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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER: 1-13461
GROUP 1 AUTOMOTIVE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 76-0506313
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
950 ECHO LANE, SUITE 100, HOUSTON, TEXAS 77024
(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code (713) 647-5700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Securities Exchanges on which Registered
------------------- -----------------------------
COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
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The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $216.4 million as of March 21, 2000 (based on
the last sale price of such stock as quoted on the New York Stock Exchange). At
such date there was no non-voting stock outstanding.
As of March 21, 2000, there were 22,369,129 shares of Registrant's
Common Stock, par value $.01 per share, outstanding.
Documents incorporated by reference: Proxy Statement of Group 1
Automotive, Inc. for the Annual Meeting of Stockholders to be held on May 24,
2000, which is incorporated into Part III of this Form 10-K.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
UNITED STATES................................................................................1
PART I.......................................................................................4
Item 1. Business...........................................................................4
Item 2. Properties........................................................................14
Item 3. Legal Proceedings.................................................................14
Item 4. Submission of Matters to a Vote of Security Holders...............................14
PART II.....................................................................................15
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............15
Item 6. Selected Consolidated Financial Data..............................................16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................17
Item 7A.Qualitative and Quantitative Disclosures About Market Risk........................25
Item 8. Financial Statements and Supplementary Data.......................................26
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure........................................................................26
PART III....................................................................................26
Item 10. Directors and Executive Officers of the Registrant...............................26
Item 11. Executive Compensation...........................................................26
Item 12. Security Ownership of Certain Beneficial Owners and Management...................26
Item 13. Certain Relationships and Related Transactions...................................26
PART IV.....................................................................................26
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................26
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Group 1 Automotive, Inc. ("Group 1", the "Company", "we" or "us") is a
leading operator and consolidator in the highly fragmented automotive retailing
industry. Through a series of acquisitions, we own 98 dealership franchises. Our
automobile dealership franchises are located in Texas, Oklahoma, Florida, New
Mexico, Georgia, Colorado, Louisiana and Massachusetts. Through our dealerships,
we sell new and used cars and light trucks, provide maintenance and repair
services, sell replacement parts and arrange vehicle financing, insurance and
service contracts. Additionally, we operate Internet web pages to market our
products and services.
OPERATING STRATEGY
We follow an operating strategy that focuses on decentralized dealership
operations, new technology initiatives, expansion of higher margin businesses,
customer service and centralization of certain administrative functions.
DECENTRALIZED DEALERSHIP OPERATIONS. We believe that by managing our
dealerships on a decentralized basis, we provide superior customer service and a
focused, market-specific responsiveness to sales, service, marketing and
inventory control. Local presence and an in-depth knowledge of customers' needs
and preferences are important in generating market share growth. By coordinating
certain operations on a platform basis, we believe that we will achieve cost
savings in such areas as advertising, vendor consolidation, data processing and
personnel utilization. We create incentives for our management teams and sales
forces through the use of stock options and cash bonus programs.
INTERNET. We use the Internet to more effectively communicate with our
customers. Customers can arrange service appointments, search our inventory and
receive notice of special offers. Our platform portal web pages provide
customers a direct one-stop shopping experience in their local market, providing
multiple brands and an extensive inventory of vehicles. Also, as franchised
dealerships, we receive Internet leads from manufacturers' e-commerce programs,
and through a contractual relationship with an e-commerce software company, we
receive Internet leads from several major portals. Lastly, at times, we use
automotive Internet referral services to provide incremental sales
opportunities.
EXPAND HIGHER MARGIN ACTIVITIES. We focus on expanding our higher margin
businesses such as used vehicle retail sales, parts and service and arranging
vehicle service, finance and insurance contracts. While each of our platforms
operates independently in a manner consistent with its specific market's
characteristics, they also pursue an integrated company-wide strategy designed
to grow each of these higher margin businesses to enhance profitability and
stimulate internal growth. With a competitive advantage in sourcing inventory,
new vehicle franchises are especially well positioned to capitalize on industry
growth in used vehicle sales. In addition, each of our dealerships offers an
integrated parts and service department, which provides an important source of
recurring higher margin revenues. We also have the opportunity on each new or
used vehicle sold to generate incremental revenues from the arranging of vehicle
service contracts, credit insurance policies and finance or lease contracts.
COMMITMENT TO CUSTOMER SERVICE. We focus on providing high quality
service to meet the needs of customers. Our dealerships strive to cultivate
lasting relationships with their customers, and we believe these efforts
increase our opportunities for significant repeat and referral business. For
example, the dealerships regard their service and repair activities as an
integral part of their overall approach to customer service. This approach
provides us with an opportunity to foster ongoing relationships with customers
and deepen customer loyalty. In addition, our dealerships continually review
their processes in an effort to better meet the needs of
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their customers. Some of our dealerships utilize the one-price method of pricing
their inventory for sale, while the majority of our dealerships utilize
non-confrontational variable pricing.
NATIONALLY CENTRALIZED ADMINISTRATIVE FUNCTIONS. We believe that by
consolidating the purchasing power of our dealerships on a centralized basis we
have benefited from significant cost savings. For example, since we began
operations, we have reduced the interest rate on our floorplan financing through
our consolidated credit facility. Furthermore, we have benefited from the
consolidation of administrative functions such as risk management, employee
benefits and employee training.
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 may in the future use, our common stock to fund a
portion of our acquisitions. In addition, we have a revolving credit facility,
which provides us with the ability to borrow up to $220 million for
acquisitions.
ENTERING NEW GEOGRAPHIC MARKETS. We intend to expand into geographic
markets we do not currently serve by acquiring large, profitable and
well-established megadealers that are leaders in their regional markets. We
pursue megadealers that have superior operational and financial management
personnel, which we seek to retain. We believe that by retaining existing high
quality management we will be able to effectively operate acquired megadealers
with management personnel who understand the local market without having to
employ and train new and untested personnel. We believe that we are positioned
to pursue larger, well-established acquisition candidates because of our depth
of management, our capital structure and the reputation of our principals as
leaders in the automotive retailing industry.
EXPANDING WITHIN EXISTING MARKETS. We plan to make tuck-in acquisitions
of additional dealerships in each of the markets in which we operate, including
acquisitions that increase the brands, products and services offered in these
markets. We believe that these acquisitions will increase our operating
efficiencies and cost savings on a regional level in areas such as advertising,
vendor consolidation, data processing and personnel utilization.
RECENT ACQUISITIONS. Since December 31, 1999, we have completed
acquisitions of 11 dealership franchises. One of these acquisitions is a new
platform with 10 dealership franchises in Massachusetts. The remaining
acquisition is a tuck-in, which will complement our platform operations in
Florida. These acquisitions bring our total number of dealership franchises to
98. The aggregate consideration paid in completing these acquisitions, including
real estate acquired, was approximately $29.3 million in cash and 330,000 shares
of our Common Stock and the assumption of an estimated $32.6 million of
inventory financing and $10.7 million of mortgage and other debt.
In connection with these acquisitions, certain of the former owners
involved in the management of the dealerships executed long-term employment
agreements that contain post-employment non-competition covenants.
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DEALERSHIP OPERATIONS
Each of our platforms has an established management structure that
promotes and rewards entrepreneurial spirit, and the achievement of team goals.
The general manager of each dealership is ultimately responsible for the
operation, personnel and financial performance of the dealership. The general
manager is complemented with a management team consisting of a new vehicle sales
manager, used vehicle sales manager, parts and service managers and finance
managers. Each dealership is operated as a distinct profit center, in which
dealership general managers are given a high degree of autonomy. The general
manager and the other members of the dealership management team, as long-time
members of their local communities, are typically best able to judge how to
conduct day-to-day operations based on their experience in and familiarity with
the local market.
NEW VEHICLE SALES. We currently represent 29 American, Asian and
European brands of economy, family, sports and luxury cars, light trucks and
sport utility vehicles. The following table sets forth for the twelve months
ended December 31, 1999, the brands of new vehicles sold at retail by us on an
actual and on a pro forma basis assuming that all of our dealerships (acquired
by December 31, 1999) were acquired on January 1, 1999. These results may not be
indicative of our results after the acquisition of the dealerships by us:
<TABLE>
<CAPTION>
PRO FORMA ACTUAL
NUMBER OF NEW PERCENTAGE OF NUMBER OF NEW
MANUFACTURER VEHICLES SOLD PRO FORMA TOTAL VEHICLES SOLD
---------------------- --------------------- ------------------ -----------------
<S> <C> <C> <C>
Ford................ 26,221 35.4% 17,767
Toyota.............. 9,272 12.5% 7,616
Chevrolet........... 6,354 8.6% 6,354
Dodge............... 5,486 7.4% 4,600
Nissan.............. 4,554 6.1% 4,554
Honda............... 3,533 4.8% 3,533
Lexus............... 2,827 3.8% 2,827
GMC................. 2,169 2.9% 1,699
Plymouth............ 2,051 2.8% 1,807
Chrysler............ 1,900 2.5% 1,695
Mitsubishi.......... 1,751 2.4% 1,409
Jeep................ 1,698 2.3% 1,603
Acura............... 1,491 2.0% 1,491
Pontiac............. 1,471 2.0% 1,140
Isuzu............... 977 1.3% 851
Mercedes-Benz....... 607 0.8% 211
Buick............... 321 0.4% 301
Volkswagen.......... 281 0.4% 196
Cadillac............ 243 0.3% 192
Volvo............... 213 0.3% 59
Other............... 754 1.0% 479
--------------------- ------------------ -----------------
TOTAL.......... 74,174 100.0% 60,384
===================== ================== =================
</TABLE>
Our dealerships' new vehicle retail sales include traditional new
vehicle retail lease transactions and lease-type transactions, both of which are
arranged by the dealerships. New vehicle leases generally have short terms,
bringing the customer back to the market sooner than if the purchase were debt
financed. In addition, leases provide our dealerships with a steady source of
late-model, off-lease vehicles for their used vehicle inventory. Generally,
leased vehicles remain under factory warranty for the term of the lease,
allowing the dealerships to provide repair service to the lessee throughout the
lease term.
Our dealerships seek to provide customer-oriented service designed to
meet the needs of its customers and establish lasting relationships that will
result in repeat and referral business.
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The dealerships continually evaluate innovative ways to improve the buying
experience for their customers. We believe that our ability to share best
practices among our dealerships gives us an advantage over smaller dealerships.
For example, the dealerships strive to:
(1) employ more efficient selling approaches;
(2) utilize computer technology that decreases the time necessary to
purchase a vehicle;
(3) engage in extensive follow-up after a sale in order to develop
long-term relationships with customers; and
(4) extensively train their sales staffs to be able to meet the needs of
the customer.
Our dealerships acquire substantially their entire new vehicle inventory
from the automobile manufacturers ("Manufacturers"). Manufacturers allocate a
limited inventory among their franchised dealers based primarily on sales volume
and input from dealers. The dealerships generally finance their inventory
purchases through revolving credit arrangements, including a portion of our
credit facility, known in the industry as floorplan facilities.
USED VEHICLE SALES. We sell used vehicles at each of our franchised
dealerships. Sales of used vehicles have become an increasingly significant
source of profit for the dealerships. Consumer demand for used vehicles has
increased as prices of new vehicles have risen and as more high quality used
vehicles have become available. Furthermore, used vehicles typically generate
higher gross margins than new vehicles because of their limited comparability
and the somewhat subjective nature of their valuation. We intend to continue
growing our used vehicle sales operations by maintaining a high quality
inventory, providing competitive prices and offering vehicle service contracts
for our used vehicles, and continuing to promote used vehicle sales.
Profits from sales of used vehicles depend primarily on the dealerships'
ability to obtain a high quality supply of used vehicles and effectively manage
that inventory. Our new vehicle operations provide the used vehicle operations
with a large supply of high quality trade-ins and off-lease vehicles, which are
the best sources of high quality used vehicles. The dealerships supplement their
used vehicle inventory with used vehicles purchased at auctions.
Each of the dealerships generally maintains a 30-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.
Our dealerships have taken several steps towards building client
confidence in their used vehicle inventory, one of which includes their
participation in the manufacturer certification processes, which are available
only to new vehicle franchises. This process makes these used vehicles eligible
for new vehicle benefits such as new vehicle finance rates and extended
manufacturer service contracts. In addition, the dealerships offer vehicle
service contracts covering the used vehicles that they sell.
We believe that our franchised dealerships' strengths in offering used
vehicles include:
(1) access to trade-ins on new vehicle purchases, which are typically
lower mileage and higher quality relative to trade-ins on used car
purchases,
(2) access to late-model, low mileage off-lease vehicles, and
(3) the availability of manufacturer certification programs for our higher
quality used vehicles.
A supply of high quality trade-ins and off-lease vehicles reduces our
dependence on auction vehicles, which are typically a higher cost source of used
vehicles.
PARTS AND SERVICE SALES. We provide parts and service at each of our
franchised dealerships primarily for the vehicle makes sold at that dealership.
We perform both warranty and non-warranty service work. In addition to each of
our dealerships' parts and service businesses, we currently own 19 collision
service centers.
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Historically, the automotive repair industry has been highly fragmented.
However, we believe that the increased use of advanced technology in vehicles
has made it difficult for independent repair shops to retain the expertise to
perform major or technical repairs. Additionally, Manufacturers permit warranty
work to be performed only at franchised dealerships. Hence, unlike independent
service operations, our franchised dealerships are qualified to perform work
covered by Manufacturer warranties. Given the increasing technological
complexity of motor vehicles and the trend toward extended manufacturer and
dealer warranty periods for new vehicles, we believe that an increasing
percentage of repair work will be performed at our franchised dealerships, each
of which have the sophisticated equipment and skilled personnel necessary to
perform such repairs and offer vehicle service contracts.
We attribute our profitability in parts and service to a comprehensive
management system, including the use of variable rate pricing structures,
cultivation of strong customer relationships through an emphasis on preventive
maintenance and the efficient management of parts inventory.
In charging for their mechanics' labor, our dealerships use variable
rate structures designed to reflect the difficulty and sophistication of
different types of repairs. The percentage mark-ups on parts are similarly
priced based on market conditions for different parts. We believe that variable
rate pricing helps our dealerships achieve overall gross margins in parts and
service which are superior to those of certain competitors who rely on fixed
labor rates and percentage markups. Additionally, it allows the dealership to be
competitive with local service centers that provide discounted pricing on select
services.
Our dealerships seek to retain each vehicle purchaser as a customer of
the dealership's parts and service departments. The dealerships have systems in
place that track their customers' maintenance records and notify owners of
vehicles purchased or serviced at the dealerships when their vehicles are due
for periodic services. The dealerships regard service and repair activities as
an integral part of their overall approach to customer service, providing an
opportunity to foster ongoing relationships with the dealership's customers and
deepen customer loyalty.
The dealerships' parts departments support their respective sales and
service departments. Each of the dealerships sells factory-approved parts for
vehicle makes and models sold by that dealership. These parts are either used in
repairs made by the dealership, sold at retail to its customers or at wholesale
to independent repair shops and other franchised dealerships. Currently, each of
the dealerships employs its own parts manager and independently controls its
parts inventory and sales. Our dealerships that sell the same new vehicle makes
have access to each other's computerized inventories and frequently obtain
unstocked parts from our other dealerships.
OTHER DEALERSHIP REVENUES. Other dealership revenues consist primarily
of finance, vehicle service contract and insurance income. The dealerships
arrange financing for their customers' vehicle purchases, sell vehicle service
contracts and arrange selected types of credit insurance in connection with the
financing of vehicle sales. The dealerships place heavy emphasis on finance and
insurance ("F&I") and offer advanced F&I training to their finance and insurance
managers. Typically, the dealerships forward proposed financing contracts to
Manufacturers' captive finance companies, selected commercial banks or other
financing parties. The dealerships receive a financing fee from the lender for
arranging the financing and are typically assessed a chargeback against a
portion of the financing fee if the contract is terminated prior to its
scheduled maturity for any reason, such as early repayment or default. As a
result, the dealerships must arrange financing for a customer that is
competitive (i.e., the customer is more likely to accept the financing terms and
the loan is less likely to be refinanced) and affordable (i.e., the loan is more
likely to be repaid). We do not own a finance company and, generally, do not
retain significant credit risk after a loan is made.
At the time of a new vehicle sale, the dealerships offer vehicle service
contracts to supplement the manufacturer warranty. Additionally, the dealerships
sell primary vehicle service contracts for used vehicles. Generally, the
dealerships sell service contracts of third party vendors, for which they
recognize a commission upon the sale of the contract.
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The dealerships also offer certain types of credit insurance to
customers who arrange the financing of their vehicle purchases through the
dealerships. The dealerships sell credit life insurance policies to these
customers, providing for repayment of the vehicle loan if the obligor dies while
the loan is outstanding. The dealerships also sell accident and disability
insurance policies, which provide payment of the monthly loan obligations during
a period in which the obligor is disabled. The dealerships sell such insurance
through third party vendors, for which they recognize a commission upon the sale
of the contract.
AGREEMENTS WITH MANUFACTURERS
The following table sets forth the percentage of our new vehicle retail
unit sales attributable to the Manufacturers we represented during 1999 that
accounted for 10% or more of new vehicle retail unit sales, on a pro
forma basis giving effect to all of our acquisitions in 1999:
<TABLE>
<CAPTION>
PERCENTAGE OF OUR
NEW VEHICLE
PRO FORMA RETAIL
UNITS FOR THE TWELVE
MONTHS ENDED
MANUFACTURER DECEMBER 31, 1999
------------ -----------------
<S> <C>
Ford.................................. 35.8%
Toyota/Lexus.......................... 16.3%
DaimlerChrysler....................... 15.8%
General Motors........................ 14.4%
</TABLE>
FRANCHISE AGREEMENTS. Each of our dealerships operates under a franchise
agreement with one of our Manufacturers (or authorized distributors). Under our
dealership franchise agreements, the Manufacturers exert considerable influence
over the operations of our dealerships. Each of the franchise agreements may be
terminated or not renewed by the Manufacturer for a variety of reasons,
including any unapproved changes of ownership or management. While we believe
that we will be able to renew all of our franchise agreements, we cannot
guarantee that all of our franchise agreements will be renewed or that the terms
of the renewals will be favorable to us. Our franchise agreements do not give us
the exclusive right to sell a Manufacturer's product within a given geographic
area. 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. 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,
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and they may replace them with different systems.
In addition, a Manufacturer may limit the number of its dealerships that
we may own or the number that we may own in a particular geographic area. The
following is a summary of the restrictions imposed by our Manufacturers that
accounted for 10% or more of new vehicle retail unit sales.
Ford. Ford currently limits the number of dealerships that we may own to
the greater of (1) 15 Ford and 15 Lincoln Mercury dealerships and (2) that
number of Ford and Lincoln Mercury dealerships accounting for 5% of the
preceding year's total Ford, Lincoln and Mercury retail sales of those brands in
the United States. In addition, Ford limits us to one Ford dealership in a
Ford-defined market area having two or less authorized Ford dealerships and
one-third of Ford dealerships in any Ford-defined market area having more than
three authorized Ford dealerships. In many of its dealership franchise
agreements Ford has the right of first refusal to acquire, subject to applicable
state law, the Ford franchised dealership when its ownership changes.
Toyota. Toyota restricts the number of dealerships that we may own and
the time frame over which they may be acquired. We can acquire no more than two
Toyota dealerships in each semi-annual period from January to June and July to
December until we acquire a total of seven Toyota dealerships. After we acquire
seven Toyota dealerships we can acquire, if we are then qualified, additional
dealerships, over a minimum of seven semi-annual periods, up to a maximum number
of dealerships equal to 5% of Toyota's aggregate national annual retail sales
volume. In addition, Toyota restricts the number of Toyota dealerships that we
may acquire in any Toyota-defined region and "Metro" market, as well as any
contiguous market. We may acquire only three Lexus dealerships nationally and
two Lexus dealerships in any one of the four Lexus geographic areas. While we
own 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 evaluates our acquisitions of
GM dealerships on a case-by-case basis. GM, however, limits the maximum number
of GM dealerships that we may acquire at any time to 50% of the GM dealerships,
by franchise line, in a GM-defined geographic market area. Additionally, our
current agreement with GM does not include Saturn dealerships and our future
acquisition of a Saturn dealership will be subject to GM approval on a
case-by-case basis.
We currently own 13 Ford, 29 Chrysler, five Toyota and two Lexus
dealership franchises. 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 and approximately 400
additional Ford, Lincoln and Mercury dealerships.
FINANCINGS. Provisions in our agreements with our Manufacturers may
restrict in the future our ability to obtain certain types of financing. A
number of our Manufacturers prohibit pledging the stock of their franchised
dealerships. For example, our agreement with General Motors contains provisions
prohibiting pledging the stock of our GM franchised dealerships. Our agreement
with Ford permits pledging our Ford franchised dealerships' stock and assets,
but only for Ford dealership-related debt. Moreover, our Ford agreement permits
our Ford franchised dealerships to guarantee, and to use Ford franchised
dealership assets to secure, our debt, but only for Ford dealership-related
debt. Ford waived that requirement with respect to the Notes and the subsidiary
guarantees of the Notes.
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Certain Manufacturers require us to meet certain financial ratios, which, if we
fail to meet these ratios, the Manufacturers may reject proposed acquisitions,
and may give them the right to purchase their franchises for fair value.
OUR OWNERSHIP AND MANAGEMENT. As a condition to granting their consent
to our previous acquisitions and our initial public offering, some Manufacturers
have imposed other restrictions on us.
These restrictions prohibit, among other things:
o any one person, who in the opinion of the Manufacturer is unqualified
to own its franchised dealership or has interests incompatible with
the Manufacturer, from acquiring more than a specified percentage of
our common stock (for example, 20% in the case of General Motors and
Toyota, and 50% in the case of Ford);
o certain material changes in us or extraordinary corporate
transactions such as a merger or sale of a material amount of our
assets;
o the removal of a dealership general manager without the consent of
the Manufacturer;
o the use of dealership facilities to sell or service new vehicles of
other Manufacturers, in certain situations; and
o change in control of our Board of Directors or management.
If we are unable to comply with these restrictions, we generally must
(1) sell the assets of the dealerships to the Manufacturer or to a third party
acceptable to the Manufacturer, or (2) terminate the dealership agreements with
the Manufacturer. The Manufacturers may impose additional restrictions on us in
the future.
OPERATIONS. We depend on our Manufacturers for operational support:
o We depend on the Manufacturers to provide us with a desirable mix of
new vehicles. The most popular vehicles usually produce the highest
profit margins and are frequently difficult to obtain from the
Manufacturers. If we cannot obtain sufficient quantities of the most
popular models, our profitability may be adversely affected. Sales of
less desirable models may reduce our profit margins.
o We depend on the Manufacturers for sales incentives and other
programs that are intended to promote dealership sales or support
dealership profitability. Manufacturers historically have made many
changes to their incentive programs during each year. A
discontinuation or change in Manufacturers' incentive programs could
adversely affect our business. Moreover, some Manufacturers use a
dealership's CSI scores as a factor for participating in incentive
programs. Failure to comply with the CSI standards could adversely
affect our participation in dealership incentive programs, which
could have a material adverse effect on us.
Our Manufacturer agreements also specify that, in certain situations, we
cannot operate a dealership franchised by another Manufacturer in the same
building as that Manufacturer's franchised dealership. In addition, some
Manufacturers, like GM, are in the process of realigning their franchised
dealerships along defined "channels", such as combining Pontiac, Buick and GMC
in one dealership location. As a result, GM may require us to move or sell some
dealerships. Moreover, our Manufacturers generally require that the dealership
premises meet defined image standards. All of these requirements could impose
significant capital expenditures on us in the future.
COMPETITION
The automotive retailing industry is highly competitive. In large
metropolitan areas consumers have a number of choices in deciding where to
purchase a new or used vehicle and where to have such vehicle serviced.
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In the new vehicle area, our dealerships compete with other franchised
dealerships in their marketing areas. Our dealerships do not have any cost
advantage in purchasing new vehicles from the Manufacturers, and typically rely
on advertising and merchandising, sales expertise, service reputation and
location of the dealership to sell new vehicles. In recent years, automobile
dealers have also faced increased competition in the sale or lease of new
vehicles from independent leasing companies, on-line purchasing services and
warehouse clubs. In addition, Ford has started to acquire and subsequently
operate automobile dealerships for the purpose of consolidating Ford
dealerships. For example, Ford acquired dealerships in Tulsa, Oklahoma and
entered into an agreement with Autonation, Inc. to jointly acquire Ford
dealerships in Rochester, New York.
In used vehicles, our dealerships compete with other franchised dealers,
independent used car dealers, automobile rental agencies and private parties for
supply and resale of used vehicles.
Our 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.
In addition to competition from traditional franchised dealerships, we
are facing the threat of competition from start-up Internet-based automotive
retailers that sell new and used vehicles. We expect this competition to
intensify in the future. Currently, these companies are acquiring new vehicles
from franchised dealerships, such as ours, and are attempting to divert a
portion of the profits from these sales to themselves. We believe some
Internet-based retailers may attempt to acquire dealership franchises in an
effort to obtain vehicles directly from the manufacturers. Additional
Internet-based retailers may enter our market. Many of these present and
potential competitors on the Internet may have greater technical capabilities
and access to greater financial resources than we have. This may place us at a
disadvantage in responding to the Internet offerings of these competitors,
technological changes in the Internet or changes in our customers' requirements.
GOVERNMENTAL REGULATIONS
A number of regulations affect our business of marketing, selling,
financing and servicing automobiles. We are also subject to laws and regulations
relating to business corporations generally.
Generally, we must obtain a license in order to establish, operate or
relocate a dealership or provide certain automotive repair services. These laws
also regulate the way we conduct our business, including our advertising and
sales practices.
Our financing activities with our customers are subject to federal truth
in lending, consumer leasing and equal credit opportunity regulations as well as
state and local motor vehicle finance laws, installment finance laws, insurance
laws, usury laws and other installment sales laws. Some states regulate finance
fees that may be paid as a result of vehicle sales. Penalties for violation of
any of these laws or regulations may include revocation of certain licenses,
assessment of criminal and civil fines and penalties, and in certain instances,
create a private cause of action for individuals. We believe that our
dealerships comply substantially with all laws and regulations affecting their
business and do not have any material liabilities under such laws and
regulations and that compliance with all such laws and regulations will not,
individually or in the aggregate, have a material adverse effect on its capital
expenditures, earnings, or competitive position.
12
<PAGE> 13
ENVIRONMENTAL MATTERS
We are subject to a wide range of federal, state, and local
environmental laws and regulations, including those governing discharges into
the air and water, the storage of petroleum substances and chemicals, the
handling and disposal of wastes, and the remediation of contamination arising
from spills and releases. As with automobile dealerships generally, and parts,
service and collision service center operations in particular, our business
involves the generation, use, handling, storage, transport and disposal of
hazardous or toxic substances or wastes. Operations involving the management of
hazardous and nonhazardous wastes are subject to requirements of the federal
Resource Conservation and Recovery Act and comparable state statutes. Pursuant
to these laws, federal and state environmental agencies have established
approved methods for storage, treatment, and disposal of regulated wastes with
which we must comply.
