleration, but
before a judgment or decree based on acceleration, the Holders of a majority in
aggregate principal amount of the Outstanding Debt Securities of that series
may, under certain circumstances, rescind and annul such acceleration if all
Events of Default, other than the non-payment of accelerated principal (or other
specified amount), have been cured or waived as provided in the applicable
Indenture. (Section 502) For information as to waiver of defaults, see
"Modification and Waiver".
Subject to the provisions of the Indentures relating to the duties of the
Trustees in case an Event of Default shall occur and be continuing, each Trustee
will be under no obligation to exercise any of its rights or powers under the
applicable Indenture at the request or direction of any of the Holders, unless
such Holders shall have offered to such Trustee reasonable indemnity. (Section
603) Subject to such provisions for the indemnification of the Trustees, the
Holders of a majority in aggregate principal amount of the Outstanding Debt
Securities of any series will have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee with respect to the Debt
Securities of that series. (Section 512)
No Holder of a Debt Security of any series will have any right to institute
any proceeding with respect to the applicable Indenture, or for the appointment
of a receiver or a trustee, or for any other remedy thereunder, unless (i) such
Holder has previously given to the Trustee under the applicable Indenture
written notice of a continuing Event of Default with respect to the Debt
Securities of that series, (ii) the Holders of at least 25% in aggregate
principal amount of the Outstanding Debt Securities of that series have made
written request, and such Holder or Holders have offered reasonable indemnity,
to the Trustee to institute such proceeding as trustee and (iii) the Trustee has
failed to institute such proceeding, and has not received from the Holders of a
majority in aggregate principal amount of the Outstanding
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Debt Securities of that series a direction inconsistent with such request,
within 60 days after such notice, request and offer. (Section 507) However, such
limitations do not apply to a suit instituted by a Holder of a Debt Security for
the enforcement of payment of the principal of or any premium or interest on
such Debt Security on or after the applicable due date specified in such Debt
Security. (Section 508)
We will be required to furnish to each Trustee annually a statement by
certain of our officers as to whether or not we, to their knowledge, are in
default in the performance or observance of any of the terms, provisions and
conditions of the applicable Indenture and, if so, specifying all such known
defaults. (Section 1004)
MODIFICATION AND WAIVER
Modifications and amendments of the Indentures may be made by us, the
Subsidiary Guarantors and the applicable Trustee with the consent of the Holders
of a majority in aggregate principal amount of the Outstanding Debt Securities
of each series affected by such modification or amendment; provided, however,
that no such modification or amendment may, without the consent of the Holder of
each Outstanding Debt Security affected thereby:
(1) change the Stated Maturity of the principal of, or any installment
of principal of or interest on, any Debt Security,
(2) reduce the principal amount of, or any premium or interest on, any
Debt Security,
(3) reduce the amount of principal of an Original Issue Discount
Security or any other Debt Security payable upon acceleration of the
Maturity thereof,
(4) change the place or currency of payment of principal of, or any
premium or interest on, any Debt Security,
(5) impair the right to institute suit for the enforcement of any
payment on or with respect to any Debt Security,
(6) in the case of Subordinated Debt Securities, modify the
subordination provisions in a manner adverse to the Holders of the
Subordinated Debt Securities,
(7) except as provided in the applicable Indenture, release the
Subsidiary Guarantee of a Subsidiary Guarantor,
(8) reduce the percentage in principal amount of Outstanding Debt
Securities of any series, the consent of whose Holders is required for
modification or amendment of the Indenture,
(9) reduce the percentage in principal amount of Outstanding Debt
Securities of any series necessary for waiver of compliance with certain
provisions of the Indenture or for waiver of certain defaults or
(10) modify such provisions with respect to modification and waiver.