Our business involves the use of aboveground and underground storage
tanks. Under applicable laws and regulations, we are responsible for the proper
use, maintenance and abandonment of regulated storage tanks which we own or
operate, and for remediation of subsurface soils and groundwater impacted by
releases from such existing or abandoned aboveground or underground storage
tanks. In addition to these regulated tanks, we own, operate, or have otherwise
abandoned, other underground and aboveground devices or containers (e.g.,
automotive lifts and service pits) that may not be classified as regulated
tanks, but which are capable of releasing stored materials into the environment,
thereby potentially obligating us to remediate any soils or groundwater
resulting from such releases.
We are also subject to laws and regulations governing remediation of
contamination at facilities we operate or to which we send hazardous or toxic
substances or wastes for treatment, recycling or disposal. The Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), also known as
the "Superfund" law, imposes liability, without regard to fault or the legality
of the original conduct, on certain classes of persons that are considered to
have contributed to the release of a "hazardous substance" into the environment.
These persons include the owner or operator of the disposal site or sites where
the release occurred and companies that disposed or arranged for the disposal of
the hazardous substances released at such sites. Under CERCLA, these
"responsible parties" may be subject to joint and several liability for the
costs of cleaning up the hazardous substances that have been released into the
environment, for damages to natural resources and for the costs of certain
health studies, and it is not uncommon for neighboring landowners and other
third parties to file claims for personal injury and property damage allegedly
caused by the release of hazardous substances.
Further, the Federal Water Pollution Control Act, also known as the
Clean Water Act, and comparable state laws prohibit discharges of pollutants
into regulated waters without authorized National Pollution Discharge
Elimination System (NPDES) and similar state permits, require containment of
potential discharges of oil or hazardous substances, and require preparation of
spill contingency plans.
Environmental laws and regulations have become very complex and
stringent over the years, and the task of achieving and maintaining full
compliance with all applicable environmental laws and regulations has become
much more rigorous. We currently own or lease, and in connection with our
acquisition program will in the future own or lease, properties that in some
instances have been used for auto retailing and servicing for many years.
Although we have utilized operating and disposal practices that were standard in
the industry at the time, it is possible that environmentally sensitive
materials such as new and used motor oil, transmission fluids, antifreeze,
lubricants, solvents and motor fuels may have been spilled or released on or
under the properties owned or leased by us or on or under other locations where
such materials were taken for disposal. Further, we believe that structures
found on some of these properties may contain suspect asbestos-containing
materials, albeit in nonfriable, undisturbed condition. In addition, many of
these properties have been operated by third parties whose use, handling and
disposal of such environmentally sensitive materials were not under the
Company's control.
13
<PAGE> 14
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.
EMPLOYEES
As of December 31, 1999, we employed approximately 4,400 people, of whom
approximately 540 were employed in managerial positions, 1,420 were employed in
non-managerial sales positions, 2,020 were employed in non-managerial parts and
service positions and 420 were employed in administrative support positions.
We believe that our relationships with our employees are favorable. None
of our employees are represented by a labor union, however, because of our
dependence on the Manufacturers we may be affected by labor strikes, work
slowdowns and walkouts at the Manufacturers' manufacturing facilities.
ITEM 2. PROPERTIES
We use a number of facilities to conduct our dealership operations. Each
of our dealerships may include facilities for (1) new and used vehicle sales,
(2) vehicle service operations, (3) retail and wholesale parts operations, (4)
collision service operations, (5) storage and (6) general office use. We try to
structure our operations so as to avoid the ownership of real property. In
connection with our acquisitions, we generally seek to lease rather than acquire
the facilities on which the acquired dealerships are located. We generally enter
into lease agreements with respect to such facilities that have 30-year terms
and, with respect to third-party leases, are cancelable at our option after an
initial 15-year period and at the end of each subsequent five-year period.
Related party leases are generally renewable at our option after an initial
15-year period and at the end of each subsequent five-year period, up to a term
of 30 years. As a result, we lease the majority of our facilities, and these
facilities are subject to long-term leases.
ITEM 3. LEGAL PROCEEDINGS
From time to time, our dealerships are named in claims involving the
manufacture of automobiles, contractual disputes and other matters arising in
the ordinary course of business. Currently, no legal proceedings are pending
against or involve us that, in our opinion, could be expected to have a material
adverse effect on our business, financial condition or results of operations.
Because of their vehicle inventory and nature of business, automobile
dealerships generally require significant levels of insurance covering a broad
variety of risks. Our insurance includes an umbrella policy with a $100 million
per occurrence limit as well as insurance on real property, comprehensive
coverage for vehicle inventory, general liability insurance, employee dishonesty
coverage and errors and omissions insurance in connection with vehicle sales and
financing activities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock is listed on the New York Stock Exchange ("NYSE") under
the symbol "GPI". There were 161 holders of record of our Common Stock as of
March 21, 2000.
The following table presents the quarterly high and low sales prices for
our common stock since our initial public offering, as reported on the New York
Stock Exchange Composite Tape under the symbol "GPI".
<TABLE>
<CAPTION>
HIGH LOW
---------------- -------------
<S> <C> <C>
1997:
Fourth Quarter (commencing October 30, 1997) $13 15/16 $7 3/4
1998:
First Quarter 11 1/2 8 5/8
Second Quarter 18 1/2 10 15/16
Third Quarter 18 1/2 11 3/8
Fourth Quarter 26 12 15/16
1999:
First Quarter 30 18 5/16
Second Quarter 26 15/16 20 11/16
Third Quarter 25 1/2 17 3/4
Fourth Quarter 18 3/8 12 3/4
2000:
First Quarter (through March 21, 2000) 14 5/8 9 1/2
</TABLE>
We have never declared or paid dividends on our Common Stock. We intend
to retain future earnings, if any, to finance the development and expansion of
our business and, therefore, do not anticipate paying any cash dividends on our
Common Stock in the foreseeable future. The decision whether to pay dividends
will be made by our Board of Directors after considering our results of
operations, financial condition, capital requirements, general business
conditions and other factors.
Certain provisions of the Credit Facility and the senior subordinated
notes require us to maintain certain financial ratios and prohibit us from
making substantial disbursements outside the ordinary course of business,
including limitations on the payment of cash dividends. In addition, pursuant to
the automobile franchise agreements to which our dealerships are subject, all
dealerships are required to maintain a certain minimum working capital.
We have entered into agreements to purchase all of the outstanding
capital stock or purchase certain assets and assume certain liabilities of
various automobile dealerships for cash and shares of our Common Stock. The
following is a summary of the transactions in which stock has been issued:
<TABLE>
<CAPTION>
DATE SECURITIES
DATE OF AGREEMENT ISSUED ACQUISITION SHARES
- ---------------------- --------------------- ----------------------------- ----------
<S> <C> <C> <C>
December 17, 1997 March 24, 1999 Carroll Automotive Group 20,981
February 25, 1998 March 15, 1999 Johns Automotive Group 151,260
November 20, 1998 February 4, 1999 Sunshine Buick, Pontiac, GMC 17,826
November 25, 1998 April 14, 1999 Tidwell Ford 346,558
January 25, 1999 June 9, 1999 Messer Automotive Group 393,226
July 28, 1999 November 12, 1999 Bohn Automotive Group 497,999
July 28, 1999 January 3, 2000 Bohn Automotive Group 300,998
August 10, 1999 February 16, 2000 Ira Automotive Group 332,890
November 4, 1999 November 4, 1999 SMC Investments, Inc. 667,435
</TABLE>
15
<PAGE> 16
We are relying on Regulation D and Section 4(2) under the Securities Act
of 1933, as amended, as an exemption from registration of the Common Stock to be
issued in the acquisitions. We believe we are justified in relying on such
exemption since all but two stockholders of the groups who have received shares
of our Common Stock are "accredited investors" under Regulation D.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
We acquired four automobile dealership groups on November 3, 1997 (the
"founding groups"). For financial statement presentation purposes, however, the
Howard Group, one of the founding groups, has been identified as the accounting
acquirer. As such, the financial data as of December 31, 1996 and 1995, and for
each of the two years in the period ended December 31, 1996 represent the
historical financial data of the Howard Group on a stand-alone basis. The
financial data as of and for the year ended December 31, 1997, includes the
operations of Group 1 Automotive, Inc., the parent company, and the founding
groups, excluding the Howard Group, beginning October 31, 1997, the effective
closing date of the acquisitions for accounting purposes. The Howard Group is
included for the entire year ended December 31, 1997. The financial data as of
and for the years ended December 31, 1999 and 1998, includes the operations of
Group 1 and the founding groups from January 1, 1998 and the dealerships
acquired since January 1, 1998, from the effective dates of the acquisitions.
The following selected historical financial data as of December 31, 1999, 1998,
1997, 1996 and 1995, and for each of the five years in the period ended December
31, 1999, have been derived from audited financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(dollars in thousands, except per share amounts)
INCOME STATEMENT DATA:
Revenues...................... $2,508,324 $1,630,057 $403,967 $281,492 $254,003
Cost of sales................. 2,131,967 1,393,547 349,366 241,898 219,907
-------------------------------------------------------------
Gross profit................ 376,357 236,510 54,601 39,594 34,096
Selling, general and
administrative expenses..... 279,791 178,038 43,360 30,027 25,628
Depreciation and amortization. 10,616 6,426 1,020 741 538
-------------------------------------------------------------
Income from operations...... 85,950 52,046 10,221 8,826 7,930
Other income (expense):
Floorplan interest expense.. (20,395) (12,837) (3,810) (3,112) (3,410)
Other interest expense, net. (10,052) (4,027) (176) (56) (61)
Other income (expense), net. 186 39 156 (69) (80)
-------------------------------------------------------------
Income before income taxes.. 55,689 35,221 6,391 5,589 4,379
Provision for income taxes.... 22,174 14,502 573 382 744
-------------------------------------------------------------
Net income.................. $33,515 $20,719 $5,818 $5,207 $3,635
=============================================================
Earnings per share: -
Basic....................... $1.62 $1.20 - - -
Diluted..................... $1.55 $1.16 - -
Weighted average shares
outstanding:
Basic....................... 20,683,308 17,281,165 - - -
Diluted..................... 21,558,920 17,904,878 - - -
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
(in thousands)
BALANCE SHEET DATA:
Working capital................. $ 80,128 $ 48,251 $ 55,475 $ 9,327 $ 7,538
Inventories..................... 386,255 219,176 105,421 47,674 39,573
Total assets.................... 842,910 477,710 213,149 72,874 61,641
Total long-term debt, including
current portion............. 114,250 45,787 9,369 344 284
Stockholders' equity............ 232,029 136,184 89,372 12,210 8,620
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We are a leading operator and consolidator in the highly fragmented
automotive retailing industry. We own automobile dealership franchises located
in Texas, Oklahoma, Florida, New Mexico, Georgia, Colorado, Louisiana and
Massachusetts. Through our dealerships and Internet sites, we sell new and used
cars and light trucks, provide maintenance and repair services at all of our
dealerships, and operate 19 collision service centers. We expect a significant
portion of our future growth to come 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 commissions, documentary fees and
after-market product sales. Sales revenues from new and used vehicle sales and
parts and service sales include sales to retail customers, other dealerships and
wholesalers. Other dealership revenue includes revenues from arranging
financing, insurance and vehicle service contracts, net of a provision for
anticipated chargebacks, and documentary fees.
Our total 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
products and services generally varies between approximately 7.0% and 85.0%,
with new vehicle sales generally resulting in the lowest gross margin and other
dealership revenue sales generally resulting in the highest gross margin. When
our new vehicle sales increase or decrease at a rate greater than our other
revenue sources, our gross margin responds inversely. Factors such as
seasonality, weather, cyclicality and manufacturers' advertising and incentives
may impact our merchandise mix, and therefore influence our gross margin.
Selling, general and administrative expenses consist primarily of
compensation for sales, administrative, finance and general management
personnel, rent, marketing, insurance and utilities. Interest expense consists
of interest charges on interest-bearing debt, including floorplan inventory
financing, net of interest income earned. Until we acquired them, all of the
dealerships had been managed as independent private companies and their results
of operations reflect different tax structures (S Corporations and C
Corporations), which influenced, among other things, their historical levels of
owners' compensation. Certain of these owners and key employees agreed to
reductions in their compensation and benefits in connection with their
acquisition by us.
We are integrating certain functions and installing practices that have
been successful at other franchises and in other retail segments ("best
practices"). This integration of functions and installation of best practices
may present opportunities to increase revenues and reduce costs but may also
necessitate additional costs and expenditures for corporate administration,
including expenses necessary to implement our acquisition strategy. These
various costs and possible cost-savings and revenue enhancements may make
historical operating results difficult to compare to and not indicative of,
future performance.
17
<PAGE> 18
RESULTS OF OPERATIONS
SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE YEARS ENDED DECEMBER 31, 1999
AND DECEMBER 31, 1998
NEW VEHICLE DATA
<TABLE>
<CAPTION>
(dollars in thousands,
except per unit amounts)
INCREASE/ PERCENT
1999 1998 (DECREASE) CHANGE
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Retail unit sales................... 60,384 39,822 20,562 51.6 %
Retail sales revenues............... $1,465,759 $931,205 $534,554 57.4 %
Gross profit........................ $121,639 $74,096 $47,543 64.2 %
Average gross profit per retail
unit sold........................... $2,014 $1,861 $153 8.2 %
Gross margin........................ 8.3 % 8.0 % 0.3 % -
</TABLE>
USED VEHICLE DATA
<TABLE>
<CAPTION>
(dollars in thousands,
except per unit amounts)
INCREASE/ PERCENT
1999 1998 (DECREASE) CHANGE
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Retail unit sales................... 45,630 31,248 14,382 46.0 %
Retail sales revenues (1)........... $606,764 $411,065 $195,699 47.6 %
Gross profit........................ $59,308 $38,282 $21,026 54.9 %
Average gross profit per retail
unit sold........................... $1,300 $1,225 $75 6.1 %
Gross margin........................ 9.8 % 9.3 % 0.5 % -
</TABLE>
- ------------------
(1) Excludes wholesale revenues
PARTS AND SERVICE DATA
<TABLE>
<CAPTION>
(dollars in thousands)
INCREASE/ PERCENT
1999 1998 (DECREASE) CHANGE
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Sales revenues...................... $212,970 $139,144 $73,826 53.1 %
Gross profit........................ $116,622 $74,616 $42,006 56.3 %
Gross margin........................ 54.8 % 53.6 % 1.2 % -
</TABLE>
OTHER DEALERSHIP REVENUES, NET
<TABLE>
<CAPTION>
(dollars in thousands,
except per unit amounts)
INCREASE/ PERCENT
1999 1998 (DECREASE) CHANGE
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Retail new and used unit sales...... 106,014 71,070 34,944 49.2 %
Retail sales revenues............... $78,788 $49,516 $29,272 59.1 %
Net revenues per retail unit sold... $743 $697 $46 6.6 %
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
REVENUES. Revenues increased $878.2 million, or 53.9%, to $2,508.3
million for the year ended December 31, 1999, from $1,630.1 million for the year
ended December 31, 1998. New
18
<PAGE> 19
vehicle revenues increased primarily due to strong customer acceptance of our
products, particularly Chevrolet, Ford, Lexus and Honda, and the acquisitions of
additional dealership operations during 1998 and 1999. The growth in used
vehicle revenues was primarily attributable to an emphasis on used vehicle sales
in the Houston and Oklahoma markets, and the additional dealership operations
acquired. The increase in parts and service revenues was due to the additional
dealership operations acquired, coupled with strong organic growth in the
Denver, Houston and Beaumont markets. Other dealership revenues increased
primarily due to the implementation of our vehicle service contract and
insurance programs, and related training, which resulted in improved revenues
per unit, in addition to an increase in the number of retail new and used
vehicle sales.
GROSS PROFIT. Gross profit increased $139.9 million, or 59.2%, to $376.4
million for the year ended December 31, 1999, from $236.5 million for the year
ended December 31, 1998. The increase was attributable to increased revenues and
an increase in gross margin from 14.5% for the year ended December 31, 1998, to
15.0% for the year ended December 31, 1999. The gross margin increased even
though lower margin new vehicle revenues increased as a percentage of total
revenues, as improvements in other dealership revenues per unit and increases in
the gross margin on new and used vehicle sales and parts and service sales
offset the change in the merchandising mix. The gross margin on new retail
vehicle sales improved to 8.3% from 8.0% due to our dealership managers
performing well in a favorable market and our sales training programs. The
increase in gross margin on used retail vehicle sales to 9.8% from 9.3% was
primarily attributable to our dealership managers performing well in a favorable
operating environment and our sales training programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $101.8 million, or 57.2%, to $279.8 million
for the year ended December 31, 1999, from $178.0 million for the year ended
December 31, 1998. The increase was primarily attributable to the additional
dealership operations acquired and increased variable expenses, particularly
incentive pay to employees, which increased as gross profit increased. Selling,
general and administrative expenses decreased as a percentage of gross profit to
74.3% from 75.3% due primarily to increased operating leverage.
INTEREST EXPENSE. Floorplan and other interest expense, net, increased
$13.5 million, or 79.9%, to $30.4 million for the year ended December 31, 1999,
from $16.9 million for the year ended December 31, 1998. The increase was
primarily attributable to the floorplan interest expense of the additional
dealership operations acquired and borrowings to complete acquisitions. A
portion of the increase is due to the completion of our offering of $100 million
of senior subordinated notes during the first quarter of 1999. Partially
offsetting the increases was a 40 basis point decline in the weighted average
interest rate on our floorplan notes payable. Contributing to the rate decline
was a rate reduction realized from obtaining a lower interest rate on our
floorplan notes payable.
SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE YEARS ENDED DECEMBER 31, 1998
AND DECEMBER 31, 1997
NEW VEHICLE DATA
<TABLE>
<CAPTION>
(dollars in thousands,
except per unit amounts)
INCREASE/ PERCENT
1998 1997 (DECREASE) CHANGE
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Retail unit sales................... 39,822 10,498 29,324 279.3 %
Retail sales revenues............... $931,205 $228,044 $703,161 308.3 %
Gross profit........................ $74,096 $15,695 $58,401 372.1 %
Average gross profit per retail
unit sold........................... $1,861 $1,495 $366 24.5 %
Gross margin........................ 8.0 % 6.9 % 1.1 % -
</TABLE>
19
<PAGE> 20
USED VEHICLE DATA
<TABLE>
<CAPTION>
(dollars in thousands,
except per unit amounts)
INCREASE/ PERCENT
1998 1997 (DECREASE) CHANGE
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Retail unit sales................... 31,248 9,990 21,258 212.8 %
Retail sales revenues (1)........... $411,065 $117,672 $293,393 249.3 %
Gross profit........................ $38,282 $11,575 $26,707 230.7 %
Average gross profit per retail
unit sold........................... $1,225 $1,159 $66 5.7 %
Gross margin........................ 9.3 % 9.8 % -0.5 % -
</TABLE>
- -----------------
(1) Excludes wholesale revenues
PARTS AND SERVICE DATA
<TABLE>
<CAPTION>
(dollars in thousands)
INCREASE/ PERCENT
1998 1997 (DECREASE) CHANGE
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Sales revenues...................... $139,144 $30,006 $109,138 363.7 %
Gross profit........................ $74,616 $16,921 $57,695 341.0 %
Gross margin........................ 53.6 % 56.4 % -2.8 % -
</TABLE>
OTHER DEALERSHIP REVENUES, NET
<TABLE>
<CAPTION>
(dollars in thousands,
except per unit amounts)
INCREASE/ PERCENT
1998 1997 (DECREASE) CHANGE
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Retail new and used unit sales...... 71,070 20,488 50,582 246.9 %
Retail sales revenues............... $49,516 $10,410 $39,106 375.7 %
Net revenues per retail unit sold... $697 $508 $189 37.2 %
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues increased $1,226.1 million, or 303.5%, to $1,630.1
million for the year ended December 31, 1998, from $404.0 million for the year
ended December 31, 1997. The increases in all revenue categories were due
primarily to the inclusion of the dealership operations acquired since October
31, 1997, and our focus on higher margin activities.
GROSS PROFIT. Gross profit increased $181.9 million, or 333.2%, to
$236.5 million for the year ended December 31, 1998, from $54.6 million for the
year ended December 31, 1997. The increase was attributable to increased
revenues and an increased gross margin to 14.5% for the year ended December 31,
1998, from 13.5% for the year ended December 31, 1997. The increase in gross
margin was caused primarily by improvements in other dealership revenues per
unit and increases in the gross margin on new vehicle sales. Additionally,
changes in the merchandising mix, higher-margin parts and service sales and
other dealership revenues increased as a percentage of total revenues, added to
the gross margin improvement.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $134.6 million, or 310.1%, to $178.0 million
for the year ended December 31, 1998 from $43.4 million for the year ended
December 31, 1997. The increase was primarily attributable to the additional
dealership operations acquired and increased variable expenses, particularly
incentive pay to employees, which increased as gross profit increased. Selling,
general and administrative expenses decreased as a percentage of gross profit to
75.3% from 79.4% due primarily to increased operating leverage.
INTEREST EXPENSE. Floorplan and other interest expense, net, increased
$12.9 million, or 322.5%, to $16.9 million for the year ended December 31, 1998,
from $4.0 million for the year ended December 31, 1997. The increase was
primarily attributable to the floorplan interest expense of the additional
dealership operations acquired and additional interest expense from borrowings
to complete acquisitions. Partially offsetting the increases was a cost
reduction realized from obtaining a lower interest rate on our floorplan notes
payable.
20
<PAGE> 21
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash on hand, cash from
operations, our credit facility (which includes the floorplan facility and the
acquisition facility) and equity and debt offerings.
The following table sets forth historical selected information from our
statements of cash flows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997
---------------- --------------- ---------------
(in thousands)
<S> <C> <C> <C>
Net cash provided by
operating activities...... $73,224 $24,277 $6,922
Net cash provided by (used
in) investing activities.. (126,944) (58,225) 10,661
Net cash provided by
financing activities..... 106,101 65,299 5,830
---------------- --------------- ---------------
Net increase in cash and
cash equivalents......... $52,381 $31,351 $23,413
================ =============== ===============
</TABLE>
CASH FLOWS
Total cash and cash equivalents at December 31, 1999, were $118.8
million.
OPERATING ACTIVITIES. For the three-year period ended December 31, 1999,
we generated $104.4 million in net cash from operating activities, primarily
driven by net income plus depreciation and amortization. Cash flow provided by
operating activities increased $48.9 million from $24.3 million for the year
ended December 31, 1998, to $73.2 million for the year ended December 31, 1999.
Excluding working capital changes, during 1999 cash flows from operating
activities increased $26.1 million over the prior-year period.
INVESTING ACTIVITIES. The $126.9 million of cash used for investing
activities during 1999 was primarily attributable to cash paid in completing
acquisitions, net of cash balances obtained in the acquisitions, and purchases
of property and equipment, partially offset by sales of property and equipment.
During 1999, we used approximately $27.4 million in purchasing property and
equipment, of which, approximately $19.6 million was for the purchase of land
and construction of facilities. Partially offsetting these uses of cash, we
received $11.7 million from sales of property and equipment. The proceeds were
received primarily from the sale of dealership properties to a REIT for
approximately $11.2 million, and for which no gain or loss was recognized.
During 1998, $58.2 million was used in investing activities, primarily
for acquisitions, net of cash received, and purchases of property and equipment,
net of sales. Of the $9.7 million used in purchasing property and equipment
during 1998, approximately $5.6 million related to the purchase of land and
construction of facilities for new or expanded operations. During December 1998,
we completed the sale and leaseback of six dealership properties and received
$20.0 million in gross proceeds from the sale, for which no gain or loss was
recognized.
FINANCING ACTIVITIES. We obtained approximately $106.1 million, $65.3
million and $5.8 million from financing activities during the years 1999, 1998
and 1997, respectively. The net cash provided during 1999 was generated
primarily from our March 1999 offerings of 2 million shares of common stock and
$100 million of senior subordinated notes. The net proceeds from these
offerings, approximately $137.7 million, were used to repay $59.0 million
borrowed under the acquisition portion of the credit facility, with the
remainder of the proceeds being used in completing acquisitions during 1999.
Additionally, in connection with the sale of properties to a REIT, we paid off
mortgages of approximately $2.5 million.
The net cash provided during 1998 was generated primarily from drawings
on our credit facility and was utilized in completing acquisitions and
supporting increased sales volumes. Partially offsetting the $75.5 million in
borrowings was $10.0 million in principal payments on long-term debt, of which
$6.6 million was related to the payoff of mortgages in connection with the sale
21
<PAGE> 23
and leaseback transaction completed in December 1998.
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.
WORKING CAPITAL. At December 31, 1999, we had working capital of $80.1
million. Historically, we have funded our operations with internally generated
cash flow and borrowings. While we cannot guarantee it, based on current facts
and circumstances, management believes we have adequate cash flow coupled with
borrowings under our credit facility to fund our current operations.
ACQUISITION FINANCING
We anticipate that our primary use of cash will be for the completion of
acquisitions. We expect the cash needed to complete our acquisitions will come
from the operating cash flows of our existing dealerships, borrowings under our
current credit facilities, other borrowings or equity or debt offerings.
Although we believe that we will be able to obtain sufficient capital to fund
acquisitions, we cannot guarantee that such capital will be available to us at
the time it is required or on terms acceptable to us. See "Cautionary Statement
About Forward-Looking Statements".
CAPITAL EXPENDITURES
Our capital expenditures include expenditures to extend the useful life
of current facilities and expenditures to start or expand operations.
Historically, our annual capital expenditures exclusive of new or expanded
operations have approximately equaled our annual depreciation charge.
Expenditures relating to the construction or expansion of dealership facilities,
generally, are driven by new franchises being awarded to us by a manufacturer or
significant growth in sales at an existing facility. Although we believe that we
will be able to obtain sufficient capital to fund capital expenditures, 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 October 1999, we amended our credit facility to increase the
commitment from $500 million to $1 billion and to extend the term of the credit
facility from December 2001 to December 2003. The credit facility provides a
floorplan facility of $780 million for financing vehicle inventories and an
acquisition facility of $220 million for financing acquisitions, general
corporate purposes and capital expenditures. Currently, $190 million is
available to be drawn under the acquisition facility, subject to a cash flow
calculation and the maintenance of certain financial ratios and various
covenants. The credit facility also limits the amount we may pay as cash
dividends.
In January 1998, we entered into a three-year interest rate swap
agreement to hedge our exposure to changes in interest rates. This swap converts
the interest rate on $75 million of debt to a fixed rate of approximately 6.91%.
SALE OF DEALERSHIP PROPERTIES TO A REIT
During 1998, we entered into an agreement with a REIT to sell certain of
our dealership properties. In connection with the sale of the properties, we
have agreed to leaseback the properties under leases with terms of 30 years,
with tenant termination options after 15, 20 and 25 years. As of December 31,
1998, we had closed the sale of six properties to the REIT, pursuant to the
terms of the agreement, for approximately $20.0 million. During 1999, we sold
two additional properties to the REIT for approximately $11.2 million.
We generally seek to avoid the ownership of real property. Accordingly
we intend to continue to enter into sale and leaseback transactions in order to
minimize our investment in acquired and constructed facilities.
LEASES
We lease various real estate, facilities and equipment under long-term
operating lease agreements, including leases with related parties. Generally,
the related-party leases have terms
22
<PAGE> 24
of 30 years and are renewable at our option 15 years from execution of the lease
and at the end of each subsequent five-year period. Typically, the third-party
leases also have 30-year terms, but are cancelable after an initial 15-year
period and at the end of each subsequent five-year period.
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
This annual report includes certain "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements appear in a number of places
in this annual report and include statements regarding our plans, beliefs or
current expectations, including those plans, beliefs and expectations of our
officers and directors with respect to, among other things:
o future acquisitions;
o expected future cost savings;
o future capital expenditures;
o trends affecting our future financial condition or results of
operations; and
o our business strategy regarding future operations.
Any such forward-looking statements are not assurances of future
performance and involve risks and uncertainties. Actual results may differ
materially from anticipated results for a number of reasons, including:
o industry conditions;
o future demand for new and used vehicles;
o restrictions imposed on us by automobile manufacturers;
o the ability to obtain the consents of automobile manufacturers to our
acquisitions;
o the availability of capital resources; and
o the willingness of acquisition candidates to accept our common stock
as currency.
The information contained in this annual report, including the
information set forth below and under the heading "Business", identifies
additional factors that could affect our operating results and performance. We
urge you to carefully consider those factors.
All forward-looking statements attributable to us are qualified in their
entirety by this cautionary statement.
DEPENDENCE ON ACQUISITIONS FOR GROWTH
Growth in our revenues and earnings will depend significantly on our
ability to acquire and successfully operate dealerships. There can be no
assurance that we will be able to identify and acquire dealerships in the
future. In addition, managing and integrating additional dealerships into our
existing mix of dealerships may result in substantial costs, delays or other
operational or financial problems.
Restrictions by our Manufacturers as well as covenants contained in our
debt instruments limit our ability to acquire additional dealerships.
In addition, increased competition for acquisition candidates may
develop, which could result in fewer acquisition opportunities available to us
and/or higher acquisition prices.
Further, acquisitions involve a number of special risks, including
possible diversion of resources and management's attention, inability to retain
key acquired personnel and risks associated with unanticipated events or
liabilities, some or all of which could have a material adverse effect on our
business, financial condition and results of operations.
23
<PAGE> 25
We will continue to need substantial capital in order to acquire
additional automobile dealerships. In the past, we have financed these
acquisitions with a combination of cash flow from operations, proceeds from
borrowings under our credit facilities with banks and issuances of our common
stock. We cannot guarantee that these sources of funds will be sufficient to
fund our acquisition program and other cash needs, or that we will be able to
obtain adequate additional capital from other sources.
We expect to utilize our current credit facility to borrow a portion of
the funds required for acquisitions. If funds under the credit facility are
insufficient to fund our acquisition program, we will be required to obtain
alternative financing such as from the issuance of additional debt or equity
securities or an expansion or replacement of the credit facility.
We currently intend to finance acquisitions by issuing shares of common
stock as full or partial consideration for acquired dealerships. The extent to
which we will be able or willing to issue common stock for acquisitions will
depend on the market value of the common stock from time to time and the
willingness of potential acquisition candidates to accept common stock as part
of the consideration for the sale of their businesses. If potential acquisition
candidates are unwilling to accept our common stock, we will be forced to rely
solely on available cash or debt or equity financing, which could adversely
affect our acquisition program. Accordingly, our ability to make acquisitions
could be adversely affected if our common stock is unfavorably valued by the
market.
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 would
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 will be
required to pay them the difference between the price they receive and the
guaranteed price. As of December 31, 1999, there were approximately 3.2 million
shares of common stock subject to our guarantee with a weighted average
guarantee price of approximately $13.60 per share. These guarantees have terms
of three years to ten years with a weighted average term remaining of
approximately 4.5 years. If we are required to perform on our guarantees, our
liquidity and ability to finance our acquisition program could be adversely
affected.
In addition, in certain 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 in
the future under these contingent payment arrangements. If we are required to
make any of these contingent payments, we will have to pay approximately
one-half of each payment in common stock and one-half in cash. If these
contingent payments must be paid in full, our liquidity and ability to finance
our acquisition program could be adversely affected.
DEPENDENCE ON THE SUCCESS OF OUR MANUFACTURERS
Our success depends upon the overall success of the line of vehicles
that each of our dealerships sells. Demand for our Manufacturers' vehicles as
well as the financial condition, management, marketing, production and
distribution capabilities of our Manufacturers affect our business.
Although we have attempted to lessen our dependence on any one
Manufacturer by buying dealerships representing a number of different domestic
and foreign Manufacturers, events such as labor disputes and other production
disruptions that may adversely affect a Manufacturer may also adversely affect
us. Similarly, the late delivery of vehicles from Manufacturers, which sometimes
occurs during periods of new product introductions, can lead to reduced sales
during those periods. Moreover, any event that causes adverse publicity
involving any of our Manufacturers may have an adverse effect on us regardless
of whether such event involves any of our dealerships.
24
<PAGE> 26
CYCLICALITY
Our operations, like the automotive retailing industry in general, can
be impacted by a number of factors relating to general economic conditions,
including consumer business cycles, consumer confidence, economic conditions,
availability of consumer credit and interest rates. Although the above factors,
among others, may impact our business, we believe the impact on our operations
of future negative trends in such factors will be somewhat mitigated by our (i)
strong parts, service and collision repair services, (ii) variable cost salary
structure, (iii) geographic diversity and (iv) product diversity.
SEASONALITY
Our operations are subject to seasonal variations, with the second and
third quarters generally contributing more operating profit than the first and
fourth quarters. This seasonality is driven by three primary forces: (i)
Manufacturer-related factors, primarily the historical timing of major
manufacturer incentive programs and model changeovers, (ii) weather-related
factors and (iii) consumer buying patterns.
ADDITIONAL FACTORS TO CONSIDER
Our business is subject to factors in addition to those discussed above.
For a discussion of those factors, see "Business - Agreements with
Manufacturers", "- Competition", "- Governmental Regulations" and
"- Environmental Matters."
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about our market-sensitive
financial instruments and constitutes a "forward-looking statement". Our major
market-risk exposure is changing interest rates. Our policy is to manage
interest rates through use of a combination of fixed and floating rate debt.
Interest rate swaps may be used to adjust interest rate exposures when
appropriate, based upon market conditions. These swaps are entered into with
financial institutions with investment grade credit ratings, thereby minimizing
the risk of credit loss. All items described are non-trading.
<TABLE>
<CAPTION>
FAIR VALUE
EXPECTED MATURITY DATE DECEMBER 31,
1999
------------------------------------------------------------------ ---------------
(dollars in millions) 2000 2001 2002 2003 2004 Thereafter Total
------ ------ ----- ------ ----- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
VARIABLE RATE DEBT
Current................. $ 0.4 $ - $ - $363.5 $ - $ - $363.9 $363.9
Average interest
rates................ 9.47% - - 7.72% - -
Non-current............. - $ 0.5 $ 0.7 $ 10.6 $ 0.6 $ 1.4 $ 13.8 $ 13.8
Average interest
rates................ - 9.75% 9.57% 8.34% 9.96% 9.96%
------ ------ ----- ------ ----- -------- -------
Total variable rate
debt................... $ 0.4 $0.5 $ 0.7 $374.1 $ 0.6 $ 1.4 $377.7
Interest rate swap...... $ - $ 75.0 $ - $ - $ - $ - $ 75.0 $ (0.3)
Average pay rate
(fixed).............. - 6.91% - - - -
Average receive rate
(variable)........... - 7.72% - - - -
------ ------ ----- ------ ----- -------- -------
Net variable rate debt.. $ 0.4 $(74.5) $ 0.7 $374.1 $ 0.6 $ 1.4 $302.7
====== ====== ===== ====== ===== ======== =======
</TABLE>
25
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Financial Statements for the information required by this item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
For information concerning:
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the definitive Proxy Statement of Group 1 Automotive, Inc. for the
Annual Meeting of Stockholders to be held May 24, 2000, which will be filed with
the Securities and Exchange Commission and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
The financial statements listed in the accompanying Index to
Financial Statements are filed as part of this Annual Report on Form
10-K.
(b) Reports on Form 8-K
On October 29, 1999, the Company filed a Current Report of Form 8-K
reporting under Item 5 thereof and including exhibits under Item 7
thereof.
On November 5, 1999, the Company filed a Current Report of Form 8-K
reporting under Item 5 thereof and including exhibits under Item 7
thereof.
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<S> <C>
3.1 -- Restated Certificate of Incorporation of the Company (Incorporated by reference
to Exhibit 3.1 of the Company's Registration Statement on Form S-1 Registration
No. 333-29893).
3.2 -- Certificate of Designation of Series A Junior Participating Preferred Stock
(Incorporated by reference to Exhibit 3.2 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
3.3 -- Bylaws of the Company (Incorporated by reference to Exhibit 3.3 of the Company's
Registration Statement on Form S-1 Registration No. 333-29893).
</TABLE>
26
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
4.1 -- Specimen Common Stock certificate (Incorporated by reference to Exhibit 4.1 of
the Company's Registration Statement on Form S-1 Registration No. 333-29893).
4.2 -- Form of Subordinated Indenture (Incorporated by reference to Exhibit 4.5 of the
Company's Registration Statement on Form S-3 Registration No. 333-69693).
4.3 -- Form of Subordinated Debt Securities (included in Exhibit 4.2).
4.4 -- First Supplemental Indenture dated as of March 5, 1999 among Group 1 Automotive,
Inc., the Subsidiary Guarantors named therein and IBJ Whitehall Bank & Trust
Company (Incorporated by reference to Exhibit 4.1 of the Company's current
report of Form 8-K dated March 5, 1999).
4.5 -- Form of 10 7/8% Senior Subordinated Note due March 1, 2009 (included in Exhibit
4.4).
10.1 -- Employment Agreement between the Company and B.B. Hollingsworth, Jr. dated
November 3, 1997 (Incorporated by reference to Exhibit 10.1 of the Company's
Annual Report on Form 10-K for the year-ended December 31, 1997).
10.2 -- Employment Agreement between the Company and Robert E. Howard
II dated November 3, 1997 (Incorporated by reference to Exhibit
10.2 of the Company's Annual Report on Form 10-K for the
year-ended December 31, 1997).
10.3 -- Consulting Agreement between the Company and Sterling B. McCall, Jr. dated
November 4, 1999.
10.4 -- Employment Agreement between the Company and Charles M. Smith
dated November 3, 1997 (Incorporated by reference to Exhibit
10.4 of the Company's Annual Report on Form 10-K for the
year-ended December 31, 1997).
10.5 -- Employment Agreement between the Company and John T. Turner
dated November 3, 1997 (Incorporated by reference to Exhibit
10.5 of the Company's Annual Report on Form 10-K for the
year-ended December 31, 1997).
10.6 -- Employment Agreement between the Company and Scott L.
Thompson dated November 3, 1997 (Incorporated by reference to
Exhibit 10.6 of the Company's Annual Report on Form 10-K for the
year-ended December 31, 1997).
10.7 -- 1996 Stock Incentive Plan (Incorporated by reference to Exhibit 10.7 of the
Company's Registration Statement on Form S-1 Registration No. 333-29893).
10.8 -- First Amendment to 1996 Stock Incentive Plan (Incorporated by reference to
Exhibit 10.8 of the Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.9 -- Lease Agreement between Howard Pontiac GMC and Robert E.
Howard II (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 Registration No.
333-29893).
10.10 -- Lease Agreement between Bob Howard Motors and Robert E. Howard II (Incorporated
by reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
10.11 -- Lease Agreement between Bob Howard Chevrolet and Robert E. Howard II
(Incorporated by reference to Exhibit 10.9 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.12 -- Lease Agreement between Bob Howard Automotive-H and North Broadway Real Estate
(Incorporated by reference to Exhibit 10.9 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.13 -- Lease Agreement between Mike Smith Autoplaza and Olds-Honda Realty (Incorporated
by reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
10.14 -- Rights Agreement between Group 1 Automotive, Inc. and ChaseMellon Shareholder
Services, L.L.C., as rights agent dated October 3, 1997 (Incorporated by
reference to Exhibit 10.10 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
10.15 -- 1998 Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.11 of
the Company's Registration Statement on Form S-1 Registration No. 333-29893).
</TABLE>
27
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.16 -- Form of Agreement between Toyota Motor Sales, U.S.A., and Group 1 Automotive,
Inc. (Incorporated by reference to Exhibit 10.12 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.17 -- Form of Supplemental Agreement to General Motors Corporation Dealer Sales and
Service Agreement (Incorporated by reference to Exhibit 10.13 of the Company's
Registration Statement on Form S-1 Registration No. 333-29893).
10.18 -- Supplemental Terms and Conditions between Ford Motor Company and Group 1
Automotive, Inc. dated September 4, 1997 (Incorporated by reference to Exhibit
10.16 of the Company's Registration Statement on Form S-1 Registration No.
333-29893).
10.19 -- Toyota Dealer Agreement between Gulf States Toyota, Inc. and Southwest Toyota,
Inc. dated April 5, 1993 (Incorporated by reference to Exhibit 10.17 of the
Company's Registration Statement on Form S-1 Registration No. 333-29893).
10.20 -- Lexus Dealer Agreement between Toyota Motor Sales, U.S.A., Inc. and SMC Luxury
Cars, Inc. dated August 21, 1995 (Incorporated by reference to Exhibit 10.18 of
the Company's Registration Statement on Form S-1 Registration No. 333-29893.
10.21 -- Form of General Motors Corporation U.S.A. Sales and Service Agreement
(Incorporated by reference to Exhibit 10.25 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.22 -- Fourth Amended and Restated Revolving Credit Agreement, dated
as of October 15, 1999, and Effective as of November 1, 1999
(Incorporated by reference to Exhibit 10.1 of the Company's
Current Report on Form 8-K dated October 29, 1999).
10.23 -- Stock Pledge Agreement dated December 19, 1997 (Incorporated
by reference to Exhibit 10.54 of the Company's Annual Report on
Form 10-K for the year-ended December 31, 1997).
10.24 -- Swap Transaction Letter Agreement dated January 23, 1998
(Incorporated by reference to Exhibit 10.55 of the Company's
Annual Report on Form 10-K for the year-ended December 31,
1997).
10.25 -- First Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit 10.35
of the Company's Annual Report on Form 10-K for the year-ended
December 31, 1998).
10.26 -- Employment Agreement between the Company and Johns S. Bishop
dated October 7, 1998 (Incorporated by reference to Exhibit
10.37 of the Company's Annual Report on Form 10-K for the
year-ended December 31, 1998).
10.27 -- Form of Ford Motor Company Sales and Service Agreement
(Incorporated by reference to Exhibit 10.38 of the Company's
Annual Report on Form 10-K for the year-ended December 31,
1998).
10.28 -- Form of Chrysler Corporation Sales and Service Agreement
(Incorporated by reference to Exhibit 10.39 of the Company's
Annual Report on Form 10-K for the year-ended December 31,
1998).
10.29 -- Lock-up Agreement dated June 24, 1999, between the Company
and Robert E. Howard II.
10.30 -- Second Amendment to the 1996 Stock Incentive Plan.
(Incorporated by reference to Exhibit 10.1 of the Company's
Current Report on Form 8-K dated May 14, 1999).
10.31 -- Group 1 Automotive, Inc. Deferred Compensation Plan effective November 10, 1999.
11.1 -- Statement re: computation of earnings per share is included under Note 2 to the
financial statements.
21.1 -- Group 1 Automotive, Inc. Subsidiary List.
23.1 -- Consent of Arthur Andersen LLP.
27.1 -- Financial Data Schedule.
</TABLE>
28
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the city of Houston,
Texas, on the 30th day of March, 2000.
Group 1 Automotive, Inc.
By:/s/ B.B. Hollingsworth, Jr.
---------------------------
B.B. Hollingsworth, Jr.
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on the 30th day of March, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ B.B. Hollingsworth, Jr. Chairman, President and Chief
- ----------------------------------------------- Executive Officer and Director (Principal
B.B. Hollingsworth, Jr. Executive Officer)
/s/ Scott L. Thompson Senior Vice President - Chief Financial
- ----------------------------------------------- Officer and Treasurer (Chief Financial and
Scott L. Thompson Accounting Officer)
/s/ Robert E. Howard, II Director
- -----------------------------------------------
Robert E. Howard, II
/s/ John L. Adams Director
- -----------------------------------------------
John L. Adams
/s/ Charles M. Smith Director
- -----------------------------------------------
Charles M. Smith
/s/ John H. Duncan Director
- -----------------------------------------------
John H. Duncan
/s/ Bennett E. Bidwell Director
- -----------------------------------------------
Bennett E. Bidwell
</TABLE>
29
<PAGE> 31
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> 32
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, 1999 and 1998 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. 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, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Houston, Texas
February 17, 2000
F-2
<PAGE> 33
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
ASSETS 1999 1998
---------------- ----------------
<S> <C> <C>
CURRENT ASSETS: (in thousands)
Cash and cash equivalents....................... $118,824 $66,443
Accounts and notes receivable, net.............. 35,296 21,373
Inventories..................................... 386,255 219,176
Deferred income taxes........................... 8,619 11,212
Other assets.................................... 4,429 8,718
---------------- ----------------
Total current assets.......................... 553,423 326,922
---------------- ----------------
PROPERTY AND EQUIPMENT, net....................... 46,711 21,960
GOODWILL, net..................................... 235,312 123,587
OTHER ASSETS...................................... 7,464 5,241
---------------- ----------------
Total assets.................................. $842,910 $477,710
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Floorplan notes payable......................... $363,489 $193,405
Current maturities of long-term debt............ 1,076 2,966
Accounts payable and accrued expenses........... 108,730 82,300
---------------- ----------------
Total current liabilities..................... 473,295 278,671
---------------- ----------------
DEBT, net of current maturities................... 15,285 42,821
SENIOR SUBORDINATED NOTES......................... 97,889 -
DEFERRED INCOME TAXES............................. 3,217 -
OTHER LIABILITIES................................. 21,195 20,034
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, 21,801,367 and 18,267,515 issued.. 218 183
Additional paid-in capital...................... 181,398 118,469
Retained earnings............................... 51,705 18,190
Treasury stock, at cost, 78,609 and 37,366 shares. (1,292) (658)
---------------- ----------------
Total stockholders' equity.................... 232,029 136,184
---------------- ----------------
Total liabilities and stockholders' equity.... $842,910 $477,710
================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 34
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997
---------------- ----------------- -----------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C>
REVENUES:
New vehicle sales................. $1,465,759 $931,205 $228,044
Used vehicle sales................ 750,807 510,192 135,507
Parts and service sales........... 212,970 139,144 30,006
Other dealership revenues, net.... 78,788 49,516 10,410
---------------- ----------------- -----------------
Total revenues.................. 2,508,324 1,630,057 403,967
COST OF SALES:
New vehicle sales................. 1,344,120 857,109 212,349
Used vehicle sales................ 691,499 471,910 123,932
Parts and service sales........... 96,348 64,528 13,085
---------------- ----------------- -----------------
Total cost of sales............. 2,131,967 1,393,547 349,366
---------------- ----------------- -----------------
GROSS PROFIT........................ 376,357 236,510 54,601
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES........... 279,791 178,038 43,360
DEPRECIATION EXPENSE................ 4,853 3,783 850
AMORTIZATION EXPENSE................ 5,763 2,643 170
---------------- ----------------- -----------------
Income from operations 85,950 52,046 10,221
OTHER INCOME AND (EXPENSES):
Floorplan interest expense........ (20,395) (12,837) (3,810)
Other interest expense, net....... (10,052) (4,027) (176)
Other income, net................. 186 39 156
---------------- ----------------- -----------------
INCOME BEFORE INCOME TAXES.......... 55,689 35,221 6,391
PROVISION FOR INCOME TAXES.......... 22,174 14,502 573
----------------- ---------------- -----------------
NET INCOME.......................... $33,515 $20,719 $5,818
================= ================ =================
S Corporation pro forma income taxes
(unaudited)....................... 1,465
-----------------
Pro forma net income
(unaudited)....................... $4,353
=================
Earnings per share:
Basic............................. $1.62 $1.20
Diluted........................... $1.55 $1.16
Weighted average shares outstanding:
Basic............................. 20,683,308 17,281,165
Diluted........................... 21,558,920 17,904,878
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 35
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
-------------------------- PAID-IN EARNINGS TREASURY
SHARES AMOUNT CAPITAL (DEFICIT) STOCK TOTAL
------------ ----------- -------------- -------------- ----------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE, December 31,
1996.................. 3,570,302 $36 $6,270 $5,904 $- $12,210
Net income............. - - - 5,818 - 5,818
Acquisition of
founding Companies... 5,954,613 60 33,294 - - 33,354
Initial public
offering, net........ 5,148,136 51 51,707 - - 51,758
Purchase of treasury
stock................ - - - - (92) (92)
Stock transfer by
shareholder, net of
tax.................. - - 575 - - 575
Dividends, prior to
the initial public
offering............. - - - (14,251) - (14,251)
------------ ----------- -------------- -------------- ----------- -------------
BALANCE, December 31,
1997.................. 14,673,051 147 91,846 (2,529) (92) 89,372
Net income............. - - - 20,719 - 20,719
Issuance of common
stock in
acquisitions......... 3,516,805 35 26,770 - - 26,805
Proceeds from sales of
common stock under
employee benefit
plans................ 234,650 1 2,063 - - 2,064
Issuance of treasury
stock to employee
benefit plan......... (156,991) - (2,210) - 2,210 -
Purchase of treasury
stock................ - - - - (2,776) (2,776)
------------ ----------- -------------- -------------- ----------- -------------
BALANCE, December 31,
1998................... 18,267,515 183 118,469 18,190 (658) 136,184
Net income............. - - - 33,515 - 33,515
Common stock offering,
net.................. 2,000,000 20 42,866 - - 42,886
Issuance of common
stock in acquisitions 1,459,852 15 21,069 - - 21,084
Proceeds from sales of
common stock under
employee benefit
plans................ 322,195 3 4,195 - - 4,198
Issuance of treasury
stock to employee
benefit plan......... (248,195) (3) (5,201) - 5,204 -
Purchase of treasury
stock................ - - - - (5,838) (5,838)
------------ ----------- -------------- -------------- ----------- -------------
BALANCE, December 31,
1999................... 21,801,367 $218 $181,398 $51,705 $(1,292) $232,029
============ =========== ============== ============== =========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 36
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
------------- ------------- ------------
(dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $33,515 $20,719 $5,818
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization...................... 10,616 6,426 1,020
Non-cash compensation, net of tax.................. - - 575
Deferred income taxes.............................. 4,011 (4,201) (1,015)
Provision for doubtful accounts and uncollectible
notes.............................................. 1,153 356 270
Gain on sale of assets............................. (53) (115) (112)
Changes in assets and liabilities -
Accounts receivable................................ (4,717) (4,544) 1,564
Inventories........................................ (49,079) 44 5,686
Prepaid expenses and other assets.................. (3,487) (2,661) 3,609
Due from affiliates, net........................... - - 491
Floorplan notes payable............................ 68,584 (1,730) (5,374)
Accounts payable and accrued expenses.............. 12,681 9,983 (5,610)
------------- ------------- ------------
Total adjustments.............................. 39,709 3,558 1,104
------------- ------------- ------------
Net cash provided by operating activities...... 73,224 24,277 6,922
------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable....................... (2,452) (2,276) (362)
Collections on notes receivable.................... 1,040 1,630 88
Purchases of property and equipment................ (27,382) (9,695) (2,164)
Proceeds from sale of property and equipment....... 11,705 20,238 1,935
Cash paid in acquisitions, net of cash received.... (109,855) (68,122) 11,164
------------- ------------- ------------
Net cash provided by (used in) investing
activities..................................... (126,944) (58,225) 10,661
------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) under floorplan facility for
acquisition financing.............................. - 33,523 (33,523)
Net borrowings on revolving credit facility........ (32,000) 42,000 -
Principal payments of long-term debt............... (3,610) (10,001) (471)
Borrowings of long-term debt....................... 5,684 490 109
Proceeds from common stock offering, net........... 42,886 - 51,759
Proceeds from senior subordinated notes offering, net. 94,781 - -
Proceeds from issuance of common stock to benefit
plans.............................................. 4,198 2,063 -
Purchase of treasury stock......................... (5,838) (2,776) (92)
Dividends paid in cash............................. - - (11,952)
------------- ------------- ------------
Net cash provided by financing activities...... 106,101 65,299 5,830
------------- ------------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............. 52,381 31,351 23,413
CASH AND CASH EQUIVALENTS, beginning of period......... 66,443 35,092 11,679
------------- ------------- ------------
CASH AND CASH EQUIVALENTS, end of period............... $118,824 $66,443 $35,092
============= ============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for -
Interest........................................... $27,156 $15,218 $4,200
Taxes.............................................. $22,812 $17,832 $131
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE> 37
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Group 1 Automotive, Inc. and Subsidiaries ("Group 1" or the "Company")
was founded in December 1995 to become a leading operator in the highly
fragmented automobile retailing industry. The Company is engaged in the retail
sale of new and used vehicles and the arranging of vehicle finance, insurance
and service contracts. In addition, the Company sells automotive parts and
provides vehicle servicing and collision repair.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
For financial statement presentation purposes, Howard Group, one of four
groups acquired in 1997 (the "Founding Groups"), has been identified as the
accounting acquirer. The acquisition of the remaining Founding Groups and the
subsequent acquisitions were accounted for using the purchase method of
accounting. The results of operations of the Howard Group are included for all
periods presented. The operations of Group 1 Automotive, Inc., the parent
company, and the Founding Groups, excluding the Howard Group, are included in
the results of operations beginning October 31, 1997, the effective closing date
of the acquisitions for accounting purposes. The results of operations of all
acquisitions subsequent to October 31, 1997 are included from the effective
dates of the closings of the acquisitions. The allocation of purchase price to
the assets acquired and liabilities assumed has been initially assigned and
recorded based on preliminary estimates of fair value and may be revised as
additional information concerning the valuation of such assets and liabilities
becomes available. All significant intercompany balances and transactions have
been eliminated in consolidation.
Revenue Recognition
Revenue from vehicle sales, parts sales and vehicle service is
recognized upon completion of the sale and delivery to the customer.