(Section 902)
The Holders of a majority in principal amount of the Outstanding Debt
Securities of any series may waive compliance by us with certain restrictive
provisions of the applicable Indenture. The Holders of a majority in principal
amount of the Outstanding Debt Securities of any series may waive any past
default under the applicable Indenture, except a default in the payment of
principal, premium or interest and certain covenants and provisions of the
Indenture which cannot be amended without the consent of the Holder of each
Outstanding Debt Security of such series affected. (Section 513)
The Indentures provide that in determining whether the Holders of the
requisite principal amount of the Outstanding Debt Securities have given or
taken any direction, notice, consent, waiver or other action under such
Indenture as of any date, (i) the principal amount of an Original Issue Discount
Security that will be deemed to be Outstanding will be the amount of the
principal thereof that would be due and payable as of such date upon
acceleration of the Maturity thereof to such date, (ii) if, as of such date, the
principal amount payable at the Stated Maturity of a Debt Security is not
determinable (for example, because it is based on an index), the principal
amount of such Debt Security deemed to be Outstanding as of such date will be an
amount determined in the manner prescribed for such Debt Security and (iii) the
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principal amount of a Debt Security denominated in one or more foreign
currencies or currency units that will be deemed to be Outstanding will be the
U.S. dollar equivalent, determined as of such date in the manner prescribed for
such Debt Security, of the principal amount of such Debt Security (or, in the
case of a Debt Security described in clause (i) or (ii) above, of the amount
described in such clause). Certain Debt Securities, including those for whose
payment or redemption money has been deposited or set aside in trust for the
Holders and those that have been fully defeased pursuant to Section 1302, will
not be deemed to be Outstanding. (Section 101)
Except in certain limited circumstances, we will be entitled to set any day
as a record date for the purpose of determining the Holders of Outstanding Debt
Securities of any series entitled to give or take any direction, notice,
consent, waiver or other action under the applicable Indenture, in the manner
and subject to the limitations provided in the Indenture. In certain limited
circumstances, the Trustee will be entitled to set a record date for action by
Holders. If a record date is set for any action to be taken by Holders of a
particular series, such action may be taken only by persons who are Holders of
Outstanding Debt Securities of that series on the record date. To be effective,
such action must be taken by Holders of the requisite principal amount of such
Debt Securities within a specified period following the record date. For any
particular record date, this period will be 180 days or such other period as may
be specified by us (or the Trustee, if it set the record date), and may be
shortened or lengthened (but not beyond 180 days) from time to time. (Section
104)
DEFEASANCE AND COVENANT DEFEASANCE
If and to the extent indicated in the applicable prospectus supplement, we
may elect, at our option at any time, to have the provisions of Section 1502,
relating to defeasance and discharge of indebtedness, or Section 1503, relating
to defeasance of certain restrictive covenants applied to the Debt Securities of
any series, or to any specified part of a series. (Section 1501)
Defeasance and Discharge. The Indentures provide that, upon our exercise
of our option (if any) to have Section 1502 applied to any Debt Securities, we
and, if applicable, each Subsidiary Guarantor will be discharged from all our
obligations, and, if such Debt Securities are Subordinated Debt Securities, the
provisions of the Subordinated Indenture relating to subordination will cease to
be effective, with respect to such Debt Securities (except for certain
obligations to exchange or register the transfer of Debt Securities, to replace
stolen, lost or mutilated Debt Securities, to maintain paying agencies and to
hold moneys for payment in trust) upon the deposit in trust for the benefit of
the Holders of such Debt Securities of money or U.S. Government Obligations, or
both, which, through the payment of principal and interest in respect thereof in
accordance with their terms, will provide money in an amount sufficient to pay
the principal of and any premium and interest on such Debt Securities on the
respective Stated Maturities in accordance with the terms of the applicable
Indenture and such Debt Securities. Such defeasance or discharge may occur only
if, among other things,
(i) we have delivered to the applicable Trustee an Opinion of Counsel
to the effect that we have received from, or there has been published by,
the United States Internal Revenue Service a ruling, or there has been a
change in tax law, in either case to the effect that Holders of such Debt
Securities will not recognize gain or loss for federal income tax purposes
as a result of such deposit, defeasance and discharge and will be subject
to federal income tax on the same amount, in the same manner and at the
same times as would have been the case if such deposit, defeasance and
discharge were not to occur;
(ii) no Event of Default or event that with the passing of time or the
giving of notice, or both, shall constitute an Event of Default shall have
occurred or be continuing;
(iii) such deposit, defeasance and discharge will not result in a
breach or violation of, or constitute a default under, any agreement or
instrument to which we or any Restricted Subsidiary is a party or by which
we or any Restricted Subsidiary is bound;
(iv) in the case of Subordinated Debt Securities, at the time of such
deposit, no default in the payment of all or a portion of principal of (or