Finance, Insurance and Service Contract Income Recognition
The Company arranges financing for customers through various
institutions and receives financing fees equal to the difference between the
loan rates charged to customers over predetermined financing rates set by the
financing institution. In addition, the Company receives commissions from the
sale of credit life and disability insurance and vehicle service contracts to
customers.
The Company may be charged back ("chargebacks") for unearned financing
fees, insurance or vehicle service contract commissions in the event of early
termination of the contracts by customers. The revenues from financing fees and
commissions are recorded at the time of the sale of the vehicles and a reserve
for future chargebacks is established based on historical operating results and
the termination provisions of the applicable contracts. Finance, insurance and
vehicle service contract revenues, net of estimated chargebacks, are included in
other dealership revenue in the accompanying consolidated financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments that have an
original maturity of three months or less at the date of purchase, as well as
contracts in transit. Contracts in transit represent contracts on vehicles sold,
for which the proceeds are in transit from financing institutions.
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.
F-7
<PAGE> 38
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Expenditures for major additions or improvements, which extend the
useful lives of assets, are capitalized. Minor replacements, maintenance and
repairs, which do not improve or extend the lives of such assets, are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in current operations.
Goodwill
Goodwill represents the excess of the purchase price of dealerships
acquired over the fair value of tangible assets acquired at the date of
acquisition. Goodwill is amortized on a straight-line basis over 40 years.
Amortization expense charged to operations totaled approximately $4.5 million,
$2.2 million, and $170,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. Accumulated amortization totaled approximately $7.0 million and
$2.5 million as of December 31, 1999 and 1998, respectively.
Income Taxes
The Company follows the liability method of accounting for income taxes
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets are realized or liabilities are settled. A valuation allowance
reduces deferred tax assets when it is more likely than not that some or all of
the deferred tax assets will not be realized.
Prior to acquisition of the Founding Groups, certain entities of the
Howard Group elected S Corporation status, as defined by the Internal Revenue
Code, whereby the companies were not subject to taxation for federal purposes.
Under S Corporation status, the stockholders report their share of these
companies' taxable earnings or losses in their personal tax returns. All S
Corporation elections were terminated in conjunction with the acquisitions.
Self-Insured Medical Plan
The Company is self-insured for a portion of the claims related to its
employee medical benefits program. Claims, not subject to stop-loss insurance,
are accrued based upon the Company's estimates of the aggregate liability for
claims incurred using certain actuarial assumptions and the Company's historical
claims experience.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of floorplan notes
payable and long-term debt. 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. Specifically, the
carrying value of the Company's senior subordinated notes approximates fair
value as they were trading in the market at prices near book value.
In January 1998, the Company entered into a three-year interest rate
swap agreement to hedge its exposure to changes in interest rates. The effect of
this swap is to convert the interest rate on $75 million of debt to a fixed rate
of approximately 6.91%.
Advertising
The Company expenses production and other costs of advertising as
incurred. Advertising expense for the years ended December 31, 1999, 1998, and
1997 totaled $25.9, $16.8 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 vehicle valuations,
retail loan guarantees and future chargebacks on finance, insurance and service
contract income. Actual results could differ from those estimates.
F-8
<PAGE> 39
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statements of Cash Flows
For purposes of the statements of cash flows, cash and cash equivalents
include contracts in transit, which are typically collected within one month.
Additionally, the net change in floorplan financing of inventory, which is a
customary financing technique in the industry, is reflected as an operating
activity in the statements of cash flows.
Earnings Per Share
SFAS No. 128 requires the presentation of basic earnings per share and
diluted earnings per share in financial statements of public enterprises. Under
the provisions of this statement, basic earnings per share is computed based on
weighted average shares outstanding and excludes dilutive securities. Diluted
earnings per share is computed including the impacts of all potentially dilutive
securities. As the Company was not a public enterprise until October 1997, and
the companies included in the statements of operations were under different tax
structures (S Corporations and C Corporations), no earnings per share data have
been presented for the historical results of operations for the year ended
December 31, 1997. The following table sets forth the shares outstanding for the
earnings per share calculations for the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Common stock outstanding, beginning of period............... 18,267,515 14,673,051
Weighted average common stock issued in offerings....... 1,664,049 -
Weighted average common stock issued in acquisitions.... 739,071 2,591,834
Weighted average common stock issued to employee stock
purchase plan........................................... 128,757 90,123
Weighted average common stock issued in stock option
exercises............................................... 32,978 15,953
Less: Weighted average treasury shares repurchased...... (149,062) (89,796)
---------- ----------
Shares used in computing basic earnings per share........... 20,683,308 17,281,165
Dilutive effect of stock options, net of assumed
repurchase of treasury stock............................ 875,612 623,713
---------- ----------
Shares used in computing diluted earnings per share......... 21,558,920 17,904,878
========== ==========
</TABLE>
Recent Accounting Pronouncements
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognizes
all derivatives as either assets or liabilities in the statement of financial
position and measures those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction or (c) a hedge of the foreign currency exposure of a
net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security or a foreign currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative (that
is, gains or losses) depends on the intended use of the derivative and the
resulting designation. SFAS No. 137 amended the effective date to be for all
fiscal quarters of fiscal years beginning after June 15, 2000. Management does
not believe that the adoption of this statement will have a material impact on
the financial position or results of operations of the Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition". SAB No. 101 is
effective for years beginning after December 31, 1999, and provides guidance
related to recognizing revenue in circumstances where no specific
F-9
<PAGE> 40
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
accounting standards exist. Management does not believe that SAB No. 101 will
have a material impact on its revenue recognition policies.
Reclassifications
Certain reclassifications have been made to prior year financial
statements to conform them to the current year presentation.
3. BUSINESS COMBINATIONS:
During 1999, the Company acquired 32 automobile dealership franchises.
These acquisitions were accounted for as purchases. The aggregate consideration
paid in completing these acquisitions, including real estate acquired, and
satisfying certain contingent acquisition payment arrangements from previous
transactions included approximately $109.9 million in cash, net of cash
received, approximately 1.5 million shares of restricted/unregistered common
stock and the assumption of an estimated $101.5 million of inventory financing
and approximately $500,000 of notes payable. 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 consolidated balance sheet includes preliminary allocations of the
purchase price of the acquisitions, which are subject to final adjustment. These
allocations resulted in recording approximately $116.2 million of goodwill,
which is being amortized over 40 years.
During 1998, the Company acquired 33 automobile dealership franchises.
These acquisitions were accounted for as purchases. The aggregate 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/unregistered common stock and the assumption of an
estimated $103.1 million in inventory financing and $2.9 million of mortgage
financing. Additional consideration may be paid based on the financial
performance of certain dealerships, over specified periods. Additional
consideration, if any, will be payable in cash and common stock and will result
in an increase in goodwill on the balance sheet of the Company. The purchase
price allocations resulted in recording approximately $98.7 million of goodwill,
which is being amortized over 40 years.
The following pro forma financial information consists of income
statement data from continuing operations as presented in the consolidated
financial statements plus (1) unaudited income statement data for all
acquisitions completed before December 31, 1999, assuming that they occurred on
January 1, 1998, (2) the completion of our March 1999 offerings of 2 million
shares of common stock and $100 million of senior subordinated notes, assuming
they occurred on January 1, 1998, and (3) certain pro forma adjustments
discussed below.
F-10
<PAGE> 41
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1999 1998
------------------ -------------------
<S> <C> <C>
(in thousands, except per share amounts)
(unaudited)
Revenues .................... $2,974,422 $2,657,980
Gross profit ................ 438,151 384,773
Income from operations ...... 102,493 86,275
Net income .................. 39,010 31,329
Basic earnings per share .... 1.80 1.46
Diluted earnings per share .. 1.73 1.42
</TABLE>
Pro forma adjustments included in the amounts above primarily relate to:
(a) increases in revenues related to changes in the contractual commission
arrangements on certain third-party products sold by the dealerships; (b) pro
forma goodwill amortization expense over an estimated useful life of 40 years;
(c) reductions in compensation expense and management fees to the level that
certain management employees and owners of the acquired companies will
contractually receive; (d) incremental corporate overhead costs related to
personnel costs, rents, professional service fees and directors and officers
liability insurance premiums; (e) net increases in interest expense resulting
from net cash borrowings utilized to complete acquisitions, partially offset by
interest rate reductions received; and (f) incremental provisions for federal
and state income taxes relating to the compensation differential, S Corporation
income and other pro forma adjustments.
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts and notes receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1999 1998
--------------- ------------
<S> <C> <C>
(in thousands)
Amounts due from manufacturers........ $17,189 $9,522
Parts and service receivables......... 6,786 3,733
Due from finance companies............ 6,177 4,452
Other................................. 6,783 4,405
--------------- ------------
Total accounts and notes receivable 36,935 22,112
Less - Allowance for doubtful accounts (1,639) (739)
--------------- ------------
Accounts and notes receivable, net. $35,296 $21,373
=============== ============
</TABLE>
Inventories, net of valuation reserves, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
(in thousands)
New vehicles........................... $286,815 $155,088
Used vehicles.......................... 68,287 44,384
Rental vehicles........................ 11,115 7,228
Parts, accessories and other........... 20,038 12,476
-------------- ---------------
Total inventories................... $386,255 $219,176
============== ===============
</TABLE>
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
(in thousands)
Accounts payable, trade............... $46,437 $31,362
Accrued expenses...................... 62,293 50,938
--------------- ---------------
Total accounts payable and accrued
expenses........................ $108,730 $82,300
=============== ===============
</TABLE>
F-11
<PAGE> 42
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------------------
IN YEARS 1999 1998
------------- ------------ ---------------
<S> <C> <C> <C>
(in thousands)
Land........................... - $5,985 $2,130
Buildings...................... 30 to 40 7,701 1,086
Leasehold improvements......... 7 to 15 10,586 6,940
Machinery and equipment........ 3 to 7 16,480 8,186
Furniture and fixtures......... 5 to 7 13,958 8,104
Company vehicles............... 5 2,596 1,556
------------ ---------------
Total 57,306 28,002
Less -- Accumulated
depreciation................. (10,595) (6,042)
------------ ---------------
Property and equipment, net.. $46,711 $21,960
============ ===============
</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,
-----------------------------------
1999 1998
--------------- ----------------
<S> <C> <C>
(in thousands)
New vehicles.......................... $320,058 $166,650
Used vehicles......................... 32,719 19,452
Rental vehicles....................... 10,712 7,303
--------------- ----------------
Total floorplan notes payable. $363,489 $193,405
=============== ================
</TABLE>
During 1999, the Company amended its Revolving Credit Agreement with a
bank group (the "Credit Facility"). The maturity date was extended to December
31, 2003, and the interest rate was reduced. The notes payable bear interest at
the London Interbank Offered Rate ("LIBOR") plus 125 basis points.
As of December 31, 1999 and 1998, the interest rate on floorplan notes
payable outstanding was 7.72% and 7.12%, respectively. The floorplan arrangement
permits the Company to borrow up to $780 million, dependent upon new and used
vehicle inventory levels. As of December 31, 1999, total available borrowings
under floorplan agreements were approximately $416.5 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-12
<PAGE> 43
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
----------- ------------
<S> <C> <C>
(in thousands)
Credit Facility (described below)........... $10,000 $42,000
Note payable to a bank with monthly principal
payments of $41,892, due through March
2004, bearing interest at 7.5%, payable
monthly................................... - 2,592
Related party notes payable, maturing in
November 2007, bearing interest at LIBOR
plus 400 basis points..................... 3,835 -
Other notes payable, maturing in varying
amounts through October 2004 with a
weighted average interest rate of 9.17%... 2,526 1,195
----------- ------------
Total long-term debt........................ 16,361 45,787
Less - Current portion.................... (1,076) (2,966)
----------- ------------
Long-term portion........................... $15,285 $42,821
=========== ============
</TABLE>
The notes payable are secured by the land, buildings or other assets for
which the debt was incurred. In addition to floorplan notes payable, the Credit
Facility provides an acquisition line of credit of up to $220 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. The acquisition line of credit of the Credit Facility bears interest
based on the LIBOR plus a margin varying from 175 to 325 basis points, dependent
upon certain financial ratios. Additionally, the loan agreement contains various
covenants including financial ratios and other requirements, which must be
maintained by the Company. The agreement also limits the amount the Company may
pay as cash dividends. The interest rate on borrowings under the acquisition
line of credit of the Credit Facility was 8.21% and 7.37%, at December 31, 1999
and 1998, respectively.
The related party debt is owed to the company of an individual who is a
current employee and shareholder of the company, from whom certain of the
Company's operations were acquired. The debt was incurred to finance and is
secured by equipment, furniture and fixtures purchased for a new
dealership-facility leased under a long-term agreement by the Company from the
related party.
Total interest incurred on long-term debt was approximately $2.4
million, $4.5 million and $176,000 for the years ended December 31, 1999, 1998
and 1997, respectively, which included approximately $592,000 of capitalized
interest in 1999.
The aggregate maturities of long-term debt as of December 31, 1999, were
as follows:
(in thousands)
2000...................... $1,076
2001...................... 1,066
2002...................... 1,042
2003...................... 11,143
2004...................... 665
Thereafter................ 1,369
-----------
Total long-term debt.... $16,361
===========
8. SENIOR SUBORDINATED NOTES
The Company completed the offering of $100 million of its 10 7/8% Senior
Subordinated Notes due 2009 (the "Notes") on March 5, 1999. The Notes pay
interest semi-annually on March 1 and September 1 each year beginning September
1, 1999. Before March 1, 2002, the Company may redeem up to $35 million of the
Notes with the proceeds of certain public offerings of common stock at a
redemption price of 110.875% of the principal amount plus accrued interest to
the redemption date. Additionally, the Company may redeem all or part of the
Notes at redemption prices of 105.438%, 103.625%, 101.813% and 100.000% of the
principal amount plus accrued interest during the 12-month
F-13
<PAGE> 44
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
periods beginning March 1 of 2004, 2005, 2006, and 2007 and thereafter,
respectively. The Notes are jointly and severally guaranteed, on an unsecured
senior subordinated basis, by all subsidiaries of the Company (the "Subsidiary
Guarantors"), other than certain inconsequential subsidiaries. All of the
Subsidiary Guarantors are wholly owned subsidiaries of the Company. Certain
manufacturers have minimum working capital guidelines, which, under certain
circumstances, may impair a subsidiary's ability to make distributions to the
parent company. Separate financial statements of the Subsidiary Guarantors are
not included because (i) all Subsidiary Guarantors have jointly and severally
guaranteed the Notes on a full and unconditional basis, to the maximum extent
permitted by law, (ii) the aggregate assets, liabilities, earnings and equity of
the Subsidiary Guarantors are substantially equivalent to the assets,
liabilities, earnings and equity of the parent on a consolidated basis, and
(iii) management has determined that such information is not material to
investors.
Total interest expense on the senior subordinated notes for the year
ended December 31, 1999, was approximately $9.1 million.
9. 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.
During 1999, the number of shares authorized and reserved for issuance under the
Plan was increased from 2 million shares to 3 million shares, of which 131,923
are available for future issuance as of December 31, 1999. In general, the terms
of the option awards (including vesting schedules) are established by the
Compensation Committee of the Company's Board of Directors. All outstanding
options are exercisable over a period not to exceed 10 years and vest over
three- to six-year periods.
The following table summarizes the Company's outstanding stock options:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
NUMBER PRICE
-------- --------
<S> <C> <C>
Options outstanding, December 31, 1996.... 205,000 $2.90
Grants:
First quarter 1997 (all at $2.90 per
share)................................ 360,000 2.90
Fourth quarter 1997 (all at $12.00 per
share)................................ 682,450 12.00
--------- ------
Options outstanding, December 31, 1997.... 1,247,450 7.88
Grants (exercise prices between $12.00
and $17.88 per share)................. 780,850 16.16
Exercised............................... (49,973) 3.13
Forfeited............................... (99,648) 13.27
--------- ------
Options outstanding, December 31, 1998.... 1,878,679 11.15
Grants (exercise prices between $16.47
and $24.72 per share)................. 1,015,850 19.64
Exercised............................... (75,600) 3.09
Forfeited............................... (76,425) 13.42
--------- ------
Options outstanding, December 31, 1999.... 2,742,504 $14.45
========= ======
</TABLE>
At December 31, 1999 and 1998, 448,544 and 208,460 options,
respectively, were exercisable at a weighted average exercise prices of $9.86
and $7.35, respectively. 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 at December 31, 1999 is 8.6
years. The weighted average fair value per share of options granted during the
years ended December 31, 1999, 1998 and 1997 is $13.40, $9.18 and $5.94,
respectively. The fair value of options granted is estimated on the date of
grant using the Black-Scholes option pricing model.
F-14
<PAGE> 45
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the weighted average information used in
determining the fair value of the options granted during the years ended
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Weighted average risk-free interest 5.9%
rate............................... 6.2% 5.5%
Weighted average expected life of 10 years
options............................ 10 years 10 years
Weighted average expected volatility 47.4% 42.8% 58.1%
Weighted average expected dividends -- -- --
</TABLE>
In September 1997, Group 1 adopted the Group 1 Automotive, Inc. 1998
Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan authorizes
the issuance of up to 1 million 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 and is a qualified plan as defined by Section 423 of the Internal
Revenue Code. At the end of each fiscal quarter (Option Period) during the term
of the Purchase Plan, the employee contributions are used to acquire shares of
Common Stock at 85% of the fair market value of the Common Stock on the first or
the last day of the Option Period, whichever is lower. During 1999 and 1998, the
Company issued 246,595 and 184,677 shares, respectively, of Common Stock to
employees participating in the Purchase Plan.
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which, if fully adopted,
requires the Company to record stock-based compensation at fair value. The
Company has adopted the disclosure requirements of SFAS No. 123 and has elected
to record employee compensation expense in accordance with Accounting Principles
Board Opinion No. 25. Accordingly, compensation expense is recorded for stock
options based on the excess of the fair market value of the common stock on the
date the options were granted over the aggregate exercise price of the options.
As the exercise price of options granted under the Plan has been equal to or
greater than the market price of the Company's stock on the date of grant, no
compensation expense related to the Plan has been recorded. Additionally, no
compensation expense is recorded for shares issued pursuant to the Purchase Plan
as it is a qualified plan.
Had compensation expense for the Plan been determined based on the
provisions of SFAS No. 123, the impact on the Company's net income would have
been as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
--------- --------- ---------
(in thousands, except per share
amounts)
<S> <C> <C> <C>
Net income as reported.................. $33,515 $20,719 $5,818
Pro forma net income under SFAS 123..... 31,254 19,519 5,451
Pro forma basic earnings per share...... 1.51 1.13 -
Pro forma diluted earnings per share.... 1.45 1.09 -
</TABLE>
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 various dates through May 2029 and, in general,
are renewable, at the Company's option, at various times during the lease term.
In general, the third-party leases are cancelable at the Company's option, at
various times during the lease term, and expire on various dates through
December 2029.
During 1998, the Company completed a sale and leaseback transaction
related to six of its owned dealerships properties. During 1999, the Company
completed a sale and leaseback transaction with respect to two additional
properties.
F-15
<PAGE> 46
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum lease payments for operating leases are as follows:
<TABLE>
<CAPTION>
RELATED THIRD
YEAR ENDED DECEMBER 31, PARTIES PARTIES TOTAL
- ---------------------------- ------------ ------------- -------------
<S> <C> <C> <C>
(in thousands)
2000...................... $10,893 $14,555 $25,448
2001...................... 10,893 13,488 24,381
2002...................... 10,893 12,940 23,833
2003...................... 10,985 12,883 23,868
2004...................... 10,986 11,956 22,942
Thereafter................ 54,604 94,877 149,481
------------ ------------- -------------
Total..................... $109,254 $160,699 $269,953
============ ============= =============
</TABLE>
Total rent expense under all operating leases, including operating
leases with related parties, was approximately $19.9, $11.1 and $3.3 million for
the years ended December 31, 1999, 1998 and 1997, respectively. Rental expense
on related-party leases, which is included in the above amounts, totaled
approximately $9.6, $8.3 and $2.6 million for the years ended December 31, 1999,
1998 and 1997, respectively.
11. INCOME TAXES:
Federal and state income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1999 1998 1997
------------ ------------- --------------
(in thousands)
<S> <C> <C> <C>
Federal -
Current...... $16,632 $15,478 $1,291
Deferred..... 2,360 (3,465) (762)
State -
Current...... 1,531 3,225 297
Deferred..... 1,651 (736) (253)
------------ ------------- --------------
Provision for
income taxes... $22,174 $14,502 $573
============ ============= ==============
</TABLE>
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 35% in 1999 and 1998
and 34% in 1997 to income before income taxes as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1999 1998 1997
-------------- ------------- ---------------
<S> <C> <C> <C>
(in thousands)
Provision at the statutory
rate.......................... $19,491 $12,327 $2,173
Increase (decrease) resulting
from --
Income of S Corporations.... - - (1,269)
State income tax, net of
benefit for federal
deduction................. 2,506 1,618 29
Deferred tax assets
realized on conversion of
S Corporations to C
Corporations.............. - - (403)
Non-deductible portion of
goodwill amortization..... 407 339 -
Other....................... (230) 218 43
-------------- ------------- ---------------
Provision for income taxes.... $22,174 $14,502 $573
============== ============= ===============
</TABLE>
Deferred income tax provisions result from temporary differences in the
recognition of income and
F-16
<PAGE> 47
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
expenses for financial reporting purposes and for tax purposes. The tax effects
of these temporary differences representing deferred tax assets (liabilities)
result principally from the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
(in thousands)
Inventory (LIFO conversion)....... $(5,401) $(2,981)
Reserves and accruals not
deductible until paid.......... 18,702 17,828
Goodwill.......................... (3,311) (584)
Depreciation...................... (1,950) (1,082)
Other............................. (2,638) (186)
-------------- --------------
Net deferred tax asset......... $5,402 $12,995
============== ==============
</TABLE>
The net deferred tax assets (liabilities) are comprised of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1999 1998
-------------- -------------
<S> <C> <C>
(in thousands)
Deferred tax assets -
Current........................ $12,956 $11,238
Long-term...................... 8,114 7,154
Deferred tax liabilities -
Current........................ (4,337) (26)
Long-term...................... (11,331) (5,371)
-------------- -------------
Net deferred tax asset.......... $5,402 $12,995
============== =============
</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 Company's financial
position or results of operations.
Insurance
Because of their vehicle inventory and nature of business, automobile
dealerships generally require significant levels of insurance covering a broad
variety of risks. The Company's insurance includes an umbrella policy with a
$100 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.
13. SUBSEQUENT EVENTS (UNAUDITED):
Recent Acquisitions
Since December 31, 1999, the Company has completed acquisitions of 11
dealership franchises. One of these acquisitions is a new platform with 10
dealership franchises in Massachusetts. The remaining acquisition is a tuck-in,
which will complement platform operations in Florida. These acquisitions bring
the Company's total number of dealership franchises to 98. The aggregate
consideration paid in completing these acquisitions, including real estate
acquired, was approximately $29.3 million in cash and 330,000 shares of Common
Stock and the assumption of an estimated $32.6 million of inventory financing
and $10.7 million of mortgage and other debt.
F-17
<PAGE> 48
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1 -- Restated Certificate of Incorporation of the Company (Incorporated by reference
to Exhibit 3.1 of the Company's Registration Statement on Form S-1 Registration
No. 333-29893).
3.2 -- Certificate of Designation of Series A Junior Participating Preferred Stock
(Incorporated by reference to Exhibit 3.2 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
3.3 -- Bylaws of the Company (Incorporated by reference to Exhibit 3.3 of the Company's
Registration Statement on Form S-1 Registration No. 333-29893).
4.1 -- Specimen Common Stock certificate (Incorporated by reference to Exhibit 4.1 of
the Company's Registration Statement on Form S-1 Registration No. 333-29893).
4.2 -- Form of Subordinated Indenture (Incorporated by reference to Exhibit 4.5 of the
Company's Registration Statement on Form S-3 Registration No. 333-69693).
4.3 -- Form of Subordinated Debt Securities (included in Exhibit 4.2).
4.4 -- First Supplemental Indenture dated as of March 5, 1999 among Group 1 Automotive,
Inc., the Subsidiary Guarantors named therein and IBJ Whitehall Bank & Trust
Company (Incorporated by reference to Exhibit 4.1 of the Company's current
report of Form 8-K dated March 5, 1999).
4.5 -- Form of 10 7/8% Senior Subordinated Note due March 1, 2009 (included in Exhibit
4.4).
10.1 -- Employment Agreement between the Company and B.B. Hollingsworth, Jr. dated
November 3, 1997 (Incorporated by reference to Exhibit 10.1 of the Company's
Annual Report on Form 10-K for the year-ended December 31, 1997).
10.2 -- Employment Agreement between the Company and Robert E. Howard II
dated November 3, 1997 (Incorporated by reference to Exhibit 10.2
of the Company's Annual Report on Form 10-K for the year-ended
December 31, 1997).
10.3 -- Consulting Agreement between the Company and Sterling B. McCall, Jr. dated
November 4, 1999.
10.4 -- Employment Agreement between the Company and Charles M. Smith dated
November 3, 1997 (Incorporated by reference to Exhibit 10.4 of the
Company's Annual Report on Form 10-K for the year-ended December
31, 1997).
10.5 -- Employment Agreement between the Company and John T. Turner dated
November 3, 1997 (Incorporated by reference to Exhibit 10.5 of the
Company's Annual Report on Form 10-K for the year-ended December
31, 1997).
10.6 -- Employment Agreement between the Company and Scott L. Thompson
dated November 3, 1997 (Incorporated by reference to Exhibit 10.6
of the Company's Annual Report on Form 10-K for the year-ended
December 31, 1997).
10.7 -- 1996 Stock Incentive Plan (Incorporated by reference to Exhibit 10.7 of the
Company's Registration Statement on Form S-1 Registration No. 333-29893).
10.8 -- First Amendment to 1996 Stock Incentive Plan (Incorporated by reference to
Exhibit 10.8 of the Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.9 -- Lease Agreement between Howard Pontiac GMC and Robert E. Howard II
(Incorporated by reference to Exhibit 10.9 of the Company's
Registration Statement on Form S-1 Registration No. 333-29893).
10.10 -- Lease Agreement between Bob Howard Motors and Robert E. Howard II (Incorporated
by reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
10.11 -- Lease Agreement between Bob Howard Chevrolet and Robert E. Howard II
(Incorporated by reference to Exhibit 10.9 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.12 -- Lease Agreement between Bob Howard Automotive-H and North Broadway Real Estate
(Incorporated by reference to Exhibit 10.9 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.13 -- Lease Agreement between Mike Smith Autoplaza and Olds-Honda Realty (Incorporated
by reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
10.14 -- Rights Agreement between Group 1 Automotive, Inc. and ChaseMellon Shareholder
Services, L.L.C., as rights agent dated October 3, 1997 (Incorporated by
reference to Exhibit 10.10 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
10.15 -- 1998 Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.11 of
the Company's Registration Statement on Form S-1 Registration No. 333-29893).
10.16 -- Form of Agreement between Toyota Motor Sales, U.S.A., and Group 1 Automotive,
Inc. (Incorporated by reference to Exhibit 10.12 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.17 -- Form of Supplemental Agreement to General Motors Corporation Dealer Sales and
Service Agreement (Incorporated by reference to Exhibit 10.13 of the Company's
Registration Statement on Form S-1 Registration No. 333-29893).
10.18 -- Supplemental Terms and Conditions between Ford Motor Company and Group 1
Automotive, Inc. dated September 4, 1997 (Incorporated by reference to Exhibit
10.16 of the Company's Registration Statement on Form S-1 Registration No.
333-29893).
10.19 -- Toyota Dealer Agreement between Gulf States Toyota, Inc. and Southwest Toyota,
Inc. dated April 5, 1993 (Incorporated by reference to Exhibit 10.17 of the
Company's Registration Statement on Form S-1 Registration No. 333-29893).
10.20 -- Lexus Dealer Agreement between Toyota Motor Sales, U.S.A., Inc. and SMC Luxury
Cars, Inc. dated August 21, 1995 (Incorporated by reference to Exhibit 10.18 of
the Company's Registration Statement on Form S-1 Registration No. 333-29893.
10.21 -- Form of General Motors Corporation U.S.A. Sales and Service Agreement
(Incorporated by reference to Exhibit 10.25 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.22 -- Fourth Amended and Restated Revolving Credit Agreement, dated
as of October 15, 1999, and Effective as of November 1, 1999
(Incorporated by reference to Exhibit 10.1 of the Company's
Current Report on Form 8-K dated October 29, 1999).
10.23 -- Stock Pledge Agreement dated December 19, 1997 (Incorporated
by reference to Exhibit 10.54 of the Company's Annual Report on
Form 10-K for the year-ended December 31, 1997).
10.24 -- Swap Transaction Letter Agreement dated January 23, 1998
(Incorporated by reference to Exhibit 10.55 of the Company's
Annual Report on Form 10-K for the year-ended December 31,
1997).
10.25 -- First Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit 10.35
of the Company's Annual Report on Form 10-K for the year-ended
December 31, 1998).
10.26 -- Employment Agreement between the Company and Johns S. Bishop
dated October 7, 1998 (Incorporated by reference to Exhibit
10.37 of the Company's Annual Report on Form 10-K for the
year-ended December 31, 1998).
10.27 -- Form of Ford Motor Company Sales and Service Agreement
(Incorporated by reference to Exhibit 10.38 of the Company's
Annual Report on Form 10-K for the year-ended December 31,
1998).
10.28 -- Form of Chrysler Corporation Sales and Service Agreement
(Incorporated by reference to Exhibit 10.39 of the Company's
Annual Report on Form 10-K for the year-ended December 31,
1998).
10.29 -- Lock-up Agreement dated June 24, 1999, between the Company
and Robert E. Howard II.
10.30 -- Second Amendment to the 1996 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.1 of the Company's
Current Report on Form 8-K dated May 14, 1999).
10.31 -- Group 1 Automotive, Inc. Deferred Compensation Plan effective November 10, 1999.
11.1 -- Statement re: computation of earnings per share is included under Note 2 to the
financial statements.
21.1 -- Group 1 Automotive, Inc. Subsidiary List.
23.1 -- Consent of Arthur Andersen LLP.
27.1 -- Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10.3
CONSULTING AGREEMENT
This Consulting Agreement ("AGREEMENT") is entered into between Group 1
Automotive, Inc., a Delaware corporation having offices at 950 Echo Lane, Suite
350, Houston, Texas 77024, ("Employer"), and Sterling B. McCall, Jr., an
individual currently residing at 37 Saddlebrook, Houston, Texas 77024
("CONSULTANT"), to be effective as of November 4, 1999.
For and in consideration of the mutual promises, covenants, and
obligations contained herein, Employer and Consultant agree as follows:
WHEREAS, Employer and Consultant entered into an Employment Agreement
dated as of November 3, 1997 (the "EMPLOYMENT AGREEMENT");
WHEREAS, the parties to the Employment Agreement have determined it to
be in their mutual interests to revise their relationship from employer/employee
to employer/consultant; and
WHEREAS, from the date first stated above, this Agreement will replace
the Employment Agreement in its entirety, and the Employment Agreement shall be
terminated and of no further force and effect.
1. DUTIES:
1.1. Employer agrees to employ Consultant, and Consultant agrees to be
employed by Employer, beginning November 4, 1999 and continuing throughout the
Term (as defined below) of this Agreement, subject to the terms and conditions
of this Agreement.
1.2. Consultant shall (i) continue to serve as Chairman of the
following subsidiaries of Employer: Southwest Toyota, Inc., SMC Luxury Cars,
Inc., and McCall Automotive, Inc. and (ii) from the date of this Agreement,
serve as a consultant of Employer.
1.3. Consultant shall, during the term hereof, devote such reasonable
amount of time as may be requested from time to time by the Chief Executive
Officer of Group 1.
2. COMPENSATION AND BENEFITS:
2.1. Consultant's consulting fee under this Agreement shall be $300,000
per annum and shall be paid in semi-monthly installments in accordance with
Employer's standard payroll practice.
2.2. Consultant's participation in bonus plans shall be governed by the
bonus and incentive plans adopted by the Board of Directors of Employer in which
Consultant is a participant. Consultant's participation in such bonus and
incentive plans shall terminate as of December 31, 1999.
<PAGE> 2
2.3. While employed by Employer, Consultant shall be allowed to
participate, on the same basis generally as other employees of Employer, in all
general employee benefit plans and programs, including improvements or
modifications of the same, which on the effective date or thereafter are made
available by Employer to all or substantially all of Employer's employees. Such
benefits, plans, and programs may include, without limitation, medical, health,
and dental care, life insurance, disability protection, and pension plans.
Nothing in this Agreement is to be construed or interpreted to provide greater
rights, participation, coverage, or benefits under such benefit plans or
programs than provided to similarly situated employees pursuant to the terms and
conditions of such benefit plans and programs. For the term of this Agreement,
Employer shall provide Consultant an office and a secretary, such secretary to
be selected by Consultant. Consultant's secretary shall be an employee of
Employer with a base salary not to exceed $2,000 per month. Consultant shall be
responsible for all office and secretarial expenses above the $2,000 per month
paid by Employer to Consultant's secretary, except for those direct expenses
related to Consultant's services to Employer. In addition, in accordance with
Employer's previous arrangement with Consultant and for the term of this
Agreement, Employer shall continue to provide Consultant with the use of three
(3) Dealer vehicles.
2.4. Employer shall not by reason of this Article 2 be obligated to
institute, maintain, or refrain from changing, amending, or discontinuing, any
such incentive compensation or employee benefit program or plan, so long as such
actions are similarly applicable to covered employees generally. Moreover,
unless specifically provided for in a written plan document adopted by the Board
of Directors of Employer, none of the benefits or arrangements described in this
Article 2 shall be secured or funded in any way, and each shall instead
constitute an unfunded and unsecured promise to pay money in the future
exclusively from the general assets of Employer and its subsidiaries and
affiliates.
2.5. Employer may withhold from any compensation, benefits, or amounts
payable under this Agreement all federal, state, city, or other taxes as may be
required pursuant to any law or governmental regulation or ruling.
3. TERM OF THIS AGREEMENT, EFFECT OF EXPIRATION OF TERM, AND TERMINATION
PRIOR TO EXPIRATION OF TERM AND EFFECTS OF SUCH TERMINATION:
3.1. The term of this Agreement shall be effective from November 4,
1999 through November 2, 2002.
3.2. This Agreement will terminate for the following reasons:
(i) upon Consultant's death; or
(ii) upon Consultant's becoming incapacitated by accident,
sickness, or other circumstance which in the reasonable
opinion of a qualified doctor approved by Employer's Board of
Directors renders him mentally or physically incapable of
performing the duties and services required of Consultant, and
which will continue in the reasonable opinion of such doctor
for a period of not less than 180 days.
2
<PAGE> 3
3.3. Upon termination of the employment relationship as a result of
Consultant's death, Consultant's heirs, administrators, or legatees shall be
entitled to Consultant's pro rata consulting fee through the date of such
termination which has not been paid.
3.4. Upon termination of the consulting relationship as a result of
Consultant's incapacity, Consultant shall be entitled to his pro rata consulting
fee through the date of such termination.
3.5. In all cases, the compensation and benefits payable to Consultant
under this Agreement upon termination of the consulting relationship shall be
reduced and offset by any amounts to which Consultant may otherwise be entitled
under any and all severance plans (excluding any pension, retirement and profit
sharing plans of Employer that may be in effect from time to time) or policies
of Employer or its subsidiaries or affiliates or any successor to all or a
portion of the business or assets of Employer.
3.6. Termination of the consulting relationship shall not terminate
those obligations imposed by this Agreement which are continuing in nature,
including, without limitation, Consultant's obligations of confidentiality,
non-competition and Consultant's continuing obligations with respect to business
opportunities that had been entrusted to Consultant by Employer.
3.7. This Agreement governs the rights and obligations of Employer and
Consultant with respect to Consultant's compensation and other perquisites of
employment.
4. OWNERSHIP AND PROTECTION OF INFORMATION; COPYRIGHTS:
4.1. Employer owns certain confidential and proprietary information and
trade secrets to which Consultant will be given access for the purpose of
carrying out his responsibilities hereunder. Furthermore, Employer agrees to
provide Consultant with confidential and proprietary information and trade
secrets regarding the Employer and its subsidiaries and affiliates, in order to
assist Consultant in satisfying his obligations hereunder. Consultant, in turn,
agrees that the name "Sterling McCall" is proprietary to Group 1 and that
Consultant may not use the name "Sterling McCall" in connection with any
automotive business with the exception of the "Sterling McCall Old Car Museum"
located in Fayette County, Texas.
4.2. All information, ideas, concepts, improvements, discoveries, and
inventions, whether patentable or not, which are conceived, made, developed or
acquired by Consultant, individually or in conjunction with others, during the
term of this Agreement (whether during business hours or otherwise and whether
on Employer's premises or otherwise) which relate to Employer's or any of its
subsidiaries' or affiliates' businesses, products or services (including,
without limitation, all such information relating to corporate opportunities,
research, financial and sales data, pricing and trading terms, evaluations,
opinions, interpretations, acquisition prospects, the identity of customers or
their requirements, the identity of key contacts within the customer's
organizations or within the organization of acquisition prospects, or marketing
and merchandising techniques, prospective names, and marks) shall be disclosed
to Employer and are and shall be the sole and exclusive property of Employer.
Upon termination of Consultant's relationship with Employer, for any reason,
Consultant promptly shall deliver the same, and all copies thereof, to Employer.
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<PAGE> 4
4.3. Consultant will not, at any time during or after the term of this
Agreement, make any unauthorized disclosure of any confidential business
information or trade secrets of Employer or its subsidiaries or affiliates, or
make any use thereof, except in the carrying out of his responsibilities
hereunder. As a result of Consultant's relationship with Employer, Consultant
may also from time to time have access to, or knowledge of, confidential
business information or trade secrets of third parties, such as customers,
suppliers, partners, joint venturers, and the like, of Employer and its
subsidiaries and affiliates. Consultant also agrees to preserve and protect the
confidentiality of such third party confidential information and trade secrets
to the same extent, and on the same basis, as Employer's or any of its
subsidiaries' or affiliates' confidential business information and trade
secrets.
4.4. If, during the term of this Agreement, Consultant creates any
original work of authorship fixed in any tangible medium of expression which is
the subject matter of copyright (such as videotapes, written presentations on
acquisitions, computer programs, E-mail, voice mail, electronic databases,
drawings, maps, architectural renditions, models, manuals, brochures, or the
like) relating to Employer's, or any of its subsidiaries' or affiliates'
businesses, products, or services, whether such work is created solely by
Consultant or jointly with others, whether during business hours or otherwise
and whether on Employer's or any of its subsidiaries' or affiliates' premises or
otherwise), Employer shall be deemed the author of such work if the work is
prepared by Consultant in the scope of his duties; or, if the work is not
prepared by Consultant within the scope of his duties but is specially ordered
by Employer or any of its subsidiaries or affiliates as a contribution to a
collective work, as a part of a motion picture or other audiovisual work, as a
translation, as a supplementary work, as a compilation, or as an instructional
text, then the work shall be considered to be work made for hire and Employer or
any of its subsidiaries or affiliates shall be the author of the work. If such
work is neither prepared by Consultant within the scope of his duties nor a work
specially ordered that is deemed to be a work made for hire, then Consultant
hereby agrees to assign, and by these presents does assign, to Employer all of
Consultant's worldwide right, title, and interest in and to such work and all
rights of copyright therein.
4.5. Both during the term of this Agreement and thereafter, Consultant
shall assist Employer, or any of its subsidiaries or affiliates and their
nominees, at any time, in the protection of Employer's or any of its
subsidiaries' or affiliates' worldwide right, title, and interest in and to
information, ideas, concepts, improvements, discoveries, and inventions, and its
copyrighted works, including without limitation, the execution of all formal
assignment documents requested by Employer or any of its subsidiaries or
affiliates or their nominees and the execution of all lawful oaths and
applications for applications for patents and registration of copyright in the
United States and foreign countries.
5. NON-COMPETITION OBLIGATIONS:
5.1. As part of the consideration for the Merger, and as an additional
incentive for Group 1 to enter into this Agreement, Sterling B. McCall, Jr. (the
"DESIGNATED PERSON") and Group 1 agree to the non-competition provisions of this
Article 5. The Designated Person agrees that during the period of the Designated
Person's non-competition obligations hereunder, the Designated Person will not,
directly or indirectly for the Designated Person or for others:
4
<PAGE> 5
(i) engage in the Restricted Area in any business
competitive with any line of business conducted by Group 1 or
any of its subsidiaries or affiliates;
(ii) render advice or services to, or otherwise
assist, including financing, any other Person who is engaged
in the Restricted Area, directly or indirectly, in any
business competitive with any line of business conducted by
Group 1 or any of its subsidiaries or affiliates engaged in
automotive retailing; and
(iii) induce any employee of Group 1 or any of its
subsidiaries or affiliates to terminate his or her employment
with Group 1 or any of its subsidiaries or affiliates, or hire
or assist in the hiring of any such employee by Person not
affiliated with Group 1 or any of its subsidiaries or
affiliates.
These non-competition obligations shall apply until the later of (i)
three (3) years after the Effective Time (as defined in the Plan and Agreement
of Reorganization among Group 1 Automotive, Inc., SM Merger, Inc. and SMC
Investment, Inc., dated as of November 4, 1999) (ii) the period specified in the
Consulting Agreement. If Group 1 and its subsidiaries and affiliates abandon a
particular aspect of their business, that is, cease such aspect of their
business with the intention to permanently refrain from such aspect of their
business, then this non-competition covenant shall not apply to such former
aspect of that business.
During this non-competition period, the Designated Person will not
engage in these restricted activities or assist in the industry consolidation
efforts on behalf of any publicly held entity in the automotive retailing
industry (nor any entity with the ultimate intention of becoming a publicly held
entity or being acquired in any manner by a publicly held entity), regardless of
geographic area or market.
For the purposes of this Article 5 "RESTRICTED AREA" shall mean (i)
Harris County, Texas; and (ii) any county adjacent to Harris County, Texas.
(b) The Designated Person understands that the foregoing
restrictions may limit his ability to engage in certain businesses
during the period provided for above, but acknowledge that the
Designated Person will receive sufficiently high remuneration and other
benefits under this Agreement to justify such restriction. The
Designated Person acknowledges that money damages would not be
sufficient remedy for any breach of this Article 5 by the Designated
Person, and Group 1 or any of its subsidiaries or affiliates shall be
entitled to enforce the provisions of this Article 5 by terminating any
payments then owing to the Designated Person under this Agreement
and/or to specific performance and injunctive relief as remedies for
such breach or any threatened breach, without any requirement for the
securing or posting of any bond in connection with such remedies. Such
remedies shall not be deemed the exclusive remedies for a breach of
this Article 5, but shall be in addition to all remedies available at
law or in equity to Group 1 or any of its subsidiaries or affiliates,
including, without limitation, the recovery of damages from Group 1 and
the Designated Person's agents involved in such breach.
5
<PAGE> 6
(c) It is expressly understood and agreed that Group 1 and the
Designated Person considers the restrictions contained in this Article
5 to be reasonable and necessary to protect the legitimate business
interests of Group 1 and its affiliates, including the confidential and
proprietary information and trade secrets of Group 1 and its
subsidiaries and affiliates. Nevertheless, if any of the aforesaid
restrictions are found by a court having jurisdiction to be
unreasonable, or overly broad as to geographic area or time, or
otherwise unenforceable, the parties intend for the restrictions
therein set forth to be modified by such courts so as to be reasonable
and enforceable and, as so modified by the court, to be fully enforced.
(d) The parties hereto expressly acknowledge that Group 1's
rights under this Article 5 are assignable and that such rights shall
be fully enforceable by any of Group 1's assignees or successors in
interest.
6. MISCELLANEOUS:
6.1. For purposes of this Agreement the terms "AFFILIATES" or
"AFFILIATED" means an entity who directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with
Employer. For purposes of this Agreement the term "CONTROL" including the terms
"CONTROLLED," "CONTROLLED BY" and "UNDER COMMON CONTROL WITH") means the
possession, directly or indirectly or as trustee or executor, of the power to
direct or cause the direction of the management or policies of a Person, whether
through the ownership of stock or as trustee or executor, by contract or credit
arrangement or otherwise.
6.2. Employer, Group 1 and Consultant shall refrain, both during the
consulting relationship and after the consulting relationship terminates, from
making any negative or critical statements about each other or any of their
respective subsidiaries or affiliates, directors, officers, employees, agents or
representatives or disclosing any conflicts with same, or from publishing any
oral or written statements about each other or any of their respective
subsidiaries or affiliates, directors, officers, employees, agents or
representatives that are slanderous, libelous, or defamatory; or that disclose
private or confidential information about each other or any of their respective
subsidiaries' or affiliates' business affairs, or about their respective
directors, officers, employees, agents, or representatives; or that constitute
an intrusion into the seclusion or private lives of each other or any of their
respective subsidiaries or affiliates, directors, officers, employees, agents,
or representatives; or that give rise to unreasonable publicity about the
private lives of each other or any of their respective subsidiaries or
affiliates, directors, officers, employees, agents, or representatives; or that
place each other or any of their respective subsidiaries or affiliates,
directors, officers, employees, agents, or representatives in a false light
before the public; or that constitute a misappropriation of the name or likeness
of each other or any of their respective subsidiaries or affiliates or any of
such entities' directors, officers, employees, agents, or representatives. A
violation or threatened violation of this prohibition may be enjoined.
6.3. For purposes of this Agreement, notices and all other
communications provided for herein shall be in writing and shall be deemed to
have been duly given when personally delivered or
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<PAGE> 7
when mailed by United States registered or certified mail, return receipt
requested, postage prepaid, addressed as follows:
If to Employer to:
Group 1 Automotive, Inc.
950 Echo Lane, Suite 350
Houston, TX 77024
Attn: Chief Executive Officer
with a copy to:
Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin Street
Houston, TX 77002-6760
Attn: John S. Watson
If to Consultant, to the address shown on the first page hereof
with a copy to:
Robert D. Remy
Two Memorial City Plaza
820 Gessner, Suite 1360
Houston, TX 77024
Either Employer or Consultant may furnish a change of address to the other in
writing in accordance herewith, except that notices of changes of address shall
be effective only upon receipt.
6.4. This Agreement shall be governed in all respects by the laws of
the State of Texas, excluding any conflict-of-law rule or principle that might
refer the construction of the Agreement to the laws of another State or country.
6.5. No failure by either party hereto at any time to give notice of
any breach by the other party of, or to require compliance with, any condition
or provision of this Agreement shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time.
6.6. It is a desire and intent of the parties that the terms,
provisions, covenants, and remedies contained in this Agreement shall be
enforceable to the fullest extent permitted by law. If any such term, provision,
covenant, or remedy of this Agreement or the application thereof to any person,
association, or entity or circumstances shall, to any extent, be construed to be
invalid or unenforceable in whole or in part, then such term, provision,
covenant, or remedy shall be construed in a manner so as to permit its
enforceability under the applicable law to the fullest extent permitted by law.
In any case, the remaining provisions of this Agreement or the application
thereof to any
7
<PAGE> 8
person, association, or entity or circumstances other than those to which they
have been held invalid or unenforceable, shall remain in full force and effect.
6.7. Any and all claims, demands, causes of action, disputes,
controversies and other matters in question arising out of or relating to this
Agreement, any provision hereof, the alleged breach thereof, or in any way
relating to the subject matter of this Agreement, involving Employer, its
subsidiaries and affiliates and Consultant (all of which are referred to herein
as "CLAIMS"), even though some or all of such Claims allegedly are
extra-contractual in nature, whether such Claims sound in contract, tort or
otherwise, at law or in equity, under state or federal law, whether provided by
statute or the common law, for damages or any other relief, including equitable
relief and specific performance, shall be resolved and decided by binding
arbitration pursuant to the Federal Arbitration Act in accordance with the
Commercial Arbitration Rules then in effect with the American Arbitration
Association. In the arbitration proceeding the Consultant shall select one
arbitrator, the Employer shall select one arbitrator and the two arbitrators so
selected shall select a third arbitrator. Should one party fail to select an
arbitrator within five days after notice of the appointment of an arbitrator by
the other party or should the two arbitrators selected by the Consultant and the
Employer fail to select an arbitrator within ten days after the date of the
appointment of the last of such two arbitrators, any person sitting as a Judge
of the United States District Court of the Southern District of Texas, Houston
Division, upon application of the Consultant or the Employer, shall appoint an
arbitrator to fill such space with the same force and effect as though such
arbitrator had been appointed in accordance with the immediately preceding
sentence of this Section 7.7. The decision of a majority of the arbitrators
shall be binding on the Consultant, the Employer and its subsidiaries and
affiliates. The arbitration proceeding shall be conducted in Houston, Texas.
Judgment upon any award rendered in any such arbitration proceeding may be
entered by any federal or state court having jurisdiction.
This agreement to arbitrate shall be enforceable in either federal or
state court. The enforcement of this agreement to arbitrate and all procedural
aspects of this Agreement to arbitrate, including but not limited to, the
construction and interpretation of this agreement to arbitrate, the scope of the
arbitrable issues, allegations of waiver, delay or defenses to arbitrability,
and the rules governing the conduct of the arbitration, shall be governed by and
construed pursuant to the Federal Arbitration Act.
In deciding the substance of any such Claim, the Arbitrators shall
apply the substantive laws of the State of Texas; provided, however, that the
Arbitrators shall have no authority to award treble, exemplary or punitive type
damages under any circumstances regardless of whether such damages may be
available under Texas law, the parties hereby waiving their right, if any, to
recover treble, exemplary or punitive type damages in connection with any such
Claims.
6.8. This Agreement shall be binding upon and inure to the benefit of
Employer, its subsidiaries and affiliates and any other person, association, or
entity which may hereafter acquire or succeed to all or a portion of the
business or assets of Employer by any means, whether direct or indirect, by
purchase, merger, consolidation, or otherwise. Consultant's rights and
obligations under this Agreement are personal and such rights, benefits, and
obligations of Consultant shall not be
8
<PAGE> 9
voluntarily or involuntarily assigned, alienated, or transferred, whether by
operation of law or otherwise, by Consultant without the prior written consent
of Employer.
6.9. Except as provided in (1) written company policies promulgated by
Employer dealing with issues such as securities trading, business ethics,
governmental affairs and political contributions, consulting fees, commissions
and other payments, compliance with law, investments and outside business
interests of officers and employees, reporting responsibilities, administrative
compliance, and the like, (2) the written benefits, plans, and programs
referenced in Sections 2.2, 2.3 and 2.4, or (3) any signed written agreements
contemporaneously or hereafter executed by Employer and Consultant, this
Agreement constitutes the entire agreement of the parties with regard to such
subject matters, and contains all of the covenants, promises, representations,
warranties, and agreements between the parties with respect to such subject
matters and replaces and merges previous agreements and discussions pertaining
to the relationship between Employer and Consultant. Specifically, but not by
way of limitation, any other employment agreement or arrangement in existence as
of the date hereof between Employer or any of its subsidiaries or affiliates and
Consultant is hereby canceled and Consultant hereby irrevocably waives and
renounces all of Consultant's rights and claims under any such agreement or
arrangement.
6.10. The parties hereto expressly acknowledge that Group 1's and
Employer's rights under this Agreement are assignable and that such rights shall
be fully enforceable by any of Group 1's or Employer's assignees or successors
in interest.
[signature page follows]
9
<PAGE> 10
IN WITNESS WHEREOF, Employer and Consultant have duly executed this
Agreement in multiple originals to be effective on the date first stated above.
GROUP 1 AUTOMOTIVE, INC.
By: /s/ Scott L. Thompson
----------------------
Name: Scott L. Thompson
Title: Senior Vice President
/s/ Sterling B. McCall, Jr.
---------------------------
Sterling B. McCall, Jr.
10
<PAGE> 1
EXHIBIT 10.29
LOCK-UP AGREEMENT
THIS LOCK-UP AGREEMENT ("Agreement") dated as of June 24, 1999, between
Group 1 Automotive, Inc., a Delaware corporation (the "Company") and the
undersigned holder ("Stockholder") of Common Stock of the Company.
WHEREAS, the Company has requested that the Stockholder agree not to
sell any shares of Common Stock of the Company until July 15, 2000, except in an
offering registered with the Securities and Exchange Commission ("SEC")
initiated by the Company; and
WHEREAS, in consideration of Stockholder agreeing not to sell shares of
Common Stock of the Company, the Company has agreed to initiate an offering
registered with the SEC of a portion of the shares of Common Stock of the
Company held by Stockholder.
NOW, THEREFORE, for and in consideration of the above premises and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto hereby agree as follows.
1. Stockholder is the beneficial owner of the number of shares of
Common Stock of the Company set forth after his name on Schedule I attached
hereto and desires to sell up to the number of shares of Common Stock of the
Company set forth after his name on Schedule I attached hereto in an offering
registered with the SEC.