premium, if any) or interest on or other obligations in respect of any of
our Senior Debt shall have occurred and be continuing and no other event of
default
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with respect to any of our Senior Debt shall have occurred and be
continuing permitting after notice or the lapse of time, or both, the
acceleration thereof; and
(v) we have delivered to the Trustee an Opinion of Counsel to the
effect that such deposit shall not cause the Trustee or the trust so
created to be subject to the Investment Company Act of 1940. (Sections 1502
and 1504)
Defeasance of Certain Covenants. The Indentures provide that, upon our
exercise of our option (if any) to have Section 1503 applied to any Debt
Securities, we may omit to comply with certain restrictive covenants, including
those that may be described in the applicable prospectus supplement, the
occurrence of certain Events of Default, which are described above in clause (5)
(with respect to such restrictive covenants) and clauses (6) and (7) under
"Events of Default" and any that may be described in the applicable prospectus
supplement, will not be deemed to either be or result in an Event of Default
and, if such Debt Securities are Subordinated Debt Securities, the provisions of
the Subordinated Indenture relating to subordination will cease to be effective,
in each case with respect to such Debt Securities. In order to exercise such
option, we must deposit, in trust for the benefit of the Holders of such Debt
Securities, money or U.S. Government Obligations, or both, which, through the
payment of principal and interest in respect thereof in accordance with their
terms, will provide money in an amount sufficient to pay the principal of and
any premium and interest on such Debt Securities on the respective Stated
Maturities in accordance with the terms of the applicable Indenture and such
Debt Securities. Such covenant defeasance may occur only if we have delivered to
the applicable Trustee an Opinion of Counsel that in effect says that Holders of
such Debt Securities will not recognize gain or loss for federal income tax
purposes as a result of such deposit and defeasance of certain obligations and
will be subject to federal income tax on the same amount, in the same manner and
at the same times as would have been the case if such deposit and defeasance
were not to occur and the requirements set forth in clauses (ii), (iii), (iv)
and (v) above are satisfied. If we exercise this option with respect to any Debt
Securities and such Debt Securities were declared due and payable because of the
occurrence of any Event of Default, the amount of money and U.S. Government
Obligations so deposited in trust would be sufficient to pay amounts due on such
Debt Securities at the time of their respective Stated Maturities but may not be
sufficient to pay amounts due on such Debt Securities upon any acceleration
resulting from such Event of Default. In such case, we would remain liable for
such payments. (Sections 1503 and 1504)
NOTICES
Notices to Holders of Debt Securities will be given by mail to the
addresses of such Holders as they may appear in the Security Register. (Sections
101 and 106)
TITLE
We, the Subsidiary Guarantors, the Trustees and any agent of us, the
Subsidiary Guarantors or a Trustee may treat the Person in whose name a Debt
Security is registered as the absolute owner of the Debt Security (whether or
not such Debt Security may be overdue) for the purpose of making payment and for
all other purposes. (Section 308)
GOVERNING LAW
The Indentures and the Debt Securities will be governed by, and construed
in accordance with, the law of the State of New York. (Section 112)
DESCRIPTION OF CAPITAL STOCK
As of December 31, 1998, our authorized capital stock was 51,000,000
shares. Those shares consisted of: (a) 1,000,000 shares of preferred stock, none
of which were outstanding; and (b) 50,000,000 shares of common stock, of which
18,230,149 shares were outstanding.
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COMMON STOCK
Subject to any special voting rights of any series of preferred stock that
we may issue in the future, the holders of the common stock may vote one vote
for each share held on all matters voted upon by our stockholders, including the
election of our directors. Holders of common stock may not cumulate their votes
in elections of directors.
Subject to the rights of any then outstanding shares of preferred stock,
the holders of common stock may receive such dividends as our Board of Directors
may declare in its discretion out of legally available funds. Holders of common
stock will share equally in our net assets upon liquidation after payment or
provision for all liabilities and any preferential liquidation rights of any
preferred stock then outstanding. The holders of common stock have no preemptive
rights to purchase our shares of stock. Shares of common stock are not subject
to any redemption provisions and are not convertible into any of our other
securities. All outstanding shares of common stock are fully paid and
non-assessable. Any additional common stock we issue will also be fully paid and
non-assessable.
PREFERRED STOCK
The prospectus supplement will specify any terms of any series of preferred
stock offered by it including:
- the series, the number of shares offered and the liquidation value of the
preferred stock,
- the price at which the preferred stock will be issued,
- the dividend rate, the dates on which the dividends will be payable and
other terms relating to the payment of dividends on the preferred stock,
- the liquidation preference of the preferred stock,
- the voting rights of the preferred stock,
- whether the preferred stock is redeemable or subject to a sinking fund,
and the terms of any such redemption or sinking fund,
- whether the preferred stock is convertible or exchangeable for any other
securities, and the terms of any such conversion, and
- any additional rights, preferences, qualifications, limitations and
restrictions of the preferred stock.