2. Stockholder hereby irrevocably agrees, except for the number of
shares of the Company set forth after his name on Schedule I attached hereto to
be included in a registration statement to be filed with the SEC and sold in an
offering registered with the SEC as shall be determined by the Company, that
Stockholder will not, directly or indirectly, sell, lend, offer, contract to
sell, transfer the economic risk of ownership in, make any short sale, pledge or
otherwise dispose of or transfer any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for or any other rights to
purchase or acquire Common Stock without the prior written consent of the
Company for a period from the date hereof until the earliest of (i) 60 days
following the death of Stockholder; (ii) 60 days following the time at which
Stockholder is determined to be "permanently disabled" (for purposes of the
immediately preceding sentence, "permanently disabled" shall mean a condition
(certified by a licensed physician, selected by the Company) rendering
Stockholder unable to engage in employment that is substantially similar to
Stockholder's current employment); or (iii) July 15, 2000. Notwithstanding the
foregoing, if Stockholder is an individual, he or she may transfer any shares of
Common Stock or securities convertible into or exchangeable or exercisable for
Common Stock either during his or her lifetime or on death by will or intestacy
to his or her immediate family or to a trust the beneficiaries of which are
exclusively the undersigned and/or a member or members of his or her immediate
family; provided, however, that prior to any such transfer each transferee shall
execute an agreement, satisfactory to the Company, pursuant to which each
transferee shall agree to receive and hold such
<PAGE> 2
shares of Common Stock, or securities convertible into or exchangeable or
exercisable for the Common Stock, subject to the provisions hereof, and there
shall be no further transfer except in accordance with the provisions hereof.
For the purposes of this paragraph, "immediate family" shall mean spouse, lineal
descendant, father, mother, brother or sister of the transferor. The Stockholder
understands that the agreements of the Stockholder are irrevocable and shall be
binding upon the Stockholder's heirs, legal representatives, successors and
assigns.
3. Whether or not the offering registered with the SEC actually occurs
depends on a number of factors, including market conditions. Any offering
registered with the SEC will only be made pursuant to one or more agreements
(each a "Purchase Agreement"), the terms of which are subject to agreement
between the Company and either the underwriters, dealers, agents or direct
purchasers (the "Purchasers"), depending on the type of offering. The
Stockholder agrees and consents to the entry of stop transfer instructions with
the Company's transfer agent against the transfer of Common Stock or other
securities of the Company held by the Stockholder except in compliance with this
Agreement.
4. Attached hereto as Appendix A is a form of Power of Attorney and
Custody Agreement that the Stockholder agrees to execute contemporaneous with
the execution of this Agreement.
5. The Company shall, as expeditiously as reasonably possible, and in
any case prior to August 1, 1999, prepare and file with the SEC a registration
statement with respect to the shares of Common Stock that Stockholder desires to
sell as set forth in paragraph 1 and use its best efforts to cause such
registration statement to become and remain effective; provided, however, that
the Company shall have no obligation to maintain the effectiveness of any
registration statement filed hereunder or to cause the information therein to
remain current for more that such period as is customary and is required by the
Purchaser in the offering registered with the SEC. The Company shall select the
Purchaser or Purchasers, as the case may be, with respect to the offering of the
shares of Common Stock held by the Stockholder. The Company shall cooperate with
the Purchasers as the Purchasers may reasonably request in facilitating the
offering registered with the SEC.
6. All expenses incurred in connection with a registration statement
pursuant to this Agreement, including without limitation all registration and
qualification fees, printing and accounting fees, and fees and disbursements of
counsel for the Company and the Stockholder, shall be borne by the Company. The
Stockholder shall pay the Purchasers' discounts and commissions applicable to
the Common Stock sold by the Stockholder. In addition, the Stockholder shall pay
his or her own costs for experts or professionals (other than counsel) employed
by the Stockholder or on his or her behalf in connection with the registration
of the Common Stock under this Agreement.
7. The Company agrees to indemnify the Stockholder with respect to the
offering registered with the SEC of Common Stock pursuant to this Agreement as
set forth in Appendix B attached hereto.
<PAGE> 3
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date set forth above.
STOCKHOLDER GROUP 1 AUTOMOTIVE, INC.
/s/ Robert E. Howard II By: /s/ B. B. Hollingsworth, Jr.
------------------- ----------------------------
Robert E. Howard II, Individually B. B. Hollingsworth, Jr.
Chairman, President and
/s/ Robert E. Howard II Chief Executive Officer
-----------------------
Robert E. Howard II, Manager
Howard Investments LLC
an Oklahoma Limited Liability Company
<PAGE> 4
APPENDIX A
CUSTODY AGREEMENT AND POWER OF ATTORNEY
FOR SALE OF COMMON STOCK OF
GROUP 1 AUTOMOTIVE, INC.
B.B. Hollingsworth, Jr.
Scott L. Thompson
As Attorneys-in-Fact
c/o Group 1 Automotive, Inc.
950 Echo Lane, Suite 350
Houston, Texas 77024
Scott L. Thompson
As Custodian
c/o Group 1 Automotive, Inc.
950 Echo Lane, Suite 350
Houston, Texas 75024
Gentlemen:
Group 1 Automotive, Inc., a Delaware corporation (the "Company"), the
undersigned and certain other stockholders of the Company (the undersigned and
such other stockholders being hereinafter referred to as the "Selling
Stockholders") may sell certain shares of Common Stock, par value $.01 per
share, of the Company ("Common Stock") covered by a Registration Statement on
Form S-3, as amended from time to time filed with the Securities and Exchange
Commission (the "Registration Statement") through underwriters, dealers, agents
or directly to one or more purchasers (collectively, the "Purchasers") as
contemplated by the Registration Statement. It is understood that at this time
there is no commitment on the part of any Purchaser to purchase any shares of
Common Stock and the undersigned acknowledges that no assurance can be given
that an offering of Common Stock will take place. The number of shares of Common
Stock that the undersigned proposes to sell to the Purchasers (the "Shares") are
set forth on Schedule I hereto. This Custody Agreement and Power of Attorney is
referred to herein as this "Agreement."
1. APPOINTMENT AND POWERS OF ATTORNEYS-IN-FACT.
(a) The undersigned hereby irrevocably constitutes and
appoints B.B. Hollingsworth, Jr. and Scott L. Thompson (the
"Attorneys-in-Fact"), and each of them, his agent and attorney-in-fact, with
full power of substitution, with respect to all matters arising in connection
with the public offering and sale of the Shares, including, but not limited to,
the power and authority on behalf of the undersigned to do or cause to be done
any of the following things:
(i) determine whether the Purchasers will be
underwriters, dealers, agents or direct purchasers and select the
particular Purchasers to act in such capacity;
<PAGE> 5
(ii) negotiate, determine and agree upon (a) the
price at which the Shares will be initially offered to the public by
the Purchasers pursuant to the applicable Purchase Agreement, as
hereinafter defined, (b) the underwriting discount with respect to the
Shares and (c) the price at which the Shares will be sold to the
Purchasers by the Selling Stockholders pursuant to the applicable
Purchase Agreement; provided, however, that in no event may the Shares
be sold to the Purchasers at a price per share less than $20;
(iii) prepare, execute and deliver one or more
agreements with one or more Purchasers (each, a "Purchase Agreement"),
the terms of which are subject to agreement between the Company and the
Purchasers, including the making of all representations and agreements
provided in the applicable Purchase Agreement to be made by, and the
exercise of all authority thereunder vested in, the undersigned;
(iv) sell, assign, transfer and deliver the Shares to
the Purchasers pursuant to the applicable Purchase Agreement and
deliver to the Purchasers certificates for the Shares so sold;
(v) take any and all steps deemed necessary or
desirable by the Attorneys-in-Fact in connection with the registration
of the Shares under the Securities Act of 1933, as amended (the
"Securities Act" ), the Securities Exchange Act of 1934, as amended,
and under the securities or "blue sky" laws of various states and
jurisdictions, including, without limitation, the giving or making of
such undertakings, representations and agreements and the taking of
such other steps as the Attorneys-in-Fact may deem necessary or
advisable;
(vi) instruct the Company and the Custodian, as
hereinafter defined, on all matters pertaining to the sale of the
Shares and delivery of certificates therefor;
(vii) provide, in accordance with the applicable
Purchase Agreement, for the payment of underwriting discounts and
commissions, transfer taxes and other expenses, if any, in connection
with the offering and sale of the undersigned's Shares covered by the
Registration Statement;
(viii) retain such legal counsel as the
Attorneys-in-Fact or any of them in their sole discretion deem
appropriate (which may be the same as the Company's counsel), to act as
counsel for the undersigned in connection with the sale of the Shares,
such counsel being hereby authorized to rely upon the representations
and warranties of the undersigned contained in the applicable Purchase
Agreement and in Section 4 of this Agreement in acting in such
capacity; and
(ix) otherwise take all actions and do all things
necessary or proper, required, contemplated or deemed advisable or
desirable by the Attorneys-in-Fact in their discretion, including the
execution and delivery of any documents, and generally act for and in
the name of the undersigned with respect to the sale of the Shares to
the Purchasers and the reoffering of the Shares by the Purchasers as
fully as could the undersigned if then personally present and acting.
<PAGE> 6
(b) Each Attorney-in-Fact may act alone or in concert in
exercising the rights and powers conferred on the Attorneys-in-Fact by this
Custody Agreement and Power of Attorney, and the act of any Attorney-in-Fact
shall be the act of the Attorneys-in-Fact. Each Attorney-in-Fact is hereby
empowered to determine, in his sole and absolute discretion, the time or times
when, the purposes for which, and the manner in which, any power herein
conferred upon the Attorneys-in-Fact shall be exercised.
(c) The Custodian, the Purchasers, the Company and all other
persons dealing with the Attorneys-in-Fact as such may rely and act upon any
writing believed in good faith to be signed by one or more of the
Attorneys-in-Fact.
(d) The Attorneys-in-Fact shall not receive any compensation
for their services rendered hereunder, except that they shall be entitled to
cause the Custodian to pay, from the proceeds payable to the undersigned, the
undersigned's proportionate share of any out-of-pocket expenses incurred under
this Agreement and similar instruments executed by other Selling Stockholders.
2. APPOINTMENT OF CUSTODIAN; DEPOSIT OF SHARES.
(a) In connection with and to facilitate the sale of the
Shares to the Purchasers, the undersigned hereby appoints Scott L. Thompson, as
custodian (the "Custodian") and herewith deposits with the Custodian one or more
certificates for Common Stock. The certificate(s) for Shares deposited hereunder
represent currently owned Shares at least equal in number in the aggregate to
the total number of Shares to be sold by the undersigned to the Purchasers,
which number is set forth on Schedule I hereto. Each such certificate for Shares
so deposited hereunder is in negotiable and proper deliverable form endorsed in
blank with the signature of the undersigned thereon guaranteed by a commercial
bank or trust company in the United States or by a member firm of the New York
Stock Exchange, or is accompanied by a duly executed stock power or powers in
blank, bearing the signature of the undersigned so guaranteed. The Custodian is
hereby authorized and directed, subject to the instructions of the
Attorneys-in-Fact, (a) to hold in custody any certificates for Shares deposited
herewith, (b) to deliver or to authorize the Company's Transfer Agent to deliver
the certificates for Shares deposited hereunder (or replacement certificate(s)
for the Shares) to or at the direction of the Attorneys-in-Fact in accordance
with the applicable Purchase Agreement and (c) to return or cause the Company's
Transfer Agent to return to the undersigned new certificate(s) for the shares of
Common Stock represented by any certificate for Common Stock deposited hereunder
which are not sold pursuant to the applicable Purchase Agreement.
(b) Until the Shares have been delivered to the Purchasers
against payment therefor in accordance with the applicable Purchase Agreement,
the undersigned shall retain all rights of ownership with respect to the Shares
deposited hereunder, including, if applicable, the right to vote and to receive
all dividends and payment thereon, except the right to retain custody of or
dispose of such Shares (but only to the extent provided herein), which right is
subject to this Agreement.
<PAGE> 7
3. SALE OF SHARES; REMITTING NET PROCEEDS.
(a) The Attorneys-in-Fact are hereby authorized and directed
to deliver or cause the Custodian or the Company's Transfer Agent to deliver
certificates for the Shares to the Purchasers, in accordance with the applicable
Purchase Agreement, against delivery to the Attorneys-in-Fact for the account of
the undersigned of the purchase price of the Shares, at the time and in the
funds specified in the applicable Purchase Agreement. The Attorneys-in-Fact are
authorized, on behalf of the undersigned, to accept and acknowledge receipt of
the payment of the purchase price for the Shares and shall promptly deposit such
proceeds with the Custodian. After reserving an amount of such proceeds for
expenses as provided below, the Custodian shall promptly remit to the
undersigned his proportionate share of the proceeds.
(b) Before any proceeds of the sale of the Shares are remitted
to the undersigned, the Attorneys-in-Fact are authorized and empowered to direct
the Custodian to reserve from the proceeds an amount determined by the
Attorneys-in-Fact to be sufficient to pay the undersigned's proportionate share
of all expenses to be paid by the Selling Stockholders. The Custodian is
authorized to pay all of the Selling Stockholders' expenses relating to the
offering from the amount reserved for that purpose pursuant to the direction of
the Attorneys-in-Fact. After payment of expenses, the Custodian will remit to
the undersigned his proportionate share of any balance. To the extent expenses
exceed the amount reserved, each Selling Stockholder shall remain liable for his
proportionate share of such expenses. The Selling Stockholders' expenses shall
include all discounts and commissions applicable to the sale of the Shares and,
to the extent applicable to such Selling Stockholder, all costs for experts or
professionals (other than counsel) employed by or on behalf of such Selling
Stockholder in connection with the registration and sale of the Shares.
4. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The undersigned
represents and warrants to, and agrees with, the other Selling Stockholders, the
Company, the Attorneys-in-Fact, the Custodian and the Purchasers as follows:
(a) The undersigned has and, on each date on which the
undersigned consummates the sale of any Shares as contemplated herein, will have
full legal right, power and authority to enter into and perform this Agreement
and the applicable Purchase Agreement. If the undersigned is acting as a
fiduciary, officer, partner, or agent, the undersigned is enclosing with this
Agreement certified copies of the appropriate instruments pursuant to which the
undersigned is authorized to act hereunder. If the undersigned is an individual
and is married, the undersigned is enclosing with this Agreement a duly
completed and executed consent of his spouse, in the form attached to this
Agreement as Annex A.
(b) The undersigned has reviewed a draft of the applicable
Purchase Agreement, including without limitation the agreements and
representations and warranties to be made by the undersigned as a Selling
Stockholder and the indemnification and contribution provisions contained
therein insofar as such provisions relate to the undersigned. The undersigned
hereby represents, warrants and covenants that each of the representations and
warranties of the Selling Stockholders contained in the applicable Purchase
Agreement is true and correct with respect to the undersigned as of the date
hereof and, except as the undersigned shall have notified the Attorneys-in-Fact
pursuant to
<PAGE> 8
paragraph I of the attached instructions, will be true and correct at all times
from the date hereof through and including each Time of Delivery (as such terms
are defined in the applicable Purchase Agreement). The undersigned will promptly
notify the Attorneys-in-Fact of any development that would make any such
representation and warranty untrue.
(c) The undersigned has read Schedule II and Schedule III
attached hereto and has supplied the information called for therein, and the
information contained in Schedule II and Schedule III attached hereto supplied
by the undersigned is true, complete and correct.
(d) Upon execution and delivery of the applicable Purchase
Agreement by the Attorneys-in-Fact on behalf of the undersigned, the undersigned
agrees to be bound by and to perform each of the covenants and agreements
(including, without limitation, those relating to indemnification and
contribution, as well as the "lockup" provisions contained therein) of the
undersigned as a Selling Stockholder in the applicable Purchase Agreement.
(e) The undersigned agrees to deliver to the Attorneys-in-Fact
such documentation as the Attorneys-in-Fact, the Company, the Selling
Stockholders or the Purchasers or any of their respective counsel may reasonably
request in order to effectuate any of the provisions hereof or of the applicable
Purchase Agreement, all of the foregoing to be in form and substance
satisfactory in all respects to the Attorneys-in-Fact.
The foregoing representations, warranties and agreements are made for the
benefit of, and may be relied upon by, the other Selling Stockholders, the
Attorneys-in-Fact, the Company, the Custodian, the Purchasers and their
respective representatives, agents and counsel and are in addition to, and not
in limitation of, the representations, warranties and agreements of the Selling
Stockholders in the applicable Purchase Agreement.
5. IRREVOCABILITY OF INSTRUMENTS; TERMINATION OF THIS AGREEMENT.
(a) This Agreement, the deposit of certificates pursuant
hereto and all authority hereby conferred, is granted, made and conferred
subject to and in consideration of (i) the interests of the Attorneys-in-Fact,
the Purchasers, the Company and the other Selling Stockholders who may become
parties to the applicable Purchase Agreement in and for the purpose of
completing the transactions contemplated hereunder and by the applicable
Purchase Agreement and (ii) the completion of the registration of Common Stock
pursuant to the Registration Statement and the other acts of the above-mentioned
parties from the date hereof to and including the execution and delivery of the
applicable Purchase Agreement in anticipation of the sale of Common Stock,
including the Shares, to the Purchasers; and the Attorneys-in-Fact are hereby
further vested with an estate, right, title and interest in and to the
certificates deposited herewith for the purpose of irrevocably empowering and
securing to them authority sufficient to consummate said transactions.
Accordingly, this Agreement shall be irrevocable prior to the earliest of (b) 60
days following the death of Stockholder, (a) 60 days following the time at which
Stockholder is determined to be "permanently disabled" (for purposes of the
immediately preceding sentence, "permanently disabled" shall mean a condition
(certified by a licensed physician, selected by the Company) rendering
Stockholder unable to engage in employment that is substantially similar to
Stockholder's current employment), or (c) July 15, 2000,
<PAGE> 9
(the "Termination Date"); this Agreement shall remain in full force and effect
until the Termination Date, unless prior to such date the applicable Purchase
Agreement has been terminated by the Purchasers due to the failure of a
condition precedent to the closing of the transactions contemplated thereby, in
which case this Agreement shall cease to remain in full force and effect as of
such time. The undersigned further agrees that this Agreement shall not be
terminated by operation of law or upon the occurrence of any event whatsoever,
including the death, disability or incompetence of the undersigned or any other
Selling Stockholder or, if the undersigned or any other Selling Stockholder is
not a natural person, upon any dissolution, winding up, distribution of assets
or other event affecting the legal existence of the undersigned or such Selling
Stockholder. If any event referred to in the preceding sentence shall occur,
whether with or without notice thereof to the Attorneys-in-Fact, any of the
Purchasers or any other person, the Attorneys-in-Fact shall nevertheless be
authorized and empowered to deliver and dispose of the certificates deposited
under the Agreement by the undersigned in accordance with the terms and
provisions of the applicable Purchase Agreement and this Agreement as if such
event had not occurred.
(b) If the sale of the Shares contemplated by this Agreement
is not completed by the Termination Date, this Agreement shall terminate
(without affecting any lawful action of the Attorneys-in-Fact or the Custodian
prior to such termination), and the Attorneys-in-Fact shall cause the Custodian
to return to the undersigned all certificates deposited hereunder representing
Shares on or prior to such date, but only after having received payment of the
undersigned's proportionate part of any expenses to be paid or borne by the
Selling Stockholders. The undersigned hereby covenants with the
Attorneys-in-Fact and with all other Selling Stockholders that if for any reason
the sale of the Shares contemplated hereby shall not be consummated, the
undersigned shall pay the undersigned's proportionate share of all expenses
payable by the Selling Stockholders hereunder or under the applicable Purchase
Agreement.
6. LIABILITY AND INDEMNIFICATION OF THE ATTORNEYS-IN-FACT AND
CUSTODIAN. The Attorneys-in-Fact and the Custodian assume no responsibility or
liability to the undersigned or to any other person, other than to hold and
dispose of the certificates and Shares, the other documents deposited hereunder,
the proceeds from the sale of the Shares and any other shares of Common Stock
deposited with the Custodian pursuant to the terms of this Agreement in
accordance with the provisions hereof. The undersigned hereby agrees to
indemnify and hold harmless the Attorneys-in-Fact and the Custodian, and their
respective officers, agents, successors, assigns and personal representatives
with respect to any act or omission of or by any of them in good faith in
connection with any and all matters contemplated by this Agreement or the
applicable Purchase Agreement. THIS SECTION 6 SHALL BE ENFORCEABLE
NOTWITHSTANDING THE SOLE, CONCURRENT, ACTIVE OR PASSIVE NEGLIGENCE OF ANY
INDEMNIFIED PARTY.
<PAGE> 10
7. INTERPRETATION.
(a) The representations, warranties and agreements of the
undersigned contained herein and in the applicable Purchase Agreement shall
survive the sale and delivery of the Shares and the termination of this
Agreement.
(b) The validity, enforceability, interpretation and
construction of this Agreement shall be determined in accordance with the laws
of the State of New York applicable to contracts made and to be performed within
the State of New York, and this Agreement shall inure to the benefit of, and be
binding upon, the undersigned and the undersigned's heirs, executors,
administrators, successors and assigns, as the case may be.
(c) Wherever possible each provision of this Agreement shall
be interpreted in such manner as to be effective and valid under applicable law,
but if any such provision shall be prohibited by or invalid under applicable
law, it shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Agreement.
(d) The use of the masculine gender in this Agreement includes
the feminine and neuter, and the use of the singular includes the plural,
wherever appropriate.
8. NOTICES. Any notice or communication shall be in writing and shall
be delivered (i) if to the Company, at the office of the Company, at 950 Echo
Lane, Suite 350, Houston, Texas 77024, Attention: B.B. Hollingsworth, Jr.,
President and Chief Executive Officer; (ii) if to the Purchasers, at their
customary business address, (iii) if to the Attorneys-in-Fact, c/o the Company,
950 Echo Lane, Houston, Texas 77024, (iv) if to the Custodian, Scott L.
Thompson, c/o the Company, 950 Echo Lane, Houston, TX 77024; and (v) if to the
undersigned, at the address set forth on the signature page.
IN WITNESS WHEREOF, the undersigned has executed this Custody Agreement
and Power of Attorney this 30th day of June, 1999.
/s/ Robert E. Howard II
-----------------------
(Please sign exactly as your name
appears on your stock certificate(s))
Name and address to which notices and
funds shall be sent.
Robert E. Howard II
-------------------
(NAME)
P.O. Box 14508
--------------
(STREET)
Oklahoma City, OK 73113
-----------------------
(CITY) (STATE) (ZIP)
<PAGE> 11
ACCEPTED by the Attorneys-in-Fact ACCEPTED by the Custodian as
as of the date above set forth: of the date above set forth:
- ----------------------------------- ------------------------------------
- -----------------------------------
By
- ----------------------------------- ----------------------------------
- -----------------------------------
<PAGE> 12
APPENDIX B
INDEMNIFICATION
(a) The Company will, if Common Stock held by a Stockholder is
included in the securities as to which such registration, qualification
or compliance is being effected, indemnify such Stockholder, each of
its officers and directors, and each person controlling such
Stockholder, with respect to which registration, qualification or
compliance has been effected pursuant to this Agreement, and each
Purchaser, if any, and each person who controls any Purchaser, against
all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any prospectus,
offering circular or other document (including any related registration
statement, notification or the like) incident to any such registration,
qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated
therein or necessary to make the statements not misleading, or any
violation by the Company of any rule or regulation promulgated under
the Securities Act of 1933, as amended (the "Act"), or of any other
federal, state or common law applicable to the Company and relating to
any action or inaction required of the Company in connection with any
such registration, qualification or compliance, and will reimburse each
such Stockholder, each of its officers and directors, and each person
controlling such Stockholder, each such Purchaser and each person who
controls any such Purchaser, for any legal and any other expenses
reasonably incurred in connection with investigating or defending any
such claim, loss, damage, liability. or action, provided that the
Company will not be liable in any such case to the extent that any such
claim, loss, damage, liability or expense arises out of or is based on
any untrue statement or omission based upon written information
furnished to the Company by an instrument duly executed by such
Stockholder or Purchaser and stated to be specifically for use therein.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of such party and shall survive the
subsequent transfer of shares of Common Stock by the seller thereof and
the transfer of any shares of Common Stock of the Company which were
the subject of such registration, qualification or listing.
(b) Each Stockholder will, if Common Stock held by such
Stockholder is included in the securities as to which such
registration, qualification or compliance is being effected, indemnify
the Company, each of its directors and officers, each legal counsel and
independent accountant of the Company, each Purchaser, if any, of the
Company's securities covered by such a registration statement, each
person who controls the Company or such Purchaser within the meaning of
the Act, and each other Stockholder registering Common Stock, each of
its officers and directors and each person controlling such
Stockholder, against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to
<PAGE> 13
make the statements therein not misleading, and will reimburse the
Company, such Stockholders, such directors, officers, persons,
Purchasers or control persons for any legal or any other expenses
reasonably incurred in connection with investigating or defending any
such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent, that such untrue statement (or alleged
untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular or other document
in reliance upon and in conformity with written information furnished
to the Company by an instrument duly executed by such Stockholder and
stated to be specifically for use therein; provided, however, that (i)
the obligations of such Stockholders hereunder shall be limited to an
amount equal to the proceeds to each such Stockholder of Common Stock
sold as contemplated herein and (ii) the indemnity for untrue
statements or omissions described above shall not apply if the
Stockholder providing such written information provides the Company
with such additional written information prior to the effectiveness of
the registration as is required to make the previously supplied written
information true and complete, together with a description in
reasonable detail of the information previously supplied which was
untrue or incomplete.
(c) Each party entitled to indemnification hereunder (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which
indemnity may be sought, and shall permit the Indemnifying Party to
assume the defense of any such claim or any litigation resulting
therefrom, provided that counsel for the Indemnifying Party, who shall
conduct the defense of such claim or litigation, shall be approved by
the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at
such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve
the Indemnifying Party of its obligations under this Agreement. After
notice from the Indemnifying Party to the Indemnified Party of its
election to assume the defense of such claim or litigation, the
Indemnifying Party will not be liable to such Indemnified Party for any
legal or other expenses subsequently incurred by such Indemnified Party
in connection with the defense thereof other than reasonable costs of
investigation, unless the Indemnifying Party abandons the defense of
such claim or litigation. No Indemnifying Party, in the defense of any
such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a
release from all liability in respect to such claim or litigation. No
Indemnified Party shall consent to the entry of any judgment or enter
into any settlement without the prior written consent of the
Indemnifying Party.
<PAGE> 1
EXHIBIT 10.31
GROUP 1 AUTOMOTIVE, INC.
DEFERRED COMPENSATION PLAN
Effective November 10, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE PAGE
- ------- ----
<S> <C> <C>
I - Definitions and Construction ........................ I-1
II - Participation ....................................... II-1
III - Account Credits and Allocations of Income or Loss ... III-1
IV - Deemed Investment of Funds........................... IV-1
V - Determination of Vested Interest and Forfeitures..... V-1
VI - In-Service Distributions ............................ VI-1
VII - Termination Benefits ................................ VII-1
VIII - Administration of the Plan........................... VIII-1
IX - Administration of Funds ............................. IX-1
X - Nature of the Plan .................................. X-1
XI - Miscellaneous ....................................... XI-1
</TABLE>
(i)
<PAGE> 3
GROUP 1 AUTOMOTIVE, INC.
DEFERRED COMPENSATION PLAN
W I T N E S S E T H :
WHEREAS, Group 1 Automotive, Inc. has decided to adopt the following
Group 1 Automotive, Inc. Deferred Compensation Plan, hereinafter referred to as
the "Plan," to aid certain of its employees in making more adequate provision
for their retirement;
NOW THEREFORE, the Plan is hereby adopted as follows, effective as of
November 10, 1999:
(ii)
<PAGE> 4
I.
DEFINITIONS AND CONSTRUCTION
1.1 DEFINITIONS. Where the following words and phrases appear in the Plan,
they shall have the respective meanings set forth below, unless their context
clearly indicates to the contrary.
(1) ACCOUNT(S): A Member's Employer Account and/or Deferral Account, including
the amounts credited thereto.
(2) AFFILIATE: Each trade or business (whether or not incorporated) which
together with the Company would be deemed to be a "single employer" within
the meaning of subsections (b), or (c) of Section 414 of the Code.
(3) BASE SALARY: The base rate of pay paid in cash by the Employer to or for
the benefit of a Member for services rendered or labor performed while a
Member, including base pay a Member could have received in cash in lieu of
(i) Compensation deferrals pursuant to Section 3.1 and (ii) elective
contributions made on his behalf by the Employer pursuant to a qualified
cash or deferred arrangement (as defined in section 401(k) of the Code) or
pursuant to a plan maintained under section 125 of the Code.
(4) BOARD: The Board of Directors of the Company.
(5) BONUS: Each incentive bonus, if any, paid in cash by the Employer to or for
the benefit of a Member for services rendered or labor performed, including
the portion thereof that a Member could have received in cash in lieu of
(i) Compensation deferrals pursuant to Section 3.1 and (ii) elective
contributions made on his behalf by the Employer pursuant to a qualified
cash or deferred arrangement (as defined in section 401(k) of the Code) or
pursuant to a plan maintained under section 125 of the Code.
(6) CHANGE IN CONTROL: A "Change in Control" shall be conclusively deemed to
have occurred if (and only if) any of the following events shall have
occurred: (1) any merger, consolidation, or reorganization in which the
Company is not the surviving entity (or survives only as a subsidiary of an
entity), (2) any sale, lease, exchange, or other transfer of all or
substantially all of the assets of the Company to any other person or
entity other than a wholly-owned subsidiary of the Company (in one
transaction or a series of related transactions), (3) dissolution or
liquidation of the Company, (4) when any person or entity, including a
"group" as contemplated by Section 13(d)(3) of the Exchange Act acquires or
gains ownership or control (including, without limitation, power to vote)
of more than 50% of the outstanding shares of the Company's voting stock
(based upon voting power), or (5) during any two-year period, the persons
who were directors of the Company (together with any new directors whose
election by the Board or whose nomination for election by the Company's
shareholders was approved by a vote of at least three quarters of the
directors still in office who were either directors at the beginning of
such period or whose election or
I-1
<PAGE> 5
nomination for election was previously so approved) shall cease for any
reason to constitute a majority of the Board; provided, however, that the
term "Change in Control" shall not include any reorganization, merger,
consolidation, or similar transaction or series of transactions pursuant to
which the record holders of the voting stock of the Company immediately
prior to such transaction or series of transactions continue to hold
immediately following such transaction or series of transactions 50% or
more of the voting securities (based upon voting power) of (a) any entity
which owns (directly or indirectly) the stock of the Company, (b) any
entity with which the Company has merged, or (c) any entity that owns an
entity with which the Company has merged.
(7) CODE: The Internal Revenue Code of 1986, as amended.
(8) COMMITTEE: The administrative committee appointed by the Compensation
Committee to administer the Plan.
(9) COMPANY: Group 1 Automotive, Inc.
(10) COMPENSATION: Base Salary and/or Bonus.
(11) COMPENSATION COMMITTEE: The Compensation Committee of the Board.
(12) DISABILITY: The term "Disability" shall mean total and permanent disability
as determined under the Savings Plan.
(13) DEFERRAL ACCOUNT: An individual account for each Member to which is
credited his Member Deferrals pursuant to Section 3.1 and which is adjusted
to reflect changes in value as provided in Section 3.3.
(14) EFFECTIVE DATE: November 10, 1999.
(15) ELECTION DATE: The first day of each Plan Year; provided, however, that the
Election Date for the first Plan Year shall be December 15, 1999.
(16) ERISA: The Employee Retirement Income Security Act of 1974, as amended.
(17) EMPLOYER: The Company and any other adopting entity that adopts the Plan
pursuant to the provisions of Section 2.3.
(18) EMPLOYER ACCOUNT: An individual account for each Member to which is
credited the Employer Deferrals made on his behalf pursuant to Section 3.2
and which is adjusted to reflect changes in value as provided in Section
3.3.
(19) EMPLOYER DEFERRALS: Deferrals made by the Employer on a Member's behalf
pursuant to Section 3.2.
I-2
<PAGE> 6
(20) EXCHANGE ACT: The Securities Exchange Act of 1934, as amended.
(21) FUNDS: The investment funds, if any, designated from time to time for the
deemed investment of Accounts pursuant to Section 4.1.
(22) MEMBER: Each individual who has been selected by the Committee for
participation in the Plan and who has become a Member pursuant to Article
II.
(23) MEMBER DEFERRALS: Deferrals made by a Member pursuant to Section 3.1.
(24) PLAN: The Group 1 Automotive, Inc. Deferred Compensation Plan, as amended
from time to time.
(25) PLAN YEAR: The twelve-consecutive month period commencing January 1 of each
year; provided, however, that the first Plan Year shall commence on the
Effective Date and end on December 31, 1999.
(26) RETIREMENT DATE: The date upon which a Member attains age 55.
(27) SAVINGS PLAN: The Group 1 Automotive, Inc. 401(k) Savings Plan, as amended
from time to time.
(28) TERMINATION OF SERVICE: The termination of a Member's employment with the
Employer and all Affiliates for any reason whatsoever.
(29) TRUST: The trust, if any, established under the Trust Agreement.
(30) TRUST AGREEMENT: The agreement entered into between the Employer and the
Trustee pursuant to Article X.
(31) TRUST FUND: The funds and properties, if any, held pursuant to the
provisions of the Trust Agreement, together with all income, profits and
increments thereto.
(32) TRUSTEE: The trustee or trustees qualified and acting under the Trust
Agreement at any time.
(33) UNFORESEEABLE FINANCIAL EMERGENCY: An unexpected need of a Member for cash
that (i) arises from a sudden and unexpected illness or accident of the
Member or of a dependent of a Member, loss of the Member's property due to
casualty, or similar extraordinary and unforeseeable circumstances arising
as a result of events beyond the control of such Member and (ii) would
result in severe financial hardship to such Member if his Compensation
deferral election was not canceled pursuant to Section 3.1(g) and/or if a
benefit payment pursuant to Section 6.2 or 7.5(b)(ii) was not permitted.
Cash needs arising from foreseeable events, such as the purchase of a house
or education expenses for children, shall not be considered to be the
result of an Unforeseeable Financial Emergency. Further, cash needs that
may be relieved (a) through reimbursement or compensation by insurance or
otherwise,
I-3
<PAGE> 7
(b) by liquidation of the Member's assets, to the extent the liquidation of
such assets would not itself cause severe financial hardship, or (c) by
cessation of deferrals under the Plan shall not be considered to be
Unforeseeable Financial Emergencies.
(34) VALUATION DATE: Each day that the New York Stock Exchange is open for
business; provided, however, that the Committee shall in its discretion
determine the Valuation Dates that will occur during any period for which
the provisions of Section 4.2 apply.
(35) VESTED INTEREST: The portion of a Member's Accounts which, pursuant to the
Plan, is nonforfeitable.
1.2 NUMBER AND GENDER. Wherever appropriate herein, words used in the
singular shall be considered to include the plural and words used in the plural
shall be considered to include the singular. The masculine gender, where
appearing in the Plan, shall be deemed to include the feminine gender.
1.3 HEADINGS. The headings of Articles and Sections herein are included
solely for convenience, and if there is any conflict between such headings and
the text of the Plan, the text shall control.
I-4
<PAGE> 8
II.
PARTICIPATION
2.1 PARTICIPATION. Prior to each Election Date, the Committee, in its sole
discretion, shall select and notify those management or highly compensated
employees of the Employer who shall be eligible to become Members as of such
Election Date. Any such eligible employee may become a Member on such Election
Date by executing and filing with the Committee, prior to such Election Date,
the Compensation deferral election prescribed by the Committee for the Plan Year
beginning on such date. Subject to the provisions of Section 2.2, a Member shall
remain eligible to defer Compensation hereunder and receive an allocation of
Employer Deferrals for each Plan Year following his commencement of
participation in the Plan.
2.2 CESSATION OF ACTIVE PARTICIPATION. Notwithstanding any provision
herein to the contrary, an individual who has become a Member of the Plan shall
cease to be entitled to defer Compensation hereunder and/or receive an
allocation of Employer Deferrals effective as of any date designated by the
Committee. Any such Committee action shall be communicated to the affected
individual prior to the effective date of such action. Such an individual may
again become entitled to defer Compensation hereunder and receive an allocation
of Employer Deferrals beginning on any subsequent Election Date selected by the
Committee in its sole discretion.
2.3 ADOPTING ENTITIES. It is contemplated that other entities may adopt
this Plan and thereby become an Employer. Any such entity, whether or not
presently existing, may become a party hereto by appropriate action of its
officers without the need for approval of its board of directors or of the
Committee or the Compensation Committee; provided, however, that such entity
must be an Affiliate. The provisions of the Plan shall apply separately and
equally to each Employer and its employees in the same manner as is expressly
provided for the Company and its employees, except that (a) the power to appoint
or otherwise affect the Committee and the Trustee and the power to amend or
terminate the Plan or amend the Trust Agreement shall be exercised by the
Compensation Committee alone and (b) the determination of whether a Change in
Control has occurred shall be made based solely on the Company. Transfer of
employment among Employers and Affiliates shall not be considered a termination
of employment hereunder. Any Employer may, by appropriate action of its officers
without the need for approval of its board of directors (or noncorporate
counterpart) or the Committee or the Compensation Committee, terminate its
participation in the Plan. Moreover, the Compensation Committee may, in its
discretion, terminate an Employer's Plan participation at any time.
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<PAGE> 9
III.
ACCOUNT CREDITS AND ALLOCATIONS OF INCOME OR LOSS
3.1 MEMBER DEFERRALS.
(a) A Member meeting the eligibility requirements of Section 2.1 may:
(i) Elect to defer a portion of such Member's Base Salary for each
Plan Year commencing on or after January 1, 2000 in an amount equal to a
specific dollar amount per pay period of such Member's Base Salary or an
integral percentage of from 1% to 50% of such Member's Base Salary. If a
Member elects to defer an integral percentage of such Member's Base Salary,
such Member may elect to establish a maximum Base Salary deferral, the
dollar amount of which such Member's combined aggregate total of Base
Salary deferrals for any Plan Year shall not exceed; and/or
(ii) Elect to defer a portion of such Member's Bonus for each Plan
Year commencing on or after January 1, 2000 in an amount equal to a
specific dollar amount of such Member's Bonus or an integral percentage of
from 1% to 100% of such Member's Bonus. In addition, a Member meeting the
eligibility requirements of Section 2.1 for the first Election Date may
elect to defer a portion of such Member's Bonus for the 1999 calendar year
in an amount equal to a specific dollar amount of such Member's Bonus for
the 1999 calendar year or an integral percentage of from 1% to 100% of such
Member's Bonus for the 1999 calendar year. If a Member elects to defer an
integral percentage of such Member's Bonus, including a Member's Bonus for
the 1999 calendar year, such Member may elect to establish a maximum Bonus
deferral, the dollar amount of which such Member's Bonus deferral for any
Plan Year shall not exceed.
In the event that a Member elects to defer an amount of Compensation pursuant to
both Section 3.1(a)(i) and 3.1(a)(ii) for any Plan Year commencing on or after
January 1, 2000, such Member may also elect to establish a maximum combined Base
Salary and Bonus deferral, the dollar amount of which such Member's combined
aggregate total of Base Salary and Bonus deferrals for such Plan Year shall not
exceed.
(b) Paragraph (a) above notwithstanding, as of the first day of any
Plan Year commencing on or after January 1, 2000, a Member's Member Deferral
elections made pursuant to such paragraph must, in the opinion of the Committee,
be reasonably expected to result in minimum aggregate Member Deferrals for such
Member of $25,000 for such Plan Year. Member Deferral elections determined by
the Committee to not be reasonably expected to result in such minimum deferral
shall be void.
(c) Compensation for a Plan Year not deferred pursuant to elections
under Section 3.1(a) shall be received by such Member in cash. A Member's
election to defer an amount of his Compensation pursuant to this Section 3.1
shall be made by effecting, in the form prescribed by the
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<PAGE> 10
Committee, a Member Deferral election pursuant to which the Member authorizes
the Employer to reduce his Compensation in the elected amount and the Employer,
in consideration thereof, agrees to credit an equal amount to such Member's
Deferral Account maintained under the Plan. The reduction in a Member's
Compensation pursuant to his Member Deferral election shall be effected by
Compensation reductions each payroll period as determined by the Committee
following the effective date of such election. Such Compensation reductions
shall be within the Plan Year to which the Member Deferral election relates,
except that Compensation reductions attributable to elections to defer a
Member's Bonus may be made within the next following Plan Year if the Bonus to
which the Member Deferral election relates is paid in such next following Plan
Year. Member Deferrals made by a Member shall be credited to such Member's
Deferral Account as of a date determined in accordance with procedures
established from time to time by the Committee; provided, however, that such
Member Deferrals shall be credited to the Member's Deferral Account no later
than 30 days after the date upon which the Compensation deferred would have been
received by such Member in cash if he had not elected to defer such amount
pursuant to this Section 3.1.
(d) A Member Deferral election pursuant to Section 3.1 shall become
effective as of the Election Date which is immediately after the date the
election is effected by the Member and filed with the Committee. A Member
Deferral election shall remain in force and effect for the entire Plan Year to
which such election relates. A Member Deferral election shall remain in force
and effect for each subsequent Plan Year (following the Member's initial year of
participation in the Plan) for which he satisfies the eligibility requirements
set forth in Section 2.1, unless and until such election is changed or revoked
by such Member prior to the Election Date of the subsequent Plan Year to which
such change or revocation relates; provided, however, that a Member Deferral
election with respect to a Member's Bonus for the 1999 calendar year shall not
remain in force and effect for any subsequent Plan Year. Plan provisions to the
contrary notwithstanding, a Member Deferral election shall be suspended during
any period of unpaid leave of absence from the Employer and shall terminate
immediately on the date such Member incurs a Termination of Service.
(e) A Member who has made a Member Deferral election may change his
election, as of the Election Date of any subsequent Plan Year, by effecting a
new Member Deferral election prior to such Election Date and within the time
period prescribed by the Committee.
(f) A Member who has made a Member Deferral election may cancel his
election, as of the Election Date of any subsequent Plan Year, by effecting the
same in the form prescribed by the Committee prior to such Election Date and
within the time period prescribed by the Committee. A Member who so cancels his
Member Deferral election may again make a new Member Deferral election for a
subsequent Plan Year, if he satisfies the eligibility requirements set forth in
Section 2.1, by effecting a new Member Deferral election prior to the Election
Date of such Plan Year and within the time period prescribed by the Committee.
(g) In the event that the Committee, upon written petition of a Member,
determines in its sole discretion that such Member has suffered an Unforeseeable
Financial Emergency or that such Member will, absent suspension of such Member's
Member Deferral election then in effect, suffer an Unforeseeable Financial
Emergency, then the Member Deferral election of such Member then in effect, if
any, shall be suspended as soon as administratively practicable after
III-2
<PAGE> 11
such determination. A Member whose Member Deferral election has been so
suspended may again make a new Member Deferral election for a subsequent Plan
Year that is at least twelve months after the effective date of such suspension,
if he satisfies the eligibility requirements set forth in Section 2.1, by
effecting a new Member Deferral election for such Plan Year and within the time
period prescribed by the Committee.
3.2 EMPLOYER DEFERRALS.
(a) (i) For each Plan Year, the Employer shall defer an amount on
behalf of each Member (1) who makes the maximum elective deferrals permitted
under the terms of the Savings Plan for such Plan Year, (2) who has an amount
forfeited (but does not receive a distribution of such forfeited amount) from
his "Employer Contribution Account" under the Savings Plan in order to satisfy
the requirements of Code sections 401(k)(3), 401(m)(2), and/or 401(m)(9) for
such Plan Year, and (3) who has not incurred a Termination of Service prior to
the date such forfeiture occurs under the terms of the Savings Plan. The amount
of each such Employer Deferral shall equal 100% of such forfeited amount.
(ii) Employer Deferrals made on a Member's behalf pursuant to this
Section 3.2(a) for a Plan Year shall be credited to such Member's Employer
Account as of the date the related forfeiture for such Plan Year occurs under
the terms of the Savings Plan.
(b) As of any date selected by the Employer, the Employer may credit a
Member's Account(s) with Employer Deferrals in such amount, if any, as the
Employer shall determine in its sole discretion. Such credits may be made on
behalf of some Members but not others, and such credits may vary among
individual Members in amount and/or with respect to the Account to which they
are credited.
3.3 VALUATION OF ACCOUNTS. All amounts credited to an Account shall be
deemed invested in accordance with Article IV on the date such amount is
credited to the Account, and, except as provided in Section 4.2, the balance of
each Account shall reflect the result of the daily pricing of the assets in
which such Account is deemed invested from the time of such crediting until the
time of distribution.
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<PAGE> 12
IV.
DEEMED INVESTMENT OF FUNDS
4.1 MEMBER DIRECTIONS.
(a) Each Member shall designate, in accordance with the procedures
established from time to time by the Committee, the manner in which the amounts
allocated to his Accounts shall be deemed to be invested from among the Funds
made available from time to time for such purpose by the Committee. Such Member
may designate one of such Funds for the deemed investment of all the amounts
allocated to his Accounts or he may split the deemed investment of the amounts
allocated to his Accounts between such Funds in such increments as the Committee
may prescribe. If a Member fails to make a proper designation, then his Accounts
shall be deemed to be invested in the Fund or Funds designated by the Committee
from time to time in a uniform and nondiscriminatory manner. In the event that
during any Plan Year the Committee does not make available Funds for the
investment of the amounts in Members' Accounts, the amounts in each Member's
Accounts shall be credited with earnings at a rate of return set by the
Committee prior to the start of such Plan Year.
(b) A Member may change his deemed investment designation for future
deferrals to be allocated to his Accounts. Any such change shall be made in
accordance with the procedures established by the Committee, and such changes
may only be made on January 1 and July 1 of each Plan Year.
(c) A Member may elect to convert his deemed investment designation
with respect to the amounts already allocated to his Accounts. Any such
conversion shall be made in accordance with the procedures established by the
Committee, and such conversions may only be made on January 1 and July 1 of each
Plan Year.
4.2 CREDITING RATE IN THE ABSENCE OF FUNDS. Notwithstanding the provisions
of Sections 3.3 and 4.1, if for any Plan Year (or portion thereof) the Committee
does not make available Funds for the deemed investment of the amounts in
Members' Accounts, then the amounts in each Member's Accounts shall be credited
with earnings during such period based upon a rate of return set by the
Committee prior to the start of such period. The rate of return set by the
Committee may be fixed for the entire Plan Year (or portion thereof) or it may
vary from time to time based on one or more benchmark rates selected by the
Committee. As of each Valuation Date that occurs during a period for which this
Section 4.2 applies, each Account of a Member shall be increased to reflect an
earnings allocation as described in this Section 4.2 based upon the balance in
such Account as of the next preceding Valuation Date; provided, however, that
the balance of such Account as of the next preceding Valuation Date shall be
reduced by the amount of any withdrawals or distributions made therefrom since
the next preceding Valuation Date.
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<PAGE> 13
V.
DETERMINATION OF VESTED INTEREST AND FORFEITURES
5.1 DEFERRAL ACCOUNT. A Member shall have a 100% Vested Interest in his
Deferral Account at all times.
5.2 EMPLOYER ACCOUNT. A Member's Vested Interest in his Employer Account
shall equal such Member's Vested Interest in his "Employer Contribution Account"
under the Savings Plan. Further, a Member who is employed by the Employer
immediately prior to a Change in Control shall have a 100% Vested Interest in
his Employer Account upon the occurrence of such Change in Control; provided,
however, that such accelerated vesting shall not occur if the consummation of
such Change in Control is contingent on using the pooling of interests
accounting methodology and the Committee determines that such accelerated
vesting will prevent the use of such accounting methodology.
5.3 FORFEITURES. A Member who has a Vested Interest in his Employer Account
that is less than 100% as of the date of his Termination of Service shall
forfeit to the Employer the nonvested portion of such Account as of the date of
such termination. Notwithstanding the preceding provisions of this Article V,
the vested portion of a Member's Account may be forfeited to the Employer under
Sections 6.3, 7.3(c), 7.5(b)(i), and 7.7.
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<PAGE> 14
VI.
IN-SERVICE DISTRIBUTIONS
6.1 RESTRICTIONS ON IN-SERVICE DISTRIBUTIONS AND LOANS. Except as provided
in Sections 6.2 and 6.3, Members shall not be permitted to make withdrawals from
the Plan prior to incurring a Termination of Service. Members shall not, at any
time, be permitted to borrow from the Trust Fund. Following a Member's
Termination of Service, this Article VI shall not be applicable to the Member
and the amounts credited to such Member's Accounts shall be payable to such
Member in accordance with the provisions of Article VII.
6.2 EMERGENCY BENEFIT. In the event that the Committee, upon written
petition of a Member, determines in its sole discretion that such Member has
suffered an Unforeseeable Financial Emergency, such Member shall be entitled to
a benefit in an amount not to exceed the lesser of (a) the amount determined by
the Committee as necessary to meet such Member's needs created by the
Unforeseeable Financial Emergency or (b) the then value of such Member's
Deferral Account. Such benefit shall be paid in a single lump sum payment as
soon as administratively practicable after the Committee has made its
determinations with respect to the availability and amount of such benefit. If a
Member's Deferral Account is deemed to be invested in more than one Fund, such
benefit shall be distributed pro rata from each Fund in which such Account is
deemed to be invested.
6.3 ELECTIVE WITHDRAWAL. A Member may elect at any time, by following the
election procedure prescribed by the Committee, to withdraw as a benefit all or
a portion of his Deferral Account as of any Valuation Date, subject to a
withdrawal penalty of 10% of the amount of any such withdrawal. Upon any such
withdrawal, the withdrawal penalty referred to in the preceding sentence shall
be forfeited to the Employer. Further, upon any such withdrawal, such Member's
participation in the Plan shall terminate and no further Compensation deferrals
shall be made under the Plan on behalf of such Member until the first Election
Date following the date of such withdrawal. If a Member's Deferral Account is
deemed to be invested in more than one Fund, such withdrawal shall be
distributed pro rata from each Fund in which such Account is deemed to be
invested. Notwithstanding the preceding provisions of this Section 6.3, a Member
shall not be entitled to a withdrawal under this Section 6.3 if the Committee
determines, in its sole discretion, that the primary purpose of such withdrawal
is the cessation of Compensation deferrals under the Plan. The Committee shall
consider such factors as it deems appropriate in order to make a determination
pursuant to the preceding sentence, including, without limitation, the amount of
the requested withdrawal, the balance in the Member's Accounts, the Member's
Compensation deferral election then in effect, and the timing of such withdrawal
request.
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<PAGE> 15
VII.
TERMINATION BENEFITS
7.1 AMOUNT OF BENEFIT. Upon a Member's Termination of Service, the Member,
or, in the event of the death of the Member while employed by the Employer or an
Affiliate, the Member's designated beneficiary, shall be entitled to a benefit
equal in value to the Member's Vested Interest in the balance in his Accounts as
of the Valuation Date next preceding the date the payment of such benefit is to
commence pursuant to Section 7.2.
7.2 TIME OF PAYMENT. Payment of a Member's benefit under Section 7.1 shall
commence as soon as administratively practicable after the Valuation Date
coincident with or next succeeding the date of the Member's Termination of
Service; provided, however, that, in a written election on the form prescribed
by the Committee, a Member may elect at the time specified in Section 7.3(c) to
defer the commencement of the payment of his benefit in the event of his
Termination of Service prior to his Retirement Date by reason of Disability to
the Valuation Date coincident with or next succeeding the earlier of (a) the
date of such Member's death or (b) such Member's Retirement Date.
7.3 ALTERNATIVE FORMS OF BENEFIT PAYMENTS.
(a) A Member's benefit under Section 7.1 shall be paid in the form of a
single lump sum payment if such Member's Termination of Service occurs prior to
his Retirement Date for a reason other than Disability.
(b) With respect to a Member whose Termination of Service occurs (i)
prior to his Retirement Date by reason of Disability or (ii) on or after his
Retirement Date, such Member shall receive his benefit payments in one of the
following forms elected by such Member in writing on the form prescribed by the
Committee at the time specified in Section 7.3(c):
(1) A single lump sum payment; or
(2) Annual installments for a period of five, ten, or fifteen years
as designated by such Member; provided, however, that in the event of such
Member's death prior to the end of such period, the remaining balance in
such Member's Account shall be paid as soon as administratively feasible in
one lump sum payment to such Member's designated beneficiary as provided in
Section 7.4. The amount of each annual installment shall be computed by
dividing the Member's Vested Interest in the unpaid balance in his Accounts
as of the Valuation Date next preceding the date of payment of such annual
installment by the number of annual installments remaining.
A separate election shall be made pursuant to this Section 7.3(b) by each Member
with respect to the form of distribution to be made in connection with a
Termination of Service that occurs (A) prior to such Member's Retirement Date by
reason of Disability or (B) on or after such Member's Retirement Date. In the
event such Member fails to timely elect in accordance with Section 7.3(c)
VII-1
<PAGE> 16
the form in which his benefit payments are to be made, such benefit payments
shall be in the form of a single lump sum payment.
(c) A Member's elections pursuant to Sections 7.2 and 7.3(b) shall be
made on or before the date he first becomes a Member of the Plan.
Notwithstanding the foregoing, subject to the consent of the Committee in its
sole discretion, a Member may, on the form prescribed by the Committee, make one
change to each of his original elections made pursuant to Sections 7.2 and
7.3(b); provided, however, that (i) upon making any such change, the aggregate
balance in such Member's Accounts as of the Valuation Date coincident with or
next succeeding such change shall be reduced by 5% and such amount shall be
forfeited to the Employer and (ii) such change shall not be effective (but the
penalty described in clause (i) of this sentence shall still apply) if such
Member incurs a Termination of Service on or before the date that is thirteen
months after such Member delivers the form implementing such change to the
Committee.
7.4 DESIGNATION OF BENEFICIARIES.
(a) Each Member shall have the right to designate the beneficiary or
beneficiaries to receive payment of his benefit in the event of his death. Each
such designation shall be made by executing the beneficiary designation form
prescribed by the Committee and filing same with the Committee. Any such
designation may be changed at any time by execution of a new designation in
accordance with this Section.