The description of the terms of the preferred stock to be set forth in an
applicable prospectus supplement will not be complete and will be subject to and
qualified in its entirety by reference to the statement of resolution relating
to the applicable series of preferred stock. The registration statement of which
this prospectus forms a part will include the statement of resolution as an
exhibit or incorporate it by reference.
We may issue preferred stock from time to time in one or more series.
Subject to the provisions of our Restated Certificate of Incorporation and
limitations prescribed by law, our Board of Directors may adopt resolutions to
issue the shares of preferred stock, to fix the number of shares, and to change
the number of shares constituting any series and establish the voting powers,
designations, preferences and relative participating, optional or other special
rights, qualifications, limitations or restrictions thereof, including dividend
rights (including whether dividends are cumulative), dividend rates, terms of
redemption (including sinking fund provisions), redemption prices, conversion
rights and liquidation preferences of the shares constituting any series of
preferred stock, in each case without any further action or vote by our
stockholders.
Undesignated preferred stock may enable our Board of Directors to render
more difficult or to discourage an attempt to obtain control of us by means of a
tender offer, proxy contest, merger or otherwise, and to thereby protect the
continuity of our management. The issuance of shares of preferred stock may
adversely affect the rights of the holders of our common stock or any existing
preferred stock. For example, any preferred stock issued may rank prior to our
common stock or any existing preferred stock as to dividend rights, liquidation
preference or both, may have full or limited voting rights and may
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be convertible into shares of common stock or any existing preferred stock. As a
result, the issuance of shares of preferred stock may discourage bids for our
common stock or may otherwise adversely affect the market price of our common
stock or any existing preferred stock.
ANTI-TAKEOVER PROVISIONS
Certain provisions in our Restated Certificate of Incorporation and Bylaws
and our stockholders' rights plan may encourage persons considering unsolicited
tender offers or other unilateral takeover proposals to negotiate with our Board
of Directors rather than pursue non-negotiated takeover attempts.
Classified Board of Directors and Limitations on Removal of Directors. Our
Board of Directors is divided into three classes. The directors of each class
are elected for three-year terms, and the terms of the three classes are
staggered so that directors from a single class are elected at each annual
meeting of stockholders. Stockholders may remove a director only for cause and
upon the vote of holders of at least 80% of the voting power of the outstanding
shares of common stock. In general, our Board of Directors, not the
stockholders, has the right to appoint persons to fill vacancies on the Board of
Directors.
No Written Consent by Stockholders. Our Restated Certificate of
Incorporation provides that any action required or permitted to be taken by our
stockholders must be taken at a duly called annual or special meeting of our
stockholders. Special meetings of our stockholders may be called only by our
Board of Directors.
Business Combinations under Delaware Law. We are a Delaware corporation
and are subject to Section 203 of the Delaware General Corporation Law. Section
203 prevents a person who owns 15% or more of our outstanding voting stock (an
"interested stockholder") from engaging in certain business combinations with us
for three years following the date that the person become an interested
stockholder. These restrictions do not apply if:
- before the person became an interested stockholder, our Board of
Directors approved the transaction in which the interested stockholder
became an interested stockholder or the business combination;
- upon completion of the transaction that resulted in the interested
stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of our outstanding voting stock at the time
the transaction commenced; or
- following the transaction in which the person became an interested
stockholder, the business combination is approved by both our Board of
Directors and the holders of at least two-thirds of our outstanding
voting stock not owned by the interested stockholder.
These restrictions do not apply to certain business combinations proposed
by an interested stockholder following the announcement of certain extraordinary
transactions involving us and a person who was not an interested stockholder
during the previous three years or who became an interested stockholder with the
approval of a majority of our directors, if that extraordinary transaction is
approved or goes unopposed by a majority of our directors who were directors
before any person became an interested stockholder in the previous three years
or who were recommended for election or elected to succeed such directors by a
majority of such directors then in office.
Stockholders' Rights Plan. Our Board of Directors has adopted a
stockholders' rights plan (the "Rights Plan"). Under the Rights Plan, each Right
entitles the registered holder under the circumstances described below to
purchase from us one one-thousandth of a share of our Junior Participating
Preferred Stock (the "Preferred Shares") at a price of $65 per one
one-thousandth of a Preferred Share (the "Purchase Price"), subject to
adjustment. The following is a summary of certain terms of the Rights Plan. The
Rights Plan is filed as an exhibit to the registration statement of which this
prospectus is a part and this summary is qualified by reference to the specific
terms of the Rights Plan.
Until the Distribution Date (as defined below), the Rights attach to all
common stock certificates representing outstanding shares. No separate Right
Certificate will be distributed. A Right is issued for
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each share of common stock issued. The Rights will separate from the common
stock and a Distribution Date will occur upon the earlier of
- 10 business days following a public announcement that a person or group
of affiliated or associated persons (an "Acquiring Person") has acquired
beneficial ownership of 20% or more of our outstanding Voting Shares (as
defined in the Rights Agreement), or
- 10 business days following the commencement or announcement of an
intention to commence a tender offer or exchange offer the consummation
of which would result in the person or group beneficially owning 20% or
more of our outstanding Voting Shares.
Until the Distribution Date or the earlier of redemption or expiration of
the Rights, the Rights are evidenced by the certificates representing the common
stock. As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights (the "Rights Certificates") will be mailed to
holders of record of the common stock as of the close of business on the
Distribution Date and such separate Right Certificates alone will thereafter
evidence the Rights.
The Rights are not exercisable until the Distribution Date. The rights will
expire on November 4, 2007 (the "Final Expiration Date"), unless the Final
Expiration Date is extended or the Rights are earlier redeemed or exchanged.
If a person or group acquires 20% or more of our Voting Shares, each Right
then outstanding (other than Rights beneficially owned by the Acquiring Persons
which would become null and void) becomes a right to buy that number of shares
of common stock (or under certain circumstances, the equivalent number of one
one-thousandths of a Preferred Share) that at the time of such acquisition has a
market value of two times the Purchase Price of the Right.
If we are acquired in a merger or other business combination transaction or
assets constituting more than 50% of our consolidated assets or producing more
than 50% of our earning power or cash flow are sold, proper provision will be
made so that each holder of a Right will thereafter have the right to receive,
upon the exercise thereof at the then current Purchase Price of the Right, that
number of shares of common stock of the acquiring company which at the time of
such transaction has a market value of two times the Purchase Price of the
Right.
The dividend and liquidation rights, and the non-redemption feature, of the
Preferred Shares are designed so that the value of one one-thousandth of a
Preferred Share purchasable upon exercise of each Right will approximate the
value of one share of common stock. The Preferred Shares issuable upon exercise
of the Rights will be non-redeemable and rank junior to all other series of our
preferred stock. Each whole Preferred Share will be entitled to receive a
quarterly preferential dividend in an amount per share equal to the greater of
(i) $1.00 in cash, or (ii) in the aggregate, 1,000 times the dividend declared
on the common stock. In the event of liquidation, the holders of Preferred
Shares may receive a preferential liquidation payment equal to the greater of
(i) $1,000 per share, or (ii) in the aggregate, 1,000 times the payment made on
the shares of common stock. In the event of any merger, consolidation or other
transaction in which the shares of common stock are exchanged for or changed
into other stock or securities, cash or other property, each whole Preferred
Share will be entitled to receive 1,000 times the amount received per share of
common stock. Each whole Preferred Share will be entitled to 1,000 votes on all
matters submitted to a vote of our stockholders and Preferred Shares will
generally vote together as one class with the common stock and any other capital
stock on all matters submitted to a vote of our stockholders.
The number of outstanding Rights and the number of one one-thousandths of a
Preferred Share or other securities or property issuable upon exercise of the
Rights, and the Purchase Price payable, may be adjusted from time to time to
prevent dilution.
At any time after a person or group of affiliated or associated persons
acquires beneficial ownership of 20% or more of our outstanding Voting Shares
and before a person or group acquires beneficial ownership of 50% or more of our
outstanding Voting Shares our Board of Directors may, at its option, issue
common stock in mandatory redemption of, and in exchange for, all or part of the
then outstanding and exercisable Rights (other than Rights owned by such person
or group which would become null and void) at an
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exchange ratio of one share of common stock (or one one-thousandth of a
Preferred Share) for each two shares of common stock for which each Right is
then exercisable, subject to adjustment.
At any time prior to the first public announcement that a person or group
has become the beneficial owner of 20% or more of the outstanding Voting Shares,
our Board of Directors may redeem all but not less than all the then outstanding
Rights at a price of $0.01 per Right (the "Redemption Price"). The redemption of
the rights may be made effective at such time, on such basis and with such
conditions as our Board of Directors in its sole discretion may establish.