(b) If no such designation is on file with the Committee at the time of
the death of the Member or such designation is not effective for any reason as
determined by the Committee, then the designated beneficiary or beneficiaries to
receive such benefit shall be as follows:
(i) If a Member leaves a surviving spouse, his benefit shall be
paid to such surviving spouse;
(ii) If a Member leaves no surviving spouse, his benefit shall be
paid to such Member's executor or administrator, or to his heirs at law if
there is no administration of such Member's estate.
7.5 ACCELERATED PAY-OUT OF CERTAIN BENEFITS.
(a) Notwithstanding any provision in Section 7.3(b) to the contrary, if
a Member's benefit payments are to be paid in a form other than entirely in a
single lump sum payment and the aggregate amount to be paid with respect to such
Member in any particular calendar year is less than $50,000, then the Committee
may, in its sole discretion, elect to cause the entire remaining Vested Interest
in the balance in such Member's Accounts to be paid in a single lump sum
payment.
(b) If a Member incurs a Termination of Service and such Member's
benefit payments are being, or are to be, paid in a form other than entirely in
a single lump sum payment, then:
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<PAGE> 17
(i) Such Member may elect at any time, by following the election
procedure prescribed by the Committee, to receive the Vested Interest in
the remaining balance in his Accounts (reduced by the 10% penalty described
in the following sentence) in a single lump sum payment as soon as
administratively feasible after the date such Member delivers to the
Committee the form prescribed by the Committee requesting such
distribution. Upon such a request, the Vested Interest in the aggregate
balance in such Member's Accounts as of the date of such distribution shall
be reduced by 10% and such amount shall be forfeited to the Employer; and
(ii) In the event that the Committee, upon written petition of such
Member, determines in its sole discretion that such Member has suffered an
Unforeseeable Financial Emergency, such Member shall be entitled to an
emergency benefit in an amount and under conditions similar to those
described in Section 6.2.
7.6 PAYMENT OF BENEFITS. To the extent the Trust Fund has sufficient
assets, the Trustee shall pay benefits to Members or their beneficiaries, except
to the extent the Employer pays the benefits directly and provides adequate
evidence of such payment to the Trustee. To the extent the Trustee does not or
cannot pay benefits out of the Trust Fund, the benefits shall be paid by the
Employer. Any benefit payments made to a Member or for his benefit pursuant to
any provision of the Plan shall be debited to such Member's Accounts. All
benefit payments shall be made in cash to the fullest extent practicable.
7.7 UNCLAIMED BENEFITS. In the case of a benefit payable on behalf of a
Member, if the Committee is unable to locate the Member or beneficiary to whom
such benefit is payable, upon the Committee's determination thereof, such
benefit shall be forfeited to the Employer. Notwithstanding the foregoing, if
subsequent to any such forfeiture the Member or beneficiary to whom such benefit
is payable makes a valid claim for such benefit, such forfeited benefit (without
any adjustment for earnings or loss after the time of such forfeiture) shall be
restored to the Plan by the Employer and paid in accordance with the Plan.
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<PAGE> 18
VIII.
ADMINISTRATION OF THE PLAN
8.1. APPOINTMENT OF COMMITTEE. The general administration of the Plan shall
be vested in the Committee which shall be appointed by the Compensation
Committee and shall consist of one or more persons. Any individual, whether or
not an employee of the Employer, is eligible to become a member of the
Committee.
8.2. TERM, VACANCIES, RESIGNATION, AND REMOVAL. Each member of the
Committee shall serve until he resigns, dies, or is removed by the Compensation
Committee. At any time during his term of office, a member of the Committee may
resign by giving written notice to the Compensation Committee and the Committee,
such resignation to become effective upon the appointment of a substitute member
or, if earlier, the lapse of thirty days after such notice is given as herein
provided. At any time during his term of office, and for any reason, a member of
the Committee may be removed by the Compensation Committee with or without
cause, and the Compensation Committee may in its discretion fill any vacancy
that may result therefrom. Any member of the Committee who is an employee of the
Employer or any Affiliate shall automatically cease to be a member of the
Committee as of the date he ceases to be employed by the Employer and all
Affiliates.
8.3. SELF-INTEREST OF MEMBERS. No member of the Committee shall have any
right to vote or decide upon any matter relating solely to himself under the
Plan or to vote in any case in which his individual right to claim any benefit
under the Plan is particularly involved. In any case in which a Committee member
is so disqualified to act and the remaining members cannot agree, the
Compensation Committee shall appoint a temporary substitute member to exercise
all the powers of the disqualified member concerning the matter in which he is
disqualified.
8.4. COMMITTEE POWERS AND DUTIES. The Committee shall supervise the
administration and enforcement of the Plan according to the terms and provisions
hereof and shall have all powers necessary to accomplish these purposes,
including, but not by way of limitation, the right, power, and authority:
(a) To make rules, regulations, and bylaws for the administration of
the Plan that are not inconsistent with the terms and provisions hereof, and to
enforce the terms of the Plan and the rules and regulations promulgated
thereunder by the Committee;
(b) To construe in its discretion all terms, provisions, conditions,
and limitations of the Plan;
(c) To correct any defect or to supply any omission or to reconcile any
inconsistency that may appear in the Plan in such manner and to such extent as
it shall deem in its discretion expedient to effectuate the purposes of the
Plan;
VIII-1
<PAGE> 19
(d) To employ and compensate such accountants, attorneys, investment
advisors, and other agents, employees, and independent contractors as the
Committee may deem necessary or advisable for the proper and efficient
administration of the Plan;
(e) To determine in its discretion all questions relating to
eligibility;
(f) To determine whether and when a Member has incurred a Termination
of Service, and the reason for such termination;
(g) To make a determination in its discretion as to the right of any
person to a benefit under the Plan and to prescribe procedures to be followed by
distributees in obtaining benefits hereunder;
(h) To receive and review reports from the Trustee as to the financial
condition of the Trust Fund, including its receipts and disbursements; and
(i) To establish or designate Funds as investment options as provided
in Section 4.1.
8.5. CLAIMS REVIEW. In any case in which a claim for Plan benefits of a
Member or beneficiary is denied or modified, the Committee shall furnish written
notice to the claimant within 90 days (or within 180 days if additional
information requested by the Committee necessitates an extension of the 90-day
period), which notice shall:
(a) State the specific reason or reasons for the denial or
modification;
(b) Provide specific reference to pertinent Plan provisions on which
the denial or modification is based;
(c) Provide a description of any additional material or information
necessary for the Member, his beneficiary, or representative to perfect the
claim and an explanation of why such material or information is necessary; and
(d) Explain the Plan's claim review procedure as contained herein.
In the event a claim for Plan benefits is denied or modified, if the Member, his
beneficiary, or a representative of such Member or beneficiary desires to have
such denial or modification reviewed, he must, within 60 days following receipt
of the notice of such denial or modification, submit a written request for
review by the Committee of its initial decision. In connection with such
request, the Member, his beneficiary, or the representative of such Member or
beneficiary may review any pertinent documents upon which such denial or
modification was based and may submit issues and comments in writing. Within 60
days following such request for review the Committee shall, after providing a
full and fair review, render its final decision in writing to the Member, his
beneficiary, or the representative of such Member or beneficiary stating
specific reasons for such decision and making specific references to pertinent
Plan provisions upon which the decision is based. If special
VIII-2
<PAGE> 20
circumstances require an extension of such 60-day period, the Committee's
decision shall be rendered as soon as possible, but not later than 120 days
after receipt of the request for review. If an extension of time for review is
required, written notice of the extension shall be furnished to the Member,
beneficiary, or the representative of such Member or beneficiary prior to the
commencement of the extension period.
8.6. MANDATORY ARBITRATION. If the Member, his beneficiary, or a
representative of such Member or beneficiary is not satisfied with the final
decision of the Committee pursuant to the Plan's claims review procedure, such
Member, his beneficiary, or a representative of such Member or beneficiary may,
within 180 days of receipt of the written final decision of the Committee,
request by written notice to the Committee, that his claim be submitted to
arbitration pursuant to the arbitration procedures then in effect as adopted by
the Committee. Such arbitration shall be the sole and exclusive procedure
available to the Member, his beneficiary, or a representative of such Member or
his beneficiary for review of a final decision of the Committee. In reviewing
the decision of the Committee, the arbitrator shall use the standard of review
which would be used by a Federal court in reviewing such decision under the
provisions of ERISA. The Member, his beneficiary, or a representative of such
Member or beneficiary and the Plan shall share equally the cost of such
arbitration. The arbitrator's decision shall be final and legally binding on
both parties. This Section shall be governed by the provisions of the Federal
Arbitration Act.
8.7. EMPLOYER TO SUPPLY INFORMATION. The Employer shall supply full and
timely information to the Committee, including, but not limited to, information
relating to each Member's Compensation, age, retirement, death, or other cause
of Termination of Service and such other pertinent facts as the Committee may
require. The Employer shall advise the Trustee of such of the foregoing facts as
are deemed necessary for the Trustee to carry out the Trustee's duties under the
Plan and the Trust Agreement. When making a determination in connection with the
Plan, the Committee shall be entitled to rely upon the aforesaid information
furnished by the Employer.
8.8. INDEMNITY. To the extent permitted by applicable law, the Company
shall indemnify and save harmless each member of the Committee and the
Compensation Committee against any and all expenses, liabilities and claims
(including legal fees incurred to defend against such liabilities and claims)
arising out of their discharge in good faith of responsibilities under or
incident to the Plan. Expenses and liabilities arising out of willful misconduct
shall not be covered under this indemnity. This indemnity shall not preclude
such further indemnities as may be available under insurance purchased by the
Company or provided by the Company under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, as such indemnities are
permitted under applicable law.
8.9. CHANGE IN CONTROL. Notwithstanding any provision in the Plan to the
contrary, upon the occurrence of a Change in Control, the Committee's powers and
duties under the Plan shall cease to the extent, if any, such powers and duties
are vested in the Trustee under the terms of the Trust Agreement.
VIII-3
<PAGE> 21
IX.
ADMINISTRATION OF FUNDS
9.1. PAYMENT OF EXPENSES. All expenses incident to the administration of
the Plan and Trust, including but not limited to, legal, accounting, Trustee
fees, and expenses of the Committee, may be paid by the Employer and, if not
paid by the Employer, shall be paid by the Trustee from the Trust Fund, if any.
9.2. TRUST FUND PROPERTY. All income, profits, recoveries, contributions,
forfeitures and any and all moneys, securities and properties of any kind at any
time received or held by the Trustee, if any, shall be held for investment
purposes as a commingled Trust Fund pursuant to the terms of the Trust
Agreement. The Committee shall maintain one or more Accounts in the name of each
Member, but the maintenance of an Account designated as the Account of a Member
shall not mean that such Member shall have a greater or lesser interest than
that due him by operation of the Plan and shall not be considered as segregating
any funds or property from any other funds or property contained in the
commingled fund. No Member shall have any title to any specific asset in the
Trust Fund, if any.
IX-1
<PAGE> 22
X.
NATURE OF THE PLAN
The Employer intends and desires by the adoption of the Plan to recognize
the value to the Employer of the past and present services of employees covered
by the Plan and to encourage and assure their continued service with the
Employer by making more adequate provision for their future retirement security.
The establishment of the Plan is made necessary by certain benefit limitations
which are imposed on the Savings Plan by ERISA and by the Code. The Plan is
intended to constitute an unfunded, unsecured plan of deferred compensation for
a select group of management or highly compensated employees of the Employer.
Plan benefits herein provided are a contractual obligation of the Employer which
shall be paid out of the Employer's general assets. Nevertheless, subject to the
terms hereof and of the Trust Agreement, the Employer may transfer money or
other property to the Trustee to provide Plan benefits hereunder, and the
Trustee shall pay Plan benefits to Members and their beneficiaries out of the
Trust Fund. To the extent that Employer transfers assets to the Trustee pursuant
to the Trust Agreement, the Committee may, but need not, establish procedures
for the Trustees to invest the Trust Fund in accordance with each Member's
designated deemed investments pursuant to Section 4.1 respecting the portion of
the Trust Fund assets equal to such Member's Accounts.
The Compensation Committee, in its sole discretion, may establish the Trust
and direct the Employer to enter into the Trust Agreement. In such event, the
Employer shall remain the owner of all assets in the Trust Fund and the assets
shall be subject to the claims of the Employer's creditors if the Employer ever
becomes insolvent. For purposes hereof, the Employer shall be considered
"insolvent" if (a) the Employer is unable to pay its debts as such debts become
due or (b) the Employer is subject to a pending proceeding as a debtor under the
United Sates Bankruptcy Code (or any successor federal statute). The chief
executive officer of the Employer and its board of directors shall have the duty
to inform the Trustee in writing if the Employer becomes insolvent. Such notice
given under the preceding sentence by any party shall satisfy all of the
parties' duty to give notice. When so informed, the Trustee shall suspend
payments to the Members and hold the assets for the benefit of the Employer's
general creditors. If the Trustee receives a written allegation that the
Employer is insolvent, the Trustee shall suspend payments to the Members and
hold the Trust Fund for the benefit of the Employer's general creditors, and
shall determine in the manner specified in the Trust Agreement whether the
Employer is insolvent. If the Trustee determines that the Employer is not
insolvent, the Trustee shall resume payments to the Members. No Member or
beneficiary shall have any preferred claim to, or any beneficial ownership
interest in, any assets of the Trust Fund, and, upon commencement of
participation in the Plan, each Member shall have agreed to waive his priority
credit position, if any, under applicable state law with respect to the assets
of the Trust Fund.
X-1
<PAGE> 23
XI.
MISCELLANEOUS
11.1 NO CONTRACT OF EMPLOYMENT. The adoption and maintenance of the Plan
shall not be deemed to be a contract between the Employer and any person or to
be consideration for the employment of any person. Nothing herein contained
shall be deemed to (a) give any person the right to be retained in the employ of
the Employer, (b) restrict the right of the Employer to discharge any person at
any time, (c) give the Employer the right to require any person to remain in the
employ of the Employer, or (d) restrict any person's right to terminate his
employment at any time.
11.2 ALIENATION OF INTEREST FORBIDDEN. The interest of a Member or his
beneficiary or beneficiaries hereunder may not be sold, transferred, assigned,
or encumbered in any manner, either voluntarily or involuntarily, and any
attempt so to anticipate, alienate, sell, transfer, assign, pledge, encumber, or
charge the same shall be null and void; neither shall the benefits hereunder be
liable for or subject to the debts, contracts, liabilities, engagements or torts
of any person to whom such benefits or funds are payable, nor shall they be an
asset in bankruptcy or subject to garnishment, attachment or other legal or
equitable proceedings.
11.3 WITHHOLDING. All Compensation deferrals and Employer Deferrals and
payments provided for hereunder shall be subject to applicable withholding and
other deductions as shall be required of the Employer under any applicable
local, state or federal law.
11.4 AMENDMENT AND TERMINATION. The Compensation Committee may from time to
time, in its discretion, amend, in whole or in part, any or all of the
provisions of the Plan; provided, however, that no amendment may be made that
would impair the rights of a Member with respect to amounts already allocated to
his Accounts. The Compensation Committee may terminate the Plan at any time. In
the event that the Plan is terminated, the Vested Interest in the balance in a
Member's Accounts shall be paid to such Member or his designated beneficiary in
the manner specified by the Compensation Committee, which may include the
payment of a single lump sum payment in full satisfaction of all of such
Member's or beneficiary's benefits hereunder.
11.5 SEVERABILITY. If any provision of this Plan shall be held illegal or
invalid for any reason, said illegality or invalidity shall not affect the
remaining provisions hereof; instead, each provision shall be fully severable
and the Plan shall be construed and enforced as if said illegal or invalid
provision had never been included herein.
11.6 GUARANTY. Notwithstanding any provisions of the Plan to the contrary,
in the event any Employer fails to make payment of the benefits due under the
Plan on behalf of its Members, whether directly or through the Trust, the
Company shall be liable for and shall make payment of such benefits due as a
guarantor of such entity's obligations hereunder. The guaranty obligations
provided herein shall be satisfied directly and not through the Trust.
XI-1
<PAGE> 24
11.7 GOVERNING LAWS. All provisions of the Plan shall be construed in
accordance with the laws of Texas except to the extent preempted by federal law.
XI-2
<PAGE> 25
EXECUTED this 9th day of December, 1999.
GROUP 1 AUTOMOTIVE, INC.
By: /s/ B. B. HOLLINGSWORTH, JR.
---------------------------------------
Name: B. B. Hollingsworth, Jr.
----------------------------------
Title: Chairman, Chief Executive
Officer and President
---------------------------------
(iii)
<PAGE> 1
EXHIBIT 21.1
10-K SUBSIDIARY LIST
Koons Ford, Inc.
D/b/a World Ford Hollywood; World Auto Center; World Automotive Group
Florida corporation
Courtesy Ford, Inc.
D/b/a World Ford Kendall
Florida corporation
Flamingo Ford, Inc.
D/b/a World Ford Homestead
Florida corporation
Bob Howard Automotive - H, Inc.
D/b/a
Oklahoma corporation
Bob Howard Chevrolet, Inc.
D/b/a Bob Howard Subaru
Bob Howard Chevrolet-Geo
Oklahoma corporation
Bob Howard Dodge, Inc.
D/b/a N/A
Oklahoma corporation
Bob Howard Motors, Inc.
D/b/a Bob Howard Toyota
Oklahoma corporation
Bob Howard Nissan, Inc.
D/b/a N/A
Oklahoma corporation
Jim Tidwell Ford, Inc.
D/b/a N/A
Georgia Corporation
Page 1 of 8
<PAGE> 2
Howard Pontiac-GMC, Inc.
D/b/a Bob Howard GMC Truck
Oklahoma corporation
Bob Howard Automotive-East, Inc.
D/b/a South Pointe Chevrolet
Oklahoma corporation
Bob Howard German Imports, Inc.
D/b/a Benchmark Motors
Oklahoma corporation
Casa Chevrolet Inc.
Dba/ N/A
New Mexico corporation
Casa Chrysler Plymouth Jeep, Inc.
Dba/ Westside Chrysler Plymouth Jeep
New Mexico corporation
Sunshine Buick Pontiac GMC Truck, Inc.
Dba/
New Mexico corporation
Chaperral Dodge, Ltd.
D/b/a N/A
Texas limited partnership
Page 2 of 8
<PAGE> 3
Colonial Chrysler-Plymouth, Ltd.
D/b/a N/A
Texas limited partnership
Courtesy Nissan, Inc.
D/b/a N/A
Texas corporation
KuTZ-DC, Ltd. (formerly McKinney Dodge, Inc.)
D/b/a
Texas corporation
Kutz Auto Group, Inc.
(merged into Group 1 Associates on 2/10/00)
D/b/a
Texas corporation
Luby Chevrolet Co.
D/b/a
Delaware corporation
Highland Autoplex, Inc.
D/b/a Maxwell Highland
Texas corporation
MMK Interests, Inc.
(merged into Group 1 Associates on 2/10/00)
(Prestige Chrysler Plymouth, Inc. &
Maxwell Chrysler Plymouth Dodge, Inc.
merged into MMK Interests)
D/b/a
Texas corporation
Maxwell Chrysler Plymouth Dodge Jeep Eagle, Ltd.
D/b/a Maxwell Superstore
Texas limited partnership
Prestige Chrysler Plymouth Northwest, Ltd.
D/b/a Maxwell Dodge
Texas limited partnership
Page 3 of 8
<PAGE> 4
Prestige Chrysler Plymouth South, Ltd.
D/b/a Maxwell South
Texas limited partnership
Maxwell Texas Management, Inc.
Merged into MMK Interests
D/b/a
Delaware corporation
Group 1 LP Interests-DC, Inc.
(formerly Group 1 Holdings-CC, Inc. ,
formerly Prestige Maxwell, Inc.)
D/b/a
Delaware corporation
Maxwell Ford, Ltd.
D/b/a
Texas limited partnership
Group 1 Holdings - F, Inc.
(formerly Maxwell Holdings, Inc.)
D/b/a
Delaware corporation
Group 1 Ford, Inc.
D/b/a Maxwell Ford of Elgin
Texas corporation
Round Rock Nissan, Inc.
D/b/a Maxwell Nissan Round Rock
Texas corporation
Smith, Liu & Kutz, Inc.
D/b/a
Texas corporation
Town North Imports, Inc.
D/b/a Town North Mitsubishi
Texas corporation
Town North Nissan, Inc.
D/b/a Maxwell Nissan Mitsubishi North
Texas corporation
Page 4 of 8
<PAGE> 5
Town North Suzuki, Inc.
D/b/a
Texas corporation
Foyt Motors, Inc.
D/b/a A.J. Foyt Honda/Isuzu
Texas corporation
McCall-TL, Ltd. (formerly SMC Luxury Cars, Inc.)
D/b/a Sterling McCall Lexus
D/b/a Lexus of Clear Lake
Texas limited partnership
McCall-HA, Ltd. (formerly Smith, Liu & Corbin, Inc.)
D/b/a Acura Southwest
Texas limited partnership
McCall-T, Ltd. (formerly Southwest Toyota, Inc.)
D/b/a Sterling McCall Toyota
Texas limited partnership
Lubbock Motors - F, Ltd.
D/b/a Gene Messer Ford
Texas limited partnership
Lubbock Motors - T, Ltd.
D/b/a Gene Messer Toyota
Texas limited partnership
Lubbock Motors - M, Inc.
(formerly Lubbock Automotive - M, Inc.)
D/b/aGene Messer Mitsubishi,
Gene Messer Volkswagon,
Gene Messer Kia
Delaware corporation
Page 5 of 8
<PAGE> 6
Lubbock Motors, Ltd. (formerly Lubbock Motors, Inc.)
D/b/a The Credit Connection
Texas limited partnership
Rockwall Automotive - F, Ltd.
D/b/a Rockwall Ford-Mercury
Texas limited partnership
Amarillo Motors -C, Ltd.
D/b/a Gene Messer Cadillac
D/b/a Gene Messer Mitsubishi
Texas limited partnership
Amarillo Motors - F, Ltd.
D/b/a Amarillo Ford
Gener Messer Ford of Amarillo
Texas limited partnership
Amarillo Motors - J, Ltd.
D/b/a Gene Messer Jeep
Gene Messer Chrysler-Plymouth
Gene Messer Chrysler-Plymouth Jeep
Texas limited partnership
Mike Smith Automotive - N, Inc.
D/b/a Mike Smith Nissan
Texas corporation
Mike Smith Autoplaza, Inc.
D/b/a
Texas corporation
Mike Smith Autoplex, Inc.
D/b/a
Texas corporation
Page 6 of 8
<PAGE> 7
Mike Smith Autoplex Dodge, Inc.
d/b/a
Texas corporation
Mike Smith Autoplex-German Imports, Inc.
D/b/a
Texas corporation
Mike Smith Autoplex-V, Inc.
D/b/a
Texas corporation
Mike Smith GM, Inc.
D/b/a
Delaware corporation
Mike Smith Motors, Inc.
D/b/a
Texas corporation
Mike Smith Imports, Inc.
D/b/a
Texas corporation
Smith Automotive Group, Inc.
(DISSOLVED July 30, 1999)
Texas corporation
Harvey Holdings, Inc.
D/b/a
Delaware corporation
Harvey -T, Inc.
D/b/a
Delaware corporation
Harvey Ford, LLC
D/b/a Don Bohn Ford
Delaware corporation
Page 7 of 8
<PAGE> 8
<TABLE>
<S> <C>
Harvey GM, LLC McCall-H, Inc.
D/b/a Don Bohn Buick-Pontiac-GMC D/b/a N/A
Delaware corporation Texas corporation
Harvey Operations-T, LLC McCall-SI, Inc.
D/b/a Bohn Bros. Toyota D/b/a N/A
Delaware corporation Texas corporation
Perimeter Ford, Inc. Amarillo Motors-SM, Ltd.
D/b/a D/b/a N/A
Delaware corporation Texas limited partnership
Jim Tidwell Ford, Inc. Lubbock Motors-SH, Ltd.
(formerly GPI Atlanta, Inc.) D/b/a N/A
D/b/a Texas limited partnership
Delaware corporation
Lubbock Motors-S, Inc.
Key Ford, Inc. D/b/a N/A
D/b/a Texas corporation
Florida corporation
Howard-DC, Inc.
Shamrock Chevrolet, Inc. D/b/a N/A
D/b/a Delaware corporation
Florida corporation
Howard-GM, Inc.
Group 1 Realty, Inc. D/b/a N/A
D/b/a N/A Delaware corporation
Delaware corporation
Howard-HA, Inc.
IRA Automotive Group, LLC D/b/a N/A
D/b/a N/A Delaware corporation
Delaware corporation
Howard-H, Inc.
Danvers-DC, Inc. D/b/a N/A
D/b/a IRA Jeep Delaware corporation
Delaware corporation
Howard-SI, Inc.
Danvers-DC II, Inc. D/b/a N/A
D/b/a IRA-Dodge-Medford Delaware corporation
Delaware corporation
Group 1 Associates, Inc.
Danvers-GM, Inc. (formerly Group 1 Holdings Inc.)
D/b/a IRA Pontiac-Buick D/b/a N/A
Delaware corporation Delaware corporation
Danvers-S, Inc.
D/b/a IRA Mazda-Isuzu
IRA Porsche-Audi
Delaware corporation
Danvers-SU, Inc.
D/b/a IRA Subaru
Delaware corporation
Danvers-T, Inc.
D/b/a IRA Toyota
Delaware corporation
Danvers-TL, Inc.
D/b/a IRA Lexus
Delaware corporation
</TABLE>
Page 8 of 8
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated February 17, 2000 included in this Annual Report on Form
10-K, into the Company's previously filed registration statements on Form S-3
(File No. 333-83407) and on Form S-8 (File No. 333-42165, File No. 333-70043 and
File No. 333-80399).
ARTHUR ANDERSEN LLP
Houston, Texas
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 118,824
<SECURITIES> 0
<RECEIVABLES> 35,296
<ALLOWANCES> 0
<INVENTORY> 386,255
<CURRENT-ASSETS> 553,423
<PP&E> 46,711
<DEPRECIATION> 0
<TOTAL-ASSETS> 842,910
<CURRENT-LIABILITIES> 473,295
<BONDS> 113,174
0
0
<COMMON> 218
<OTHER-SE> 231,811
<TOTAL-LIABILITY-AND-EQUITY> 842,910
<SALES> 2,429,536
<TOTAL-REVENUES> 2,508,324
<CGS> 2,131,967
<TOTAL-COSTS> 2,131,967
<OTHER-EXPENSES> 290,407
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,447
<INCOME-PRETAX> 55,689
<INCOME-TAX> 22,174
<INCOME-CONTINUING> 33,515
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,515
<EPS-BASIC> 1.62
<EPS-DILUTED> 1.55
</TABLE>