Immediately upon the action of our Board of Directors ordering redemption of the
rights, the right to exercise the Rights will terminate and the only right of
the holders of Rights will be to receive the Redemption Price.
LIMITATION OF LIABILITY OF OFFICERS AND DIRECTORS
Delaware law authorizes corporations to limit or eliminate the personal
liability of officers and directors to corporations and their stockholders for
monetary damages for breach of officers' and directors' fiduciary duty of care.
The duty of care requires that, when acting on behalf of the corporation,
officers and directors must exercise an informed business judgment based on all
material information reasonably available to them. Absent the limitations
authorized by Delaware law, officers and directors are accountable to
corporations and their stockholders for monetary damages for conduct
constituting gross negligence in the exercise of their duty of care. Delaware
law enables corporations to limit available relief to equitable remedies such as
injunction or rescission.
Our Restated Certificate of Incorporation limits the liability of our
officers and directors to us and our stockholders to the fullest extent
permitted by Delaware law. Specifically, our officers and directors will not be
personally liable for monetary damages for breach of an officer's or director's
fiduciary duty in such capacity, except for liability
- for any breach of the officer's or director's duty of loyalty to us or
our stockholders,
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation law, or
- for any transaction from which the officer or director derived an
improper personal benefit.
The inclusion of this provision in our Restated Certificate of
Incorporation may reduce the likelihood of derivative litigation against our
officers and directors, and may discourage or deter stockholders or management
from bringing a lawsuit against our officers and directors for breach of their
duty of care, even though such an action, if successful, might have otherwise
benefitted us and our stockholders.
Both our Restated Certificate of Incorporation and Bylaws provide
indemnification to our officers and directors and certain other persons with
respect to certain matters to the maximum extent allowed by Delaware law as it
exists now or may hereafter be amended. These provisions do not alter the
liability of officers and directors under federal securities laws and do not
affect the right to sue (nor to recover monetary damages) under federal
securities laws for violations thereof.
TRANSFER AGENT AND REGISTRAR
Our transfer agent and registrar of the common stock, as well as the rights
agent under our Rights Plan, is ChaseMellon Shareholder Services, L.L.C.
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DEPOSITARY SHARES
GENERAL
We may offer fractional shares of preferred stock, rather than full shares
of preferred stock. If we decide to offer fractional shares of preferred stock,
we will issue receipts for depositary shares. Each depositary share will
represent a fraction of a share of a particular series of preferred stock. The
prospectus supplement will indicate that fraction. The shares of preferred stock
represented by depositary shares will be deposited under a deposit agreement
between us and a bank or trust company that meets certain requirements and is
selected by us (the "Depositary"). Each owner of a depositary share will be
entitled to all the rights and preferences of the preferred stock represented by
the depositary share. The depositary shares will be evidenced by depositary
receipts issued pursuant to the deposit agreement. Depositary receipts will be
distributed to those persons purchasing the fractional shares of preferred stock
in accordance with the terms of the offering.
We have summarized selected provisions of the deposit agreement and the
depositary receipts. The summary is not complete. The forms of the deposit
agreement and the depositary receipts are filed as exhibits to the registration
statement and you should read such documents for provisions that may be
important to you.
DIVIDENDS AND OTHER DISTRIBUTIONS
If we pay a cash distribution or dividend on a series of preferred stock
represented by depositary shares, the Depositary will distribute such dividends
to the record holders of such depositary shares. If the distributions are in
property other than cash, the Depositary will distribute the property to the
record holders of the depositary shares. However, if the Depositary determines
that it is not feasible to make the distribution of property, the Depositary
may, with our approval, sell such property and distribute the net proceeds from
such sale to the holders of the preferred stock.
REDEMPTION OF DEPOSITARY SHARES
If we redeem a series of preferred stock represented by depositary shares,
the Depositary will redeem the depositary shares from the proceeds received by
the Depositary in connection with the redemption. The redemption price per
depositary share will equal the applicable fraction of the redemption price per
share of the preferred stock. If fewer than all the depositary shares are
redeemed, the depositary shares to be redeemed will be selected by lot or pro
rata as the Depositary may determine.
VOTING THE PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of the preferred
stock represented by depositary shares are entitled to vote, the Depositary will
mail the notice to the record holders of the depositary shares relating to such
preferred stock. Each record holder of these depositary shares on the record
date (which will be the same date as the record date for the preferred stock)
may instruct the Depositary as to how to vote the preferred stock represented by
such holder's depositary shares. The Depositary will endeavor, insofar as
practicable, to vote the amount of the preferred stock represented by such
depositary shares in accordance with such instructions, and we will take all
action which the Depositary deems necessary in order to enable the Depositary to
do so. The Depositary will abstain from voting shares of the preferred stock to
the extent it does not receive specific instructions from the holders of
depositary shares representing such preferred stock.
AMENDMENT AND TERMINATION OF THE DEPOSITARY AGREEMENT
The form of depositary receipt evidencing the depositary shares and any
provision of the deposit agreement may be amended by agreement between the
Depositary and us. However, any amendment that materially and adversely alters
the rights of the holders of depositary shares will not be effective unless such
amendment has been approved by the holders of at least a majority of the
depositary shares then outstanding. The deposit agreement may be terminated by
the Depositary or us only if (i) all outstanding depositary shares have been
redeemed or (ii) there has been a final distribution in respect of the preferred
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stock in connection with any liquidation, dissolution or winding up of us and
such distribution has been distributed to the holders of depositary receipts.
CHARGES OF DEPOSITARY
We will pay all transfer and other taxes and governmental charges arising solely
from the existence of the depositary arrangements. We will pay charges of the
Depositary in connection with the initial deposit of the preferred stock and any
redemption of the preferred stock. Holders of depositary receipts will pay other
transfer and other taxes and governmental charges and any other charges,
including a fee for the withdrawal of shares of preferred stock upon surrender
of depositary receipts, as are expressly provided in the deposit agreement to be
for their accounts.
WITHDRAWAL OF PREFERRED STOCK
Upon surrender of depositary receipts at the principal office of the Depositary,
subject to the terms of the deposit agreement, the owner of the depositary
shares may demand delivery of the number of whole shares of preferred stock and
all money and other property, if any, represented by those depositary shares.
Partial shares of preferred stock will not be issued. If the depositary receipts
delivered by the holder evidence a number of Depositary shares in excess of the
number of depositary shares representing the number of whole shares of preferred
stock to be withdrawn, the Depositary will deliver to such holder at the same
time a new depositary receipt evidencing the excess number of depositary shares.
Holders of preferred stock thus withdrawn may not thereafter deposit those
shares under the deposit agreement or receive depositary receipts evidencing
depositary shares therefor.
MISCELLANEOUS
The Depositary will forward to holders of depositary receipts all reports and
communications from us that are delivered to the Depositary and that we are
required to furnish to the holders of the preferred stock.
Neither the Depositary nor us will be liable if we are prevented or delayed by
law or any circumstance beyond our control in performing our obligations under
the deposit agreement. The obligations of the Depositary and us under the
deposit agreement will be limited to performance in good faith of our duties
thereunder, and we will not be obligated to prosecute or defend any legal
proceeding in respect of any depositary shares or preferred stock unless
satisfactory indemnity is furnished. We may rely upon written advice of counsel
or accountants, or upon information provided by persons presenting preferred
stock for deposit, holders of depositary receipts or other persons believed to
be competent and on documents believed to be genuine.
RESIGNATION AND REMOVAL OF DEPOSITARY
The Depositary may resign at any time by delivering to us notice of its election
to do so, and we may at any time remove the Depositary. Any such resignation or
removal will take effect upon the appointment of a successor Depositary and its
acceptance of such appointment. Such successor Depositary must be appointed
within 60 days after delivery of the notice of resignation or removal and must
be a bank or trust company having its principal office in the United States and
having a combined capital and surplus of at least $50,000,000.
PLAN OF DISTRIBUTION
We may sell securities pursuant to this prospectus (a) through underwriters
or dealers; (b) through agents; or (c) directly to one or more purchasers,
including existing stockholders in a rights offering.
BY UNDERWRITERS
If underwriters are used in the sale, the offered securities will be
acquired by the underwriters for their own account. The underwriters may resell
the securities in one or more transactions, including negotiated transactions,
at a fixed public offering price or at varying prices determined at the time of
sale. The obligations of the underwriters to purchase the securities will be
subject to certain conditions. Unless indicated in the prospectus supplement the
underwriters must purchase all the securities of the series
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<PAGE> 142
offered by a prospectus supplement if any of the securities are purchased. Any
initial public offering price and any discounts or concessions allowed or
re-allowed or paid to dealers may be changed from time to time.
BY AGENTS
Securities offered by us pursuant to this prospectus may also be sold
through agents designated by us. Unless indicated in the prospectus supplement,
any such agent is acting on a best efforts basis for the period of its
appointment.
DIRECT SALES; RIGHTS OFFERINGS
Securities offered by us pursuant to this prospectus may also be sold
directly by us. In this case, no underwriters or agents would be involved. We
may sell offered securities upon the exercise of rights which may be issued to
our securityholders.
DELAYED DELIVERY ARRANGEMENTS
We may authorize agents, underwriters or dealers to solicit offers by
certain institutional investors to purchase offered securities providing for
payment and delivery on a future date specified in the prospectus supplement.
Institutional investors to which such offers may be made, when authorized,
include commercial and savings banks, insurance companies, pension funds,
investment companies, education and charitable institutions and such other
institutions as may be approved by us. The obligations of any such purchasers
under such delayed delivery and payment arrangements will be subject to the
condition that the purchase of the offered securities will not at the time of
delivery be prohibited under applicable law. The underwriters and such agents
will not have any responsibility with respect to the validity or performance of
such contracts.
GENERAL INFORMATION
Underwriters, dealers and agents that participate in the distribution of
offered securities may be underwriters as defined in the Securities Act, and any
discounts or commissions received by them from us and any profit on the resale
of the offered securities by them may be treated as underwriting discounts and
commissions under the Securities Act. Any underwriters or agents will be
identified and their compensation described in a prospectus supplement.
We may have agreements with the underwriters, dealers and agents to
indemnify them against certain civil liabilities, including liabilities under
the Act, or to contribute with respect to payments which the underwriters,
dealers or agents may be required to make.
Underwriters, dealers and agents may engage in transactions with, or
perform services for, us or our subsidiaries in the ordinary course of their
businesses.
LEGAL MATTERS
Our legal counsel, Vinson & Elkins L.L.P., Houston, Texas, will pass upon
certain legal matters in connection with the offered securities. Any
underwriters will be advised about other issues relating to any offering by
their own legal counsel.
EXPERTS
Arthur Andersen LLP, independent public accountants, audited the financial
statements included in our annual report on Form 10-K for the year ended
December 31, 1997 incorporated by reference in this prospectus and elsewhere in
the registration statement. These documents are incorporated by reference herein
in reliance upon the authority of Arthur Andersen LLP as experts in accounting
and auditing in giving the report.
Crowe, Chizek and Company LLP, independent public accountants, audited the
financial statements of the Carroll Automotive Group included in the Current
Report on Form 8-K dated May 28, 1998, incorporated by reference in this
prospectus and elsewhere in the registration statement. These documents are
incorporated by reference herein in reliance upon the authority of Crowe, Chizek
and Company LLP as experts in accounting and auditing in giving the report.
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No dealer, salesperson or other person is authorized to give any information or
to represent anything not contained in this prospectus. You must not rely on any
unauthorized information or representations. This prospectus is an offer to sell
only the Notes offered hereby, but only under circumstances and in jurisdictions
where it is lawful to do so. The information contained in this prospectus is
current only as of its date.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement
Prospectus Supplement Summary........... S-1
Risk Factors............................ S-10
Cautionary Statement about Forward-
Looking Statements.................... S-20
Use of Proceeds......................... S-22
Capitalization.......................... S-23
Pro Forma Consolidated Financial
Statements............................ S-24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ S-31
Business................................ S-39
Management.............................. S-57
Principal Stockholders.................. S-60
Description of Credit Facility.......... S-61
Description of Notes.................... S-63
Validity of the Notes................... S-92
Experts................................. S-92
Index to Financial Statements........... F-1
Underwriting............................ U-1
Prospectus
Table of Contents....................... 2
About this Prospectus................... 2
Where You Can Find More Information..... 2
Cautionary Statement about Forward-
Looking Statements.................... 3
Disclaimer.............................. 4
The Company............................. 4
Risk Factors............................ 4
Use of Proceeds......................... 12
Ratios of Earnings to Fixed Charges and
Earnings to Fixed Charges plus
Dividends............................. 12
Description of Debt Securities.......... 12
Description of Capital Stock............ 21
Depositary Shares....................... 26
Plan of Distribution.................... 27
Legal Matters........................... 28
Experts................................. 28
</TABLE>
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$100,000,000
GROUP 1 AUTOMOTIVE, INC.
% Senior Subordinated Notes Due 2009
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PROSPECTUS
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GOLDMAN, SACHS & CO.
CHASE SECURITIES INC.
MERRILL LYNCH & CO.
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